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Originally Posted by NJBlackBerry
From today's New York Times:
A Payday for Patents 'R' Us
By IAN AUSTEN and LISA GUERNSEY
he express elevator that whisks visitors to Donald E. Stout's office on the top floor of a black glass building across the Potomac from Washington suggests success. But nothing up there indicates that Mr. Stout is a major player in the software business. There are no cubicles for software engineers or humming server farms capturing their keystrokes.
There are, however, plenty of lawyers. Mr. Stout, who has practiced patent law for 33 years, is a founder of NTP, whose only assets are a series of wireless e-mail patents granted to Thomas J. Campana Jr., the other founder, and whose only business is extracting licensing fees from companies.
Started 13 years ago, NTP has used the staff at Mr. Stout's law firm to exploit those patents. In March, their persistence paid off. Research In Motion, the Canadian maker of the popular BlackBerry wireless e-mail devices, agreed to pay NTP $450 million to settle a long-running and sometimes bitter patent dispute between the companies.
Mr. Campana, a Chicago-area resident, died of cancer last year. Mr. Stout said the settlement was a vindication of individuals over large corporations. And the settlement has emboldened NTP, which is pursuing additional licenses. Other companies, including Nokia, a rival of Research In Motion, have already signed licensing agreements with NTP.
"Most people would like to see that a small inventor can succeed in this country," Mr. Stout said. "This is proof that it can happen."
But others find the growth of patent holding companies troublesome rather than heartwarming. Critics of the patent system maintain that these companies - called "patent trolls" by their detractors - rely on excessively broad patents, particularly for software, that should never have been granted in the first place.
And the costs of litigation and licensing fees to settle patent disputes have become facts of life for technology companies. In March, an appeals court upheld a $29.5 million penalty against eBay in a patent infringement suit brought by MercExchange, a failed online travel service that holds patents related to eBay's "Buy Now" feature. (The case remains in litigation, in part because of a preliminary Patent Office ruling against MercExchange in April.)
In 2003, Eolas Technologies, a Web browser patent-licensing spinoff of the University of California, was awarded $565 million in damages in a patent infringement lawsuit against Microsoft. In March, an appeals court ordered a retrial.
Other than legal respite, these companies get very little for their settlement money. For example, Research In Motion's BlackBerry e-mail software is far more sophisticated than anything outlined in Mr. Campana's patents, and there has never been any suggestion that R.I.M. relied on those patents while developing its own software.
Josh Lerner, a Harvard Business School professor and an author of "Innovation and Its Discontents," argues that the potential costs of patent litigation are higher for small technology companies.
"Any start-up company is a long shot," he said. "But now, even if you are successful in the market, there's a high probability that someone will show up with a patent. Many of these patent holding companies have been quite successful even when their patents have been problematic."
There have long been companies organized solely around pressing patent rights. Henry Ford required a prolonged legal battle to successfully fight a holding company that claimed patent rights over all automobiles with internal combustion engines in 1911.
It was not until 1982 that appeals of patent cases were moved to the Court of Appeals for the Federal Circuit in Washington, producing more consistent rulings. Before that, appeals were handled in circuit courts around the country, depending on the trial court where the case was first heard. Several of those appellate courts, specialists said, had reputations of siding against patent owners seeking to press their claims.
"Before the Federal Circuit, patents weren't worth much," said Thomas L. Creel, a lawyer with the firm of Goodwin Procter in New York. "Patents have now become a piece of property that is very valuable."
Mr. Stout, who is 58, and Mr. Campana first met at Telefind, a company that in 1987 introduced a primitive form of wireless e-mail that could send relatively short messages to pager-like devices. (The devices could only receive messages, not transmit them.) While Mr. Campana has been described as the inventor of the software that Research In Motion will now license, Mr. Stout acknowledged that was not the case. Instead it was developed by two employees of E.S.A., a separate company Mr. Campana owned.
"Tom was basically an overall developer of networks," Mr. Stout said. "The two co-workers at E.S.A. were software guys."
