Ascent of the 'patent troll'

Ascent of the ‘patent troll’
City bus systems are the newest targets of companies that vacuum up patents
and turn them into lawsuits

Waiting for a Capital Area Transit bus that’s running late in Raleigh? Regular riders
know they can track its whereabouts. There’s an app for that.

There’s a patent for that too, and it doesn’t belong to the city – at least that’s the claim
made by ArrivalStar S.A., a Luxembourg-based company that has, in recent years, filed
more than 100 patent infringement lawsuits arising out of the use of package and other
tracking devices. The actions have targeted big box stores like Home Depot, small
companies and even the U.S. Postal Service, which ArrivalStar sued in federal court in
November 2011.

The company has since set its sights on transit systems in cities like Portland, Ore.,
Cleveland, Missoula, Mont. and now,
Raleigh, accusing them of using its
patented technology without a
license. Unlike others, Raleigh has not yet
been sued, but it has received ArrivalStar’s
peremptory demand notice.

 “ArrivalStar sent us a letter essentially
saying that our folks are in violation of
these various patents and asking us to
contact them to negotiate,” said City
Attorney Thomas McCormick. “We’re
reviewing that now.”

Should the city decide to pay up, it will join
countless others that have decided to
settle rather than fight with ArrivalStar,
even in the face of questionable patent
claims, and avoid the prohibitive costs that
come with a full-fledged patent challenge.

And that white flag mentality has critics red
with rage.

“It didn’t take long for the plaintiff’s bar to
realize that, with the cost of patent
litigation so high and the uncertainty of
results, they could leverage the system for
pretty high returns, even if the case is of     WHAT'S THE DIFFERENCE BETWEEN THESE
highly questionable merit,” said                NEARLY IDENTICAL BUS TRACKING SYSTEMS?
Anthony Biller of Raleigh’s Coats and Bennett. The Mountain Line System in Missoula, Mont., (top)
                                                   has been sued for patent infringement. Raleigh's
                                                   Capital Area Transit (bottom) hasn't -- at least not yet.

The essence of a troll

In the patent world, ArrivalStar is often called a “troll,” a company that buys patents from
inventors, or their successors, and then monetizes those rights through negotiation or
litigation. The more polite term, said Biller, is “non-practicing entity — a patent owner
that is enforcing patent rights for technology that it does not practice.” But that definition
doesn’t really capture the essence of a troll, he added.

“There are a lot of legitimate patent owners out there — inventors or companies that are
trying to bring inventions to market or to license them and are really contributing to the
advancement of technology,” Biller said. “Their claims are legitimate.”

That’s what distinguishes the patent troll, he added. “A fair definition of a patent troll is
that it is a nonpracticing entity that collects very broad patents, vague patents, and has a
pattern of asserting them under questionable validity and enforcement,” Biller said. “The
goal is not to advance the technology. The goal is to get a settlement.”

ArrivalStar has been extracting settlement payments in the range of $50,000 and
$75,000 for public transit systems, its attorney Anthony Dowell said in a report on the
website arstechnica.com.

That might sound like a reasonable fee for the use of a patented technology, but critics
say the underlying patents are so general as to conceivably cover any technology that
tracks a vehicle along a route and notifies the recipient of its whereabouts.

The Electronic Frontier Foundation is working with the Samuelson Law, Technology, and
Public Policy Clinic at Berkeley Law to defeat ArrivalStar’s patents. Back in March, the
organization issued a call for “prior art” — all public knowledge predating those patents
that describes the steps claimed to be covered by them — namely, a tracking method
that tracks a vehicle, compares the tracking information to the vehicles’ scheduled arrival
time along a route, and contacts a user to tell him if the vehicle is on schedule.

Mother Murphy fights back

Though ArrivalStar’s patents may be of questionable validity, few of its targets have
chosen to challenge them.

Not Greensboro-based flavoring manufacturer Mother Murphy’s Laboratories, which in
Feb. 2011 launched its own pre-emptive attack, suing ArrivalStar in federal court in
response to a demand letter received from its attorneys.

That letter described ArrivalStar’s patents, complete with a literary description of their
origins: “Martin Jones . . . conceived his inventions in 1985 when he observed young girl
waiting at a school bus stop on a rainy, foggy Atlanta morning.” The company went on to
list the growing number of companies and agencies who had signed on as licensees, as
well as the lawsuits it had brought to enforce its patents, and offered to settle its claims
without litigation against Mother Murphy’s for a licensing fee of $110,000.

Instead, Mother Murphy’s asked the court to rule that its delivery tracking system did not
infringe on the ArrivalStar patents.

That suit was short-lived, though, and Mother Murphy’s is now a licensee of the
ArrivalStar patents, said Jacob Wharton of Womble Carlyle in Winston-Salem, who
represented Mother Murphy’s in that action.

“The trolls have become sophisticated, in terms of what dollar amount they ask for,”
Wharton said. “If they come in and ask for $500,000, people are going to dig in and
litigate. But if you’re asking for what would take two months of litigation, a business has
to stop and seriously consider whether it’s in their best business interests to make a
reasonable settlement offer.”

