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.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
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    Twinrova, Feb 11th, 2009 @ 4:28am

    *cough* Streisand Effect?

    Doesn't reporting this type of news spawn ideas in others?

    It seems these cases are growing because news is spreading of the successes by those who litigate.

    Copyright and patents need to go away. Both systems hint at the possibility of owning an idea.

    Until this happens, these lawsuits will never go away.

    Capitalism 401a classes to begin shortly. >:)

     

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  2.  
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    Anonymous Coward, Feb 11th, 2009 @ 4:57am

    So why do losers spend years writing being anti-music industry? Hey Mike, silicon valley called it has a job for you. No they didn't they don't want dot com failure.

     

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  3.  
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    Anonymous Coward, Feb 11th, 2009 @ 5:39am

    Re: *cough* Streisand Effect?

    Don't blame the messenger. It's the judicial system that's at fault here. The news does sensationalize a lot of stories but rather than ignore them and hope they go away I think it is the right thing to put the story out there so that it engages thought and stimulates minds to act to fix the problem (and why not make a few dollars off the story by attracting more readers to your site... capitalism never ceases.)

     

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  4.  
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    Anonymous Coward, Feb 11th, 2009 @ 5:50am

    "Imagine being handed millions for failing in the marketplace?"

    If you're a bank owner, it's actually billions. Our government loves failed businesses. That's the only explanation I can think of for the lack of IP law reform we're seeing on top of the love-fest for the RIAA and MPAA Congress and the President have.

     

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  5.  
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    eleete, Feb 11th, 2009 @ 6:21am

    Not Just Profit

    I have personally been involved in a copyright lawsuit that involved an image I took with my own camera. I was able to point out countless differences between two photos (including counts of things inside the image, tonality differences, and things that were in one photo but not the other). The lawsuit was frivolous at best but a defense was necessary. The litigant was jealous of the new business venture and figured since we were just starting up that we couldn't afford to defend this case based on lies. The purpose was not for profit but to force us to spend more than we could afford, eventually bankrupting the business. To me that is the worst thing that can happen in any marketplace. A frivolous lawsuit that begins with guilt until innocence is proven. Anyone who has ever experienced this knows that a $5000 retainer is not uncommon, and is usually consumed in the first month of the case. Following months can be even higher if the opposing attorney protracts the suit. The exorbitant legal fees were used as a club to beat the smaller company and they almost got their wish.

    I could easily see individuals filing lawsuits using family or friends as lawyers to force those expenses onto the opposing side. I also experienced the plaintiffs attorney dragging the case out longer and longer, wanting more and more depositions. It truly is a horrible experience to know that you are in the right but cannot afford to prove it. I'm not sure how many start up companies plan for litigation costs in starting up, but these days it is becoming essential due to IP laws. You need minimal proof to file suit, if any, and the 'defendant' starts out guilty.

    I would argue that power, destruction and force are alternate incentives to lawsuits.

     

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  6.  
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    y8, Feb 11th, 2009 @ 6:46am

    refund

    So the real question is can Facebook recoup the cost of the settlement from the party that broke the settlement agreement?

    It doesn't seem like the UConnect group broke the terms, however, not only does the law firm breaking the agreement seem like malpractice, but as a party to the proceedings they should be held responsible to keep the terms of the settlement just as any other party should.

    I'm sure there's some lawyer out there somewhere that would take that case on contingency. It might even be worth it to Facebook to let the lawfirm keep 100% of the proceeds just as extra incentive.

     

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  7.  
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    Overcast, Feb 11th, 2009 @ 6:56am

    If you're a bank owner, it's actually billions. Our government loves failed businesses. That's the only explanation I can think of for the lack of IP law reform we're seeing on top of the love-fest for the RIAA and MPAA Congress and the President have.

    Yeah, unless it's a business they or one of their friends have an interest in - then there are laws to protect them.

    I wouldn't be surprised in the future to see laws that specifically cover the interests of only certain companies... like the "Exxon/Haliburton Fair Dealings Acts" or some BS like that.

     

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  8.  
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    Anonymous Coward, Feb 11th, 2009 @ 7:32am

    Whoa...! This article does make a point that litigation can result, but usually infrequently, in what may be considered substantial damages awards, but keep this in mind when reviewing this matter:

    Quinn & Emmanuel (Q&E) does nothing but litigate. I did a check on the backgrounds of about 25 members of its IP litigation group, and noted that only a very, very few have any kind of a technical background (all undergraduate) and none of them have ever practiced IP law in any context other than litigation. None of those I surveyed are even admitted to practice before the USPTO, something that I consider a necessary predicate for actually learning what IP law is and how to apply it fairly and consistently.

