On a day that the White House declared it was “taking on patent trolls,” IV announced two new lawsuits against JP Morgan and other banks for infringement of its patents, including one that issued in the year 2001 for “Systems and methods for authorizing a transaction card.” The patent, which lasts until 2018, appears to cover a basic verification system:

Intellectual Ventures has gained notoriety for promulgating so-called “patent trolling,” in which shell companies that don’t produce anything but acquire old patents in order to threaten lawsuits against companies that do. Since a patent defense in federal court costs millions of dollars, most companies — especially startups — acquiesce to the trolls’ demands for a license.

IV’s founder, former Microsoft executive Nathan Myhrvold, has remained impervious to criticism that he is damaging the economy through his decision to game a broken patent system. Even as technology startups and small businesses protest the sprawl of patent litigation, Myhrvold and the company have instead tried to foster goodwill by casting themselves in the tradition of America’s great innovators.

IV’s charm offensive may be wearing thin, however, as a growing legion of opponents criticize the trolling business. On Tuesday, the White House published a blog post announcing executive action to curb troll activity, and a report that notes how trolls:

have “over-asserted” their patents, pursuing legal action in a way that does not increase incentives for innovation, and in fact reduces these incentives and complicates normal business operation.”

The White House initiative may have limited effectiveness, however, as critics note the troll problem may lie in a system that permits overly broad patents in the first place. To curb trolling, influential financial blogger Felix Salmon has proposed using the SEC and other federal institutions to prosecute the trolls.

Meanwhile, on a popular level, the state of Vermont and radio shows like This American Life have highlighted the plight of small businesses taxed by the patent trolls.

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In a complaint filed in Vermont’s Superior Court, the state accuses MPHJ Technology — which operates 40 shell companies through a UPS store in Delaware  – of violating consumer protection law by demanding small businesses buy a license or face a patent lawsuit.

“Hopefully would-be patent trolls will see this and realize that if you want to prey on Vermont businesses large and small they’re going to have a fight on their hands,” Attorney General, William Sorrell, said by phone on Wednesday.

The patents in question date from the year 2001 and involve technology for scanning documents and attaching them to an email. Despite being around for more than a decade, no one tried to enforce the patents until 2012 when an attorney from Texas — a notorious troll forum — named Jay Mac Rust began brandishing them.

The Vermont complaint explains that Mr. Rust and his friends have been sending letters to hundreds of businesses in Vermont, including non-profit groups that help the disabled, and telling them to pay $900-$1200 per employee or face a federal lawsuit.

Patent trials are one of the most expensive forms of litigation and are an ordeal for even big companies — let alone a small shop in the Green Mountains. Worse, the defendants are out of luck even if they win since the shells that sue them don’t have any assets.

According to Sorrell, “patent trolling is a national problem” and the trolls have been harassing Vermont’s tech sector, as well as small business and non-profits, for years.

Vermont’s lawsuit, which demands the troll pay $10,000 for each letter it sent out, is based on consumer protection laws that forbid deceitful communications. The state’s governor this week also signed a new anti-troll law that Sorrell describes as “another arrow in the quiver.”

The suit will almost surely raise constitutional issues concerning state power and patents but, for now, businesses will welcome a big new ally in the fight against patent trolls; others include Google and patent scholars like Mark Lemley and Brian Love. It will be interesting to see if states with big tech centers, like California and Massachusetts, ask to intervene or file suits of their own. You can read the complaint yourself here:

Vermont v MPHJ Technologies Complaint

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Rackspace General Counsel Alan Schoenbaum detailed the legal challenge in a blog post on Friday. You can read the details there and in its petition to the United States Patent and Trademark Office, but the gist is that Rotatable sued Rackspace (as well as Apple, Netflix, Electronic Arts, Target, Whole Foods Market and numerous other large companies) and then told Rackspace it was ready to settle the claim for $75,000, possibly less. Classic troll behavior.

And even though its USPTO challenge will end up costing much more than $75,000, Rackspace decided to stick it to Rotatable and stick up for everyone else who has developed a rotatable mobile app. Some already have been sued and others might be, and all they did was utilize a feature of the operating system their apps run on. It’s the equivalent of suing Microsoft Office users for infringement if you thought Office had infringed your patent.

