Cisco, Apple, and Google Join Forces on Patent Law

Thursday saw lawmakers busy themselves with the issue of patent reform surrounding a bill introduced by Representative Peter DeFazio, an Oregon Democrat, which would raise the stack on any party bringing an infringement case that was not also a "practicing entity." As complicated as all that may sound, the heart of the bill is targeted at shifting the cost of litigation to a party that does not actually use the patent but still brings suit and loses. Major technology firms including Cisco (NASDAQ: CSCO  ) , Apple (NASDAQ: AAPL  ) , and Google (NASDAQ: GOOGL  ) all support the bill because each spends millions every year defending these cases. Still, the proposed law poses some real hazards that ultimately outweigh its benefit as written.

The players
The new legislation is targeted specifically at patent litigation enforcement companies -- aka PLECs, or "patent trolls" as they are more affectionately known by the companies that they harass and annoy. A PLEC does not actually make anything, but rather hunts for patents that it believes are being infringed and then files lawsuits. In rare cases, the original patent holder -- the inventor of the patented technology -- is a party to the suit, but in most cases, the PLEC buys the patent for itself and then goes about enforcing it.

The best-known patent troll case, and the one which brought the practice en vogue, was one that involved a judgment against BlackBerry (NASDAQ: BBRY  )  (then Research In Motion), in which it was ordered to pay $612.5 million to NTP for patents the smartphone maker had infringed. What made that case especially egregious was the fact that Research In Motion had independently developed the technology and not acted in bad faith. Furthermore, the U.S. Patent Office had issued NTP "non-final rejections" of the patents held by NTP but had not processed the matter quickly enough to protect RIM. The judgment was the largest patent ruling in history at the time in was given, having only recently fallen to the Apple ruling in the Samsung case.

On the other side of this battle are the actual technology companies like BlackBerry and Cisco and Google that uses these patents to protect the things that they make. Last fall, The New York Times did an in-depth review of the issue:

In the smartphone industry alone, according to a Stanford University analysis, as much as $20 billion was spent on patent litigation and patent purchases in the last two years -- an amount equal to eight Mars rover missions. Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings.

Cisco reported that it spent $50 million last year to defend 50 baseless cases. Clearly the cost of patent litigation is out of control and some type of reform is appropriate. The very existence of PLECs is premised on exploiting inefficiencies in the system and allowing non-productive opportunists to profit from them.

The new law and the American Rule
Under the terms of the new law, a party that brings an unsuccessful patent suit may be ordered to pay the legal fees of the company it sues if the judge determines that such relief is appropriate. The plaintiff would be automatically exempted from such a determination if the original inventor or a university was a party to the suit. More significantly, if the party bringing suit is actively involved in the manufacture of a product that relies on the patent, this cost-shifting option would not come into play.

The problem with the entire concept is that in the U.S., we follow what is called the American Rule. Under the American Rule, all parties are responsible for paying their own legal fees. This differs from the English Rule under which the losing party is responsible for the legal fees of the winner. The concept behind the American Rule is that injured parties should not be chilled from bringing legitimate cases by the fear that if they lose they may be forced to bear the crushing legal expenses of larger defendants. In general, we Americans cannot help but root for, or at least try to protect, the little guy.

Rep. John Conyers, D-Mich., said: "We have a measure before us that the plaintiff pays and the defendant who might be an alleged patent infringer pays nothing. This is disturbing." What this comment highlights is the idea that putting a law on the books that subverts the American Rule should be somewhat offensive to us all. While the aim of the law is to effectuate important patent reform, this may not be the best way to accomplish it.

Each of the above companies has made full-throated supports of the new law. This makes sense given the ever-rising cost that these nuisance suits represent. While this issue is not likely to be resolved in the immediate term, it warrants the attention of all technology investors.