    Q&E apparently took this case on a contingency fee basis. Many who practice nothing but litigation do this, and it is thus in their interest to "win" and collect a sizeable fee. Of course, clients are only too happy to sign on the dotted line since they will not have to pay any money to have the case litigated. Apparently Q%E's share of the award totalled $13M, an amount that is currently in dispute and the subject of litigation. Had this matter originally been litigated by a "full-service" IP firm, such as the one now defending ConnectU, the firm's fees would amost certainly have been but a small fraction of the $13M to which Q&E says it is entitled. While perhaps not the case here, in many cases where a non-IP, litigation-only firm is the litigator my experience reveals that the non-IP versus IP firm fee differential can be as much as 10-1 (I base this number on substantial experience). Moreover, only a very, very few IP firms ever undertake representation on a contingency fee arrangement, which has a very sobering and restraining effect on a client that is contemplating resort to litigation.

    You keep using NTP v. Rim as the poster child of all that is wrong with the patent system. Based upon my close review of the entire case at both the district and appeal court levels, it is clear that the final number for damages was many, many times higher than it otherwise would have been were it not for the inexplicable intransigence of Rim's lawyers. NTP was originally prepared to settle the case for a very small fraction of what was eventually awarded. It was Rim who said "pound sand", drew out discovery far longer than it should have taken, challenged the meaning of even "single" words that raised litigation costs to ridiculously high levels, and in general gave the appearance that its goal was to litigate NTP into submission. To me this was an abuse of the legal system, was totally unnecessary, and gave the litigation a "black eye" that would likely never have occurred had the attorneys on both sides of the aisle been full service IP firms like ConnectU's current representative, Finnegan, Henderson, Farabouw, Garrett and Dunner. Quite unlike non-IP firms dedicated to litigation, Finnegan et al does not need to undertake a "learning curve" because it already well knows the law. The same can not be said for non-IP litigators.

    If anything, this case in my view reflects an unhealthy trend that began in the late 80's and early 90's when non-IP litigators decided that IP litigation was a potential cash cow and decided to add it to its portfolio of "services". It is in view of this "trend" I have always adovcated that a legal specialization be created to severely restrict those firms that hold themselves out as "IP experts", when in my opinion this is very, very, very rarely the case. I am confident that if this was done the number of litigated cases would drop precipitously and reason would return to the system.

    I devoted many years of practice, about 8-10 years, before I felt confident enough to say knowledge of the entire body of IP law had become a part of my "legal DNA", and it irks me to no end that so many have simply sidestepped taking the time to do this and regularly advertise their "extensive experience". Of course, their sidestep did have one beneficial effect. When facing such non-IP firms the majority of the time it was much like "shooting fish in a barrel". That was good for my clients, but without a doubt the interests of the opposing party were poorly, and at times, unprofessionally represented. Of course, the firm for the opposing party never bothered to mention this to its client who lost on all counts before the district court and appeals court.

     

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  9.  
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    Some Person, Feb 11th, 2009 @ 7:41am

    Re:

    "So why do losers spend years writing being anti-music industry? Hey Mike, silicon valley called it has a job for you. No they didn't they don't want dot com failure."

    If you are going to spout out nonsensical babel, please proofread first. It looks like you are some middle school kid who was worried the teacher would see you.

     

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  10.  
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    Anonymous Coward, Feb 11th, 2009 @ 7:45am

    Re:

    In referring to "learning curve" I overlooked mentioning that IP firms, beyond already knowing the law, are also in cases such as patent litigation almost as knowledgeable as their clients in the technology that relates to the case. It is no accident that a large number of the attorneys in the firm have advanced technology degrees, MAs and PhDs. In contrast, the majority of the litigation-only firms are staffed with attorneys who have undergradute education in such relevant fields as english lit., political science, history, etc. The former know what to ask at the outset, but the same cannot be said for the latter.

     

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  11.  
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    Anonymous Coward, Feb 11th, 2009 @ 7:49am

    "Why Losers Litigate: It's Profitable!"
    Gosh what an insight - in fact that's the same reason winners litigate.

    Let's generalise: everyone who litigates is going to profit in some manner if they win ...... stunning I think we have genuinely figured out why people litigate !.

     

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  12.  
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    NullOp, Feb 11th, 2009 @ 8:37am

    Ideas

    I've Said it here before, if you have what seems like a great idea and can't implement it write it down and send it to yourself via snail mail. Registered is better. That way you can prove your point that you really did have an idea when you claim you did. Its nasty business these days but if this is the way they're gonna play, then play!

