The need for patent reform is not a new issue, but a recent ruling provides a perfect example of all that is wrong with our current system.
Last week, the Federal Circuit Court ruled that the egregious case against Newegg—ongoing since 2010 when the patent troll AdjustaCam LLC sued them and a number of other defendants—which should never have been brought on appeal in the East District of Texas. Court Newegg was awarded $15,000 for legal fees from AdjustaCam for filing this frivolous case, a mere six percent of the $230,000 in legal fees that NewEgg had to pay to defend their case in the Eastern District of Texas Courtland on appeal.
The technology at issue? Patent number 5,855,343, “a technical description for a moveable camera clip that affixes small cameras to laptop screens.” Despite other companies deciding to settle out of court to save themselves the exorbitant cost of legal fees, NewEgg refused to give in to patent trolls who file meritless lawsuits indiscriminately. In sum, a company who has done nothing wrong gets sued in a junk lawsuit, WINS the case, and still takes a loss of $215,000.
“Loser pays” is one of the most critical components of any good reform. This provision will stop patent trolls from filing frivolous lawsuits just to fish for out-of-court settlements. Most small companies cannot afford the $200,000 plus in legal fees to defend themselves in court, even when they know they’re not in the wrong. In fact, the median legal cost for most major patent cases is $5 million–a cost too large even for some major corporations. And that attitude is patent trolls bread and butter; they bank on the fact that the vast majority of their victims will give in to their demand payments. It’s extortion at its best–or worst.
Legislation being considered in Congress would address this issue, and would shift the costs onto the losing plaintiffs if a judge finds that they are abusing the system and filing overly-frivolous lawsuits indiscriminately. Companies like NewEgg would no longer have to pay $215,000 for a “win.”
The second critical component to patent reform is venue reform. Currently, trolls and their overzealous trial lawyers shop around for the easiest, most patent-friendly courts, since there are essentially no limits on where these cases can be filed. They’ve found a safe haven in the Eastern District of Texas Court, where NewEgg’s case was filed. This single federal court district—located in a rural, remote part of the county without a vibrant technology sector—accounts for 44 percent of patent lawsuits filed thus far this year. The U.S. Chamber of Commerce ranked the county as one with the “least fair and reasonable litigation environment” and has been known to offer quick trials, award large damages and is particularly favorable to trolls. In fact, this abuse is driving an entire industry there, with an influx of hotels and legal service businesses. The city of Marshall, Texas, attributes 90 percent of their business to that drummed up by patent lawsuits.
The Eastern District of Texas is a long way from the technology mecca of Silicon Valley, but the current laws allow these lawsuits to be filed anywhere the defendant’s products or services are “available.” Clearly, that must be fixed. Venue reform would require lawsuits be brought only in the district where the “invention” was made, or the where product at issue was developed or manufactured. This provision must be a part of reform and will cut to the heart of patent litigation abuse.
Judges and lawyers from the Eastern District of Texas, however, have caught on to the push for these improvements, and are getting ready to mount a major PR and lobbying offensive to defeat venue reform efforts. Congress must stand strong. There’s bipartisan consensus that venue reform and fee shifting provisions are badly needed to stop this abuse. No amount of lobbying dollars in the world can change the facts. We must stop rewarding this frivolity and abuse.
Bartlett Cleland is the Managing Principal at Madery Bridge Associates, LLC. Bartlett is also the Policy Counsel for the Institute for Policy Innovation.