Sunday, January 30, 2022

Patent Trolls

Patent Trolls exist because our litigation system is broken.

A reader writes asking me about Patent Trolls. I have written about them before, but not exclusively.  What is a Patent Troll and how do you determine if someone is a Patent Troll?  Why do we allow Patent Trolls to Exist? Well the first question is easy to answer.  A Patent Troll is someone who obtains rights to a Patent and then sues just about anyone claiming they infringe their Patent, even if they clearly do not.  They settle for a nominal sum (hundreds of thousands of dollars) which is less than the cost of hiring a lawyer.  It is drive-by litigation - strike and settle, and move on.  Each case makes little money, but collectively, after you've sued dozens of people, you've made millions or even hundreds of millions.

As for the second question, there are a number of hallmark characteristics of Patent Trolls.  To begin with, they are companies or organizations that buy or license Patents, either by approaching inventors, or by purchasing Patents at bankruptcy auctions.  They sue not the maker of a product, but the user of it.  The sue in "friendly" venues such as the Eastern District of Texas (home to most suits).  They settle before trial, often for relatively small amounts, compared to what they were asking for.  Wash.  Rinse.  Repeat.

I'll give you an example, based on a fellow (not a client) I talked to.  He obtained a Patent on an office phone system.  The claims were pretty narrow and it wasn't like he invented the telephone or anything, just a modest improvement, if that.  A company (TrollCo.) licensed his Patent and sued.  They didn't sue a telephone company or even a telephone manufacturing company.  Rather, they sued a soft-drink company that had worldwide offices and of course, phone systems.   The filed in a friendly venue and on the eve of trial, they settled for a hundred grand.  Then they went after another business unrelated to phone systems, but had a phone system in their offices.

These companies settle as their lawyers charge them tens of thousands of dollars - if not a lot more - per month to litigate these issues.  TrollCo on the other hand, need only go through the motions of pre-trial discovery and whatnot.  And since TrollCo has sued several companies in a row, well, they have all the forms and pleadings already written up on their computer.  It is a low-effort deal, sort of like how those billboard lawyers take personal injury cases and settle them for less than the insurance company would have given the plaintiff if he had just asked them directly.

Many people think Patent Trolling is an outrage and a sign the Patent system is "broken" and that the Patent Office is somehow at fault.  Why did they issue these Patents?  If only the Patents hadn't been issued, the Trolls would have no grounds to sue!   But as the example above illustrates, it really doesn't matter whether the Patent is valid, broad, or narrow.   Trolls sue, and use the nuisance value of litigation to obtain a settlement.  You could sue someone claiming your Patent on an ice cream machine was violated by their use of a photocopier.   They'd have to go to court to prove they don't infringe - and that costs money.  And no, Rule 11 sanctions are basically worthless.

It is akin to these "drive-by" ADA lawsuits they have, particularly in Florida.  In Florida, one man has filed hundreds, if not thousands, of ADA lawsuits against small businesses, claiming their handicap ramps or toilets or doors or parking spaces are not compliant.  The business then hires a lawyer who wants a $100,000 retainer.  Before they can pay that, the plaintiff offers to settle for $20,000.  The business owner agrees.  Two years later, he is sued again by the same guy.   The law had good intentions, the lawyers didn't.

In Texas, they just passed a law allowing anyone to sue anyone else who may have "assisted" a woman in getting an abortion.  You can imagine how this will play out.  Eventually, our economy will devolve into everyone suing everyone else all day long.

Of course, no one is sitting on their hands here.  New laws have been enacted to allow for "3rd Party Re-Exam" of Patents at the Patent Office.  So, instead of paying hundreds of thousands of dollars just to start discovery in litigation, you can spend a few thousand asking the Patent Office to reconsider.  The small problem with that technique is that the Patent Office often does allow the Patent a second time, which makes litigation even harder. "Ladies and Gentlemen of the Jury - the Patent Office examined this Patent not once,- but twice! - and found it valid!"  Of course, that assumes the case ever gets to a jury - few do.  The smarter trolls settle and move on.  A jury trial might result in something messy, like your Patent being found invalid and non-infringed.

The Patent Office is also trying to do a better job of issuing Patents, and I have to say, before I retired, the issue rate seemed to be in decline, and the appeals process much stricter.  Some Examiners seem to have the attitude that anything software-related was just trolling.  It isn't like the USPTO isn't aware of the problem - and in fact, seems to have a chip on its shoulder about it.  But like I said, Patent trolls don't need to have a Patent on the invention they are suing about - they will take a Patent on invention A and apply it to invention B.

There was one fellow, we'll call him "Mr. X" who was, depending on who you ask, the "greatest inventor you never heard of" or the biggest Patent Troll of all time.  I offer no opinion on either claim.  He has made hundreds of millions of dollars ($450 million before his death) litigating Patent cases.  The most famous was a Patent for a Hot Wheels type of track and you can guess who he sued over that.  But most of his work was related to "machine vision" systems, or at least the Patents I looked at and reviewed.

Another change in the law that was designed to curtail Patent trolls was to limit Patent terms to 20 years from the date of filing.  Before that, you could file for a Patent, and if it took 10 years to issue, your Patent term (17 years back then) wouldn't start until then.  For example, I researched a case involving a microprocessor clocking circuit.  The Patent Office was, back then (and even today) very strict about issuing anything computer-related. It went to the Board of Appeals twice and was rejected again and again.  A decade later, it was issued, but by then, this clocking circuit was heavily embedded in every microprocessor sold by every maker worldwide.  If the Patent Office had just issued the damn thing, the Patent would have expired before PCs became popular, and competing chipmakers could have designed around the Patent.  As it was, the Patent Office inadvertently handed the inventor (and the company he worked for) a gold mine.

