A Haven for Patent Pirates

East Texas lawyer Michael C. Smith calls it the “rattlesnake speech.” It generally occurs in the early stages of a patent trial in the Marshall, TX, courtroom of Judge T. John Ward, when some attorney has failed to read up on the rules specific to litigation in the U.S. District Court for the Eastern District of Texas.

Like a scene out of the comedy movie “My Cousin Vinny,” the speech starts with a polite invitation to approach the bench – and ends with a stern warning to pick up the pace or else.

“He gives you a real talking to,” says Smith, a partner with the Roth Law Firm in Marshall and chairman of the Eastern District’s rule committee, a group of local attorneys that works with Judge Ward to set the guidelines for basic pre-trial and trial procedure. “He won’t bite you that first time, but if you don’t get the message, you’ll wish you did.”

Judge Ward’s toughness is a big reason that Marshall, a city of fewer than 20,000 residents, located 150 miles east of Dallas, has become a destination for patent attorneys around the world.

In the rough calculus of intellectual property litigation, tough judges equate with speedy cases – and that’s exactly what you want if you’re a plaintiff with limited cash, but potentially big-time settlement payments or damages from a company you claim is infringing on your patent.

As an example, attorney Smith cites the ongoing case of Laser Dynamics Inc. v. BenQ. It pits a Japanese plaintiff with a patent relating to optical disk drive recognition against a billion-dollar Taiwanese device maker. When defense counsel for BenQ failed to cough up a set of relevant e-mails in the pre-trial discovery phase, Ward, a jurist who has heard more than 160 patent cases in the seven years since his appointment to the federal bench by President Clinton, decided to make an example of the company: BenQ would have to pay a $500,000 fine and forfeit a third of its courtroom time in the upcoming case.

“Attorneys in California, they’re raised to keep pressing a judge until he says ‘If you open your mouth one more time,’” says firm founder Carl Roth. “Here, it’s done a little differently. Judges expect you to back off and let the case move forward.”

Throw in an all-digital filing system, to cut down on paperwork, and Proposition 12, a 2003 Texas law that put a cap on pain-and-suffering damages in medical malpractice suits – thereby encouraging the state’s personal injury lawyers to migrate to the greener pastures of intellectual property – and you have a cottage industry. Patent infringement suits that once loaded down tech-heavy dockets in the Eastern District of Virginia or the Northern District of California now gravitate to a city with more pottery manufacturers than software companies.

“It kind of has a legend to it,” says Craig Tyler, a partner in the Austin, TX, office of the widely known intellectual property law firm Wilson Sonsini Goodrich and a member of the defense team in the Laser Dynamics case. “When you say ‘Marshall, Texas’ to your Pacific Rim clients…they know what you’re talking about.” And their response is rarely a happy one, he adds.

Although Tyler credits Ward and other Marshall judges with a solid knowledge of patent law and an extreme devotion to efficiency, he believes Marshall’s reputation as a “rocket docket” for patent cases only expands the advantage most plaintiffs already enjoy in such suits. Indeed, patent plaintiffs whose cases go to trial in Marshall win 88 percent of the time, according to research firm Legalmetric, compared with 68 percent nationwide.

The general rule in patent law is that defendants can’t file a motion to dismiss until a “Markman hearing,” a post-dotcom procedure during which a plaintiff finally reveals to a judge the exact nature of the infringed claim.

Local rules in Marshall, meanwhile, ensure a brisk pre-trial process, meaning that in the 30 to 60 days it takes to reach the Markman milestone, plaintiff’s attorneys have ample time to comb through a defendant’s paperwork, e-mail, and source code, and turn the broadly written language of a U.S. Patent Office filing into the scalpel-sharp language a jury will understand.

The final result is a high-stakes version of some gambling card game: Given a choice between a $200,000 settlement and a $2.8 million trial – which is the mean cost to a defendant of litigating patent cases in Texas involving between $1 million and $25 million in damages, according the American Intellectual Property Law Association – most defendants choose to fold early and cut their losses.

“Once you’re named as a patent infringer, you’re there until you settle, get a summary judgment, or go to trial,” says Tyler. “If you combine that with an accelerated docket, it just raises the pressure on defendants.”

Such pressure leads to a new class of plaintiffs that Tyler and other attorneys label “patent pirates.” Essentially shell companies, they do little more than purchase patents with the purpose of squeezing quick settlements out of major technology companies whose technologies may overlap with the patented feature.

Not only do such suits drive up legal costs across the industry, but they also disturb the equilibrium of a system in which technology companies such as Microsoft and Nokia hold off on exercising their patent rights, to avoid the resulting battles that can undermine fast-emerging technology platforms and the lucrative markets that build up around them.

“Anyone in the patent business knows that a patent-infringement suit against these well-protected larger companies will bring a massive infringement counterclaim,” Tyler wrote in a 2004 article for Texas Lawyer. “But this tactic is useless against the patent pirate, who typically has no products at all, so there is nothing against which to make an infringement counterclaim.”

In another illustrative case, American Video Graphics, a limited partnership, purchased a set of video-game patents once owned by Tektronix of Beaverton, OR. Tyler calls them a “litigation machine.” Among their patented technologies is a software method to simulate spherical panning, that is, the sort of roving, three-dimensional player’s-eye-view common in many modern video games.

Tektronix’s patent (number 4,734,690) was first filed in 1984 and granted in 1988. In August, 2004, nearly two decades after that first filing, American Video Graphics filed a trio of complaints against Sony, LucasArts, Nintendo, and a dozen other gamemakers and device manufacturers.

But visit the American Video Graphics corporate website and you’ll get a “coming soon” message and a phone number shared by a Marshall resident. A call to that resident was quickly referred to AVG’s legal counsel, the Dallas law firm of McKool Smith, which declined to be interviewed for this article.

Gil Gillam, a Marshall attorney who represented Intel in an American Video Graphics suit, says his client ultimately chose to settle the case rather than fight it. “I think the legal team at Intel would have jumped to try that case, but it just made better business sense to get out of that case at the price they got out at,” Gillam says.

The reason for such a situation comes down to patent law itself. Although the topics are generally technical, the legal theory is modeled on the common law tradition of land title and civil trespass. Assuming that a claim has well-marked boundaries, government recognition, and a clear chain of ownership, a patent-holder’s motives are nobody else’s business. Perhaps it’s not surprisingly then, that such a philosophy has played particularly well in a state where many homes, ranches, and farms still enjoy 19th-century homestead protection.

“Buying a patent and forcing your rights has become a new kind of entrepreneurial activity in recent years,” says Gillam. “It’s also completely legal.”