SHAPIRO: Beware the patent trolls

Innovators need protection from legal leeches

Legislators have an opportunity this week to learn from one of the businessmen who has been a victim of patent trolls the cretins who tie up entrepreneurs in court with frivolous litigation. The difference between Lee Cheng and others is that he fought the trolls and won.

Mr. Cheng, the chief legal officer of online electronics retail giant Newegg Inc., is in Washington on Tuesday to meet with lawmakers. He will make a compelling case for lawmakers to support victims of patent trolls by reforming the broken patent system.

Mr. Cheng has experienced the problem firsthand. He led Newegg’s recent legal battle against Soverain Software LLC, a patent troll that demanded $34 million from Newegg, claiming ownership of online shopping cart and checkout features that are common in Internet retail.

Newegg stood up to the bullies and won. The company’s long and expensive struggle and the millions of dollars Soverain got out of other Internet retailers who weren’t willing to fight highlight the tremendous need for drastic reforms to the system. Mr. Cheng recently talked to the Consumer Electronics Association about how patent trolls stifle innovation. Instead of spending money on research and development or creating more jobs, many company resources such as time and capital are wasted in defense of these frivolous lawsuits, he said.

Under the current, broken patent system, it’s cheap and easy to sue for a patent while expensive to defend against one. In fact, academics estimate that businesses paid out $29 billion to trolls in 2011, double the amount paid in 2009. Patent trolls are free to sue anyone they like in the hopes of a pretrial payoff with little fear of negative consequences should they lose. Reforms that would protect the entities that are bringing products and services to market would go a long way toward curbing the overall volume of frivolous lawsuits.

One reform the House is considering is the Saving High-Tech Innovators from Egregious Legal Disputes (Shield) Act, an important piece of legislation introduced by Rep. Peter A. DeFazio, Oregon Democrat, and Rep. Jason Chaffetz, Utah Republican. The bill would impose reforms designed to protect entrepreneurs, such as “loser pays” allowing the losing litigant to be assessed legal fees, a helpful and sensible first step to strike back at patent trolls. Under the Shield Act, trolls will be forced to think twice about pursuing lawsuits before proceeding.

It’s important for the government to defend entrepreneurs because, unfortunately, not all patent-troll targets have the resources to defend themselves like Newegg did. For large companies, these threats and suits are a legal form of blackmail and cut into profits, jobs and productive work. For middle-size companies, the threats and distraction and settlements can be the difference between profit and loss. For startups, they too often mean an end to the venture as funding dries up.

This is a huge problem. The Consumer Electronics Association has more than 2,000 members, 80 percent of which are small businesses, and I have yet to talk to one of these American companies that does not consider this a huge problem and a festering sore increasingly devastating productive American businesses and sustaining legal leeches.

If we want a shot at a decent economy and an opportunity to build American businesses and create jobs, we need to change the law that encourages baseless, disruptive legal threats to American businesses. Lawsuits cannot sustain a nation’s economy. Today’s patent law encourages unethical patent trolls, and I encourage everyone to stand with President Obama and the authors of the Shield Act to get it changed.

Innovation is the great driver of economic growth. By implementing the act, we can be sure that those who are contributing to our economy are the ones who are rewarded, not punished, for their innovative breakthroughs. Our patent-law system is broken, and the Shield Act is a great first step to fixing it.

Gary Shapiro is president and CEO of the Consumer Electronics Association and author of “Ninja Innovation: The Ten Killer Strategies of the World’s Most Successful Businesses” (William Morrow, 2013).

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