Today, we publish pending Patent Applications (but it is, sadly, an opt-out system, unlike the rest of the world).   The idea is, if you publish the pending application, people can object and notify the Patent Office that a case pending should not be allowed.   It also allows competitors to "design around" others' inventions, so as to avoid possible infringement, should their Patent issue.  And yes, designing around a Patent is one of the motivations of the system - to spur innovation.

Back then, you could chain together applications, one after another, each claiming "priority" from the previous one.  In order to reject a case, the Examiner would have to find a reference with an effective date earlier than the earliest application in the chain.  So, for example, in one Mr. X Patent I researched, it claimed priority back to the 1950's - for a bar code scanner.  The original Patent showed a box going down a conveyor belt, interrupting an electric eye - something you see in nearly every grocery store checkout.  By the time the 10th application in the chain was filed, the electric eye became a laser and the box a bar code.  Mr. X made a lot of money off that Patent.

Sadly, there are still Mr. X applications pending today (or at least before I retired).   Older cases under the old law were "grandfathered" in, so I suspect in the year 3000 there will still be a Mr. X application pending - unless they change the law by then.  Maybe they have.  I don't keep up anymore.

Now, some people claim Mr. X is a nogoodnik, or perhaps his lawyer is.  But they haven't broken any laws that I am aware of - they just used the system as it is exists.  In the case I researched, we charged the client tens of thousands of dollars just for an opinion about validity and infringement (there were a dozen Patents involved and the research was extensive).  Our conclusion was that the bulk of the Patents were either unenforceable or not infringed.  But a couple were sort of a toss-up.  Meanwhile, the Mr. X people offered to settle for less than what we charged for the infringement opinion, so the client settled, much to our chagrin.

Mr. X is dead now, but you might have heard his name - it is attached to cultural institutions and his estate sponsors various charitable causes.  I guess he felt he needed to buy some respectability.

People get frustrated by the existence of Patent trolls.  And by people, I don't mean the CEO's of major corporations, but ordinary individuals who are outraged by it all, after reading a few articles on the subject.  It is like people who are outraged by the McDonald's cup-o-coffee case, either because they believe personal injury attorneys to be agents of Satan himself, or the evil McDonald's corp to be the same.  They probably both are, if you think about it. Getting outraged doesn't help you, though, personally.

The CEOs of fortune-500 companies probably don't give a shit.   Paying a hundred grand to a Patent troll is just the cost of doing business.  And since big companies have resources to hire lawyers and litigate these things, the Patent trolls leave them largely alone.  You don't go nibbling on a shark or an alligator when there is smaller fish to be had more easily.

The real injustice, if there is one, is that small to medium size companies are often targets of trolls, as they cannot afford to pay for litigation and die a "death of a thousand cuts" if they are sued serially by troll after troll.  Patent trolls thus act as a barrier to entry in the marketplace - you have to go big, fast, in order to afford to fend off the trolls.  If not, you are sunk.  And that's why many start-up companies wisely sell-out to larger companies to avoid such headaches.  And its why the Fortune-500 companies don't mind the trolls so much - they keep competition down.

Could the system be fixed?  Can we kill off the trolls entirely?  Should we?  Because one problem in tamping down trolls is that you also tamp down small inventors - individuals and start-up companies with real ideas and real products.   You make it harder to get and enforce a Patent and, well, it makes it easier for the powers-that-be to just steal the ideas of smaller companies and get away with it.  Funny thing that - either way, the big companies win.

But overall, it is not a problem with the Patent Office or the Patent system, it is a litigation problem.  When lawsuits cost more to litigate than the actual damages involved, the threat of a lawsuit can be used as a weapon to silence critics and squelch opponents (as a certain ex-President was fond of doing) - or just cash-in on some quick and easy money.

Our ligation system allows plaintiffs to request a jury trial, which is an expensive and time-consuming process. Moreover, juries are not very technologically sophisticated and they tend to favor Patent holders in many cases, as they see infringers as scofflaws and "bad guys".  You don't litigate the merits of the Patent, you litigate the personalities involved.  The first person to go technical, loses - so goes the thinking of litigators.

Overseas, they do things differently.  They've always published patent applications and limited terms.  They also have a "first to file" system (which we also finally adopted) and have no one-year "grace period" for filing.  They also have a lot less litigation.  The Japanese tend to cross-license among large companies.  In Germany, a "special master" is appointed as judge, jury, and attorney, in any Patent litigation.  Maybe those are more efficient systems, but they are also weaker in terms of Patent enforcement.  There are trade-offs involved.

No, ours isn't a perfect system - nor will it ever be.  Here's a wake-up call: neither is our tax system, our justice system, our politcal system - or any system designed by or operated by mankind.  If this shocks you, maybe the problem lies within yourself.  So many people today - and historically - have gotten themselves all worked up by comparing the world as-it-is to some hypothetical and unattainable ideal that could never be realized - and then getting depressed when the world doesn't transform itself to their ideal.  "If only we had Communism!" the young unemployed man argues, "the world would be perfect!  We'd all live in a worker's paradise!"  But somehow that never seems to work out that way, and people often exchange one set of horrors for another, often far worse.

We could eliminate Patent trolls entirely, but to do so either means gutting the Patent system entirely or gutting our litigation system entirely.  Both would destroy the rights of legitimate Patent holders and litigants in the process.  I think the best we can hope for - and have started to do - is reform both the Patent system and our litigation system - the latter of which is the real problem.  No, it is not a perfect solution - nothing is - but it's a start!