Patent Trolls: A Conspiratorial Story of Symbiosis

On Friday, July 9, 2010, Garmin International Inc., a unit of Garmin Ltd. (NASDAQ: GRMN), issued a press release touting the fact that they had managed to win a Motion for Summary Judgment in the Northern District of Illinois, with the Federal District Court granting Garmin’s motion in SP Technologies, LLC v. Garmin International, Inc. and TomTom, Inc. The Memorandum Opinion and Order, issued by Federal District Court Judge Rebecca R. Pallmeyer, hands famous, notorious and/or infamous (depending on your viewpoint) attorney Ray Niro a defeat. Niro, a favorite attorney of those alleged to be patent trolls, represented SP Technologies.

The Order granting Summary Judgment in favor of Garmin, which issued on July 7, 2010. explains that all asserted claims of U.S. Patent 6,784,873 are invalid. The did not decide the matter of non-infringement, finding it to be mooted as a result of the invalidity determination of the ‘873 patent. Nevertheless, wining on validity, or invalidity as the case may be, is still and win, and this marks the third consecutive patent suit that Garmin has successfully concluded by aggressively attacking invalid patents asserted by non-practicing patent holding companies, also known as patent trolls in some circles.

“We are pleased with this judgment – it reaffirms our belief that courts are willing to take decisive action against bad patents when presented with solid evidence of their invalidity. Companies like Garmin, that employ innovators, manufacture products, and sell goods in the market, should not be forced to settle lawsuits that assert patents that never should have issued from the Patent Office,” said Andrew Etkind, Garmin’s Vice President and General Counsel.

Etkind also indicated his hope that Garmin’s string of victories might influence other actual market participants: “We hope other companies will begin to invest the necessary resources to invalidate patents that are clearly anticipated by prior inventions and stem the tide of these patent lawsuits.” This last statement by Garmin’s General Counsel caught my attention, which is why I decided to write this article when I came across the story.

At an earlier time in my career, when I was a new associate fresh out of law school, I worked for a general civil litigation firm that did any type of litigation, regardless of subject matter. There was an attorney for practically every specialty, but everyone handled automobile accidents, although it was a rapidly decreasing line of business for the firm.

While I can’t tell you from first hand experience, what I have been told is that during the 1980s and perhaps into the early part of the 1990s the auto insurance companies would settle everything. If you were to sue an insured motorist the insurance company would calculate how much they would spend on defending the litigation and then offer you nuisance value, which was of course a little less. They would dispose of the case and feel confident in the believe that they had saved money doing so because, after all, they could pay their attorneys and ultimately lose. So if they could pay less than what they calculated the attorneys would charge they did.

It doesn’t take a rocket scientist to know what happened. Every attorney with a pulse signed up every client they could who had been in an auto accident and sued. There was easy money to be had because insurance companies would settle cases that were specious at best. It was win-win for everyone except the insurance companies. You see, their decision to settle everything without a fight lead to far more claims and that cost them big over time. In fact, it wasn’t until about the early 1990s to mid 1990s that the gravy train was over and auto insurers figured out that they had to fight and stop the specious claims. And fight they did. They fought everything, perhaps they still do. It has been over a decade since I had any such legal experience, but the lesson was and is clear. If you don’t fight, and if you make yourself an easy target, people will shoot at you.

I have been perplexed for some time as to why more companies don’t take the Garmin approach to fighting those they believe to be patent trolls. Of course, if there is a legitimate claim it is appropriate to pay and settle, and sometimes when there is a legitimate claim there are justifiable differences and litigation can be an appropriate avenue to pursue to resolve disputes. But unless and until large companies wise up and stop paying specious claims and actually fight they are only going to face more and more patent infringement claims, some legitimate to be sure, but many specious at best.

I don’t know whether the SP Technologies case was legitimate or specious. That is not what I am commenting about here, but it seems quite clear that Garmin thought it feel into the specious category and in the press release announcing its victory is practically begging other companies to stand up to the patent trolls, also known as non-practicing entities, who bring those claims. But why hasn’t the industry stood up?

I can’t tell you the reason why companies choose to be targets, but I think I have a compelling idea. Those companies that are the ones who complain about patent trolls are also the ones who continually are on Capitol Hill lobbying for patent reform, which in their mind is really only appropriate when it makes issued patents easy to challenge and much more difficult to get. These are the folks who built their corporate empires on patents, growing from small company to mega-giant company while building an enormous intellectual property portfolio heavily dominated with patents that gave them a competitive advantage. Now that they have their market dominant position they really don’t need the patents so much because they have their market power to insulate them from competition, so they want to make it harder for the next individual inventor, start-up tech business or small business to innovate, protect and grow up the corporate food chain.

