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Why Bash Individual Inventor-Owned or Controlled Companies?

Written by Raymond P. Niro
Niro, Haller & Niro
Posted: June 30, 2013 @ 10:24 am
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Patent Freedom’s data shows that roughly 56% of all NPE suits are brought by companies that are owned or controlled by individual inventors — the original assignees of the patents involved. If you include companies in which individual inventors receive a substantial portion of any license fees or other recoveries, the number is more like 80%. So, why all this hysteria about the evils of entities enforcing and licensing patents, rather than those manufacturing products? The answer is because the debate (if you want to call it that) serves the interests of a group of high-tech companies on the West Coast and some foreign companies who, together, have thrown hundreds of millions of dollars at political groups to influence Congress and even the President.

Incredibly, even the Chief Judge of the Federal Circuit has joined the chorus, lending his name to an article that appeared in the New York Times on June 4, 2013 — an article that includes this statement:

The onslaught of litigation brought by “patent trolls” – who typically buy up a slew of patents, then sue anyone and everyone who might be using or selling the claimed inventions – has slowed the development of new products, increased costs for businesses and consumers, and clogged our judicial system.

Their business plan is simple: trolls (intellectual property lawyers use less evocative terms like “non-practicing entities” and “patent-assertion entities”) make money by threatening companies with expensive lawsuits and then using that cudgel, rather than the merits of a case, to extract a financial settlement.

Randall R. Rader, Colleen V. Chien and David Hricik, Make Patent Trolls Pay in Court , N.Y. Times, June 4, 2013. What empirical data supports this claim? Has new product development really been slowed? Have consumer costs really increased? And is our judicial system really now clogged by NPE litigation, rather than the cell-phone wars?

The President proclaimed that “trolls just want to hijack somebody else’s idea and see if they can extort money.” Who wrote that script? Probably a publicist for the special-interests groups. Of course, according to the authors of the New York Times article, it is all the fault of contingent-fee lawyers:

Trolls, moreover, often use lawyers to represent them on a contingent-fee basis (lawyers get paid only when they win), allowing trolls to defer significant legal costs that manufacturers, who generally must pay high hourly fees, cannot.

With huge advantages in costs and risks, trolls can afford to file patent- infringement lawsuits that have just a slim chance of success. When they lose a case, after all, they are typically out little more than their own court- filing fees. Defendants, on the other hand, have much more to lose from a protracted legal fight and so they often end up settling.

But, what lawyer representing a client on a contingent-fee basis brings “lawsuits” that have just a slim chance of success? Is that what they do: “Let’s pick the worst case and sue the biggest companies.” Ridiculous. I’m betting the authors never represented a client on a contingent-fee basis. Take away the contingent fee and you take away the ability of most individual inventors and small companies to afford the legal process. Yet, these West-Coast law professors (who are actually financed, in part, by the high-tech companies) rehash the same bogus data to make the same bogus arguments. The $29 billion in annual costs of NPE litigation (used to support the various bills pending in Congress) comes from a Boston University Law Review Article that relies on data supplied by RPX and includes lawsuits brought by universities and individual inventors — virtually anyone who doesn’t manufacture a product. James Bessen, Michael J. Meurer, The Direct Costs from NPE Disputes, B.U. L. Rev. Working Paper No. 12-34, 31 (2012). Why shouldn’t HP, IBM, GE, Texas Instruments and others also be included as NPEs, since they license and enforce patents that relate to products they do not manufacture? Has their activity increased costs or slowed product development?

At a CES meeting in Las Vegas, Newegg’s patent counsel even suggested “criminalizing patent trolling.” And this comes from a company that is a notorious serial infringer of United States patents, having been sued for patent infringement by manufacturing and non-manufacturing entities more than 30 times in the last five years. Newegg’s work force is primarily Chinese and has been accused by three of its former employees of requiring them to hack into U.S. competitors’ websites to gain unfair competitive advantages. Yet, these are the same people that now encourage our Congress and the FTC to punish individual inventors and their companies simply for asserting United States patents against entities they believe infringe. These companies have done a good job portraying themselves as victims and inventors as villains. But, just the opposite is true.

A debate on the subject would be a good thing. My fear, however, is that Congress, the President, the FTC and others in power are only hearing one side of the story. That’s not a debate; it’s a public lynching.

Who Do We Represent?

Many of our clients are individual inventors who form companies they own or control. Another category of client is a company not owned by the inventors, but that returns a significant portion of any recoveries or licensing fees to the inventors. Often, these companies are formed to protect the inventor individually and to provide favorable, Congress-approved, tax treatment for the inventor, e.g., capital gains rates on recoveries, instead of ordinary income rates. This is something that has been part of the tax law for 40 years. See § 1235 of the IRS Code.

