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Patent 'trolls' upended in East Texas

By Legal News Line | Mar 22, 2009


Editor's note: This story is the third in a series examining the future of patent infringement litigation in the 'rocket docket' of the Marshall Division of the Eastern District of Texas.

They are called by a name nobody wants to use for its derogatory meaning, yet everyone does use it because it so clearly defines the objective.

Whatever they're called, patent litigation's so-called "trolls," businesses and people who buy patents expressly for the purpose of suing someone for infringement, could find it tougher to do business in East Texas in light of recent rulings affecting the court.

"In the past, if you had a weak patent you would go to East Texas because you had a statistically better chance of getting to trial and surviving a validity attack before a jury," Los Angeles intellectual property attorney Steve Sereboff said.

The recent writ of mandamus issued in the Ts Tech case by the U.S. Court of Appeals for the Federal Circuit against a judge in the U.S. Eastern District of Texas has already begun to alter the docket, and vicariously make the court less appealing for trolls wanting settlements for their patents, dubious or otherwise.

Because the writ of mandamus is a powerful court correction over forum challenges, the number of defendants seeking forum transfer out of East Texas has grown, while the number of new cases being filed there has decreased in 2009. The East Texas court, called a "rocket docket" by patent professionals, is known as a premiere court for plaintiffs in patent infringement and intellectual property lawsuits.

Just a month after the writ was issued, a lawsuit against Microsoft showed the immediate impact of the decision in East Texas. In Odom vs. Microsoft, the writ of mandamus was cited in the court's decision to grant a motion to transfer the case to Oregon based on convenience.

With more forum challenges, and greater costs to try a case, plaintiffs may soon find it more difficult to get settlements. Caught up in the shuffle are the trolls, though to what extent remains to be seen.

"Some have speculated that the non-practicing entities, trolls as their commonly called, will set up subsidiaries or shell companies in the East Texas district to win forum challenges," Atlanta-based patent attorney Alan McDonald said.

When it comes to trolls, anything is possible, though few know for sure what is likely.

Why troll?

Trolls, in patent litigation nomenclature, refer to individuals or companies whose primary objective is to sue over patent infringement.

"The thing that people don't realize is that corporations have created the term 'trolls' to put a negative face on this type of litigation," inventor Michael Thomas said. "The reality is that corporations don't want anybody cutting in on their ability to steal intellectual properties from inventors or obtaining the inventions cheaply."

Washington, D.C., patent attorney Peter Strand said "non-practicing entities" is a more neutral and acceptable term for describing people or companies that exist primarily to hold patents and license them.

"Non-practicing entities range over the whole gamut," Strand said. "Venture capitalists, individual human beings, some lawyers that have patents to well-funded companies to anything in between.

"They can be well funded and have staying power," Strand said.

Sereboff said the topic of trolls is colored through the lens from whatever side of the bench one sits.

"Most companies view a troll as anyone who sues them and is not the actual competition," he said. "It's all in the eye of the beholder."

Which is exactly the point Thomas wants to make. Whereas trolls are denigrated for not inventing the patents they end up using as a basis for a lawsuit, big companies, he claims, often first stole the intellectual property of other struggling inventors like himself. The ultimate effect is that "human advancement will stagnate," bereft of the financial rewards from inventing a new patent, he said.

"I'm being shut out of the process by the inability to afford the court costs," he said.

But McDonald points out the costs of complex patent cases cut both ways. Many defendants, blanching at potentially millions in legal fees to defend a case and millions more in losses should they lose in court, seek to settle even the most speculative of cases rather than risk the losses.

"Patent litigation is so ungodly expensive." McDonald said. "Trolls can pull this off in the patent field probably easier than any other field."

Sereboff said patent litigation is a natural by-product of the field itself. Building a portfolio of patents can add to a company's, or an individual's, bottom line.

"A patent portfolio is a tangible corporate asset, like real estate or equipment, that can be sold," Sereboff said. "Investors are very interested in a strong patent portfolio. If a high-tech start-up goes out of business it probably has little more than a bunch of worthless servers and code nobody understands, unless it has a strong patent portfolio."

The patents that comprise these portfolios once started with genuine research and development, Sereboff pointed out, no matter where they eventually end up.

"These patents come from companies that do real research and development but could not make their business work financially, for whatever reason," he said. "The patents are then sold to help pay the debt or investors' losses - sometimes to companies that do not do any research on their own. Their business is buying patents that be eventually be the basis of a lawsuit."

Such is the complex nature of the problem of trolls, and the court's challenge in actually honoring who is the rightful owner of a patent -- particularly in cutting-edge fields like high tech and pharmaceuticals -- and thereby entitled to financial compensation.