Wharton estimates that taking a patent infringement case to completion would cost
easily over $500,000 and some three years in North Carolina courts.

The Carolina way

North Carolina has a home-grown patent troll of sorts, Raleigh-based Scenera
Research, which through its subsidiary FotoMedia Technologies sued more than 60
companies during 2007 and 2008 for alleged infringement of its patents for photo-
sharing technology. According to a report on the blog The Prior Art, two of the three
patents underlying the lawsuits were invented by a Massachusetts Institute of
Technology graduate who created a photo-sharing site called YoBaby in 1997.

FotoMedia, and one of its targets, FotoTime, were spotlighted in a July 2011 episode of
This American Life on National Public Radio, in which the owner of FotoTime admitted to
settling with Fotomedia in order to save his business. The show also featured a former
Google executive who accused another alleged troll, Intellectual Ventures, of engaging
in “Mafia-style” tactics.

FotoMedia has since sued Facebook, MySpace and three other companies in Delaware
federal court for alleged infringement of the photo-sharing patents. Fotomedia’s
attorneys in that action from Kilpatrick Townsend & Stockton in Atlanta and Winston-
Salem did not respond to an email requesting comments.

Scenera and its subsidiary FotoMedia did not file any of its suits in North Carolina,
though. That’s consistent with patent trolls’ preference for the federal courts in the
Eastern District of Texas, in Delaware, and recently, in the Eastern District of Virginia,
Biller said. The Carolinas are not really known for patent litigation, he added, despite the
fact that Research Triangle Park is one of the leading areas of the country for innovation
and patents. “From what I can tell, and I’ve been watching the docket fairly closely, it’s
by no means a favored venue of patent trolls,” he said.

Tim St. Clair, of Turner Padget in Greenville, says the same is true in South Carolina.
“I’ve handled a sizeable portion of patent litigation in South Carolina over the past
several years, and I haven’t seen any patent troll activity here.”

But Wharton, the attorney for Mother Murphy’s, sees some benefits for local companies
bringing a pre-emptive suit here.

“If you’re a Lowe’s, or you’re a Mother Murphy’s, and you’re in Greensboro or you’re in
Statesville in federal court, and you’ve got this troll harassing you, I think you’ve got a
more attractive story to tell the judge as to why this case should stay here,” he
said. “The trolls make noise about being brought into court here, but we invite them to
bring the motion to dismiss, and we’ll talk to the judge here about that.”

Silver lining?

Biller thinks the patent troll problem, and other patent issues, could pick up some traction
in this election year.

“We have some heavy hitters here at SAS and Red Hat who are really pissed off,” he
said. “We are creating these huge disincentives for technology companies to do
business in the U.S., and the patent trolls and litigation burden are a big thing.”

Biller has suggested some solutions to the troll problem that he’d like to see adopted as
further revisions to the patent laws, including a cap on damages, fee-shifting and a
requirement that lawsuits be filed where a defendant’s principal place of business is
located.

St. Clair agrees that patent litigation is costly, particularly for defendants. “A secondary
market may have been created for patents in which you find holding companies being
established merely to own and to litigate patents, and they can be highly financed and
they can be set up purposefully for the goal of pursuing patent litigation,” he said. “So the
financing is already there. That’s got to be frustrating.”

He also thinks that other tactics typically available to defendants in an infringement suit
may not be available in troll litigation. “For example, where both plaintiff and defendant
are practicing a patent, the defendant might be able to assert counterclaims for
infringement, which adds additional incentive for a plaintiff to enter into a reasonable
settlement. That likely won’t apply in actions brought by a troll.”

But St. Clair wonders if there just might be a silver lining here. “If you think about the
secondary market — if in fact the secondary market is being encouraged by non-
practicing entities and holding companies, doesn’t that increase the value of patents and
isn’t that a good thing for everyone involved in the patent system?”

Not to Ken Hammer, general counsel of DataFlux in Cary. “Trolls are different because
they don’t build or sell anything most of the time. They often don’t invent things,” he
said. “They’re opportunistic. They purchase IP from distressed or bankrupt companies
and then seek licensees from companies that build and sell products. This throws off
the balance of commerce since IP is not used as a means of protecting innovation in a
competitive marketplace. Instead, it’s used as leverage to extort payments.”

As for ArrivalStar, attorney Anthony Dowell thinks his client gets a bad rap. He likened
Martin Jones, one of the company’s owners and the original inventor of the tracking
patents, to the Wright brothers. “They were never successful businessman, but they
were great inventors,” he said. “They ended up in years of litigation with Glenn Curtiss,
who was able to successfully manufacture and market a better plane.”

“There’s a long history in this country of rewarding the first to invent something,
regardless of whether they ultimately are able to create and build a business — which is
an entirely different skill set,” Dowell added. “ArrivalStar owns these patents, and they
have the right to enforce them. What else are they going to do but offer to license them
to other companies and when companies decline, to sue them?”