For eight years, a small self-funded enterprise built a successful company in Vernon, helping consumers buy and sell sports and entertainment tickets. We grew to more than 100 employees and made the Inc. Magazine list of fastest growing small companies. Then one day we knew for sure that we were in the big leagues.
What tipped us off? Our company was sued — along with the world's biggest airlines and ticketing companies — by a company that claimed its patents cover almost every interesting aspect of online ticket purchasing. The patent owner claimed that its patents were so valuable that our company and virtually every enterprise that sold tickets should pay it at least 30 cents per transaction.
Remarkably, the patent owner is not in the business of selling tickets, or even offering software or services to companies that sell tickets. It simply owns several patents and it generates revenue by licensing those patents to companies that sell tickets. When companies do not offer products or services, but instead their business model is to license patents and sue companies that won't pay up, they are known as "patent assertion entities" or PAEs, and are often disparagingly called "patent trolls."
A patent owner can file a lawsuit and claim that its patents are being infringed even if the patent owner has not first asked the lawsuit target to license the patents voluntarily. By ambushing companies with lawsuits, some trolls quickly drive up the target company's legal fees. Of course, most companies settle quickly because it is cheaper than fighting, even when the targets know they have not infringed and they can win if they can afford to fight.
In our case, several airlines and ticketing companies fought back, and their effort proved righteous when a jury ruled that the patents were invalid — and that clearly the patents never should have been allowed because Expedia had offered very similar "select-a-seat" technology several years before the patents in our litigation were granted. If the U.S. Patent and Trademark Office had done its job well, there would have been no patents or assertions of infringement, and our company would not have paid thousands of dollars to lawyers and suffered hundreds of hours of executive distraction.
For our company, this story illustrates how many have been taking advantage of our broken patent system. Beset by many years of budget challenges and ineffectual rules that favor patent applicants, the Patent Office has improvidently approved tens of thousands of vague, overly broad patents. Opportunistic companies are taking advantage, by forming or partnering with PAEs to create a new business model — using such patents not to create products or innovations but to threaten lawsuits and demand unjustified license fees. Victims then settle for amounts that are very costly, but are substantially cheaper than righteously defending oneself in court.
Studies document that patent litigation has exploded since 2008 and especially since 2011, and the significant majority of cases are initiated by PAEs. Due to the costs of litigation, more than 90 percent of patent assertions are resolved before trial, but when defendants fight back the PAEs lose more than 90 percent of cases inside of courts.
For our company the costs of defending against patent abuse are staggering — averaging $465,000 annually for the last five years. Economists would call this spending deadweight loss, as it produces no benefits for our customers, our employees or our company. Sadly, it has become a cost of doing business that costs jobs, productivity and economic growth.
Fortunately, the White House and many in Congress understand that patent litigation has become abusive, and are taking steps to pass legislation to stop this expensive game. The House of Representatives passed the Innovation Act in early December, and later this month the U.S. Senate Judiciary Committee — including our Sen. Richard Blumenthal — will consider similar legislation.
America is the strongest economy in the world because our system rewards hard work and real innovation. Our company weathered the patent infringement storm and has continued to flourish here in Connecticut, but if poor quality patents and abusive litigation continue to undermine companies locally and nationally, then our economy will continue to sputter and our best innovators will move overseas.