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New York Patent Troll Litigation Ensnares Start-Up Founders

Many had hoped that by now, we’d be seeing more results from legislative efforts to help control the patent trolls.
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These are the opportunistic shell firms that exist solely for the purpose of snapping up obscure patents and then targeting any and all potential violators with the prospect of costly litigation.

As we reported in a recent New York business litigation blog post, President Barack Obama signed off on the Leahy-Smith America Invents Act two years ago. In part, this law made it unlawful for businesses to file a single patent lawsuit against numerous defendants. Now, patent holders have to file individual lawsuits for each company or entity that has allegedly infringed.

This was supposed to serve as a major financial deterrent to those who were essentially on a financial fishing expedition.

However, it hasn’t stopped these efforts entirely. Particularly vulnerable are new start-ups. These are entities that often don’t have a great deal of reserved capital to fight back against such frivolous claims, even when they are unjustified or represent a serious overreach.

Recently, the L.A. Times profiled the closely-watched case of a consumer comparison website founder. Not long after the launch of FindTheBest.com, the founder received a letter from a law firm in Connecticut, indicating that he was the subject of a patent infringement lawsuit. The letter referenced an obscure patent and offered a discussion on an out-of-court settlement. However, the letter also threatened that if the founder filed an answer to the lawsuit, any settlement amount would be pushed upward. For every motion the founder filed, the patent holder indicated it would boost its bottom line demands.

The founder could have folded and settled right there. Many might have said that would have made the best financial sense, as he was otherwise facing the possibility of spending tens of thousands if not hundreds of thousands of dollars to litigate the matter. Still, he made the decision to fight.

He filed a counter lawsuit against the company behind the original claim, alleging extortion and racketeering under the Racketeer Influenced and Corrupt Organization Act, or RICO. It’s an unusual approach, and it hasn’t proven fruitful in the past. However, the claims of this company were so outrageous, he may actually have a chance at success. Many business are watching closely to see how the case unfolds.

Not every company that owns a patent is a “troll.” Some exist for the legitimate purpose of protecting their clients’ inventions. At issue in this case, as in many patent troll lawsuits, is whether the plaintiff is attempting to enforce a patent against a firm it has a genuine reason to believe might be infringing.

Oftentimes, “trolls,” knowing most defendants can’t afford to fight the claims, are more interested in strong-arming business defendants into paying up in a settlement agreement. In a lot of cases, there is not a great deal of research that has gone into the determination of whether there is a legitimate case at hand. Usually, at the first indication that the defendant intends to fight back, a “troll” will back off.

In targeting start-up firms, trolls can catch business owners at a point when they are at their most vulnerable, with much riding on the success of the firm. They simply want the issue resolved so they can move forward and start generating some legitimate profits for themselves and their investors.

We’ll be watching this case closely to see whether RICO proves a viable option in battling these kind of claims. In the meantime, if your start-up has been targeted by a claim of patent infringement, contact our offices today to learn more about how we can help.

The Law Offices of Ira S. Newman provides business litigation representation in New York City, Long Island, Great Neck and throughout the area. Call 516-487-7375 or send us an e-mail.

Additional Resources:
Start-up founder sees a troll behind patent lawsuit, Oct. 13, 2013, By Michael Hiltzik, The New York Times
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