Alexandria

I’ve wanted to write about patent trolls for a while, but have been waiting for the right opportunity. As so often is the case, The Wall Street Journal provided the impetus with today’s article Patent ‘Troll’ Tactics Spread. While many patent litigators deny the existence of patent trolls and claim they are doing a service to inventors through their aggressive techniques, one thing that both the pro- and anti-troll folks all agree on is that patent litigation is punitively expensive. Thus, I want to use this as another opportunity to point out how broken our civil litigation system really is—and the absurd economic consequences that flow from our broken system.

So what is a patent troll? From Wikipedia:

Patent troll is a term used for a person or company who enforces patents against one or more alleged infringers in a manner considered aggressive or opportunistic with no intention to manufacture or market the patented invention.

More specifically, patent trolls are companies who acquire large numbers of patents for no reason other than to make profits by suing and settling. According to the WSJ article linked to above, tech companies are now creating separate shell entities to hold their patents—much like the troll companies themselves. That companies are reorganizing just to deal with one legal issue should be a red flag that something has gone terribly wrong.

As always, there are two sides to the story. The General Patent Corporation has a good video in which they make the argument that patent trolls are a myth. They maintain that patent acquisition companies perform a good service for small businesses because they have the resources to pursue infringement claims—which they say average $4 million per suit—that the inventors could not otherwise file. Without these patent acquisition companies, big corporations run roughshod over smaller patent holders (and they undoubtedly do).

But, as fark.com CEO Drew Curtis explains here, there most definitely are completely bogus patent infringement suits out there. He was able to settle with patent acquisition company Gooseberry Natural Resources for—hold you breath—$0.00. With all due respect to the General Patent Corporation, patent trolls do exist.

As second-hand evidence, a large number of patent infringement suits get filed in the Eastern District of Texas, which is legendary for its hospitability for patent suits. Whenever you see a particular form of litigation pooling up in a single state or district, you can generally assume that lawsuit abuse is occurring.

You also know that lawsuit abuse is going on when the plaintiffs’ bar gets aggressive in its P.R. tactics. In-house counsel for Cisco, Rick Frenkel, used to maintain a popular blog called Patent Troll Tracker, and he did so anonymously. Patent trolls became so outraged at the exposure they received that one lawyer offered a $15,000 bounty to anyone who could “out” the site’s owner. He eventually was exposed, and was subsequently sued for defamation by several attorneys whose activities had been reported on the blog. The cases eventually settled. But the message is clear—mess with patent trolls and they will fight back.

So why is patent litigation so lucrative, and why has it become big business? As I alluded to above, it is because our civil litigation system is a mess—as well as some quirks of patent law that make these suits so lethal.

As I’ve mentioned before on these pages, civil litigation is a painfully long and expensive process. As Mr. Curtis reported in the video linked above, it took six months just to get to the discovery phase of litigation, which is the slowest and most expensive stage of litigation. Thus, the General Patent Corporation claims that the average patent infringement suit costs $4 million, where Mr. Curtis claims it is $2 million. Either way, that’s a lot of dough to obtain justice. It is the length, the cost, and the complexity of these suits that make early settlement an attractive option.

But, there are two idiosyncrasies of patent law that make these suits particularly lucrative. First, as Mr. Curtis noted, the defendants bear the burden of proof to show they are not infringing. While there may be other examples, this is the only body of law I’m aware of in which the defendant is “guilty” until proven innocent (to borrow the criminal law concept).

Second, as I learned while practicing, retailers can also be held liable for selling infringing products. Thus, most distribution contracts have escape clauses that let retailers out of a contract if there is a risk they will be held liable. I had a client who had a contract with a big-box home improvement store, and one of their competitors sued for infringement. The suit went on until the chain decided to escape from the contract, and the suit quickly settled after that. While the plaintiff wasn’t a troll per se, it is another weapon in patent trolls’ arsenals to force a quick settlement.

The bottom line is patent litigation is a big and profitable business. Mr. Curtis claims we spend more in this country on patent troll suits every year than the total sum of damages inflicted on this country by terrorists ($500 billion per year versus $123 billion). While I believe he overstates the problem—the best figure I’ve seen is $500 billion from 1990-2011—it is clear that patent trolls are an economic problem. If you work the numbers, patent trolling works out to over a half a percent of the economy, which is an extraordinary figure if you think about it.

And, when you see tech companies changing their business structures in response to one particular form of litigation as the WSJ reported today, you know something has gone terribly astray.

This article is also published at The Country Thinker.