Why tech vendors fund patent 'trolls'

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

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The practice of tech vendors and other entities funding PAEs is common but relatively unpublicized, in part because at least one major aggregator goes to great lengths to keep its dealings private. One tactic is the practice of creating over a thousand companies that have different legal names and no obvious link to the aggregator that created them. (See sidebar, below.)

Tech investors in Intellectual Ventures

Investor name Which IV fund
Adobe Systems Inc. Invention Investment Fund II
Amazon.com NV Investment Holdings Inc. Invention Investment Fund I, II
Apple Inc.

Invention Investment Fund I, II;

Intellectual Ventures II
Cisco Systems Inc.

Invention Investment Fund II;

Intellectual Ventures II
eBay Inc.Invention Investment Fund I, II
Google Inc.Invention Investment Fund I
Intel Corp.Invention Investment Fund I, II
Microsoft Corp.

Invention Investment Fund I, II;

Intellectual Ventures I, II
Nokia Corp.

Invention Investment Fund I, II;

Intellectual Ventures I, II
Nvidia International Holdings, Inc.Invention Investment Fund I, II
SAP America Inc.Invention Investment Fund I, II
Sony Corp.

Invention Investment Fund I, II;

Intellectual Ventures I, II
Verizon Corporate Services Group, Inc.

Invention Investment Fund II;

Intellectual Ventures II
Xilinx Inc.Invention Investment Fund I, II
Yahoo Inc,Invention Investment Fund I, II

All the technology companies named as IV investors were contacted multiple times for this story; none except Verizon would comment for attribution. Nor would IV comment on the record about its Who's Who list of investors, which also includes universities and charitable foundations.

Nat Goldhaber, managing director of the venture firm Claremont Creek Ventures, explains that "all these companies are using Intellectual Ventures as a patent pool to avoid suit and [have the ability to] cross-license" the patents in the pool.

In January, attorney Ewing and Robin Feldman, a professor at the University of California's Hastings College of Law, published a comprehensive report in the Stanford Technology Law Review that among other things detailed the intricate linkages between some technology vendors and PAEs.

"Big companies aren't just doing this for troll litigation chump change," Ewing explains. "They're doing it for strategic reasons of protection... or [to] cause competitive disruption and do so in a way that avoids showing they're obviously involved." The evidence for all this is "hidden," he says, "but it is hidden in the public record in plain sight."

In that January report, Feldman and Ewing acknowledge that PAEs could "potentially have positive effects." Among other things, they say PAEs could ensure that individual inventors receive the compensation due to them, and could create "a powerful weapon stream" to deter lawsuits.

Another benefit to joining up with aggregators is the notion of cross-licensing under the PAE's umbrella -- members using each other's patents without fear of being sued.

However, the report goes on to say that "the activity of mass aggregation brings its own potential harms." Among these are "potentially reducing future innovation and productivity." Most important, the report says, "the basic business model of mass aggregation is troubling."

Under the radar

The situation is so secretive that very few sources, and especially those in companies involved directly with any PAEs, agreed to be quoted on the record for this story. Instead, almost all spoke on the condition of anonymity, but Computerworld verified information in this story by looking at court documents, applications with the U.S. Patent and Trademark Office, filings with the U.S. Securities and Exchange Commission (SEC), and other legal documents.

Indeed, Intuit and Verizon, according to SEC filings and sources speaking not for attribution, paid, respectively, $120 million and $350 million to IV in exchange for access to some part of the 35,000-plus patents in its collection. Also, Verizon was missing from the lineup of mobile service providers that Intellectual Ventures I LLC and Intellectual Ventures II LLC sued on Feb. 16 (PDF). On that date, IV sued five mobile carriers -- Sprint, AT&T, Nextel, T-Mobile and SBC Internet Services -- for patent infringement.

Robert Varettoni, a Verizon spokesman, responds: "Our comment [about IV] is in our 10K" -- the SEC document Verizon filed in 2008 that references the $350 million figure.

Here's an excerpt from Verizon's 2008 SEC filing:

"During 2008, we entered into an agreement to acquire a non-exclusive license [IP License] to a portfolio of intellectual property owned by an entity formed for the purpose of acquiring and licensing intellectual property. We paid an initial fee of over $100 million for the IP license, which is included in [other] intangible assets and is being amortized over the expected useful lives of the licensed IP."

Additionally, the SEC filing said, Verizon invested $250 million "to become a member in a limited liability company" that gives Verizon rights to "certain intellectual property" in return for an annual license fee.

Verizon had no further comment on the matter. "The bottom line is Verizon has nothing to do with IV's attempts to license its patents to other companies or the lawsuits it filed," Varettoni adds.

For its part, Intuit refused comment.

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