Investing in IPR – Use or Abuse of the System?

(IPRinfo Special Issue, September 2006)
Eeva Hakoranta
Specialist Counsel,
Roschier Holmberg Attorneys Ltd.
President of the Finnish Association for
Industrial Property Rights (STY).

Some say the American ”Patent Trolls” abuse the patent system. Others say they are creating a real market for innovation benefiting both small innovators and large corporations. But are ”Patent Trolls” mean?

Intellectual Property (IP) has become an increasingly interesting commercial discussion topic during the recent years. The corporate world talks about ”Intellectual property, the strategic imperative of the 21st century”.

IP has entered the Board Room
We are experiencing an evolution – or perhaps a revolution – of intellectual property as a result of development trends visible throughout the world economy. The transformation from a manufacturing driven economy into a service driven economy is underway.

Spending on research and development as well as patenting activity is increasing. Intellectual capital is becoming a leading corporate asset class. Recent changes in accounting and securities reporting rules also enable – and obligate – companies to more accurately value their intellectual capital.

There is a clearly increased interest in commercializing and capitalizing intellectual property. Phenomena such as patent auctions and IP asset backed securitization are emerging. Business and IP strategies are aligned. IP has entered the Board Room – of various players.

The ”Arms Race” for patents
Intellectual Asset Management has become a highly strategic business issue. Technology licensing revenue in the United States accounts for an estimated $ 45 billion annually and the world wide figure is approximately $ 100 billion, growing fast. There is an ”arms race” among the large players in industries relying on interoperability standards, such as the IT and telecoms industries.

Companies engage in patenting to protect their innovations but also to defend themselves against third party patent holders. The uncertainty of a potential patent infringement simply cannot be avoided, and the strategic competitive position of the companies is based on the strength of their patent portfolios and cross licensing agreements. IP is a volume business.

The convergence of the IT and telecoms industries is encouraging companies to cooperate in new ways to protect and exchange their technology. Interoperability of the equipment is a central requirement. The balance is tough. R&D is focused and companies are increasingly licensing out their innovations and licensing in those of others. They are also enforcing IP rights and asserting patents against other players, and they are prepared to litigate.

IP litigation is also more and more affected by competition law as a means to arbitrate IP disputes and balance the exclusive rights conferred on IP holders. But companies are also voluntarily giving up their exclusive rights to promote innovation on strategic areas.

Alongside this development, new creative business models are invented and the boundaries of the traditional patent system are tried. A market for innovation and pure IP is emerging.

Are ”Patent Trolls” mean?
Peter Detkin, former Director of Licensing and Patent Litigation at Intel Corporation came up with the name ”Patent Troll” to describe ”somebody who tries to make a lot of money from a patent that they are not practicing, have no intention of practicing and in most cases never practiced” during the patent infringement litigation regarding Intel Pentium Pro and Pentium II (1999).

Curiously enough, Mr. Detkin now serves as the Managing Director of Intellectual Ventures, a company investing purely in invention and patents and highly likely matching the definition of a ”Patent Troll”.

The ”Trolls” acquire patents and create patentable innovations solely for licensing and litigation purposes. They aggressively enforce their IP rights usually against large established entities aiming at cost-of-litigation settlement. The average cost of patent litigation in the US through discovery and trial is in the range of $ 5 million, which makes settlement amounts below that figure attractive to many large companies facing a damages claim.

The ”Trolls” are at advantage as compared to manufacturing companies facing the threat of injunction. Cross licensing benefits are not helpful bargaining tools against the ”Trolls”, as these companies do not manufacture or sell products that would make use of such licenses.

The ”Trolls” are not either afraid of taking the cost of an invalidity litigation regarding a questionable patent and have often calculated this possibility into their business plan. The ”Trolls” are utilizing the patent system and the industries affected have to adapt.

Creating a market – or ”trolling”?
There are many examples of mere intellectual property companies. Qualcom has a strong patent position in CDMA technology, a third generation mobile phone standard. One third of the company’s revenues and 60 per cent of its profits derive from royalties on the equipment employing that technology. Although Qualcom still also manufactures chips, it is perceived as a ”Troll” in the market and it continuously litigates against major industry players.

Acacia Research Corporation controls a total of 47 patent portfolios and engages in the business of acquiring, developing, licensing and enforcing patents. It is known, among others, for commercializing aviation pilot Paul Ware’s invention regarding credit card fraud technology by enforcing a patent claim relating to use of a unique number to identify each credit card transaction. The patent has been out-licensed to some 30 companies.

Intellectual Ventures founded by former Microsoft Chief Technology Officer Nathan Myhrvold finances pure research and development activity employing patent engineers with a track record of inventing. The company organizes ”invention sessions” with top scientists to come up with interesting problems to be solved with new inventions. It is innovating in areas such as information processing, wireless communications, digital imaging, biomedical devices and advanced particle physics and has recently filed its 500th patent application.

