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How Patent Trolls Are Hindering Innovation At Rackspace — And Among Our Customers

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In a recent blog post, I issued a call to action to make patent trolls pay. It stemmed from a questionable patent infringement lawsuit filed against Rackspace by a patent troll – a plaintiff calling itself PersonalWeb Technologies – that claims Rackspace infringes on its patents with Rackspace Cloud Servers and by hosting the GitHub code repository (view the complaint here).

Frivolous patent lawsuits – filed in hopes of a quick financial payoff via settlement – are sapping capital and slowing the pace of innovation and job growth at Rackspace and at the startups and other small and midsized companies that account for many of our customers.

In the past two years we have seen a dramatic increase in patent infringement cases filed against Rackspace, all of them brought by non-practicing entities. We spend a substantial amount of time and money dealing with these claims – time that would be better spent addressing the needs of our employees and customers. The dollars are also substantial. Defending a patent infringement lawsuit can easily cost in excess of $3 million. In most cases, the cost of settling is significantly less than the cost of fighting and these patent trolls know it.

Now imagine this on a grander scale. How is this impacting the technology industry? Consider Google, Yahoo, Apple and other major technology companies and the deluge of patent infringement suits they suffer at the hands of patent trolls. The financial impact and drain on resources and innovation is astronomical. One recent study by James Bessen and Michael Meurer of the Boston University School of Law, The Direct Costs from NPE Disputes,” estimated that patent trolls cost the American economy $29 billion – a 400 percent increase over 2005 — and affected 5,842 defendants in 2011. Of course this $29 billion burden falls on the shoulders of stockholders and employees. Additional research suggests that of that $29 billion, the costs are largely deadweight and less than 25 percent actually flows to support innovation and another 25 percent goes toward legal fees.

Patent trolls aren’t just a large company problem anymore. Startups and small companies are now prime targets. “Startups and Patent Trolls,” a recent study by Colleen Chien of the Santa Clara University School of Law, found that most defendants in troll suits are small companies and startups. According to the findings, which were released this month, companies with less than $100 million in annual revenue represent at least 66 percent of defendants in patent troll suits, while 55 percent of defendants have annual revenue of less than $10 million. Chien’s survey found that the smaller the company, the more likely a bogus patent suit caused a “significant operational impact” such as delaying hiring, postponing a milestone achievement, forcing changes in a product or business strategy, shutting down a line of business or the entire business, or diminishing the company’s valuation.

This threat goes to the heart of Rackspace’s customer base, and I would imagine that many of our customers have been damaged by these spurious lawsuits. (If you’re a troll victim, we’d love to hear your story and share it with legislators; please comment below, contact me on Twitter at @AlanSchoenbaum or send an email to our blog editor at andrew.hickey@rackspace.com.)

Patent trolls also exact a heavy emotional and personal toll on entrepreneurs and their teams. In Chien’s study, one survey respondent noted:

“It was agonizing to hand over all the money we had earned from a product we had invented and created ourselves to a firm that invents nothing and creates nothing. Our founder has since lost his house, car — all his assets.”

Had Rackspace been subjected to this sort of harassment in its early stages, we might never have become the $1 billion, 4,500-employee company that we are today.

This new research reaffirms that patent trolls cannot be allowed to continue to prey on productive businesses. We have to band together and fight back. We at Rackspace are working with legislators to toughen laws against patent trolls. The Leahy-Smith America Invests Act is a great start. So is the work that Rep. Peter DeFazio (D-Ore.) and Representative Jason Chaffetz (R-Utah) are doing with the introduction of the SHIELD Act, which requires plaintiffs to pay defendants’ legal costs if a lawsuit is unsuccessful. I’d like to again encourage all of our customers, partners and friends to get behind the SHIELD Act and push for legislation directed at patent trolls. We must work together to defend innovation and force these trolls back under their bridges with empty pockets.

You can read the full text of the proposed SHIELD Act here. And consider signing this Defend Innovation petition, which will be presented to Congress in support of patent law reform.

About the Author

This is a post written and contributed by Alan Schoenbaum.

Alan Schoenbaum is Special Counsel for Rackspace.

Prior to joining Rackspace in 2005, he was a partner at Akin Gump Strauss Hauer & Feld LLP in San Antonio, Texas. Alan has more than 25 years of experience in corporate and securities law and mergers and acquisitions. Throughout his legal career he has represented public and private growth companies, venture capital funds and their portfolio companies. Alan received his B.A. in English and his law degree from the University of Texas at Austin.


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3 Comments

there is a big difference between a suit to protect your IP and using it to either get a quick pay-off or to try and corner the market. I would agree that there needs to be some kind of protection against the more frivolous and predatory lawsuits.

avatar blackxangus on October 4, 2012 | Reply

Its amazing that this suppression of innovation isn’t driving innovators to other countries where the legal system doesn’t encourage bullying. Oh wait…

If the US doesn’t change these laws, Silicon Valley will simply lose to India and Singapore. We have the Internet now, for many applications it no longer matters where your company is based.

avatar Leslie Viljoen on October 5, 2012 | Reply

These [expletive removed] patent trolls have plagued this world long enough! We should KILL these [expletive removed]!

avatar John on March 29, 2013 | Reply

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