Businesses forced to pay the troll tax

Imagine you’re a small business owner who, through sacrifice and hard work, managed to survive the Great Recession. Then, just as you’re starting to regain a solid footing amid a fragile economic recovery, you get a letter in the mail that demands $50,000 and threatens you with a patent infringement lawsuit if you don’t pay up.

Las Vegas resident Mark Hedge doesn’t have to imagine such a scary scenario. He, along with an untold number of other American business owners, have lived it. All because of the office technology they’re presumed to have.

Hedge was targeted by a patent troll. Unscrupulous lawyers are using this booming scam to drill entrepreneurs, thereby diverting more business capital away from job creation and into the legal system.

“We really need to put a stop to this,” said Hedge, who heads Lochsa Engineering, a firm that has been in business nearly 30 years and has worked on some of the tallest buildings on the Strip. “If you don’t pay and they sue, a patent case can cost you half a million dollars in court. And that’s why people pay these trolls.”

Hedge received letters from a company claiming to hold patents on basic office hub technology: scanning, filing, storing, emailing and printing documents. The letter said Lochsa’s use of that equipment violated several patents, and that he needed to pay a licensing fee to the company equal to $1,000 per employee to avoid court.

The letters didn’t specify the brand or model number of Hedge’s equipment and, under the law, they don’t have to. Trolls, which are typically shell companies, either purchase or license old, broad patents for the sole purpose of casting a wide net and shaking down small businesses for alleged violations.

The major corporations that manufacture such technology have the legal firepower and resources necessary to knock down frivolous patent claims, so the trolls go after the end users of technology: the customers who can’t afford a court battle but might be willing to pay a reasonable amount to make the issue go away. Any business that is likely to heavily use office scanning technology, from engineering and architectural firms to doctor’s offices and real estate companies, are easy targets, as are tech start-ups. The trolls just look up building addresses online and mass-mail their demand letters.

Michael Petricone, senior vice president of government affairs for the Consumer Electronics Association, says the trolls have a lucrative business model, as evidenced by the proliferation of the practice. It was a major issue at the recently concluded Consumer Electronics Show in Las Vegas.

Las Vegas entrepreneur David Leibner, founder and chief executive officer of the mobile gifting app itsonme, said show attendees swapped patent troll stories like travel anecdotes — everyone had one. “It’s not just a couple of tech firms — it was every single company,” he said. Las Vegas casino companies have been trolled, as well.

Petricone said other common targets are restaurants and coffee shops. Many diners provide free Wi-Fi for their customers. Trolls that acquire patents related to wireless technology have an easy mark.

“Half of patent lawsuits are brought by companies that don’t make anything,” Petricone said.

Sometimes the demands are relatively small. But the patent troll who targeted Hedge made a big mistake in his pricing strategy. Because Lochsa has about 50 employees, the troll’s proposed out-of-court licensing settlement amounted to $50,000, no small sum for any company. Hedge hired a lawyer. Actually litigating the case wasn’t part of this particular troll’s business model, so he backed down.

But Hedge was out thousand of dollars in legal costs to protect his company.

To get a sense of the broader economic impact of these claims, multiply Hedge’s troll bill by tens of thousands.

That’s why Petricone, Leibner and technology entrepreneurs from around the country, big and small, created a website to raise awareness of their cause: www.trollingeffects.org. The site posts some of the troll letters companies have received in recent years. And much of the country’s high-tech industry is behind federal legislation to rein in the patent troll trade. The Innovation Act passed the House last month 325-91 — with majorities of both parties.

The bill would impose more disclosure requirements on patent holders by forcing them to cite specific infringement — no more fishing expeditions — and reveal exactly who has a financial interest in the patent to bring shell companies out of the dark. It would institute a loser-pays system, which would discourage frivolous, baseless claims, and it protects the end users of products, so small businesses can’t be sued over what they buy at Costco.

This is a jobs bill. And patent trolls are effectively a tax. What is the Senate waiting for?

Glenn Cook (gcook@reviewjournal.com) is the Las Vegas Review-Journal’s senior editorial writer. Follow him on Twitter: @Glenn_CookNV. Listen to him Mondays at 4 p.m. on “Live and Local with Kevin Wall” on KXNT News Radio, 100.5 FM, 840 AM.