Patent trolls and their foes square off at the FTC

The one branch of the government that seems to have shown some concern about the phenomenon of so-called “patent trolls” is the Federal Trade Commission. The FTC has taken to calling the trolls Patent Assertion Entities, or PAEs.

On Monday, the FTC hosted a most unusual gathering. Some of the biggest names in patent-trolling were invited to talk about their business, and they actually showed up—including patent-holding giant Intellectual Ventures. Critics of trolls, from both academia and the corporate world, were also in attendance to make sure the government heard their views on the issue.

Professor Collen Chien of Santa Clara University kicked off the session with a remarkable statistic: in 2012, patent trolls have brought the majority of the patent lawsuits in the US, filing 2,530 lawsuits through December 1.

And for some tech companies, trolls are virtually 100% of the litigation. A lawyer from Hewlett-Packard who spoke at the event said that about 60 percent of its 50 pending patent cases were PAEs, or trolls; however, the others were mostly non-competing operating companies, individuals, or no-longer-operating companies—all of which essentially act the same as trolls in court. HP is facing one patent case from a university and one from a competitor.

Some corporations ready to join up with the trolls

The easily understood dynamic of  “tech companies hate trolls” is getting more complex. That was clearly on display from the start of the forum yesterday. Licensing patents in business lines that are less successful (or not successful at all) has become a lucrative calling for some operating companies as well.

“So we have $80 million of transaction costs to net the patent holder $8 million. That’s a 90 percent transaction cost, which I think no one would argue is an efficient market.”

Nokia is one company that is not necessarily on the side of the trolling issue you would expect it to be. The Finnish company’s chief IP officer, Paul Melin, noted that his company is among the most frequently sued for patent-infringement in the US. “I have to agree with a lot of things people say,” he said.

At the same time, Nokia is happy to work with patent trolls when it believes it will be helpful. The company recently struck a deal with Mosaid, a Canadian patent-licensing company. “We found a good buyer in Mosaid,” said Melin. “They took the portfolio and carried the risk from now on.” Microsoft—which has been more profitable as a patent-licensor in the mobile space so far than as a player—was an investor in the Nokia/Mosaid deal, too, said Melin.

Once Nokia sells off the patents, “we truly divest them, and we have no operational control,” emphasized Melin. Still, they collect money when Mosaid gets licensees. “We have a passive economic interest,” he acknowledged.

One problem with patent-licensing is that there’s a feeling of “entitlement” in the tech world when it comes to cross-licensing patents, said Melin. Sometimes a company with 10 patents has the attitude that those would be a fair trade for Nokia’s thousands of patents, representing “billions in investments,” he said. “Is that fair to our licensees, to our shareholders, to give away such free licenses?” asked Melin. “Of course not.”

Other corporate heavyweights at the panel took a more predictably anti-troll position. Mary Stich, associate general counsel for Rackspace Hosting, said that her company’s legal spend went up by 500 percent in 2010 because of PAE cases. “We believe the cost to litigate is being used as a club to force settlements,” she said. “Is a small business going to go to trial at a cost of over $2 million or settle for, say, $100,000?” she asked. “Often the scenario is, you face a damage claim in the millions, a legal budget in the millions—and a very early opportunity to settle for the low six-figures.”

Intellectual Ventures: Criticism of shell companies is a “red herring”

“You want me to pay a royalty? You and what army? They aren’t taking a license unless you bring an army to the market and force them to do it.”

Intellectual Ventures is widely seen as the largest patent-holding company, and has boasted of holding more than 30,000 patents (that includes foreign patents, however). Peter Detkin, the chief of licensing at the patent giant, spoke on the first panel.

“This is a solution in search of a problem,” said Detkin. The idea that tech companies couldn’t avoid Intellectual Ventures patents isn’t really true, he said. “It would cost $80,000 to analyze our entire portfolio. I think people could figure it out if they really wanted to.”

And as for the shell companies that IV moves its patents around with, that’s a “red herring” of an issue, said Detkin. “We have never filed a lawsuit in any name other than ‘Intellectual Ventures,’” he said, adding that only six have been filed in IV’s 10-year history. “The reason we have a lot of different acquisition entities is logistical. Not all investors are investors in every IP group that we buy, and we have to carefully track who owns what.”

Detkin also echoed the feelings of other licensors when he said that patent-licensing gets money to a good cause."The money we pay all goes to inventive entities,” said Detkin. “A quarter billion-plus goes to individuals.” (How much of the ‘take’ of patent licensing actually goes to research and development was contested at other points during the day-long workshop.)

Not everyone saw that supposed efficiency the same way, though.

Mallun Yen, executive VP at RPX Corp., a defensive patent aggregator, gave an example based on her company’s trove of data about patent-assertion entities. One PAE, she said, had made an estimated $40 million in revenue, suing about 40 target company in all. Of that $40 million, $5 million went to plaintiffs’ lawyers; $27 million went to a patent-advisory firm, experts, and other costs; while $8 million went to the inventor. “Given that the defendants also spent around $1 million each defending their cases, that’s $40 million in defense costs and $40 million in settlement costs,” she noted. “So we have $80 million of transaction costs to net the patent holder $8 million. That’s a 90 percent transaction cost, which I think no one would argue is an efficient market.”

Pro-trolling vs. anti-trolling panels put their views to the feds

Later in the day, separate panels discussed “possible efficiencies,” a generally pro-licensing table; and “possible harms,” a panel of speakers more critical of patent trolling.

The most vigorous defense of widespread patent-licensing was probably given by Ron Epstein, CEO of Epicenter IP Group, a patent broker and advisory firm. People in the patent-licensing business can agree that plenty of patents are garbage, said Epstein; the issue is that some of them have to have value and should be paid for. “Let’s all agree there are in fact great inventors out there and every once in a while they’re lucky enough to get a great patent,” said Epstein.

The reason litigation happens is because the typical licensee reaction, said Epstein, is: “You want me to pay a royalty? You and what army? They aren’t taking a license unless you bring an army to the market and force them to do it.”

“PAEs are simply arbitragers,” he continued. “It’s not shocking that in a situation where patents are worth more than nothing—and inventors were getting nothing—arbitragers showed up.”

On the “harms” panel, investor Brad Burnham of Union Square Ventures, who also spoke at a recent Silicon Valley patent event featuring Richard Stallman, told horror stories of startups his fund invests in that were hit by trolls.

One company became a “tiny shell of its former self,” he said, after being hit by two patent lawsuits brought by entities that some wouldn’t consider trolls or PAEs, but they were both “failed entrants” into a particular market. The company has gone from more than 60 employees down to five.

In total, he said, one-third of the mostly small companies that Union Square Ventures invests in have been sued for patent infringement; fully one-half of the companies have been sent a patent threat letter. Twitter, one of Union Square Venture’s biggest success stories, currently has 14 patent lawsuits pending against it, he added. (Hard to see what the recently founded microblogging service was “stealing,” exactly, but patent holders apparently think otherwise.)