Why tech vendors fund patent 'trolls'

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

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.

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.

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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