It is undeniably the best policy for job creation and economic stimulus to incentivize independent inventors, start-up tech businesses and small businesses. That is where the exciting new technologies always come from, save a few well run giant companies. So it is reckless and myopic to allow the mega-giant companies to forward an anti-patent agenda. That will hurt the economy and prevent job growth, plain and simple.

But what about the patent trolls? If we don’t water down the patent system we won’t be able to deal with the frivolous lawsuits! Woe is me! Woe is me!

I don’t like frivolous lawsuits any more than the next guy, trust me! But if the lawsuit is really frivolous then fight! There are mechanisms in place to fight, and Federal District Courts are showing more willingness to cut to the chase and to entertain sanctions and even consider using Rule 11 where appropriate. It isn’t as helpful as the language of Rule 11 suggests it ought to be, but it is a start.

There is also a well developed reexamination strategy that could be utilized, and the mega-giant companies that complain about frivolous patent lawsuits simply do not use a reexamination strategy let alone a meaningful strategy that is likely to succeed. So why? I couldn’t tell you because I along with a few others created a reexamination strategy that would have cost certain mega-giants a fraction of what they pay monthly to litigate and there were no takers. Everyone seemed interested in paying exorbitant sums of money to litigate, complaining all the while. It seems obvious to me that those that complain, for the most part, do so because they need a boogeyman to rail against on Capitol Hill as the reason they need legislation that will destroy the fabric of the patent right and bring the patent system to its knees.

Yes, I realize that is a conspiracy theory, and I am not all that big on conspiracy theories. I tend to think that general incompetence is far more likely an explanation than an elaborate conspiracy theory, but can incompetence explain what is going on? You be the judge, but if you ask me even the most incompetent fool would realize that a reexamination strategy that takes the fight to those who file frivolous, or allegedly frivolous, lawsuits would be far cheaper to implement and far more likely to succeed.

According to USPTO statistics, between 1981 and March 31, 2010, there were 7,442 ex parte reexamination certificates issued. Here are the results:

• Certificates with all claims confirmed — 1,768 (24%)
• Certificates with all claims canceled — 860 (11%)
• Certificates with claims modified —- 4,814 (65%)

According to USPTO statistics, between November 29, 1999 and March 31, 2010, there were 152 inter partes reexamination certificates issued.  Here are the results:

• Certificates with all claims confirmed — 12 (8%)
• Certificates with all claims canceled (or disclaimed) — 76 (50%)
• Certificates with claims modified — 64 (42%)

While it is nice to get all the claims canceled, the reality is in order to be an effective strategy one needs to get claims canceled or modified.  This is true because a modified claim cannot be used against a defendant who started engaging in activities prior to the modification of the claim through reexamination.  Armed with that knowledge you see that ex parte reexamination would be an effective tool in 76% of cases and inter partes reexamination would be an effective tool in 92% of cases.  But the mega-giants in their infinite wisdom continue to pay truck loads of shareholder money to litigate rather than paying modest amounts to pursue reexamination.  So either these companies are seemingly breaching their fiduciary duty, or there is something else in play.  Hence my boogeyman theory.

Yes, the mega-giants bemoan non-practicing entities, a name they coined to capture far more into their web than patent trolls, such as federal laboratories, independent inventors, R&D companies, Universities and the like, all of whom license rather than produce.  But as they bemoan allegedly frivolous lawsuits they lose those lawsuits at an alarming rate.  If they lose then how exactly could the case be frivolous?

Here Garmin did prevail, and Garmin seems to be begging others in the industry to stand up to those that are frivolous and not settle.  It is quite a bit more complicated than that, unfortunately.  Those who have the ability to put an end to the frivolous lawsuits have been making hay with them on Capitol Hill for years, and others simply cannot engage in an undertaking as large as a patent litigation in order to do the right thing, even though long term that might be cheaper.

So the next time you hear that a patent troll, such as Acacia Research Corporation (Nasdaq:ACTG), settles a case you will likely have a lot more to consider than just falling for the easy headline.  First, what exactly is wrong with a patent owner bringing a lawsuit when there is infringement?  I suggest nothing, even if the entity is non-practicing or characterized as a patent troll.  So perhaps it would be wise to think of patent trolls as those who bring frivolous lawsuits or make frivolous demands, but losing a case doesn’t make the lawsuit frivolous in and of itself.  And who can deny that having a boogeyman has changed the debate on patent reform in extraordinary ways, with reform efforts largely favoring those handful of mega-giants with strong lobbyists and the inability to innovate anything useful in their own right.

By the way, Acacia just did enter into another license agreement, announcing that earlier today.  One of its subsidiaries, Online News Link LLC, entered into a license agreement with Morningstar, Inc.  According to the press release, the license agreement “covers patents relating to the delivery of news content via electronic mail with links to additional content,” and resolves litigation that had been pending in the United States District Court for the Eastern District of Texas.