The End-Users Strike Back

As Josh Lamel noted the other day, end-users such as retailers, financial services, grocery stores, advertising, hotel industries, and even oil companies are coming out in droves to fight abusive patent troll tactics. The FTC has posted all 68 public comments submitted to its patent assertion entity workshop; a surprising number come from end-users.

Patent trolls have started to target end-users, especially small companies, because they typically lack the expertise, experience and ability to fight questionable claims. Litigation costs can quickly mount up to $250,000 to $500,000, and reach millions if the case goes all the way through trial (not to mention appeals). End-users also have to deal with disruptions to their business from discovery requests and managing the litigation. Often companies are forced to divulge secret financial and technical information as well as divert key personnel from their work to participate in depositions and give testimony. Patent trolls, on the other hand, have few costs in pursuing a suit because they do not operate in any market. The lawsuit has no disruptive effect on the patent troll’s business because it is the patent troll’s business.

Patent trolls use this imbalance in cost to threaten end-users with nuisance suits unless they take a license. Demand letters often emphasize these high costs and contain license fees below the litigation costs. The result is end users paying to ward off litigation; they receive no benefit in the form of new technology.

The nuisance suit strategy has proven so effective that it is starting to cause serious problems for small businesses. Now these businesses are turning to the FTC for help. Here are some highlights from the comments:

  • The Food Marketing Institute and National Restaurant Association conducted a survey of its members and found that demand letters from patent trolls “are frequently amorphous and make broad claims without providing an adequate basis to assess those claims.” Patent trolls “demand broad licensees while refusing to disclose what patents are involved and what patents are infringed.”

  • The National Retail Federation wrote that “over 200 retailers have contacted NRF about this issue because they have been, or are currently, the target of patent trolls’ abusive litigation practices. . . . Often retailers will choose to pay the licensing fee because patent litigation is prohibitively expensive.” Examples of claims made against retailers include patents “that purport to cover the printing of receipts at cash registers, the sale of gift cards, and the connection of any product such as a computer or printer to an Ethernet network.”

  • Internet Retailers wrote that “in a discovery fight between a non–practicing entity that consists of a post office box located in a law office near the local courthouse, and an Internet retailer sued because it sells millions, or billions, of dollars of products each year, the result is pre–ordained. The retailers alone face the crippling cost and distraction of discovery, and often the risk of producing their most sensitive information, from source code to financial information, to business plans, in cases in which their co–defendants may be their primary competitors.”

  • The Retail Industries Leaders Association wrote that patent costs “are more than simply a ‘cost of doing business,’ like a zoning fee; they are an unbounded, unpredictable, and unavoidable impediment to providing innovative products and services to consumers.”

When patent trolls target end-users with abusive behavior it is ultimately consumers who suffer. Retailers who operate on thin margins can’t absorb much of these new costs and will have to pass the bulk of them on to consumers. The suits also discourage retailers from adopting new technologies that consumers demand because of the increased risk of being a patent troll target. If these suits continue then consumers will be paying more for less.

For more information on how patent trolls are impacting restaurants and retailers please see my comment to the Federal Trade Commission.

 

David Balto

David Balto

David Balto is a public interest antitrust lawyer in Washington, DC.  He has over 15 years of government antitrust experience as a trial attorney in the Antitrust Division of the Department of Justice and in several senior level positions at the Federal Trade Commission. David was the Policy Director of the Bureau of Competition of the Federal Trade Commission (1998-2001) and attorney advisor to Chairman Robert Pitofsky (1995-1997). He was a senior advisor in all aspects of the FTC’s merger and non- merger enforcement program and helped litigate the challenges to the Staples/Office Depot, Drug Wholesalers, and Heinz/Beechnut mergers, the Intel monopolization case, and the challenges to anticompetitive conduct by several pharmaceutical companies.