Lawyer’s Encounter 25 Years Ago Foreshadowed Patent Wars

Posted by Mike Dillon, SVP, General Counsel and Corporate Secretary

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

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.

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