"Patent trolls" stalk this land
Manufacturers must be aware of a new front in "tort reform" wars
By Staff -- Manufacturing Business Technology, 12/1/2005 12:00:00 AM MST
For dedicated BlackBerry users, it was quite a scare. A stalemate in an ongoing patent violation lawsuit forced Ontario-based Research In Motion (RIM), the maker of the popular handheld device, to announce it might have to shut down its wireless e-mail service.
The lawsuit was brought by NTP, a nonmanufacturer and so-called "patent troll" whose revenues come mainly from licensing the patents it owns and suing companies it deems to have violated them. Other alleged "patent terrorists," as they are also called, include Eolas Technologies, which, along with the University of California, won a $560-million settlement against Microsoft from a 2003 suit regarding browser plug-ins; and Freedom Wireless, which specializes in lawsuits against established telecom companies.
Patent litigation has doubled in the last 10 years: nearly 3,100 cases were filed in 2004, and most experts predict sustained growth.
"This isn't just about software and pharmaceuticals anymore," says Josh Lerner, coauthor of Innovation and Its Discontents: How Our Broken Patent System is Endangering Innovation and What to Do About It. Because patents now cover basic processes like data transfer and "one-click" transactions, patent trolling has become a concern in manufacturing.
For instance, Rockwell Automationfaced a suit whereby Solaia Technology, which had obtained the patents of Schneider Automation in an auction, sued several of Rockwell's customers. At issue was a means for sending data between PLCs and spreadsheets. To protect its customers, Rockwell countersued, accusing Solaia of extortion. But some of those customers settled out of court just to avoid the lengthy litigation process. And some of them sued Rockwell for failing to indemnify them in the first place.
The PLC suits sparked debate about whether such a generalized process could be patented.
Litigation's rising tide
According to patent attorney Dennis Crouch, "Patents usually are presumed to be valid." This presumption, which may give plaintiffs an advantage, helps explain typical outcomes. Crouch points out that about 85 percent of patent lawsuits settle, 10 percent are resolved with summary judgments, and 5 percent go to trial. "Even companies that settle never think they infringe," claims Crouch.
The fact is, as technology has evolved, patents have become more valuable.
"Investors are looking for real yardsticks to evaluate competitive strength," says Lerner. "Patents, trademarks, and other forms of intellectual property represent a 'currency' that is used to demonstrate to financial markets, suppliers, and customers that [a company] is a strong player, and can be expected to achieve a dominant position."
Some business and legal analysts have speculated that the problem lies with the U.S. Patent and Trademark Office (PTO). According to M-CAM—a Charlottesville, Va.-based consultancy and a premier developer of intellectual property characterization and monetization technology—about one in three patents make duplicate claims. With more patent applications coming in—and fees for applications on the rise—the PTO has an incentive to approve more applications.
While "patent trolls" deserve their reputations as parasites, larger, more established organizations have thrown their weight around in an attempt to protect—or even corner—markets. Patent attorney Ron Shulman believes part of the problem lies with "legitimate companies that have ... turned their intellectual property departments ... into profit centers. Texas Instruments [TI], Lucent, and IBM have been doing this for years. Plus, the damage awards are huge."
But it's a double-edged sword: If RIM is the poster child for the risks of a patent abuse lawsuit, TI might be the poster child for aggressive patent licensing. Author Lerner estimates that TI, which had no revenue from patent licensing in the 1980s, was realizing hundreds of millions of revenue by the late 1990s. "TI saved itself through licensing fees," he says.
Beyond legislation
A bill sponsored by U.S. Rep. Lamar Smith of Texas would cap awards for patent holders that don't actually make products, but it has been stalled in Congress. It faces opposition from pharmaceutical companies and software vendors, but is supported by other business groups. The National Association Manufacturers, in particular, has remained neutral, partly because of ongoing litigation and partly because its membership is divided on the issue.
Lerner suggests there are other options besides legislation.
"Moving from a jury system, which isn't well-suited to grapple with the complicated legal and technological aspects of the patent system, toward a panel of federal judges or masters is one way to have a more reasoned discussion on the issue," says Lerner. "Arbitration boards and multiple-level reviews before litigation starts are other options."
What, if anything, can manufacturers do to protect themselves? The first step is to understand risk. Old-line manufacturers may face less risk of patent lawsuits, especially if they are narrowly focused on single products or straightforward production processes. And companies that use off-the-shelf software applications from Oracle, SAP, or other vendors may have more protection than companies that develop proprietary or custom technology systems. Companies also should determine if their customers are at any risk, and how contracts structure liability sharing.
Researching existing patents before releasing new products is another important step to reducing risk, though it's not foolproof because it's difficult and expensive to research every single patent, and because some patent applications remain confidential. A patent attorney can be used to file "freedom to operate" opinions. These filings can provide some protection from future lawsuits.
ThinkFire, for instance, is an intellectual property advisory founded by former Microsoft executives. And the U.S. PTO offers online guidance about patent applications, as well as trademarks and copyrighting (see box).
The value of assets
Companies also shouldn't overlook potential opportunities, like the value of existing intellectual property and assets.
"Think strategically about whether to play offense or defense, or both," advises Lerner. Intellectual property may have value for a company, but revenue gains must be balanced against the time and expense of litigation. And if you are developing custom software code or your own processes, it may be worth considering a patent.
Lerner also urges companies to participate in industrywide dialogue to shape policies. Such a dialogue is ongoing in Europe, where "open-source" programmers have rallied to resist the granting of patent protection for software.
Amid all the uncertainty, one thing is clear: as business and technology grow ever more complex and more central to all types of manufacturers, patent lawsuits look to be a part of the legal landscape for many years to come.
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