As Schoenbaum explained during a phone call, this is standard operating procedure in patent troll cases. Because of a legal theory called patent exhaustion, patent holders who sue and lose or settle with and grant a license to upstream defendants (e.g., OS or device manufacturers in this case) can’t then go after downstream users such as Rackspace or Whole Foods. It’s often a lot more effective to shake down lots of those downstream users — be they individuals, small businesses or corporations — for relatively small settlements than it is to target one or two big upstream infringers.

Small businesses, especially, are often ”perfectly situated sitting ducks for lawsuits,” Schoenbaum said. However, he added, “[Rotatable] probably shouldn’t have started with us.”

Going on the offensive against trolls

This isn’t the first time a large company has decided to stick it to a patent troll in the name of justice rather than settle, though. Last week, Rackspace decided to sue a troll called Parallel Iron that claimed Rackspace committed patent infringement by using the Hadoop Distributed File System. As part of its lawsuit against Parallel Iron, Rackspace is seeking a declaratory judgment that the patents involved don’t actually relate to Hadoop — a decision that could come in handy for other Parallel Iron defendants such as Facebook, Amazon and Oracle. (IP Nav, an alleged troll associated with Parallel Iron, gives its account of the situation here.)

In 2012, Cisco, Netgear and Motorola joined forces (albeit unsuccessfully in the end) to file a federal racketeering complaint against a patent troll demanding payments from hotels and restaurants for using WiFi.

And, of course, there are some more-defensive attempts to tackle the problem of patent trolls, such as Google’s decision to pledge non-assertion for a number of patents related to its MapReduce technology. That decision essentially freed up anyone to use the processing components (but, obviously, not the storage component) of the Hadoop platform without fear of infringement claims from anybody.

Covering the Rackspace-Parallel Iron news, I suggested more large companies serious about fighting the alleged scourge of patent trolling should do exactly what Rackspace is doing with Rotatable — and it’s possible that might happen. Rackspace is attacking Rotatable thanks to a provision of recent patent reform legislation that lets third parties (like Rackspace in this case, because it’s not claiming any patent ownership) to challenge the validity of a patent based solely on the existence of prior art. Prior art that would refute the novelty of a patent has historically been difficult to track down, but new tools such as Google Patent Search are making it an easier process.

In this case, Schoenbaum told me, the amount of prior art available made it a perfect opportunity to take advantage of the new law.

One of many pieces of evidence in the Rackspace petition.

However, he noted, just because the recent patent reform legislation was a step forward, that doesn’t mean the system is perfect. Patent examiners are still overloaded with applications, and in difficult-to-parse software and business-process patents there’s probably a bias to grant rather than deny. He’d also like to (and is optimistic he will) see Congress take up patent reform once again to give end-users (like mobile developers in this case, or WiFi users in the Cisco case) immunity against patent infringement suits.

Whatever happens in Washington, though, it appears Rackspace will keep on taking the fight to patent trolls. Just like Red Hat before it, new open source champion Rackspace wants to do what it can to defend the open source community, Schoenbaum said. “We want to start a movement.”

Feature image courtesy of Shutterstock user Denys Prykhodov.

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The patent troll problem, widely exposed by NPR in 2011, has long infuriated real companies and the tech sector. And now people in high places are starting to notice.

This week, a young woman told President Obama in a Google Hangout that she and other entrepreneurs live in fear of patent trolls and asked if he planned to continue patent reform. In response, the president made his boldest statement to date on the issue:

“The folks that you’re talking about are a classic example; they don’t actually produce anything themselves. They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

It looks like common sense has come even to the highest halls of power (see interview and transcript here via Patent Progress). The question now is whether President Obama will actually take charge and do something about the patent plague that is sucking money out of the most innovative sector of the economy.

In the past, the president has proved adept at throwing sops to his fans and fundraisers in the tech sector without doing much to help them. In 2011, for instance, he signed the America Invents Act, which was a milquetoast measure to fix the worst elements of the patent system. While the law made it easier to challenge bad patents, it didn’t reign in absurd jury verdicts or overly broad patents that enable the trolls in the first place.

