Staking patent claims--for gold mines

Ryan is the CEO of Acacia Research, a technology development company that has made waves in the past two years with its controversial practice of acquiring patents from other companies, then seeking royalties and licensing fees from those that may be violating them.

"If you look at the great inventions of the 1920s, none of those were invented by large companies," Ryan said, noting that his company often helps small inventors who don't have big corporations behind them. "Patent protection is a fundamental right. It is why some people left Europe."

Others see a less noble side to the patent business, arguing that intellectual-property companies and other litigants unfairly exploit the loopholes of an overworked patent system in a form of legalized extortion. U.S. law gives a patent holder a 20-year monopoly for an invention from the date the application is filed.

Still, Acacia and other patent companies say their work helps protect the pioneering spirit that has historically defined the American way. Inventors and patent holders say they must constantly fight an uphill battle against wealthy multinationals that deploy legions of lawyers and invariably want to exploit their ideas for little or no cost. Common tactics include persuading small companies to submit their ideas to standards organizations, which subsequently license them cheaply or for free, and filing counterclaims against small companies in an effort to force them into cross-licensing arrangements.

Regardless of which side is right, the intellectual-property business is thriving. Companies such as Forgent Networks and Intellectual Ventures, an incubator company co-founded by former Microsoft Chief Technology Officer Nathan Myhrvold, are rapidly expanding their patent portfolios, both by buying patents and coming up with ideas that can be broadly licensed. One of the latest entrants in the intellectual-property field is Applied Minds, a company funded by the Silicon Valley venture capital firm Kleiner, Perkins, Caufield & Byers. Applied Minds comes up with product ideas and then works with established companies to bring them to market.

"Patent work is no longer just a defensive insurance policy," said Kent Richardson, vice president of intellectual property at Rambus, an intellectual-property company. "It is part of your product offering."

Acacia alone has collected more than 120 patents, signed hundreds of technology-licensing agreements and filed several lawsuits on patents relating to, among other ideas, electronic bar codes, credit card fraud, video-on-demand services and chips for setting parental controls on TV use. The company's list of licensees includes National Instruments, Nokia, Playboy, Petco, Sunglass Hut and Walt Disney. Texas Instruments and Intel are defendants in a pending Acacia lawsuit.

Depending on the circumstances and the clout of the players involved, the stakes can be astronomically high.

That was made abundantly clear in 2002, when Forgent reviewed its portfolio and came across U.S. Patent No. 4,698,672, which it obtained when it acquired Compression Labs in 1997. The patent purportedly gave Austin, Texas-based Forgent the rights to the JPEG method for compressing digital video images.

In the last three years, the company has received more than $100 million in fees from Adobe Systems, Macromedia and others. A pending lawsuit against dozens of defendants, including Dell, and pending licensing deals could boost total royalties from the patent to $1 billion. Last week, Forgent filed a lawsuit against 15 more companies, saying it has the right to collect royalties on digital video recorders, or DVRs.

"The patent, in some respects, is a lottery ticket," said Jay Peterson, chief financial officer of Forgent, which didn't realize at first that it could claim the rights to JPEG, which isn't actually called by that name in the patent. "If you told me five years ago that 'You have the patent for JPEG,' I wouldn't have believed it."

Another company that could benefit from lucrative license fees is Picture Marketing Inc., which says it holds a patent for embedding photos in electronic messages sent for marketing purposes. The company, which has retained a former Microsoft attorney to represent it, will seek to collect royalties from companies that send (or have been sending) advertising e-mails that contain pictures. The patent was obtained in the late 1990s.

"Up to 1998, the patent office didn't grant many Web patents," said Mable Yee, chief executive of PMI, which has already signed some licensees. "They opened up from 1998 to 2000, but then they shut the window down."

Established companies such as IBM are also expanding patent licensing operations. One of the unintended consequences of the Sarbanes-Oxley Act is that companies must now comb through their patent files to make sure they're not wasting any valuable, unexploited assets. Some are also picking for gold among the bones of dead dot-coms.

