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Congress Should Help Small Businesses Deter Patent Trolls The patent trolls are the only stakeholders who benefit from vague and unclear threats to sue for patent infringement.

By Scott Shane

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Darrell Issa, the California Republican who is the incoming chairman of the House Intellectual Property Subcommittee, said recently that legislation to curb patent trolls is high on his agenda. That's good news for small business owners who have faced a growing problem in recent years – letters from trolls demanding payment for alleged patent infringement.

When House-passed legislation to curb the problem stalled in the Democrat-controlled Senate last year, small business owners were left without a Congressional solution.

Patent trolls are businesses that acquire intellectual property for the sole purpose of collecting damages for infringement. More often than not, they employ unscrupulous tactics to extract compensation from alleged infringers. One commonly employed technique is to send a vaguely worded letter alleging an ill-defined infringement and demanding that the recipient take a license to the troll's patent to avoid a lawsuit.

Trolls often target young and small companies, research by Colleen Chien of Stanford University law school finds. The American Intellectual Property Law Association (AIPILA) estimates that the average cost of defending a patent infringement case is $650,000 for lawsuits of $1 million or less and $2.5 million for those of $1 million to $25 million. Because patent trolls know that many small companies lack these kinds of dollars for a fight over intellectual property, they often ask for relatively small sums of money – in the tens of thousands of dollars. The difference between the trolls' demand for compensation and the cost of defending an infringement charge gives small business owners a strong incentive to pay up rather than fight.

Trolls often send letters to thousands of companies in the hope that a few of them will quickly settle, allowing them a good return on their investment in the purchased patents. Because many of the trolls' patents are weak and of limited validity, most know that their odds of success are too low to go much beyond a demand letter, let alone to pursue an infringement lawsuit.

Related: Startups Can Now Buy Insurance to Protect Themselves Against Patent Trolls

Congress can help curb the troll problem by passing legislation that requires more clarity in demand letters. A good start would be the Targeting Rogue and Opaque Letters (TROL) Act, introduced to the 2013-2014 Congress by Nebraska Republican Lee Terry. The bill was passed by the House Subcommittee on Commerce, Manufacturing and Trade and was sent to the Committee on Energy and Commerce last July.

According to the Congressional publication The Hill, Terry's bill would require letters demanding royalties or settlements for alleged patent infringement to be more transparent. Specifically, the proposed legislation would compel senders to identify the patent being infringed and explain the way their claims are being violated. Moreover, the law would require letter writers to specify the owner of the patents, as well as to be forthright about their validity. Finally, Terry's bill would codify the Federal Trade Commission's authority to take action against violators, giving teeth to efforts to control patent trolls.

Passing legislation to curb patent trolls won't be easy. The laws must be strong enough to deter the trolls, but not so powerful as to limit the ability of legitimate non-practicing entities (NPEs) – organizations that own patents but do not make products – from successfully suing infringers of their patents. Technology-transfer companies, universities, and startups that rely on technology licensing as their business model must be able to stop patent violators, or others will strategically infringe on their patents to gain access to their technology without licensing it.

Boosting the transparency of demand letters is a good place to begin. The patent trolls are the only stakeholders who benefit from vague and unclear threats to sue for patent infringement.

Related: An Entrepreneur's Guide to Getting Sued and Fighting Back

Scott Shane

Professor at Case Western Reserve University

Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).

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