Results tagged “patent troll”

Lawyer’s Encounter 25 Years Ago Foreshadowed Patent Wars

As an associate, he viewed a so-called troll’s challenge with wide-eyed bemusement.

Note: This op-ed first appeared in National Law Journal on May 5, 2014

troll-Article-201405021213

Zak Pullen

 

 

 

 

 

 

 

 

Early in my career, when I was a law firm associate, one of my clients, a small networking company, received a curious letter. It was from an unknown company accusing my client of patent infringement and “inviting” it to pay a very large license fee.

What made the letter so strange was that the referenced patent had nothing to do with the products made by my client. Stranger still, after some investigation, we discovered the other company was little more than a thinly capitalized shell that appeared to have a single employee — an attorney who had purchased the patent from someone else.

Because it was rather novel, I discussed the letter with other attorneys in the firm and we concluded it must be a mistake, so I decided to call the other company to clarify things. It didn’t work out as I expected.

Instead, our discussion became increasingly heated (at least on my end) until I said: “There’s no way my client will pay a dime. They aren’t infringing.” To which I heard a calm voice reply: “Yes, they will, because the license fee I’m offering is less than what it will cost them to fight a patent lawsuit. It’s basic economics.”

It turns out I was wrong.

Since that telephone call some 25 years ago, patent trolls have overrun the U.S. patent system, spawning an entire industry of attorneys, technical and damages experts, and causing a significant drain on judicial resources.

Here’s a patent litigation fun fact: In 2012 alone, more than 60 percent of all patent cases were filed by patent trolls. That’s more than 2,900 cases in a single year that required the attention of a frequently overworked judiciary.

More importantly, it’s been an enormous diversion of money and ­resources from innovation and job creation. According to study released in 2012 by Boston University School of Law professor Michael Meurer and lecturer James Bessen, the cost to American businesses in 2011 was a staggering $29 billion. In an era of increasing global competition, this doesn’t bode well for America.

The question is: What do we do about it? We have to attack the economics of patents. What’s notable about the patent-troll problem is that these entities seldom win their lawsuits. But their business model isn’t predicated on going to trial; instead, it is dependent on casting as wide a net as possible knowing that some percentage of companies will pay a license fee rather than incur the cost of litigation.

Today, a company can expect to incur several million dollars for outside counsel, expert witnesses and jury consultant fees to defend a case involving a single patent. If multiple patents are asserted, the costs are significantly higher. In addition, a company’s finance, legal and engineering teams must spend time to support the company’s defense, time better spent on the company’s business.

The lawyer representing the patent troll who told me it was about “economics” was correct, of course. It is about economics — asymmetrical economics. A lawsuit by a patent troll potentially puts at risk a company’s products (in the remote case when a jury finds infringement), but more importantly requires a company to incur the costs described above. On the other hand, the cost to a patent troll is almost negligible.

Although there is some risk that a patent might be found to be invalid during the course of litigation, this happens infrequently. Also, lawyers for patent trolls are usually paid on a contingency basis. Consequently, the patent troll has little out-of-pocket expense but tremendous upside opportunity.

How can we rebalance a clearly out-of-balance system? The real answer lies with Congress. A number of proposed bills are pending in the Senate directed at patent reform and the patent-troll problem.

These bills contain different ­proposals that help address the issue. One of those proposals would require that patent-troll lawsuits against customers be stayed until the case against the company producing the allegedly infringing product is resolved.

Although helpful, however, most of these measures do not get at the root of the problem — the asymmetrical ­economics.

The solution is to change the standard for awarding attorney fees under federal patent law.

The presumption should be that legal fees and expenses will be awarded to the prevailing party. In December, the House passed what is referred to as the “Innovation Act” that provides just this. The Innovation Act is one of those rare pieces of proposed legislation these days that has true bipartisan backing in the House and from the president. At the same time, the Senate Judiciary Committee is working on various patent-reform bills.

Addressing the imbalanced economics in our patent system will be one of the truest tests of reform. Once this happens American companies can get back to focusing on innovation and job creation.

 

Part 3: Troll Wars: The Problem Can Only be Solved by Congress

Note: This blog is cross-posted from Mike Dillon’s personal blog. 

