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Patent Lawsuits: The Good, The Bad, And The Frivolous

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Large corporations claim constant harassment by lawsuits they deem as meritless so do not dignify a response. Millions are pouring into lobby shops in attempts to pass legislation to swat away these “insects”. Specifically, House bill H.R. 6245 or the SHIELD Act aims to curb frivolous lawsuits by Non Practicing Entities or so called Patent Trolls. Conversely, trade groups like American Innovators for Patent Reform (AIPR) lobby to strengthen protections for the independent inventor. Their agenda includes the draconian measure of criminalizing willful infringement. Who is right? There is no justice there is only the law…... and a wide gray swath titled ambiguity separates right from wrong.

I came across a disturbing 2010 article on Huffington Post by economist Pat Choate describing patent theft as a business strategy. To soothe the amorality, (certainly not the guilt) the more dignified moniker of “efficient infringement” is applied. It simply implies an exercise in arithmetic. Calculations are performed tabulating the benefits of stealing another person’s patented technology against the odds of getting busted and, if so, what would be the projected trial costs and damage assessments: If pecuniary rewards of theft minos probable losses if found guilty is greater than zero, then do the heist. What if it were a criminal offense, as AIPR proposes,  willfully made with malice aforethought, to steal other peoples patents? It is a tough question as what constitutes the threshold to prove premeditation? It is a slippery slope.

Perhaps the precipitous rise of patent trolls is a pushback against this alleged sordid economic corporate calculus. For every action there is an equal and opposite reaction. The parabolic rise in patent litigation by patent trolls in 2011 cost our economy $29 billion more than double 2009 figures and up five fold over the past decade. In 2011, over 5,800 suits were filed against 1,150 firms and these figures are also about double from 2009. Most disturbing is that 82% of defendants had median revenues of less than $12 million annually. Attacking small firms, many still in the startup phase, may be potentially stifling innovation. It’s like letting birds openly feed on eggs of sea turtles; most startups won’t make it anyway but without some protections none of them will. Has the pendulum now swung too far to the other side?

Too Many Patents?

Each argument has two sides. Eminent scholar and jurist Richard Posner is of the opinion that there are simply too many patents and that all industries are not created equal. In his case put forth, the “poster child” deserving of most protection is the pharmaceutical industry in which average time to market for a new drug from inception, through trials may be ten years and at least hundreds of millions of dollars. Leaving only a ten year tenure (patent life is twenty years) for a company to recoup investment and profit from its monopoly status, the implication is that there is a compelling rationale for treating patented processes or ideas which were created as a result of time and development costs differently from those patented ideas which do not bear the same investment time or financial expenditure.. Do firms that only marginally improve a product, spending relatively few dollars to obtain a patent, really deserve twenty years to benifit financially exclusively from such creation? Wouldn’t that innovation have been forthcoming anyway as a natural evolution of market competition? A patent doesn’t give the owner a right to use the patented invention, rather” the patent owner has the right to exclude others from making, using, or selling anything that uses the patented invention”.  So buying or developing enough patents in and about a particular technology will certainly lessen competition. But isn’t that the whole point? Judge Posner points out that often firms acquire troves of patents solely to make as certain as possible that they are not infringing on anyone else when then bring a product to make…….so called “defensive patenting”. The next iteration of this is the seemingly ubiquitous patent trolls or non-practicing entities firms that, by definition, produce nothing and acquire patents as a business model solely for the purpose of suing for patent infringement: A legitimate strategy beneficial to society or a huge waste of resources ultimately hurting consumers by raising prices to defray defending harassing legal claims. Posner lands squarely in the camp that the world is “over patented” and many of these lawsuits are wealth depleting diversions. As with most things in life, it is not quite that definitive.

