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Scary Bedtime Stories: Health Care and the Patent Trolls

08/07/2014 11:13 am ET | Updated Oct 07, 2014

"Trolls can smell the rainbow, trolls can smell the stars. Trolls can smell the dreams you dreamed before you were ever born." -- Neil Gaiman, Troll Bridge

Trolls can smell money too ... lots of money.

If you ever want to liven up a dull conversation at a gathering of business executives and technology managers, just bring up the subject of "patent trolls." You're likely to provoke many interesting reactions. Ambivalence is not likely to be among them.

A true patent troll does not produce or sell any products of its own. It's a legal entity created specifically and solely to generate a revenue stream from patents, preferably through entering into licensing agreements, but also through litigation. These companies are also known as "Non-Practicing Entities" (NPEs) or, more recently, "Patent Assertion Entities" (PAEs).

This practice is growing rapidly and generating billions of dollars in royalties for the patent trolls. Not surprisingly, it has also ignited a firestorm of criticism from many segments of the technology industry, and they've begun to push back on the political front. The Federal Trade Commission (FTC) recently announced an investigation into the negative effects of patent trolls on the economy, and no fewer than six bills have been introduced in the current session of Congress aiming to reign in the perceived abuses by patent trolls. So does this mean we're in the midst of a patent troll "crisis?" Will innovation in health care grind to a halt under the weight of unnecessary litigation? Not necessarily.

With all of the hyperbole and conflicting information out there, what are the lessons for health care-related companies involved in developing new technologies and commercializing products? For answers, I turned to Leland D. Schultz, an intellectual property lawyer who helps defend clients against lawsuits brought by patent trolls and works to strategically position themselves to minimize that risk. His first piece of advice? "For one thing, don't panic. But at the same time, don't simply ignore the risk, either. This is definitely a situation where ignorance is not bliss."

The Government Accounting Office (GAO) recently released a report that cuts through much of the rhetoric and largely contradicts the commonly accepted perception of unfettered patent trolls causing widespread destruction. The report provides a more balanced understanding of the ways patent trolls operate and the risk of being sued by them. This issue doesn't just affect the big health care players like Cerner, Philips, Siemens, Allscripts, etc. It should also be recommended reading for anyone developing technology solutions in the health care space.

One of the more interesting conclusions by the GAO is that while there has been a tremendous increase in overall patent litigation in the last 5 years, patent trolls account for only about 20 percent of those lawsuits. This somewhat undercuts the perception of a patent troll "crisis." However, the GAO report also highlighted an increasing risk to software patent-holders, who faced 89 percent of the increase in patent litigation from 2007 to 2011.

Schultz explains that the implications of the GAO report are that "... if you're active in the software space, your chances of being sued are much higher in relative terms, and not just from patent trolls. In my opinion, those in the EMR (Electronic Medical Record) space need to be particularly concerned. It's a rapidly growing segment of the health care industry that is almost entirely software-based and the leading companies don't appear to be paying sufficient attention to patents, either as a valuable business asset or as a threat to their business."

To that end, Schultz advises readying a team and procedures to react decisively to patent troll lawsuits. To complicate matters, patent trolls are careful to set licensing fees at levels that may not warrant the considerable costs and uncertainty involved in mounting a legal defense. On the other hand, settling too quickly and easily may encourage other patent trolls to pile on. As Schultz colorfully puts it, "It's like blood in the water to the (legal) sharks, and that's a reputation that you definitely don't want."

On a more basic level, the takeaway here is to pay attention to what's happening in your industry. As Schultz explains, "Once you see your direct competitors being sued, it's likely only a matter of time until your name comes up as well."

The health care industry has a number of difficult challenges facing it. Unfortunately, that also includes looking under bridges for trolls.

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Rob Szczerba is the CEO of X Tech Ventures. Follow him on Twitter (@RJSzczerba), Facebook, and LinkedIn.