State of Innovation

Patents and Innovation Economics

Patent Trolls vs. Legal Trolls

There has been a lot of media attention about so called patent trolls.  I am intimately familiar with these issues, but the characterization is incorrect.  There are legal trolls, some of whom specialize in patents, but they prey upon the same problems that infects all of our legal system and so there is nothing unique regarding patents.  As happens so often, the government creates one problem and then people see the symptom and propose more improper government policies, which will just cause more problems.

I had a small software startup that was contacted by a legal troll.  The troll had selected the company because its website stated it was in a somewhat similar space to the patents they were attempting to enforce.  I analyzed the claims and it was clear the company was not practicing the patented invention.  When I contacted the troll they were unwilling to review the case or the claims.  They did not appear to be interested in the truth.  The company decided it would rather die litigating than take a license they did not require.  They also worried that taking the license would make it harder to be acquired.

Another case that illustrates the point, happened before the term “troll“was invented.  A patent counsel for a large Fortune 500 company received a complaint for patent infringement of over 30 patents.  Under the CAFC rules at the time, the company would have to spend at least three hundred thousand dollars on opinions just to respond to the complaint.  A couple of days later the troll offered to settle for about one hundred thousand dollars, knowing full well that both the costs and time constraints made this a great hold up game.  The patent counsel was so pissed off about this clear extortion, that he refused to give in and found there was a cross licensing agreement that gave his company the right to use the patents.  Nevertheless, this was an attempt to extort the company for a quick Christmas bonus and all that happened to the troll was they had to eat crow and some minor legal fees.

These situation arose not because of patent laws that protect the rights of inventors, but because of our overly burdensome federal litigation system and because Rule 11 sanctions are almost never enforced against legal trolls.  The reality is that legal trolls have been using the complexity of the law and the absurdly lenient standard for pleading to extort money from companies since at least the 1970s.  These Legal Trolls use medical malpractice, product liability, securities laws, and many others areas of law for this purpose.  However government is one of the biggest legal troll of them all.  They use the environmental laws to extort money from companies, OHSA rules, the IRS and many others.

In the case of medical malpractice lawsuits, 90% of those that go to trial fail.   In a rational system you would expect about a 50% rate of success.  Otherwise it should be in the interest of the parties to settle.

Here is an article, Annual Meeting Holdup: Securities Class Action Lawyers’ Latest Scheme, on the latest holdup innovation by securities plaintiff attorneys.

But, as I pointed out, the government is the biggest legal troll of them all.  The EPA regularly demands people comply with their arbitrary ruling or face bankrupting daily fines.  One example of this, Sackett v. EPA, made it to the Supreme Court.  The EPA has not only given itself the ability to assess this fines separate from a court or a trail, but they have argued successfully that they do not need to get a warrant to investigate a person.  This case is hardly unique.  In fact EPA administrator Al Armendariz admitted the EPA purposely terrorizes companies to force compliance among subsequent targets.  He compared it to the Romans, when they conquered a village they would crucify five people arbitrarily to ensure compliance.

The SEC refuses to define “insider trading.”  Accusing people of insider trading has been the favorite political stepping stone for attorney generals out of New York.  See Rudolf Giuliani and Elliot Spitzer.  How can you be charged with a crime the government won’t define?  How do you know if you violated the law?  How can you have mens rea?  The securities laws are just politics disguised as law – also see anti-trust laws.

Clearly, we have a problem with legal trolls not with patents.  So how do we fix the problem?  I will ignore how to fix the abuses of our government.  First,we need to clearly define what we mean by legal troll.  I would define a legal troll as any group that uses the complexity of the legal system to make a profit when they know their case is dubious.  Based on this definition there are two main components: the complexity of the legal system and baseless lawsuits.

In an attempt to promote justice our legal system reduced the requirements for pleadings and provided a wide open discovery process.  These are the two main reasons why lawsuits are so expensive.  The requirement for a good faith investigation of the facts before filing a complaint should be made stricter.  However, it is utopian thinking that judges are going to enforce this.  I will propose a solution in the next section for this.  The discovery process should be time limited and page limited.  Discovery should not be used as a fishing expedition.  Another problem is that we have an over worked Federal Judiciary.  This is in part because we do not have enough federal judges and partly because we have federalized too many crimes/regulations.  On the patent level we should have judges who have technical backgrounds and have passed the patent bar.

Rule 11 sanctions are supposed to prevent frivolous lawsuits, but judges almost never apply them and when they do it is so arbitrary as to appear politically motivated.  I suggest that the Rule 11 type sanctions should be a private right and award.  This would balance the risks of filing frivolous lawsuits.  In addition we might want to consider a loser pays type rule.

We do not have Patent Trolls we have Legal Trolls.  The biggest Legal Trolls of all are governments.

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June 4, 2013 - Posted by | -Law, -Philosophy, Patents | , ,

1 Comment »

  1. Good luck trying to get the elephant in the room out of there by saying, no, it’s a “pachyderm”.

    There is an area of psychology that says vociferous denial of an untruth only serves to strengthen the untruth.

    Example:
    No, I never even began to beat my wife let alone stopped to!
    No, I never even began to beat my wife let alone stopped to!

    So they (the anti-patent folk) say “Patent” Troll and you say “Pachyderm” Troll.
    The new moniker does not unravel the old one. The elephant stays in the room.
    Nice try.

    BTW, do you see how that word, “in NO vation” keeps popping up?
    Do you see how the word “inventor” has been swept under the rug?
    “Inventors” no longer exist. We are all “innovators” now.
    Drink Brando (It’s got electrolytes) –from the movie, Idiocracy.

    Comment by step back | June 4, 2013 | Reply


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