By Sarah Lai Stirland, special to National Journal
© National Journal Group Inc.
Saturday, Feb. 26, 2005

Early last year, Thomas Warfield, a proprietor of Goodsol Development, a small software-games business in Springfield, Ill., received a letter from a law firm representing an individual named Sheldon Goldberg.

The letter informed Warfield that the computerized card games he had created and sold through his Web site violated several of Goldberg's patents. But, the letter continued, Goldberg would be open to licensing his patented ideas for "a onetime lump-sum payment or, alternatively, an annual royalty for the life of the Goldberg patents."

Goldberg's attorney said in the letter that his client's patent covers the playing of card games, among other aspects of the online game-playing experience. He gave Warfield 30 days to respond. An angry Warfield later vented his frustrations on his Web log.

Anecdotal evidence suggests that Warfield's experience is becoming increasingly routine -- to the point where the technology industry has come up with a name for companies that do not manufacture or invent anything, but merely own patents. The business model of these firms is to make money by forcing other companies to pay licensing fees for patent claims that some would call questionable.

Peter Detkin, now a managing director at Intellectual Ventures, a firm based in Bellevue, Wash., helped to coin the term "patent troll" several years ago when he was Intel's patent counsel -- and after Intel was sued for publicly referring to one of the patent-licensing firms as "patent terrorists" and "patent extortionists."

"A troll is someone who games the system," Detkin says. "What they're really looking for is the nuisance value of a settlement."

Technology-industry lobbyists and public-interest groups charge that the country's patent laws have evolved to reward the trolls. And trade groups -- notably the Business Software Alliance and the Information Technology Industry Council -- have taken the lead in calling on Congress to reduce the disruptiveness and cost of patent litigation.

"Patents are intended to encourage innovation," says BSA President and CEO Robert Holleyman. "What we're saying now is that the equation and balance is not correct, that the litigation has thwarted innovation -- and that has harmed BSA members."

ITIC Senior Vice President Ralph Hellmann agrees. "Patent litigation is beginning to strangle innovation," he asserts. "For us, class-action reform was big, but the next step is to take on patent reform."

A report published last year by the National Academy of Sciences showed that, from 1988 to 2001, the number of patent-infringement lawsuits that were resolved in federal district courts doubled from 1,200 to 2,400 cases per year.

The report also cited a survey by the American Intellectual Property Law Association that found that the median cost to each party in bringing a patent-infringement case to trial verdict was about $500,000. In suits where more than $25 million was at stake, the median cost of litigation was $4 million for each side. Those costs did not include private settlements between companies that negotiate licenses simply to avoid going to court.

"A neglected and largely undocumented cost of the patent system is associated with working out licensing arrangements, or negotiating royalties, or simply fending off threats of infringement," said the NAS report.

Plans are afoot in Congress to explore possible legislative changes. The House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property is expected to hold hearings on patent reform in upcoming months, according to a spokesman for Chairman Lamar Smith, R-Texas. Several Senate aides at a recent technology conference said they expect to work on patent reform issues this year.

Reps. Howard Berman, D-Calif., and Rick Boucher, D-Va., are also working on a bill that would address the concerns of the technology industry and those of public-interest advocates. A congressional source working on the issue said that a bipartisan bill is possible.

Meanwhile, the Federal Trade Commission, the National Academies' Board on Science, Technology, and Economic Policy, and the AIPLA are holding town hall meetings around the country to discuss how best to reform the system. And an industry group called the Intellectual Property Owners Association will hold a conference in March focusing on the most effective ways for companies to deal with patent trolls.

One step the Bush administration is taking to address the issue is to revamp the way the U.S. Patent and Trademark Office allows people to challenge patents. Jon Dudas, undersecretary of Commerce for intellectual property and director of the PTO, said his office is working with "owners of intellectual property, the public at large, and small and medium enterprises to put together a post-grant opposition system that we think will be a better alternative to litigation." Any changes would ultimately require legislation, however, and Dudas predicts "some movement on this fairly early on in Congress."

The BSA and its members have floated a package of ideas for minimizing the cost and nuisance of litigation. One proposal would make it harder for plaintiffs to seek injunctive relief in infringement cases; another would change existing law so that treble damages could be awarded only if a patent infringer is proved to have acted maliciously. The BSA also proposes that the PTO set up new procedures to allow companies to participate more fully in challenging questionable patents, and it is calling for more resources and improved databases so that patent examiners can spend sufficient time assessing patent applications and becoming familiar with ideas that are already obvious in various fields.

