Tim Steller: Local firm faces heat of patent enforcer

Everyday actions like scan-send targeted by 'trolls' seeking payoff
2013-02-17T00:00:00Z 2013-02-17T21:16:29Z Tim Steller: Local firm faces heat of patent enforcerTim Steller Arizona Daily Star Arizona Daily Star
February 17, 2013 12:00 am  • 

Pay $100,000 and we'll forget the whole thing. That was the bottom-line message of an otherwise cordial letter that Bill Nelson, president of Tucson's GLHN Architects and Engineering, received Oct. 1.

Who the letter came from wasn't exactly clear, since it was signed by "The Licensing Team" at AdzPro LLC, an entity Nelson knew nothing about.

The reason AdzPro wanted the money: It presumed that employees at GLHN use their photocopier to scan and email documents with the push of a button. This process, used in pretty much all offices around the United States, is patented, the letter said.

Nelson couldn't believe it and decided to fight. If GLHN doesn't resist, he told me, "The next thing you know we'd get a letter from somebody who patented toilet paper or running water."

GLHN is one of a surging number of businesses nationwide receiving demand letters from companies that say they own patents to common technologies or processes. Researchers say it's especially affecting small companies, the ones more likely to hire in an economic recovery.

GLHN, a 50-year-old firm at 2939 E. Broadway, has 92 employees, who are the company's owners through an employee stock ownership plan. It's the only place Nelson has worked in his 44-year career.

The scanning-and-emailing process is just one of many examples of the everyday activities businesses like GLHN are being accused of doing without a license. In 2011, a company began demanding money from, and filing lawsuits against, coffee-shop chains and hotels that offer wireless Internet service to their customers, claiming it had a patent on wireless local area networks.

Companies such as GLHN are targets because they're what UA law professor Derek Bambauer calls "the sweet middle" - big enough to have money on hand and with enough employees to make the licensing worthwhile, "but not big enough to hire good patent counsel who will eviscerate the patent."

Unwelcome advice

The letter from AdzPro LLC features a comic false friendliness.

"You should know also that we have had a positive response from the business community. As you can imagine, most businesses, upon being informed that they are infringing someone's patent rights, are interested in operating lawfully and taking a license promptly."

Their recommended licensing fee: $1,050 per employee, or about $97,000.

Nelson ignored the first letter but received a second one on Nov. 19, from attorney Maeghan Whitehead of the Farney Daniels law firm, based near Austin, Texas. That's when GLHN consulted a patent attorney and got unwelcome advice: Try to negotiate the price down to maybe $40,000 or $50,000 and settle.

Nelson's reaction: "Screw that. I'm not sending these dudes $40,000."

Some people call companies such as AdzPro LLC by the neutral acronym PAE, for Patent Assertion Entity, but they're better known as "patent trolls." These businesses exist for one main purpose: to soak licensing fees from companies that find it cheaper to pay up than hire lawyers to fight.

Larger PAEs buy up patents hoping to sue major technology corporations and come up with a major payday in the hundreds of millions of dollars.

"Rather than inventing things themselves, all they do is buy up patents, often software patents, then they go around and threaten to sue people," Bambauer said. "It's a pretty good business model, as it turns out. You can really easily make money out of it."

These businesses defend their activities as a way to get the value out of a patented technology that never made the money it merited. Sometimes the person or company that won the patent went bankrupt before the invention went into wider use and became valuable.

But some researchers have found that these patent-assertion demands slow down innovation and business growth without providing a significant benefit.

President Obama made a harsher assessment of patent trolls during an online chat on Thursday. Responding to an entrepreneur's question about the issue, he said, "They're just trying to essentially leverage and hijack somebody else's idea to see if they can extort some money out of people."

The enforcers

As much as he dislikes the fact, Nelson has come to a disappointing conclusion about AdzPro LLC.

"They've got a case."

The case came from a purchase of a set of patents first filed by a man named Laurence Klein in 1997. A group of investors bought the patents in recent years and set up a company called Project Paperless LLC.

Project Paperless went about demanding licensing fees from companies across the country, hitting up, among many others, a group of Atlanta companies on a newspaper's "best workplaces" list. Last year, the patents changed hands again, to a company called MPHJ Investments.

After that transaction, a new group of companies including AdzPro began sending the demand letters.

Their lawyer, Brian Farney, told me Friday he views patent enforcement as a way of guaranteeing innovation.

"If you don't make the patents useful and enforceable, you'll have fewer people coming out with their ideas," he said.

As to why AdzPro and the others are targeting smaller companies, he said, "They essentially had to start somewhere."

However, one small company that won't be targeted, Farney acknowledged, is his own law firm, although he said it, too, uses the push-button scan-and-email function without a license.

"We represent them, so I don't think they'll pursue us," Farney said.

Neither will AdzPro and its sister companies be going after the manufacturers of the photocopiers themselves because it's the linking of the copier with a local network for a push-button transmission of documents to a computer via email that is patented.

Challenge unlikely

That isn't to say those manufacturers should be off the hook. Nelson is convinced that copier manufacturers are among the villains in this story.

They're selling the copiers for high prices, advertising the push-button scan-and-send feature, aware that the purchasers may be hit with a demand for licensing fees later.

"You buy a $4,000 copier, then you have to spend $100,000 to use the thing," Nelson said. "We're somewhat P.O.'d that the copier makers are standing on the sidelines."

If they're not willing to warn customers of the potential for licensing fees, he said, they should band together and buy the patents to eliminate the issue.

I emailed three big manufacturers - Ricoh, Xerox and Canon - but got only no-comments in response.

The best solution to this problem would be for someone to challenge the patent itself and have it thrown out as invalid. But that's unlikely to happen unless the patent trolls go after a big company like IBM, Bambauer said, and that would risk wrecking the business model.

"They'd get crushed if they did," he said. "If they lose once, the patent's dead."

Contact columnist Tim Steller at tsteller@azstarnet.com or 807-8427. On Twitter: @senyorreporter

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