Tech Giants Counter-Punch Against Patent Trolls

Of growing concern to many technology companies is the threat of patent infringement suits by “non-practicing entities”, or “patent trolls”, i.e., companies that extract royalties by threatening or filing actions for the infringement of patents acquired from inventors and businesses that were not actively enforcing them. According to Lex Machina, an intellectual property litigation, data and analytics firm, patent lawsuits filed by NPEs have grown from 22% of the cases filed five years ago to almost 40% filed in 2011. NPEs justify their actions by arguing that they encourage innovation by allowing inventors, such as university research labs, to financially benefit from their efforts.

A strategy often employed by NPEs is to offer to settle their claims for a nominal amount — well below the substantial cost of defending a patent infringement suit. Costs of defending a patent case include legal fees, the lost opportunity cost resulting from employee effort being diverted to the litigation, and of course, a possible adverse monetary judgment. The impact on the perception of the company’s willingness to aggressively defend against questionable infringement claims should be considered as well. The present value of a patent infringement suit can be determined by estimating the probability of the occurrence of each of the possible outcomes of the litigation, from an outright loss to complete victory, and applying those probabilities to the cost of pursuing the pathway that leads to each outcome. As painful as it may be, if a case can be settled for an amount substantially below its present value, doing so is often the prudent decision, even if the NPE’s case has little or no merit.

Recently, some NPEs have adopted a strategy to further increase the cost of not acceding to their settlement demand. In addition to pursuing the manufactures of purportedly infringing products, NPEs accuse the manufacturer’s customers of infringement, and demand payment from them. One example is the case filed last year by Chicago-based Innovatio IP Ventures LLC against 8,000 restaurants, hotels and other retailers that had installed WiFi equipment that Innovatio claimed infringed its patents. It demanded $3,000 from each to settle, which under any cost/benefit analysis is cheaper than defending the suit.

The manufacturers of the WiFi equipment, Cisco Systems, Netgear Inc., and Motorola Solutions Inc. could have responded in the usual way by simply filing a declaratory judgment action requesting a ruling that the patents were invalid and/or that their products did not infringe. Instead, on October 1, 2012 Cisco, Netgear and Motorola took a more aggressive approach by jointly filing an amended complaint in which they claim that some of the patents that Innovatio was asserting had expired, and that the products it alleged infringed the patents were licensed. The founder of Innovatio, Noel Whitley, is named as a defendant as well. Innovatio acquired a majority of its patents from Broadcom, whose former VP of Intellectual Property is – Mr. Whitley. The complaint claims that Innovatio’s conduct was no more than an extortion scheme that violated federal antiracketeering laws.

In response, Innovatio has stated that “Cisco’s claims are long on rhetoric and hyperbole and short on the facts and law,” and has moved to dismiss them. Cisco, Netgear, and Motorola are clearly sending a message that they will not only aggressively defend against what they deem to be meritless patent infringement claims, they will give NPEs whose strategies they believe are “misleading, fraudulent and unlawful” a downside as well. Whatever the outcome, the case will likely cause NPEs to think twice before going after their customers.

UPDATE TO THE STORY –
On February 4th, 2013, Judge James Holderman in Chicago dismissed Cisco’s, Motorola’s, and Netgear’s racketeering, civil conspiracy, and unfair competition claims. The Court concluded that the claims, even if taken as true, “… do not establish that Innovatio’s licensing campaign alleging infringement of the Innovatio patents is a sham.” The plaintiffs’ claim for breach of contract, as well as their claim that Innovatio is bound by its predecessor’s promises to patent holders that it would be reasonable in granting licenses under the patents, were not dismissed.

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