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The Rising Threat of Patent Trolls and What You Can Do to Protect Your Startup

The Rising Threat of Patent Trolls and What You Can Do to Protect Your Startup

Picture this: You're a young entrepreneur, and you've just launched your first startup. You debut an amazing iOS app--one that allows users to pay for your service with a tap of the screen, and people are downloading it like crazy. Your model is scaling and the media has taken notice.

All of a sudden, you receive a letter from an obscure company claiming you infringed on their patent. The patent in question? Payment within an app, a feature used by an enormous amount of developers. The company demands an astronomical licensing fee or otherwise a lawsuit will ensue.

Don’t think this scenario can happen? You’re wrong. Thousands of these letters are sent out yearly by companies known as non-practicing entities, or patent trolls, who are only in business to sue others over broadly worded patents.

Two well-known patent troll cases involve the above scenario, where a company went after a huge number of developers for an in-app payment feature, and the Paperless Project LLC troll, who sued a plethora of small businesses that used scanners in their office.

So, how does this vicious patent cycle stop and what can young entrepreneurs do to prevent paying these high licensing fees or risk being sued?

To find out, we caught up with Tim Sparapani, vice president of policy for the Application Developers Alliance, an industry association dedicated to entrepreneurs.

The Rising Threat of Patent Trolls and What You Can Do to Protect Your Startup
Tim Sparapani, Vice President of Policy at Application Developers Alliance

Q: What are patent trolls and what do they do?
A: A patent troll is a particular type of business which does not use the patents that it owns and has no intention of creating anything with the patent. Instead, they go around buying old or dormant patents and use them to sue people they believe may be using the underlying technology embodied in the patent.

Q: Do they also develop over generalized patents?
A: Yes. They register patents that are so broad or vague they can’t really refer to any particular invention. They then go around and sue hundreds, if not thousands, of companies claiming infringement. The patent troll will send out demand letters saying something to the effect of 'You are in the violation of a patent. If you would like to avoid very expensive litigation, you can simply sign a licensing fee.' From our perspective and on behalf of most entrepreneurs, this is extortion.

Related: 3 Common Mistakes to Avoid When Naming Your Business

Q: How does the U.S. Patent and Trademark Office fit in?
A: It's been part of the problem in the past, as some patents that have been issued are so broadly written, so vague, they permit many different interpretations. And these vague patents are the prime tool the trolls use.

Q: How do patent trolls harm startups?
A: They take away their hard earned capital by diverting it to litigation fees and lawyers. There is a secondary problem, too. They distract key executives and employees from developing great new technologies.

It's also a distraction for other investors. Typically, the case for startups is the people most likely to invest in second and third rounds of funding for a company are those who invest in the first round. When you get a demand letter from a patent troll, most companies feel the need to let their early investors know what is happening. And when those investors find out about the letter, they may be less inclined to invest in a subsequent round.

Also, when startups are trying to raise other capital, they have to disclose to potential new investors that they have a pending demand that could lead to litigation.

Related: How To Protect Intellectual Property

Q: How can young entrepreneurs protect their startup?
A: Get your own patents. And when they find an overbroad patent, they can flag it and ask for a reexamination. It is a costly experience, but they probably should if it is going to be a problem for them. Companies have to be thinking about these issues-- how to protect their intellectual properties--from day one.

Q: If a patent troll comes after an entrepreneur, what resources are out there?
A: They can take the bare knuckle stance and fight until the bitter end, but you've got to have resources set aside for that inevitable patent suit.

Unfortunately, there is not a great deal else an entrepreneur can do to protect themselves. This is why so many startups have ended up paying these extortionate “licensing fees."

Q: In the future, how do you hope this issue gets resolved?
A: We need to see some fee shifting occurring in litigation, so it becomes far less onerous to defend yourself from one of these lawsuits. If someone brings a ridiculous legal claim, you should be able to in some way punish them for the expense they have imposed on your company.

We should set up a system where we can more easily have patents that were unwisely issued reviewed and reexamined, and hopefully pare down or thrown out entirely if they are not valid or if they were poorly written.

And I think we need some continuing education at the Patent and Trademark Office. Software development is moving so quickly that six months is a lifetime. We have to have those software experts at the USPTO getting continuous education, continuous updates about their training, so they know what state-of-the art is, even if it is moving at essentially the speed of light.

To learn more about patent reform, tomorrow the Application Developers Alliance is kicking off a 15-city tour  to chat with, and better inform, startups across the country.

-This interview was edited for clarity and brevity.

Andrea Huspeni is an article editor at Entrepreneur. 

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