Saving Small Businesses From Patent Trolls

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Published October 12, 2015 The Courier-Journal

Entrepreneurs push the limits of innovation – investing in people, real estate, equipment and services – to grow great organizations. In my own experience building and nurturing NuVo Technologies in Northern Kentucky, I tapped every available resource to make NuVo a leader in whole home audio solutions.

And we were. In just five years, we grew our team from four to 37 people, and our revenues increased ten-fold. Small businesses like mine are the backbone of the American economy. So why are patent trolls so insistent on leaching off our success and tearing us down?

Patent trolls – also called patent assertion entities – drain an estimated $80 billion from the U.S. economy every year. Eighty percent of patent-troll targets are small- and medium-sized businesses. That’s not by accident. The average company victimized by these lawsuits has annual revenues of $11 million a year. Trolls realize that, unlike large corporations, smaller businesses – especially startups – typically don’t have the financial wherewithal to hire legal teams to defend them, and will agree to settle out of court to avoid costly litigation.

Patent suits are easy and inexpensive to file. Sending a threatening demand letter costs as little as the price of a stamp. Meanwhile, every dollar spent defending against these meritless lawsuits is one less dollar that small businesses can invest in technological innovation, growing the economy and creating jobs.

Hiring a high-performance software engineer in Northern Kentucky is a $100,000 annual investment – well worth it when you consider the amazing work a team can accomplish in a matter of months. Consider that YouTube was founded in February 2005 and bought by Google for more than $1 billion 19 months later. But, get caught in a troll’s extortionist clutches, and your $100,000 investment is instead siphoned off to lawyers’ fees.

Of course, not every patent infringement lawsuit is bogus, and we need laws that help innovators protect valuable, legitimate ideas. In the early days of NuVo, I was contacted by a competitor claiming we were intruding on their intellectual property with one of our accessory products. Their claim was fair, and so we negotiated a licensing fee. NuVo went on to sell thousands of these accessories, while the inventor earned recurring revenue as a reward for his innovation – a win-win.

We need common sense laws that weed out patent trolls, while protecting legitimate innovators and small businesses like NuVo. A bill co-sponsored by Reps. Bob Goodlatte, R-Va., and Peter DeFazio, D-Or., the Innovation Act, H.R. 9, will put a stop to economically destructive patent-infringement lawsuit abuse. The House measure is supported by “stakeholders from all areas of our economy, representing businesses of all kinds from every corner of our country, including inventors and innovators.” Similar legislation sponsored by Sens. Chuck Grassley, R-Ia., and Patrick Leahy, D-Vt., the Protecting American Talent and Entrepreneurship (PATENT) Act, is now making its way through the Senate.

The bills include several key provisions that would discourage trolls from filing frivolous lawsuits, help small businesses fight back and make sure that inventors who do need to defend their property rights in court are able to do so without any extra roadblocks.

Meanwhile, trolls are stepping up their efforts to cash in before Congress intervenes. In the first half of 2015, patent lawsuits filed in district courts jumped 11 percent over the same period in 2014, and are 35 percent higher than the second half of last year. More than two-thirds of patent-infringement suits in 2015 were initiated by trolls, and nine in ten of these suits involved high-tech companies.

Changing and reforming our laws is a key component to maintaining and expanding the U.S.’s global position as a leader in innovation.

Entrepreneurs and inventors are free to sell their patents and innovations to whomever they wish, and they deserve to be compensated for their ideas and property.  However, we need to change the economic incentives of patent suits, shifting the burden of frivolous claims to the trolls instead of innovators and entrepreneurs.

The fee-shifting provisions of the Innovation and PATENT Acts will ensure that a patent troll has to pay the defendant’s legal fees, if it brings a bogus lawsuit and loses. Provisions in both bills would also make it easier to collect legal fees from patent troll shell companies, reducing the likelihood they will simply declare bankruptcy and disappear if they lose the lawsuit.

On behalf of millions of small businesses like NuVo, we urge Senate Majority Leader Mitch McConnell to stop predatory patent trolls from legally leeching tens of billions of dollars from the U.S. economy and choking off American innovation and job creation.

David Rodarte operates ChangingVelocity, advising consumer electronics businesses. He is also associated with Connetic Ventures, an angel capital fund focused on startup enterprises in Kentucky and the Midwest Region. He was CEO from NuVo Technologies from 2002 – 2012.

 

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