In the business of being a patent troll, there's little to lose and plenty to gain.
Non-practicing entities (NPEs) or patent assertion entities (PAEs), as they are more formally termed, are a familiar bane to tech companies across the U.S. With no products of their own and no operating costs, PAEs are streamlined to attack companies through patent lawsuits. They stockpile patents of a typically vague or broad nature for the sole purpose of suing operating companies on the grounds of patent infringement.
As patent trolls chase profits by pressuring companies to settle rather than fight the suits --a practice President Barack Obama has publicly likened to extortion -- many are turning their attention to the cloud. As an emerging market full of complexity and potentially foggy technological definitions, cloud computing offers abundant opportunity for the hungry troll.
Efrat Kasznik, president of intellectual property (IP) consulting firm Foresight Valuation Group and a lecturer at the Stanford Graduate School of Business, says troll activity in the cloud space is just beginning to see major growth.
"It's up-and-coming in the cloud," she says, pointing to software-oriented Platform as a Service and Software as a Service providers as trolls' primary targets. "When you go into the software patent area, the patents are much broader. Sometimes patents that should not have been issued are being issued."
Since software patents protect business method ideas rather than the code of the technology itself, encapsulating those ideas in a sufficiently specific definition proves tricky for time-pressed patent officers. Such broadly defined patents often encompass technologies that don't meet the United States Patent and Trademark Office's requirements of originality, creativity and usefulness.
[Patent trolls] sometimes go after the weakest link -- whoever they can go after.
Efrat Kasznik, president, Foresight Valuation Group
Kasznik explains that the difficulty of defining these technology patents leads to overlapping claims, one area of complexity that works in the troll's favor.
"That problem goes back to the patent office," she says. "If two companies issue a patent and some of the claims in one patent are the same as in the other patent, there's a problem there: Who owns the IP? So there's that going on because the products are very complicated. There are a lot of layers to the cloud, and there are a lot of large existing patent holders in the cloud."
The way cloud providers do business also complicates matters. Layers of partnership in service provisioning can make providers liable to claims of infringement even if they aren't directly involved, explains Matt Levy, patent counsel at the Computer and Communications Industry Association (CCIA), a nonprofit advocacy group whose members include executives from such tech giants as eBay, Facebook, Google and Microsoft.
"For cloud providers, there's an interesting issue that comes up sometimes because you have different parties working together to do something," he says. "Sometimes a patent will be written so that it actually takes the cloud provider and the end user together to infringe it, and that raises a whole other set of legal issues about something called divided infringement."
Divided or joint infringement can occur when a claim involves multiple steps with at least two actors. Any party who performs at least one of the steps of the patented invention can face litigation, even if that party did not perform the steps outlined in the patent in their entirety. The potential for divided infringement puts both providers and end users at risk of becoming a victim of patent lawsuits. By exploiting some of the technology and business practices of cloud computing, trolls become even more potent threats.
For trolls, no target is too small
The broad nature of cloud providers' software patents makes them an easy target for trolls, compared to more explicitly defined patents for products in such industries as pharmaceuticals. Another factor driving PAEs' interest in the cloud space is the accelerating growth of the industry.
"The cloud is going to be a big market," Kasznik says. "That's another thing that makes it attractive for trolls, because if there's no money in the market, it's not really interesting for trolls."
Major companies with deep revenue streams have felt the brunt of the trolls' impact initially. But as Levy explains, "What's happened is that bigger companies get sort of used to it. And after a while, some of them have just started fighting and made it much more expensive."
Rackspace is one such company. Van Lindberg, the company's vice president of intellectual property, says the decision to stop feeding the trolls came after many frustrating battles with PAEs such as IPNav.
"Everybody spends time making individual decisions, [thinking,] 'It's cheaper for me to pay off than it is to fight.' That's what keeps these trolls going," Lindberg says. "And we've decided that when someone comes up against us with a patent that doesn't apply to our stuff and is invalid, we're going to fight it. We're going to stand up, and we're going to tell everybody about it so that everybody knows, and other people who are being targeted by the same patent troll can stand up too. Because if everybody stood up, this terrible extortion wouldn't work."
