Business

PATENT PREDATORS

Get rights to invention, find juicy target, make $450 million. Nice business.

KATHERINE MACKLEM March 28 2005
Business

PATENT PREDATORS

Get rights to invention, find juicy target, make $450 million. Nice business.

KATHERINE MACKLEM March 28 2005

PATENT PREDATORS

Business

KATHERINE MACKLEM

Get rights to invention, find juicy target, make $450 million. Nice business.

WHEN RESEARCH IN MOTION LTD., maker of the celebrated BlackBerry email device, agreed last week to pay US$450 million to settle a long-standing patent-infringement law-suit, the news fairly buzzed through both the tech and legal communities. Not only was the settlement among the richest known deals in patent-law history, the case spotlights a growing, mega-million-dollar phenomenon south of the border. RIM is the latest victim in an era of multiplying and increasingly controversial lawsuits over patent violations.

At the centre of the debate are companies known as patent vultures or trolls, set up solely for the purpose of holding patents and pursuing licensing agreements and lawsuits over infringements. They often obtain rights to intellectual property by picking up the remains of dot-com failures. Other times, they buy patents directly from inventors. “These are paper companies,” says Boston-based patent lawyer Philip Swain, “that never built a product, never built a business, and never really did any good for anyone.” Swain, who wrote a brief supporting RIM’s position on behalf of the Canadian Chamber of Commerce, says such outfits use patents to hold up legitimate, successful companies, “just like the trolls in mythology who hid under bridges they didn’t build themselves.”

No one’s counted them, but patent lawyers like Swain say vultures are becoming increasingly common in the litigationhappy U.S. Legal journals are publishing papers about the suits, and lawyers and academics are debating how to keep such cases in check. Just last week, the Intellectual Property Owners Association (IPO), a Washington-based lobby group representing patent-owning corporations and inventors, held a one-day conference on the issue. There’s a legitimate role for patentlicensing organizations, many of which help small inventors protect their innovations, says Herbert Wamsley, IPO’s executive director. “But there are also abusive practices going on. We’ve been hearing from members about lots of threats of lawsuits and offers of licences by organizations that buy up patents.”

The company that sued RIM may not qualify as a vulture. But in this case, it certainly moved in for the kill. NTP Inc. is a Virginia-based patent-holding company.

Privately owned and so small that one attorney described it as a file drawer in a lawyer’s office, it was created 13 years ago by a now deceased engineer named Tom Campana; one of his lawyers, Don Stout; and an investor named Bill White. Today, NTP has 23 shareholders, among them six of the founders’ relatives, says Jim Wallace, the D.C. lawyer who argued NTP’s patent suit against RIM.

These 23 individuals will share the US$450-million windfall, says Wallace. “They can go buy an airplane; some of them may retire; some may buy a boat. They can do whatever they want.”

IN RECENT YEARS, patent litigation has risen steadily in the States, up eight per cent in the 12 months ended March 31, 2004. Meanwhile, the volume of patent applications has skyrocketed, doubling over the past decade, according to the U.S. Patent Office, which in 2003 handled 342,441 new files.

While 50 years ago patents typically covered mechanical and chemical advances, many applications today seek to protect high-tech innovations. Often expressed as lines of code, they can be virtually indecipherable to all but the most highly trained computer programmers. And this is partly what’s driving the patent-lawsuit industry. Critics says the Patent Office is ill-equipped to deal with the complexity of new technology applications. It’s difficult, they say, to determine what’s really novel or truly inventive, causing the office to issue patents that should never have been granted.

Another concern is the way industry manages patents. As a matter of strategy, large corporations tend to amass patents on their own innovations, says Alexander Stack, a Canadian patent lawyer who’s pursuing a Ph.D. in international patent law. These organizations know that their competitors, also patent stockpilers, are likely to make infringement claims against them. So, like kids with hockey cards, they agree to exchange licences. “The idea of building up your arsenal is to have something to trade,” Stack says. “This is a defensive system.” Vultures, however, don’t create anything that might infringe another’s patents, so there’s nothing to trade. They simply come looking for money.

One issue discussed at last week’s conference, Wamsley recalls, was the “1,000letters problem.” Patent trolls typically send out missives—often form letters—to dozens if not hundred of companies, in which they suggest the firms may be using a patented function. The troll may offer a licence for a relatively low price—say, $5,000. Some companies opt to pay the fee, which can cost less than investigating a potential breach, rather than risk a lawsuit, Wamsley says.

NTP’s first communication with RIM came in early 2000—a year after the BlackBerry was introduced—in a letter saying some of Campana’s patents were related to technology used in the BlackBerry’s wireless email system. The letter, which was similar to ones sent to 47 other companies, didn’t accuse RIM of violating patent protection and didn’t threaten a lawsuit.

‘TLIETCET I are paper companies that never built a product, never built a business, never did any good for anyone’

Almost two years went by before RIM heard from NTP again. This time, though, NTP informed the BlackBerry maker that it was suing for patent infringement. (The other 47 companies targeted earlier, which weren’t as high-profile as RIM, were not sued.) NTP’s claim was based on a series of patents Campana had acquired some 10 years before for a method he’d developed of sending messages electronically from a computer to a pager.

Right from the start, the case went against RIM. In November 2002, a jury awarded US$23 million to NTP, plus 5.7 per cent royalties on RIM’s U.S. BlackBerry sales. Some months after, the judge upped the penalty to US$54 million and boosted royalties to 8.55 per cent. He later went further, barring the sale of BlackBerries in the United States, but that was put on hold pending RIM’s appeal. That decision came last December, reaffirming crucial parts of the jury verdict. It was a disaster for RIM.

In January, the Canadian government took the extraordinary measure of filing a brief in support of RIM. Ottawa rarely interferes in a business’s legal affairs, but this case raised the question of whether U.S. patent law could reach over the border. Since BlackBerry emails are routed through RIM’s servers in Waterloo, Ont., the technology may fall outside American patent jurisdiction. Because RIM and NTP settled their dispute, that question was never answered by the court. Another issue that remains open is RIM’s claim—and the gist of its defence— that NTP’s patents are invalid, an issue the U.S. Patent Office continues to investigate.

NTP’s owners believe the RIM settlement is just the beginning of their patent profits, says Wallace. “They’re over there in Virginia as we speak, negotiating more deals,” he says. “Every handset manufacturer is coming out with wireless email capability. The way we see it, in the United States now there are approximately 200 million wireless handsets. With all these new products coming out, most will be converted to wireless email. As big as this is with RIM, we see it as just the tip of the iceberg.” HI

katherine.macklemtamacleans.rogers.com