Trolls noticed all this–as well as the fact that some jurisdictions were very friendly to patent holders. Jurisdictions whose jurors favor strong private-property rights were more inclined to find infringement; in the Eastern District of Texas, for instance, a company accused of infringement has only a one-in-six chance of winning at trial. Those odds, plus the threat of an injunction, plus the prospect of spending millions to defend even a small case, made the pressure to settle overwhelming.
To make matters worse, those who had business in court faced a systemic problem that had no malice behind it. Legal fees increased substantially, in part because of a 1996 Supreme Court decision requiring that trial judges hold focused hearings to determine the limits of litigated patent claims, a process called “claim construction.” According to the Court, claim construction is a matter of law–not a factual question that a jury could decide. This means the Federal Circuit can review a trial judge’s limit-setting decisions afresh; in fact, patent suits are reversed at a rate of 35 percent and rising. Trial judges trying to avoid reversals reacted by delaying limit-setting rulings. So getting sued for patent infringement meant languishing for 18 months or more before the chance for a summary-judgment hearing arose.
A Free-for-All Ends
By the late 1990s, patent trolls were finding it easy to attack companies at little risk to themselves. Unlike a company that makes products, a troll faces only the risk of a counterclaim to invalidate the patent it’s defending; it’s merely a shell that files lawsuits, collects money, and distributes that money to patent owners. Trolls also enjoy a significant cost asymmetry. They have few documents to produce during the document-discovery phase of litigation, and much of their legal paperwork can be reused against new defendants in later cases. In many instances, trolls have sued upon patents that are very likely invalid. They then demand settlements, knowing that defending a lawsuit can be more expensive than settling. Many trolls took care to settle before courts could construe the boundaries of the patents in question and issue summary judgments dismissing their cases.
Even some publicly traded companies have covertly been trolling for license fees. Typically, they spin out their questionable patents to shell subsidiaries, which then transfer them to trolls. The public company and the troll have a secret agreement to split licensing fees. The troll is then directed to seek fees from the established company’s competitors. For the public company, it’s all risk-free: no counterclaim can be filed against it, and the legal work is done on a contingency basis.
Trolls are choking off economic growth. Small companies cannot afford millions in legal fees, so they pay tribute instead. As the English learned a thousand years ago, however, you can pay danegeld, but the Vikings still come back. Large companies can fight trolls, but they risk huge judgments.
Filings of patent suits increased from 2,112 in 1997 to 2,830 in 2006. That does not take into account any increase in the number of defendants per filing. Between 2001 and 2005, the average cost of litigating a large case through trial jumped from $3 million to $4.5 million. How much of that jump is due to the increase in filings–and thus in demand for lawyers–is unknown. At several million dollars a case, plus the costs of settlement and of the many expensive patent opinions sought, the direct costs mount. Indirect costs do, too: companies feel obliged to practice “defensive patenting” to protect against infringement claims, and litigation can disrupt a company’s operations.