     

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  13.  
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    eleete, Feb 11th, 2009 @ 8:54am

    Re:

    One thing is sure, neither sides lawyers will not profit. Rarely, if ever, is an IP case taken on contingency.

     

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  14.  
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    Anonymous Coward, Feb 11th, 2009 @ 9:00am

    Re:

    If you're a bank owner, it's actually billions. Our government loves failed businesses.

    Which Mike recently supported here on Techdirt. (see http://www.techdirt.com/articles/20090201/1803353590.shtml ) Isn't that strange? Being handed millions for failure is bad, but being handed billions is good!

     

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  15.  
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    Anonymous Coward, Feb 11th, 2009 @ 9:09am

    Re:

    Moreover, only a very, very few IP firms ever undertake representation on a contingency fee arrangement, which has a very sobering and restraining effect on a client that is contemplating resort to litigation.

    Ah yes, legal remedies should be restricted to only those who can afford them. Poor people have absolutely no business filing lawsuits, they should only be on the receiving end.

     

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  16.  
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    Mike (profile), Feb 11th, 2009 @ 10:07am

    Re:


    Quinn & Emmanuel (Q&E) does nothing but litigate.


    Um. My point had nothing to do with the *law firm* involved, but the company that decided to pursue this.

    Based upon my close review of the entire case

    Right. We should trust an unknown person who misread the post and who doesn't even sign his (or her) own name? Very convincing.

    NTP was originally prepared to settle the case for a very small fraction of what was eventually awarded. It was Rim who said "pound sand", drew out discovery far longer than it should have taken, challenged the meaning of even "single" words that raised litigation costs to ridiculously high levels, and in general gave the appearance that its goal was to litigate NTP into submission. To me this was an abuse of the legal system, was totally unnecessary

    Um. You leave out the rather pertinent point that the patents held by NTP were completely bogus -- which the USPTO later pointed out as well.

    I don't know, but if some company that failed in the market, which I had nothing to do with, attacks me for actually innovating and succeeding in the market, and does so with incredibly broad and obvious patents, you better believe I'm going to fight it. Why should I settle?

    The point about RIM/NTP is accurate and I stand by it, your "reading of the case" notwithstanding.

     

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  17.  
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    Mike (profile), Feb 11th, 2009 @ 11:19am

    Re: Re:

    Which Mike recently supported here on Techdirt. (see http://www.techdirt.com/articles/20090201/1803353590.shtml ) Isn't that strange? Being handed millions for failure is bad, but being handed billions is good!

    Wow. You should try reading. I absolutely do not support the bailout and DID not support it in that post. What I (I thought clearly) stated in that post was that looking for someone to pin up for blame isn't the right way to go about things.

    But I also made it quite clear in the post (you did read it, didn't you?) that doesn't mean we should socialize the losses.

    But, nice attempt at lying about my positions. You must be proud of yourself.

     

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  18.  
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    Anonymous Coward, Feb 11th, 2009 @ 2:08pm

    Re: Re:

    "Um. My point had nothing to do with the *law firm* involved, but the company that decided to pursue this."

    My bad. I did not realize that contingency fee arrangements are not a factor in a plaintiff's decision to proceed with a lawsuit.

    "Right. We should trust an unknown person who misread the post and who doesn't even sign his (or her) own name? Very convincing."

    My bad, again. I must have failed to recognize that this was a news article, and not another continuing tirade that "IP bad" because it "hinders innovation".

    Moreover, I have read every opinion issued by the district court, the CAFC, the cert petition and briefs (for and against) filed with the SCOTUS (who denied cert), and journal articles pertaining to the "good, bad and ugly".



    "Um. You leave out the rather pertinent point that the patents held by NTP were completely bogus -- which the USPTO later pointed out as well."

    Also my bad. I never realized that the grant of a reexam by the USPTO is proof positive that a patent is "bad" and should never have been granted. Similarly, I never realized that a rejection during reexamination by a patent examiner is also proof positive that NTP's patent were "bogus".

    How could I have failed to point this out? Merely FYI, it is my understanding that some of the reexamination actions that were initiated at the insistence of RIM (See Patently-O for some of the behind the scenes machinations and lobbying that have taken place) were argued before the BPAI on or about 10/28/08. I have not as yet heard that a decision has been rendered. If the examiner is upheld, the matter will go to the CAFC, with a decision still well over a year away. Please note, the argument was for only some of the reexams. I understand that there are still more in the USPTO pipeline, all the courtesy, of course, of RIM as it ran up the bill in its attempt to outspend NTP into oblivion.

    "The point about RIM/NTP is accurate and I stand by it..."

