Patent trolling is when a company or individual acquires patent rights for the solitary purpose of legal action and threats against other companies or individuals rather than using them to manufacture or create anything. Often times those targeted by trolls will opt to settle out of court rather than paying hefty legal fees because it is cheaper, even when the infringement claim is frivolous.

Patent trolling costs the U.S. economy $29 billion a year, according to a Boston University study. In the past few years, nearly half of the states have passed laws to combat the practice, but a new threat is arising that states are ill-equipped to fight: patent trolling companies bankrolled by foreign governments.

Known as government-sponsored patent trolls (GSPTs), these companies have the financial backing of foreign nations. Japan, Taiwan, France and South Korea all have created patent trolling firms. For American companies large and small, and particularly retailers, these GSPTs could become a huge drain on our economy if left unchecked.

Historically, patent trolls have pursued technology companies almost exclusively, but times have changed.  Fewer than half of their targets are tech companies these days, according to research completed at San Diego State University, and the largest non-tech sector to be targeted is retail. Patent trolls are targeting the end users of technology rather than the manufacturers, and because retailers use a great deal of hardware and software to make transactions more customer-friendly, they make a potentially lucrative target.

A good example comes from right here in Illinois. In 2011, Chicago-based patent trolling company Innovatio IP, represented by two Chicago law firms (http://www.chicagolawyermagazine.com/Archives/2013/04/Innovation-Patent-Trolls.aspx), sent thousands of “demand letters” to companies such as coffee shops and hotels for allegedly infringing on Innovatio IP patents. The offense? Buying off-the-shelf wireless routers to provide customers with Wi-Fi. Those routers, Innovatio claimed, contained technology protected by its patents. It demanded $2,500 per location. Cisco, maker of many of the routers in question, counter-sued to protect its customers.

Last fall a federal judge ruled that Innovatio was eligible to receive no more than a dime per device, and the case was settled for 3.2 cents per device. A company that was arguably entitled to only pennies was demanding thousands – sometimes from small business owners who did nothing wrong and didn’t have a team of lawyers at their beck and call.

This example illustrates the threat that a domestic patent troll with powerful representation can pose, whether or not their claims are meritless. Now imagine the damage that could be done by patent trolls backed by the financial resources and regulatory assets of foreign governments.

The government of Taiwan operates a patent trolling firm called Industrial Technology Research Institute, which controls more than 18,000 patents. It has claimed infringement on over 20 patents in U.S. District Court in the Eastern District of Texas, which is known to be friendly to patent trolls. Intellectual Discovery, financed by the South Korean government, has already acquired more than 200 patents and intends to use them to protect that country’s domestic companies against foreign competitors. The Korean government wants to get an edge over the competition in court rather than risk losing in the marketplace.

Patent trolls of course don’t always win in court. They often prefer to settle with targets rather than fight battles in court due to their often frivolous claims but also their own legal fees. But if the troll has deeper taxpayer funded pockets, litigation costs are merely a drop in the bucket.  That is one of the primary problems caused by GSPTs. For a small retailer the thought of taking on a foreign government in court, even if their claim is frivolous, can be a daunting motivator to settle out of court.

Though larger retailers may have more access to legal resources, they are still disadvantaged when facing a government who is slated to regulate the market in which they are participating through their state controlled troll.

Our lawmakers in Washington should seek to foster an international level playing field which encourages innovation and shields our retailers from trolling threats both private and government sponsored. We urge more action to defend against this expanding threat as more and more foreign governments get into the trolling businesses rather than risk falling behind their trading partners.

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