The small town of Marshall (population: less than 25,000) in the east Texas part of the Piney Woods forest – famous for wild hog hunting – is the self-proclaimed "Pottery Capital of the World". More recently, however, it has become best known for lawsuits brought by "patent trolls" – companies that apply for or buy up catch-all patents (often from companies forced to liquidate their assets), hunt down other companies with patents that may have a degree of crossover with theirs – and then sue.

There are office blocks with hundreds of these firms registered in Marshall, home of the US district court for the eastern district of Texas, which has a particularly favourable regime for patent trolls.

Previously, many personal injury litigation cases were brought in east Texas but a reform of Texas tort law in 2003 put an end to that, leading to the boom in intellectual property (IP) litigation – and the slogan bandied about by lawyers: "From PI to IP".

One London company has had bitter experience of a run-in with patent trolls. Serverside Group, founded in 2003 by brothers Adam and Tom Elgar, pioneered payment cards that customers can personalise with their own photographs. It now supplies more than 200 banks in 27 countries, including Royal Bank of Scotland, Lloyds Banking Group, ING and Capital One.

Out of the blue, at midnight on Friday, 13 August 2010, Michael Campbell, head of Serverside's legal team, received an email from a US lawyer. "It said: 'You're being sued, let me help you.'" Campbell says his heart sank when he realised that the young technology company was being sued in Marshall.

Along with more than 25 other companies, including Adidas, Nike, Mars and Hallmark, Serverside was sued by Quark Images.

The plaintiff was a firm that had been incorporated the previous month in Longview, east Texas, as a "non-practising entity", that is, one with no business activities or employees of its own. At the same time, it acquired two patents from Jones Soda, a Seattle-based fizzy drinks company, which allow customers to personalise their bottles with photographs.

"It could have been lights off for us," recalls Campbell. "We pretty much stopped managing the company for a week or two to work out what was going on and put a plan in place. We took a crash course in US patent law."

About 95% of patent cases do not reach trial – many are settled out of court even if they have little merit. But according to the American Intellectual Property Law Association, the median defence cost per defendant is $3m (£1.9m) for a typical mid-sized patent case. For large cases in Texas, the figure is nearly $6m. Unlike in Britain, costs cannot be recovered from unsuccessful plaintiffs.

Serverside reckoned that taking the Quark Images suit through to trial would have landed it with a legal bill of $2m-$4m. Moreover, many of its customers were included in the lawsuit and Serverside would have had to indemnify them for the legal costs involved in defending the suit.

Court records disclose that Serverside and all the other defendants in the suit settled.

"In the east district of Texas, patent suits are usually tried by jury," says Campbell. "The technicalities of patent suits are so extremely complex that the risk of not being able to explain them satisfactorily to the jury adds to the general uncertainty of the litigation."

Emotive techniques



Serverside declined to comment further but another source said: "East Texas does not have a particularly young or technologically sophisticated populace. Often simpler and more emotive legal techniques are used rather than digging into detail which the jurors may not be entirely sympathetic towards."

Patent information firm PatentFreedom has identified more than 570 "non-practising entities" and 30 UK companies have been sued by these firms, in the US, in the first nine months of this year.

In October, UK tech firm Really Simple Systems was accused of patent infringements by Marshall-based Lodsys, which is also suing Finland's Rovio, maker of the Angry Birds app. Ten other app developers face legal action in east Texas, leading some app developers to withdraw their products from the American market.

John Paterson, chief executive of Really Simple Systems, Europe's largest provider of cloud-based CRM (customer relationship management) systems, says he sent an email to Lodsys "telling them to get lost" and has not had a reply yet. His firm has US customers but no office or assets there.

Paterson says: "If more companies stood up to patent trolls, instead of capitulating and paying them off, they would run out of resources and find a proper business to pursue. The more software companies pay them off, the more resources they have to pursue other people, and the more other trolls will be created to look for opportunities. Like paying off Somali pirates, paying patent trolls off just makes the situation worse for everybody."

Vincent Chabasseur, a European patent attorney, says: "Patent trolls expose an inherent unfairness in the patent system. People think it's unfair because they're getting money for nothing. But the idea of making money from patents is not restricted to trolls – a lot of companies get revenues from their patent portfolio."

The US has just passed a patent reform bill – the catchily named America Invents Act – which is expected to put a stop to the boom in multidefendant lawsuits.

Charles Gorenstein, partner at Birch, Stewart, Kolasch & Birch in Falls Church, Virginia, says: "There will no longer be suits joining many unrelated parties on the mere basis that they are accused of infringing the same patent.

"Before the new act, suing 10 or 100 parties was hardly more difficult than suing one," Gorenstein says.

"Now it will be necessary to file and pay for numerous lawsuits, participate in and prepare submissions for proceedings in each, etc. The cost will be substantially greater."

Others are more sceptical.

"Unfortunately, aside from the limits on multidefendant lawsuits, there is nothing in the new law that will curb the patent troll problem," says Julie Samuels, a lawyer specialising in IP issues at the Electronic Frontier Foundation in San Francisco.

"In fact, it's even unclear if the multidefendant provision will help," she says. "I've already heard of some schemes the trolls are using to get around it.

"It's really a shame that Washington DC's one attempt in more than half a century to reform the patent laws does nothing to address patent trolls which are arguably one of the biggest threats to innovation in America today," Samuels adds.

"This is especially troubling now, as trolls are targeting small app developers, driving some of those developers out of the US market entirely. Lately, we're seeing more and more small companies and, in some cases, individuals targeted by those trolls. Litigation (or threat of litigation) has become a tax on innovation in this country, creating a disincentive for innovators, entrepreneurs, and tinkerers who want to introduce their products to society at large. And, for that, we are all worse off."

High-tech companies have started to strike back and formed patent-buying consortiums to prevent patents falling into the hands of trolls.

Some big technology companies, including Hewlett-Packard, Ericsson and BlackBerry-maker Research In Motion, have banded together and formed Allied Security Trust. Members pay a one-off initiation fee of $150,000 and a $200,000 annual fee. A similar organisation is RPX Corporation, which launched in San Francisco in 2008 and has spent more than $250m acquiring some 1,500 patents.

However, smaller companies that cannot afford these fees – including UK firms with US patents – remain at risk.