Patent trolls can be huge, single-minded licensing companies. These nonpracticing entities purchase patents from small inventors who don’t have the desire or funding to create what they’ve patented and threaten potential infringers to get money through licensing fees or lawsuits. Business owners of small and midsize companies can be caught off guard when they receive the letter claiming their product infringes an existing patent, and often don’t know what to do.

“Fighting the alleged infringement usually costs more than the licensing fee the troll is seeking,” says Christian Drago, a patent attorney at Fay Sharpe LLP.

This can make a business owner feel trapped. However, he says patent trolls often cast a wide net, sending letters to companies that may not be infringing. That’s why it’s important to know how to respond.

Smart Business spoke with Drago about how to deal with patent trolls.

Who is most at risk of being the victim of a patent troll?

Generally, infringement claims are a lot more successful when made against small to midsize businesses because they don’t have the capital to fight an infringement suit, so they often opt to pay the license fee.

A patent troll is not going to pick a company out of the clear, blue sky. It will buy a company’s products and reverse engineer them, or scrutinize its marketing collateral for product descriptions. It’s important for companies with patents to be careful what they post on their website. Market your company, but don’t give too much away because you could be giving ammunition to a troll.

If you receive a letter from a nonpracticing entity, what do you do?

First, don’t panic. The entity is soliciting a licensing fee and its track record in litigation is not great. Contact a patent attorney and have him or her review the claim and your product to find out if you’re actually infringing. Don’t use your in-house or general practice attorney; courts want outside independent review.

If it’s discovered that you’re not infringing, get a non-infringement opinion by outside counsel. That can be used to offset damages and show you acted in good faith by procuring the assistance of an attorney.

The attorney will compose a letter that says your company had outside counsel review the claim and determined you are not infringing. Now the troll has to do its cost/benefit analysis and decide whether it wants to pursue this any further. The troll may just move on.

However, if willful infringement is discovered, meaning you continue to infringe after you’re made aware of the infringement, the penalty can be upped by a judge. That’s why it’s important to show you acted on the well-reasoned opinion of counsel as soon as possible.

How can you protect yourself?

If you’re going to file for a patent, you want to file as soon as is practical. Bring an attorney onboard while the product is in development, not when you join the market. Have a patent attorney conduct a patentability search and get a freedom to operate opinion. This gives you the best idea of what patents are out there.

If the attorney finds similar, existing patents, he or she can show them to your engineers, and the engineers can innovate around current designs. This could give you a competitive edge and allow you to go after competitors when they infringe on you. The process also focuses the company on what it’s doing in the market.

If you have to backpedal because you failed to do your due diligence, your R&D costs could double because of scrapping a project and going back to the drawing board.

However, keep in mind patent searches aren’t exhaustive because, at the time of the search, there may be applications that are being reviewed but have not published. Patents issue from three to five years after they’re filed and they’re published 18 months after filing. That leaves a gap.

That’s why, it’s important to take these letters seriously and get counsel involved right away. You need to quickly determine the best course of action based on the facts, not the claims.

Christian Drago is a patent attorney at Fay Sharpe LLP. Reach him at (216) 363-9000 or cdrago@faysharpe.com.

Insights Legal Affairs is brought to you by Fay Sharpe LLP

Published in Cleveland

Smaller businesses often don’t have the wherewithal to enforce their patent rights because pursuing this type of litigation is very expensive, and they lack the expertise. However, the rise of nonpracticing entities (“NPE”) — organizations that enforce patents against alleged infringers with no intent to manufacture or market the invention — have made this an area that businesses need to take seriously.

“When you are a company that has one or two patents in an area and you’re fighting against an entity with hundreds in that area, it’s difficult to win,” says Michael G. Craig, a patent attorney with Brouse McDowell.

If you don’t have a standalone IP protection program, you’re losing revenue now, have lost it in the past and will continue to do so in the future.

