VERDICT: Touchdown!

Patent Trolls: Predatory Litigation and the Smothering of Innovation

By William J. Watkins Jr. (Oakland, CA: The Independent Institute, 2014). 96 pgs. $14.50. Order, www.amazon.com.

Reviewed by Donna M. Jones

In this concise, well-researched book, William J. Watkins Jr. sounds the alarm on how patent trolls are “smothering innovation” and harming the economy with predatory litigation. He discusses patent trolls, the history of the patent system, the U.S. Patent and Trademark Office (USPTO), how and where trolls are most harmful, efforts to “tame” trolls, and possible reforms. Watkins emphasizes that “innovation is the reason why governments grant patent rights.” “These rights grant inventors a temporary [20 year] monopoly on an invention … to commercialize it or license it to others for use.” Due to patent trolls, “in too many instances patents have become tools for litigation rather than mechanisms to create and market products and processes.”

Patent trolls are referred to as nonpracticing entities (NPEs) because they are not using their patents to provide products and processes. Instead they accumulate patents for the purpose of bringing infringement litigation against practicing entities (PEs) that are producing products and processes. The trolls’ patents are usually overbroad, dated, or “remixes” of earlier software and related computer technology. A PE that cannot afford to litigate might be forced to abandon its entity or settle with the NPE. If a PE litigates and loses, it is exposed to possible penalties such as damages, prejudgment interest, attorney fees, willful infringement damages, permanent injunction, and more. Cases cited by Watkins resulted in damages alone ranging from $1 million to $368 million.

“‘The current crop of NPE litigation is responsible for an unprecedented loss of wealth’ and stifling of incentive to innovate,” conclude Boston University School of Law researchers. They estimate that “‘from 1990 to October 2010’ NPE lawsuits ‘are responsible for over half a trillion dollars in lost wealth (in 2010 dollars).’” The U.S. District Court for the Eastern District of Texas “leads in the United States in the number of patent cases, plaintiffs and defendants.” “Over one three-year period, there were 20 consecutive [patent] plaintiff victories without a single defense win….”

Why? The American Tort Reform Foundation “notes that local rules have sped up trials to keep defendants off balance throughout the proceedings.” The district also eschews grants of summary judgment, which Watkins states “puts defendants at a great disadvantage.”

Reform is imperative. Watkins shares measures taken to tame trolls and states “the USPTO has been short on funds and staff.” He offers seven possible reforms. Examples include creating specialized patent trial courts; reducing the term of software patents to five years, which would allow sufficient time to “reap profits” and “deny trolls the use of older patents to shakedown new inventors”; and creating an “international industry requirement” that a plaintiff must be “actively participating in an industry that exists….” “Trolls without plants, equipment, employees or significant investment in the patents would not be allowed to bring suit.”

This book is excellent. It also includes notes, a selected bibliography, and an index.

Donna M. Jones, U.W. 1978, is a former member of the State Bar Board of Governors and a former president of the Nonresident Lawyers Division Board. She resides in Marietta, Ga.

Verdict: Touchdown!

Real Lawyers

By Kenneth Farmer (North Charleston, SC: CreateSpace, 2014.) Novel. 289 pgs. $10.35. Order, www.amazon.com.

Reviewed by Tim Kiefer

The title of Kenneth Farmer’s debut novel, Real Lawyers, refers to a timeworn jailhouse insult: that public defenders, unlike their private bar counterparts, are not “real lawyers.” While anyone who has practiced criminal law knows the absurdity of this myth, it persists from generation to generation in jails across America.

Farmer recently retired from the Dane County District Attorney’s Office. (The reviewer and the author worked together there from 2007 to 2011.) Before becoming a prosecutor, Farmer worked as a public defender in Louisville, Ky. Real Lawyers draws on that experience. Set in Louisville in 1985 and 1986, it chronicles a year in the life of Paul Fields, a newly minted lawyer from Minnesota who takes a job as a public defender in Louisville.

Readers of Real Lawyers should get an ethics CLE credit, as the book covers a wide range of ethics issues. Substance abuse, attorney burnout, what must be disclosed in discovery, an elderly judge suffering from episodes of dementia, and a “hallway lawyer” who earns a living by quickly settling all his cases with unfavorable plea deals are just some of the dilemmas presented.

Two ethics issues deserve special mention. The first is peremptory jury strikes based on race. The seminal case on race-motivated jury strikes, Batson v. Kentucky, 476 U.S. 79 (1986), originated in the Louisville public defender’s office. The U.S. Supreme Court decided Batson in April 1986, roughly midway through the one-year time frame of the novel. Although the Batson case is mentioned by name just once in the novel, the question of racial bias in jury selection comes up on multiple occasions. (In fact, Farmer represented James Batson as a Louisville public defender, but not on the case that brought Batson to the U.S. Supreme Court.)

