Wednesday, April 22, 2009

Our Legal System is too often a Tax on Innovation

Fred Wilson has a very thoughtful post from several months ago (and ongoing dialog) on his blog about how "patent trolls are a tax on innovation." In his words, the problem occurs "when [an] entrepreneur and the company he/she creates is hit with a baseless claim from a patent troll represented by lawyers working completely on contingency." The issue is that a lawsuit, regardless of whether it has any merit whatsoever, takes quite a bit of time and more importantly money to fight. This detracts from the start-ups ability to survive and focus on what is most important, innovation. What often ends up happening is that the start-up, if funded, ends up settling out of court to avoid a prolonged legal battle.

Early Woodward light bulb patent purchased by ...Image via Wikipedia

While the flip side of the patent protection argument here has to do with protecting small inventors, Wilson rightly claims that a "solo inventor who does not commercialize his/her technology does not bring nearly as much economic value (and jobs) to our society as the entrepreneur who actually takes the risk, starts the company, hires people, commercializes the technology, raises the necessary capital, and builds lasting sustainable value." This is a key point, that it is not necessarily about filing the patent or just thinking of the idea first but it has just as much to do with the implementation and realization of the idea on a scale relevant to society.

While I will not debate a topic so well covered on Wilson's blog I wanted to take his argument one step further, to say that it is the legal system, and not patent trolls, that are a tax on innovation. The problem isn't that there are companies rolling up patents and suing start-ups, the problem is that we live with a legal system today where lawyers work on contingency, courts ignore the notion of reasonableness, and more generally every company that tries to create something new subjects itself to endless amounts of litigation.

Having recently read about a court case involving a failed S&L suing the U.S. government claiming it was the cause of its failure, I can say that I have seen first hand how our legal system has created unnecessary bloat around legal process. From judges who can't keep their cases straight, to lawyers who bill by the hour on one side and bill by contingency on the other, to $1000 expert witnesses - I feel that we are held hostage to a system where those getting paid decide when, why and for how long trials will last. The plaintiff in these frivolous lawsuits is little more than an accomplice to a system that encourages such practices (read ambulance chasers).

I don't have an issue with lawsuits as they are an indispensable part of maintaining a thriving and fair free market, but my issue has to do with the complete lack of a reason when it comes to allowing such lawsuits to gain traction. It is as if there is no conscience or appeal to rationality by all the parties involved where lawyers can work for years on a case they know is frivolous, making the excuse that they are tools of the law, and the plaintiffs can sue without fear or cost as they are encouraged by lawyers willing to work on contingency.

Take for example this scenario: if I decided today to sue my former employer for sexual harassment they would have to spend hundreds of hours digging up every e-mail from anyone I worked with, interviewing everyone I interacted with, and documenting it all for a discovery process where lawyers billing at hundreds of dollars an hour would be needed. As a public company, moreover, the potential negative press would be further reason for my former employer to seek a settlement before anything were brought to court. This is why most companies have funds set aside for legal disputes as a necessary course of business.

It is hard to know what the total cost of these out of court settlements is, but it is safe to say that a significant portion of this cost is little more than a tax on those willing to put their neck on the line to innovate.

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