As Acacia's Ryan puts it, "There's a lot of IP floating around out there without a home."

He and other supporters of the patent system say it provides necessary protections for companies and individuals that might otherwise stand little chance of getting paid for their ideas.

Going to the mattresses
Intergraph was a flailing workstation manufacturer when it filed an antitrust suit against Intel. After that failed, the company pursued claims that Intel chips infringed on Intergraph's Clipper processor patents, resulting in settlements and verdicts that have thus far totaled $675 million and royalties that will continue to 2009.

The goal of patent companies does not always involve litigation. Sometimes they consult with licensees to help them develop products; other times, they just provide an idea. But if voluntary licensing fails, legal action could result in monetary damages or an injunction that prevents the defendant from selling the disputed product.

Still, as Intergraph's case shows, asserting a patent takes more than reciting a magic incantation.

"Some people have tried the Rumplestiltskin process, but it generally doesn't work," said Ron Epstein, a principal at IPotential, which advises companies on how to handle their intellectual property. For smaller inventors, the cost of seeking protections can be prohibitive.

Years ago, filing a patent might cost about $800 in legal and processing fees, said Elwood "Woody" Norris, who has invented various types of speakers and is now trying to popularize personalized helicopters. Today, the cost of filing a patent can run from $8,000 to $10,000.

"Lawyers have priced it beyond the reach of the average guy," Norris said, adding, "If you get rid of all patents, you cripple the motivation to create."

Critics say just the opposite is true. "People are writing patents to get in the way of other people's progress," said Sam Jadallah, a partner at Mohr Davidow Ventures and an outspoken critic of software patents. "It is sucking R&D dollars out of the system."

Intellectual-property companies counter that they are performing a job that large companies have abdicated by slashing research and development in recent years. In a sense, they say, patent companies provide a form of white-collar outsourcing.

"Many of our inventors have had successful product companies in the past. But ironically, the guys who have had success are the most likely to sign up, because they know what a pain it is," said Myhrvold of Intellectual Ventures. "Net-net, you'll probably get less than if you were founder of the next Cisco, but it won't take five years of your life either."

Many in-house inventors at Intellectual Ventures--including Leroy Hood, inventor of the DNA sequencer--take leaves of absence from their universities to participate in periodic "invention sessions" to figure out new directions for the company.

By 2007 or 2008, Intellectual Ventures will be ready to market its first patents, said Laurie Yoler, the company's chief development officer. Outside sources say that Google, Microsoft and Intel have invested in the company and hold licenses to technology invented by the outfit.

As with all things technological, however, success is never guaranteed. Before they get to the royalty stage, many companies build prototypes, assemble extensive documentation and engage in lengthy negotiations with potential license holders.

Acacia provides potential licensees with a CD containing court transcripts, patent filings and relevant opinions, and gives the companies six months to examine the materials. Even so, the company's intellectual-property division still lost more than $10 million in the last two years. (Acacia has another division, CombiMatrix, that performs research.) But Ryan emphasizes that his company doesn't rush to court to challenge infringers.

"We've been called vultures, parasites, but we give people adequate time and let them meet with our engineers. We save them $500,000," Ryan said. "Large companies tend to ignore any requests for licensing discussions and have been successful in wearing down inventors. As a result, they've been successful in using other people's inventions without paying."

He and Myhrvold say that computer and electronics companies typically try to wish away patent disputes, largely because of the nature of their products. Because electronic goods have so many parts, conducting a patent examination on every design element can be extremely difficult and time-consuming.

The term "patent troll"--the derisive phrase used to describe companies that make their living by seeking royalties out of others--was coined years ago by lawyer Peter Detkin.

Detkin came up with the term when he defended Intel against suits by companies claiming to have microprocessor patents of "critical" importance.

