The Typical Kinds of Software Patent Plaintiffs

Yesterday I published one of Sawyer’s posts titled Why the Decks are Stacked Against Software Startups in Patent LitigationIn it, I realized that Sawyer hadn’t defined the different types of plaintiffs in a patent case.  Below are good definitions (from Sawyer) of each type and clear explanations about what you are up against in each one.

If you’re sued in a software patent case, the first thing you should do is figure out what kind of plaintiff you’re up against, because that will have a major impact on your negotiation posture, and you will almost surely want to settle out sooner rather than later.

One important prefatory note has to do with contingent fee arrangements.  Most software patent plaintiffs hire their lawyers on contingent fee.  Depending on the state, the contingency can be anywhere from 30-40% of the final dollar amount exchanged between the parties, and it’s usually taken off the top.  This arrangement gives the lawyers powerful incentives to (1) push the case toward its maximal outcome and (2) not do any work on the case if they don’t have to.  So, if you think you have a contingent fee suit on your hands, know that you’re not just negotiating with the other side, but also with the lawyers who, both in front and behind the scenes, may be trying to undermine a resolution that they don’t feel is significant enough financially.

Now, here’s my non-exhaustive classification of types of software patent plaintiffs:

The active competitor:  These are the IBMs and Apples of the world, the active, money-making companies that get patents and sue their competitors for market advantage.  Competitor cases are usually not on contingent fee because the plaintiff doesn’t want money, it wants a more intangible advantage in the marketplace.  Between big players, these cases are often settled in cross-license arrangements, but one can imagine cases like Apple v. HTC being taken straight to trial because the plaintiff wants nothing more than to wipe out or diminish the defendant.

The defunct competitor or pseudo-competitor:  Many startups in the dot-com era filed for and got patents on things that we now would consider silly or obvious.  As those companies went under, or go under now, the entity that ends up with the companies’ assets seeks to monetize whatever is left, which usually ends up being the patents.  These companies morph from going concerns creating stuff to pure licensing entities that proceed to sue every player in a particular market sector.  These case are often on contingency because the plaintiffs can’t pay hourly.  Settlement strategies vary widely in these kinds of cases, but usually the plaintiff will be incentivized to push every suit to its rational limit unless someone comes along to vigorously defend against the patents.  These, in my experience, are the cases startups get caught up in the most, because the plaintiff doesn’t want to sue big players who can defend themselves (the patents are usually pretty bad), and so decides to extract as much value out of small companies in a particular sector as it can.

The “small fry” troll:  Here’s the strategy – I have a patent, and I want to collect money to fund some serious suits against big players.  What I do is find dozens of small companies (and by small I mean even made up of two people) and I sue them all in one suit, or several suits.  I have my lawyer play “nice guy” and offer to settle each plaintiff out for anywhere from $30k-100k, depending on company size.  At the end of the day, I’ve collected several million dollars and I can roll that money into suits against the big companies.  The reason the defendants settle is that they can’t afford to litigate the case out for a few months, let alone to trial, so they’re stuck and have to pay something.  I won’t call it extortion, but I guess I just did.  These cases are also sometimes on contingency, but the plaintiff usually hires very inexpensive counsel, with no intention of litigating the case, and those lawyers are fine with the relatively small payouts they get from small settlements.

The fund troll:  Many patent suits these days are backed, if you can figure out who the backers are, by specialized funds.  These are “venture funds” that collect money from LPs like traditional investment banks and use that money to identify and buy promising patents and set up/manage litigation against significant players to “make” the fund.  These cases are sometimes on contingency, and usually on partial contingency with capped fees (half of fees paid, with a 15-17% contingency).  The guys running these suits from the funds are usually very sophisticated, and have very specific ways of evaluating cases and deciding settlement amounts.  They usually won’t sue anyone too small to defend themselves, because it doesn’t make financial sense.  They also don’t let their lawyers influence settlement discussions.  In my experience, they are the most reasonable people to deal with in settlement, but at the end of the day you’re still paying the toll.

The “big fish” troll:  Sometimes there are software patents out there that have no good invalidity defenses, and where infringement by major players is very likely.  These are the holy grail for plaintiffs:  big, valuable, winnable cases.  The number of firms who handle these types of cases is very small, and one in particular has been racking up huge wins down in Texas for a few years now, especially the past year or two.  The plaintiff could be a specialized fund, or just an individual inventor; regardless, the plaintiff and the lawyers are perfectly aligned in wanting to litigate the case through trial.  If you see one of these firms, it’s a signal that they did their homework and think they have a very good shot at winning several hundred million dollars against some major player in the case.  The chances of settling these types of cases for anything less than eight figures is basically nil.  If you’re ever on the other side of a case like this, be afraid.

