The following guest post was written by Steph Kennedy of IP Troll Tracker.
Steph follows the patent industry closely, blogging about the issues surrounding patent litigation and the negative effect it is having on businesses far and wide. In early 2010, she re-started her own software development company (898 Data, LLC) and works from home developing database and web applications. Prior to that, she worked at a major law firm for ten years, and then took consulting assignments in the financial and patent litigation industries.
My college years were spent on sixth street studying, working as a softball umpire, and listening to Vanilla Ice solve problems, yo! That and a Subway on every corner is what makes me love America: when there’s a problem, American ingenuity steps up to solve it.
The patent system has flaws that the trolls have found and are exploiting to the tune of $29 billion in a single year. The number itself, as I’ve argued, is less important than the fact that the problem clearly exists and these guys are making everyone’s life miserable.
But, true to American form, while some companies have been built to take advantage of the system, other companies have sprung up to shut them down. A market-driven response to a business problem is always going to be better than anything Washington, D.C. can come up with. As Newton put it in his Third Law, “For every action, there is an equal and opposite reaction.” The corollary here being: “For every (patent) law Congress passes, there is someone who will find a way around it.” What the trolls/NPEs/PAEs, take your pick of term, are doing is not, in most cases and strictly speaking, illegal. What it is is immoral, bad for business, and bad for innovation.
So how do you stop it? Shaming is one way, but something tells me that most guys who live under bridges and don’t shower often and jump out to scare people are not going to be affected by being called out on their behavior. Besides which, incredulously, they don’t seem to think they’re doing anything wrong. The choice then is to come up with another way to solve the problem which We The People have done via the industry collectively known as Patent Risk Management.
Let’s take a look at the different forms of Patent Risk Management then, shall we?
Patent Defense Aggregation: Taking the Marbles Away
This particular business model is best represented by RPX Corporation and Allied Security Trust (AST). Both companies buy up patents at play, which is to say patents that are likely to be used by trolls as a weapon. By taking these sticks out of the hands of trolls, they offer their subscribers safe passage over a subset of all available bridges. All companies who’ve subscribed take a license to the entire portfolio, except of course where legal mumbo jumbo indicates that they can’t. The price for admission into the fold differs, but it is typically based on the size of the company wishing to join. The patents are purchased in one of three ways:
- Open Market Acquisitions: Folks at the company go out and actively look at patents that have the potential to be asserted against their current book of subscribers, or against companies they wish to persuade to join them. At RPX, those acquisitions are made at the sole discretion of company management. At AST, the member companies themselves make the decision on which portfolios to purchase.
- Brokers: Sometimes, the deal comes to the aggregator via a patent broker. Someone’s got a portfolio to sell and contacts the RPX/ASTs of the patent world and is all “Can I show you my etchings?” Then the aggregator has the option to buy or not buy. This is really not much different than #1, except that the deal is brought to the company rather than the company going out to the market and looking for it.
- Litigation: Because lawsuits are publicly filed, it’s fairly straightforward to find out which patents are currently being litigated. By sending some reps down to counsel for the plaintiff, Patent Defense Aggregators can put an offer on the table and try to buy their way into a license for their constituents. Something like “I see you’re suing Bob’s Ratchets over here over the ‘454 patent. We’d like to offer you $2 million for a license for all of our companies, that way you don’t have to sue them too. Cool, huh?” And then blah blah blah they negotiate and suddenly the good guys have another patent in their stable and they all meet up at the local saloon and clink glasses and say “Cheers!” and call it a day.
The good thing about this business model is that it provides a sense of relief for the subscribers in that, for at least those patents in the aggregator’s portfolio, you can’t be sued. One of the problems though is that no one company can buy all the patents that are at play, or could potentially be at play. There’s no definitive way to know exactly which patents will be asserted next, though there’s a new business model explained in Part 2 of this series that will give that a go. But we know that if you go in at the litigation stage on a patent that is already problematic, you’ll pay more than you should. Additionally, the 80/20 rule applies. Once you get the top 80% of patent troll targets, the remaining 20% aren’t worth your time, and you’re not worth their money. So you will have nowhere to go once they top players are in the fold, and they largely are.
It remains to be seen if this model will hold out over time. There’s always risk when your solution depends on the problem continuing. Kind of like that old Despair.com poster about consulting. If the patent trolls are significantly neutered, then this model will eventually lose its effectiveness.
The company offering patent litigation insurance is selling you their vast amounts of litigation data and expert analysis thereof. Because the insurer has studied past events and has a handle on the plaintiff’s prior litigation antics, they are able to reasonably predict the costs associated with each stage of litigation and offer a premium to their clients to cover it. Similar to the way medical insurance companies negotiate rates with doctor’s offices for immunizations and well-child visits, patent litigation insurance companies have a set of vetted legal counsel that they have agreed-upon pricing with. They go through the same process with litigation support/eDiscovery vendors and companies that track legal spend. All of these negotiated rates and probabilities and statistics go into a salad spinner-like program that spits out a premium for the client.
I’ll admit to being personally biased against this type of defense to trolls because insurance companies make my skin crawl. Too strong a statement? OK, I strongly dislike insurance companies. My personal feelings aside, I’m not sure how this particular method of PAE abatement is going to work.
In normal insurance arenas, there are fewer variables. You know what a car part will cost to replace, you know what a house will cost to replace. You have a farmer’s almanac and you can reasonably predict what the weather will be like in any given area that you’re insuring. That makes it much easier to price and predict your payouts. In the litigation arena, you really don’t know jack. There are way too many variables to make it an effective use of anyone’s money. You have judges that make decisions that don’t follow any patterns of predictability that anyone has been able to establish. How do you set premiums to mitigate against the human thought process? How do you determine the payout amount when litigation is so hard to keep track of, cost-wise? There are no actuarial tables that show you how “normal” patent litigation is going to go.
Then there’s the risk of something like the Samsung/Apple case where the lead juror has a bone to pick and renders a judgment that is over the top stupid. There was a great article on SeekingAlpha about the Markman Hearing. (Note: link may require registration to read article in full.) This is an important stage of an infringement trial and the personality of the judge and the lawyers plays heavily in the outcome. It is very hard to insure against that phase of the trial going badly, and it’s the game-changingest stage.
Litigation insurance is not necessarily new, but it remains to be seen how well this particular defense against the Dark Arts will work.
This guest post was written by Steph Kennedy of IP Troll Tracker.
The content of this post does not reflect the opinions of Article One Partners.
To read more of Steph’s posts on patents and intellectual property, visit her blog.
Consulting Poster image from Despair.com
Other images provided by Steph Kennedy