Large Technology Companies Generate Nearly As Many Lawsuits As The Entities That Have No Products

judiciary.house.gov, Aug 11, 2005

A primary justification advanced for the injunction proposal is that successful and innovative companies need this legislation to beat back a rising tide of nuisance lawsuits originating from greedy trial lawyers and unscrupulous patent holders. I can sympathize with this because when I was Microsoft, I frequently had to deal with patent lawsuits in my role as Chief Technology Officer. Microsoft has the dubious distinction of having been named as a defendant in patent lawsuits 52 times in the last five years, making it the second most “popular” defendant in the country.

So, while I can understand the frustration that my colleagues in large technology companies have, the reality is that the impact of these lawsuits is exaggerated. Some horror stories exist, but they are rare. The magnitude of the supposed problem is not borne out by the statistics.

I was curious, so I did a study counting the total number of lawsuits filed against technology companies by entities that do not produce products. The total of all these lawsuits over the last five years was just over 2% of all patent lawsuits. Furthermore, fully half of those lawsuits are from one very litigious company. Those horror stories aren’t about an epidemic, or a situation that is out of control – it is actually a very minor phenomenon. I also counted the number of patent lawsuits in which a large technology company was the plaintiff – the result is 1.6%. Large technology companies generate nearly as many lawsuits as the entities that have no products.

These numbers put some perspective on the problem. On one hand, we have the potential to harm tens of thousands of small inventors. On the other hand we have the supposed benefit – to reduce the total number of lawsuits by perhaps one percent. It seems clear that the cure is far worse than the disease.

This is particularly true because the proposal in the Committee Print won’t decrease litigation at all. In fact, it will dramatically increase the number of patent lawsuits, as well as their complexity and cost. Ironically, this proposal, which is often described as being yet another much needed and important reform against the excesses of trial lawyers, is in fact the trial lawyers’ full employment act.

First there is the volume of the lawsuits. Today, about 97% of the patent lawsuits that are filed settle prior to a trial. The entire viability of the court system depends on this high settlement rate. Even a small change would overwhelm the courts with vastly more trials. Yet under the proposal, large companies will have no reason to settle. Their principal motive in settling a patent suit before trial is to avoid the possibility of an injunction should the company be found to be infringing, and to avoid enhanced damages should their unauthorized use of property be found to be willful. Without these threats, companies being sued will adopt the best strategy for their shareholders: refuse to settle and use the advantage of their deep pockets to drag lawsuits out to the bitter end, secure in the knowledge that no injunction can get in their way.

The complexity of the litigation also increases substantially, because now several new issues have been added to the already complex decision making process of the courts. In addition to determining infringement, the courts must also try an entirely different set of facts. The Committee Print directs that the court “shall consider and weigh evidence that establishes or negates any equitable factor relevant to a determination of the existence of irreparable harm, including the extent to which the patentee makes use of the invention”.

In simple terms, this is a second lawsuit tacked onto the original lawsuit, complicating the already difficult patent litigation with an entirely new set of issues. Provisions like “consider and weigh evidence” mean a whole new area for motions, discovery and argument in court. As it stands, patent lawsuits can take five to seven years, and in some cases even longer. This new process will add substantially to this timetable.

This isn’t the only new complexity thrown at the courts. By reducing or eliminating the right to an injunction, the courts are for the first time put in the position of determining the terms and conditions under which technology is licensed on a broad scale. Instead of the marketplace, courts will now be the primary determinant of licensing terms.

This also greatly adds to the complexity of the litigation. Under current patent law, the court may determine damages for past usage, but the court explicitly does not interfere in the market for future use of the patents. Instead, the court determines whether the property of the patent holder is being used – if it is, then the court issues an injunction and the two parties must work out for themselves what to do. In many cases there is no future use, because the infringer will use the many years that it took for the case to wind its way through the courts to redesign their product. In other cases the infringer and patent holder decide to settle based on their unfettered negotiations, which take into account the full panoply of market factors and competitive alternatives available in the modern economy.

Instead, under the proposal in the Committee Print, the court would have to set future licensing terms. Economists have a name for this scheme – it is called compulsory licensing. Numerous studies have shown that it is a poor way to run a patent system. It is also out of keeping with the key principles of the American economy and Constitution of the United States.

The decision-making process inherent in this huge new responsibility will weigh heavily on the courts. Current courts already expend a lot of time and energy determining past damages. Adding the future, which might stretch for a decade or more depending on the life of the patents, greatly raises the stakes. Higher stakes generally means more arguing on yet another issue – what should the future damages be? One thing seems certain: this proposal would be a boon for expert witnesses and the trial lawyers who deploy them.