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IP, Patent

Software Patent “Rant” Misses The Point

Another day, another uniformed rant about the evils of “software patents.”  The author quickly demonstrates a complete misunderstanding of the nature of NPE patent litigation:

On one hand, an NPE does not need much money to bankroll (or at least initiate) a patent infringement suit — in fact, there are law firms who will take such cases on contingency. On the other hand, the company being sued faces potentially ruinous costs. Moreover, even if a company feels certain that a lawsuit against it is baseless, the company cannot count on the imperfect and inefficient legal system to reach a fair outcome. As a result, the company has to choose between spending heavily in its own defense or settling with the NPE. Most companies opt for the less risky route and negotiate settlements, providing funds that the NPEs use to sue more companies.

Via A Practical Rant about Software Patents

Examining this sentence by sentence, it’s easy to demonstrate what’s wrong here:

On one hand, an NPE does not need much money to bankroll (or at least initiate) a patent infringement suit — in fact, there are law firms who will take such cases on contingency.

Right, because law firms just jump at the chance to take a case on contingency. For every lawsuit there are substantial costs on both sides. The law firm is taking a calculated business risk in bringing a suit on contingency, and a patent owner typically has to convince the firm that the patent represents a good investment. Every lawyer worth his or her salt will assume that any given case will proceed through trial, and needs to secure financing to cover those costs.

On the other hand, the company being sued faces potentially ruinous costs.

Sophisticated assertion entities that look at patent litigation as a business investment focus their efforts on large companies that can afford to pay the kinds of royalties that patent owners typically seek.  These large, multinational, billion dollar corporations are hardly ruined by the cost of litigation (running in the low to mid seven figures). Further, this high cost is due to their own choice of extremely highly paid litigation counsel. Smart companies can control costs and focus efforts on fights that need fighting.

Moreover, even if a company feels certain that a lawsuit against it is baseless, the company cannot count on the imperfect and inefficient legal system to reach a fair outcome.

Neither can the NPE.

As a result, the company has to choose between spending heavily in its own defense or settling with the NPE.

Again, this is the same reason that NPE’s settle. Certainty is valued over possibility.

Most companies opt for the less risky route and negotiate settlements, providing funds that the NPEs use to sue more companies.

Consider the alternative. Spending millions to fight the NPE can spell disaster if you win.  Suppose your company invalidates the NPE’s patent. Now all of your competitors get the benefit of your expense and hard work without paying any of the costs.

In fact, the author may have already experienced this:

In a previous job, one of my key accomplishments was to hire a director of intellectual property. It was a difficult hire, but it happened just in time to defend against a particularly noxious patent troll. I am not at liberty to spell out the details, but I can say that we responded with a long, expensive fight that effectively quashed the patent and the lawsuit.

Ultimately, the author hits upon the real issue in the comments:

small companies don’t usually sue big companies for patent infringement today

That’s true (although it does happen), this isn’t typical. The reason is that the small company is focused on running its business.  Litigation is expensive and time consuming.  More importantly, even where there is clear liability, or affirmative misconduct, the larger company won’t deal in good faith with the smaller company.  Just ask Skyhook Wireless how they were treated by Google, or ask inventor Michael Powell how he was treated by Home Depot.

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Discussion

12 thoughts on “Software Patent “Rant” Misses The Point

  1. I’m flattered by the attention you’ve given my post, and I’ll reciprocate by responding to yours. And I’m not even sure we disagree that much on the facts of how things are, even if we differ on how we want them to be.

    You are right that not every NPE can bankroll a patent infringement lawsuit or find a law firm willing to take a case on contingency, but I’ve seen enough baseless suits to conclude that the entry barrier isn’t very high. Indeed, my personal experience in patent prosecution made it clear that examiners lack the subject matter expertise to do their jobs, at least when it comes to software patents. As a result, there are a lot of software patents that should not (and hopefully would not) stand up to re-examination, but enjoy the presumption of validity.

