Two Canadian fintech companies have teamed up with some of America’s biggest tech giants to fend off patent trolls.

Although they represent two extremes of Canada’s financial services sector – FI.SPAN is a startup while TD Bank has assets worth $998 billion – both firms have joined a U.S. group pushing back against frivolous patent lawsuits.

The License on Transfer (LOT) Network was founded in 2014 by Google, Canon, Red Hat and SAP. The non-profit consortium now has more than 100 members worldwide, hailing from sectors ranging from retail and automotive to telecom and ecommerce.

LOT was established to protect members’ intellectual property from patent trolls, who file baseless lawsuits against companies solely to shake them down for money.

One of the most famous examples is Erich Spangenberg. Until last year he was CEO of ipNAV, which reportedly filed patent suits against 1,638 companies, making it the most litigious troll in the IP space. In a 2013 New York Times profile, high school dropout Spangenberg claimed to earn $25 million a year from IP trolling.

Although comedian John Oliver poked fun at patent trolls on his TV show, frivolous IP lawsuits are no laughing matter for legitimate companies.

Trolls often operate in the hope that their targets will quickly pay them a settlement in order to avoid lengthy, expensive legal actions. As comedian John Oliver put it in a 2015 segment on his TV show Last Week Tonight, trolls in fairy tales “control bridge access for goats and ask people fun riddles. Patent trolls just threaten to sue the living s–t out of people. And believe me, those lawsuits add up.”

Targets, large and small

According to research compiled by LOT Network, the average patent suit costs $3.2 million to defend. Since, as LOT notes, 50 per cent of companies targeted by trolls have less than $10 million in annual revenue, just one such lawsuit can bankrupt a startup or small company.

“It prevents you from operating your business. When you’re a startup, you’re cash constrained. You should be protecting your IP that you generate and make sure it’s not in (legal) violation. But there’s a whole bunch of demanding things for your time and often, (patent protection) gets pushed to the wayside,” said Clayton Weir, co-founder of FI.SPAN, a Vancouver firm that provides third party fintech API platforms for banks.

Weir: Trolls can “prevent you from operating a business.”

As a company launched just over a year ago, FI.SPAN hasn’t been hit with any troll suits so far. Large enterprises are more popular targets, and although they have more resources, trolls are still a considerable burden for them. Considering that Apple alone faced 171 troll suits between 2009 and 2013, it’s easy to see why more than 80 per cent of defendants choose to settle before trial.

TD’s Josh Death estimates the bank has been targeted by about a dozen troll lawsuits over the past five to 10 years, all in the U.S. Trolls are having a tougher time in the U.S. due to changes in the law there, “so they’re looking at new jurisdictions where they can do this,” said Death, associate VP of IP and patent litigation at TD Bank.

That makes Canada an attractive market for trolls. So does Canada’s high concentration of players in the fintech sector, which has become a favourite target of patent louts in recent years.

“A recent report shows Canada is the eighth largest market for fintech patent applications,” Death noted.

Why are trolls suddenly so interested in fintech patents these days? Weir suggests it’s because fintech involves newer technologies like blockchain or machine learning, which haven’t been tapped out by troll litigation yet. The use of various technologies (often developed by several providers) within one new banking product also allows trolls to take aim at multiple patents in one fell swoop, he said.

“There may be an amalgam of four or five or 10 API services as part of one new (bank) service. So there’s all this different IP co-mingling … under the hood,” Weir said.

Herd immunity

LOT operates using a form of herd immunity. Each LOT member agrees that if any of its patents should be transferred into the hands of a troll, they will automatically grant a license for that patent to every other member of LOT. (Hence the group’s name License on Transfer.) From that moment on, every LOT member is protected from lawsuits involving that specific patent. As LOT’s membership grows, so does the potential immunity of all members.

LOT defines a troll as any entity that generates more than 50 per cent of its gross revenue from asserting patent rights.

According to LOT’s website, “what (our) agreement does not do is prevent members from suing one another – or anyone else – for patent infringement. Nor does it prevent them from licensing their IP normally. As long as a member company holds onto its patents, it can use them and assert them to its heart’s content. The agreement is triggered only if one of those patents” becomes owned by a troll.

TD Bank’s Josh Death.

Why don’t LOT members just make sure their patents are never sold or transferred to trolls? LOT’s website states that “by some estimates, over 80 per cent of patents asserted by (trolls)” were transferred to them at some point from valid operating companies.

Death explained that patents are usually enforceable for about 20 years. Over that length of time, a patent can change hands from its original owner to one or several entities before eventually landing in a troll’s possession.

“The operating companies may not have initially sold (patents) to a troll. But at some point, because (patents) last so long, they get transacted to an entity that decides to enforce them in some manner,” he said.

Since LOT was formed, members have divested or transferred more than 42,000 patent assets. No LOT member has ever been sued over one of its transferred patents, even though 35 member patents have ended up in the hands of eight trolls since the group was established.

IP seems to be top-of-mind in the tech community lately. On Monday, a new U.S.-based group called High Tech Inventors Alliance was launched to lobby government and legal officials for what it calls “balanced patent policy.” Its founding members are Adobe, Amazon, Cisco, Dell, Google, Intel, Oracle and Salesforce.

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