Under the Radar: Two Tales From the Secret Life of Patents

The patent system is often portrayed as the defender of creativity, but as it's grown powerful, it's become a tool to extract settlements from little guys with the threat of astronomical legal costs.
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Two recent developments show sides of the patent system not normally exposed to public view.

The first was ignored by the media: A firm called Channel Intelligence has sued 17 small websites, including three owned by individuals, for infringing a broad patent on user-generated lists. Almost ignored, except that it was picked up by Techcrunch, which even published the full complaint. So if you've ever wondered what it's like to be sued for patent infringement, here's your chance to step into the shoes of some unlikely victims.

Often the victim gets a letter inviting her to take a license, but in this case, judging by comments posted (and the fact that Channel Intelligence declined to respond to my question), there was no letter and at least some of the defendants were not aware that they were being sued. But sued they are -- in the Federal District Court in Delaware, in some cases, thousands of miles from home.

What's going on here? And why isn't it news? Especially when patent trolls and patent reform have become popular topics.

It's not news because no recognizable companies are involved. The classic troll story is when a small "non-producing entity" sues a deep-pocketed company with a household name on a questionable patent of breathtaking sweep or triviality.

Here we have a company of modest size using a high-profile Washington law firm, Patton Boggs, to go after 17 tiny companies and individuals. These are not competitors -- or even technology companies. They are mom and pop websites of virtually no commercial significance -- but they are getting hauled into patent litigation (sometimes known as the "sport of kings") far from home without warning. Is this America in 2008?

How often does this under-the-radar stuff happen? In 2003, SBC (now AT&T) gained some notoriety shaking down websites for the use of frames. But that was news because SBC was a big regulated company -- and, for some reason known only to their legal department, they went after an award-winning children's website, Museum Tour.

The patent system is often portrayed as the defender of the creative individual, the small inventor who would otherwise be greedily ripped off by large companies. But as patents have grown plentiful and powerful, they become not just protection but powerful tools that can be used in variety of ways. Ambush and hold-up, in the case of the classic troll. Or to extract settlements from little guys with the threat of astronomical legal costs.

The costs? The Channel Intelligence defendants are going to have to get a lawyer in Delaware just to prevent a default judgment against them. But they should be grateful that they do not have to defend in the notoriously pro-patentee Eastern District of Texas, which has inspired reform legislation to prevent venue abuse. Unfortunately, the proposed reforms have stalled in the Senate ... No luck here.

Look at the patent. Here it is for free.

Look at the 63 claims -- those are all things you can't do without permission. Can't understand them? Even if you think can, you're advised to get a lawyer to help you. The good news is that the patent may not be valid.

To assess the validity of a patent based simply on prior art cost an average of $13,000 in 2007. Then, if the patent appears valid, a legal opinion on whether or not you infringe is another $13,000. So you may be looking at $30,000 for starters just to preserve your options and get a preliminary assessment.

More good news. The patentee may be willing to offer you a license for $10,000, instantly saving you at least $20,000. How can you rationally refuse? Case settled. The patentee nets $170,000 from all defendants and moves on to other offending websites, pointing to your settlement payments as evidence of the patent's validity.

During the impassioned debate over a proposed European directive on software patents, opponents of software patents mounted a graphic demonstration of the problem, entitled the Patented European Webshop. The website showed that despite official proscription of patents on "computer programs as such" in Europe, patents were nonetheless granted for common website functions. This propaganda coup elicited anxiety among small businesses and played an important in defeating the directive, which would have legitimized those patents.

The great achievement of the Web is that it offers a democratic technology that untold millions can use to start online stores, create social networks, provide resources for communities of users, or simply to express themselves. But is it reasonable to expect untold millions to read the thousands of patents, such as No. 6917941, that may apply to websites?

To their credit, big companies with thousands of software patents do not go around beating up on small websites no matter how lucrative it might be to do so. But those who can operate below the radar may have little to lose -- and much to gain. At the same time, defendants prefer to keep things quiet, because they don't want their customers to know.

I promised two stories.

The other story is plastered all over the mainstream media. Nokia and Qualcomm have suddenly settled their epic, multi-country dispute over mobile phone patents, although Qualcomm is still locked in royalty disputes with other manufacturers. Business Week headlines: "Why Qualcomm Folded to Nokia." But if Qualcomm folded, why did its stock rise nearly 17%, while Nokia's only rose 4%? There is widespread speculation on what really happened and who really won.

Here's what I think.

Within high-tech, companies settling with patent trolls find that trolls are asking for patents as part of the settlement. These add to the troll's arsenal, allowing it to pursue others (often competitors of the settling company) with a new weapon.

Qualcomm is not a troll, but it is an upstream supplier of standardized technology arguing with manufacturers about royalties and the quality of Qualcomm's patents. Part of the deal with Nokia is that Nokia transfers some of its patents to Qualcomm.

I haven't seen any speculation on that part of the deal, so here goes: It's the same principle as in Channel Intelligence. The value of patents is context-dependent. Which means that patents will naturally migrate to those that can extract the most revenue from them. Nokia is already extensively cross-licensed as a manufacturer must be, so a few spare patents may be of little value to it. But Qualcomm is less of a manufacturer and more a supplier of technology. It has less need for cross-licenses from others and is freer to use patents aggressively.

Qualcomm may win bigger because of the transferred patents but it uses them to Nokia's benefit by raising costs for everybody else and going after Nokia's competitors. Furthermore, the Qualcomm patents that Nokia was contesting are left standing, but Nokia gets a good deal. Both win. Nokia's competitors face an emboldened Qualcomm, the public will pay higher prices, and there is more work for lawyers.

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