© 2013 The Texas Lawbook.
By Jeff Bounds
Staff writer for The Texas Lawbook
(November 18) – Litigation brought by so-called patent trolls is having such a huge negative economic impact on businesses throughout Texas and across the country that Congress needs to act quickly to correct the problem, three prominent corporate general counsels from Texas said Monday.
The chief legal officers of Whataburger, Rackspace Hosting Inc., the Texas Hotel & Lodging Association and the Internet Association trade group said patent lawsuits have an $80 billion drag on the national economy and are damaging the financial bottom lines of even non-technology businesses in Texas such as hotels, hospitals and charities.
The number of new patent lawsuits filed in Texas increased by more than 90 percent between 2011 and 2012 – a large percentage of those were filed by patent trolls, according to federal court records.
The three general counsels conducted a joint press conference Monday in support of the Innovation Act of 2013, which is one of seven patent reform bills pending in the House and Senate. The legislation is scheduled to be debated and drafted next week by the House Judiciary Committee, which has five Texas representatives as members.
Patent trolls, known in legal circles as “patent assertion entities,” are businesses that buy patents on the open market and then seek legal settlements from companies that supposedly infringe on the intellectual property. PAEs don’t sell goods or services to the public, but exist only to pursue lawsuits and seek out of court settlements.
Alan Schoenbaum, the general counsel of the San Antonio-based web hosting company Rackspace, said the current system for dealing with trolls is “totally unfair.”
“They acquire cheap patents, which can be invalid or low quality, but the expense of defending the case is so great that they can use it as a weapon to extort a settlement from a defendant like Rackspace,” Schoenbaum said.
It can cost $2 million to $5 million to take a patent case to trial, he added.
That exact troll tactic prompted the Whataburger fast food chain to refrain from offering WiFi wireless connections in its stores, according to Michael Gibbs Sr., who is general counsel of the San Antonio-based firm.
“Most of the time, you have no way of knowing if you’re buying hardware or software that’s been patented,” Gibbs said. “We didn’t put WiFi into our restaurants, as we thought we’d be buying into a lawsuit.”
In a similar vein, Whataburger pulled a service it offered on its web site offering nutritional information on its food following threats of patent litigation, Gibbs said.
“We’re just a burger company,” he said. “We are being forced to deal with these (trolls) every year now.”
A growing percentage of the 1,423 patent lawsuits filed in Texas in 2012 involved Texas companies involved in the hotel and travel industry, according to federal court records.
Texas Hotel & Lodging Association General Counsel Justin Bragiel said Monday that about 100 hotels have been sued during the past year for alleged infringement of intellectual property related to WiFi.
“If we purchase a wireless router, we have no way to know whether the manufacturer … has covered all licensing for patents,” said Bragiel, whose trade group represents 2,500 hotels, motels and lodges in Texas. “At the end of the day, we’re standing alone at the courthouse over something we have no control over.”
The general counsels said legislation needs to require patent trolls to specify the exact parts of a patent the defendant has supposedly violated, rather than making broad claims about the alleged infringement. They said requiring patent plaintiffs who lose their case in court to pay defendants’ court costs would also deter frivolous patent lawsuits.
Other key elements in the legislation include:
• Limit discovery – the pre-trial exchange of information between two sides in a lawsuit – while a judge rules on the meaning of certain terms in a patent;
• Allowing technology vendors to step in and take over in the event their customers are sued for infringement that the vendors’ technology is supposedly committing;
• Force plaintiffs to disclose the names of all individuals and companies with financial interests in the patents on which they’re suing;
• Broaden the types of patents that can be challenged via a streamlined process at the U.S. Patent and Trademark Office. At the moment, that process is limited to patents in the financial services industry. The Innovation Act would extend that to software and business method patents.
Surprisingly, many of the proposed legislative reforms are being supported by some businesses that assert patents for a living. One of them is Dallas-based IP Navigation Group LLC, a licensing firm that helps individuals, universities and other inventors make money on patents.
Dallas-based IP Navigation Group Director Rick Sanchez agrees with provisions forcing a loser-pays system for patent litigation.
“We go through extensive measures and controls to ensure that we find good patents and assert good patents,” said Sanchez.
At the same time, he added, it’s important for any changes to be fair to all concerned.
“If Congress feels it’s in the best interest to have a loser-pays structure, IP Navigation supports that,” he said. “But it should be unbiased in whether it’s a (patent assertion entity) or a mega-corporation.”
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