Of Trolls and Leeches
Note: This post is cross-posted from Mike Dillon’s personal blog.
Silicon Valley. It’s a place emulated around the world as a continuous source of innovative thought spawning new products, companies and industries. More importantly, this innovation is a powerful economic and job-creation engine for the Digital Age.
Unfortunately, there are a group of individuals and entities that are constantly siphoning fuel from this engine. They go by a variety of names. Some people describe them with polite terms like “non-practicing entities” or “NPEs”; others refer to them with more subtly negative names like “patent trolls”. I prefer to be more blunt: they are leeches; leeches that divert capital investment and innovative energy away from job creation and, instead, to litigation.
Much has been written on this subject, but in general this is what is happening. An individual or small group of investors purchases a patent on the open market. Often it is a weak patent that shouldn’t have been issued by an overworked examiner at the U.S. Patent Office or it could be a strong patent that may have been interpreted incorrectly in the judicial process. The owners of these patents then file lawsuits against any company where they can even remotely make a claim of patent infringement. In years past, the focus of these suits was primarily technology companies, but that is no longer the case. Recently, on a single day, more than twenty retail companies, including J.C. Penny, Dick’s Sporting Goods, Men’s Wearhouse, Walgreens and Pier 1 Imports were all sued for patent infringement in this type of case.
Every company that I have worked for has been on the receiving end of these lawsuits. Most of these cases begin with a demand letter in which the plaintiff doesn’t even bother to specify the allegedly infringing feature of the product, or the precise part of the patent that is claimed to infringed. The letters just list one of many patents, refer nebulously to a company’s products, and say “pay up.” And, when you don’t, your company finds itself receiving a visit from a process server, delivering a similarly vaguely worded complaint and lawsuit.
Recently, for example, one of these entities filed suit against comedian Adam Carolla, alleging infringement of a patent that appears to describe a way of disseminating episodes of content in a serialized fashion. First question: Really? You can patent that? Second question: Why are they suing Carolla, a comedian who is best known for his free podcast?
The answer is that it’s all about economics. In the U.S. we have a judicial system in which each party pays its own legal costs and attorney fees. The plaintiffs in this type of case uses this to their advantage. They know that when faced with even a specious patent infringement lawsuit, a company will be inclined to settle because if it wins the case, it loses from a financial standpoint. On average it cancost between $3 – $5 million to defend a patent infringement lawsuit. So, if a company wins at trial, it gets nothing other than a large legal bill and a verdict of non-infringement. Thus, it’s a financially rational decision to raise the white flag as long as the settlement amount is less than the anticipated legal cost of going to trial. Knowing this many companies elect to settle as soon as they face one of these lawsuits and incur significant costs in defending it.
Now, you may ask, why don’t companies use their own patents and sue these entities as a form of deterence? Good question. This intellectual property equivalent of “mutually assured destruction” is the reason that patent litigation between competitors across all industries is relatively rare. If you intend to sue a competitor over a patent, you had better be prepared that your company will face the downside risk of being sued for infringement in response. What’s different in these cases is that the entities that file them don’t actually make anything. They are instead, just litigation shell companies. Because of this, their tactics can’t be used against them – i.e. they have no products that a company can claim are infringing.
This all plays to the plaintiff’s benefit because if they file enough cases, some percentage of companies will settle. The proceeds from these settlements are then used to fund litigation against other companies and the purchase of additional patents to be used in future lawsuits. In order to obtain an ROI, plaintiffs only have to cast a broad net and manage their legal costs efficiently.
Often the plaintiffs defend their actions by saying that they are “standing up for the sole inventor.” Well, we like sole inventors. Adobe was founded by two guys in a garage. (The name of the company originated from a creek near where they lived.) But the plaintiffs in these cases are not standing up for quality patents, and getting meaningful value for these patents. They are, instead, just holding companies up for the cost of litigation. It doesn’t even matter what the patent is about. The only people getting wealthy from this system are the lawyers (and that’s coming from one).
At Adobe the vast majority of the litigation against our company are patent infringement cases of this type. We fight all of them because, quite frankly, they’re bullshit.
But this doesn’t mean it’s an easy decision because we don’t measure our defense costs in dollars; we measure them in jobs. When we fight a case through trial it is the equivalent of 15 to 20 forgone engineering positions. Positions that could be creating additional innovation and job growth.
Now, what if in this area of litigation only, we changed the economics? What if instead of each side paying their own fees and costs, we changed to a “loser pays” system as it is in much of the rest of the world? This wouldn’t prevent anyone from bringing a patent infringement suit, they would just have to be very confident that they would prevail at trial.
Last year, Congressmen Peter Defazio and Jason Chaffetz introduced a piece of bipartisan legislation called the SHIELD Act (Saving High-tech Innovators from Egregious Legal Disputes Act). Although various business, legal and government constituencies are still negotiating the details, in concept it is as I have described above – a shifting of economic incentives so that in this type of patent litigation, the losing party would be required to pay the prevailing party’s fees and costs. Under this system, the true “garage” inventors would still be able to use the courts to enforce their patents, but plaintiffs would face more risk when they bring a poorly founded lawsuit.
While not a perfect solution, the SHIELD Act would go a long way to helping companies spend more on creating jobs, rather than fighting litigation. It’s legislation that matters to employers, shareholders and consumers. For more information and to show your support contact Congressman Defazio here.