Legislators crack down on 'patent trolls' who target small businesses

Minnesota legislators are trying to fix a growing problem hitting small to midsize businesses hard: so-called "patent trolls."

Legislators want to block individuals or firms who buy patents — sometimes with no intention of making a product or technology — and then sue businesses who they say are violating the patents. In some cases, they aren't.

The proposal would allow the attorney general to bring civil action against someone who has made a "bad-faith claim" in a patent issue. These "trolls" would face a penalty of up to $50,000 per violation.

"It's not a big deal until you're the one being sued, or you're the one getting that demand letter," said state Sen. Kari Dziedzic, DFL-Minneapolis. Trolls "usually demand a settlement, and sometimes it's cheaper to settle and that's not fair to the average consumer."

Businesses have found the cost of fighting a frivolous claim in court staggering. A review of a single, simple patent by an attorney can cost $5,000. Going to court can add tens or even hundreds of thousands of dollars in legal fees. Many businesses simply settle.

"There isn't any protection for businesses like ours," said Sarfaraz (Raz) Bajwa, chief executive of a Plymouth logistics technology firm, IndusTrack. Bajwa's firm has paid three confidential settlements to alleged patent trolls, the most recent one last year.

"We had to pay them," Bajwa said. "You look at the business justification, and say it doesn't make sense for me to go to court."

The impact in Minnesota is hard to quantify, but researchers have found that patent trolls have a major impact nationwide. According to a 2014 Cornell Law Review study, businesses spent $29 billion in direct out-of-pocket costs to patent trolls in 2011, a 400 percent increase from 2005. The Harvard Business Review also found that patent trolls hurt innovation by discouraging smaller start-ups from spending on research and development.

The House approved the legislation unanimously, 129-0. It's expected to come before the full Senate for a floor vote next week, and it doesn't face any discernible opposition, Dziedzic said.

Davanni's Stupka said that before the pizza chain was sued for an alleged patent violation, he was not familiar with patent trolls. "If we had ever heard of a patent troll, we didn't pay much attention to it," he said.

Because the settlement was confidential, he was unable to say how much the company paid, but "generally speaking, it was an unpleasant experience and we're in favor of the legislation if it prevents one person from doing what we did."

The issue has earned the attention of the White House, which has called for reforms to the patent system. Efforts by Congress to curb the problem have so far stalled, leading nearly 30 states to enact legislation.

When the legislation was first introduced last year, there was concern about how it would affect legitimate patent holders such as 3M, Medtronic and even the University of Minnesota. 3M, in a statement, supported the legislation, saying it "is drafted in a manner that reflects balance and fairness to patent owners."

The bill currently moving through the Legislature has broad support from trade groups, including real estate agents, restaurants and insurance agents. Proponents say the bill would offer consumers and businesses stronger safeguards.

"We wanted to clearly define what the bad business practices are that lead to these very vague demand letters," said Witt, noting that valid patent infringement claims are typically sent to manufacturers or others making a product.

Jason Campbell, a St. Paul patent attorney, said the legislation should help small businesses avoid costly legal representation, particularly since patent law requires significant time and research. Without the legislative solution, "you don't allow the business owner to assess their situation on their own without having to hire expensive legal counsel," Campbell said.

Attorney General Swanson said she welcomed the legislation, partly because it could help curb those costs.