The Patent Troll's Achilles Heel
How some patent trolls break the law and get away with it.

August 24, 2013


If you've worked in the technology industry, especially on mobile applications, you might have heard of Lodsys. Lodsys is a notorious patent troll that made a name for itself by suing developers who made software for the Apple App Store. It argued that it had patented in-app purchases.

Most startups fear patent trolls because they are perceived as invincible due to the current state of patent law, which makes it legal for an organization to assert patent rights that it is not actually using in commerce. In contrast, trademark law works on the basis of continuous usage; if you stop losing your trademark, you might end up losing your rights as well. There are reasons for the difference, but one way that legal scholars think about patent rights is that they are property rights, akin to owning a piece of land. Just because your land isn't being used doesn't mean that it's not yours anymore.

Of course, in many ways patents are not like land. For example, it's difficult to license the same piece of land to multiple parties at the same time. Federal patent law has yet to recognize this, however, and so patent trolls have continued doing their thing under the general perception that everything they do is completely legal, albeit distasteful.

Simply put, that view is wrong.

Recent legislative proposals intended to put a damper on the activity of patent trolls have centered on the notion that legal fees are the key problem. It's true that legal fees are an enormous burden heaped upon innocent victims of trolling, who typically cannot afford millions of dollars in legal expenses, which are themselves inflated and fraudulent as a general rule thanks to the dynamics of the legal industry. Therefore, forcing trolls to pay the legal fees of their victims if trolls lose in court isn't a bad idea at all. That being said, it's also the case that some of the problem could be solved without passing any new laws at all. In fact, quite a bit might be solved if the laws already on the books were just enforced.

Take Title 8, Chapter 5, Section 502 of the Delaware Code. Delaware is a favorite home of countless corporations, with patent trolls being no exception. Delaware's Secretary of State is extremely business-friendly, and so are its courts. Part of that friendliness means that the state knows how to keep things quiet—pesky things, like who owns what, and how much. Unlike other states, Delaware charges $20 per corporation just to view details about corporation ownership and status, which are technically public information that should be available free of charge.

What is interesting about Section 502, entitled "Annual franchise tax report; contents; failure to file and pay tax; duties of Secretary of State," is that even though the Secretary of State can charge for information contained in reports, the filing of the report each year is mandatory. As sub-section (a) states, "Annually on or before March 1, every corporation now existing or hereafter incorporated under Chapter 1 of this title or which has accepted the Constitution of this State, shall make an annual franchise tax report to the Secretary of State."

Which brings us back to Lodsys. Lodsys is actually four separate Delaware corporations with confusingly-similar names: Lodsys, LLC; Lodsys Group, LLC; Lodsys Holdings, LLC; and Lodsys Holdings Group, LLC. Patent ownership has shuffled between the companies over the years just to make things more confusing. Think Computer Foundation (which is part of the joint venture that operates PlainSite) recently paid the $20.00 for each of the holding companies' Delaware files, and learned that neither company has ever filed any of its mandatory annual reports. Between the two of them, there should be five reports on file by now. There are zero.

It's probably not just an small oversight. These annual filings would provide the government and the public with valuable information about who actually owns Lodsys, and how much money the company actually makes. (Court filings stupidly only require disclosure of part-owners if those part-owners are publicly traded and own more than 10% of a corporation. So some companies intentionally buy 9.9% stakes.) Incredibly, despite the fact that the Lodsys companies' owner(s) have violated Delaware law at least five times, Delaware still considers both of the companies we checked to be in "good standing."

Violations of seemingly minor laws such as Section 502 are actually a big deal. California's Unfair Competition Law, Section 17200, makes the violation of any other law that affects a company's ability to compete a violation of Section 17200 itself. So the next time a patent troll comes knocking at a startup's door, it might want to make sure its papers are in order first. Otherwise, the situation could get ugly before you can even say the word "counterclaims."

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