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Beware patent trolls.

One of the biggest risks facing companies today is the so-called "patent troll." The patent troll-nicknamed for the frightening mythical creature that lives under bridges and charges passersby a toll to cross--is a person or company that holds patents for the sole purpose of extracting license revenue and/or suing infringers. The patent troll does not manufacture or sell anything. Its only business is monetizing patents by threatening to sue and suing companies that actually make things.

While companies have always operated with some risk that someone might have a patent covering some aspect of their business or products, patent trolls pose a far more serious risk. First, unlike your competitors who may hold patents, trolls are not running a business. They do not have the same set of considerations in determining whether to assert a patent. Nor do they face the same possible downside risks, for example from a counterclaim based on one of your patents.

Second, a competitor knows that bringing a lawsuit may be disruptive to its business and may result in divulgence of confidential and other sensitive information through the discovery process. The troll, on the other hand, has no confidential or competitively sensitive documents and no executives to be distracted by having their depositions taken. Third, the patent troll faces relatively less expense than your competitor and likely will have the case handled by a contingency fee lawyer. In many cases, the trolls are the lawyers. While your competitor has to consider legal expenses as a major downside to suing for patent infringement, the troll does not.

The Trouble with Trolls

The U.S. patent system is based on the concept that patents are issued as an "incentive to invent." They give the inventor-whether an individual or major companies--the exclusive right to make, use or sell an invention in return for providing a public, detailed description of the invention so that others may make improvements and innovations.

One of the earliest inventors to engage in what we now call "troll" behavior was Jerome Lemelson. During his lifetime, Lemelson applied for and was granted more than 500 patents coveting an array of technology, ranging from automated manufacturing systems to bar code readers to automatic teller machines to video cameras to cordless telephones and facsimile machines. Beginning in the 1970s, Lemelson, who was not himself in the business of making or selling anything, teamed with a lawyer and brought actions for patent infringement against major corporations throughout the United States, including General Motors, Ford, Chrysler, IBM, Mitsubishi, General Electric, Matsushita, Zenith and many others. He also entered into license agreements with companies all over the world. He is reported to have reaped hundreds of millions of dollars in royalties and court awards during his lifetime. His quest continued after his death in 1997 in the name of the Lemelson Medical, Education and Research Foundation, which owns his patents.

Lemelson did not contribute his "inventions" to the public or to companies he sued. At the time he filed his patent applications, the law provided that the application would remain secret until a patent issued. Therefore, many of Lemelson's "inventions" remained secret for years while they made their way through the U.S. Patent and Trademark Office (USPTO). Meanwhile, Lemelson watched and waited while industry invested in and developed technology arguably covered by his broad patents. He then sought to monetize his patents through licenses or litigation. In the world of inventors, he is a hero. In the world of manufacturing and commerce, he has inspired a growing group of people to focus on patents not as the means to inspire innovation, but rather as a tool to extract license fees or promote litigation with respect to the innovations of others.

Business Method Patents

The 1990s brought a rise in what are known as "business method" patents. Business method patents cover processes, generally implemented by computers, involved in operating businesses. Probably the most famous early business method patent was the "1-click" patent, which claimed a method of placing an order over the Internet requiring only a single click of the mouse to check out. Many business method patents involve known methods of doing business, where the novel contribution is to carry out the method using a computer, a network of computers, an intranet or the Internet.

Over the past 15 years, the patent office has issued thousands of business method patents. While the USPTO has publicly stated that it will bring more scrutiny to bear on business method claims in the future, it cannot change the past: there are a broad array of business method claims within issued patents, available to create risk, particularly for companies doing business over the Internet or networked systems.

Patent trolls holding an inventory of business method patents pose a particular risk to modern day businesses. Many of the business method patents claim methods of doing business, with the "invention" being the use of a computer, or networking computers together. In other words, the "inventor" claims a known business operation but, for the first time, adds the idea of performing that business operation with a computer. Not surprisingly, many businesses run computer networks, voicemail, accounting systems, inventory systems, systems integration products, etc., which perform day-to-day business tasks using computers, networks and the Internet. Thus, almost any business is susceptible to an attack by a patent troll.

Business method patents are also very difficult to invalidate based on what was known at the time of the patent application. Often the business method claimed is something that was known at the time of the application or would have been "obvious." But to invalidate a patent, the alleged infringer must prove that the invention was described in a printed publication or in use or on sale more than one year before the application date. Unlike typical mechanical or technology inventions, there generally is very little in printed publications about business methods and it is very difficult to prove that they were in use or on sale before the critical date. Thus, even for inventions that feel like they have been around forever, it may be very hard to find the proof needed to prove the patent invalid in court.

