For years, patent trolls have been the best evidence that pure evil exists. And like most evil entities, they are almost impossible to stop. Even a 2014 U.S. Supreme Court decision that was highly critical of patent trolls has done little to slow their slimy, reptilian-like existence. But a federal judge on Dec. 19 crafted a novel tactic to curb patent trolls when she slapped a half-million-dollar bill on the lawyers and said that they were personally responsible for paying it, not their client. This could truly be a game-changer.
This unusual decision could make lawyers hesitate to take patent trolls as clients. Part of the patent-troll economic model is based on lawyers taking a contingency fee, meaning that they take a percentage of whatever money is extracted from victims rather than being paid an hourly fee. This makes the lawyers more of a partner than a traditional contractor, which factored into the judge’s decision.
The ruling may make lawyers say forget about contingency fees; we want upfront hourly fees. And patent trolls, unwilling or unable to do that, may forgo pursuing the most tenuous lawsuits. As a result, the patent-troll business model starts to crumble.
Some background. The case at issue is Gust vs. Alphacap Ventures and Richard Juarez (some early rulings go into extensive background), and last month’s final ruling came from U.S. District Court Judge Denise Cote. Cote found that patent troll Alphacap had pursued a case against Gust, despite the U.S. Supreme Court ruling that made it clear it couldn’t succeed legally.
“It is highly, highly, highly unusual for counsel to be held directly responsible for these fees,” said Lori Smith, an attorney with the White and Williams law firm that represented Gust, an internet crowdfunding company. “I think it is going to have a significant chilling effect on patent troll litigation. You’re going to see law firms thinking twice before they take on clearly questionable patent litigation.”
Let’s start with a definition of a patent troll. A troll is a firm that does two distinct things. First, it purchases lots of patents that it has no intention of using. That is a prerequisite for being a patent troll, but it doesn’t make a company one. The second element is essential: They must take this patent (and the vaguer the patent, the better) and threaten lots of companies that in reality have done nothing wrong. Those companies must either pay license fees or be dragged through the court system at great expense. The troll then offers to sell a license at a deeply discounted price, counting on companies deciding that it would be much easier and cheaper to pay than fight.
Frank Bruno, a colleague of Smith’s at White and Williams, said the comparatively low license amounts are typical of patent trolls. Typically, firms use elaborate mathematical calculations to determine the license fee, as a percentage of likely future revenue and/or profit.
“Under patent law, damages are calculated based on a reasonable royalty,” Bruno said, adding that patent trolls’ small license fees “bear no relationship” to projected revenue or profits. “When you see these small numbers, you know that the patent troll, that they simply wanted a quick get-out number. That’s illustrative of extortion.”
Indeed it is. What the federal judge has done is attack the heart of the patent-troll system. Normally, patent trolls rely on large numbers. If they threaten a large number of companies, they’ll make more than enough to justify their efforts. Then, by suing a handful of other companies, they scare more innocent firms into paying or else.
Often, when a judge slaps down one patent troll in one case, the penalties are less than the total of the other monies extorted. In short, the troll comes out ahead. By placing the fines on the lawyers personally — well, to be precise, on their law firms — it threatens to change the dynamics. If lawyers stop taking these cases, patent trolls will no longer have a viable way to threaten thousands of companies.
What the judge specifically did was to tell Gust that it could retrieve the court’s ordered money from either the law firm or the patent troll. That is interesting, because the lawyers representing the patent troll, according to Bruno, had already told the firm that suing the patent troll was pointless because it had no money, making it judgment-proof. That statement helped convince the judge to go after the law firm’s funds, Bruno said.
Patent trolls directly threaten the industry of ideas. They dilute the value of legitimate patents while making honorable companies suspicious of legitimate patent complaints. This was never what patents were all about. They were designed to protect inventors who came up with truly innovative ways of doing things.
Patents need to get back to protecting inventors, not opportunists who conclude that what business needs today is more extortion. Cote’s decision won’t finish off patent trolls, but it’s a step in the right direction.