We Need More Companies To Stand Up To Patent Trolls The Way Newegg Did, But We Can't Rely On Them

from the public-goods dept

We recently wrote about Newegg successfully defeating a rather successful patent troll, in part by taking the line-in-the-sand stance that the company will never settle with patent trolls. Many (probably most) other companies end up doing a cost-benefit analysis and realize that it's cheaper to just pay up and settle. That, of course, is exactly what patent trolls rely on. That's why they're in business. For companies, it's a rational short-term decision to settle. It may not be quite as rational in the long-term, as agreeing to settle can attract an increasing number of troll suits, while showing a commitment to fighting back may scare them off. Also, fighting patent trolls may lead potential customers to be happier about doing business with you (and, if our comments are any indication, this fight helped keep Newegg customers loyal).

In the end, though, most companies who really stand up to patent trolls do it mainly on principle. They really dislike the fact that trolls are getting away with what they get away with, and so they fight back. We've seen the same thing in a few other cases, such as with Drew Curtis and Fark, but it's still somewhat rare.

Dan O'Connor gives the economic explanation for why what Newegg did was of massive benefit to consumers, but also just not likely to be repeated enough by other companies to make a difference. It's why we need real reform for the patent system, rather than just waiting for principled companies like Newegg to stand up against bullies. It all comes down to the basic economics:

In economic parlance, busting trolls with bad patents is a “public good.”  In other words, the entire industry benefits when an individual company invalidates a bad patent.  Or, as Dan Ravicher of PUBPAT pointed out in an amicus brief in the pay to delay pharmaceutical antitrust case:

Accused infringers who prove a patent invalid perform an important public service by correcting the PTO’s errors on their own nickel.

Economic theory also tells us that public goods are generally underprovided (by the private market at least) because individual market actors do not reap the full benefit of their investments.  In this instance, Soverain had cases pending against over 30 companies, including such household names as eBay, RadioShack, Nordstrom, Bloomingdales and Walgreens.  Newegg’s stubborn refusal to rollover means that those other companies are also saved the significant time and expense of fighting to knock out Soverain’s patents.

For the most part, I agree with this, though I believe there is some good and important research going on these days that shows that the claims concerning "public goods" aren't quite as universal as some make them out to be -- but that's often context specific. And, in this context, the traditional definition of public goods does appear to apply. The problem here isn't just that it's a public good, but that the cost of producing the public good is greater than the cost of the alternative (a settlement), which may be considered to have similar benefits (being allowed to continue making product). In some other cases, the cost/benefit structure is different with public goods and that raises some interesting challenges. Either way, when it comes to bogus patents, what's clear is that we can't just rely on companies to fight back against them. The incentives, unfortunately, often push companies in the other direction.

Filed Under: patent trolls, patents, standing up