The Patent Troll Lawyer Business Model
It’s no secret that patent infringement is one of the hottest areas in which to practice law these days. The inventor-friendly principles that governed the original United States Patent Office back when Thomas Jefferson ran it (though he personally wasn’t too much a fan of patents) are still the law today, even though the scope of prior art in most industries has expanded far beyond the point where any patent examiner could reasonably review it, much less ensure an inventor in an ex parte proceeding fairly describes it.
These days, if an inventor has enough determination, or enough funds to pay for his or her patent registration attorneys to go the whole nine yards, then they can likely obtain a patent even if their invention is at beast only arguably novel or useful. Once granted, the patent has immense value, and is protected against all but the strongest invalidity challenges thanks to the Supreme Court’s opinion in Microsoft v. i4i last summer.
As a matter of law, from the plaintiff’s perspective patent infringement claims are a sweet deal (assuming your claims aren’t totally meritless, in which case the sanctions can be quite severe). Patent infringement cases are less of an uphill climb than, say, anti-trust, drug or medical device product liability, or any claims dependent upon a class action, all of which have been under attack by the Supreme Court for years. It’s no surprise that defendants facing patent infringement claims often run scared to large corporate defense firms, asking them to pull out all the stops to defend them.
As a practical matter, though, patent infringement cases are a little more complicated than that. They are astonishingly expensive, routinely costing six figures in expenses even before counting attorney’s fees. As Inc. magazine said in recounting its top ten lies to never tell investors,
“We filed patents so our intellectual property is protected.” If you don’t have the money to sue other companies for infringement, then the number of patents doesn’t matter. If someone can design around your patent, they don’t even need to infringe.
Patent lawsuits require a mind-boggling amount of external support, from patent searches to consulting experts to testifying experts to accountants and actuaries and economists, not to mention the chore of dealing with hundreds of thousands of documents produced in discovery, the bulk of which are irrelevant. (As an aside, “design around” doesn’t always absolve a defendant, given the doctrine of equivalents.)
Which brings me to the inspiration for my post. A week ago the Wall Street Journal Law Blog discussed two white shoe law firm partners who left their highly profitable practices to take on the even more lucrative work of managing all of the litigation for patent portfolios put together by private investors. The WSJ Law Blog frames this shift as a change in the patent litigation bar from having lawyers at big firms sometimes representing companies as plaintiffs and sometimes representing companies as defendants to one in which, more like the personal injury and regular trial lawyer bars, lawyers typically represent plaintiffs or defendants but not both.
That’s an astute observation, and has been the direction that smaller firms have been going for years — as usual in the legal profession, innovation starts with the smaller practices first and then their methods are adopted by the big firms — but I think there is an even bigger trend underlying that movement.
Much of the discussion these days about patent law focuses upon the distinction between ordinary companies that may infringe upon patents with the products they sell and the non-practicing entities (“NPE”) a/k/a patent trolls. Those distinctions make sense, but there’s another dimension to it. As I see it there are three types of patent holders:
- Corporations that regularly utilize their technologies; they may have some degree of a defensive patent portfolio, but the company exists primarily to sell products or services, rather than to licensed patents;
- Venture capital or private equity backed companies that, even if they do use some of the technologies, exist primarily to license patents to others; and
- Individual inventors who still hold the patent rights to their inventions.
The corporations are driven by business needs external to their patent portfolio. They certainly don’t mind making money off of their patents, but they choose their litigation strategies based upon the overall objectives of the company, as I discussed in the Google v. Oracle case.
The private investor firms are the ones getting all of the attention these days, even if it is only in the past year or two that press reports have really started focusing on the underlying ownership of these “non-practicing entities.” Intellectual Ventures is certainly the most well-known of them all, not least due to the recent NPR report on patent controls, but it is by no means the only one, and right now billions of dollars in venture capital and private equity money is flowing into these entities to get in on the patent litigation gold rush. As I discussed before, I think the American Invents Act, for all of its claims of “patent reform,” will strengthen these firms’ hands by adding new bureaucratic hurdles to the patent process, while not altering the fundamental issue of patentability.
Which leaves us with the investors, and an unfortunate trend I have seen lately. If you are an inventor with a patent, you have four options:
- You can find investors to help you build a company that utilizes the patent.
- You can sell or license the patent to a company which will use it.
- You can sell or license the patent to a “NPE” or troll that will try to enforce the patent against other companies using it.
- You can use the patent yourself and find lawyers to help you enforce it against infringers.
Unfortunately, as with any gold rush, there are plenty of unscrupulous parties looking to make a quick buck, and I am sad to say that lawyers are included among their numbers.
As I have mentioned before, the primary impetus behind a contingency fee agreement is risk. The plaintiff is unable or unwilling to pay the lawyers’ fees as they arise, and so the lawyer takes on the risk of no recovery or an unprofitable recovery by agreeing to forego a guaranteed payment in favor of the contingency fee. It’s a good system in my humble opinion, one that ensures far more people and small businesses have access to justice, instead of restricting our courts to the wealthiest corporations and individuals who can afford to pay the tens of thousands of dollars a month minimum (not to mention the retainer) charged by most patent infringement lawyers.
But there is a market inefficiency in the system: a lawyer can sign up a client for the one-third to 45% pre-trial contingency fees that are normal in the industry, but leave themselves a loophole to withdraw if the client doesn’t accept settlement on their recommended terms. The lawyer then either files a lawsuit (or just serves a letter demand), demands from the defendant some grossly under-valued settlement, and then runs away if the plaintiff doesn’t accept it. For these patent troll lawyers, it’s largely irrelevant if the case is meritorious or not, so they file everything they can: in their business model, they toss the complaint or demand out there, demand some settlement of more than $100,000 but less than $1,000,000 regardless of the patent’s reasonable value, then either collect a toll from the defendants or withdraw, leaving the plaintiff in a lurch. It’s good for the troll lawyers, but bad for everyone else, including the inventors whose claims are compromised and the defendants who have to pay on weak claims (as you can see, it’s a good deal for large companies that truly infringe, because they end up paying less than they should).
I don’t know how to fix this problem. There is nothing wrong with lawyers including that sort of term in their agreement – and the last thing any client needs is a lawyer stuck on their case who doesn’t believe in it – and the problem itself is due more to a lack of zealous advocacy by the lawyer than any fundamental problem with their relationship.
Frankly, I think this sort of unfair relationship will persist until some meaningful degree of patent reform clamps down on the types of patents available or the law applicable to the claims themselves, like as happened in the securities bar. When the Private Securities Litigation Reform Act was passed, the net effect was to remove most of the trolls from the securities bar and leave the largest and most capable firms intact, thereby making the securities litigation market as a whole more stable and rational. (As an aside, some have argued that, with the decline of Milberg Weiss, the securities bar has become unstable again, but in time that will correct itself.) I bet the same would happen if, for example, patent infringement claims were held to the Iqbal / Twombly pleading standard, like every other type of claim, because it would force the inventor’s lawyers to do more work preparing cases.
Unfortunately, if even some of the biggest names in technology cannot get Congress or the Supreme Court to change patent law, I don’t hold out much hope anyone else can, either, and so the trolling will continue, to the detriment of investors and defendant businesses alike.