Patent-troll fight ends in retreat

After nearly two years of effort, MyWebGrocer Chief Operating Officer Jerry Tarrant has seen his crusade to fight back against patent trolls come to nothing.

Tarrant was stunned and bitterly disappointed in May when U.S. Sen. Patrick Leahy, D-Vt., abruptly dropped a bill addressing the practices of trolls — companies, usually shells, that threaten to sue businesses such as MyWebGrocer over frivolous, and often ridiculous, patent-infringement claims. Leahy took the bill off the agenda of the Senate Judiciary Committee he chairs just as the measure appeared to be nearing a vote.

Tarrant found Leahy's action particularly hard to swallow given that a patent troll bill had passed, 325-91, in December in the ultra-contentious House of Representatives, and that President Barack Obama had said he would sign a bill.

U.S. Rep. Peter Welch, D-Vt., called the vote in the House a "miracle of miracles."

"We had a bipartisan bill on a very important issue, protecting our small businesses, nonprofits and entrepreneurs from these stick-up artists that are lower than low — patent trolls," Welch said in a recent interview.

EARLIER: Patent trolls demand "infringement" fees

So what could possibly have gone wrong in a Democratically controlled Senate?

"You have this divided House that is so partisan typically, and they're able to get a strong bill through," Tarrant said. "The president of the United States comes out and strongly supports it. He mentions it in his State of the Union address that he wants to see a bill. And the Democratically controlled Senate can't even get a bill to the floor for a vote? I think it's disgusting."

In an interview with the Burlington Free Press, Leahy said he was essentially forced to drop the bill by U.S. Senate Majority Leader Harry Reid.

"I am furious with what happened," Leahy said. "We worked so hard to get a coalition. Harry Reid and a couple of others said, 'We won't let it come to the floor.' I think that's wrong, but I'm not going to give up."

Calls to Reid's office seeking comment were not returned last week.

Leahy said opposition to the bill came primarily from the bio-pharmaceutical industry, along with universities and trial lawyers. The Vermont senator's postmortem confirmed rampant speculation in the Washington media that Reid had strong-armed Leahy at the behest of lobbyists representing those groups.

Asked about Reid's opposition, Leahy said only that Reid knew there were enough forces aligned against the patent-troll bill that it would be filibustered by Republicans and by Democrats. Therefore, why bring it up?

Ron Eritano, director of federal affairs for The Normandy Group, a Washington lobbying firm, has been working with a variety of clients for the passage of a patent-troll bill. Eritano said the most outspoken opponents of the bill have been the bio-pharma companies, which hold large patent portfolios and like the laws governing patents the way they are.

"They've utilized the system for a long time, and it's worked very well for them, particularly as it relates to interactions with generic drug makers," Eritano said.

Other industries and companies with large patent portfolios, particularly Johnson & Johnson and 3M, have lined up against the bill, too. Universities have expressed their concern that their research and development efforts could be hindered.

"Any time you tinker with ways to litigate patents, these folks are concerned it will affect the value of their portfolios," Eritano said.

Trial lawyers have come out against the reform, also, and particularly against fee shifting, which would make it easier to collect legal fees if the target of a patent-troll lawsuit demonstrates there was no patent infringement.

The idea behind that provision is to ensure that patent trolls have skin in the game. As lawyer Peter Kunin of the Burlington firm Downs Rachlin Martin explained, the prospect of paying your opponent's legal fees can be sobering.

"This rule helps discourage a patent holder from bringing frivolous lawsuits, because the plaintiff bringing the suit knows that the trial court might require them to pay the target's legal fees," Kunin said.

The trial lawyers worry fee shifting as envisioned in the patent reform bill will inhibit the ability of legitimate plaintiffs to file lawsuits.

"The trial lawyers make a slippery slope argument, saying patent reform could set a precedent for other types of litigation," Eritano said.

Leahy, a former state's attorney in Vermont, said he was unconcerned about the opposition of trial lawyers.

"I told trial lawyers I didn't give a damn what their feelings were, because it didn't affect them anyway," Leahy said.

