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Patent system called broken; lawsuits target Ohio businesses

Companies’ letters tell many Ohio businesses they face legal action.

An Ohio business last fall received a letter threatening possible legal action for patent infringement if the company owned copier or scanner equipment that allows scanned documents to be attached to an e-mail through a local computer network.

Most offices own scanner equipment with these capabilities, and the technology is found in products of virtually major manufacturer of multi-function imaging equipment, including Konica Minolta, Ricoh and Xerox.

But in the letter, a Delaware company called DucPla said the Ohio business likely uses the technology and that would violate its patents, and therefore the business must pay a licensing fee of $1,200 for each of its employees to avoid possible legal consequences.

DucPla is what some industry experts call a “patent troll,” which is a pejorative term for some patent-assertion entities. Patent trolls include groups that try to extract licensing fees using questionable and overly broad patents, hoping the businesses will pay up to avoid a potentially expensive legal fight, industry experts said.

“Litigation costs are just outrageous, and in a patent suit you can easily spend $500,000, ” said Richard Mescher, a Columbus attorney who teaches patent law at The Ohio State University Moritz College of Law. “The (licensing) fee is low enough that a certain number of companies will just pay it.”

The patent system was designed to facilitate innovation and reward and protect inventors, and more than 6,100 patents have been granted in the Dayton metropolitan area since 1980, according to data from the Metropolitan Policy Program at the Brookings Institution.

Dayton was once the patent capital of America, and local attorney Charles Faruki said the Miami Valley still has a reputation for innovation and technology.

“Dayton has a thriving number of lawyers that pursue patents on behalf of clients,” said Faruki, who was among a small group of attorneys who helped draft the local patent rules for the U.S. District Court in the Southern District of Ohio. “Those clients would not be doing that if there were not a healthy base of inventors here.”

Flood of patents

But some attorneys said instead of fostering innovation, the patent system is now hindering it, and much of the problem stems from patent applications skyrocketing in recent years.

Applications grew to 576,763 in 2012, which was up 38 percent from 2005 and 227 percent from 1990, according to the U.S. Patent and Trademark Office.

The flood of patent applications overwhelmed the patent office, while the types of patents sought increasingly were concentrated in complicated subject areas, such as computer software, said Mescher, a 1993 graduate of the University of Dayton School of Law who also works at Porter Wright law firm in Columbus.

A lack of adequate resources and technical expertise in rapidly evolving fields resulted in the patent office issuing some patents that it should not have, including some for technology or processes that are obvious, unoriginal or overly broad, some attorneys said.

“The US Patent Office, overwhelmed and underfunded, issues questionable patents every day,” according to the Electronic Frontier Foundation, which advocates for patent reform. “ ‘Patent trolls’ buy too many of these patents and then misuse the patent system to shake down companies big and small.”

Faruki said there has been an increase in patent infringement lawsuits since the late 1990s, with his firm presently handling six such suits for plaintiffs or defendants.

Patent trolls not only go after companies that manufacture the alleged patented technology, but also companies that use it.

DucPla is one of about 40 shell companies operated by MPHJ Technology Investments. MPHJ uses the shell companies to send letters to hundreds or thousands of businesses across the country threatening legal action for patent infringement, according to the court documents filed by the Vermont Attorney General’s office.

The attorney general is suing MPHJ for allegedly engaging in unfair and deceptive consumer practices.

Instead of asserting its patents against copier manufacturers, MPHJ has targeted “end users,” which are consumers and companies that use the widely available scanner technology, experts said.

Preventing shakedowns

MPHJ seeks licensing fees from small companies that are unlikely to fight patent litigation or consult an attorney because of a lack of resources, the attorney general said. The company also sends letters to businesses threatening patent litigation with no independent evidence the recipients were infringing its patents, the lawsuit said.

“If you are (threatening to sue) 10,000 people who happen to have a scanner in their office, obviously what you are doing is trying to get each one of those just to cough up just a couple of thousand bucks because the cost of defense is so high,” Gallagher said. “That just has shakedown written all over it.”

The Vermont Attorney General is seeking a permanent injunction against MPHJ from engaging in any business activity in the state. Additionally, Ricoh Americas Corp. and Xerox Corp. in May filed a petition asking the U.S. Patent and Trademark Office to review one of MPHJ’s patents and rule that its claims are “unpatentable” and fully anticipated by various prior art references.

DucPla did not return requests for comment. But DucPla sent the Ohio business a letter in June saying the matter was likely closed and would not require further action. The business asked not to be named out of fear of further action by DucPla.

Some U.S. lawmakers said new laws are needed to prevent patent trolls from “extorting” fees from businesses using the threat of pricey lawsuits.

Legislation introduced earlier this year by various U.S. senators seeks to shift the financial burden of legal fees and court costs to certain patent-assertion entities if they lose their lawsuits.

Other legislation would allow people who are threatened with patent infringement lawsuits to petition the patent office to review the claims administratively before the cases can move forward.

But some legal experts said they fear Congress could pass bad laws in response to the actions of a few unscrupulous parties.

The patent system is set up to help small inventors protect their intellectual property rights, and inventors often lack the resources to enforce their patents, so they sell them to patent-assertion entities that can afford the legal fight.

“The people who are most upset about the so-called patent troll problem are the big corporations and the big entities,” Gallagher said. “They hold so many patents and they’ve got a lot of money so they make a good target. But on the other hand, you could say they do a lot of infringing.”

Changing the law in the hopes of punishing patent trolls could hurt the ability of legitimate inventors and patent-assertion entities to protect their innovations and investments.

“The system does work, but sometimes there are bad facts. … Bad facts can make some very bad law,” said Kelly Henrici, executive director of Program in Law & Technology with the UD School of Law. “Maybe this (scanner issue) is the test case for how the system works poorly, but there are also test cases for how the system works right.”

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