Beware Of the Trolls: Boston Startups Are Spending Millions Fighting Patent Litigation

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With all the money that LevelUp CEO Seth Priebatsch has spent fighting so-called “patent trolls” in order to keep his business moving forward, he could have hired close to 20 new employees at his Boston headquarters.

“Saying this ruins your day is probably an understatement,” he said. “The next six months of my working life, more than two percent has to be spent on something useless.”

As of Tuesday, Priebatsch said he has been approached by four different patent trolls, all looking to take money from his business in exchange for not furthering litigation and bringing LevelUp to court.

Patent trolling is the practice of “legal shell companies,” which do not invent or make products but simply acquire patents in order to sue technology companies for licensing fees or infringement. The patents are vague, and only mildly reflect what LevelUp—which allows users to pay for merchandise using their smartphones—does, but the wording in the patents are enough to “extort” the businesses and siphon money in the form of settlements.

“It’s very easy to prove on an obvious level that [a patent is] irrelevant, but on a legal level, it’s going to cost over a million dollars just to prove that,” if they go to court, Priebatsch said. “They usually ask for around $100 to $150,000 to settle.”

And that’s just for one of the trolls.

With Priebatsch up against multiple lawsuits, it’s getting draining to think about the ongoing battle. “It’s absolutely already [impacted us]. There is no doubt. We would be doing a lot more. Based on what we are spending on patent lawsuits, we have hired 10 to 20 less people,” he said.

In some of the emails he received about pending litigation, Priebatsch said patent trolls often threaten to increase the amount they want in a settlement each day that their request isn’t met.

Tim Rowe, Founder and CEO of the Cambridge Innovation Center, said that gap in new hires could be the difference between success and failure in the long-term for any company. “It could also be the difference between being profitable or unprofitable,” he said, adding that these types of lawsuits are common, and there are many local startups in both Cambridge and Boston entangled in similar litigation. “[Spending money to fight these] is the difference between going out of business and growing.”

Over the summer, when President Barack Obama delivered his State of the Union, Rowe said a group of entrepreneurs met during a “pow-wow” and decided that the patent issue was the biggest problem that they would like to see fixed.

Since that’s not an option at the moment, Priebatsch started working with Attorney General Martha Coakley last week, to see what can be done on a state level. Patents are largely in the hands of federal officials, and require changes in Congress in order to fine-tune the law.

Priebatsch and his legal counsel have filed counter suits against some of the current patent trolls to show they won’t “be bullied,” but it is still costing him a substantial amount to fend them off. “We are not backing down,” he said. “But I would so much rather spend this money on new employees.”

He said the bigger a company gets, and the more recognition they have in the press, the more trolls start to descend upon them. Unless the law changes, it’s something he will be dealing with forever. “We will win each individual case, but your expenses now become health care, salary, real estate, and dealing with patent trolls,” he said.

Coakley, who went to LevelUp’s offices to speak to employees Wednesday, likened the problem with patent trolls to the children’s fairy tale about the “Billy Goats Gruff,” crossing the bridge with a troll underneath. “It’s a barrier keeping companies from going where they want to go,” she said. “The moral of the story is, trolls are bad. We shouldn’t allow them in fairy tales, and we shouldn’t allow them in real life.”

Coakely is looking at existing state laws to see how she can help businesses keep trolls at bay. She also pledged to determine whether other legal remedies are available to technology companies like LevelUp.

As the patent trolls keep piling on, however, leaving little wiggle-room for the company to focus on the task at hand, Priebatsch is trying to remain confident that LevelUp will come out on top, and he is refusing to “bend” to the threat of legal action. “We will have to raise more money, and we will have to hire slightly less people, but we will fight our way through it,” he said.