The BlackBerry Case

Few cases have brought more attention to the issue of patent trolls than the ongoing litigation between BlackBerry handheld maker Research in Motion (RIM) and NTP Inc. NTP does not actually make or sell anything (and never has), but turns a revenue from licensing its patents to other companies. In the early 1990s, it purchased a portfolio of patents relating to wireless e-mail.

In 1992, NTP began sending letters to wireless e-mail providers and software and equipment makers, citing its patents and offering licenses. At that time, RIM, based in Waterloo, Ontario, was a small manufacturer of specialized data wireless cards mostly for industry and the military. It was around this time that RIM embarked on what would become the BlackBerry, which is now the world's leading provider of portable, remote e-mail communications devices.

In 2001, NTP--which essentially consists of one employee--sued RIM for infringing upon a number of wireless technology patents. To say that the ensuing legal battle between NTP and RIM has been bloody is a bit of an understatement. It has been more like civil war. In late February, the U.S. Patent Office officially discounted one of the disputed patents, strengthening RIM's case considerably. Despite this development, the judge presiding over the case strongly pushed for the parties to settle, and an injunction against RIM--which, if enforced, would have required RIM to discontinue its BlackBerry service in the United States--was never out of the question. On March 3, RIM settled the case by agreeing to pay NTP a one-time payment of $612.5 million for the lifetime of the disputed patents. This is less than the $1 billion originally sought by NTP, but more than the $450 million settlement that was negotiated in 2004 (but fell apart before finalization). The settlement is a bitter, but not fatal pill for RIM to swallow. The amount of service subscribers it lost from the lawsuit will likely be recouped within weeks of the settlement, and the financial prospects for the company remain bright despite this ugly and unfortunate episode.

As with other patent trolls, NTP never made a BlackBerry-type device or system. Nor did it share any ideas or technology with RIM. Rather, it waited until RIM had invested in, developed and commercialized its BlackBerry system, then brought suit, alleging that the BlackBerry system infringes its patents.

Managing the Risk

Patent trolls have inverted the traditional rationale for building an intellectual property portfolio. They obtain patents not to make, use or sell new products and technologies, but solely to force third parties to purchase licenses. And because patent trolls have no incentive to reach business solutions, target companies are left with two options: pay up or litigate.

Many companies in all areas of business are finding themselves on the receiving end of letters from patent trolls asserting patent infringement and offering a license. Often these initial letters offer an "early bird special," claiming that if the receiver pays a lump sum within 30 to 90 days, it will be off the hook (via a nonexclusive license to the patents). Usually these deals are priced to be moderately less than what the cost of litigation would likely be.

While there are no easy answers, there are some steps that businesses can take to better manage their risk:

Keep track of your technology. The best defense against a troll is proof that you have been performing the method claimed in the patent since before the patent was filed. Having good documentation is essential. Put in place a system to keep track of and track the development of your systems and the source of all of your business software and hardware, including when you started using them, and how you use them.

Conduct an infringement assessment. If you receive a letter in the mail saying your company is infringing on a patent, do not panic. The first thing you need to do is review the patent carefully and conduct an internal assessment of (1) whether your company's accused systems indeed come within the claims of the patent; and (2) if so, when you first started using the accused systems. It is best to engage counsel in this process to be certain that you have a clear understanding of the parameters and to benefit from frank, attorney-client communications about all of your options.

Closely assess and negotiate with third party vendors. Many business systems are purchased as custom or off-the-shelf products and/or services from third party vendors. For any significant business system, you can reduce your risk by carefully evaluating the outside vendor and, in certain circumstances, by negotiating for indemnification from liability and expense if the vendor's products or services form the basis for an infringement allegation.

Form alliances. If your company is getting letters from a patent troll, chances are your competitors are, too. Some companies have formed defense groups to reduce the costs of fighting patent trolls in court. By banding together, companies are not only taking a stand that they will not let patent trolls bully them into paying for licenses on patents they do not infringe, but also saving the expense of solo litigation.

Consider your options carefully. If you are in a business where you are susceptible to multiple attacks by trolls, it may not be smart to pay. You do not want to be known as an easy mark and it may, therefore, be worth your while to fight and incur the legal expenses that will follow. However, if you are not a likely target, you may be smarter to take the early bird deal (or even negotiate for a better deal, which is often possible) and move on with your business.

Sarah Chapin Columbia is chair of the intellectual property litigation group and the patent and intellectual property department at Choate, Hall & Stewart LLP in Boston, where she focuses on complex intellectual property, antitrust and other commercial disputes. Stacy L. Blasberg is an associate in the intellectual property practice at the firm.
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Title Annotation:Patent licensing risk
Author:Columbia, Sarah Chapin; Blasberg, Stacy L.
Publication:Risk Management
Geographic Code:1USA
Date:Apr 1, 2006
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