Post 19: Free Rider's problem in fighting hard against trolls

Newegg has been involved in a five-year battle against Soverian, a non-practicing agency, even though Soverain owned only three patents. The threat from these three patents, however, was aimed at the whole industry of online retailers. Newegg was fighting really hard against the patent troll, and was able to win. But the fruits of victory are distributed equally to all the companies in the industry - where the problem of free-riding occurs.

Soverain, as discussed in the previous post, is a shell company, whose main purpose was to sue "the world" even though it had business contracts and worked as an operating business entity from the first sight. However, most of its revenues it would receive from the law-suits. Newegg decided not to settle down and fight hard till the end against the Soverain. However, buying out the patent troll for 20-25 million early on would have relieved the whole industry from the threat.

Fighting against the Soverain cost Newegg more than $3.5 million, more than any other defendants. The victory didn't come to the Newegg cheaply. And the litigation costs are so high for the operating entity, so there is no way for it to win unless the NPE is asking for eight number figure. An argument against this could be that fighting hard brings two benefits to the operating entity: a good cause law-suit, and the potential decrease in the aggressive tactics from NPEs in the future.

The calculations on litigation costs in the patent law-suit provided by RPX - Rational Patent are the following:

"Let’s consider a hypothetical e-tailer with an average of four new NPE cases per year.  We will assume it is only possible to establish a “fight hard” reputation by refusing to settle all or nearly all NPE litigation, so the company will take almost every case all the way through trial. Each matter will take about three years and $3 million to conclude (per AIPLA estimates), so our hypothetical company would have 12 open cases each year and $12 million per year in legal costs.  Even if we presume a generous 75% success rate at trial and an average verdict of only 1x the litigation costs in losing cases each year, our hypothetical company carries roughly $15 million in NPE litigation expenses – $12 million litigating cases and a $3 million judgment for the case it loses.   Now compare this result if the same company took a “settle sensibly” strategy that assumes an average settlement of $1 million and $100,000 in legal costs per NPE case. With the same level of litigation as above, this strategy would cost our hypothetical company only $4.4 million a year, a 71% annual reduction. Said differently, the “fight hard” strategy would have to reduce the NPE caseload by 71% for that strategy to be more attractive financially. As it happens, since Newegg took Soverain through trial in 2009 and arguably established its “fight hard” reputation, Newegg has actually seen an increase in NPE campaigns from three in 2010 to five in 2012.* While tweaking the presumptions could narrow that gap, the required reduction would still need to be massive to pay for the approach."

In the Soverain case there are clearly winners and losers, since all of the online retailers are now relieved from the pressure and future law-suits of the very aggressive patent troll. For all these companies Newegg saved tens of millions in potential future legal costs. But none of these companies is going to send a "thank you" check to Newegg for fighting hard against the patent troll. Because one NPE creates risk for entire industry, the most reasonable action in this case would be binding together and sharing the risk, and increasing the effectiveness in the battle against the troll.

Soverain software brought in more than $60 million in 11-year litigation campaign. Its portfolio, however, was bought at $590 000 from a bankrupt start up. If only 38 defendants had joined together to buy out the portfolio, each of them would have to put only $16000. This would eliminate a lot of risk and the free-rider's problem where all the companies are expecting one entity to step up and fight hard against the troll threatening the whole industry. So fighting against trolls together is the most rational and feasible approach which involves a broad-base, risk-sharing approach.

Original Article at RPX blog