But Leahy does want to bring the bio-pharma companies and universities back to the bargaining table.

Bad faith

When patent trolls strike, many small- to medium-sized companies opt to pay "licensing fees" rather than go to the trouble and expense of defending against the infringement claims. The practice was estimated by researchers at Boston University to have cost the nation's businesses $29 billion in 2011 alone, a figure cited by the White House in a June 2013 report, "Patent Assertion and U.S. Innovation."

In Vermont, Attorney General Bill Sorrell filed a first-of-its-kind lawsuit last year against MPHJ Technology Investments, based in Wilmington, Del. In the lawsuit, Sorrell alleged that MPHJ sent demand letters to "numerous" businesses and nonprofits across the state, threatening patent litigation if the businesses fail to pay licensing fees. MPHJ claimed to hold a patent on the process of scanning a document and attaching it to an email, among other claims.

MPHJ has been trying — and so far failing — to have the case transferred to federal court in eastern Texas, which Sorrell says the company believes is a more favorable jurisdiction than Vermont state court.

Tarrant cites harassment by trolls for costing MyWebGrocer jobs during the past year. Tarrant's company works with major grocery chains across the country on digital marketing and sales.

"We have never paid any money to trolls. We feel like that opens up the floodgates," Tarrant said. "We've spent an enormous amount of money in defense costs. It's cost us business. We had two different clients that were going to do bigger deals with us that pulled it back because of threats of patent trolls. I calculated eight to 10 people weren't hired."

Mike Lane, co-founder and chief operating officer of Dealer.com in Burlington, echoed Tarrant's remarks. Lane said his company, which provides sales and management software and online services for car dealers across the country, also has been the target of patent trolls and has been forced to deal with illegitimate infringement claims. Lane said he was disappointed by the failure of the Senate to pass a bill for patent reform.

"Patent trolls and their 'bad faith claims' and frivolous lawsuits represent a significant problem for legitimate businesses and serve as an impediment to innovation," Lane wrote in an email to the Burlington Free Press.

Over in an hour

Sitting recently in his spacious office in the Champlain Mill building in Winooski, Tarrant recalled the details of May 21, when he received the call that the Senate bill was dead.

"At 11:04, I get an email to schedule a call with Leahy's staff at noon," Tarrant said. "At 11:36, I get an email that says, 'A few things need to be worked out, can we push off the call?' Then it was probably around noontime I got the call from the senator's office that it was done.

"So within the course of an hour, we went from 'Things are progressing,' to death."

Leahy issued a statement May 21that stated: "Because there is not sufficient support behind any comprehensive deal, I am taking the patent bill off the Senate Judiciary committee agenda. If the stakeholders are able to reach a more targeted agreement on the problem of patent trolls, there will be a path for passage this year and I will bring it immediately to the Committee."

Tarrant said Leahy has worked hard for patent reform, despite the complexity of the issues and the obstacles placed in his way. Tarrant's ire is focused elsewhere.

"I blame Harry Reid," Tarrant said. "You have a bipartisan bill out of the House, strong voices in support in the Senate, and one guy who can pull the plug on it, and that's wrong."

No fee shifting, please

Adding to Tarrant's frustration was the news that the University of Vermont had expressed concern about the bill, as well. In a letter to Leahy dated April 1, John Evans, vice president for research, recently retired, addressed the aspects of the House bill that concerned him most, should those provisions make it into the Senate bill.

The first was fee shifting.

"We would like to see this amendment limited to infringement cases only and for fee shifting to remain within the discretion of the trial judge," Evans wrote.

The second aspect of patent legislation that Evans found troublesome was so-called "joinder," which refers to the legal concept of adding parties or additional claims to a lawsuit in the interest of solving the issues at hand. Evans worried that under certain circumstances, UVM could be required to pay hefty judgments or give up its patent rights.

