Tech vendors, patent pools and the curse of the troll

Some of the largest names in the tech industry are funding patent 'trolls,' for protection from lawsuits and for access to the patent pool.

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Major technology vendors are financing the activities of so-called patent trolls, according to experts, court documents and patent and other legal filings, an investigation has found.

Patent "trolls", more politely called mass patent aggregators, non-practicing entities or, as the US Federal Trade Commission defines them, patent assertion entities (PAEs), litigate more than they innovate. These companies derive the bulk of their income, if not all of it, from licensing the huge libraries of patents they hold and from the money they make by suing companies that use their patents without permission.

The bottom line for both consumers and IT professionals is that the costs of defending patents are passed along to consumers in the form of higher product prices, and the lawsuits hamper technology innovation, experts say. Some tech vendors, including Apple and Micron, rail against the concept of patent 'nuisance' lawsuits, only to fund or otherwise support some of the patent aggregators.

In a May 2011 report, Citigroup analyst Walter Pritchard said that phone maker HTC pays Microsoft $5 for every Android phone sold as part of a patent settlement reached in April 2011. By those numbers, HTC paid Microsoft somewhere between $35 million and $45 million in the first quarter of 2011 for patent fees alone.

Patent litigation has increased by more than 230% over the past 20 years, according to Article One Partners, a patent organisation. Further, Article One says, in 2008, some 2,896 patent infringement actions were filed, only 179 fewer than in 2004, the peak year.

"Most of the major tech companies are backing a troll in some way, probably financially," says Thomas Ewing, an attorney who has authored reports on what he calls "patent privateering" and whether patent "giants" are dangerous for American innovation.

One example, according to patent attorneys and other experts, is Intellectual Ventures (IV), a patent-licensing firm founded in 1999 by former Microsoft executives Nathan Myhrvold and Ed Jung, among others. According to a court document that IV filed in April 2011 and then fought to keep secret, IV investors include Adobe, Apple, Cisco, eBay, Google, Intel, Microsoft, Nokia, Nvidia, SAP, Sony, Verizon and Xilinx.

Each of these tech companies made a financial investment in IV. All except Google and Adobe went for more than one round of funding. IV has raised at least $5 billion from investors, including tech firms.

All the technology companies named as IV investors were contacted multiple times for this story; none except Verizon would comment for attribution. Nor would IV comment on the record about its Who's Who list of investors, which also includes universities and charitable foundations.

Nat Goldhaber, managing director of the venture firm Claremont Creek Ventures, explains that "all these companies are using Intellectual Ventures as a patent pool to avoid suit and [have the ability to] cross-license" the patents in the pool.

In January, attorney Ewing and Robin Feldman, a professor at the University of California's Hastings College of Law, published a comprehensive report in the Stanford Technology Law Review that among other things detailed the intricate linkages between some technology vendors and PAEs.

"Big companies aren't just doing this for troll litigation chump change," Ewing explains. "They're doing it for strategic reasons of protection... or [to] cause competitive disruption and do so in a way that avoids showing they're obviously involved." The evidence for all this is "hidden," he says, "but it is hidden in the public record in plain sight."

In that January report, Feldman and Ewing acknowledge that PAEs could "potentially have positive effects." Among other things, they say PAEs could ensure that individual inventors receive the compensation due to them, and could create "a powerful weapon stream" to deter lawsuits. Another benefit to joining up with aggregators is the notion of cross-licensing under the PAE's umbrella, members using each other's patents without fear of being sued.

However, the report goes on to say that "the activity of mass aggregation brings its own potential harms." Among these are "potentially reducing future innovation and productivity." Most important, the report says, "the basic business model of mass aggregation is troubling."

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