Why tech vendors fund patent 'trolls'

A love-hate relationship

Companies including Apple and Micron have historically spoken out against patent trolls, only to wind up doing business with PAEs anyway.

Recently retired Apple intellectual property chief Richard J. Lutton spoke out bitterly against the practice of patent litigation for dollars in testimony he gave before the U.S. House of Representatives in April 2005.

In that testimony, Lutton said, "The IT industry, like so many others, is encountering the enormous costs of dealing with poor quality patents. We are also faced with a growing cottage industry of patent assertions, orchestrated by entities with no business other than acquiring and asserting patents."

He went on: "Increasingly, [these companies] use the uncertainties of the civil litigation system as their primary bargaining chip. The result is that bad patents can cause... substantial litigation risks and costs. Defendants in these suits now must spend an average of $5 million defending themselves and, in some courts, the average is more like $8 million."

Yet patent records show that Apple later provided at least two patents -- via a company named Cliff Island -- to Digitude Innovations, a Virginia-based patent aggregator that has as its major stakeholder Altitude Capital Partners, a New York-based venture capital firm.

The two patents that Apple transferred -- Patent Nos. 6,208,879 and 6,456,841 -- form half the basis of Digitude's February 2012 lawsuit (PDF) against Motorola Mobility Holdings, which alleges patent infringement, according to records in the U.S. Patent and Trademark Office patent-assignment database. Google has made an offer to purchase Motorola Mobility and is waiting for legal approval.

Nor is Apple the only tech vendor to say one thing publicly and then do another. The late Micron CEO, Steve Appleton, also lashed out at "patent trolls" in his March 2009 testimony (PDF) during a Senate Judiciary Committee hearing on the Patent Reform Act.

U.S. patent law has encouraged abuse of the system, Appleton complained, since the law has been interpreted to award royalties based on entire market value and not simply based on a company's share of that market -- for example, the value of all mobile phones and not only those that use a specific platform involved in a patent dispute.

Such awards can "exceed the infringer's entire profit on the infringing product or service -- making clear that the entire standard has no basis whatever in economic reality," Appleton said. "Such a royalty is by definition unreasonable, because a product manufacturer would stop making the product rather than pay it. But this legal rule authorizes NPEs to pursue irrational damages demands with impunity..."

Unlike companies that make or sell products, "NPEs cannot be deterred from asserting opportunistic and unjustified patent claims by the counter-threat of infringement claims asserted by defendants back against them -- their lack of any products or services prevents the assertion of such claims," Appleton said.

"Because the patent system was designed with product manufacturers in mind, not NPEs, the NPEs are able to exploit the lack of clarity of the reasonable royalty standard in a way that manufacturing companies cannot."

Just nine months later, in December 2009, Micron sold at least 20% of its patent portfolio to Round Rock Research LLC, a Mount Kisco, N.Y.-based patent aggregator. Micron's patents are the only ones that Round Rock holds, according to the U.S. Patent and Trademark database. Appleton was still Micron's CEO when this sale occurred, a post he held until the time of his untimely death in February 2012.

Apple and Micron refused to comment for this story.