Defending Small Inventors

I have penned several articles recently about so-called patent trolls suing the likes of Facebook, Google, and Apple and, most recently, tiny AMEX traded MGT Capital Investments (MGT) facing off against casino operators Caesars Entertainment (CZR) and MGM Resorts International (MGM) among others. The gist is alleged infringement by the casinos of a 2011 patent which links slot machines allowing them to be interactive for players to compete against each other in a “bonus round”.  I had an opportunity to speak with inventor Steven Brandstetter and came away with a clearer perspective on why he teamed up with MGT. First, his patent was filed in 2001 yet took a decade to clear numerous United States Trademark and Patent Office hurdles before final issuance. A lot transpired in those ten years. Brandstetter collaborated over several years with various gaming manufacturers in an attempt to reach a licensing arrangement for his technology. In a separate lawsuit he filed alone in May of 2011, Brandstetter sued International Game Technologies (IGT) and Bally’s Gaming, Inc. for fraud and conspiracy alleging that defendants used his ideas to surreptitiously file their own patents and did not disclose having any knowledge of Mr. Brandstetter’s prior art. As a small inventor, Mr. Brandstetter soon discovered both the power of large corporations and the deep pockets necessary to prosecute a patent lawsuit. With large amounts of his own capital already tied up just to prosecute his patent, he realized not only was he not financially able to take on another suit, but that he also lacked the expertise to wage war against billion dollar companies.

I know firsthand a little of what Mr. Brandstetter speaks. I received two patents, the most recent received in May 2011, on a device I came up with and each one took about three and a half years from filing date. I spent many thousands in legal fees, thousands with design engineers and thousands more on marketing studies. When bids were received, I discovered it would probably cost half a million or more dollars to fully design and manufacture a working prototype. The shared characteristic of all the lawsuits featured in my previous writings is that, in every case, the inventors themselves are key drivers of the litigation. One way or another they have partnered up with people knowledgeable in patent law and well capitalized enough to dig in for trench warfare against well-funded corporations. These are the “good” patent trolls attempting to defend the rights of the small independent inventor, many of whom may lack the wits to assert for themselves.

Fighting the Trolls

Recently tech giant Cisco Systems Inc. (CSCO) along with Motorola Solutions Inc. (MSI) and Netgear Inc. (NTGR) filed suit against, in my opinion, an insidious Chicago based patent troll, Innovatio IP Ventures LLC. It’s generally the other way around but not this time. Innovatio has mailed 8,000 threatening letters to retailers, hotel and coffee chains accusing them of infringing on technologies in their Wi-Fi equipment that was purchased or leased from the plaintiffs. So instead of suing Cisco, MSI, and NTGR directly, the troll has chosen to attack its customer base. The lawsuit asserts Innovatio’s tactics to be “misleading, fraudulent, and unlawful.” Further it claims that the threatening letters “effectively amount to an extortion scheme” and as such violates federal antiracketeering laws. “When someone runs a racket we’re going to make them liable for racketeering”, announced Cisco general counsel Mark Chandler.  The Cisco approach is novel and befitting of the axiom, "the best defense is a good offense." Legal experts seem divided on the outcome but it sure seems to me like Innovatio has engaged in nothing more than a tawdry shakedown. If each of the 8,000 businesses paid $30,000 to make the troll disappear, that is $240 million. You can barely answer a lawsuit, do a little discovery, and take a deposition for thirty grand. Further Innovatio can’t prosecute all 8,000 lawsuits. Therefore in my opinion, these letters were meant to intimidate people to a quick settlement. If the troll had any courage it would have directly sued Cisco, et.al……And if there were infringement then there would be a penalty to pay. Abusive behavior like this gives rise to the derisive term “patent troll”. These are the “bad” lawsuits that drain resources and are a social waste to society.

Is our system so broken that necessity compels, as Posner postulates, some major revamping? Should there be some patent discrimination between inventing the telephone versus some minor change to an integrated circuit……yet how can the Patent Office be the final arbiter of what may become revolutionary innovation? Is it technology unique to Facebook (FB) that makes it what it is, or the concepts behind the science? After all, there are other social networking sites but apparently none with the “secret sauce” that distinguishes Facebook. After all the evidence I conclude there are too many lawsuits being filed. So while the small inventor must be protected against being run over roughshod by a tyrannical corporation, firms conversely must enjoy some safeguards against wasting energy on suits with little merits. To the patent litigator, Judge Posner may be the pariah postulating placing strict production limits on a prolific gold mine. One answer is to impose the English rule; that is. the loser of the lawsuit must pay the legal fees of the winner. This would certainly make any plaintiff have a second look before embarking on what is by definition lengthy and expensive litigation. While no solution is perfect, this one is worth a try.