It’s time for the president to try again. To do so, he will first need to get around the specific concerns of the pharmaceutical industry, which has blocked previous patent reform efforts; as Judge Richard Posner has noted, drug makers are among the few who may need the monopoly power of a patent in order to recoup their investments. This is not the case for software and tech where a first-mover advantage provides an adequate head start and technology rapidly becomes obsolete.

As for addressing the trolls, law professor Brian Love has proposed a very sensible solution. Love, a protege of IP godfather Mark Lemley, suggests changing the patent fee structure to create disincentives for hoarding the obsolete patents that trolls typically use to torment their targets. The advantage here is that this is something Obama can do directly. Meanwhile, in Congress, the president can push for legislation to eliminate billion dollar jury verdicts.

Finally, the president can also tap his executive power to increase antitrust scrutiny of giant patent trolls like Intellectual Ventures for imposing what is, essentially, a startup tax across the tech sector. If the Obama administration even attempted to impose such a tax, the political cost would be enormous; there’s no reason the private sector should get away with the same thing.

Enough talk. It’s time to act, Mr. President.

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Among IBM patents was a cognitive system implemented on IBM Watson that enables the computer to accept a natural-language question, understand it and answer it;  another is a traffic prediction method that delivers congestion information to in-car GPS systems. Still another is a pattern recognition system that helps computers understand spoken phrases or process satellite data to predict the  aforementioned traffic jams. An IBM spokesman said 300 of IBM’s new patents, relate to analytics, where IBM has invested in both organic growth and growth by acquisition. The goal, as we hear over and over from many tech vendors, is to solve the “big data” problem.

The trotting out of this list and IBM’s press release announcing its number one slot has become a yearly rite. IBM was granted more than 1,000 more patents in 2012 than #2 Samsung Electronics.  Only three US companies — IBM, Microsoft, and General Electric cracked the top ten this year.

There was considerable shuffling in the top 50 list this year. Google hit the top 50 for the first time, coming in at number 21, nosing out nemesis Apple by 15 patents. Google’s patent count soared 170 percent year over year, the biggest jump for any company. Apple also rose to the 22 slot from 39 last year, with 60 percent more patents than in 2011.

Patent ownership represents more than just bragging rights. Increasingly tech companies rush to amass patents to protect themselves from infringement lawsuits and to wage legal war on competitors. Complicating matters are the “patent trolls” – companies that buy patents to assemble a legal arsenal to go after alleged infringers but don’t actually create technology. Critics contend that patents do more harm than good in protecting companies from competition. They charge that the patent system, instead of promoting and rewarding innovation, is often used to stifle it.

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In a series of complaints filed in Delaware, Clouding IP LLC claims the media outlets are infringing on two patents from 2005 and 2007 entitled “technique for enabling remote data access and manipulation from a pervasive device.”

Clouding IP, formed in February of 2012, points to readers’ ability to read the New York Times’ website and mobile apps through a smartphone as evidence of infringement:

New York Times has infringed and continues to infringe the ’481 patent by, among other things, making, using, offering for sale, selling and/or importing products and/orservices in the United States that enable access to and manipulation of data using a pervasive device, such as a mobile phone, by receiving a data request from a pervasive device, obtaining the requested data, determining the available data manipulation operations and locations of such operations for the obtained data and returning the obtained data and the data manipulation operations and locations to the pervasive device.

In separate filings, Clouding IP makes similar allegations against Time Inc, the Huffington Post, Reuters, Ti-Media, Gannett Co and Fox News. Earlier this year, it also sued major tech companies, including Amazon, Apple and Google. A New York Times spokesperson declined to comment on the Clouding IP lawsuit.

Richard Kirk, the head lawyer for Clouding IP, did not immediately return a request for comment about the identity of his client or elaborate on the alleged infringement. The people behind Clouding IP are likely to remain a mystery because Delaware is one of three states that permit shell companies to be owned and managed anonymously.

This is not the first time the New York Times has been targeted by a so-called “patent troll” — shell firms backed by investors who make a business of obtaining old patents and then suing those who refuse to license them. Last year, a company called Boadin Technologies sued the Times, Bloomberg and others for using the common feature known as autocomplete. The Times elected to fight that suit, and recent court filings show the parties agreed to dismiss the case with each side paying their own costs. In August, the NYT’s general counsel described the troll activities as a “tax for being on the Internet.”

