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Patent trolls: New Jersey out to stop companies unfairly profiting from patents

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They are called “patent trolls” — and that's the nice nickname. Their critics feel what they do is not so nice. Or ethical. Or really anything other than a shakedown or a shameful money grab.

Without any real consideration of ever developing or using the patents, these critics say trolls (also known as NPEs, or "non-practicing entities") look to acquire as many patents as possible and then proceed to find as many companies as they can to sue on the grounds of patent infringement.

It's like throwing darts at a wall and seeing what sticks.

New Jersey is starting to fight back.

In February, Assemblyman Troy Singleton (D-Mount Laurel) introduced what he notes is a "bipartisan measure" that would prohibit a person "from making a bad faith assertion of patent infringement."

"We wanted to take a strong approach to this in the state of New Jersey and try to address it," Singleton said.

Singleton said the measure is about more than stopping frivolous suits.

These trolls, he said, through their "very amorphous claims" of patent infringement, pose a serious threat to business innovation.

"I don't think we have the luxury, especially in a state like New Jersey … to allow individuals to stifle that innovation," Singleton said.

The trouble is they are tough to fight.

And as bogus as a case may be, settling out of court is often cheaper than fighting in court.

According to Jon Fallon, an intellectual property and patent attorney with West Orange-based law firm Mandelbaum Salsburg, the patent troll business model depends on this reality.

With the "astronomical" cost of patent litigation, trolls appeal to companies by offering them the ability to "pay less to get the guaranteed result," Fallon says.

For instance, the minimum a company might be faced with in legal fees is at least upwards of $25,000. Knowing this, trolls will offer to settle for $20,000.

"You're never going to go to trial," Fallon says of the patent troll business model. "It's just too cost-prohibitive. That's why most patent lawsuits end up with settlements."

And when one company settles with a troll, more are out there watching and waiting to pounce, Fallon says.

"Every client that I've ever had that's actually paid off a troll gets another suit in six months," Fallon said.

With "bare-minimum" legal work involved and little to no operating costs, Fallon says patent trolling has become quite the lucrative business model.

"There's no cost; it's all profit," Fallon said. "It's next to no work on the lawyer's part, and some of these trolls are, on average, filing a (suit) a week."

New Jersey is no stranger to this growing trend. According to PatentFreedom.com, Panasonic, which maintains its North American headquarters in Newark, is the 16th most targeted company by NPEs, amassing a total of 79 lawsuits since 2009. Apple leads the pack, with a total of 191 lawsuits during that same period, the website found.

New Jersey is not alone in the fight. Bills designed to fight the growing trend already have passed or are currently in motion through the state legislatures of Oregon, Virginia, Kentucky, Tennessee, Maine and Wisconsin.

One potential issue with New Jersey's bill is that it could set up a "slippery slope" in which patent trolls aren't necessarily distinguishable from those with valid patent infringement claims, Fallon says.

The other is that patents fall under the "exclusive jurisdiction of the federal government," and so anything tackled at the state level could be trumped in federal court.

"I believe that what we're going to see being raised (is) that we're running into a state versus federal government issue," Fallon said.

And it appears as if there's some action on the federal front.

U.S. Sen. Claire McCaskill (D-Missouri) introduced a bill in February that would give the Federal Trade Commission the power to require that patent trolls make minimum disclosures in their demand letters to businesses. Under the bill, the FTC would also be able to specify deceptive demand letters for businesses.

"Patent trolls are stifling innovation, endangering jobs and harming businesses and consumers," McCaskill said. "Acting now and giving the FTC the tools it needs to properly address this serious problem will send a message to these bottom-feeders they will understand that we plan to do whatever it takes to protect American consumers and small businesses from scam artists trying to make a quick buck."

President Barack Obama's administration has also announced that it intends to get tougher on patent trolls.

Singleton notes that if and when Washington is ready to stand up to patent trolls, the move would be welcomed. Until then, the state is prepared to press ahead, he says.

E-mail to: andrewg@njbiz.com
On Twitter: @andrgeorge

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Andrew George

Andrew George

Andrew George covers the Statehouse from NJBIZ's Trenton bureau. Born and raised in N.J., Andrew has also spent time as a reporter in D.C., Texas and Pa. His email is andrewg@njbiz.com and he is @AndrGeorge on Twitter.

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