Stop trolls from slowing the growth of start-ups

Trolls’ strongest weapon is the threat of costly litigation, which usually results in innovative companies and small businesses digging into their coffers to reach settlements, often regardless of the validity of the patent or claim being asserted against them.

Fortunately, the House and Senate have shown a great deal of interest in supporting legislative solutions to the troll problem.

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In response to Congressional attention to the problem, trolls are increasing their lobbying activities in Washington to try to slow down this important legislative momentum. Recently, Nathan Myhrvold, co-founder of perhaps the most notorious patent troll, Intellectual Ventures, is walking the halls of Congress and hitting the airwaves to defend the practices of his company and others like it.

Patent trolls claim to be pro-innovation advocates for small businesses and start-ups, but increasingly, they are attacking entrepreneurs, in all industries.  Patent trolls’ claims are dubious, but their demands are clear: pay up or face years of costly, often futile, patent litigation.

Small businesses and start-ups are the least prepared to defend themselves against patent trolls’ attacks, but according to a recent survey by Santa Clara University legal scholar Colleen Chien, companies with less than $10 million in revenue now account for 55 percent of patent troll lawsuit defendants.  And though the businesses being attacked span almost all American industries, including restaurants, grocers, retailers, hospitals, pharmacies, and even non-profits, Chien found that the impact on small tech companies remains overwhelming, with nearly 90 percent of technology venture capital entities having been impacting by demand letters from patent trolls. These are the companies that grow quickly and create jobs, and that need an environment in which they can succeed.

The cost of patent troll activity is high, and it is growing. One leading study estimated that patent trolls cost the U.S. economy $29 billion annually, and another recent study found that the actual costs of litigation associated with patent trolls grew more than 11 percent annually for 25 years, from 1984 through 2009.

What’s more, in many cases, patent trolls have filed cases against dozens of unrelated defendants at once, multiplying the impact of each case.

It is undeniable that the negative impact of patent trolls is also felt outside of the courtroom. Patent abuse happens daily, when American companies – from the largest innovators to the smallest coffeehouses – receive extortion letters demanding payment. Most of these victims choose to avoid the unpredictable cost of litigation in favor of the certain (but no less infuriating) expense of settlement.

Imagine a small business with a handful of employees but potential for growth. Defending against a patent assertion in court would be nearly impossible, so a settlement – though burdensome – helps avoid a disastrous outcome.  Unfortunately, that business is often saddled with a recurring “license payment” that continues to divert resources from innovation and growth.

Patent trolls call these settlements “business agreements,” arguing that they provide small businesses with access to technologies they need to succeed.  But this simply is not true.

Patent trolls’ economic impact goes beyond the cost of settlement or litigation.  Professor Chien found that the threat of patent trolls causes delays in hiring, changes in business strategy, and even premature business exits.  Is this the future that America wants for its entrepreneurs and emerging companies?

Intellectual property is important, and many troll victims themselves own valuable intellectual property. But the patent system is intended to support innovation and job creation – not to stymie the growth of small businesses or to hijack company funds that would be better used for research and growth.

In all 50 states, businesses of all sizes have fallen prey to patent trolls’ deliberate, manipulative attacks. It is time for Congress to address the patent troll problem, to find a viable solution, and in so doing, to allow hardworking American companies to get back to business.

Potter is president of the Application Developers Alliance. McGeary is co-founder of Engine Advocacy.