Legal Departments Confront Complicated IP Arena

There are all kinds of fights. On one end of the spectrum you have the gentlemanly dual, where two combatants resolve their dispute via a time-honored, tradition-bound ritual. On the other end is the roadhouse brawl, a chaotic scrum where strange alliances are quickly forged and broken, and ultimate victory is a relative proposition.

The intellectual property arena these days looks a bit more like the latter than the former: It's a lot more complicated and aggressive than it used to be, there are more fighters in the ring, and Queensberry rules have pretty much gone out the window.

"Patent litigation is more gritty than in the past," says Brad Lytle, a partner at Oblon Spivak. "It has to be, because the future of companies' businesses are based on strong IP."

Combatants, be they traditional competitors or nonpracticing entities (NPE), are fighting harder because the stakes are higher than ever, and that intensity is transforming in-house practice.

"It's a far cry from what we used to see five years ago or so. People are being more aggressive in litigation," says Bruce Schelkopf, chief counsel and executive director of IP for Cummins Inc. "To handle that, you've got to be prepared."

Up in the Air

Today's intellectual property battles are playing out against a particularly unsettled backdrop.

"We're clearly in a disruptive world right now, with respect to technology, content and individual rights," says Richard Neff, founder of Neff Law Firm. "The rules of the game are changing, and the traditional companies either have to adapt or they'll slowly die."

Computing technology in particular is in the midst of its most significant transition since the advent of personal computers more than three decades ago. Transmission capacity has caught up with data processors, enabling a fundamental shift to cloud computing. Traditional hardware and software business models are turned on their ear by the prospect of accessing data and applications on a multitude of devices from virtually anywhere.

"The model of everybody having Microsoft Office, for instance, is almost obsolete," says Neff, who often serves as an outside general counsel for small technology companies. "That's a huge game changer, because so much of our tech world was about delivering big machines."

The disruption is just as significant on the content side. Large copyright owners such as film, music and publishing companies have been fighting a pitched and arguably a losing battle for years as it gets easier and easier for end-users to access protected intellectual property.

The current watershed is evidenced in the ascendance of companies such as Apple, Google and Facebook, which are on the vanguard of delivering nontraditional devices, applications and content. The recent aggressive litigation stance of Apple in particular--a company with a major stake in all three of those fronts--denotes the high stakes in play.

"Anytime there's a disruptive trend, there are big winners and big losers," Neff says.

It's tempting to see this transition merely in the context of Silicon Valley, but that would miss the point. Intellectual property has so permeated global business that these days, every large corporation is essentially a technology company.

Cummins is a perfect example. A producer of diesel engines, filtration systems, generators and other power-related products, it's easy to view the company as an old-line manufacturer. Not so, says Schelkopf.

"We have a convergence of technologies, and we have blended markets, just like virtually every company out there," he says. "Sure, we have absolutely traditional manufactured components, things that have been made since the 1920s like giant diesel engine core blocks. But what optimizes these products--what allows them to run efficiently, to have better exhaust or lower emissions--are of all the brains around it, the computer systems."

Today's markets, just like intellectual property itself, do not have clear lines of demarcation. A cog is not just a cog. It must be seen in the context of all the complex chemical, electronic and mechanical systems that facilitate its design, manufacture and performance, as well as the business processes that bring it
to market.

As these traditional silos crumble, it's incumbent upon in-house counsel to recognize and inform the company on the rapidly expanding spectrum of intellectual property considerations, diffuse and subtle as they may be.

"If IP is not part of your culture, it will never be a successful business aspect in your operation. And it has to be successful for you to be profitable," Schelkopf says. "So the IP group, whoever that may be in your company, needs to do educational awareness sessions, needs to be with project teams, needs to be with business folks as they create the business model of what will constitute success."

As significant as that internal challenge may be, it's only part of the puzzle for IP counsel. And when it comes to external threats, the landscape is more crowded than ever.