IPNav sees the situation differently. A spokesperson was not available to speak with SearchCloudProvider prior to deadline, but the company's website describes its services as "full service patent monetization," which it defines as assistance for small companies and individual inventors looking to capitalize on their intellectual property.
IPNav may be a PAE, but it rejects the term troll and distinguishes itself from the NPE category: "We are not a 'non-practicing entity,'" read briefs filed to the Federal Trade Commission by IPNav's head of corporate communications, Barry Leff. "We do not take title to patents, although in some cases we will assist clients in selling their patents to an NPE."
If everybody stood up, this terrible extortion wouldn't work.
Van Lindberg, vice president of intellectual property, Rackspace
IPNav acts on behalf of patent owners to litigate businesses they say infringe the patents. Recently, IPNav sued Rackspace for infringing IP owned by a company called Parallel Iron, a move that Rackspace says makes IPNav a troll regardless of which entity technically holds the patent.
Rackspace has taken the offensive in electing to sue Parallel Iron and IPNav, arguing that Rackspace's technology does not infringe the entities' patents. The cloud giant may be able to take such action, but for smaller providers, even defending against a suit can prove impossible. High in number and financial vulnerability, the plethora of startups in the cloud space has become an attractive target for trolls. More than half of companies patent trolls sue earn less than $10 million in annual revenue, explains Daniel Nazer, staff attorney on the Electronic Frontier Foundation's (EFF) intellectual property team.
"It's a big issue because these companies don't have the resources to defend a patent suit," he says. "It costs about $2 million to defend a patent case all the way through trial, and so smaller companies are faced with unacceptable choices: They either have to pay a licensing fee or they have to spend a fortune defending a case. And because you don't usually get your legal fees back, even if you win, that means they're just out of pocket that money. So, the patent trolls are able to use the really big expense of patent litigation as a weapon to get settlements."
The expense of a patent suit, which Levy says can run up to $6 million, puts some companies out of business entirely. Many trolls have moved on to these smaller targets, he says, because "they're far more vulnerable" and more likely to pay the relatively low cost of settling.
Kasznik points out that even individual developers can face a PAE's threat of litigation.
"That's an interesting phenomenon also with trolls: They don't necessarily go after the biggest company," she says. "They sometimes go after the weakest link -- whoever they can go after."
Waging the reform battle against trolls
Even with the Rackspaces of the world taking PAEs to task for their dubious patent infringement claims, experts agree systemic reform is needed. The 2011 America Invents Act fell short of instituting any meaningful improvements for the patent system, according to the EFF. Other bills -- like this year's proposed Patent Quality Improvement and Patent Abuse Reduction Acts and the 2012 SHIELD Act -- offer more fine-tuned reforms to rein in trolls' power to litigate operating companies.
Recent legislative initiatives and executive actions from the White House have put a spotlight on the issue of degraded patent quality and stifled innovation. They call for greater transparency in patent ownership, expanded provisions for patent review and tightened standards around functional claiming.
Rackspace's Lindberg is particularly optimistic about the future of functional claiming, where patent asserters file for protection of the function the software performs rather than the actual technology.
"The executive order around functional claiming says you can't just sort of claim the solution and say, 'No matter which way you do this, I own it,'" he explains. "Instead, it's focused around tightening that down and making it be closer to what the person actually invented."
This provision offers benefits for companies that face the challenge of seeking software-centric patents, the contents of which can be more difficult to define than other areas of innovation. The move "will make a big difference over the long term," Lindberg says.
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The CCIA's Levy agrees.
"There's a lot of interest in the issue," he says. "A lot of companies from a lot of industries are coming out, so we're hopeful that we might actually be able to get something."
Even with the government's initiatives for reform, some advocates feel more drastic measures may be necessary. The EFF's Nazer offers one solution: Scrap patents for software entirely.
"Almost all patent trolling is with software patents," he says, explaining that at least 80% of troll cases involve software. "I think getting rid of them altogether would go a long way to ending the patent troll problem. ... Ultimately, software patents and the patent system aren't a very good match."
Nazer does, however, offer a compromise that could help companies protect their legitimate innovations and avoid the armament of patent trolls.
"Slow down the flood of poor quality software patents," he suggests. "If we're going to have software patents, it would be a lot better if they were much more narrow and much better-defined and harder to get."
This was first published in June 2013