Is There an Emerging Business Model for IP Lawyers’ Owning So-Called “Patent Trolls”? Only Until Their Corporate Clients Find Out.

Dennis Crouch of The PatentlyO blog recently posted an intriguing tidbit aboutCorporations are punishing patent trolls by refusing to feed them work about well-known IP attorneys Carl Moore (Of counsel at Marshall Gerstein); Timothy Vezeau (patent attorney at Katten Muchin); and Nate Scarpelli (who used to and still appears to be associated with Marshall Gerstein). These prominent members of the Chicago IP community appear to be “moon-lighting” from their respective law practices to act as managing partners at a patent holding company called “Virtual Photo Store LLC” (“VPS”). As reported in PatentlyO, VPS is currently involved as defendant in a Declaratory Judgment action.

Here is a copy of the DJ Complaint, also posted at PatentlyO. (Interestingly, the Complaint lists VPS’ address as that of the Marshall, Gerstein law firm.)The Complaint alleges that VPS is a non-practicing entity (“NPE”) owner of several patents that appear to be related to digital image processing. Mssrs. Moore, Vezeau and Scarpelli allegedly own a company that operates under a business model directed toward enforcement of patent rights alone. In other words, VPS is company in that does not actually make, use or sell a product covered by the claims of the patent, which gives rise to the “NPE” moniker. (Of course, NPEs are more pejoratively referred to as “Patent Trolls.”) It then follows that Mssrs. Moore, Vezeau and Scarpelli are managing VPS in its operations as an NPE, even while they are certainly concurrently representing large corporations that are the “victims” of NPE lawsuits.

Admittedly, these prominent Chicago IP lawyers are being innovative in seeking alternative business models to create value from their IP legal expertise and they are to be commended for doing so in this time of decreasing law firm revenues. One must also expect that their respective law firm partners have signed onto this business model and are, perhaps, looking to obtain some aspect of royalties that VPS might obtain from its endeavors to license its patents. However, I also wonder how happy their respective firms’ clients would be at learning this turn of events?

Specifically, in a recent conversation with a friend of mine, who is Chief IP Counsel at a Fortune 10 technology company, the issue of his company’s NPE litigation came up. My friend informed me that of 25 patent lawsuits in which his company is currently engaged, they are a defendant in 21. Moreover, each of the plaintiffs in these 21 cases is, as my friend unabashedly states, a “Patent Troll.” My friend went on to say that his company spends millions of dollars every year responding to and defending against litigation brought by NPEs. His company’s business and technology leadership must also participate in these litigation activities, which takes them away from what they need to do to keep the business running. Perhaps more significant than the time and money associated with defending these cases is the fact that this NPE litigation introduces risk and uncertainty into the company’s mid- and long-term business plans. Put simply, “Patent Troll” litigation is more than a distraction, it is a serious problem for his company’s ability to do business.

My Chief IP Counsel friend indicated to me that his company realizes that the long-standing strategy of fighting these lawsuits one-by-one effectively was the equivalent of “Whack-A-Mole” because, regardless of any affirmative steps his company takes, the NPE lawsuits just keep coming. He and his company’s leaders have therefore decided that they need a new strategy to address these increasingly numerous and costly NPE lawsuits. They have decided to hit at the pocketbooks of those they see as facilitators of these onerous litigation events–that is, the IP lawyers who represent the NPEs.

Accordingly, this Fortune 10 technology company’s new tack is to go after the law firms that represent NPEs by pulling lucrative corporate legal work from their law firms if they can determine that these law firms are involved in any way with NPEs. This means that the law firms involved in NPE litigation will not only be rejected as providers of IP legal services, but also will lose the opportunity to obtain wholly unrelated lucrative corporate and litigation work. As indicated by my friend, his company, which spends tens of millions of dollars per year on outside counsel for non-IP matters, will no longer “reward bad behavior” by sending its legal spend to lawyers and law firms that represent NPEs.

The obvious goal of firing law firms that represent NPEs is to limit the ability of these entities to obtain quality legal representation. By refusing to send work to law firms that represent NPEs my friend’s company seeks to ensure that NPEs do not obtain access to the best patent litigation resources. As a result, NPEs will at least have to commit greater resources to locating lawyers who are willing to represent them. In the best case scenario, at least according to my Chief IP Counsel friend, NPEs will effectively be cut off from the country’s best patent litigation counsel, thus leaving them with a significant disadvantage when going up against large corporations which, of course, will have access to the best and brightest patent litigators.

Moreover, my friend’s Fortune 10 technology company is not the only one taking this strategy to address NPE litigation. In a recent webinar that I attended, Dan McCurdy of Allied Security Trust indicated that members of the AST consortium report to the group what law firms represent NPEs in lawsuits brought against them so that other members can assess whether continued business with law firms that support NPEs is appropriate. It is thus apparent that many corporations that are repeatedly subject to lawsuits brought by NPEs are “mad as hell and not going to take it anymore.”

So, bringing the conversation back to the lawyer-owned NPE VPS, I must wonder what their respective law firm partners’ reaction will be when my friend’s company pulls seemingly unrelated legal work from their law firms as a result of Mssrs. Vezeau, Moore and Scarpelli’s managing ownership interest in a “Patent Troll.” Undoubtedly, it is bad enough for a law firm to merely represent an NPE, so how must it look like to clients when their law firms are effectively in the NPE business. I am sure that my Fortune 10 Chief IP Counsel friend, as well as his savvy corporate IP counsel peers, would accept no explanation for such activity and that he would remove all work from as soon as practicable from any law firm that counted among its partnership ranks lawyers that managed an NPE.

The question arises of why sophisticated and venerable law firms such as Marshall Gerstein and Katten Muchin would allow their partners to engage in activities that could result in significant corporate legal work being pulled from their respective firms. It could be as simple as that they believe no one will find out or, if they do, no one will care because it has not been an issue previously. Indeed, in days past, information such as which law firms and what lawyers were doing and who they represented was generally available, but it was nonetheless difficult to collect and analyze efficiently. Clients thus could not really see into the client rosters of their law firms to see whom else the lawyers represented. To the contrary, it was up to lawyers to decline representation only if there was a direct or potential ethical conflict. In my years of practice at a law firm, neither I nor my fellow partners declined work because a lucrative existing client did not like the business model of a potential new client. While I am sure that some lawyers can point to examples of a new client being sent away due to a potential dislike, I expect that these situations are fairly few and far between.

This is no doubt will be changing as a result of my Chief IP Counsel friend’s actions, as well as those of his peers. Law firms need to be prepared for this to happen on a more frequent basis in the future. As online resources, such as the great PatentlyO blog, continue to collect and present valuable insider information, I predict information such as whether a law firm represents or its lawyers actually own an NPE will not just become more available, but also more actionable. As a result, I believe that lawyers who try to play both sides of the fence (e.g. such as by generating significant revenue from both corporations and NPEs or, as with Mssrs. Moore, Vezeau and Scarpelli, actually owning a NPE) will not be able to hide this fact from those who are looking to act on such information.

It will be interesting to see how corporations exert their buying power to limit the ability of NPEs to obtain quality legal representation in the future. Time will tell if corporations can effectively reduce the amount of NPE litigation by hitting corporate lawyers where it hurts–in their pocketbooks. And, I would love to be the proverbial “fly on the wall” when a senior partner at Katten Muchin or Marshall Gerstein loses a major client because of his partner’s ownership in VPS.

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