Occasionally, we also represent entities that have purchased patents from a larger company, as was the case with Innovatio IP Ventures, who purchased patents from Broadcom, a practicing entity. The patents relate to Wi-Fi and are being asserted against both equipment suppliers, like Cisco and Motorola, and end-users, like Walmart, Federal Express, Marriott, Starbucks and Au Bon Pain — hardly “Ma and Pa shops.” Interestingly, Qualcomm paid Broadcom close to $900 million for licenses under the same patents.

How Did The Term “Patent Troll” Originate?

The origin of the term “patent troll” is quite interesting. Let me share it with you.

In July 2001, Brenda Sandburg wrote an article for an American Lawyer publication called The Recorder. It was titled “Trolling for Dollars.” On page one is a picture of Intel’s then Assistant General Counsel, Peter Detkin, holding a small troll doll. On the second page, there is a picture of me with the caption: “Patent Power.” The accompanying article begins with the “once upon a time” claim that:

In the sleepy village of Santa Clara, there lived a very wealthy but very frightened giant named Intel. Intel was plagued by a fearsome band of evil trolls — patent trolls to be exact — who wanted a glittering pot of gold in exchange for doing absolutely nothing. And they were very powerful because they said they owned the patent on some of the magic Intel used to become rich.

The Recorder, “Trolling for Dollars,” p. 1, July 30, 2001. Poor Intel; terrorized by evil trolls and suddenly a victim because it had been sued for defamation, as well as patent infringement, after publicly calling our client an “extortionist.” So Detkin coined the term “troll” to avoid more lawsuits:

“We were sued for libel for the use of the term >patent extortionist’ so I came up with ‘patent trolls,’” Detkin said. “A patent troll is somebody who tries to make a lot of money off a patent that they are not practicing and have no intention of practicing and in most cases never practiced.”

Detkin later revised his definition after he co-founded Intellectual Ventures (by is original definition, the largest troll ever, having purchased more than 30,000 patents and, contrary to its original pledge, having brought more than 30 lawsuits for patent infringement).

In January 1998, our client, TechSearch, had purchased a patent from a defunct manufacturing company called International Meta Systems, Inc. (“IMS”). Nothing secret or deceptive about that! IMS did not have the resources needed either to license or enforce its patent, but retained an interest in the patent in the hope of paying off its debts and having a little something left over for its owners and employees.

The IMS patent was an outgrowth of its own creative efforts to develop a microprocessor chip that would match Intel’s fastest chips. Unfortunately, IMS could not get funding to continue its operations and, after some business failures, was forced to file for Chapter 11 bankruptcy protection. IMS believed that the principal reason it failed was that prospective partners in the industry (such as Compaq) were unwilling to help IMS because Intel had threatened to cut Pentium chip allocations and, perhaps, take other measures against any company that supported competing technology. Since IMS was not yet capable of supplying chips at high volumes, companies like Compaq simply could not risk being cut off by Intel. Lee Hoevel, the former President of IMS, was scheduled to testify as an FTC witness at a legal proceeding the FTC brought against Intel for allegedly engaging in such predatory practices.

Shortly after it acquired the patent, TechSearch notified Intel that certain products infringed. Intel refused a license and TechSearch filed suit alleging that Intel’s Pentium Pro and Pentium II lines of products infringed. Based upon Intel’s public filings, Intel was making approximately $8 billion a year in revenues from these two products.

Intel’s first defensive act was to hire both the inventor of the IMS patent and his attorney to elicit testimony that the patent was invalid. Intel also tried to buy the patent for itself through a shell company it secretly formed in the Cayman Islands. The company, named Maelen Limited, filed a motion asking the federal bankruptcy court to approve bringing an avoidance action against TechSearch to recover the patent for the estate. In an avoidance action, the bankrupt estate may recover an asset that was transferred within the prior year if it can show that the purchaser of the asset paid less than a reasonably equivalent value for the asset. The IMS estate had no funds. Maelen offered to pay administrative costs of the trustee and to fund costs of litigating the avoidance action with TechSearch. Maelen also proposed that if the estate recovered the patent, it would be auctioned and Maelen would make a minimum bid of $325,000 for the patent. A copy of Maelen’s motion was sent to all IMS creditors.

After investigation, IMS and the creditors learned that Maelen was a Cayman Island shell corporation that was owned of record by a nominee of Bank of America for the account of Intel. Intel had acquired Maelen in August 1998, shortly after TechSearch sued Intel for patent infringement. Maelen, thus, came on the scene strictly for the purpose of acquiring the patent from the IMS bankruptcy estate. The officers and directors of Maelen were all Bank of America employees; Maelen had no income or other operations and its only asset was the $100 used to capitalize it. Maelen’s “offices” were a file cabinet. Maelen’s corporate witness did not know of any reason for Maelen’s existence, other than to disguise Intel’s identity as the real party in interest. Maelen received instructions from Intel’s in-house counsel and was told that the patent was worth a great deal more than what TechSearch paid for it.

