How Small and Mid-Market Firms Can Navigate Patent Purgatory

CEOs of small and medium-sized companies face very different challenges than Apple and Samsung do.

Not everyone has been as successful as Goodway and Oxford, and the results can be devastating for a company and for the overall cause of innovation. Aaron Bannert had been working full-time for six months on a new mobile device application called Smart Ride that tells users what train and bus schedules are in major cities.

He got some of the data from public sources, namely municipalities and cities, and bought a license to get other data from a private company. More than two years ago, he got a letter via FedEx from a lawyer saying he represented an entrepreneur in Vancouver, Canada, who had already developed the piece of software Bannert was using before Bannert had developed it, and that Bannert was in violation of his patent. The lawyer demanded the equivalent of two years of revenue from him. “That was pretty outrageous,” he recalls. “They had no idea how my app worked.”

“If you have something you love and believe in, you have to pursue it. But there’s always a risk that the 800-pound gorilla is going to come after you.”

He ignored the approach at first. “When you have a small business, you get tons of junk mail from people trying to scam you,” Bannert says. But then the lawyer called and demanded payment for a license. At the time, Bannert had only a handful of employees and scant sales. “Even if you take us to court, we don’t have any money,” Bannert recalls telling him. To which the lawyer responded: “All we have to do is punch a button and we can sue you.”

The next thing he knew, he was being sued in the southern district of Florida by a company called ArrivalStar, which had a complicated ownership structure involving Luxembourg and the British Virgin Islands, but also an office in Delray Beach, Florida. “They were coming at me from weird places,” Bannert says. He assumed the Canadian entity was linked to ArrivalStar, which is one of the most litigious firms in the patent arena.

Just responding to the complaint cost $350 to file with the court, but Bannert estimated it would cost $100,000 all in, which would have been just the opening of a protracted legal struggle. “It would have killed the company—I obviously had no choice,” he says. He acquired a license from them for an undisclosed price. Efforts to contact ArrivalStar were not successful.

Patent-3-compressorEven though Bannert obtained a license, the whole experience cost him so much time and money that he is now down to being a one-man company. Efforts to raise venture capital have failed because he does not have clear patents for his applications.

“If you have something you love and believe in, you have to pursue it,” he says. “But there’s always a risk that the 800-pound gorilla is going to come after you. I hate that it kills people’s drive and innovation. That’s a huge hidden cost. I gave up my savings and time to build this thing I believe in.” Software is the most profitable field for trolls, says William J. Watkins, Jr., author of a book entitled Patent Trolls: Predatory Litigation and the Smothering of Innovation. He is a research fellow at The Independent Institute, a libertarian think tank based in Oakland, California.

“Your typical patent term runs for 20 years,” Watkins explains. “That might make sense if you are a big pharmaceutical company spending all these years developing a new drug. If the drug gets past the Food and Drug Administration, it might become the drug for cholesterol or heart disease for 10 or 15 years or more.”

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