The second ethics issue involves a question that anyone who has practiced criminal defense will have been asked countless times. In the novel, it comes from the father of the protagonist’s girlfriend. “How do you defend these poor people, all of whom you know are guilty?”

This question may not be difficult for most attorneys, who already know about the Gideon right to appointed counsel for indigent defendants, the presumption of innocence, and the reasonable-doubt standard. But the novel suggests that the legal profession could do a better job of explaining these principles to the general public, if only to better respond to needling from future in-laws.

Real Lawyers is an enjoyable read that spins a fast-moving tale of corruption and deceit. Farmer’s highly unflattering portrayal of the Louisville criminal court system is unlikely to win him any invitations to Kentucky Derby parties. But his conclusion in the novel’s epilogue should be one all attorneys can agree on: “Success for a real lawyer, after all, has never been defined by wins and losses or Hollywood flamboyance, but rather by diligence, hard work, and integrity.”

Tim Kiefer, Harvard 1998, practices criminal defense and family law at Kiefer Law Office LLC, Madison. He also serves as an elected member of the Dane County Board.

VERDICT: Not for Me, Maybe for You

Confidence Games: Lawyers, Accountants, and the Tax Shelter Industry

By Tanina Rostain & Milton C. Regan Jr. (Cambridge, MA: The MIT Press, 2014). 420 pgs. $21.74. Order: mitpress.mit.edu/books.

Reviewed by Richard H. Ebbott

In 1999, the Abrams family wanted to sell their father’s company, Arrow Fastener. They would owe $80 million in taxes on $400 million in capital gains. The company’s accountants at KPMG (remember Peat Marwick?) convinced the family to enter into a BLIPS (bond-link issue premium structure) tax shelter. The Abrams family “borrowed” hundreds of millions of dollars at a premium interest rate, which happened to equal the tax loss desired. The loan also contained a penalty clause for pre-payment, which tax law allowed as a contingent liability but did not reduce the bases of the partnerships they formed. After the bank was “repaid,” the partnerships were dissolved at a nominal value. The family had pass-through tax losses of $330 million.

Confidence Games describes abusive tax shelters including SOS, OPIS, FLIP, SC2, BOSS, CLAS, CDS, COBRA, BEST, HOMER, and BLIPS (acronyms worthy of the government itself). Each tax shelter involved an accounting firm, a bank, and an independent legal opinion certifying that more likely than not the shelter would pass IRS scrutiny. Rather than hourly fees, the clients paid a fee based on a percentage of the taxes evaded. Fees totaled hundreds of millions. Tax revenues lost by the government were in the billions.

The book takes the reader through the labyrinth of the abusive-tax-shelter industry. The middle chapters, on topics including the “need” for more revenue, the weakening of corporate structure and ethics, secrecy, camouflage, and outrageous fees, are well done and interesting. For example, starting in 2006, Deutsche Bank was involved in 1,300 tax shelter deals with more than 2,100 customers. It “loaned” nearly $3 billion just on BLIPS. In 2010, the Justice Department agreed it would not prosecute Deutsche Bank upon payment of more than $553 million.

On the legal side, the Texas law firm of Jenkins & Gilchrist, principally Paul Daugerdas, rode its participation in the abusive-tax-shelter industry like a rocket before its crash into oblivion. At Brown & Wood in New York, RJ Ruble issued more than 700 opinions. For a fee ranging from $50,000 to $150,000, the firm used the same opinion for each shelter, changing only the client’s name.

The authors’ solution is to have more governmental regulation. The authors call for a middle-of-the-road approach by tax advisers, saying they should consider that society is on the other side of every tax dispute. They fail to consider pure greed and an arcane tax system that loses $10 billion per year and is used mainly for social engineering.

The authors are to be lauded for their exhaustive research and ability to weave the bits and pieces of information culled from a huge number of sources into this interesting and readable story. However, I take vigorous issue with the authors’ attack on the legal profession as a whole and their claim that lawyers cannot enforce their code of ethics.

I can’t believe that more government is the answer. And I would never advocate that a lawyer consider anything less than 100 percent effort for clients. The book says we should have a warm, fuzzy feeling for the IRS. Really? But if you have an interest in this era of abusive tax shelters and want to form your own opinions on the causes and solutions, Confidence Games is well done and a good read.

Richard H. Ebbott, U.W. 1967, is a partner in Morrissey, Bove & Ebbott, Flint, Mich.