While there is widespread agreement in the technology industry that changes are needed, the idea of curbing injunctive relief is controversial. Backers of one version of the idea -- the Semiconductor Industry Association and Intel -- want to give courts the leeway to fine defendants when they are found to infringe, rather than stopping them from manufacturing the infringing product. They believe that this would reduce the trolls' incentive to sue.

"The big change we're looking for is to take the gun out of the trolls' hands," said David Simon, Intel's chief patent counsel. Trolls "just want to get money from us," he said. "If we can take away the threat of stopping us from shipping processors, it changes the negotiations pre- and post-litigation."

But some in the legal community believe that such a proposal is too big a trade-off. The legal community "is split right now, because this proposal limits your ability to get an injunction as a manufacturer, which strikes at the heart of patents," says an industry source at one legal trade associations.

And although the term "troll" has become a popular way of referring to patent-licensing firms that do nothing except hold patents and sue other companies, the line between such companies and other kinds of companies that hold patents is sometime fuzzy .

Detkin symbolizes the schizophrenic nature of the debate. The man who helped to coin the term when he worked at Intel now works at a low-profile and closely held company that is building a patent portfolio but doesn't itself make anything. Detkin says that Intellectual Ventures is in the business of investing in ideas and creating a market for them. "There's no question, it's a slippery slope," he said. "When you look deeply into the [term] 'troll' -- it's a colorful [term], and it certainly got me attention when I used it -- it is a complicated concept. It doesn't lend itself to easy definitions."

Intellectual Ventures is different from other patent licensors, Detkin argued, because his firm has not set out to aggressively assert its patent portfolio. Asked whether the company will do so in the future, Detkin replied that it was too early to say.

"What is the difference between what you think I'm doing and what IBM and Lucent are doing?" he asks. "They're taking a very large portfolio of ideas and offering them for license in the IT industry, and I don't think they're called trolls.... If people want to use our ideas, then they should come to us and take out a license."

But disagreement often arises over the validity of patents, and the process of sorting that out is expensive. Proponents of patent reform say that the current system harms innovation because it places the burden on defendants to prove that a patent is not valid; defendants often find it easier and cheaper to pay licensing fees rather than fight.

Intel -- which says it receives at least one letter a week accusing it of infringement -- and other deep-pocketed firms have made the practice of fighting off trolls a part of doing business. Simon estimates that Intel spends $20 million a year on each patent lawsuit that it decides to fight all the way through the courts. Intel is a BSA member, as are such other industry heavyweights as Apple, Cisco Systems, Dell, Hewlett-Packard, Macromedia, Microsoft, and Veritas Software. A glance at financial filings shows that almost every member of the BSA is currently involved in patent litigation.

Microsoft alone is involved in about 35 separate patent lawsuits. Currently, for example, the software giant is waiting for a court ruling on a closely watched infringement suit brought by Eolas Technologies, a patent-licensing firm that relies on academic research conducted by its founder, Michael Doyle. The law firm representing Doyle -- Robins, Kaplan, Miller & Ciresi -- is one of the biggest names in the world of intellectual-property litigation.

Eolas maintains that Microsoft's Internet Explorer browser incorporates an idea that Doyle patented in 1998 -- specifically, the concept of enabling browsers to perform separate tasks, such as looking at photographs and playing movie clips, by incorporating a mechanism that launches the additional software needed to perform those functions. Eolas filed a patent-infringement suit against Microsoft in 1999; four years later, a jury awarded Eolas more than half a billion dollars in damages.

The Eolas patent dispute caused a storm across the technology community. For one thing, many argued that Doyle's idea wasn't new at the time he filed his patent. Technologists across the board were also upset because enforcing the patent could have rendered millions of Web pages inoperative. After receiving scores of letters from technology companies, and one from Tim Berners-Lee, the father of the World Wide Web, the PTO made a preliminary finding last year that Doyle's patent wasn't valid. The process of finalizing that decision, one way or another, could take years.

Jason Schultz, a staff attorney at the Electronic Frontier Foundation, is so concerned about the chilling effect that patent trolls exert on innovative activities at small businesses and start-ups that he and his colleagues have posted an FBI-style most-wanted list online. The public-interest group's campaign identifies 10 patents that the EFF claims are stifling innovation. The group is asking the PTO to re-examine these patents and declare them invalid on the basis that they were obvious ideas within their respective fields when the patents were granted.

Goldberg's patents on networked games are on the list. Goldberg's attorney, Lee Grossman of Chicago, said his client would not comment.

For his part, Warfield says that he consulted a lawyer after receiving the letter from Grossman, and that he did not pay the licensing fee, because he disputes Goldberg's claims. Warfield said he did not hear back from Goldberg's lawyer. "Going after me would be pretty ridiculous," Warfield said.

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