Commentary: It’s Time for Congress to Take on Patent Trolls

Unethical lawyers are draining the economy of billions of dollars every year.

Innovation is the backbone of the American Dream. Our nation has always encouraged entrepreneurs to turn their inventive and problem-solving ideas into the successful enterprises that drive our economy and create jobs. But in recent years, unethical lawyers have latched onto that success like parasites, draining businesses -- especially startups and small companies -- of the resources they need to grow and be successful. It’s past time for the government to step in and protect American businesses and the U.S. economy from patent trolls.

Patent assertion entities, more commonly known as patent trolls, drain our economy of billions of dollars each year, forcing businesses to pay out settlements or expensive legal fees at the expense of creating new jobs or growing their businesses. In 2011 alone, patent trolls cost U.S. businesses $80 billion in wealth creation. That same year, businesses directly paid out $29 billion to fight patent suits. Patent suits brought by trolls made up 62 percent of all patent lawsuits filed in 2012.

Patent trolls tend to style themselves as modern-day Davids helping small companies stand up to big-business Goliaths. This is disingenuous to say the least. In 2011, 90 percent of sued companies were small or mid-sized businesses, with average annual revenues of $11 million. Patent trolls hit startup tech companies especially hard, with 40 percent of these companies saying the lawsuits have significantly hurt their businesses, stifling their ability to innovate and create new products.

Consider these examples:

  • In 2011, Innovatio threatened 8,000 businesses across the U.S. for offering Wi-Fi to their customers. Innovatio claimed the companies’ use of Wi-Fi violated patents it held, and raked in $2,300 to $5,000 per company in settlement fees.
  • Early this year it came out that Project Paperless, LLC demanded small- and medium-sized companies to purchase licenses, at a cost of $1,000 per employee, to scan documents and email them.
  • A company called Personal Audio has been sending licensing demands to podcasters and has sued Apple and other companies over the rights to create podcasts and playlists.

Patent trolls mooch off the legal system to increase their personal wealth. One recently profiled owner of a patent trolling company makes about $25 million per year. These trolls don’t actually produce anything themselves. Instead, they buy up old patents and file suits against any companies they claim are violating them. While most of the suits are frivolous, businesses settle out of court rather than fight them to save on legal costs. More than 97 percent of the suits are settled before trial.

Litigation pending in Congress would impose a “loser pays” system, which would require patent trolls to cover defendants’ court costs in frivolous lawsuits. With the cost of defending a patent suit typically between $2 million and $6 million, a loser pays system could have a significant deterrent effect.

It’s heartening to see the Congress united in working to reform patent litigation. The Consumer Electronics Association recently came out in support of the Patent Litigation and Innovation Act, introduced in the House by Reps. Blake Farenthold, R-Texas, and Hakeem Jeffries, D-N.Y. Reps. Darrell Issa, R-Calif., and Judy Chu, D-Calif., have introduced the Stopping the Offensive Use of Patents Act, which closely mirrors the Patent Quality Improvement Act introduced in the Senate by Sen. Charles Schumer, D-N.Y., in May. The SHIELD Act, sponsored by Rep. Jason Chaffetz, R-Utah, and Rep. Peter DeFazio, D-Ore., would make patent trolls pay court costs when they bring frivolous lawsuits. These are among the many proposals pending in Congress to help innovators fight this scourge.

Congressional leaders in both parties along with President Obama agree that the patent litigation system is broken and in desperate need of reform. Businesses drive our nation’s economy. They shouldn’t have to put off creating new jobs or expansion in order to fight bullies pushing dubious patent claims.

Gary Shapiro is president and CEO of the Consumer Electronics Association (CEA)®, the U.S. trade association representing more than 2,000 consumer electronics companies, and author of the New York Times best-selling books, "Ninja Innovation: The Ten Killer Strategies of the World's Most Successful Businesses" (William Morrow, 2013) and "The Comeback: How Innovation Will Restore the American Dream(Beaufort Books, 2011). His views are his own. Connect with him on Twitter: @GaryShapiro.