Tech, auto companies join forces to thwart patent trolls

Patents exist to protect innovation. But in recent years, hundreds of patents have been turned into weapons wielded by so-called patent trolls — entities that buy patents as ammunition for infringement lawsuits. Such lawsuits drain billions of dollars a year from the economy.

Now a who’s who of technology, automobile and other companies has banded together in a novel approach seeking to thwart patent trolls. LOT Network counts Google, Canon, Dropbox, Ford Motor Co., GitHub, JP Morgan Chase, Pandora, Pure Storage Red Hat, Solar City, Uber and Wikimedia Foundation as members. On Monday, it will announce that Hyundai Motor Co. and Kia Motors Corp. have joined the nonprofit.

“These companies may share very little from a technology or market standpoint,” said Ken Seddon, LOT executive director. “But one thing they have in common: They suffered from patent troll problems.”

LOT, which stands for License on Transfer, works by disarming litigious trolls. LOT’s 53 members control about 360,000 patents. If any falls into the hands of a troll — defined as an entity that derives more than half its revenue from patent lawsuits — it is automatically cross-licensed to all members so they cannot be sued over it.

It’s similar to the herd immunity conferred by vaccines. “The more people who have the flu shot, the greater the likelihood of stamping out the flu,” Seddon said.

Cost of membership

Members pay based on their revenue with rates ranging from $1,500 a year to $20,000 a year — roughly the cost of a single patent application.

“This solves a very real problem at a low cost,” said Ramsey Homsany, general counsel of Dropbox, one of LOT’s founding companies. “It doesn’t matter how big or small your company is, at some point you will be sued by a patent troll. It will be expensive and, worse, cause a lot of interruption to the people at your company who are actually building something.”

As the group grows, Seddon hopes for a snowball effect bringing in new members. He aims to see LOT add 50 companies and expand its portfolio to a million patents by year end — or about 40 percent of the 2.5 million active U.S. patents.

“The approach leverages a network effect: The more companies that join, the more attractive it is to join,” said Eric Schulman, Uber’s senior director of intellectual property. He originated LOT in summer 2014 during his previous job as Google legal director as a way to address the problem at scale.

“This is a big-tent kind of program,” he said. “It should appeal to all kinds of companies; it’s pretty much a no-brainer to join to provide peace of mind.”

Still, companies may have concerns that they risk losing control of their patents. In fact, the member companies can still defend their patents, even suing one another.

‘We believe in IP’

“We are all companies that have a healthy respect for intellectual property,” said Joe FitzGerald, vice president and general counsel of Pure Storage. “We’re all innovative companies; we believe in IP.”

Daniel Nazer, a staff attorney at the Electronic Frontier Foundation who holds the delightfully titled Mark Cuban Chair to Eliminate Stupid Patents, had cautious praise for LOT.

“It’s a targeted program that’s good for limiting the supply of patents to the very worst actors who use litigation to shake down people for settlements,” he said. “But it doesn’t stop problems with patent quality and with operating companies attacking each other.”

Still, he said, “It’s growing, and it’s good to see that it’s gone outside traditional technology companies with car companies getting involved.”

The Electronic Frontier Foundation just released its annual “Hacking the patent system” report , which discusses a variety of ways to defend patents from trolls. LOT is among several “defensive patent” networks and pledges. There’s even patent troll insurance, because standard liability policies don’t cover such lawsuits.

It seems counterintuitive that successful companies would ever sell their patents to a troll, more formally known as patent-assertion entities, patent holding companies or nonpracticing entities. But the trolls acquire more than 80 percent of their patents from regular companies. It might be that a company culled little-used patents that were expensive to maintain. It might have been duped into believing the buyer was a legitimate operating company. It might have sold patents to a company that then resold them to a troll.

Some might even engage in privateering — when a company deliberately sells patents to a troll in hopes that the troll will sue its competitors. And with the rapid pace of change, today’s successful companies could end up with their assets on the auction block tomorrow. Patents are good for 20 years, so trolls may acquire older patents and use them against new technology even if the connection is tenuous.

7,500 cases in 2015

Patent disputes hit an all-time high of about 7,500 cases in 2015, largely fueled by trolls who filed two-thirds of the lawsuits, according to a report from Unified Patents. Targeted companies often agree to pay a licensing fee to avoid the cost of litigation — essentially submitting to a shakedown.

Trolls can range from single-person fly-by-night operators to major enterprises that portray themselves as fostering innovation, including some publicly traded companies. Some even sport impressive pedigrees: Nathan Myhrvold, former chief technology officer of Microsoft, co-founded Intellectual Ventures, a private company that has acquired more than 40,000 patents and houses them at hundreds of shell companies, according to IP Checkups.

Seeking broad reform

Ultimately, the Electronic Frontier Foundation would like to see comprehensive patent reform, Nazer said. Many of LOT’s members agree the system is broken, and said they’d love Congress to fix it but got tired of waiting for it.

“I can’t tell you how many times I’ve traveled to Washington, D.C., to try to work on patent reform legislation,” FitzGerald said. “What you find is that at the eleventh hour your efforts get watered down by special-interest groups and you don’t make any progress.”