The trolls represent a dilemma for cash-strapped media businesses because it can cost millions in legal fees to defend a patent suit. Paying the unwanted license fee may be a cheaper option than going to court; however, doing so may encourage other trolls to seek their own payments.

In a rare piece of good news for potential targets of such shell companies, the US Patent Office proposed a rule to force patent trolls to identify their real owners. This comes during a week in which another patent troll sued America’s major retailers for using online chat.

Clouding IP LLC

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Today, technology firms launched a new website called Patent Progress to call attention to the patent problem, and to share solutions from legal and policy experts. The site is run by the Computer & Communications Industry Association, an advocacy group that counts Google, Microsoft, Yahoo and Facebook among its members. Its contributors include leading intellectual property and antitrust lawyers and scholars.

The significance of the site is that it adds new intellectual heft to a growing patent reform movement in Congress and the courts. Patent Progress also provides plain English explanations of topics like “trolls” and the “Court of Appeals for the Federal Circuit” which have contributed to the patent problem. The site also has a helpful dictionary of terms like prior art and payday mugging (“the phenomenon of small start-up companies being targeted with litigation by patent plaintiffs immediately after receiving venture capital investment.”)

“The goal is to build a narrative towards a bigger picture legislative solution,” said Dan O’Connor, a  policy expert and director at the CCIA.

Will all this be enough to stop the patent troll epidemic that, according to a recent academic study, has drained $500 billion from the US economy in the last decade?

In the short term, probably not. The trolls and their lawyers have invested too much in their sprawling legal campaigns (which rely on “inventions’ like emoticon patents) to stop now. And Nathan Myhrvold, the man most responsible for the patent mess, continues to gull media outlets into believing his shakedown campaigns are a force for global good.

But in the bigger picture, the launch of Patent Progress coincides with a growing public awareness, reflected in radio shows like NPR’s “When Patents Attack” and websites like PatentTrolls.org, that there is more to patent policy than romantic images of Thomas Jefferson or Steve Jobs.

(Image by Creativa via Shutterstock)

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For the unfamiliar, IV is the dark empire of Nathan Myhrvold, a former Microsoft executive who gamed the patent system by amassing tens of thousands of often-flimsy patents and then threatening to sue everyone in sight. IV and other trolls have reportedly drained $500 billion from the economy and created widespread disenchantment with America’s patent policies.

While IV has been at this for years, its activities are often undetected thanks to a clever use of a reported 1,300 shell companies. This means that the start-ups and tech companies who receive “pay-up-or-else” letters for using things like emoticons are confronted by patent owners with futuristic names like “iZ2″ or “Mobile Transformations” — only to discover that the patent owner is little more than a group of lawyers with a PO Box in Texas. All the while, the puppet master remains well hidden.

Now, however, a boutique analytics firm called IP Checkups is creating the “IV Thicket Case Files“, a blog and database that will serve as a taxonomy of IV’s trolling. The idea, says the company, is to keep tabs on IV and to provide a warning mechanism that will help start-ups determine if they are likely to be mugged by one of IV’s progeny.

More broadly, IP Checkups’ project could reframe public perception of IV’s activities. So far, Myhrvold has gulled the media with tales of IV’s marvelous inventions. This could change once it becomes easier to see the extent of the dirty work carried out by the shells and, just possibly, galvanize the federal government to drive an anti-trust stake into IV’s heart.

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The study, which was commissionedby the Government Accountability Office, is encapsulated in a Duke Law and Technology Review article titled “The America Invents Act 500: Effects of Patent Monetization Entities on US Litigation.” The authors — Sara Jeruss of Lex Machina, Robin Feldman of the University of California, Hastings, and Joshua Walker of Simpson Thacher & Bartlett LLP (and founding CEO of Lex Machina) — analyzed 500 random patent lawsuits since 2007 (100 per year) and concluded the number filed by suspected patent trolls (called “monetizers” in the study) rose from 22 percent in 2007 to almost 40 percent in 2011. Of the five biggest lawsuit filers among their sample set, four are monetizers.