PatentWhen it comes to claims by patent trolls, the short answer as to why more companies don’t fight back is – cost. A company can expect to incur several million dollars for outside counsel, expert witness, and jury consultant fees to defend  a case involving a single patent.  If multiple patents are asserted the costs are significantly higher. In addition, there is time required of a company’s finance, legal and engineering teams to support the company’s defense – time better spent on the company’s business. In the Select Retrieval case, discussed in my last post, we spent more than $200,000 defending our customer even though that case was resolved very early in the litigation process. For a small retailer or a start-up this amount could be prohibitive.

The lawyer representing the patent troll who told me it was about “economics” was correct, of course. It is about economics – asymmetrical economics. A lawsuit by a patent troll potentially puts at risk a company’s products (in the remote case where a jury finds infringement), but more importantly requires a company to incur the costs described above.  On the other hand, the cost to a patent troll is almost negligible. While there is some risk that a patent might be found to be invalid during the course of litigation, this happens infrequently. Also, lawyers for patent trolls are usually paid on a contingency basis. Consequently, the patent troll has little out of pocket expense – but tremendous upside opportunity.

If the root of the problem is asymmetrical economics, why don’t we change things to level the playing field?  For example, what if we allowed the prevailing party in a patent troll litigation to recover its legal fees from the other party?  Risk and expense are then part of the equation for BOTH parties.

Surprisingly, current law already provides for this. Under 35 U.S.C. Section 285 a court “in exceptional cases may award attorney fees to the prevailing party.”  Many commentators, including Judge Rader, chief judge for the U.S. Court of Appeals for the Federal Circuit, have advocated that judges apply this law more often. Yet courts rarely do because of confusion over what constitutes an “exceptional” case. Does this mean that the lawsuit was brought in bad faith? That it was objectively baseless? It’s unclear. Currently, there are two cases before the U.S. Supreme Court that may provide clarity.  However, given the reports of how the hearings went, it doesn’t look like the Supreme Court will be able to rationalize the standard to a level that will actually solve the problem.

The uncertainty in the application of Section 285 also goes to the question posed in my last blog: “Why did Select Retrieval settle for nothing?”

The answer could be that Select Retrieval had settled or dismissed most of the other defendants in the California case and didn’t want to litigate against just a single defendant in one court. Or, it could be that Select Retrieval knew that it had a weak case and didn’t want to risk losing at trial and having attorney fees awarded against it under Section 285.

After Adobe settled the case with Select Retrieval, we asked the court to award us attorney fees under Section 285. In our view, the fact that Select Retrieval dismissed the case with no payment indicated that they filed the lawsuit in bad faith, with no real belief that they would prevail on the merits.  The court, however, rejected our request finding that Select Retrieval’s conduct did not meet the “exceptional” standard because the case was dismissed and, consequently, the merits of the lawsuit were never tested. In other words, in this court’s view, absent some type of clearly egregious conduct by a patent troll, the court will not award attorney fees unless there is a trial. Because most patent troll cases never go to trial this means that Section 285 won’t change the asymmetrical economics.

The real answer lies with Congress. There are currently a number of proposed bills in the Senate directed at patent reform and the patent troll problem. These contain different proposals that help address the issue; for example, requiring that patent troll lawsuits against customers be stayed, until the case against the company producing the allegedly infringing product is resolved. While helpful, however, most of these measures do not get at the root of the problem – the asymmetrical economics.  The solution is to change the standard articulated in Section 285 to one in which the presumption is that legal fees and expenses will be awarded to the prevailing party.

Last December, the House passed what is referred to as the “Innovation Act” (H.R. 3309) that provides just this. It  states: “The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action, unless the court finds that the position of the non-prevailing party was reasonably justified or that special circumstances make the award unjust.” Under this standard, Select Retrieval would have been required to reimburse Adobe the $200,000 we spent in defending our client unless it could show that the lawsuit was reasonably justified or that special circumstances existed that would have made this unjust. We doubt that it  could have met this standard.