In a subsequent interview with the Burlington Free Press, Evans said research at UVM and resulting patents have been a boon for Vermont businesses. As one example, Evans cited Leader Evaporator in St. Albans, which has a license for a maple syrup tap invented at UVM that increases the amount of sap coming from a tree by nearly four times. Leader has the taps made by another Vermont company, Evans said.

Evans worried that the proposed legislation could threaten all of this.

"It would only take one large judgment to be assessed to the University of Vermont or a similarly situated university to put many of us out of the technology transfer business," Evans wrote in his letter to Leahy.

Evans also expressed concerns about the patent bill's discovery provisions, heightened pleading requirements and transparency requirements, all of which are intended to force trolls to make detailed claims, explaining exactly how they believe their patents have been infringed and providing documentation to support those claims.

"Patent trolls inundate you with discovery requests instead of sticking to the issue," Jerry Tarrant said. "They go at you and bury you in paperwork, ringing up your attorneys' fees to make it more painful so you'll be more inclined to settle."

As the law stands now, trolls can hide behind vague claims and thin or nonexistent evidence, sending out thousands of infringement letters to prime the pump for collecting so-called "licensing" fees.

Attorney General Sorrell said an investigation by the Federal Trade Commission showed MPHJ Technologies mailed more than 16,400 letters to small businesses and nonprofits in all 50 states that claimed infringement on its patents, including letters to dozens of Vermont companies and nonprofits.

"I'm disappointed that Congress has thus far not taken action in the patent troll arena," Sorrell said in an interview. "I know the compromise being discussed in the Senate fell apart, but I can't say with certainty what that compromise was going to be."

May 21, the day the patent bill died, Evans emailed a second letter to Leahy's office urging restraint.

"It is critical to the University of Vermont that the patent legislation now before your committee both limit troll activities and protect the US innovation system," Evans wrote.

"We understand that some high tech companies are pushing for immediate consideration of the draft of this legislation that troubles us," Evans continued. "We hope you will not feel the necessity to report the patent legislation before this balance is reached."

Leahy said he hopes universities and others voicing opposition to the reform see the value of compromise.

"We tried to explain to them that not everyone gets everything they want, but you can have something a heck of a lot better than where we are," Leahy said.

High-tech companies — frequent targets of patent trolls — were indeed pushing for legislation. In late April, companies including Adobe, Apple, Cisco Systems, Dell, Facebook, Google, Oracle, Twitter and dozens of others sent a letter to Leahy and Sen. Chuck Grassley, R-Iowa, the ranking Republican on the Judiciary Committee, urging passage of patent troll legislation.

"Today, abusive patent litigation is killing small companies, chilling employment and growth of all companies, and stifling the economies of a wide range of industries nationwide," the letter states. "Instead of investing in new jobs and services, businesses must fight frivolous claims and overly broad lawsuits made by patent trolls against a range of technologies and commonplace ideas."

UVM's John Evans says he, too, is in favor of legislation targeting patent trolls, as long as any new law steers clear of targeting his university and other legitimate patent holders.

"We just got to be careful as one tries to eliminate the patent troll that at the same time we don't hurt the legitimate defense of patents, whether they be big companies or small companies or universities," Evans said. "I would like to dispel in any way, shape or form that we tried to have this legislation pulled, and I would like to dispel any idea we aren't fully supportive of eliminating patent trolls."

From Jerry Tarrant's perspective, UVM remains on the wrong side of the issue.

"They came out against small business in Vermont on this thing," Tarrant said. "It was a huge mistake. I've let them know it. It was very, very disappointing to me. I can't tell you how upset I was about it."

Despite Leahy's determination to revisit the patent-troll bill this year, lobbyist Ron Eritano believes it will be early 2015 before the proposal returns.

Sen. Leahy wants to make something happen sooner than that. He's targeting the mid-term elections in Congress in November.

"I'm hoping after the elections, tempers calm, and with Republicans and Democrats who joined me in the past we can get it done," Leahy said. "I really want to get it done."

Contact Dan D'Ambrosio at 660-1841 or ddambrosio@freepressmedia.com. Follow him on Twitter at www.twitter.com/DanDambrosioVT.