Three's a Crowd

The NPE phenomenon is of course nothing new, but the role third parties play in the patent market has evolved considerably in recent years.

The old notion of NPEs as purely predatory, parasitic trolls may have been dealt a death blow in spring 2010 when Micron Technology--the largest U.S. chip maker--sold a portfolio of 4,500 patents to the NPE Round Rock Research. The move may validate the concept of companies essentially outsourcing their patent assertion function to NPEs--a thought that would have been anathema just a few years ago, but not an illogical one.

"Companies are not well-equipped to enforce their own patents," says Bob Yoches, a partner at Finnegan. "They have plenty of other things to worry about, and so the third parties fill that void."

Enforcing a patent portfolio requires companies to investigate competitors, reverse-engineer their products, prepare infringement analyses and then begin the arduous litigation process. That may be effective for large patent holders such as IBM and Texas Instruments, but it requires time and money most companies can't afford.

Moreover, outsourcing assertion eliminates the biggest caveat in the process: counterclaims. Micron reportedly still has royalty-free access to the patents it sold, presumably profited from the sale (terms have been kept secret), and now it avoids counterclaim risk to boot.

"In a traditional competitor lawsuit, each side has the risk of a counterclaim," says Jeanne Gills, vice-chair of the intellectual property practice at Foley & Lardner. "If you sue me for infringement, I can turn around and countersue you, so you always have to think strategically about how aggressive you want to be. NPEs don't make or sell anything, and therefore don't have much to lose."

Passing assertion to NPEs could easily foster a higher level of aggression, and the controversial Micron deal has certainly stirred the pot. Assertion, however, is not the only role third parties are playing in the market these days. A new breed of defensive patent aggregators is also making waves.

The first generation of patent aggregators followed a rather simple logic: that it should be cheaper to pool resources and buy troll patents than to face the threat of enormous judgments. But that too has evolved in the past few years.

"Two things happened," Yoches says. "One, it turned out there were more patents out there than they could buy. Two, the amount of judgments came down because the law started to change."

In the early part of the past decade, settlements and judgments could eclipse $100 million. But as courts reigned in infringement damages--particularly the entire market value metric--the economics of patent aggregation changed, and with it, the business model.

"Aggregators started saying, 'We've got all these patents, let's get some of our money back by licensing them,'" Yoches says. "So it's now no longer purely defensive, and it's turned into kind of a protection racket. They are saying, 'If you pay us a whole lot of money, you can join us, and we won't sue you on all these patents that we now have.'"

John Amster, the CEO and co-founder of the aggregator RPX Corp., disputes that interpretation.

"The only people who would say that are the people who stand to lose from our activities," he says. "We don't hear that from companies, and we certainly don't hear that from our clients. It's kind of a silly thing to say, because these NPEs exist. An extortionist comes and breaks your window and then says, 'I'll fix your window.' We're not breaking the window. We're not the ones filing the lawsuits. We're not the ones asserting the patents. This problem exists; we didn't create it, and it's not free to fix it."

Founded just two years ago, RPX says it has spent $240 million to purchase 1,500 patents, or what it estimates to be 10 percent of the patents available on the market. To date, 69 companies have signed on.

"By paying us a reasonable subscription fee and by virtue of the fact that we're able to say to them, very cleanly, we are never going to sue you, they can use us as a service provider to spend their collective subscription fees to buy as many patents as we can," Amster says.

Aggregators like RPX purport to serve as a check to the insulation from countersuits that companies gain from divesting intellectual assets to NPEs. RPX estimates that since September 2008, 1,051 NPE cases have been filed, and it claims an additional 60 to 90 NPE cases would have been filed had RPX not been purchasing patents.

Still, the impact on the market is difficult to measure. Even Amster admits that two years is not long enough for definitive quantification to emerge. The only thing that is certain is that defensive aggregators represent a sophisticated new vendor relationship that adds yet another layer of complexity to the mix.

