Part 1: Troll Wars: Costing American Businesses $29B and Counting

Note: This post is cross-posted from Mike Dillon’s personal blog.

Early in my career, when I was a law firm associate, one of my clients, a small networking company received a curious letter. It was from an unknown company accusing my client of patent infringement and “inviting” them to pay a very large license fee.

What made the letter so strange was that the referenced patent appeared to have nothing to do with the products made by my client. Stranger still, after we did some investigation, we discovered that the other company was little more than a thinly capitalized shell that appeared to have a single employee – an attorney who had purchased the patent from someone else.

Because it was rather novel, I discussed the letter with other attorneys in the firm and we concluded that it must be a mistake, so I decided to call the other company to clarify things. It didn’t work out as I expected. Instead, our discussion became increasingly heated (at least on my end) until I said: “There’s no way my client will pay a dime – they aren’t infringing.” To which I heard a calm voice reply: “Yes, they will because the license fee I’m offering is less than what it will cost them to fight a patent lawsuit. It’s basic economics.”

It turns out, I was wrong.

My client was angry as hell and wanted to respond with a countersuit asserting his company’s patents; that is, until I explained that the other company didn’t have products. They didn’t actually make anything that could be infringing. A few weeks later he decided to pay the license fee (in the six digit range) to avoid the cost of fighting a patent infringement case in court.

That was my first introduction to a patent troll. At the time, my fellow attorneys at the firm and I thought that this type of claim was an aberration in the U.S. legal system, something that our clients would rarely have to deal with in the future.

It turns out, we were wrong.

Since that telephone call some twenty-five years ago, patent trolls have overrun the U.S. patent system spawning an entire industry of attorneys, technical and damages experts, and causing a significant drain on judicial resources. (Here’s a patent litigation fun fact: In 2012 alone, more than 60% of all patent cases were filed by patent trolls. That’s over 2,900 cases in that year alone that required the attention of a frequently overworked judiciary.)

More importantly, it’s been an enormous diversion of money and resources from innovation and job creation to funding of lobbyists and lawyers. According to one recent study, the cost to American businesses in 2011 was a staggering $29b. In an era of increasing global competition, this doesn’t bode well for America.

Let me give you a couple of real life examples this from earlier in my career.

– A small start-up I supported was focused on quickly increasing revenue growth and market share. Like many companies at this stage, it was dependent on private investors and operating on a very lean budget. An important factor in the company’s future success was the ability to develop and release a new set of features in its products. But, there was a competing demand for funding – for the company’s defense of a lawsuit filed against it by a patent troll. The result? The company was forced to delay some of its product development efforts in order to finance the litigation, and in-turn risked losing its competitive-edge.

– I was once asked to meet with the VP of the software development organization (at another company) to discuss a number of patent troll cases that had been filed against us. I thought the purpose of the meeting was to cover legal strategy, but what we discussed was far different. When I arrived, the VP had on his desk invoices from the law firms that were defending us in the lawsuits. I still remember him handing me a list of engineering and development roles and saying: “Mike, in order to pay these invoices and still achieve my financial targets I’m going to need to eliminate these positions. Before I do this, I wanted to check with you to see if you have any other ideas.” As it turns out, I did, but the meeting brought home the true cost of patent trolls to American business.

These examples are not unique. I’m sure if you ask the general counsel of most companies they would have similar stories.

The question is what do we do about it?