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Patent Trolls and Public Goods

October 4th, 2010 · 18 Comments

Mike Masnick writes that a surprising number of online music vendors are choosing to settle rather than fight lawsuits from a company called Sharing Sound which managed to secure a ridiculous patent on, essentially, the very idea of selling music online. They are, one assumes, settling because Sharing Sound is asking less than what it would cost in legal fees to fight the patent, even if a victory were all but assured.

It strikes me that we can think of the invalidation of bad patents as a public good: If someone does fight back and get the patent declared bogus, that’s game over for Sharing Sound—and good news for all their other potential victims, who are now spared the threat of litigation (or the cost of settling) without themselves having to pony up for legal fees. For just this reason, of course, Sharing Sound is probably careful to limit their settlement demands to less than the cost of beating them in court. The patent is sufficiently plainly bogus that if anyone were expected to fight, the lawsuit would probably not have been worth filing in the first place, since it would just result in a costly defeat.

It seems entirely possible that the combined cost of all those settlements is actually quite a bit more than the cost of mounting one successful counterattack in court. But, of course, if anyone proposed that the target companies pool their resources to mount a unified defense, each would have an incentive to free ride. You could have some kind of insurance-like setup where a consortium of tech firms keep a legal team on retainer to defend any members targeted for a suit over a patent determined by some independent panel to be sufficiently frivolous, where  companies that don’t join make more attractive targets for patent trolls, which reduces the incentive to free-ride.  If the companies together can credibly commit to fight such suits, then assuming sufficient transparency, the existence of the mechanism should create enough of a deterrent threat that they’d seldom actually have to. But there are plenty of reasons such a system might be unworkably complex and have its own incentive problems.

Anyway, I do think this goes to show why more rigorous up-front scrutiny of patents is so important. Once a bad one is granted, a clever patent troll will structure their rent extraction to avoid triggering any after-the-fact legal scrutiny, which means once they’re granted, even the most manifestly bogus ones may exert substantial economic drag without ever actually being challenged.

Tags: Tech and Tech Policy



18 responses so far ↓

  • 1 Michael Yuri // Oct 4, 2010 at 5:32 pm

    There’s another reason companies are hesitant to litigate patent infringement suits: patent injunctions.

    If you lose a patent infringement case, you face not just royalty payments, but the possibility of an injunction that would shut you down permanently (absent a post-verdict license agreement negotiated under duress). If there’s even a small possibility that a court might find infringement, it’s not worth gambling the entire business.

  • 2 Dan // Oct 4, 2010 at 6:17 pm

    Not being a patent lawyer, I still feel like there are some plausible ways of getting around the tragedy of the commons. The companies could file a class action suit against the company for a declaratory judgment that the patent is void. This would still face some problems (unlike class action suits for damages, if the plaintiffs win, even people who didn’t join in the judgment benefit, plus there wouldn’t be any damages with which to pay the lawyers so they’d have to pay out of pocket) but it would be easier to arrange than the kind of defensive insurance arrangement you discuss.

  • 3 Ben // Oct 4, 2010 at 7:03 pm

    I would think your tech consortium insurance idea would not be covered by antitrust immunity (the Noerr-Pennington doctrine).

    Plus, I’d be concerned that the scheme would end up torpedoing legitimate plaintiffs who might not have deep enough pockets to go up against an overfunded legal team for a long time.

    I’d be concerned about putting more effort up front with regards to determining the validity of patents, as it would make it more expensive to apply for patents and would be bad for smaller businesses.

    I think it might make more sense to require the plaintiff to provide attorneys’ fees to the defendant if their patent turns out to be bogus.

  • 4 patrick // Oct 4, 2010 at 7:38 pm

    A ‘lotta companies pooled together to defend Linux from SCO. I think it happens, it just depends on the technology at hand and the stakes. A lot of the biggest tech companies are very good at making patent trolls hurt. (Through a combination of pre-emptive patents, counter-suits, pooled resources, and deterrence through malice.)

    At this point it is just part of the industry, just read some /. or BoingBoing. They cover this stuff in lots of detail. Owning ideas is a messy business.

  • 5 ronathan richardson // Oct 4, 2010 at 7:40 pm

    It’s sort of an unsolvable problem in that having a patent office with enough expertise to hand out patents in a timely, fair, and educated fashion would require a huge and hugely skilled workforce. Perhaps an office that specifically targets and challenges patents that seem to be the most ruinous to progress without protecting anything useful would be best. But the knee-jerk defense of intellectual property protection as a right is a pretty stupid aspect of current conservative dogma–patents exist to promote business being done, not “rights” to your ideas.

  • 6 Mike Masnick // Oct 4, 2010 at 9:34 pm

    A couple of quick points.

    In response to Michael Yuri’s point about injunctions: that was a lot more true a few years ago before the Supreme Court’s MercExchange ruling. Since then, however, the courts have *mostly* decided that it won’t issue injunctions on lawsuits brought by non-practicing entities. With a company that has an actual product, there’s more of a threat of an injunction, but with NPEs, like in this case, most companies know the threat of an injunction is very, very small.

    As for Dan’s note about a declaratory judgment, with patents, the path normally taken is to go to the USPTO to get them to re-examine the patent absent a lawsuit. Often (though, unfortunately not always), if the USPTO has granted a re-exam (which almost always results in invalidated, or greatly limited claims) courts will wait until the re-exam is over. That doesn’t always happen. It really does depend on the judge, but getting a re-exam is generally the way to go.