A lot at stake

With such complexities and costs, it's easy to understand why tensions run high among both the companies suing over patent infringement and the companies being sued.

"There's a lot of money at stake," Strand said.

Perhaps, but Thomas said the powerful interests of the patent office, major U.S. corporations and wealthy attorneys have blocked the average inventor.

"I've been skunked totally, although I've produced all of the intellectual materials since 1953 and received no financial gain, as in 'not a nickel,'" Thomas said. He has a Web site that solicits patents, though he said to date it has not yet reaped the potential financial rewards.

Others have been seen the payoffs, or at least seen that the potential is worth the time and expense to sue.

Strand offered an example of an ongoing case against software giant Microsoft.

"You have a single individual with a patent on one of many complex technological processes involved in making Windows," he said. "The lawsuit asks for $1.65 on each Windows package sold, which when you've sold about 300 million items, it adds up in a hurry."

The costs of many lawsuits are exponentially lucrative as well, Strand said.

"One patent might be infringed by 20, 30 or even 50 entities, so suddenly we are talking real money," he said.

Real money that companies, Sereboff said, are loathe paying out.

"Just like a new tax code: nobody wants to pay someone for what they were already doing," he said.

"When a company defies the normal rules of business growth and instead has hockey-stick growth, that's when we see the patent infringement hubris."

The hubris, Sereboff explained, is evident when a company can pay "a relatively small amount of money to resolve the patent problem, but ends up paying more to litigate the case and in damages or an eventual settlement. Because they defied the normal business growth rules, they think that they can defy the patent law, too."

The experience of paying out for patent lawsuits has given rise to still other ways to profit from patent litigation. In 2008, a San Francisco start-up company launched, offering membership subscriptions to their company, which would then buy potentially threatening patents against its members.

RPX Corp. hopes to offer litigation protection, through what founder John Amster calls the first "third party, independently funded defensive patent aggregator."

His immediate success, which includes subscriptions from companies like IBM and Cisco Systems, reveals the extent some companies are willing to go to protect against patent litigation. According to Amster in a Law.com article, companies will pay between $35,000 to $5 million annually for a membership to RPX.

RPX then aggressively purchases patents of interest to their companies, thereby "getting them off the streets," as one lawyer said. And out of the courts. If RPX owns them, others who might sue, don't.

Patents that could lead to lawsuits for companies that don't pay the membership fee, will be re-sold, Amster said, which would probably result in a lawsuit. The bottom line for RPX is the hope that companies will find it cheaper to pay him to own the patent, than to pay attorneys to defend against it.

"I don't think anybody has figured out a foolproof strategy to deal with trolls, and I think will help," Fabio Marino, an intellectual property attorney for Orrick, Herrington and Sutcliffe said. "But the question is, will it help enough?"

Thomas said the so-called problem is not dealing with trolls, but encouraging and rewarding inventors, something the government, he said, remains unwilling to do. He cited President Barack Obama's recent stimulus efforts as just another example of how the accomplishments of inventors are lost to the interests of big business.

"The so called economic stimulus plan recently approved by the house and senate demonstrates the slap in the face that our inventors are receiving by the country providing no money for economic stimulus at all to independent inventors," Thomas said. "This demonstrates the lack of concern or even recognition that our entire economy is driven by new invention conceptions and without funding these new conceptions, expansion of the private sector cannot occur."

What now for East Texas

Whatever the impact of these latest changes in patent litigation, all eyes are again on East Texas. Thomas said the famed rocket docket - as East Texas was known for its fast-paced docket that sped plaintiffs toward quicker settlements - had provided hope to those seeking financial compensation for their patents. Contingency attorney relationships, critical for someone like Thomas who can't afford to bear the brunt of the full costs of litigation, were more feasible in a court that moved quickly, and generally favored plaintiffs.

"The East Texas venue allows a potentially inventor justice friendly atmosphere as opposed to hostile local venues that have witness pools and judges that may be prejudice against having monetary awards against companies that have an impact on their local economy," Thomas said.

Thomas believed the East Texas court helped balance the "mismatch between top corporate lawyers and under-employed, under-financed investors," he said.

All of which makes McDonald a bit skeptical that the recent rulings will completely dry up the efforts of non-practicing entities to have their cases heard in Texas. The impact he said, is just beginning. If non-practicing entities, aka trolls, set up shell companies in East Texas to establish forum in the district, the courts could follow up with further scrutiny.

"It could lead to a true investigation of the company structures of these companies," he said.

In other words, while business is still good for trolls, whether it's still good for trolls in East Texas remains to be seen.

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