March 31, 2011, 12:00 AM

Take a Stand

It's time for online retailers to stop paying financial tribute to patent trolls.

Lead Photo

Bill Crutchfield, CEO and Co-Founder, Crutchfield Corp.

Every ship that passes through the northwestern portion of the Indian Ocean is subject to attack by Somali pirates. Likewise, every business with a web site is subject to crippling lawsuits from firms known as "patent trolls."

These firms have developed a very perverse business model. Typically, they buy up seemingly worthless software or business process patents, often covering broad, obvious and commonplace e-commerce features. Using creative interpretations of the patents, they sue web site operators, including online retailers, for infringement.

Because the costs of defending patent infringement suits have been traditionally high, these firms know they can often negotiate "licensing fees" that are less than the defense costs but still ridiculously expensive. In other words, it is generally a pure (albeit legal) shakedown.

Unfortunately, their scheme does not stop here. Some trolls then buy new questionable patents and sue the same companies with which they previously settled. The cycle continues—just as the piracy does in the Indian Ocean.

It is a serious problem for three fundamental reasons. First, it takes capital from some of our most productive companies and transfers it to people who add no value to society. In fact, lawyers typically refer to these patent trolls as "non-practicing entities," because they do none of the research and development that advances technology. This transfer of capital is ultimately paid for by consumers who will be paying higher prices for goods and services. Furthermore, it adversely impacts innovation at a time when our country so desperately needs it.

Second, these cases highlight a serious flaw in our legal system. Our federal judiciary appears to be very inconsistent in its approach to these frivolous and counterproductive lawsuits. Most federal courts discourage them by providing a fair venue for the defendants. Unfortunately, not all courts provide such a venue, and the patent firms know where they can get a friendly hearing.

Third, this is a serious problem because it probably can be stopped relatively easily but is not.

Here is my four-pronged approach for stopping the patent trolls:

Reduce defense costs

The trolls are smart. They realize that defendants are typically not very strategic. The common practice is for a troll to sue multiple defendants—sometimes up to 100. Each defendant typically goes to its own, large and expensive law firm.

There can be problems with using large firms. Some may not have a core competency in patent law. Therefore, they assign a large number of their partners and associates to each case. That increases the defendants' costs exponentially.

Another problem is that some large firms that do have strong intellectual property expertise may represent both patent trolls and the companies they sue. Obviously, there are numerous potential conflict of interest issues with this questionable practice. And I have heard attorneys suggest that large law firms often pursue passive, unimaginative defenses. They may be too eager to settle—particularly if they have, or hope to attract, patent trolls as clients.

Now, here's what trolls would hate for defendants to do. Instead of each defendant using its own large law firm, paying exorbitant fees and eventually settling for ridiculous amounts, the defendants could band together and negotiate group rates with one of the boutique law firms that have tremendous expertise in fighting patent lawsuits. These small firms typically bill at half the rates of large firms. They are creative, nimble, tough on plaintiffs, resistive to a premature settlement and highly ethical.

The will to fight

The egregious lower court rulings in intellectual property cases are generally overruled by appellate courts. In some cases, the patents in question have been invalidated. Most of the cases that patent trolls bring would probably not survive an appeal.

Therefore, the defendants need to remain resolute that they will not settle a case before trial. As a group, they need to stand together and make it very clear to the plaintiff that they will take the case to trial and, if necessary, take it to appeal. If more defendants did this, there would be far fewer patent suits filed.

Patent reviews

Virtually none of the patents that patent trolls buy would be issued today. The vast majority of these patents would not survive a U.S. Patent & Trademark Office patent review. Most were issued during the 1990s when the standards for business process patents were very low.

There are significant costs associated with patent reviews. It is an expensive tactic when initiated by a single defendant. However, when a group of defendants initiates the review, the cost to each individual defendant is dramatically reduced.

Starting a review early in the litigation process would be very smart. The patent may be revoked by the time of the trial. Knowing this, patent holders probably view a patent invalidation as their biggest nightmare. It would abort their current lawsuits and shut down their business model.

Legislative reform

Many politicians continue to promote the need for tort reform. Patent litigation abuse could be the catalyst for getting real patent law reform enacted. First, with a weak economy, the president and Congress are sympathetic to eliminating the logjams that hold back economic expansion. Clearly the financial and intellectual resources wasted on these lawsuits are logjams.

Second, a key argument opposing tort reform does not apply to this particular type of legal system abuse. In the past, tort reform has been centered on controlling excessive settlements awarded to people who have been unquestionably harmed by the defendants. These patent troll suits are very different. The defendants in these cases are not being sued because they have harmed, much less unquestionably harmed, someone. They are being sued because they are merely victims of a sophisticated shakedown operation. It would be logically, morally and politically wrong for any politician to argue against correcting such a blatant abuse of our legal system.

As of this writing, the U.S. Senate has passed patent reform legislation. The U.S. House of Representatives has not finalized its version of the bill. When it does, it will need to be reconciled with the Senate bill. The president has indicated that he will sign some form of patent reform legislation.

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