Myth-Busting Software Patent Trolls
By Spencer Hosie <> The Recorder <> October 29, 2007
"In the sleepy village of Santa Clara, there lived a very wealthy but very frightened giant named Intel. Intel was plagued by a fearsome band of evil trolls -- patent trolls, to be exact -- who wanted a glittering pot of gold in exchange for doing absolutely nothing. And they were very powerful because they said they owned the patent on some of the magic Intel used to become rich."
So it began, with a clever article from 2001 in The Recorder about Intel and its patent troubles. In the years since, the existence and attributes of patent trolls have become articles of faith, an accepted truth.
We are told these trolls coerce law-abiding companies to pay large licensing fees by filing frivolous suits. Honorable companies are being held ransom by tiny outfits whose only assets are kooky and vague patents. Patent litigation is seen as "basically mugging someone," and patent plaintiffs "modern day highway robbers." It is "patent terrorism," a "cottage industry of extortion."
Come now. Extort money from the likes of Microsoft Corp. and Google Inc. by filing frivolous patent suits? These companies may be many things, but stupid is not one of them. Of course there are bad patents. But bad patents make for bad cases, and even the best lawyers lose bad cases. Far from being a "simple and effective source of illegitimate profit," filing frivolous patent suits is a fast track to a Chapter 11 filing.
The proof lies in the numbers. Take Acacia Research Corp., perhaps the patent troll poster child. This intellectual property holding company reported gross revenues of just $34 million in calendar year 2006, about what IBM makes in a week licensing IBM patents. Yet, Acacia is an extortionist and IBM an icon. What gives?
Well, large technology companies do, devoting large sums of money to innocuously named lobbying groups seeking "patent reform," like the Coalition for Patent Fairness (OK -- anyone for patent unfairness?) and the Orwellian Business Software Alliance, or BSA. These organizations have done an extraordinary job insinuating that the patent system is broken, the economy clogged with bad patents, and that something needs to be done right now. In terms of the misimpression created, a better name for these organizations would be the "Coalition to Immunize Large Infringers from Pesky Patent Suits" (with their motto being "Hey! We could have invented that.").
These efforts may yet prove successful in reshaping patent law; that process is under way. But the mischaracterizations have already been successful in a subtle but important way: in shaping the way federal district court judges view patent cases, especially software cases. And this may have been the real object of the exercise all along.
Consider this: If a federal judge believes that the patent system is broken and most software patents suspect, that judge is likely to approach patent cases with considerable skepticism. And that may change the way the court thereafter views claim construction, enablement, invalidity and now -- importantly -- obviousness. A judge who believes that the patent system is broken may be more inclined to grant an obviousness summary judgment motion than one who believes the patent system basically valid, with a few aberrant patents on the margin.
In short, perception matters. And the general perception about patent trolls is just wrong. From an IP plaintiff lawyer’s perspective, the view from the trenches is much different. Here’s why:
MYTH ONE: PLAINTIFFS WILL BRING FRIVOLOUS PATENT CASES
Perhaps the most common refrain in the patent debate is that plaintiffs will bring frivolous cases to extort unjustified settlements.
Hardly. A frivolous patent case is just a frivolous case. Smart companies do not settle frivolous cases. While doing so might save defense costs today, the cost of being seen as a soft settlement touch will be brutally expensive across the entire litigation portfolio. A big technology company simply cannot afford cheap settlements.
Microsoft, for example, is always defending scores of patent cases. Invariably, the company will conduct a litigation risk assessment, determine the claim’s real value, and settle for that much and no more. If a claim is truly frivolous, Microsoft will not settle. Period. And if the plaintiff does not understand that, or wants more than a weak claim is worth, Microsoft will pay several of its hundreds of retained lawyers to try the case; it does so frequently all over the country. This is just good business.
Now, what does this mean to the aspiring plaintiff lawyer? The cost of building and trying a patent case can easily exceed $4 million. No sane plaintiff lawyer would spend this kind of money on a frivolous case. Even if the plaintiff had a good claims construction, survived repeated invalidity, anticipation and obviousness summary judgment motions, prevailed at trial, and persuaded the trial judge not to take away the verdict on JNOV, there remains the Federal Circuit. And a frivolous patent claim will fare poorly in that court, especially today. Frivolous cases do not pay.
Now it is one thing for Microsoft to spend $3 million to $4 million defending a case -- it can afford it. But it is quite another for a small intellectual property holding company, and/or its counsel to spend $4 million and then lose -- do that once or twice and even class action work starts to look pretty good.
For these reasons, a plaintiff IP practice tends to be disciplined by economic self-interest. A plaintiff lawyer does not have the power to extort unwarranted settlements in weak cases. To the contrary, a company that carefully invests in its reputation as being slow to settle and expensive to sue may well build the ability to settle cheaply. The leverage is not with the plaintiff.
But what of injunctive relief and the specter of shutting down a defendant’s business? Pure fantasy. Getting an injunction on behalf of a perceived troll on a minor feature incorporated into a larger product is somewhat like trying to teach a dodo to fly: The bird was flightless and is now extinct. It just will not happen. Given all the hysteria about injunctive relief, how often has a court actually entered an injunction on behalf of a perceived troll to shut down an ongoing business? Not once.