The Innovation Act is one of those rare pieces of proposed legislation these days that has true bipartisan backing in the House and from the President. Currently, Senator Leahy is considering incorporation of much of the Innovation Act  – including a fee-shifting provision – in a proposed Senate bill. Let him know that you support this and passage of a Senate bill.

Once this happens American companies can get back to focusing on innovation and job creation.

Part 2: Troll Wars: Defending Against the Tony Sopranos of the Legal World

Note: This blog is cross-posted from Mike Dillon’s personal blog. 

What’s notable about the patent troll problem is that these entities seldom win their lawsuits. But their business model isn’t predicated on going to trial; instead it is dependent on casting as wide a net as possible knowing that some percentage of companies will pay a license fee rather than incurring the cost of litigation. A good illustration of this is Innovatio IP Ventures LLC, a patent troll that owns Wi-Fi patents (originally acquired from Broadcom Corporation) and claims they apply to everyone who uses a Wi-Fi connection. By some estimates Innovatio has sent out more than 10,000 letters threatening litigation unless the recipient pays a license fee of several thousand dollars.  If your corner coffee shop or diner has a Wi-Fi connection they likely have been the recipient of one of these letters.

As a result, patent trolls, like Innovatio, invest little effort or expense in “mapping” the claims of their patent against a thorough understanding of an allegedly infringing company’s products or conduct to determine whether their allegations will hold up at trial. But, they really don’t need to because their objective isn’t to win a trial, but rather to intimidate a company into paying a license fee.  Think of them as the Tony Sopranos of the legal world.

http://www.tuxboard.com/photos/2013/06/Tony-Soprano-Wallpaper.jpg

http://www.tuxboard.com/photos/2013/06/Tony-Soprano-Wallpaper.jpg

If a case does get litigated and they lose, it has little impact on the patent troll because the only consequence is that they incur their expense of litigation. Even this isn’t much, given that in most of these cases the attorneys representing the patent trolls are compensated on a contingency basis – meaning they get paid a percentage of whatever is recovered.  If there’s no recovery, the patent troll pays no attorney fees. As a result, patent trolls really have little downside risk.

In the past, Adobe, like many companies, treated claims from patent trolls as a “cost of doing business” and handled it accordingly seeking to resolve the case in the most cost efficient way possible, including by paying a license fee.  Over the past two years; however, we’ve changed our approach. Now, we are channeling our inner corporate Albert Finney  and when faced with a patent troll case we fight them using a variety of tools. In some cases this is a motion to transfer the lawsuit to different jurisdiction, or to disqualify the law firm representing the patent troll because have previously represented Adobe and have a conflict of interest. In others, we’ve asked the U.S. Patent and Trademark Office to review whether the asserted patent should be invalidated. We’ve successfully deployed other strategies as well.

The results have been positive. Here’s a recent example. Select Retrieval is a privately held, patent-holding company based in Texas. It doesn’t produce anything – other than litigation.  One of its only assets is a patent (6,128,617) that covers the way in which information from a database is displayed. This patent was granted in October, 2000 to David Lowry of Medford, Oregon. A decade later the patent was acquired by Select Retrieval. Needless to say, they then filed patent infringement lawsuits against hundreds of companies across the country. One of those lawsuits was filed in Southern California against a number of retailers, including PacSun, an Adobe customer.  Under patent law you can be sued if you make, use or sell an infringing product. Patent trolls have taken advantage of this by now suing not only the company that makes the allegedly infringing product, but also their customers that use them. In this case, Select Retrieval sued the customers of a number of technology companies, including Adobe, in courts around the country hoping that these customers would put pressure on the technology providers to settle. Instead, Adobe agreed to defend and indemnify PacSun against this claim.

From our initial analysis it was clear that the underlying Adobe product did not infringe. Consequently, we filed an answer denying the allegations and proceeded to prepare the case for trial. Along the way, Select Retrieval dismissed or settled with all but one of the other defendants, and made several attempts to settle with us. The first was a settlement offer of $210,000, to which we replied “no”. (Actually, that may have been prefaced with a profanity.)  Five months later, Select Retrieval offered a reduced settlement of $69,000, to which we again said “no”. Then shortly before opening claim construction briefs were due, Select Retrieval offered to settle for $30,000. Once again, we again said “no”.

