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Patent litigation surge against small businesses shows need for reform

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Picture this: The owner of a mom-and-pop business struggling to make ends meet decides to invest money to cut his postal expenses by scrapping the old bulky copy machine and purchasing a popular office copier with a one-button scan-and-send-to-e-mail function.

A few months after installing the new copier, the small businessman receives a demand letter from a company with an obscure six-letter name, which reads, "we are the licensing agent for certain U.S. patents listed below. We have identified your company as one which appears to be using this patented technology and we are contacting you to initiate discussions regarding your need for a license."

Late last year, hundreds of small businesses received similar letters from about 40 shell companies affiliated with MPHJ Technology LLC. MPHJ is a Patent Assertion Entity (PAE) — a company that produces no goods or services but acquires and seeks to enforce patent rights against businesses — more commonly known as a "patent troll."

In late 2012, MPHJ acquired patents granted to Israeli resident Laurence Klein in 1997 that covered scanner technologies employing a one-button scan-and-send-to-e-mail function.

Such technology is standard on most scanners and copiers today, and, although Klein's patents have changed hands several times, they have never been employed in a manufacturing setting. At least arguably, the technology was developed prior to Klein by the company Ricoh.

What was MPHJ asking for in these so-called licensing discussions? Roughly $1,000 per worker in licensing royalties for every worker that used the copier technology — all for simply using a purchased product the way it was intended to be used.

MPHJ is not alone. Another PAE, Delaware-based Innovatio IP Ventures, LLC, acquired a portfolio of 31 patents related to wi-fi technology from Broadcomm Corporation in 2011.

Innovatio then mailed more than 8,000 letters — not to the manufacturers of the technology, but to hotels, coffee shops, restaurants, and other small businesses — alleging that those businesses were infringing on the company's patents in offering Wi-Fi services to their customers. Innovatio sought licensing fees of $2,500 to $3,000 and ultimately filed 26 lawsuits.

The fear of legal action and the risk of having to spend about $650,000 to defend the patent claim in court pressures many owners to cave in to these demands for royalties.

Patent trolls make more money from these nuisance suits against end-users than they likely would from suing the manufacturers who have the resources to employ legal teams.

And such nuisance suits are on the rise. In 2012, for the first time, patent trolls targeted non-technology companies more frequently than they did tech companies, signaling a strategic shift toward retailers and end users of technology-related patents.

America's most aggressive plaintiffs' lawyers — whom the Manhattan Institute has dubbed Trial Lawyers, Inc. — are manipulating U.S. law to extract monies from the nation's small businesses.

To address patent-litigation abuse fully would require a systemic look at the American legal system, including the lack of a "loser pays" rule (which enables mom-and-pop businesses to defend themselves against bogus lawsuits) and the ability to "forum-shop" lawsuits to the friendliest jurisdictions (such as the Eastern District of Texas, where the number of patent lawsuits jumped from 32 in 2002 to 1,266 in 2012).

But more targeted fixes are available, and to their credit, both President Obama and Congress have respectively proposed executive and legislative actions addressing abusive patent litigation, particularly those suits aimed at end-user small businesses.

Small businesses remain the nation's engine for job creation, comprising 99.7 percent of all employer firms and employing 49.2 percent of the private-sector labor force. If our elected officials hope to facilitate economic recovery, they should collaborate to turn back the patent-troll division of Trial Lawyers, Inc.

Isaac Gorodetski is the project manager of the Center for Legal Policy at the Manhattan Institute, which on August 5 released a new report, "Trial Lawyers Inc.: Patent Trolls."