To put it differently, to secure an injunction, the plaintiff will have to persuade a district court judge that the patent is strong, the likelihood of prevailing great, and the injunction necessary, fair and necessary to protect the plaintiff (as against leverage a quick buck). If the plaintiff makes this showing, why shouldn’t the injunction issue?
At the end of the day, it is simply wrong to say, as the patent critics do, that the area is rife with silly suits that somehow, paradoxically, produce rich returns. It just ain’t so, which brings us to:
MYTH TWO: PATENT TROLLING IS A VERY, VERY PROFITABLE BUSINESS
Another firmly held belief is that the patent trolling and litigation business is fabulously profitable, a new asbestos-like gold rush.
If only that were true. While there are outliers, the patent trolling business is just not that lucrative. Again, take Acacia Research: in FY 2006, Acacia recognized license revenue of $34.8 million. All-in, over the last three years, this hobgoblin grossed just $58.7 million, less than $20 million a year in total revenue enforcing a patent portfolio covering thousands of patents held by 39 separate Acacia companies. Google spends more on lunch per year than Acacia makes enforcing patents.
Nor did Acacia’s revenues come cheaply. Its legal expenses rose in 2006 given more cases and more lawyers engaged on an hourly or discounted hourly basis. (If a good contingency firm won’t do your case on a contingency, might that mean something?)
These trends are revealing and likely bode poorly for Acacia. Fewer defendants are settling, early settlements less common, and litigation likely more risky given growing judicial hostility. Of course, some of this undoubtedly reflects the pillorying Acacia gets in the press as a patent troll -- Acacia’s lawyers start six steps behind just given their client’s reputation.
Over the five-year period 2002-2006, Acacia Technologies Group lost something close to $35 million. This is hardly a profitable business. At the end of the day, Acacia’s principal victims are likely to be its shareholders.
There are, of course, some aggressive litigants who make huge sums enforcing IP portfolios. But these are not the Acacias of the world; they are companies like IBM and Texas Instruments, which brings us to:
MYTH THREE: PATENT PLAINTIFFS ARE SMALL, OPPORTUNISTIC SPECULATORS
Another firmly held belief is that patent trolls are small, opportunistic speculators who buy portfolios of patents for modest sums and then use them as litigation fodder.
Once again, the reality is otherwise. As many have observed, IBM’s patent licensing revenue is stupendously large: Does a troll cease to be a troll when it grows to be a giant?
Consider, too, Texas Instruments. This company was one of the first to enforce its patents by filing cases in the Eastern District of Texas in Marshall. And this strategy worked, with TI winning significant cases and closing very large licensing agreements in 1999 and following. Honorable company or übertroll?
For that matter, even Microsoft -- a charter member of the BSA -- has been making noises about suing the open source community, alleging that Linux violates more than 200 of Microsoft’s patents. Microsoft must see nothing inconsistent in complaining about patent trolls on the one hand while threatening to sue the open source community on the other. To Microsoft as a plaintiff it is a matter of principle and honor:
"We live in a world where we honor, and support the honoring of, intellectual property," Microsoft CEO Steve Ballmer told Fortune magazine, adding that others "have to play by the same rules as the rest of the business. What’s fair is fair." But to Microsoft as defendant, it is about patent trolls and extortionate litigation.
All of this reduces to a simple point: a patent troll is always just "the other guy." It is noble to sue and ignoble to be sued.
MYTH FOUR: PATENT TROLLS EXPLOIT RENEGADE JURIDICATIONS
Well, this one is at least partially true. Plaintiffs have been flocking to the Eastern District of Texas, a trend TI started in the late '90s. And there were good reasons to file in Marshall: Local patent rules moved cases quickly, and juries in Marshall were receptive to plaintiff cases. Statistics show a significantly higher patent-holder win rate in Marshall than elsewhere.
But all good things come to an end, and so too for the Eastern District of Texas. The district has been too successful in attracting patent cases, and the rocket docket is beginning to look like a train wreck. In the last 12 calendar months, Judge T. John Ward alone received 144 new patent cases; Judge Leonard Davis got 96. How can these judges manage their dockets, run claims construction hearings, issue thoughtful opinions and conduct trials when they are getting two to three big new cases every week? There aren’t enough days in the year.
In short, filing in Marshall is very much like buying Google stock -- perhaps a better idea three years ago.
Google, Microsoft, Intel and their ilk have demonized the patent system extraordinarily well. But what is good for these large technology companies is, in this instance at least, not good for America. When investing in innovation is bad business, businesses will not invest in innovation. And that is bad for us all.
Spencer Hosie is a founding partner of the San Francisco-based trial firm Hosie McArthur. Among other things, he represents emerging technology companies and their venture backers in IP litigation. He can be reached at shosie@hosielaw.com.
law.com
Great find by Juggernaut_CDN over on Yahoo! Groups. I've never understood why so many people side with big companies in this debate - this blog piece identifies specific reasons why the big companies' arguments (and related PR/FUD) simply don't hold water....
Cheers! Rob |
