Nuisance-Value Patent Suits: An Economic Model and Proposal

INTRODUCTION Today's corporate Chief Executive Officers and Chief Financial Officers are keenly aware of the threat that big-ticket patent infringement poses to the bottom line. However, they are not attuned to a smaller, yet significant threat which is a growing concern for the office of the General Counsel. Beneath the radar of newspaper headlines and Congressional floor speeches addressing patent reform, nuisance-value patent suits are a daily fact of life for most corporate legal departments. The pattern is familiar. Corporations receive a letter in the mail from a patent holding company inviting a "discussion" regarding the company's patent portfolio. The corporation allegedly infringes this portfolio, and the holding company invites it to participate in a "licensing program." The holding company contacts dozens of potential defendants in this manner, offering preferable licensing fees to companies who settle early. The holding company pegs the cost of settlement below the cost of defending against an infringement suit; a number which can often reach into the millions. Faced with a pure business decision, most corporate legal departments opt for the "nuisance" settlement, even when there are meritorious defenses. In the words of one industry veteran, such suits are corporate America's latest "slip and fall." (1) This paper is the first academic attempt to analyze nuisancevalue patent litigation. Part I addresses the foundational question of what constitutes a nuisance-value patent suit. It then presents an economic model which reflects the unique litigation and business strategies of nuisance patent plaintiffs. This model reveals the central economic reality which enables nuisance-value patent suits to be brought-a litigation cost imbalance that favors plaintiffs over defendants. Part II explores why nuisance patent litigation is a matter of concern for those interested in innovation and a robust patent system. This section aims to establish that nuisance patent suits threaten vital gatekeepers of patent quality. Part III examines the background conditions of the U.S. patent system which enable nuisance patent plaintiffs to achieve success. An understanding of these conditions, and their relation to the economic model of Part I, is critical to developing proposals which ameliorate the problem of nuisance patent suits. Part IV examines scholarly treatment of nuisance-value settlements in the field of tort law. This examination reveals that existing proposals are ill-adapted to address the specific problem of nuisance-value patent suits. Part V advances a proposal to curtail nuisance-value patent litigation abuse. Under this proposal, at the request of a defendant, the court stays the infringement phase of a suit while first addressing the issue of the patent's validity in a condensed time frame. This proposal alters the economic dynamic upon which nuisance-value patent plaintiffs rely by allowing patent defendants to concentrate their resources on invalidity defenses while holding off the burdensome and unequal expenses of infringement discovery. I. WHAT IS NUISANCE-VALUE PATENT LITIGATION? Two major deficiencies handicap any analysis of nuisance-settlement behavior in private civil litigation. First, there is a lack of publicly available information about settlements. A vast majority of litigants agree to confidentiality agreements that prevent dissemination of financial details. (2) Second, there is difficulty in making an ex post determination of what constitutes a nuisance settlement, even when financial details are forthcoming. As a result of these analytical handicaps, this Article will be primarily theoretical, placing greater emphasis on economic models than on statistical observation. A. A Working Definition This Article relies on nuisance-value patent litigation having three specific and necessary definitional conditions. …