This increase shouldn’t be surprising.  Our Jeff Roberts regularly covers such lawsuits in the technology world, including recently filed cases against Foursquare; a power trio of Facebook , Walmart and Disney; and pretty much everyone who built a product based on Hadoop. It’s this state of affairs that has spurred U.S. appellate judge Richard Posner to call the patent system dysfunctional, and has researchers, entrepreneuers and even Google devising methods to improve it.

Source: Jeruss et al. Suspected monetizers and individuals/trusts fall under “monetizer” label.

The problem could be particularly bad online. A 2012 Stanford Technology Law Review article found that patents relating to the internet are litigated almost 10 times more than non-internet patents. In a GigaOM post on Monday, Twitter General Counsel Ben Lee described a recent trial victory over a patent troll and said his company has been hit with three lawsuits from trolls in the past month and a half alone.

However, the new study notes, an increase in patent lawsuits can’t possibly account for what must be an extraordinary number of threats, forced licensing deals and other legal tactics that never make their way to court:

“Based on anecdotal evidence, albeit a mountain of such anecdotes, the vast majority of monetization activity never progresses to the point at which the patent holder actually files an infringement lawsuit. Given the costs of litigating infringement suits, the uncertainty of the outcome, and the potential for outsized judgment awards, companies may capitulate to a patent monetizer’s demands, rather than face the ordeal of a trial.”

A recent survey from the American Intellectual Property Law Association found the median cost of legal fees in a patent litigation ranges from $650,000 to $5 million depending on how much money is at stake. And researchers at Boston University recently concluded that patent trolls are have drained $500 billion from the economy since 1990.  A proposed law, which Twitter’s Lee supports, would force patent trolls to pay defendants’ legal fees if defendants prevail.

Although the “America Invents Act 500″ authors note there are limitations to their study and methodology, it would appear their classifications of operating entities (i.e., companies actually using patents) and monetizers is accurate. They note the concentration of lawsuits brought by monetizers in the plaintiff-friendly Texas federal court system, as well as the outcome of cases brought by trolls. That group is more likely to settle rather than go to trial, and more likely to get their claims dismissed via summary judgment or default judgment.

Source: Jeruss et al

Feature image courtesy of Shutterstock user zimmytws.

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Still, even meritless lawsuits cost us money in attorney fees, and force our engineers to spend time with lawyers rather than improving our product. For example, we recently won a case regarding U.S. Patent No. 6,408,309, entitled “Method and System for Creating an Interactive Virtual Community of Famous People.” After a trial before a jury, we managed to prove that we didn’t infringe and that the asserted claims from the patent were invalid. This patent was “invented” by a patent lawyer, Dinesh Agarwal. According to his own testimony at trial, Mr. Agarwal had no computer science or programming background, and he thought up the whole idea while he was shopping for groceries.

As Judge Posner recently observed in his article, “Why There Are Too Many Patents in America,” this patent is a perfect example of a patent issued by the Patent Office with a near-zero cost-of-invention. It cost Mr. Agarwal nothing to create his patent, and it cost him nothing to bring the lawsuit (the law firm of Friedman, Suder & Cooke took his case on contingency fee). When you hear engineers complaining that the patent system is broken, a system that last year issued a record-breaking 247,000 new patents, this is the type of thing they are talking about.

According to the American Intellectual Property Law Association (AIPLA)’s 2011 survey, an average patent lawsuit costs between $900,000 to $6,000,000 to defend. In the last month and a half alone, Twitter has received three new patent troll lawsuits. The law currently does not allow us to recover the millions of dollars in fees we spent to defend ourselves — nor does it compensate us for the time spent by many Twitter employees who worked on the case. The law only allows us to ask for certain types of minor fees, which is why the court was only able to order this particular patent troll to pay us $10,447.85.

There is a bill that was introduced in Congress several weeks ago, by Representatives Peter DeFazio and Jason Chaffetz, which would try to change that. The SHIELD Act would put the financial responsibility for these sorts of trivial patent lawsuits on the patent trolls themselves. We support efforts like the SHIELD Act to improve our current patent system.

Ben Lee is legal counsel at Twitter.

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