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Trolls love vague patents, friendly courts

There are a lot of things to like about Texas — the people, the space, the open skies, the technology, the east Texas federal courts.

The east Texas federal court?

Yep, that’s where Smartflash LLC spends its time producing patent lawsuits.

Patents have been around since at least 1331 when the first authenticated letter patent was issued. They were designed to give exclusive rights (protection) to inventions; and since then, a whole segment of the legal profession has been built up to file patents, oversee them, protect them and sue folks.

It’s become a helluva’ profession, especially for lawyers such as Smartflash’s.

Smartflash was started by Patrick Racz, who had a few ideas.

He got three patents that Smartflash describes as:

“The essence of the innovation lay in the inventive digital memory system which was configured and designed so as to permit for the first time, inter alia, the secure and controlled receipt, storage, retrieval, use and transmission of digital data that offered a range of functionality which included, but was not limited to, digital rights management (DRM) and payment facilities.”

Don’t ask me what it means but the lawyers convinced “a jury of your peers” in the Tyler federal court that it meant that Apple owes them $533 million.

Smartflash’s attorney, Brad Caldwell, explained it perfectly to Ars Technica as “a gadget you could hook up to a computer.”

Now that’s an explanation the judge and jury could understand!

Of course, Gary Shapiro, head of the Consumer Electronics Association had a different view: “This case is Exhibit A for patent reform. The patent troll in this case doesn’t produce any products and services, has zero employees and operates from an office across the street from the courthouse in the notoriously troll-friendly Eastern District of Texas,”

But in their defense, there’s just no room for employees in their tiny office just down the street from the federal courthouse.

Fight continues

Naturally, Apple is fighting the verdict and it has the lawyers and money to do it.

Despite what folks like to say about the other smartphones, the iPhone is more profitable to the company and app producers.

Heck, people are talking about Apple being a $1 trillion company some day.

Of course, judgments like this will slow it down … a little.

Its success may have worked against it down in Tyler because the system might have unconsciously thought that’s a pasture full of cattle fertilizer and our good ol’ boy barely has an office to turn around in.

Just sayin…

The challenge is getting the trial moved out of Tyler.

Apple is no stranger to the court system … just to losing!

Of course, Caldwell isn’t waiting until/if the money starts rolling in because “the company” has filed similar suits against Samsung, Google, Amazon.

All of that tightens Shapiro’s jaws. He said, “This sort of blatant patent extortion is exactly the reason why Congress needs to act now on patent reform. This is yet another of example of the tsunami of bogus patent claims that drain $1.5 billion a week from the U.S. economy. The only atypical aspect of this case is the defendant — the majority of patent troll victims are small firms without big legal budgets, who can easily be coerced into a settlement.”

The problem is patents have been used and abused. Used as protective shields and as clubs.

Today, folks get patents for any concept or “what if” idea they can articulate in the filing — usually so broad you can stampede a herd through it.

Obviously, the Patent and Trademark Office (PTO) doesn’t have the people power or expertise to understand 80 plus percent of the stuff that crosses their desks, so they sign off on almost anything – good, bad and what the hell!

The flow of vague patents created a new and very profitable ying/yang industry – patent licensing firms and patent assertion entities (PAEs).

Trolls emerge

The latter are more commonly known by their less attractive name, patent trolls.

People who manage patents or have purchased tons of software patents may not necessarily be Patent Assertion Entities (PAEs) or more commonly known as patent trolls. However, if they spend most of their time sending out threat letters, being abusive on the phone (especially with a Texas drawl), then look out.

PAEs/trolls span the spectrum:

• Legal shell companies that shotgun letters to businesses claiming infringement, demanding payment

• Firms like Intellectual Ventures (remember the Kodak patent sale) which buy technology patents, assemble large portfolios and generate licensing payments that run into the millions of dollars

• Firms that license patents on behalf of others, hammering out reasonable agreements like talent agents

According to Eugene R. Quinn Jr., patent attorney with Zeis Widerman &Malek and founder of IPWatchdog, the best business to be in is being a patent troll. The number of suits have doubled in recent years to 4,731 cases a couple of years ago up from 2,304 two years before.

The cost — to the firms and consumers who must ultimately pay the costs (as Shapiro pointed out) has been tremendous.

The annual payouts for PAE lawsuits were estimated to be $29 billion a couple of years ago. Only a fraction ($6 billion) went to the actual inventors.

The rest?

Well yeah! Lawyers and troll expenses including overhead, marketing, profits.

In these trials — especially in east Texas — you’re guilty until you prove yourself innocent!

Of course, they are equal opportunity suers, litigators.

After all, trolls can’t be sued for patent infringement because they don’t make anything … just lawsuits.

The PAEs usually have a complex shell company structure that is almost impossible to penetrate so it’s hard to figure out who’s doing what and where the money goes.

Andy Marken of Marken Communications in Santa Clara, Calif., writes on a host of cultural topics. Reach him at Andy@MarkenCom.com

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