Patent trolls target US businesses, consumers ultimately foot the bill

Patent asserting groups that bully businesses and entrepreneurs into paying licensing fees or settlements—as opposed to actually using the patents—are not new, especially in the technology space.

But during the last few years, the ranks of such patent trolls have grown—and they're using ever-aggressive tactics to target more businesses not usually linked to patent scuffles or intellectual property. More Main Street shops—including restaurants, retailers, hotels, real estate agents and credit unions—are getting threatening letters, alleging a variety of infringements.

The number of defendants in patent infringement lawsuits increased roughly 129 percent over four years, from 2007 to 2011, according to a U.S. Government Accountability Office report released last year. About 89 percent of that rise was due to lawsuits involving software-related patents.

But technology clearly has proliferated beyond Silicon Valley to Main Street. Consider ubiquitous pieces of office equipment such as Wi-Fi routers and scanners. As technology embeds itself deeper into our everyday business lives, scrappy patent trolls—hungry for new income—are taking advantage of abstract patents to legally collect fees and settlements. Trolls are mining this previously untapped group of entrepreneurs because patent rules permit such suits.

It's like a light bulb for patent trolls went off—and it had Main Street written all over it.

"There's been a patent troll problem for a long time, involving the Googles and Apples of the world," said Julie Samuels, executive director of San Francisco-based Engine, a technology policy group. "It was when the trolls started to target the small companies, and the individuals in some cases, that everything changed," Samuels said.

Patent suits on Main Street have become so prevalent that some larger ventures have added patent attorneys to their payrolls. "Our larger members have patent litigators on staff," said Beth Provenzano, senior director of governmental relations for the National Retail Federation. "And we're not in the patent litigation business," said Provenzano, whose group represents retailers. "Some midsized firms have patent litigators on retainer," she said.

Lary Sinewitz is executive vice president of BrandsMart USA, a chain of 11 electronics and appliance stores in Florida and Georgia. Over the past decade, he has spent $500,000 on legal fees and settlements with patent trolls.

Sinewitz said he basically had two choices. Settle a case for under $100,000, or pay up to $1 million to fight the suit in court.

"If I was a mom-and-pop store, they [patent trolls] could have put us out of business," Sinewitz said.

Main Street business organizations, including the retail federation, are pushing legislators for reforms.

The House in December of last year passed the Innovation Act to discourage patent asserting groups from abusive practices, though the legislation stalled in the Senate.

This week, the Senate Judiciary Committee was tentatively scheduled to mark up a bill introduced by Sen. Patrick Leahy, D-Vt. The newly proposed legislation may include provisions that mirror the House's Innovation Act. Those provisions were introduced by Sen.John Cornyn, R-Texas.

Many Main Street businesses—including restaurants, grocers and hotels—are pushing for reform because they say patent abuse has created an innovation tax on their businesses and start-ups.

Prominent tech inventors also are seeking reform, including Evan Williams, Twitter co-founder; Dustin Moskovitz, Facebook co-founder; and Ranganathan Krishnan, former principal engineer at Qualcomm.

Of course, there are plenty of examples of plaintiffs legitimately trying to protect intellectual property.

But current U.S. patent rules allow aggressive plaintiffs to legally use vague language in threatening letters to defendants. The upshot is a busy small-business owner is more likely to settle and write a check to make the problem go away. And really, entrepreneurs say, who has time or money to find a patent attorney when so many pressing issues loom—such as rising health-care costs and higher minimum wages?

"It's cheaper to settle. And that's why the troll business model works," says Benjamin Lennett, senior research fellow at the Washington, D.C.-based Open Technology Institute. "Most of these trolls are not the original owner of the patent," Lennett said. The trolls "either purchased the patent or are asserting on other's behalf."

And in many of the suits, experts note, a deeper dive reveals businesses targeted in so-called demand letters aren't even using the technology in question. They're basically spam letters from trolls, ranging from individuals to larger outfits.

Trolls "go fishing and if they throw out enough nets, they're going to get a fish," said Hollywood, Fla-based Sinewitz.

Said Samuels of the tech advocate group Engine: "This behavior is nothing short of extortion. It's like the mafia frankly."

This renewed push for reform comes as five patent reform cases make their way through the U.S. Supreme Court this session. The cases collectively address issues such as what's eligible for patents.

Another issue at stake is so-called fee shifting, or when courts should make the losing side pay the other's legal fees. Under current rules, individuals and businesses cannot recover attorney fees—even if they're found to be in the right. "Fee shifting would create a deterrent for low-quality, weak cases and give companies an incentive to fight," said Lennett of the Open Technology Institute, a tech program at the New America Foundation.

Patent reform advocates also want greater transparency and details in demand letters sent to businesses. In some cases, patent trolls don't even cite the patent in question.

Beyond software, many of the patent suits today target broad business methods. The Federal Circuit in 1998 expanded the scope of patent-qualifying subject matter. "Maybe we've gone too far in terms of what's patentable," Lennett said.

Sinewitz of BrandsMart USA said letters from patent trolls accused his business of infringing patents related to using a credit-card processing machine, and accessing an Internet search engine while doing business online.

With more small-business owners like Sinewitz targeted by suits, the U.S. Patent and Trademark Office is working to improve the patent system. President Barack Obama and his administration also pushed for patent reform last year.

Patent and trademark actions include new education and outreach to assist those receiving a patent infringement letter, and greater transparency of patent ownership information. That's according to Michelle Lee, deputy director of the patent and trademark office, who made the comments in a February blog post.

The office is committed to an intellectual property system that helps American entrepreneurs produce and protect their creative output, said Lee in the post.

And in another twist on the evolving intellectual property landscape, some entrepreneurs now are inking business deals with the presumed bad guys they're avoiding.

Some entrepreneurs who are the target of a lawsuit—or want to take proactive measures against potential trolls down the line—are entering business negotiations with larger patent hoarders in exchange for protection and patent expertise, which they might not otherwise have been able to afford.

So as patent trolls become savvier, patent abuse continues to chip away at businesses.

"I can't invest in new operating systems, make my customers experience better, and it affects the costs of goods I have to sell," said Sinewitz of BrandsMart USA.

Direct costs to U.S. businesses from suits brought on by patent trolls was roughly $29 billion in 2011. The figure is based on research by professors James Bessen and Michael Meurer from the Boston University School of Law. Large firms accrued more than half of direct costs, according to BU's research. But most of the defendants were small- or medium-sized firms.

"It's ugly all the way around," Sinewitz said. "And consumers ultimately are the ones that end up paying the bill."

—By CNBC's Heesun Wee. Follow her on Twitter @heesunwee, and Facebook.