Proliferation of patents granted in U.S. prompts lawsuits

Lots of 'intellectual property owners' can demand licensing fees -- or sue

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When it's time to pay the troll toll, the bill arrives in the form of a letter filled with polite but firm language and loaded with references to patent numbers.

The invoice has been sent on hundreds of occasions by ArrivalStar, a company once based in Delray Beach, Fla., but now incorporated in the tax haven of Luxembourg. The letter describes ArrivalStar head Martin Kelly Jones as an inventor who deserves his due as owner of nearly three dozen patents related to technology for tracking vehicles and packages.

"Mr. Jones conceived his inventions in 1985 when he observed a young girl waiting at a school bus stop on a rainy, foggy Atlanta morning," the letter says.

Versions of ArrivalStar's smooth-yet-threatening document have arrived at hundreds of headquarters, including the offices of American Airlines, The Gap, even the Port Authority of New York and New Jersey, as well as Pittsburgh Logistics Services, a Beaver County freight company.

Those who have received the letter -- and later been named as defendants in patent-infringement suits -- scoff at the idea of Mr. Jones as an innovator whose vision and acumen have greased the cogs of global supply chains and online retailing. Instead, they paint him with uncharitable terms -- "shakedown artist," "cockroach" and, most commonly, "patent troll."

For Mr. Jones, the insults are part of doing business. His Boca Raton attorney, Bill McMahon, said ArrivalStar has agreed to licensing deals with more than 500 companies in recent years. The average fee is "south of $40,000," Mr. McMahon said -- leading to the obvious conclusion that ArrivalStar has brought in $20 million in licensing fees on the three dozen patents it owns.

Not that ArrivalStar's revenue sources are happy to pay up. Mr. McMahon said his licensing letters typically go ignored until he files a suit in federal court.

"I can't tell you how many people call and say, 'F-you!' " Mr. McMahon said. "I get that four or five times a week."

The arcane -- and emotionally charged -- world of intellectual property disputes grabbed headlines in June, when President Barack Obama lamented the rising number of suits filed by patent trolls, companies that exist to collect licensing fees on inventions registered with the U.S. Patent and Trademark Office.

President Obama announced several executive orders "to protect innovators from frivolous litigation."

Unlike billion-dollar patent battles between Apple and Samsung, or between the makers of brand-name drugs and generic versions, these lower-stakes "troll tolls" are collected not on a piece of crucial insider knowledge but on some easily overlooked invention.

In one example, a shell company threatened to sue 8,000 coffee shops, hotels and retailers for patent infringement because they had set up Wi-Fi networks for their customers.

ArrivalStar isn't the only patent troll, but it offers insight into a shadowy industry.

First comes the demand letter. In it, ArrivalStar offers the accused scofflaw an opportunity to "amicably resolve" the matter "under highly favorable terms" -- by paying a licensing fee of perhaps $150,000.

Companies that ignore the letter risk being named as a defendant in a lawsuit.

In the past three years, ArrivalStar has filed 201 patent infringement suits in federal court in South Florida, targeting such household names as New Balance, Nike and Nordstrom.

In each of those three suits, ArrivalStar cited the consumer brands' use of advance shipping notices and order confirmation emails sent to customers. ArrivalStar says its patents give it the right to a licensing fee.

The suits almost never make it to trial, Mr. McMahon said. Instead, they're settled quickly, for an undisclosed sum.

That secrecy is an important part of ArrivalStar's strategy, said Daniel Nazer, staff attorney at the Electronic Frontier Foundation in San Francisco. The specter of a hefty settlement can pressure companies to settle.

"Patent trolls like to operate in the shadows and use uncertainty as a weapon," Mr. Nazer said.

Mr. McMahon countered that the fee is reasonable.

"We keep them very moderate and affordable," he said of the fees. "There's no need for us to try to get rich off any single case because there are 600 other targets for us."

Mr. McMahon said Mr. Jones attempted to run a company based on his innovations but failed during the dot-com meltdown. Mr. Jones then switched his strategy to licensing his inventions, an approach the attorney calls legitimate.

"If someone is stealing or using the technology without paying, they have to pay," Mr. McMahon said. "We can't just give people passes."

Robert Thornburg, a Miami patent attorney representing Scanwell Logistics, which was sued in July by ArrivalStar, isn't so sure.

"The whole business model is, 'Let's make money off of litigation,' " Mr. Thornburg said.

Simply mounting a response to a patent infringement suit can cost about $100,000, attorneys say. Taking a case to trial can rack up $1 million in legal fees. Given those scary numbers, a five-figure settlement seems like a good deal.

Mr. Jones made a similar argument in a rare public statement in 2003, issued after ArrivalStar filed a patent infringement suit against 14 companies, including American Airlines, American Express, Continental Airlines, Delta Airlines and the city of Atlanta.

"Naturally, we prefer to avoid litigation, but many defendants were unresponsive to overtures to discuss either the relevance of the patents for their businesses or our offer of a license on reasonable terms," Mr. Jones said in a news release about the suit.

Mr. Jones paid $946,000 for a house in Delray Beach in 2004. He now lives in Vancouver, according to recent patent filings.

For all his success in collecting tolls, Mr. Jones recently entered a settlement that shows the troll can lumber out from under his bridge once too often, only to get clubbed. The American Public Transportation Association sued ArrivalStar in June, a response to what it deemed ArrivalStar's "baseless litigation" against bus and train systems throughout the country.

ArrivalStar has sued more than a dozen mass transit systems in the past few years, negotiating settlements of $80,000 from Seattle's bus operator and $50,000 from Chicago's commuter rail line. ArrivalStar accused the bus and train lines of horning in on its patented process for letting passengers know when a vehicle will arrive.

The transportation association on Aug. 21 said ArrivalStar had agreed to stop suing its members, giving 1,500 transit agencies a free pass from the troll toll.

Coral Gables patent attorney Dan Ravicher represented the mass transit association. He said ArrivalStar uses a perfectly legal strategy to take advantage of flaws in the U.S. patent system.

"Blaming them is like getting mad at the cockroach you find on your kitchen floor," Mr. Ravicher said. "Yes, it's disgusting, but who's fault is it? You're the one who left the crumbs there."

The patent system's crumbs, he said, are left because the federal government makes more money from approving patents than from rejecting them, and therefore issues too many patents.

"We have a rubber-stamp patent office that doesn't care about patent quality at all," he said.

The settlement negotiated by Mr. Ravicher addressed only public transit systems and their vendors, but a federal judge recently pushed back in a separate case. After ArrivalStar sued Gatorade in July for patent infringement, Judge K. Michael Moore wondered why an entity based in Luxembourg chose a South Florida court to file suit against a global giant based in Chicago.

"Plaintiffs and defendants have no apparent connection to Florida," Judge Moore wrote on Aug. 14.

In suits against companies as far-flung as Maine-based LL Bean and California-based Billabong USA, ArrivalStar takes pains to point out the companies' business connections to Florida. Judge Moore noted the high volume of "nearly identical" suits and said he would dismiss the case if ArrivalStar couldn't show why the suit should be heard in Florida.

Mr. McMahon said the judge's objection is only a minor setback, and he rejected the suggestion that his client is doing anything other than sticking up for what's right.

"We wouldn't have to sue so many people," he said, "if everybody wasn't infringing on our technology."

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