What became clear in discovery was that Maelen was formed to keep its identity secret from TechSearch, the bankruptcy court and the creditors and to manipulate the bankruptcy court into taking action that would undermine TechSearch’s ability to prosecute the patent infringement case against Intel. After hearing all the testimony and arguments, the Bankruptcy Court found Intel was being deceptive:

I would submit that neither Maelen nor Intel give a damn what this estate gets out of that [avoidance] litigation if, as and when it’s brought, and that their sole interest is in defending the [patent infringement] lawsuit in California, and that they are using this estate in an attempt to bring leverage upon TechSearch in the litigation in California. That is so clear from this evidence that I can’t reach any other result or conclusion.

In a Wall Street Journal article that followed, Intel was taken to task for its arguably unethical tactics which produced the “patent extortionist” (now “patent troll”) defense:

Initially, Intel didn’t disclose its involvement in International Meta’s bankruptcy case. But after it admitted its ownership of the Cayman company in court, Judge Frank R. Monroe, who is overseeing the proceedings, concluded that Intel and the Cayman company had portrayed themselves as trying to help the bankrupt debtor when they were in fact really out to undermine the patent case. “They are using this estate in an attempt to bring leverage upon TechSearch and the litigation in California,” the judge said, describing the maneuver as “totally inappropriate.”

Chuck Mulloy, an Intel spokesman, acknowledged the company’s use of the Cayman company. But he says Intel was using “tactics appropriate to the plaintiff in this matter.” He called TechSearch a “patent extortionist.”

Charles Wolfram, a Cornell University law professor and an ethics expert, said Intel appeared to disclose its role only when a “gun was to their heads,” under the pressure of discovery rules. “I am distressed by this,” Prof. Wolfram said. “What is a big company like Intel doing sneaking around like this?”

Wall Street Journal, Intel’s Bold Steps to Thwart Foe In Patent Case, Takahashi, D., April 16, 1999 (emphasis added).

In context, maybe the evil trolls were not so evil after all. They were being called “patent extortionists” (later, “trolls”) as a justification for Intel’s tactics that experts on ethics called borderline at best. TechSearch, in turn, was at least trying to help an inventor-owned company that had been driven out of business by Intel. TechSearch later granted rights to an Intel rival that needed the IMS patent to defend itself against a series of patent infringement suits brought by Intel.

So it’s from this background that the term patent troll originated – Intel’s justification for trying to secretly buy the very patent it argued was invalid based upon testimony from an inventor Intel put on its payroll. And the author of the term went on to co-found the largest “patent troll” in the world, Intellectual Ventures.

 

About the Author

Ray Niro is prominent patent litigator with the firm of Niro, Haller & Niro. Mr. Niro has been trial counsel in literally hundreds of intellectual property cases, and since 1996, has won verdicts and settlements for his clients totaling more than $1 billion.

9 comments
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  1. Re the opening line “Patent Freedom’s data shows that roughly 56% of all NPE suits are brought by companies that are owned or controlled by individual inventors — the original assignees of the patents involved. “

  2. Re the opening line here: “Patent Freedom’s data shows that roughly 56% of all NPE suits are brought by companies that are owned or controlled by individual inventors — the original assignees of the patents involved. “

    1. Ray, could you provide a hotlink to that study and organization?

    2. Isn’t the second part of the above sentence, after the dash, inconsistent with the first? How are patent suits brought by those who bought the patents from their original owners “brought by companies that are owned or controlled by individual inventors?”
    [Not to be confused with individual inventors you and a few other patent attorneys do actually represent directly, in their interest, on a contingent fee basis.]

  3. Mr. Niro,

    I enjoyed the brief overview of the industry.

    Just a couple of nits.

    1. Being sued a lot doesn’t make someone a serial infringer. Suggesting that Newegg is a serial infringer because they have been sued more than 30 times in five years is, quite frankly, ridiculous (if only because, as I’m sure you can appreciate, it is the judge and the jury who will ultimately decide if Newegg is an infringer or not). According to my own informal research (thank you dockets.justia.com), Google has been sued more than 150 times in that same period. Apple, more than 300 times. Intel, more than 50 times. Clearly, your metric for “serial infringers” is broken.

    If anything, your numbers suggest that Newegg’s approach of forcing any company asserting a patent to see the assertion through to final judgment actually works.

