Beware patent trolls.

• Author: Steiner, Tracey

What Are Patent Trolls?

The Scandinavian fairy tales that many of us grew up hearing are full of a number of unusual creatures elves, fairies, and the dreaded trolls. Among the most notable of the latter are the bridge trolls--those fearsome gnome-like creatures lurking beneath a bridge, controlling passage to the other side. These trolls demanded payment of an unreasonably high toll before allowing the innocent traveler to cross the bridge. A "patent troll" is a bit like that, claiming certain rights to patented technology and demanding licensing payment before the purchased technology may be put to use.

More specifically, patent trolls seek out unwitting infringers of patents, those exclusive property rights the federal government grants to inventors for a limited period of time (1). The process is generally as follows: The patent troll offers a license to use its patent; if this "generous" offer is rejected, then an infringement lawsuit is threatened or filed outright. The threat/invitation typically comes first in the form of a "demand letter" claiming that a particular patent is applicable to the letter recipient's business operations, coupled with an offer to license the patented technology to the recipient. Such first letters are often politely worded, and probably do not include the word "infringement". (2) Therefore, the recipient may not fully appreciate the seriousness of the demand being made in the letter. The letter serves the important purpose however, of putting the recipient--and potential infringe--on notice of the patent troll's patent.

If the recipient does not respond, the typical next step is another letter, which may not be as polite, and which may suggest that the recipient is infringing on the patent holder's rights. Further steps may involve additional letters that escalate claims, personal contact by the patent troll's litigation attorneys, or the filing of a complaint to initiate an infringement lawsuit. By that time, the patent troll has usually gotten the recipient's attention.

The use of demand letters by patent trolls is on the rise. In fact, a handful of electric cooperatives have recently received such a letter from a law firm representing a company that claims a broad patent for a method of electronic bill payment and presentment (EBPP). Utilities are second only to credit cards in offering customers online billing and payments (3), so it appears that utilities make attractive targets for EBPP business method patent trolls.

Defending Against a Patent Troll is Expensive

The cost of defending a patent infringement lawsuit is substantial. According to a recent survey conducted by the American Intellectual Property Law Association, the average cost of patent litigation, including the costs associated with the discovery process, ranges from $500,000 to $3,995,000 for each party, depending on the amount at risk.

Why so much? Civil damages allowed under federal patent law may be calculated based on lost profits or what a "reasonable royalty" payment to the patent holder would be. (4) Additionally, the patent holder can seek to recover court costs and attorneys fees. (5) Willful infringers--and they can include individual corporate officers and directors--can be subjected to triple damages.

The costs of such litigation are not limited to fees and damages, however. The staff time required to defend a lawsuit, such as providing depositions and searching for and producing requested documents during discovery, imposes additional significant costs on the cooperative--on top of the attorneys' fees.

Why Are Business Methods Patentable?

Federal law provides that the inventor of a "new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent," subject to certain conditions and requirements. (6) The term "process" is defined by law as a process, art or method, and primarily includes industrial or technical processes. (7)

Two cases were pivotal in laying the groundwork for the recognition of inventions embodying methods of doing business as patentable processes--the so-called "business method" or "business process" patent. The first case, State Street Bank & Trust Co. v. Signature Financial Group, Inc., involved a data processing system that allowed mutual funds to pool assets in an investment portfolio and calculated a total value for each fund. (8) The U.S. Court of Appeals for the Federal Circuit held that this data processing system represented patentable subject matter. In the second case, AT&T Corp. v. Excel Communications Mktg., Inc., the Federal Circuit ruled that an AT&T method to bill long-distance callers according to whether they called someone with the same or a different long-distance carrier was patentable subject matter. (9)

These legal precedents led to an avalanche of patent applications related to software at the U.S. Patent and Trademark Office. The timing coincided with the massive growth of the Internet and its use for business-to-consumer transactions. Examples of some business method patents relating to online transactions include:

* U.S. Patent No. 5,715,314 for electronic shopping carts that allow online customers to collect items for purchases during an online shopping visit to a website. Owned by Open Market, Inc.

* U.S. Patent No. 5,794,207 for reverse auction technology that allows online shoppers to name their price for a particular product or service. Owned by Priceline.com.

* U.S. Patent No. 5,960,411 for a one-click ordering system that allows repeat online shoppers to buy items by clicking a single button rather than having to re-enter billing and shipping information. Owned by Amazon.com.

Business method patents are controversial. These patents are a relatively new and novel type of patent, popularized by e-commerce ventures to gain advantage over competitors in intensely contested consumer markets.

The number of applications that the U.S. Patent Office has granted for business method patents has declined in recent years. The decline is due, at least in part, to a recognition of that controversy by the Patent Office and the adoption of a more critical eye when reviewing the applications. Some observers believe that many business method patents should not...