Another Look

Aggregation is not the only tack companies are taking to mitigate the risk posed by NPEs. Re-examination claims
are booming.

There are two types of patent re-examination requests: ex parte, in which the requester has no further involvement after filing; and inter partes, in which the requester remains actively involved in the process. According to the USPTO, in 2000, 318 ex parte re-examination requests were filed. Through three quarters of 2010, that number was 780.

The inter partes process was initiated in November 1999. No cases were filed in 2000, just 59 in 2005, and 281 in the first three quarters of 2010.

"The uptick in re-examinations looks like the Chinese economy--it's just growing by leaps and bounds," says Oblon Spivak's Lytle. "Companies have been using re-examination as a licensing and litigation tool to shift the risk from the defendant company to the nonpracticing entity, basically staying the litigation. Then you shift the activity over to the patent office, where the question is, will that patent survive re-examination, or will the claims be amended so as to at least avoid past damages."

Re-examinations get special dispatch within the USPTO and go on a completely different docket from normal patent applications. Re-exam requests are usually processed within a month or two, and the vast majority are granted--a signal that the patent office has acknowledged substantial new questions around patentability.

Historically, re-examinations were not popular among litigation defendants because of the downside risk: If you lose, the plaintiff can pursue damages based on a longer period. That's clearly changed.

"Now there's a belief that your chances of success in re-exam have gone up," says Frank Angileri, a Brooks Kushman shareholder. "So you strike that cost-benefit analysis, and certainly for a lot of people it toggles from a no to a yes."

In practice, re-examination is usually not a shot for all the marbles, but a way of winnowing down the number of issues in question.

"What often happens is, as the procedure continues, it becomes clear which way the patent office is going to decide the case," Lytle says. "Then it's very helpful in the two parties reaching a licensing agreement at the end of it all. So there's a whole bag of tricks that have made re-examines an attractive complement to the general counsel for dealing with patent infringement suits."

So far the surge in re-examination requests has been a domestic phenomenon, but Lytle says the trend is poised to go global.

"I just came back from Japan, and that's all they wanted to talk about," he says. "We talked to about 50 different companies, and every single one of them, that's all they wanted to talk about. I fully expect that in 2011, importers will become a lot more active in filing these suits. They're just studying the hell out of it right now."

That, he says, will fuel a parallel surge in patent cases before the International Trade Commission (ITC). The ITC doesn't grant damages, but can issue an exclusion order to customs officials to prohibit import of goods that infringe U.S. patents. Plaintiffs that don't want to get bogged down in re-exam proceedings can file ITC actions, which by statute must be resolved within 16 months--a counter-counter-move to keep the pressure on international defendants.

Just like an arms race, the fundamental challenge is to stay one step ahead of the opponent--not just in the weapons at your disposal, but in the sophistication of the strategies and tactics you employ. If you got the sense that that trend shows no signs of letting up, you wouldn't be wrong.

Across the Universe

Patent litigation gets all the headlines, but it's not the only aspect of intellectual property in the throes of a sea change. Licensing, particularly of copyrights for any type of digital content, is coping with the vast and unpredictable implications
of converging technologies.

"I'm in entertainment, where licenses now tend to be universewide just because we don't know where the Internet's going," says Jennifer Saunders, senior counsel for business and legal affairs at Nickelodeon Games Group. "I've never seen that before."

Restricted licenses for things like movies, music and games can quickly become obsolete as the methods for using the material evolve.

"Is it delivered via the Internet? Is it delivered via your handheld? Is it delivered via gaming console? We now say universewide--no matter how delivered," Saunders says. "We expand that grant out to cover anything we can think of."

It's all an attempt to keep control of protected content, even if five years from now teenagers end up watching movies using nothing but, say, chips planted in their brains.

"Right. Through brainwaves," Saunders laughs. "That's what we say, however delivered."

Contributing Author

Steven Andersen

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