    And that brings up a bigger point: rather than pooling legal resources for court battles, it would be better if companies were able to initiate a re-exam and judges were then obliged to wait for the re-exam to be completed. Of course it would also help if the obviousness standard for patents was moved somewhere more reasonable *and* (most important of all) there was an “independent invention defense.”

    But none of that seems likely any time soon unfortunately.

  • 7 Pete // Oct 5, 2010 at 7:15 am

    I don’t get how this works, so I’m going to ask a stupid question:

    If Sharing Sound’s limiting their demands to less than the cost of the court case, they clearly know that their patent’s bogus. So why not call their bluff? Why would they bother to fight a court case that they know they’d probably lose, rather than just dropping that scam and coming up with a new one? Or quickly settling, keeping the patent intact, and moving onto the next sucker?

  • 8 Scott Daniels // Oct 5, 2010 at 7:25 am

    Mike Masnick’s comments about patent reexamination at the USPTO are well-taken. We follow reexaminations on a day-to-day basis for our blog, Reexamination Alert, and find that reexamination is a particularly effective approach to dealing with patents, even strong patents. Of course, the prior art applied must be a patent or printed publication — public sales and uses cannot be used as prior art in reexamination.

    Scott Daniels
    Westerman Hattori Daniels & Adrian

  • 9 Matthew Yglesias » Endgame // Oct 5, 2010 at 8:32 am

    […] Patent trolls are a hugely underrated […]

  • 10 Lemmy Caution // Oct 6, 2010 at 3:22 pm

    Anyway, I do think this goes to show why more rigorous up-front scrutiny of patents is so important. Once a bad one is granted, a clever patent troll will structure their rent extraction to avoid triggering any after-the-fact legal scrutiny, which means once they’re granted, even the most manifestly bogus ones may exert substantial economic drag without ever actually being challenged.

    Scrutiny of software patents is pretty vigorous. It now requires a second layer of review to get these patents allowed that is not used for any other art area. This is a result of public pressure.

    The problem with software patents is that even valid patents are not in the public interest. It isn’t the case that the incentive of a software patent drives R&D. Software companies would innovate even without patents so software patents are just drag on the system.

    This is different than pharmaceutical patents that are probably needed to spur innovation.

  • 11 Patents: not just a problem in China // Oct 6, 2010 at 9:37 pm

    […] McArdle and Julian Sanchez have been discussing bad patents. Both posts are worth reading in […]

  • 12 Tim Lee // Oct 7, 2010 at 11:04 am

    One other thing worth mentioning: this “mutual defense” concept was sort of the original pitch for Intellectual Ventures. The idea was “give us a bunch of money and we’ll use it to build a huge patent portfolio we can use to help defend you against patent lawsuits. Then, predictably, it went to later “investors” and said “nice company there, shame if anything were to happen to it.”

  • 13 Geeky Jihad is Rational « The Kiloblog // Oct 8, 2010 at 5:33 am

    […] gotten riches by  making companies settle silly patents suits without a fight. Julian Sanchez points out that fighting rather than settling is for good of all, but not of any one victim. He forlornly […]

  • 14 Michael // Oct 8, 2010 at 2:14 pm

    One man said “It’s sort of an unsolvable problem in that having a patent office with enough expertise to hand out patents in a timely, fair, and educated fashion would require a huge and hugely skilled workforce. ”

    The problem, of course, is that there seems to be no one working at the patent office with any common sense or any skills.

    I don’t think its unreasonable to actually staff a government office with intelligent, skilled, well payed, motivated employees.

    Perhaps, just one small part of the office who’s job is to turn down patents for being predatory or contrary to the actual law.

    After all, the patent office has granted patents for pre-existing life forms and parts of pre-existing life forms (eg, part of the human hemoglobin system). It should not have happened. Created by nature, patented (stolen) by a corporation.

    If a part of government is worth having, or necessary, then it is reasonable for us to staff it with smart people, then pay them enough to motivate them. If they wont do the job, replace them. If they can’t because the system is broken, fix the system. Create penalties, or clauses that will negate any patent that is misrepresenting the subject.

    When patents are such a large part of commerce and business the US needs to keep a handle on it.

  • 15 The Engineer // Oct 11, 2010 at 5:57 am

    One of the problems is that the american patent system have a very low bar of entry (the chief reason I’ve heard is the patent office being understaffed). The proportion of patents rejected is lower than, for example Europe. This of course invites people to try to patent things that are not really reasonable to patent.

    The most baffling examples are patenting things like selling music online, and repatenting things whos patents have expired, in a slightly different wording. These things would not hold in a court of law, but it enables smal firms to Troll big firms, and big firms to lawyer-kill small firms, and independent inventors.

    There is a theory circulationg abroad that the shoddy patent system is actually a kind of hidden trade barrier, such feelings typically arise in cases like this: http://271patent.blogspot.com/2006/09/hkan-lans-is-back-at-federal-circuit.html

    Note the last paragraph. I am however unpersuaded since the system is quite toxic even to domestic firms.

  • 16 October 21 roundup // Oct 21, 2010 at 9:31 am

    […] Resisting a music-delivery-system claim: “Patent Trolls and Public Goods” [Julian Sanchez] […]

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