I think the quoter or the author meant: http://en.wikipedia.org/wiki/Myron_Scholes
The idea would be that a company with this insurance would not be a target for trolls, as long as the company made it known they had the insurance policy, because the trolls would realize that the company stands to gain by fighting the troll in court.
It's like an asymmetric game of chicken. Both players know that the troll has the advantage of having less to lose in a "collision" (a lawsuit), so the troll can count on the victim to "swerve" (settle). If the victim was able to eliminate the cost of a collision, and the troll knew that the cost of a collision to the victim company was eliminated, it would make more sense for the troll to swerve (drop the claim).
(More chicken strategies here: http://mindyourdecisions.com/blog/2009/01/20/4-tips-for-winn... . This strategy is most similar to #3.)
In its current implementation, it almost always favors the current (and largest) monopoly player, or the legal entity/corporation that doesn't actually make anything but lawsuits.
A strange tragedy of the commons has developed where it makes good sense for any one startup to pay the extortion fee but its exactly the wrong thing to do for the good of the community because it simply funds and encourages more of the same.
I completely agree this would help in many situations. It isn't easy, though, to determine what constitutes as a baseless claim. Are all claims that seem to be just aggressive litigation deserving of costs? Or just ones from "patent trolls"? If so, what defines a "patent troll"? It isn't always easy to tell who deserves to be punished.
On "Use It Or Lose It":
This is not as easy at it seems. Right now, there are many incentives to file for a patent as soon as the invention has been reduced to practice. In fact, if the invention becomes disclosed, the inventor only has a year in order to secure his patent. This results in patents for technologies which are frequently at the prototype stage. This is a good thing - now, the technology has been described in a publication that is publicly accessible.
Imagine if there was a requirement to "use it" after it was patented... In many cases, that would be impossible: just because something is patented, does not mean it is manufacturable. Furthermore, it may not have a use in a commercial product right after it is patented... Although five years later, it could be an integral part of a product.
In short, requiring the invention to immediately "used" may appear to solve problems, but will probably open up a whole new set of problems.
They only use patents to shut down new competition.
We'd all have to innovate faster and more consistently to stay ahead of our competition.
We would probably have cured cancer, have infinitely more efficient fuel sources and be able to feed the world.