New law protects Mo. research from patent scams

Say goodbye to patent trolls.

After a unanimous vote in the Missouri Senate and a near unanimous vote in the House of Representatives, Gov. Jay Nixon on July 8 signed into law the so-called “Patent Troll” bill.

Sen. Mike Cunningham, R-Rogersville, sponsored Senate Bill 706, saying this is Missouri’s way of preemptively protecting local businesses from major patent lawsuits down the road.

But just what is a patent troll, and why do businesses need protections?

A patent troll is a company or person that purchases patents without any actual desire to develop the products, Cunningham said. Opposed to a traditional business model of buying and selling, trollers largely make their money – not through sales – but through lawsuits.

After purchasing multiple patents, trollers research businesses or individuals who might infringe on their patents in order to sue them.

Cunningham said the money-making part of the process starts when the troller sends what is called a demand letter to a business they believe is infringing on the rights of the patent they hold.

 “It’s the latest scam sweeping the nation,” Cunningham said.

Here a troll, there a troll
“This new law makes it more transparent about what is needed,” Cunningham said, citing an example where a patent troll allegedly sent a business a letter demanding $800 to $1,200 per employee or get sued.

With the average patent litigation bill coming in at around $2 million, many businesses choose to settle outside of court.

With the legislation now in play, demand letters are examined through the use of a seven-factor system – outlined in the bill – to determine a good or bad faith assertion of patent infringement.

The factors include elements such as requiring patent holders to give targeted businesses a reasonable amount of time to respond or pay, and they leave room for the courts to determine other relevant factors.

Springfield patent attorney John Bay of Jonathan Bay Law Offices PC said the new law makes it harder for these patent trollers to cash in, but it doesn’t outlaw patent holding entities from pursuing litigation against Missouri’s businesses.

“Despite the morality of it, it is still a business transaction,” Bay said.

All those in favor
Prompted by the request of several Missouri trade associations for banks, grocery stores and credit unions, Cunningham said support for this kind of legislation extends to other Missouri businesses.

Keela Davis, director of Mercy Medical Research Institute, which works closely with clinical trials and recent product development for Mercy health care systems, said product development is expensive enough already without the fear of patent litigation looming overhead.

From start to finish, Davis said developing a new product requires a costly initial investment, noting the development of a defibrillator was around $30 million.

“If we had no patent for these products, as soon as it made it to the market, someone could swoop in and take it,” she said.

As a result, Mercy holds seven patents, and 11 other patents are under review by the U.S. Patent and Trademark Office. Davis said Mercy products also undergo an extensive patent review process before even filing for patent licenses.

Though never actually trolled to her knowledge, Davis said if Mercy ever received a demand letter for any of its products, it would stop production immediately and do whatever possible to avoid costly litigation, though doing so could mean limiting access to care for patients.

Patent attorney Bay said this legislation tries to bring Missouri back to the original intentions of patents.

“The initial intention with patents was not to reward the inventor or the patent holder, but to reward the public. The inventor was provided incentive, but the public was always part of the end game,” he said.

Bay points toward the recent patent case against Research In Motion Ltd., known for its BlackBerry wireless device, as the widespread start of patent trolling. To avoid closing shop from a potential ordered shutdown due to patent infringement, RIM settled in 2006 with small patent holding company NTP Inc. for a hefty $612.5 million.

“When a troll makes off with all this money, it is no service to the public at all,” Bay said, though he cited almost 90 percent of a troller’s patents fail to ever receive money.  “Trollers basically are holding a lottery ticket and are waiting to cash in.”

A detriment to innovation
Though it might be a business transaction, Davis said it’s not a transaction that promotes innovation.

“It prevents innovation, and it especially prevents innovation within health care,” Davis said. “So, this law is a good thing.

“Trollers have no intention of developing any sort of product, so we in the health care field can’t move forward with certain products because trollers are sitting on the patents.”

Litigation and innovation don’t mix, according to a May study by Massachusetts Institute of Technology Sloan School of Management associate professor Catherine Tucker on the effect of patent litigation on entrepreneurial activity.

The study found from 2004-12, patent lawsuits in the U.S. doubled to 5,000 annually.

It cites an $8.1 billion loss in estimated venture capital investment over five years due to litigation brought on by frequent patent litigators, suggesting patent litigation may actually halt the kind of innovative research and development that attracts venture capital investment.

With Missouri businesses in mind, Cunningham said legislation on this subject was needed in the Show-Me State.

“The main point of this is to stop scrupulous people from taking advantage of Missouri businesses,” he said.

Even though Bay sees it as an important problem that needs fixing, he said he expects more from elected representatives.

“I can’t help but think there are far greater problems that need to be solved by Congress right now,” Bay said, citing health care reform, immigration and Social Security as issues needing to be addressed more imminently. “Where are the laws we need for those?”