In the past year, one of my clients has been contacted by four different companies offering licenses for a total of nine different patents. Each of the lawyers representing the potential licensors told me they were willing to license the patent for “reasonable” fees. One lawyer put it simply: “We are asking for less money than it will cost your client to have you analyze the patent.”
With increasing frequency, companies large and small are receiving letters from businesses offering a license to one or more patents that they claim the companies are using-a tactic that some have taken to calling “patent extortion.” The vast majority of patent owners who seek to enforce their patents by licensing or litigation do so legitimately-using only the most ethical and principled actions. However, for the businessperson who is suddenly confronted with an allegation that his or her company is in violation of a patent, it may not be readily apparent if he or she is facing a good faith patent enforcement or some dubious claim for money. For that reason, it is imperative that a company adopt procedures for ascertaining when a patent allegation has merit and when it does not.
Licensing of patents is big business. The Association of University Technology Managers reports that the royalty income from U.S. university patent licenses was more than $1 billion in 2002. The General Accounting Office (GAO) reported in October 2002 that federal laboratories received about $70 million in patent royalty income in 2001. Corporate patent licensing can also be very profitable. IBM, for instance, is said to receive patent licensing royalties approaching $2 billion each year, while Texas Instruments has reportedly received more than $3 billion in cumulative patent royalties since the 1980s.
More and more, patent enforcement and licensing is done by a “patent holding company” whose sole purpose is to assert patents against potential licensees in an attempt to collect revenue. This revenue can be from licensing royalties, settlement payments or court-ordered damages. In some situations, the patent holding companies have no connection to any company that makes products.
Regardless of how small or large the patent owner is, in the situation where a patent owner asserts a strong and justifiable claim, the licensing opportunity is certainly legitimate. Such activity strengthens the patent system by providing a valuation mechanism for intellectual property. Like a house or other real property, IP can have an estimated value from an appraisal, but the true value of the property is best determined by what someone is willing to pay for it.
In the situation where a patent owner’s enforcement is based on a weak claim, the opportunity is anti-competitive and weakens the patent system. Weak claims involve patents with questionable validity or with narrow claims that do not cover what the patent’s owner says they cover. Licenses to these types of patents provide an indication of the nuisance value of a patent.
Although claims may be weak, lawsuits based on such claims may still be a real threat and winning case. So-called “weak” cases may provide a court with an opportunity to extend or even change the law. It is hard to predict how a judge or jury will act, especially if the technology is complex and difficult to understand or if the current law does not seem fair. Further, the patent owner has a presumption that the patent he or she is asserting is valid. Proving the patent is not infringed can be an expensive and risky endeavor.
The following scenarios are examples of how some patent owners are enforcing their patents.
Scenario 1: Targeting Industries
Ronald Katz filed and obtained patents on technologies involving call centers where operators are presented with pop-up screens related to the phone number called. Katz has obtained more than 50 patents, each with long descriptions and hundreds of claims. Most companies facing the 3,000 total patent claims included in the Katz patents are eager to find ways to limit their costs in analyzing and licensing the patents.
Katz set up a patent holding company called Ronald A. Katz Licensing, L.P. (RAKTL) that sent letters to energy companies, banks, telecos, airlines and others in an effort to have the industries coordinate settlements jointly. Some of the target industries formed consortiums to jointly negotiate licensing terms. RAKTL tells potential licensees that such group negotiations reduce negotiation costs and, therefore, licensing fees.
In a recent development, the Director of the Patent Office has ordered re-examination of four of the Katz patents. Since 1980, when re-examination laws and rules were enacted, there have been more than 6,000 re-examinations. Of that number, only 157 (or 2%) were ordered by the director/commissioner.
Despite some potential setbacks from the Patent Office, Katz’s patent enforcement demonstrates that patent owners can enforce patents against groups of companies, in a collective fashion, without facing challenges to the patents in court. Presumably, these companies could pool their resources and reduce litigation costs to each individual company. However, in the majority of instances-for whatever reasons-companies opt to license the patents instead of going to court.
Scenario 2: Mass Mailings
A growing trend among patent owners is to create a licensing company whose only assets are patents. One such licensing company recently bought a patent that it believed applied to online, searchable classified ads, then sent letters to hundreds of companies with online classified ads. Anecdotal evidence suggests that successful licensing fees were relatively small-around $10,000, which is probably less than what a lawyer would charge to analyze the patent and provide an opinion. In the aggregate, though, such fees can provide a large return to the patent owners.
Scenario 3: Targeting Customers
In the early 2000s, one company established for the sole purpose of licensing patents sued dozens of companies using particular industrial automation equipment to communicate information between a network of programmable logic controllers and a personal computer. Rather than suing the vendor for infringement, the licensing company-which purchased the patent from one of the vendor’s competitors-sued the vendor’s customers. Some suggest that the rationale for suing end users rather than the vendor is that end users are less willing than the vendor to fight and, thus, will settle quickly.
Scenario 4: Targeting Unsympathetic Defendants
Starting in 2003, Acacia Technologies Group began sending letters to hundreds of companies, asserting ownership in patents related to “digital media transmission technology.” Acacia alleges that this technology includes Internet streaming audio and video. It has sent letters to universities with “e-learning” or “distance learning programs,” Internet companies and others.
Instead of suing colleges and universities, however, Acacia filed lawsuits against more than 50 Internet porn companies. Fifteen of these porn companies banded together to form a joint defense group. This litigation is still pending.
Acacia’s patent enforcement activities demonstrate the use of litigation to promote licensing endeavors. Patent owners may choose to sue unsympathetic defendants-like Internet porn companies-or confront smaller companies with lesser resources and use them as a “straw man” defendant. Once the patent owner has a favorable court judgment, his or her licensing leverage increases. “Straw man” defendants may not challenge the validity of the patent as thoroughly as larger companies.
Dealing with Allegations of Patent Infringement
Before ever receiving any allegation of patent infringement, a company can take preventative measures to reduce its potential exposure by establishing a defensive patenting or publication program. After receiving a “license opportunity” letter from a patent owner, a company should take the following steps:
1. Contact patent counsel and send an initial response to the patent owner, asking for specific allegations and proof of the need for a license to the patent or patents.
2. Determine dates of first use, sale or offer for sale of the accused technology.
3. Determine “exposure.” How much does the accused technology generate in sales? Profits? What are future plans for the technology?
4. Examine the file history of the patent for statements that define what is and is not the “invention.”
5. Examine foreign counterpart patent applications and their file histories for helpful information, including prior art not cited to the U.S. Patent Office.
6. Review the “proof” provided by the patent owner (if any) and conduct an analysis of non-infringement and/or invalidity.
7. Determine whether to obtain opinion of counsel based on non-infringement or invalidity.
8. Determine whether to seek re-examination from the Patent Office or a declaratory judgment from a U.S. federal court.
Ultimately, a company’s chosen course of action may include relying on a non-infringement or invalidity opinion of counsel, filing a re-examination request with the Patent Office, coordinating efforts with other companies to challenge or license the patent, filing a declaratory judgment action to have a court declare the patent not infringed or invalid, or taking a license based on a reasoned understanding of the circumstances-not just the fear of litigation.
Paul S. Hunter is an attorney at Foley & Lardner LLP specializing in business and intellectual property matters involving technology and financial services. He has developed patent portfolios at startup companies, counseled companies on valuation and enforcement issues related to patents, and provided patent prosecution and litigation counsel to large and small companies. is the author of Overcoming Patent Infringement Allegations, published by Aspatore Books. He may be reached at email@example.com.