    The “ruinous costs” I referred to are those that a company faces if it does not successfully defend against the lawsuit, not the costs of the litigation. But that cost of losing is the leverage an NPE has to cause a defendant to rationally spend more money on its defense than the NPE spends on offense, since the stakes for the company are much higher than those for the NPE. And that’s why companies often settle with NPEs rather than fight to the finish — the company not only can’t afford to lose, but can settle at a lower cost than winning. That’s why NPEs can win settlements even with baseless patents.

    As for my point about small companies not suing large ones, you might have included the rest of the sentence for context: “small companies don’t usually sue big companies for patent infringement today because bigger ones are likely to have patents of their own with which to countersue.”

    Sometimes I wish I had “a complete misunderstanding of the nature of NPE patent litigation” — perhaps ignorance would be bliss! Fortunately, my experience, though painful, has been highly instructive.

    Posted by Daniel Tunkelang | March 9, 2011, 1:37 am
    • Daniel,

      Thank you for the thoughtful comments.

      “Baseless” is somewhat subjective. I expect accused infringers to inherently disagree with patent accusations, but that doesn’t make them baseless.

      If you mean you think the patents are invalid, put yourself in the shoes of the patent owner. You own an issued patent entitiled to a presumption of validity. If you truly think a given patent wouldn’t stand up to a reexam, then request one.

      However, I recently pointed out on this blog that validity is not as straightforward as you might think.

      In terms of ruinous costs, would Hyundai have been ruined by a $40 M verdict? Keep in mind that large 9 and 10 figure patent verdicts are the EXCEPTION rather than the rule. Recent research into ACTUAL damages data backs this up.

      Regarding small companies, it was not my intention to misquote you. I think you are right (about small companies not suing) but for the wrong reasons. I apologize for any confusion.

      Bottom line, I certainly didn’t mean to suggest that you had no experience to draw from, but rather that your understanding of the nature of enforcement based patent licensing is clouded by looking at the world through “defense lawyer” glasses.

      If anyone wants to suggest that I see the world through a “patent owner’s” glasses, feel free.

      Posted by Patrick | March 9, 2011, 10:35 am
      • Patrick, thank you for your response. We clearly have different agendas, but I appreciate the opportunity to engage in a civil discussion. My apologies if I over-reacted to what felt like an ad hominem attack.

        Also, I have been in the position of the patent owner — I am a co-author on eight patents and have eighteen more applications that have been published. I played a lead role in drafting and prosecuting most of these. While all of those patents and applications are now assigned to former employers, I very much felt a sense of personal ownership at the time. I may not like software patents, but that hasn’t prevented me from playing the game to the best of my ability — even as I advocate for the rules of the game to change.

        Posted by Daniel Tunkelang | March 9, 2011, 11:40 am
        • Daniel,

          No apologies necessary. Your patents are indeed very impressive.

          Personally, I believe patents generally represent a net gain for everyone, and that focusing on the hassle foisted onto the companies accused of infringing ignores the bigger picture. That said, if you read my blog, you’ll see that I do acknowledge substantial inefficiencies in the patent licensing system that can lead to illogical results. That’s why I believe most of the reforms move in the wrong direction. Aggressive patent assertions can be reduced by making patent rights stronger, not weaker. Seems counter-intuitive, but I’ll explain more about this in a later post.

          Posted by Patrick | March 9, 2011, 6:14 pm
  2. The essence of your argument rests on this sentence you wrote:

    BEGIN
    “Sophisticated assertion entities that look at patent litigation as a business investment focus their efforts on large companies that can afford to pay the kinds of royalties that patent owners typically seek. ”
    END

    For this reason, you say, companies won’t take legal action against defendants with no ability to pay- it’s too expensive, too risky that the costs won’t be recouped.

    But this is false and therefore your argument is fallacious.

    There are innumerable cases of smallish companies using their patents and lawyers against even smaller entities and individuals who are not monetizing the usage of the IP. In fact such activity is an every day occurrence, as it must be as software patents continue to explode in number because the fact of the matter is, privately held firms have no public disclosure requirements if they send a cease and desist letter, sue, license or otherwise settle, so the full scope of patent-centric legal action is unknown. This includes mere threats of lawsuits directed towards entities that can clearly not afford to mount a defense and simply go out of business.