The company maintains that ”invention is the next software”, reminding us of the fact that nobody believed in software as a stand alone product in the 1980s. Mr. Myhrvold says he wants to be the first ”invention capitalist”.

Intellectual Ventures also acquires patents in many fields of technology. It has managed to raise a considerable amount of funds from major industry players such as Microsoft, Intel, Sony, Nokia, Apple, eBay and Google for purposes of creating sort of a marketplace for patents. The patents purchased will not be asserted against its investors.

The company aims at building a patent portfolio for licensing purposes benefiting its investors, and it states that it does not intend to do business by litigating. Many are afraid of this ”very large troll”.

NTP versus RIM
NTP Incorporated (NTP) has also been characterized as a ”Patent Troll” having sued the Canadian Blackberry manufacturer Research in Motion (RIM) in a Virginia District Court claiming RIM infringed several of NTP’s patents regarding mobile e-mail communications.

A jury verdict admitting the claim was rendered by the District Court in 2002 ordering RIM to pay $ 23 million in damages. An injunction on the sale and support of Blackberry devices in the US was imposed in 2003 and stayed pending the appeal process. In 2004 the Federal Appeals Court lifted the injunction but confirmed that RIM had infringed NTP’s patents and returned the case to the District Court.

Re-examination of NTP’s patents rendered some of them invalid. Nevertheless, RIM’s motion to stay the proceedings pending completion of the re-examination was denied and the judge handling the matter clearly indicated that the parties should have settled long ago. RIM was facing the threat of an injunction in the US.

The dispute was finally settled in March 2006. RIM agreed to pay $ 612.5 million and obtained a licence to all of NTP’s patents for all of RIM’s products and services. The case has resulted in a debate on the exclusivity conferred on a patent holder as compared to public interest. An injunction would have affected millions of Blackberry users, including the US government.

Injunction requires four-factor test
Another topical US case is the Supreme Court resolution in the litigation between eBay Inc. and MercExchange L.L.C (Merc). Merc holds a US patent covering a method for internet sales. After a number of failed attempts to negotiate a licence, Merc sued eBay, a major internet sales company.

The District Court awarded damages but refused to grant an injunction.

The Court of Appeals for the Federal Circuit reversed the ruling reasoning that permanent injunctions, as a rule, follow upon patent infringement absent exceptional circumstances.

In its opinion delivered on May 15, 2006 the Supreme Court disagreed and concluded that permanent injunctions in patent infringement cases are discretionary upon application of the traditional four-factor test requiring the plaintiff to demonstrate that
1) it has suffered irreparable injury,
2) for which injury remedies at law are inadequate to compensate,
3) considering the balance of hardships a remedy in equity is warranted, and
4) public interest would not be disserved by a permanent injunction.

In a concurring opinion Justice Kennedy stated:
An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead primarily for obtaining license fees…For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent. When the patented innovation is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.

IP investors have come to stay
Some say the ”Trolls” abuse the patent system. Others say they are paving the way and creating a real market for innovation benefiting both small innovators and large corporations.

The ”Trolls” are undoubtedly American creatures encouraged by the local legal system, which allows the awarding of multiple damages and generously grants injunctions in case of patent infringement. The European legal tradition most likely will not lead to such extreme examples, but we do experience similar development in the European market as well.

Focus is shifting from manufacturing into investment in IP, and enforcement litigation is increasing. Two Finnish examples deserve to be mentioned in this connection, namely Anadeus Ltd and iprbox Ltd.

Anadeus is a company financing patent litigation. It focuses on US litigation with a network of contingency fee based law firms. It also has a few cases pending elsewhere, e.g. in Finland. It is out there looking for patents which can be asserted against established industry players.

Iprbox provides a more holistic approach offering both patenting and consultation services and investing in innovation and patents with a view to commercializing the patents by offering them to firms practising them in the market. It is prepared to exercise the IP rights against infringers.

It remains to be seen, whether innovation really is the next software and how the patent system will adapt.

Patent applications filed with the USPTO
in 1985: 125,931
in 2005: 409,532
IBM has a portfolio of approximately 40,000 patents and is granted around 3,000 more every year. Hewlett Packard (HP) holds around 25,000 patents and Nokia more than 12,000 globally. Microsoft has approximately 10,000 patent applications pending.
In January 2005 IBM released 500 patents to the open source community, immediately followed by Sun Microsystems releasing more than 1,600 patents (including several related to the successful Open Solaris product), and by Nokia in May 2005 issuing a patent statement including a legally binding obligation not to assert Nokia patents against the Linux Kernel.