There are other “types” of software patent plaintiffs, but I think they draw characteristics from the types above.  The key takeaways, I think, are (1) that as a defendant, you’re negotiating both with the plaintiff and with the lawyers and (2) the suits aren’t usually filed by “real” businesses, so it’s generally hard to reach fair business-driven settlements.  Favorable settlements tend to happen only when a defendant is prepared to litigate a case to the end, and in discovery produces some very solid prior art and information on good non-infringement defenses.  This ends up being a function of the ability of the defendant to pay its own legal fees, so at the end of the day, settlements are based much more on the ability of the defendant to pay than the merits of the case.

  • David L

    I've followed the software IP discussion closely and been torn in both directions, but the last couple of posts from Sawyer have really won me over. The sheer disconnect between theory and reality is stark, and disheartening.

    So what's the fix? No software patents at all? Or statutorily setting a higher bar for validity?

    • I think the ultimate solution is to accept that software patents are invalid constructs.  This will likely take the supreme court or congress.

  • Dean

    "So at the end of the day, settlements are based much more on the ability of the defendant to pay than the merits of the case."

    I think this gets at the heart of why entrepreneurs dislike patents. Patent litigation under the current regime simply offends our sense of social justice.

    Most entrepreneurs are not in it solely for the money; they also feel that what they do will benefit society by meeting a need or solving a problem. They put their time, money and effort into building their business, often at significant personal financial risk, not into protecting themselves from lawsuits. In doing so, they become an easy mark for those that want to exploit the patent system for financial gain.

  • Bill Mosby

    Your "fund troll" category reminds me of a co-worker I had who invested in a patent suit sometime in the early 90s. It was for a patent on one of the memory-extension schemes that people came up with for the PC in those days. I can't remember which company it was; perhaps there were more than one that would fit this description.

    • I remember Quarterdeck (for memory) and Stac (for disk double).  I know that Stac ended up winning a big award from Microsoft. 

  • Brad, how about some data?

    1. Of the VC funds you are been a partner of, how many firms have you financed?

    2. Of that number, how many have been threatened with litigation because of a software patent?

    3. How much is this changing over time? Presumably claims for software patent infringement are increasing over time.

    James Mitchell

  • Brad Schildt

    What about the legitimate small business plaintiff who spent tens (or hundreds) of thousands of dollars to create a patent portfolio that protects its unique ideas from larger, better funded competitors as well as smaller, copy-cat competitors? I understand your distaste for the plaintiffs described above, but there are also situations where the defendant is actually the bad guy.

  • Since I don’t believe software patents are valid constructs, I don’t believe this situation actually occurs.  However, until software patents are deemed invalid by the Supreme Court, the PTO, or Martians, this will be something that plays into the overall debate.

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  • Brad:
    Good job in putting focus on a topic where any discussion has the entrepreneur's voice on mute, out of sheer fear of not following the formula advised to them. As long as the accountants and the valuation experts put a line item on the balance sheet with magical dollarization of IP, this cottage industry growth of troll funds will grow, further perpetuating this disparate divide between reality and theory will continue.

    There is nothing wrong with dollarizing IP per se — however it is emphasis of the software patent from all advisers and investors to start-up CEO's that out of whack. One of the ways to counter this — is to bring visibility to this situation from a pulpit like a VC Fund and I thank you for that.
    ~Rini Das

    • Griffin

      Hi Rini,

      If you know someone looking to dollarize IP, let me know, I've been looking far and wide 😉 I guess I am just thinking "what is a million-dollar idea? and should this idea be valued on top of the rest of the business?" I see lots of number floating around like $1M+ added value per patent, which theoretically would mean that startups get more money and give up less equity. I am just not sure I have seen it so much in practice. (Then again, maybe I'm just new)

    • Thanks for the support – I completely agree with your assertion.

  • For me, the sad take-away from all this is that, like all legal "protections," the little guy has really no way to protect themselves. Suing is not an option for a lot of people, so that is why litigation in general is so skewed against individuals and tiny companies. =/ Just look at the credit industry. Companies get away with almost anything, because Joe Schmoe likely has no money to sue with — which is really the best way to slap a misbehaving collection company.

  • adam

    who is the firm in texas you reference?

  • Since Sawyer (who wishes to remain anonymous) wrote this and didn’t include the specific name of the firm, I expect he wants to keep it anonymous.

  • Software patents are a necessary time limited protection and defense to support and spur on independent innovation. Software is a capital and resource intensive endeavor. Form, method and functionality are easily replicated by larger well funded companies with the resources to go to market. When due diligence is applied a patent forces companies and start up’s to design around the patented art, spurring on innovation or wait till the patent expires to not willfully infringe, or simply license the patent and bring it to market. There is no monopoly, there is no market control. A Patent is simply a No Trespassing sign, it defines ownership. No one steals a bad idea, a bad technology, or a worthless software product. A patent is the only thing that protects and provides incentive for individual innovation and the possibility of achieving the American Dream. A patent and its parameters of ownership are the only legal recourse for the inventor or programmer to recoup a portion of the theft of innovation and the profit derived. No one gets rich off of patent litigation. Investors, inventors and programmers make the big money by bringing the software to market. A patent is only a problem if you have ignored due diligence or are profiting from patent infringement.

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