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Why tech vendors fund patent 'trolls'

Experts say it's about protection from lawsuits and access to a large pool of patents

By Gina Smith
April 5, 2012 06:00 AM ET

Computerworld - Major technology vendors are financing the activities of so-called patent trolls, according to experts, court documents and patent and other legal filings, a Computerworld investigation has found.

Patent "trolls" -- more politely called mass patent aggregators, nonpracticing entities or, as the Federal Trade Commission defines them, patent assertion entities (PAEs) -- litigate more than they innovate. These companies derive the bulk of their income, if not all of it, from licensing the huge libraries of patents they hold and from the money they make by suing companies that use their patents without permission.

The bottom line for both consumers and IT professionals is that the costs of defending patents are passed along to consumers in the form of higher product prices, and the lawsuits hamper technology innovation, experts say. Some tech vendors -- including Apple and Micron -- rail against the concept of patent 'nuisance' lawsuits, only to fund or otherwise support some of the patent aggregators. (See sidebar.)

In a May 2011 report, Citigroup analyst Walter Pritchard said that phone maker HTC pays Microsoft $5 for every Android phone sold as part of a patent settlement reached in April 2011. By those numbers, HTC paid Microsoft somewhere between $35 million and $45 million in the first quarter of 2011 for patent fees alone.

Patent litigation has increased by more than 230% over the past 20 years, according to Article One Partners, a patent organization. Further, Article One says, in 2008, some 2,896 patent infringement actions were filed -- only 179 fewer than in 2004, the peak year.

"Most of the major tech companies are backing a troll in some way, probably financially," says Thomas Ewing, an attorney who has authored reports on what he calls "patent privateering" and whether patent "giants" are dangerous for American innovation.

One example, according to patent attorneys and other experts, is Intellectual Ventures (IV) -- a patent-licensing firm founded in 1999 by former Microsoft executives Nathan Myhrvold and Ed Jung, among others. According to a court document (PDF) that IV filed in April 2011 and then fought to keep secret (PDF), IV investors include Adobe Systems, Apple Inc., Cisco Systems, eBay Inc., Google, Intel Corp., Microsoft Corp., Nokia, Nvidia International Holdings, SAP America Inc., Sony Corp., Verizon and Xilinx, Inc.

Each of these tech companies made a financial investment in IV; all except Google and Adobe went for more than one round of funding. IV has raised at least $5 billion from investors, including tech firms.



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