“In the past, people assumed patents were a trophy for smart people to hang on their walls,” he says. “Now companies are monetizing their IP. Studies have shown that some 50 to 60 percent of a company’s worth comes from trademarks alone. These are commodities that need to be monetized. If you don’t have a strategy to do that, you are losing revenue.”

Smart Business spoke with Craig about NPEs and the importance of IP protection strategies.

What is a nonpracticing entity?

There are different types of nonpracticing entities. Generally, NPEs own and enforce patents but don’t intend to manufacture the products or provide the services associated with them. They instead enforce the patent rights in other ways. Some NPEs purchase patents from companies that don’t have the wherewithal to enforce those rights, doing so through licenses or lawsuits against infringers. These are groups created solely to buy up the intellectual property of others and enforce those rights without any other business plan or means of revenue.

Some entities hold defensive patents. Companies can partner with them for protection against lawsuits, and collectively, they become a harder target because they’re part of a group. There is also the purchase of patents for offensive purposes, such as buying patents to take over a segment of the market and force others to leave or enforce their rights.

Patent trolls are another aspect of NPEs. They hold patent rights, wait for someone to monetize the idea and then pounce. EBay’s one-click purchase — which allows buyers to bypass the bidding process and buy the item instantly — was a victim of a patent troll, as was BlackBerry, which had a patent troll sue it for its technology, worth hundreds of millions of dollars.

Why are NPEs significant?

They can drive the way a company’s patent strategy is developed. NPEs don’t have anything to lose when enforcing their rights. When you are sued, you have to allocate resources to defend your rights, which takes money away from your core processes. NPEs’ resources and business models are designed to enforce patents. You need to understand what NPEs are doing because they change the landscape of IP, and you need to develop an R&D strategy to navigate it and determine where you fit in.

You can join an aggregator, which is an NPE that aggregates IP property for the benefit of having safety in numbers. Those that join them can use the IP of others, as well as the aggregator’s resources for protection, offensively or defensively. And because the cost of a lawsuit is so deleterious, most will give up their IP rather than pursue a lawsuit. Also, when you practice in an area, particularly one that utilizes an industry standard, such as wireless networking, there is likely to be an NPE from whom you, or your parts supplier, may need to license the technology.

What can companies do to protect themselves from NPEs?

There is an overarching concern in the industry that there is no protection against an NPE. The reality is, under the current legal system, NPEs are not doing anything wrong. They would say they are just protecting the rights of inventors. IP is actually property that can be bought and sold and infringements against that need to be protected.

Err on the side of overprotection. Managing IP may seem expensive at first, but as far as costs associated with patenting or licensing, in the long run, the payback is tremendous.  Further, you need a strategy to deal with NPEs in areas in which you do business, such as licensing agreements and hold harmless agreements.

IP programs should have the use of legal professionals to help them determine what is worthwhile to patent and how to go about it. A lot of companies have brainstorming sessions to come up with a list of ideas of what to patent, then flesh them out and go to their legal professionals with a list of ideas to determine which are worth protecting and the costs to do so.

Also, every company needs to have a strategy on how to protect their IP when certain situations arise, such as a potential infringer or infringement.

What should companies do when they are in a potential infringement situation?

That can be an anxious time, particularly if it is a product that drives your business. Your first call should be to an attorney who specializes in that area to analyze the claim to see if it has merit. They could contact the other party and negotiate because you don’t want to reach litigation. The worst thing you can do is put your head in the sand, because after you have been notified, it becomes willful and the penalties can add up.

You don’t need to reach that point. If a company is unsure of what the next step should be, contact a professional to manage the process. All you need is a little help to point you in the right direction and periodic management from an attorney to help along the way.

Patents are assets that need to be exploited and monetized. The IP landscape is changing, and those who don’t recognize this and look at the other way are going to be left behind.

Michael G. Craig is a patent attorney with the Intellectual Property Group at Brouse McDowell. Reach him at (330) 535-5711 or mgcraig@brouse.com.

Insights Legal Affairs is brought to you by Brouse McDowell

Published in Akron/Canton