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Read/Post Comments (6) | Recommend This Article (6)

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  • Report this Comment On March 15, 2013, at 9:36 PM, tychicum wrote:

    What the industry is attempting to eliminate are "submarine patents". The most egregious I had been involved was known as the "Katz Patent".

    Basically it is a law firm who project into the future and guess what might be invented and then filing broad patents and simply wait. Some times dozens of years. Then when something similar might be invented ... send the infringing company invoices for several millions of dollars. Many companies simply pay as it is cheaper to pay than it would be to fight a law firm intent on defending their phoney patent.

    The Katz Patent netted Katz himself many millions of dollars for a telephony cue technique common in many of not most help desk environments.

    A wicked and dastardly practice which the IT industry wants to eliminate as the "inventor" basically invents nothing to contribute to society.

  • Report this Comment On March 15, 2013, at 10:59 PM, AboutYourCat wrote:

    tychicum wrote..... "A wicked and dastardly practice which the IT industry wants to eliminate as the "inventor" basically invents nothing to contribute to society.".....

    you mean like investment bankers..... and politicians..... and real estate agents..... and stock brokers..... and most every occupation which exists as a middle man for the sole purpose of gaming the system to skim their unnecessary cuts off the top?.....

    you mean that kind of "nothing to contrubute to society"?

  • Report this Comment On March 16, 2013, at 10:24 AM, MrZ2357 wrote:

    @AboutYourCat

    So what are you suggesting?

    Making a rotten system worse?

  • Report this Comment On March 18, 2013, at 9:38 AM, staff1 wrote:

    'Cisco, Apple, and Google Join Forces'

    Thieves of a feather?

    Lies and damned lies! These are mere dissemblings by huge multinational thieves and their paid puppets -some in Congress, the White House and elsewhere in the federal government. They have already damaged the US patent system so that property rights are teetering on lawlessness. Simply put, their intent is to legalize theft -to twist and weaken the patent system so it can only be used by them and no one else. Then they can steal at will and destroy their small competitors AND WITH THEM THE JOBS THEY WOULD HAVE CREATED. Meanwhile, the huge multinationals ship more and more US jobs overseas.

    For the truth, please see http://www.truereform.piausa.org/

    https://www.facebook.com/pi.ausa.5

    http://piausa.wordpress.com/

  • Report this Comment On March 18, 2013, at 10:37 AM, RayVanDyke wrote:

    I quibble with the passage below, which does not reflect the actual facts of the case and is pejorative against NTP. At trial, RIM's counsel engaged in some dubious dealings, involving falsification of evidence (see the record), and RIM was lucky to avoid the injunction. There was abundant bad faith to justify the large award. Although I love my Blackberry, this judgment was just under the circumstances, and condemning NTP merely for asserting their legitimate patent rights (and for not being a practicing entity) misses the mark.

    The little guy MUST have an avenue to protect their innovations, lest large companies completely control the inventive process.

    "The best-known patent troll case, and the one which brought the practice en vogue, was one that involved a judgment against BlackBerry (NASDAQ: BBRY ) (then Research In Motion), in which it was ordered to pay $612.5 million to NTP for patents the smartphone maker had infringed. What made that case especially egregious was the fact that Research In Motion had independently developed the technology and not acted in bad faith - WRONG. Furthermore, the U.S. Patent Office had issued NTP "non-final rejections" of the patents held by NTP but had not processed the matter quickly enough to protect RIM - RED HERRING. The judgment was the largest patent ruling in history at the time in was given, having only recently fallen to the Apple ruling in the Samsung case."

  • Report this Comment On March 18, 2013, at 12:26 PM, BigCompany wrote:

    If the big computer companies would stop stealing inventions from others, we wouldn't need this law.

    I used to be a patent attorney for a large computer company, and we NEVER checked to see if someone else had a patent on some idea. NEVER did we try to determine if someone else beat us. The idea was to just move forward on development and wait to see if a lawsuit showed up.

    The thievery by Big computer companies must stop !

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