    2. Your suggestion that dirty tactics by Intel in the early days somehow excuses the hundreds specious claims of infringement made by NPEs on a yearly basis to collect a nuisance settlement really misses the point.

    Plus, your logic that suggests that bad acts of one company poisons an entire industry works against the NPEs as well, right?

    IMHO, no one is completely innocent in this game. But those in the trolling business better work on their image, because if things don’t change their business model could end up going the way of the dinosaurs.

  4. Ben, thanks for the assertion numbers facts.
    However, I question your comment that: “those in the trolling business better work on their image, because if things don’t change their business model could end up going the way of the dinosaurs.”
    As long as it takes several years and several million dollars for a defendant to get a Markman and then a non-infringement decision [other than an usually fast Markman + S.J,], or a rare jury invalidity decision, and as long as 95% of defendants settle instead, I see few flaws in the troll business model? In spite of the current flury of Congressional, White House and FTC announcements, the nine years of AIA legislation drafting efforts demonstrated that it is not easy to find legislative or other fixes that will distinguish over and/or not damage legitimate patent enforcement. The AIA IPR becoming a rare example. Faster and better judicial handling of patent infringement suits is what is needed. One sensisble pending legislative proposal would at least restrain costly irrelevant and completely one-sided discovery prior to a Markman claim interpretation decision as to what the patent suit is actually about and what might actually be infringed.

  5. @Paul:

    My statement was hyperbole and merely a reflection of the general public opinion of NPEs. Indeed, any time you have the Chief Justice of the court tasked with overseeing patent litigation providing an op-ed regarding reinging in questionable NPE lawsuits, I think it would be wise to take that as a signal of potential trouble ahead.

  6. If 80% of NPEs are the good guys, then there could still be up to 20% who are bad actors. Clearly, trolls exist and are a problem, but tarring all NPEs with that brush is wrong. I could really relate to the David v. Goliath story about Intel. I had a similar experience with my startup PSI v. IBM. As I have stated before, in my experience and reasonably well-informed (but humble :)) opinion, bolstering and reforming antitrust law would be the best solution to the problem, for “trolls” and any other abusers of the patent system, large or small.

  7. Ben, the NYT op-ed piece of the Chief Justice you note is another [albiet unusual source] example of ineffective anti-troll suggestions. None of those proposed sanctions would have any financial effect on the roughly 98% of troll threats and suits that settle before any trial and hence have no “prevailing party” to obtain any attorney fee recoveries! Even if the troll was not a judgement-proof shell corporation. Furthermore, the case law of the Fed. Cir. itself has made such sanctions very difficult to obtain.

    Requiring all those having a significant financial interest or control in a patent suit to be treated as necessary parties to the suit might be somewhat more help?

    Ron, if there as any way that anti-trust law could have any relation to troll issues, I have yet to see it.

  8. Paul, my statement was that bolstered, reformed antitrust laws would be the best solution to patent abuse, including but not limited to “trolls” (bad NPEs, however they may be defined). Current antitrust law is effective against patent abuse in some cases, but would admittedly needed to be augmented to handle other cases. Antitrust came into play in PSI v. IBM, and helped bring about a settlement. IBM was also investigated by the DOJ and EU for the antitrust implications of the PSI case. So there is at least one real-life example for you of the interplay between patent and antitrust law.

  9. Mr. Niro – First I want to thank you for successfully representing a friend of mine, an independent inventor who was infringed willfully by a large corporation whose attorneys incorrectly calculated that they could easily steal the invention of an independent inventor who had very limited financial resources. In America, unlike the rest of the world, the little guy can still hire an attorney on contingency and achieve justice. Certainly, multinational corporations would like to end that lunacy. Some guy a garage dares to challenge us! Does he realize who he’s dealing with? Yes, in America, for now, as our Founders intended, if that little guy creates and patents an invention, it is his property, period. The crazy idea that an individual can have freedom, justice, and unalienable rights to his own property is still alive in America, barely.

    Unfortunately, virtually 100% of all political influence in this arena is held by entities whose interests are opposed to the independent inventor. For this reason, every single recent legislative push regarding the US Patent System is counter to the interests of the independent inventor AND counter to the intentions of our Founders. The term “patent troll” is part of a public relations campaign that has the goal of eroding the rights of the independent inventor. Entities behind current legislation would like to include under the umbrella of “patent troll” any individual who 1) creates and patents an invention, 2) intends to license it instead of producing it, and 3) uses his constitutional right to sue an infringer.

    You might say that will never happen, but independent inventors are frequently called “patent trolls” and other pejoratives by infringers. The general public can be swayed so easily. If we do not stop the erosion of inventor rights, we risk losing all that our Founders envisioned.