Since then, ironically, Detkin has gone to work for Intellectual Ventures, an intellectual-property company--and now he says the meaning of the term is ambiguous.

IP firms actually have a long history in Silicon Valley. Companies such as ARM, Lucent Technologies and Rambus for years have licensed chip designs and other inventions for royalties.

Moreover, Stanford University made itself into a global powerhouse in part through licensing patents to professors and students who had start-ups. Without an exclusive license of Stanford's PageRank patents, Google wouldn't be the behemoth it is today. Though the PageRank technology was invented by Google founders Sergey Brin and Larry Page, they were Stanford students at the time, and the university owns the patents.

--Michael Kanellos

The attitude toward patents was forged in part by the particular history of the tech industry, where the rewards often have gone not to inventors, but to the companies that exploited the inventions best, Myhrvold said. IBM invented the relational database, after all, but Oracle commercialized it.

"In computing, there has been a strong sense that patents were not the fundamental secret of success of most of the big companies," Myhrvold said. "Now they view patents as this very weird, evil, bizarre thing."

Sifting through paperwork
By contrast, medical device companies perform thorough evaluations on existing patent applications before launching into the development of a new product line. If potential conflicts exist, they will pay royalties. A patent search in the medical field, however, is often much easier because of the nature of the product.

"In medicine, there is a high correlation between patents and products. Most of the drug companies have patents on the molecules themselves," said Epstein of IPotential. "In electronics, the correlation is low. There are literally hundreds, probably thousands, of patents that relate to a Handspring," he added, referring to the popular handheld device.

As a result, a patent examination for a technology product could easily cost millions of dollars, according to the Computer and Communications Industry Association, a trade group. Because a single patent can justify an injunction, settling lawsuits or agreeing to pay licenses are the only practical paths to keeping products on track.

In Washington, some lawmakers are advocating that a judge be given greater discretion over whether to apply an injunction at the end of a case. As it is now, a victorious plaintiff in a patent suit can generally get an injunction preventing a defendant from manufacturing a product that infringes the plaintiff's patent. The proposed change would give judges more leeway, so that losers in court wouldn't necessarily see their products forced off the market.

Opponents say such a change would prevent most defendants from settling and thus increase litigation. As that debate continues, lawsuits and patent filings are sure to grow.

"The number of applications has tripled in the last two decades, with the most rapid growth in the second half of 1999," said Adam Jaffe, dean of arts and sciences at Brandeis University and co-author of "Innovation and Its Discontents: How Our Broken Patent System Is Endangering Innovation and Progress, and What to Do About It." "You can't point to a distinct break, but it has become a distinct problem in the last 15 years."

The proliferation of applications has been mirrored by an increase in litigation. "There has been a significant increase in the last five years," said James Pooley, a partner specializing in intellectual property at Milbank, Tweed, Hadley & McCloy. "There are judgments and settlements, at least according to people in the IT industry, that are much larger than they should be."

Some of the problems can be blamed on the notorious case of State Street Bank & Trust v. Signature Financial Group in 1998, which prompted many to file questionable "business process" patents, said Wayne Paugh, the former chief of staff for the U.S. Patent and Trademark Office and now part of the legislative practice at the Venable Group, a law firm. A business process patent protects a method of doing business, such as Amazon.com's one-click shopping system.

Since then, the situation with these types of patents has calmed down, Paugh added. During the period right after the State Street decision, roughly 80 percent of business process patent applications were granted. But now the USPTO approves fewer of them, said Paugh, estimating that only 16 percent win approval these days.

Ultimately, any resolution of the patent issue may involve a concept that is inherently foreign to an industry built on the rigid definition of 0s and 1s: subjective, case-by-case value judgment.

"With patents, an individual can succeed against big companies," said Jadallah of Mohr Davidow Ventures, who noted nonetheless that the system shouldn't award patents for ideas that aren't true inventions. "You want to reward someone who did something that was unique."