The new mantra among some large companies about U.S. patent lawsuits is: Get them before they get you.
It’s part of a push by the technology and financial industries against patent owners that don’t make products, called non-practicing entities or NPEs. A particular source of ire is patent owners that sue a large number of companies and seek settlements less than the legal costs of fighting.
“Our view is that the nature of the cases has become even more abusive than it was before,” said Cisco Systems Inc. General Counsel Mark Chandler. “Given what’s happened in the courts, the opportunity is now there for those who were victims by these schemes to fight back.”
In October alone, eight pre-emptive lawsuits were filed by companies like Discover Financial Services and Adobe Systems Inc. whose competitors or customers were sued for patent- infringement.
Cisco and Motorola Solutions Inc. lodged racketeering claims, more closely associated with mob cases, against a company demanding cash from their customers who use wireless networks.
That attitude probably will grow following two verdicts on Nov. 6: a $368.2 million award won by VirnetX Holding Corp. against Apple Inc. and $30 million won by Vringo Inc. against Google Inc. and some of its customers.
A rash of patent sales last year – prompted by smartphone makers like Apple Inc. and Samsung Electronics Co. looking for new ammunition to use against each other – led to an unprecedented transfer of patent ownership. In some cases, the buyers were firms like Vringo, which obtained patents from Nokia Ojy and used them to sue Chinese handset maker ZTE Corp.
“I own the invention, and just because I don’t use it doesn’t give you the right to trample on my property,” said Vringo Chief Executive Officer Andrew Perlman. “A lot of big tech companies say we hate NPEs, we hate NPEs, but they are very happy to assert patents that don’t cover their products. Anybody that’s at the receiving end of a lawsuit is never happy about it.”
The tech companies don’t complain so much when it’s one of their own filing suit, said Paul Ryan, CEO of patent-licensing company Acacia Research Corp..
“No one is looking at the actual merits of the patents in the cases,” Ryan said. “It’s all spin and hyperbole over who’s bringing the litigation.”
Investors have tripled Vringo stock since the beginning of the year, looking for payouts similar to the $612.5 million Research In Motion Ltd., maker of the BlackBerry, laid out in 2006 to NTP Inc. after years of litigation. The original verdict in 2002 was $23.1 million.
Verdicts like VirnetX’s are rare and have to withstand post-trial arguments to judges and an appeals court. The last large verdict against Apple, for $625.5 million, was tossed out.
The median jury award in NPE cases against telecommunications companies between 1995 and 2011 was just over $30 million, according to a September report by PricewaterhouseCoopers LLP.
NPEs don’t succeed as often as competitors who sue each other. About a quarter of NPE suits were won by the patent owner, compared with a 38 percent success rate for companies that asserted patents they used, PricewaterhouseCoopers said.
Still, the prevalence of litigation, which can cost millions of dollars each in legal fees, has spurred technology and financial companies to act. They’ve persuaded courts to make it more difficult to use a patent’s power to block products as a cudgel to force settlements, decreased the ability to collect large royalties on minor components.
“I don’t think you can say as a class NPEs are necessarily bad, but there are people and entities who try to game the system,” said Blaney Harper, a lawyer with Jones Day in Washington. “It’s proliferated so much, companies don’t want to be seen as cash machines. At some level you have to say, ‘I’ve paid too much; it’s time to stop this.’”
Critics of NPE litigation are pushing to make it easier to invalidate patents on software and business methods, and want to force losers pay the winner’s legal fees. The Supreme Court didn’t resolve the issue in 2010, in a case involving a patent to hedge energy trades.
The U.S. Court of Appeals for the Federal Circuit will hear arguments Feb. 8 on whether computer- implemented ideas can be patented.
The U.S. Federal Trade Commission and Department of Justice are scheduled to hold a workshop Dec. 10 on the competitive effects of companies buying up patents for the primary purpose of litigation and licensing.
The ITC Working Group, whose members include Apple, Google and Cisco, is lobbying Congress to limit NPEs’ ability to file cases at the U.S. International Trade Commission in Washington, which has the power to block imports if it finds patents have been infringed. The group has spent $430,000 on lobbying, according to U.S. Senate disclosures.
“What we need to do is get the right case to the Federal Circuit or get Congress to make changes,” said Allan Lo, Google’s deputy general counsel. The company seeks “anything that helps to make the remedies for patent infringement more rational so you don’t have the ability for any NPE or anybody get more than they are entitled to.”
The Federal Circuit, which specializes in patent law, last year upheld a judge’s decision to sanction lawyers for one patent owner that targeted banks. The trial judge said the licensing program had an “indicia of extortion.”
Technology industries claim patents are valuable only if owned by big companies, when the Constitution doesn’t require that a patented invention be used to make a product, Acacia’s Ryan said.
“If you’re a big tech company and you know you’ve got a lot of surface area and you have a lot of exposure, one way to lower your cost is to go to Washington and lobby Congress,” Ryan said. “If you can make it difficult for the other side, you’ve improved your bargaining position in licensing. We understand the practical aspect of that.”
Cisco operates its largest campus outside its California headquarters in RTP.
[CISCO ARCHIVE: Check out 10 years of Cisco stories as reported in WRAL Tech Wire.]