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March 20, 2014

Troll Casino: Jackpots Won Routinely

 

A few weeks ago David Kappos, former director of the U.S. Patent and Trademark Office, wrote in an article that, in sum, so called “patent trolls” were not responsible for any major increase in patent litigation and that regardless “the building is not on fire” when it comes to the increase in patent litigation. Mr. Kappos certainly knows about patents and litigation, and is someone who rightly demands respect in this area, but in his attempt to defend the patent system he glosses over the shakedowns that regularly occur in the current system.
 
So, who are these troublemaking shakedown artists? Few of the definitions of “trolls” are particularly helpful and most of them disparage otherwise enterprising companies or business models. But there are bad guys, and they are the people who bring, or threaten to bring, abusive, frivolous litigation that is designed to leach onto innovation and drain its value.
 
Mr. Kappos’s arguments are troubling for a number of reasons, not least because he dismisses much evidence that does not fit his thesis. For a solid discussion of the academic studies regarding frivolous lawsuits and the 11 percent increase in “troll” lawsuits last year, see James Bessen here and here.
 
But a larger problem with Mr. Kappos’s argument is that he fails to consider the provision of economic damages in the legal system, which allows for “jackpot valuations” of intellectual property and so is the root of the problem. While there are certainly legitimate cases of infringement with critical contentions to be resolved, the fact is that the incentive now, in a world of cloudy and inconsistent valuation of intellectual property and little or no upfront risk, is to take a shot in the courts to see if a jackpot valuation can be won.
 
Further, the bad actors have been provided a fertile field for their malfeasance. The litigation they threaten to bring typically takes advantage of low-quality software or business method patents—sloppily awarded patents that are vague and obvious, covering commonsense steps that are performed every day in a number of businesses, or patents on software applications that have never fit well because of the nature of patents. Protecting machines or mechanical devices is the domain of patents, while copyright was designed to protect ideas and expressions such as software. Armed with these ill-fitting, ill-defined patents the bad actors threaten litigation against a broad swath of companies seeking settlements to avoid costly litigation. So trolling lawyers send what amounts to a questionable demand letter threatening litigation where they just might hit the jackpot. Or put another way, the mere threat of multimillion dollar litigation is a large part of the problem, because of the costs involved and the uncertain outcome.
 
The economic incentives make it attractive to threaten to sue, even for the most dubious of claims—a situation not much different than that which has driven many to demand broader tort reform. In the end, innovation is stunted and economic distortions grow. These lawsuits are shakedowns and should be repugnant to any serious person who cares about the long-term importance of the patent as a cornerstone of intellectual property, and to anyone simply tired of those who exploit weakness for their own gain.
 
The Senate Judiciary Committee should be moving ahead with bipartisan legislation to address some of these problems next month. Given that the House has already passed legislation, hopefully a solution will emerge from Congress this year.


 

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