Patent Terrorism – Terror of the Intangibles

Patent-Bin-Laden No bombs. No hijacks. No recorded messages. And no exclamation marks. This terror will simply strike your share prices. Your product is the hostage and your bottomline is the ransom. Pay up, or read on… Patent terrorism is perpetrated by ‘patent trolls,’ who are also called ‘patent terrorists.’ The term ‘patent troll’ was coined in 2001 by Peter Detkin, assistant general counsel for Intel, when he defended Intel against lawsuits by companies claiming to hold microprocessor patents of ‘critical’ importance. In 1999 alone, the claims were to the tune of $15 billion. Says Detkin on coming up with the new term, “We were sued for libel for the use of the term ‘patent extortionists’ so I came up with ‘patent trolls.’ A patent troll is somebody who tries to make a lot of money off a patent that they are not practicing and have no intention of practicing and in most cases never practiced.” Patent trolls are the individuals/organizations whose business models are based on patent litigation as a threat, and who generate revenue through patent licensing. Patent troll companies acquire crucial patents of other companies and then scout the market to threaten those companies of patent lawsuits, which may be engaged in business activities infringing on the acquired patents. They may demand the infringing companies to pay them royalties or license fees, or both, or may compel those companies to cough up large sums as a one-time settlement in lieu of patent litigation. Patent trolls neither have the intention to develop products based on a patent, nor to sell a product, nor to acquire new customers. They don’t enter into cross-licensing agreements, as they themselves don’t invent or manufacture any product. Whenever they find any company infringing on the acquired patents, they try to extort retroactive licensing fees from them. They don’t bother about building or maintaining good customer relationships, as it goes contrary to their ideology. However, many people in the legal fraternity, across the globe, strongly disapprove of this patent terrorism. Says David Simon, the Chief Patent Counsel of the Business Software Alliance, “Too many of these (patent litigation lawsuits) are filed in search of a quick buck through settlement negotiations, rather than a party legitimately asserting a right, because the infringer is interfering with commercial objectives.” Robert Merges, Professor of law at the Center for Law and Technology at the University of California, Berkeley, feels that patent terrorism is a very tricky issue. Says Merges, “Sometimes people will become pretty good at playing the patent game. They’ll get a patent and not really contribute anything significant in terms of technology, but just be a little ahead of the curve and be pretty clever about working the patent system. It’s kind of a tricky policy issue. How do you slap down and try to stop the illegitimate guys while not wrecking any of the beneficial uses people have found for patents?” Patent terrorism has been very widespread across the globe. One form of patent terrorism tries to anticipate the future of technological innovation in a specialized field and acquires patents in that field. Another form of patent terrorism involves the acquisition of a portfolio of patents of an obsolete technology encompassing another’s innovation. In both these instances, the patent troll tries to siphon off a huge sum from patents that infringe upon the claimed territory. Patent Trolls on a ‘Roll’ There have been many examples of patent trolls, of which the following are notable ones: Intergraph Vs. Intel & Texas Instruments In late 1996, Intergraph filed an infringement lawsuit against Intel for infringing upon its patents on Clipper Processor technology, which dealt with cache memory management. This lawsuit, won by Intergraph, resulted in a series of litigations and judgments that have totalled $675 million hitherto, while the royalties will continue to be paid till 2009. In 2003, a trolling company demanded $8 billion from Intel and threatened it of a permanent injunction after it acquired a patent for $50,000. In September 2003, Texas Instruments had to cough up a one-time payment of $18 million as licensing fee for infringing upon Intergraph’s patent related to Parallel Instruction Computing (PIC) technology. TechSearch Vs. Sears Roebuck & Hyatt Between 1999 and 2001, TechSearch LLC, an Illinois-based private company engaged in buying, owning, licensing, and enforcing of patents, made millions of dollars by acquiring a data transfer patent. About 100 companies, including UAL Corporation, Sears Roebuck, and Hyatt Corporation, have obtained licensing rights from TechSearch than engaging in expensive court litigations. TechSearch now holds nearly 24 patents, after having acquired the rights from inventors or sharing the licensing revenues, which account for about $3 million just for the web patents. RIM’s BlackBerry Vs. NTP The controversy surrounding the patents of BlackBerry involving Research in Motion (RIM) and NTP is a classic case of patent troll. The battle has been going on for six years. In 2000, NTP Inc., a small holding company, based in Arlington, Virginia, first sued RIM, the Canadian-based manufacturer of BlackBerry, for infringing on some of its patents on BlackBerry, the wireless internet device. NTP, with no products and little infrastructure, is considered by many as a patent trolling company, which acquires patent portfolios with the intention of threatening to file lawsuits against potential infringers. NTP was founded by late Thomas J. Campana Jr., and his northern Virginia lawyer, Donald Stout. Campana was an engineer in Chicago, and in 1990, he had created a unique innovative system to send e-mails through wireless devices, which was showcased in the Comdex computer show in Las Vegas. Campana worked for his own company and his main customer was a wireless carrier called ‘Telefind.’ In November 2001, NTP filed a lawsuit against RIM for patent infringement in the federal court in Richmond. A jury concluded that RIM had infringed upon NTP’s patents and ordered RIM to pay 5.7% of BlackBerry’s sales to NTP. NTP – who claim to own the US patents for the software that powers BlackBerry, and which expires on May 20, 2012 – had filed another lawsuit against RIM in 2002 for infringing upon one of the claims of their BlackBerry patent. It is estimated that NTP’s patents have 1920 claims in total. The US District Judge, James R. Spencer, who heard the case, found RIM to have infringed upon NTP’s patents, and invoked an injunction against RIM in 2003, preventing RIM from manufacturing, using, or offering to sell handhelds, services, or software in the US. However, the court stayed the injunction pending an appeal by RIM. Spencer later ordered RIM to deposit 8.55% of its quarterly revenues into an escrow account pending the final judgment. RIM and NTP’s endeavor to settle their dispute amicably – when RIM agreed to pay NTP a sum of $450 million in March 2005 – fell through. RIM finally had to terminate the long-standing patent litigation dispute with NTP by shelling an astronomical amount of $612.5 million as a full-and-final one-time settlement. Prolonging the legal battle would have caused RIM a loss of more than 5.95 million BlackBerry subscribers worldwide. As per their latest agreement, NTP need not refund the amount to RIM even if USPTO ruled in favor of RIM. The intense dispute resulted in RIM’s sales dwindling from the expected range of $590-$620 million to $550-$560 million. The Earnings Per Share (EPS) declined from the company forecast of 76-81 cents to 64-66 cents. PhoneTel Vs. IBM & Sony PhoneTel Communications Inc., a Texas-based IP firm, has more than 1000 filed patents by its prolific inventor, Dr.Kazuo Hashimato. PhoneTel, which was granted about 200 of these patents, filed a patent litigation in August 1998 against 13 of the world’s largest companies, including AT&T, Lucent Technologies, Bell South, Compaq, and Toshiba Information Systems, when they infringed on PhoneTel’s patents on caller ID services, answering machines and other telecom products. PhoneTel collected about $2 million in royalties from AT&T and Lucent Technologies alone. Over the years, PhoneTel has garnered tens of millions of dollars in settlements and by licensing its patents to giants such as AT&T, IBM, Sony, Dell Computers, Southwestern Bell, Lucent Technologies, Northern Telecom, and several other small companies. PhoneTel has also obtained settlements against more than 40 companies, which it has sued over patent infringement. PhoneTel also has pending lawsuits, filed in January 2000, against Apple, Yamaha, Nintendo, Packard Bell, Sega and twelve other companies for infringing on its patents on personal computers, sound cards, digital synthesizers, and console game systems. PhoneTel enforces the patents on answering machine, and owns 50 licenses that generate royalties to the tune of $55.5 million. Eolas Technologies Vs. Microsoft In 2003, Eolas Technologies Inc., and the University of California won a $560 million judgment against Microsoft involving patents covering web browser features. Fougnies & Day Vs Boston Communications Group In September 2005, Messrs. Fougnies and Day, which comprised the founders, Douglas Fougnies and Larry Day, and four other employees, won $128 million in damages from Boston Communications Group (BCG) Inc., over alleged infringement of a 1998 patent. BCG’s stock, which was quoting at $30 per share on NASDAQ in 2001, declined sharply after the patent troll incident and touched a low of $1.17 in September 2005. Said Day, “The cause of the lawsuit is not that we are patent trolls. The cause of the lawsuit is that these defendants used our patented technology to make over $1.5 billion in revenue.” Forgent Networks Vs Adobe Systems & Dell Forgent Networks, a Texas-based company, founded in 1985, acquired a US Patent No. 4,698,672 (’672 patent) related to data compression technology, when it acquired Compression Labs in 1997. The ’672 patent conferred on Forgent the exclusive rights to the JPEG method of compressing digital video images. The ’672 patent covers several areas including digital still image devices, such as digital cameras, personal digital assistants, cellular telephones, printers, scanners, and other devices used to compress, store, manipulate, print, or transmit digital still images. In 2004, Forgent initiated lawsuits against 40 global technology companies including Adobe Systems, Macromedia, and others for infringement of their ’672 patent and garnered over $100 million in intellectual property licensing revenues. Several of Forgent’s pending lawsuits and licensing agreements with other companies, such as Dell, is expected to catapult the company’s revenues from intellectual property to about $1 billion. In mid-2005, Forgent filed lawsuits against 15 more companies for infringing on its US Patent No.6,285,746 (’746 patent), relating to computer regulated video system enabling playback during recording. Acacia Technologies Vs Nokia & Walt Disney California-based Acacia Technologies (AT) group, a leader in technology licensing, is also considered a patent troll. The AT group and CombiMatrix group are the two operating groups of Acacia Research Corporation (ARC). The AT group, which holds 29 patent portfolios comprising 127 US patents and a few foreign patents, develops, acquires, and licenses patented technologies. The list of their licensees includes National Instruments, Nokia, Playboy, Petco, Sunglass Hut and Walt Disney. Acacia’s patents cover a gamut of technologies across several industries ranging from audio-video synchronization, broadcast data retrieval, credit card fraud protection, database management, data encryption and product activation, digital media transmission to digital video production, enhanced internet navigation, image resolution enhancement, interactive data sharing, interstitial internet advertising, network data storage, etc. It