    Here are some of the latest and some of the most famous:

    FlightPrep vs Runwayfinder, others –

    FlightPrep is a small corporation that makes flight planning software for pilots. It threatened Runwayfinder and others with a lawsuit,

    From Runwayfinder’s site:

    Update 12/16/2010 1:03pm PST

    ..I am only one person who has a more than full-time job outside of RunwayFinder. I can’t keep up with 3 different press organizations, the hundreds of messages, and the FlightPrep spin machine of at least 7 people including a marketing person and 3 attorneys…

    Pangea Intellectual Properties (PanIP)
    U.S. Patent numbers 5,576,951 & 6,289,319
    PanIP has sued small businesses in groups of ten.

    Divine, Inc.
    U.S. Patent numbers 5,715,314 & 5,909,492 & 5,724,424 & 5,708,780
    Divine has been mailing between forty and fifty cease and desist letters per week,

    SBC Intellectual Property
    U.S. Patent numbers 5,933,841 & 6,442,574
    SBC mailed at least thirty patent infringement notices to website owners

    Acacia Media Technologies
    U.S. Patent numbers 5,132,992; 5,253,275; 5,550,863; 6,002,720; 6,144,702
    Systematically suing small web site owners.

    You characterization of what goes on with respect to the chilling effects of software patents is only one aspect of a much larger picture.

    You said:
    BEGIN
    The law firm is taking a calculated business risk in bringing a suit on contingency, and a patent owner typically has to convince the firm that the patent represents a good investment. Every lawyer worth his or her salt will assume that any given case will proceed through trial, and needs to secure financing to cover those costs.
    END

    This cannot be true if litigants are willing to sue entities with zero ability to pay.

    A better characterization of the real situation is that litigants know they can pick off small companies and individuals with inexpensive threats, as do their lawyers, and they use these consciously and strategically to thwart innovation and competition within their markets.

    This accounting still leaves off what is likely the largest dynamic around software patents- the companies that never come to exist, the programming and innovation that never happens because individuals look over the software patent landscape and conclude, quite rationally, that while they could bring a product to market and serve customers, they could never afford either the patents or the lawsuits that would inevitably come their way.

    And from a larger perspective we see that this aspect of the software patent debate only focuses on the nature of legal activity around software patents. The more important, encompassing question of whether such patents contribute to the Constitutionally mandated requirement that patents must “promote the useful arts and sciences” or whether on whole they impede those same activities.

    Posted by Terry richardson | March 9, 2011, 9:09 am
    • Terry,

      Thanks for reading. I didn’t mean to suggest that small companies NEVER get sued. Rather, I don’t find it to be the norm.

      That said, if the respective patent owners have credible reason to believe these small companies are actually infringing these patents, there is nothing per se immoral about making such accusations. Unless proven to be invalid, use of a patent owner’s invention is deserving of compensation.

      If the owners and attorneys involved believe that the scant amount of money these companies are able to pay is worthwhile, that’s their decision.

      That said, small companies face unique challenges in patent litigation and should deploy unique strategies (rather than the fortune 500 “scorched earth” approach). I will probably need to write a follow up post on this topic.

      As to your last point, I personally don’t believe that the framer’s intent was to determine on an individual basis whether a given patent does or does not promote progress of the useful arts. More importantly, I don’t think such a proposal is wise. We may have to agree to disagree on that point.

      Posted by Patrick | March 9, 2011, 10:45 am
  3. Patent litigation can be lengthy and expensive! When an inventor, business or other entity owns a patent, and that patent is infringed, the patent owner has few alternatives other than patent litigation. And while several large settlements have been won in patent infringement lawsuits, patent litigation is usually lengthy, and patent litigation is always very expensive!

    Posted by Jared | March 9, 2011, 2:43 pm

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