When Telefind went under in 1991, Mr. Stout said he and Mr. Campana decided to start NTP as "a kind of virtual company" to make money from the e-mail patents. Company headquarters were in Mr. Stout's home but NTP did attract 22 investors, most of them former Telefind shareholders who had just seen that investment vanish. (All the investors will receive money from the R.I.M. settlement, once the legal bills are paid.)
Patent holding companies often take an incremental approach. They initially focus their license demands on the smallest companies in a sector on the theory that little companies will not have the time or resources for a fight. The income they generate from those licenses, in turn, is used to build a legal war chest for challenging more established players.
But in 1992, there were not many companies developing wireless e-mail. That began to change in the latter part of the decade, and NTP began sending letters to wireless e-mail providers and software and equipment makers, citing the Campana patents and offering licenses. Often, Mr. Stout acknowledged, the NTP claims had no more support than printouts of the service providers' Web pages.
"There weren't a lot of letters coming back," Mr. Stout said.
At that time Research In Motion, based in Waterloo, Ontario, was a small manufacturer of specialized data wireless cards mostly for industry and the military as it embarked on what would become the BlackBerry. Nevertheless, it chose to challenge NTP rather than license its patents. (Through a spokeswoman, R.I.M. declined to comment about its dealings with NTP.)
Challenging patent licensing companies is not a common strategy except for giant competitors like Microsoft. While there are no reliable statistics, Mr. Creel and others said that most patent enforcement attempts were settled without a trip to court.
"The philosophy in many companies is that litigation is not only expensive, it's disruptive," Mr. Creel said. "Most people are willing to pay rather than fight. It's in effect a tax on doing business."
While Mr. Stout is now careful not to discuss R.I.M.'s motivation in taking on his company, during an interview in January he attributed the action to the personalities of its executives, in particular Michael Lazaridis, R.I.M.'s president and co-chief executive. Mr. Lazaridis, who started the company while still a student at the University of Waterloo in Ontario, is widely respected for his engineering skills and holds 30 patents covering wireless technologies and software.
"I've never seen anything like it," Mr. Stout said then. "Most companies don't have this amount of fight in them."
For Research In Motion, financial penalties set in early. In addition to legal expenses, after the litigation with NTP was under way in 2001 R.I.M. was forced to reduce its earnings, regularly setting aside millions of dollars in a fund to cover the cost of any settlement.
Its decision to fight led to a trial court ruling in 2003 that upheld NTP patents and threatened to undercut R.I.M.'s success with BlackBerry. As part of its ruling, the court issued an injunction barring Research In Motion from offering BlackBerry service in the United States. And as the American market was by far the largest, NTP potentially had the power to destroy R.I.M.
Since then, NTP's litigation record has been mixed. An injunction was put on hold so Research In Motion could appeal. Late last year, the appeals court upheld 11 NTP patents but ordered that 5 should be reargued.
At the same time that R.I.M. initiated its appeal, the Patent and Trademark Office began reviewing eight of NTP's patents at R.I.M.'s request. On April 19, the patent office, in a preliminary ruling, declared one patent at the center of the legal battle between the companies invalid and rejected all 89 claims used to support it. To date, the patent office has reviewed 8 of NTP's patents in preliminary rulings, rejected 4 and dismissed 612 of its patent claims.
Research In Motion has never disclosed why it finally settled. But it had been under some investment industry pressure to end the litigation. Among other things, there were growing concerns that the uncertainty created by the NTP case might cause some wireless service providers to shy away from R.I.M.'s e-mail system.
The two adversaries are still working out the terms of the settlement, including a payment schedule. The BlackBerry's success means that Research In Motion has ample resources to cover its costs.
Little has changed at NTP beyond moving the company's mailing address from Mr. Stout's house to a business service center.
But as NTP picks new targets for its licenses, Mr. Stout is quick to reject suggestions that the company's patents will not survive patent office review or that the patent holding business is a less-than-desirable line of work.
"Those who criticize, they think that unless you make products, you aren't entitled to having rights," he said. "That's just not so."
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