    Of course you should stand up for the points you make, but I urge you not to be so enamored with them that you overlook the pertinency of other relevant information that might place them in a different light.

     

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  19.  
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    Been there, Feb 11th, 2009 @ 3:44pm

    Re: Not Just Profit

    Went through a similar experience. Our product was superior to the competitions and gaining market share. One of the market leaders claimed we stole their ideas. (They didn't claim we infringed on patents, there were none, nor did they claim we violated trademark or copyright laws. Just that we copied their product even though it used a completely different technology. With the help of the good-ol-boy justice system on South Carolina. (They were in Germany and we were in Utah...????) They got the elderly judge to issue a order requiring us to completely cease operations. $230K in legal expenses, days of irrelevant depositions months of working with expert witnesses and 19 months later we couldn't afford to fight anymore. I now understand that it isn't who is legally correct, it is who has the dollars and connections. Losers who are no longer able to innovate but have the legal resources to quell the innovators are the are the ultimate winners.

     

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  20.  
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    cycnical, Feb 11th, 2009 @ 4:22pm

    Not so fast

    and what would we say to the companies who get screwed over once by corporations who steal their tech and again by lawyers?

    Too often people think the general mentality is "if you can't win the lotto, sue someone." For people who haven't gone down that route, you have no idea how complex and costly it is to seek "justice."

    Lady Justice is not blind. It's not so simple as "innovators" and "losers." The legal system is inherently attuned to those with greater resources. Papering someone to death, dragging out the legal process. Case in point: look at the Exxon-Valdez. They've done such a great job dragging it out, most of the Plaintiffs have already died.

    Adding insult to injury... then there's the fact that you have to deal with your own attorneys screwing you. To date, I have not seen ONE competent IP lawyer. And I've seen a lot of lawyers.

    When I say 'competent' I mean that in every way you would apply the same metric to an employee who is paid hundreds of dollars on an hourly-basis. You expect results, not incompetency.

     

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  21.  
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    Anonymous Coward, Feb 11th, 2009 @ 9:33pm

    Re: Not so fast

    I am curious by your use of the term "IP lawyer". I know several who are truly professional because they have mastered all aspects of what IP law actually comprises. At the same time I know many lawyers who hold themselves out as "IP lawyers", but even a cursory examination of their breadth of experience quickly reveals this to be a fallacy.

    I would like to believe that your experience to date has been limited to the latter.

     

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  22.  
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    nasch, Feb 12th, 2009 @ 10:07am

    Re: Ideas

    What good would that do you in the absence of a patent, trademark, or copyright? I hope this technique fails, because "can't implement it" means it doesn't benefit society. Attempts to stop others from implementing it should be shut down at least, if not punished.

     

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  23.  
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    nasch, Feb 12th, 2009 @ 10:09am

    Re: Not so fast

    They're really different problems. One is that the legal system rewards those with money. This is a very real problem, but not what's addressed here. This article/post is about a patent system that does not always reward what it's supposed to, regardless of who has more money.

     

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  24.  
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    Anonymous Coward, Feb 12th, 2009 @ 5:57pm

    Re: Re: Re:

    Mike,
    I made no attempt at lying and even included a direct link to the post I was talking about. If I misinterpreted your meaning then you should have just explained why I was wrong in my analysis. I would have even been glad that I was wrong. But I hope you can also see where your position, as it seemed to me, that those responsible for the current economic state should not be held responsible for their actions would give me that impression. Somebody is going to have to pay for those failures and if it is not those responsible, then who?

    Now I didn't misquote you or make any sort of misstatement of fact (that I know of). If I did (sometimes I make mistakes) them please point it out so that I can own up to it and correct it. I thought it should have been clear that I was expressing my interpretation of what you said. So to just flat out accuse me of lying, well, that's a little strong and I really think that I deserve an apology.

     

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  25.  
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    Mike (profile), Feb 13th, 2009 @ 4:46pm

    Re: Re: Re: Re:

    The post that you linked to was quite clear. Your inability to interpret it is not my problem.

    However, for clarity: Focusing on *blame* is NOT the same thing as letting those companies fail. Blame is about pointing a finger and stringing people up. That is counterproductive. I have no problem with letting those who screwed up fail, and nowhere did I say that we should bail them out. There is no way I can see anyone reading any of my posts and assuming I support the bailout.

    What I'm saying is silly is going around looking for individuals to add an extra burden to by blaming them for the failure. The failure was systematic, not any individual's fault. Blaming individuals for the failure and exacting additional punishment from them (beyond the failure of their business, destroyed reputation) is counterproductive and damaging. It means that others won't take necessary risks in the future and will harm the economy.

    That has nothing to do with bailing them out.

     

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