is patents that have given the company the courage to take on giants. Emphasizing the importance of patents, Paul Ryan, CEO of ARC, says, “Patent protection is a fundamental right. It is why some people left Europe.” Echoing similar views, Jadallah of Mohr Davidow Ventures, a California-based venture capital firm, said, “With patents, an individual can succeed against big companies.” Medtronic Vs Karlin Technology In May 2005, Medtronic Inc., settled a 4-year long battle on patent infringement claims in spinal fusion technology with Dr. Gary Michelson’s licensing company, Karlin Technology Inc., a private patent holding company, for a stupendous amount of $1.35 billion. This amount involved the transfer of ownership of more than 100 issued US patents, about 110 pending US patents, and nearly 500 foreign patents to Medtronic. The agreement also enabled Medtronic gain ownership of future patents related to technology developed by Dr. Michelson during the next decade and a half. This settlement agreement emphasizes the significant impact of intellectual property portfolio on companies’ growth and survival, especially those that operate in a lucrative and high growth industry, such as pharmaceuticals and advanced medical devices. In this case, the global market for spinal implants was estimated at nearly $4 billion in 2004, and the market is expected to grow at a compounded annualized growth rate of 25-35% in the next decade. ThinkFire Thinkfire, another patent troll, is a New Jersey-based intellectual property licensing and advisory company that acquires patents and manages patent licensing for other companies. Thinkfire was started in July 2001 by Nathan Myhrvold, Microsoft’s ex-Chief Technology Officer, and supported by high-tech companies and venture capital investors. Similarly, IMS, a wholly-owned subsidiary of Indiana-based Hurco Companies Inc., a global industrial automation company, owns the patent on interactive control of machine tools. IMS has collected over $50 million in licensing fees by enforcing its patent, and is acquiring more patents. While some criticize patent trolls, others seem to have a diametrical view of them, since patents are also considered as tradeable properties. Says Carl Gulbrandsen, Managing Director of Wisconsin Alumni Research Foundation (WARF), “Patent trolls don’t exist. Trolls are imaginary creatures. I think the whole issue is overblown. Patents are a piece of property. To say that it’s wrong that a company acquires property and then expects to be paid for use of that property, I think, is a pretty simplistic approach.” However, patent trolls have become a very lucrative business (Refer Table-1). From 1980 to 1999, royalties on patents in the US soared from $3 billion to approximately $110 billion. IBM alone generates about $1 billion in income from patent royalties, which is 2,000% higher than in 1988. Texas instruments also make more than $1 billion through licensing revenues.

Brace! Brace! Take Your Cash Positions! One way of avoiding or averting patent terrorism is to evaluate and analyze your patent portfolio frequently to gauge any threat of infringement. Strategic management of intellectual property assets, especially patents, is the key that will help in optimizing value. It is critical that you have sound knowledge of patents and patent rights to avoid infringement or damages arising therefrom. Obtaining a patent for your invention or product is always a wise decision. Says Kent Richardson, Vice President of Rambus, an intellectual property firm, “Patent work is no longer just a defensive insurance policy. It is a part of your product offering.” When your company is accused of patent infringement, consulting a qualified and competent patent attorney is the first logical step. Trolls can be very risky, and neglecting it could prove to be a really costly mistake. A troll could lead to prolonged litigation as well as paying astronomical damages, which could prove disastrous for your business. In case of possible infringement litigation, it is always advisable to get an expert opinion of a patent attorney. Obtaining a patent attorney’s opinion as to whether a particular product infringed upon a patent will lessen your exposure to a case of willful infringement. If the patent is found to be infringed, then a patent attorney may suggest various ways to circumvent the patent or suggest that you enter into a licensing agreement with the troll. The US government is working on introducing a new draft bill – the Patent Reform Act, 2005 – to seriously tackle the issue of patent troll. The new bill aims at minimizing the incentives for patent trolls and makes it very difficult for them to chase companies and prove patent infringement. The proposed bill also seeks to achieve the following: ³ restrict the damages that a patent-holder could extract from an infringer ³ limit the patent-holder’s ability to obtain injunction against the alleged infringer, and ³ raise the level of proof for willful infringement. The bill also gives courts the discretion to decide on the patent-holder’s failure in commercializing an invention before granting an injunction against the alleged infringer. Patents are very potent weapons, whether they are used to protect intellectual ideas or to make profit through licensing agreements and litigation threats. Many companies, over the years, have discovered and harnessed the intangible value of patents through shrewd intellectual property strategies, which have yielded them significant returns. Applying for your own patents is always the best move. As always, attack is the best defense. The only confusing truth for the intellectual property war-mongers is that the battle over patents has to be fought with patents. It goes against conventional wisdom and reason. “But then, mine is not to reason why, mine is but to do or die.” May the best Attorney win!

Today’s post comes from M. Qaiser and P. Mohan Chandran with iPrex Solutions, Hyderabad. Copyright © 2006, iPrex Solutions. All Rights Reserved.