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Comment by conartist6 | Hacker News Reader

Because they don't expect to win the lawsuit. Their odds of winning a lawsuit aren't that good, so their goal is to badger a founder into settling. A founder would likely be killing their creative endeavor to become their own lawyer and go to court for themselves, and the trolls choose targets for whom paying a lawyer for the length of one of these trials would be prohibitively costly.

In other words, their real business model, the reason that they can be considered a "safe investment" is that they operate as an extortion racket at scale with the justice system itself as their (free) muscle.

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How's this?

1. You buy "litigation insurance."

2. You state that you are insured on your website.

3. The insurance company is required to defend in all patent cases that arise, so there is no doubt that you will be represented in court.

4. Nobody sues.

5. The insurance company makes a profit with no cost or risk.

Is this a real thing for small companies?

I have no experience with this, and the only time I've gone and tried to get quoted for things like cyber liability, etc, the costs are incredible relative to the value of the business and revenues.

You can buy IP insurance; the problem is that the proposed strategy only works against patent trolls. If you infringed a legitimate patent the insurer would be screwed, so they'd want to do an enormous (impossible?) amount of due diligence before writing the policy. As with most other insurance policies, insurers in practice are only willing to take on a portion of the risk.

Adverse selection would be a big issue, but actually perhaps if the indemnity only covers defense, an insurer would be willing to take more risk (and have expertise in batting away these claims.)

Couldn't some innovative insurance company create a policy that adds a clause like "policy kicks in if the litigant fits the criteria of a patent troll (as described above, lacking any assets besides the patent or a few patents that don't pass initial muster as legitimate, or has fewer than two physical locations with at least 4 non executive employees). Even saying something like "if the litigant has no health insurance for their employees" would actually easily preclude patent trolls as you'd have to be an actual decently sized company to be able to negotiate real health insurance for your employees.

The only issue is misalignment of incentives.

A patent troll will take a look at such a policy and do the bare minimum to give off the appearance of a ‘real’ company.

And then the insurance company will simply go “yep, that tracks”, with little incentive to investigate as it’s not in their best interest.

The defense to this is multiple LLCs and licensing schemes. Just like the troll, don't hold any assets in the vulnerable LLC. If Walmart sells a bootleg shirt the IP holder can't sue the company that cleans the parking lot.

That is a lot of effort, and expensive

Probably ineffective too, as some part of your firm must hold the assets, and that's the part that gets sued

Not really. It's worth it and very effective for business with significant liability risks. The corporate structure of a basic gym will have like 6 entities if it's done properly.

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