Of Counsel: Defending Your Startup Against Patent Trolls

By Adam Seitz and Cliff Brazil

Trolls now focus on small companies that lack experience with patent litigation and lack the means to defend themselves.

For startups, obtaining and protecting intellectual-property rights is rightly understood to be a critical step in building a successful business. But often forgotten in this discussion is what to do when your startup’s key technology is targeted with a patent lawsuit. And, more specifically, what do you do when your business is held up by a patent troll looking for an easy payout?

As more patent trolls shift their strategy to target small companies, having a response plan in place will help your startup save time and money, and help you avoid unnecessary stress.

Trolls Taking Aim at Small Businesses. Over the past few years, patent trolls have adopted a subtle shift in the strategies. A patent troll, or a non-practicing entity, is a company whose only business is filing lawsuits. A patent troll neither makes nor sells any products and, instead, only buys patents for the sole purpose of suing companies and extracting settlements. Previously, patent trolls focused almost exclusively on extracting significant settlements from large, well-funded companies. As these companies have begun to fight back and/or pay smaller settle-ments, the “ROI” for these patent trolls has substantially diminished.

As a result, trolls have shifted tactics. They now focus on small companies that lack experience with patent litigation and lack the means to defend themselves. Additionally, the trolls now
seek (comparatively) smaller settlement payments that, when combined with a higher volume of lawsuits, present the trolls with an increased ROI. While the median cost to litigate a patent lawsuit with less than $1 million at stake has declined in recent years, it is not unusual for costs to exceed $750,000. Faced with these facts, it is not surprising that many small companies cave to the troll’s demand.

But this calculus ignores that trolls, too, are driven by a ROI on their “investment.” It also ignores new procedures created by the Patent Office for attacking the weak patents utilized by trolls. Because their business model depends on obtaining quick and litigation-free resolutions, trolls will regularly target dozens, if not hundreds, of smaller companies, knowing that they only need to get payments from a small percentage of those targeted businesses to turn a profit. Thus, it is often possible to utilize these new procedures to quickly drive down the potential ROI and resolve the dispute with minimal costs. With this in mind, what should you do when facing a demand letter from a troll?

Don’t Panic. As mentioned above, when targeting small businesses, a troll relies on the target’s panicking and settling before a real plan can be put in place. But, more often than not, this approach will leave you spending more money than necessary to make this problem disappear. The reality is, by striking back quickly from a position of strength and making it clear that you intend to stand your ground, patent trolls will often focus their efforts on their other targets. With a proper plan, these demand letters do not need to be feared as substantial roadblocks to success but, instead, should be viewed as small speed bumps to be navigated as your business continues to grow.

Talk to an Attorney. More often than not, the patents being asserted by the troll will bear no relation to the products or services being offered by the startup. Instead, the trolls rely on over-broad patent claims to go after technologies never even contemplated by the patent itself. Once you have determined that the patents have no bearing on your products, you can begin preparing an effective response plan. In some situations, an aggressive responsive letter detailing the problems with the case can be enough to scare the troll away. In other cases, and with more determined trolls, you may need to present the troll with prior art (a patent that would invalidate or “cancel” the troll’s patent), along with a plan to attack the patent through an inter partes review at the Patent Office. Coupled with a showing of your attorney’s success rate in these types of challenges, many trolls will quickly back off.

In sum, when faced with a troll’s demand letter, it is important to stay calm and work with an attorney to craft an effective response. Ultimately, a strong initial response or tailored plan of attack at the Patent Office can lower the patent troll’s settlement demand, or even result in avoiding payment altogether.