Why Losers Litigate: It's Profitable!
from the sue-for-profitability dept
Economics is all about incentives — and when you create incentives for bad activity, you can rest assured that you’re going to get more bad activity. This has become especially troubling with respect to the belief that (a) ideas are more important than execution and (b) that you can “own” ideas. You cannot own ideas — and even though, technically, intellectual property isn’t supposed to let you own ideas, in many cases it’s created either scenarios where that is what’s happened — or where enough people believe it’s true that you can insist that ideas aren’t ownable, but you’ll still have a costly legal bill to pay.
So what does that have to do with incentives?
Well, we keep seeing scenarios where winners innovate, but losers litigate. That’s because the market “losers” claim that they had the “idea” that allowed the winners to innovate and succeed in the market. But, of course, that overvalues the idea and greatly undervalues the actual execution. Anyone who’s built a successful business recognizes that it’s the process and execution that leads to success — not the idea. But, with courts all too often rewarding the losers, it’s simply too lucrative for marketplace losers not to sue.
In one such case, it seemed absolutely ridiculous that the founders of a competing social network, ConnectU that had briefly employed Mark Zuckerberg before he founded Facebook was suing him for “stealing” their idea. ConnectU had been a massive failure in the marketplace, while obviously Facebook has been much more successful. But, of course, the “idea” part was rather meaningless. There were already a bunch of similar social networks out there when both ConnectU and Facebook were getting started. Yet, rather than avoid a drawn out legal battle, Facebook eventually just agreed to settle — though with the demands that the terms of the settlement remain confidential.
That worked… briefly. It turns out that the lawyers for ConnectU couldn’t resist bragging, and accidentally advertised that they had won $65 million from Facebook. The number is not really accurate — as the settlement was a mixture of cash and equity (whose value is really anybody’s guess). However, it does show you why losers litigate so often. Imagine being handed millions for failing in the marketplace? Why wouldn’t you litigate? But, if you believe in basic free market capitalism, you should recognize how this is rewarding exactly the wrong behavior. It punishes those who best served the market, and rewards those who couldn’t serve the market.