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Patent Troll Litigation

May 7, 2014

by Stephen J. Edwards, Esq.

Patent trolls are becoming an increasing problem for all businesses in the United States, including credit unions. These companies own patents, but produce no goods or services. In fact, they often own nothing at all except their patent portfolios. Their business model focuses on sending threatening letters and filing lawsuits, in the hope of scaring your credit union into paying a settlement fee, rather than facing the possibility of litigation. For this reason, these companies have earned the pejorative name, “Patent Troll.”

You may think that your credit union is safe from such demands, because you do not produce, let alone steal, any technology. Instead, you buy technology from third parties to better serve your members. Unfortunately, merely using technology can open the door to a lawsuit from a patent troll. Credit unions have been harassed and sued by patent trolls for simply using Wi-Fi technology, or for ambiguous concepts such as “Methods and Systems for Facilitating Transmission of Secure Messages Across Insecure Networks.” Even if such a patent is invalid, proving this can cost many thousands of dollars in legal fees. The patent troll hopes that its target will make a settlement rather than fight in court.

Small credit unions and community banks are especially vulnerable as targets because they do not have the resources to defend themselves and see settlement as an easy option.  Trolls are looking for a quick payday.  They are really not interested in protecting their patent.  Since 2005 the number of defendants sued by patent trolls has quadrupled.  In 2012 they sued more than 7,000 defendants and sent thousands more threat letters.  US companies paid $29 billion to trolls in direct payouts.

This is a very real threat.  Many credit unions in Vermont, Maine, NY NH and Georgia have been sued by these patent trolls.  Congress is now considering legislation to make it more difficult for trolls to sue, but with the gridlock in Washington, no one can predict if or when such a useful law will pass.


What can your credit union do to defend itself against patent troll lawsuits? As with many such unpredictable risks, the best choice may be insurance. Although there is no coverage for this type of claim under your standard insurance policies, CUNA Mutual has recently introduced Enhanced Defense Reimbursement coverage that pays certain defense costs associated with claims that are not covered by liability policies.  Patent troll litigation activity is one of the areas covered.

Another way to protect yourself from patent trolls is to insist that any technology vendor you deal with indemnify the credit union against such claims. They will resist, but you don’t want to do business with a company that won’t stand behind their product. In addition, make sure that you have your attorney review the contract language to make sure that the protection is adequate. Very often, companies will write extensive indemnification language into their contracts, only to eviscerate this protection by limiting the vendor’s liability to a few thousand dollars.

If you do receive a letter from a patent troll, don’t overreact.  Other credit unions or community banks are probably being targeted also.  Most of these cases start with a letter.  The initial response is critical.  Contact your attorney, your insurance company, and the League.  They can help you find others to possibly join in the fight.

DISCLAIMER: The foregoing is provided for informational purposes only, and does not constitute legal advice. It is not a substitute for legal or professional advice. Any legal advice should be tailored to specific clients and their specific needs. No attorney-client relationship is created by any use of this website. You should not act on the information contained in any of the materials on this website without first consulting a competent attorney licensed to practice in your jurisdiction.

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