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National Restaurant Association - Zeroing in on patent trolls

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Zeroing in on patent trolls

Restaurants on the receiving end of threats from so-called “patent trolls” could have reason to feel encouraged by the ongoing interest by Congress and the Federal Trade Commission in taking action to prevent frivolous patent infringement lawsuits.

Patent trolls, also known as patent assertion entities or PAEs, try to profit by threatening litigation against businesses alleged to have infringed on PAE-owned patents.

Patent trolls typically send demand letters asking businesses to pay a licensing fee in order to continue using certain technologies. For example, restaurants have been hit with demands to pay licensing fees for technologies used for online and mobile ordering, mobile payment processing, online nutrition calculators, and in-store WiFi, to name a few. The patent trolls threaten to sue if the licensing fees are not paid.

Demand letters compare the fee to the cost of litigation. Facing litigation costs, many businesses choose to either pay the fee or stop using the technology. Last month, Michael Gibbs, vice president and general counsel for San Antonio-based Whataburger, said the threat of a lawsuit put a stop to Whataburger’s plans to offer in-store WiFi.

Examples of demand letters can be found at www.trollingeffects.org.

Federal regulators are increasingly interested in patent trolls’ impact on innovation and competition. Last week, the National Restaurant Association submitted comments on a study the Federal Trade Commission will conduct on patent trolls. The comments asked the FTC to address the threat patent trolls pose to market competition, the lack of transparency that is typical in demand letters sent by patent trolls, and the lack of information available about the companies sending the letters.

“There has been a marked, increased trend of PAEs targeting end-users for quick and relatively small payouts,” the NRA wrote in its comments. “PAEs send demand letters that are often vague and are based on outdated and broadly asserted – often times grossly overstated – patents. It is also becoming more common for PAEs to send infringement demands that do not even disclose the patent until the retailer signs a covenant not to sue the PAE. These demands seem to be tied more to the potential costs of information gathering and litigation than the merits of the underlying patent infringement claim.” Improving transparency in demand letters sent by PAEs has been a focus of NRA advocacy efforts.

The FTC announced the study, which will involve the agency seeking information from 25 PAEs, in September. 

Meanwhile, Congress continues to pursue legislative solutions.  The Senate Judiciary Committee held a hearing Tuesday entitled “Protecting Small Businesses and Promoting Innovation by Limiting Patent Troll Abuse.” Judiciary Committee Chairman Sen. Patrick Leahy (D-Vt.) and committee member Sen. Mike Lee (R-Utah) have co-sponsored the Patent Transparency and Improvement Act, which contains helpful provisions to address bad-faith demand letters. Earlier this month, the House of Representatives passed the NRA-supported Innovation Act, which takes steps to curb frivolous infringement lawsuits. The NRA also supports the Demand Letter Transparency Act, introduced last month by Reps. Jared Polis (D-Colo.) and Tom Marino (R-Pa.).

“Instead of asserting a patent claim against the manufacturer of a product, entities are targeting small businesses that merely use the product,” Leahy said during Tuesday's hearing. “Across the country, thousands of coffee shops, hotels and retail stores received demand letters and were threatened with patent suits simply for using a standard, off-the-shelf,  WiFi router…Predatory conduct that simply takes advantage of end-users does not promote the important goals for which our patent system was intended, to advance science and the useful arts.”

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