"Patent Trolls" Threaten to Drain Silicon Valley Startups

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    NEWSLETTERS

    Silicon Valley: it’s marketed as the land of innovation and making your dreams come true. But what happens when the protections in place designed to help you appear to be working against you, leaving you as the defendant in a lawsuit? Stephanie Chuang reports. (Published Wednesday, Nov 27, 2013)

    Silicon Valley: it’s marketed as the land of innovation and making your dreams come true. But what happens when the protections in place designed to help you appear to be working against you, leaving you as the defendant in a lawsuit?

    That’s what Kate Doerkson said happened to her. In April 2012, the Stanford Graduate School of Business grad launched Ditto, an e-commerce site that features technology allowing users to virtually try on eyewear, customizing them for their face. After getting $3 million in venture capital, the company began to expand.

    “We started with three, then grew to 13 very quickly,” Doerkson said in Ditto’s San Mateo office. “So far over 100,000 people have come to our website to create ‘Dittos,’ and it’s just been wonderful hearing the feedback from them.”

    But at least one of those people was not the “typical” customer.

    “The management team from 1-800 CONTACTS and glasses.com came to our website to use it, and in and of itself, it’s totally fine, it just marks a point in time that they clearly knew we existed,” said Doerksen. “A month later they went out to acquire a patent that they’re now using to sue us with.”

    WellPoint, which owns both 1-800 CONTACTS and glasses.com, said in a statement to NBC Bay Area that the company decided to sue Ditto after buying a patent in 2012 to protect a virtual try-on system that glasses.com had begun to run in 2011, before Ditto launched its website.

    “Ditto could have licensed or purchased the same patent, but chose to ignore it and launched their website with an infringing virtual try on feature anyway,” the statement read.

    Doerksen counters that Ditto did file for a patent but the average wait time before it can get approved is about two years, while WellPoint had the resources to purchase a patent.

    “If you purchase a patent, you have a weapon the same day you buy it,” she added.

    She said she reached out to more than 70 law firms across the country, but none was cheap enough for Ditto to afford. Legal experts warned that a lawsuit could cost up to three million dollars to win, and even settling

    “I can definitely remember days going home from work where my husband just hugged me and said it’s gonna be OK.”

    But just two weeks later, Ditto got hit again. This time, the plaintiff was Lennon Image Technologies, which may be considered a “shell company,” or a company that does not have significant assets, operations, nor create products. Lennon Image Technologies filed a lawsuit for patent infringement against Ditto and 12 other companies, according to its attorney, Chris Joe.

    Doerksen said that’s when she and her team decided to “get creative.”

    She decided to look into patent trolls. That’s the popular term used for a non-practicing entity or patent assertion entity which buys up a patent, usually a number of patents, and sues people and company it believes is infringing on its patents.

    Ditto ended up hiring Erich Spangenberg, CEO of IPNav, perhaps the most well-known “patent troll” of all. A recent report by RPX, a patent risk management provider, said IPNav has sued more than 1,600 companies in just the last five years.

    “We’re really good at what we do,” said Spangenberg via Skype. “I don’t have any problems with what people say, I just don’t think its meaningful.”

    Spangenberg’s deal with Ditto: $1 million equity in the company contingent on whether he could get rid of both lawsuits. He said this was the first time he tried such an arrangement, but added it’s been successful so far. According to Spangenberg, it took two 15-minute phone calls to get Lennon Image Technologies to drop its lawsuit against Ditto.

    “We got the first case, the case in East Texas, dismissed without Kate having to pay any money,” he said.

    Chris Joe, the attorney for Lennon Image Technologies, said it wasn’t that simple: Kate, Ditto and Erich didn’t walk away for free, but Joe did confirm there was a deal. He also said that of the 12 companies sued, seven, including Ditto, had settled.

    Robin Feldman is professor of law at UC Hastings and Director of the Institute for Innovation Law, which offers pro-bono help to start-ups hit by patent claims.

    “There are millions of patents outstanding, it is very difficult to know what any individual patent covers. It will cost you between one-million and six-million dollars in litigation fees just to find out,” said Feldman, who has testified before Congress on the issue of intellectual property and the patent system.

    Feldman said 80-percent of startups she surveyed reported patent demands had been increasing.

    “In recent years, the patent system has been like the Wild West with no sheriff in sight,” Feldman described.

    According to a September 2013 New American Foundation study led by Colleen Chien, law professor at Santa Clara University and now senior advisor to the White House on intellectual property issues, revealed that it’s the smallest companies that make less than $10 million in annual revenue that are hit hardest by patent claims. In fact, the study indicated these small companies make up 55-percent of unique defendants.

    John Picone, an IP attorney at San Jose-based Hopkins & Carley law firm, said he has noticed an uptick in patent demands against startups and other smaller companies. But he also warns against defining “patent trolls” with one stroke of the brush, pointing to prestigious universities and research institutions that also have IP departments that will look for anyone or any entity infringing on their patents.

    “And in some cases those universities go out and sue people to monetize their patents,” said Picone. “I’m sure UC Berkeley has an IP department, I’m sure Stanford has an IP department. SO those institutions are out there doing the research and trying to create intellectual property.”

    For Doerksen and Ditto, the damage has already been done. The two lawsuits forced the Stanford grad to lay off a few of her friends who had been engineers for the company. She added that fighting has and continues to be the only option, even facing a giant like WellPoint.

    “We’re not going to go down on something like this, we can’t, we put too much into this,” she said. “We built something that makes sense and customers love, and we want to keep just fighting for it.”