A  few months before the claim construction hearing (a key hearing where the court provides an interpretation of patent claims)  they approached us again. This time they offered to settle for what is known as a covenant not to sue. In legal parlance it means we didn’t pay a dime in licensing fees and they dismissed the case.  We continue to battle with Select Retrieval in other courts, but this one case against PacSun is over.

As I mentioned, this is just one example of a successful outcome for Adobe in responding to cases filed against our company and its customers. And, we are not alone in taking this more aggressive approach. Many companies, from Build.com  to Newegg to Rackspace are doing the same thing.

Given all this, you may be asking: “Why don’t more companies fight back?”

And, why did Select Retrieval settle for nothing?

Part 1: Troll Wars: Costing American Businesses $29B and Counting

Note: This post is cross-posted from Mike Dillon’s personal blog. 

Early in my career, when I was a law firm associate, one of my clients, a small networking company received a curious letter. It was from an unknown company accusing my client of patent infringement and “inviting” them to pay a very large license fee.

What made the letter so strange was that the referenced patent appeared to have nothing to do with the products made by my client.  Stranger still, after we did some investigation, we discovered that the other company was little more than a thinly capitalized shell that appeared to have a single employee – an attorney who had purchased the patent from someone else.

Because it was rather novel, I discussed the letter with other attorneys in the firm and we concluded that it must be a mistake, so I decided to call the other company to clarify things. It didn’t work out as I expected. Instead, our discussion became increasingly heated (at least on my end) until I said: “There’s no way my client will pay a dime – they aren’t infringing.” To which I heard a calm voice reply: “Yes, they will because the license fee I’m offering is less than what it will cost them to fight a patent lawsuit. It’s basic economics.”

It turns out, I was wrong.

My client was angry as hell and wanted to respond with a countersuit asserting his company’s patents; that is, until I explained that the other company didn’t have products. They didn’t actually make anything that could be infringing. A few weeks later he decided to pay the license fee (in the six digit range) to avoid the cost of fighting a patent infringement case in court.

That was my first introduction to a patent troll. At the time,  my fellow attorneys at the firm and I thought that this type of claim was an aberration in the U.S. legal system, something that our clients would rarely have to deal with in the future.

It turns out, we were wrong.

Since that telephone call some twenty-five years ago, patent trolls have overrun the U.S. patent system spawning an entire industry of attorneys, technical and damages experts, and causing a significant drain on judicial resources. (Here’s a patent litigation fun fact: In 2012 alone, more than 60% of all patent cases were filed by patent trolls. That’s over 2,900 cases in that year alone that required the attention of a frequently overworked judiciary.)

More importantly, it’s been an enormous diversion of money and resources from innovation and job creation to funding of lobbyists and lawyers. According to one recent study, the cost to American businesses in 2011 was a staggering $29b.  In an era of increasing global competition, this doesn’t bode well for America.

Let me give you a couple of real life examples this from earlier in my career.

- A small start-up I supported was focused on quickly increasing revenue growth and market share. Like many companies at this stage, it was dependent on private investors and operating on a very lean budget. An important factor in the company’s future success was the ability to develop and release a new set of features in its products. But, there was a competing demand for funding  – for the company’s defense of a lawsuit filed against it by a patent troll. The result?  The company was forced to delay some of its product development efforts in order to finance the litigation, and in-turn risked losing its competitive-edge.

- I was once asked to meet with the VP of the software development organization (at another company) to discuss a number of patent troll cases that had been filed against us. I thought the purpose of the meeting was to cover legal strategy, but what we discussed was far different.  When I arrived, the VP had on his desk invoices from the law firms that were defending us in the lawsuits.   I still remember him handing me a list of engineering and development roles and saying: “Mike, in order to pay these invoices and still achieve my financial targets I’m going to need to eliminate these positions. Before I do this, I wanted to check with you to see if you have any other ideas.” As it turns out, I did, but the meeting brought home the true cost of patent trolls to American business.

These examples are not unique. I’m sure if you ask the general counsel of most companies they would have similar stories.

The question is what do we do about it?

 

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