Inflated patent damages settled in Delaware courts attract bad actors

Money flowing into the innovation economy is a great thing. Promising startups and research projects attract investment, leading to new inventions and technological progress. But increasingly, there has been an influx of cash into the wrong part of the innovation economy — intellectual property lawsuits. These high-stakes wagers create a vicious cycle that subverts our justice system and wreaks havoc on innovators.

Eye-popping damage awards have become commonplace in patent infringement lawsuits. We now frequently see cases where tens and hundreds of millions, or even billions, of dollars change hands. A recent $23.4 million verdict in Delaware against the popular video game developer Activision is one such example.

Where there are seeming windfalls to be made, money follows, and an insidious industry has sprung up around lawsuits. When patent cases are appealed, it often reveals that the lawsuits aren’t worth the paper they are printed on, but that doesn’t stop those looking to cash in from capitalizing.

More than half of all patent infringement lawsuits in the U.S. are now brought by non-practicing entities, or “patent trolls.” These shell companies, with no employees or products, start lawsuits to extract money from the productive economy. They purchase aging patent portfolios and then sue without ever inventing or building anything. They leverage the high cost of defending against their accusations to create something from nothing, regardless of the meritlessness of their claims.

Trolls are the face of the litigation, but are often funded and controlled by litigation investment entities. These funds enter agreements for individual lawsuits, do deals to fund groups of cases, or sometimes even own the shells outright. They are backed by foreign countries through sovereign wealth funds, hedge funds, unknown billionaires, and other investors. With few exceptions, litigation investors don’t disclose that they are funding and pulling the strings of the cases they file; the shells present themselves as the aggrieved David against a corporate Goliath, hiding their deep-pocketed backers.

This alliance has become so lucrative that a third group has entered the arena — judgment preservation insurers. Plaintiffs and funders can now lock in profit for a patent infringement award — no matter how likely to be reversed— by getting it insured. This means even if a case gets overturned on appeal, these shells and their investors still come out ahead.

Court-mandated disclosure of third-party funding agreements would moderate the worst abuses and help us understand who is turning America’s courtrooms into ATMs. Our justice system, however, also needs to address the root cause — namely, the massively inflated damages that attract bad actors to pursue this legal strategy.

The U.S. grants more than 300,000 patents a year. There are millions of patents in force, and often thousands covering even simple products. Patent infringement damages are, in theory, supposed to account for this, and only consider the infringed patent’s value, not the entire product’s value. If a shoe company is found guilty of infringing a shoelace patent, the patent owner should be paid for the value that the shoelace adds, not the entire shoe's value. This often doesn’t happen, and when patent owners can extract payments far larger than the value of their patent, it throws our intellectual property system out of balance.

In cases involving complex, cutting-edge technologies, damages can easily become inflated. Juries often fail to separate lace from shoe. Patent trolls and their investors are incentivized to demand massive sums, and their shell company arrangements shield them from negative consequences.

Activision, for example, was sued by Acceleration Bay, a patent troll with funding from Hamilton Capital. Acceleration Bay was awarded more than $20 million for its broad patent related to multiplayer games, despite the case being in jeopardy because they had “no intact damages theories” and Activision’s expert testifying that, if found liable, damages should amount to no more than $300,000. Acceleration Bay argued that because a survey showed 57% of purchasers intended to play a multiplayer game mode, 57% of all of the revenue was a reasonable guesstimate for damages.

In another recent case, Google was ordered to pay $20 million in patent infringement damages, despite a dissenting judge noting that the plaintiff’s expert “conjured the [damages] rate from nothing.”

Courts must be wary of damages sleights of hand leading to unjustified awards. Even when cases are overturned on appeal,  every unearned payday attracts more trolls and investors, turning the justice system into a stock exchange trading floor.

Our nation’s judges are gatekeepers. By enforcing proper damage calculations, judges can discourage dubious patent trolls from initiating lawsuits. When patent trolls and their investors get big paydays for the value of products and features they did not invent, it rewards meritless legal tactics and comes at the expense of the productive economy.

Jonathan Stroud is general counsel for Unified Patents.

This article originally appeared on Delaware News Journal: Inflated patent damages settled in Delaware courts attract bad actors