Big Blue Is Out To Collar Software Scofflaws

It's policing what it says is rampant patent infringement

Big Blue holds more software patents than any other company in the world. That's great for bragging rights, but it does little for the bottom line. Now, however, IBM sees money in that trove of intellectual property--and its efforts to collect are making other software companies hopping mad.

Lawyers for Big Blue are searching for software companies that it says should be paying royalties but aren't. Over the past several months, IBM has been quietly pursuing patent claims against such well-known software companies as Oracle, Computer Associates, Adobe Systems, Autodesk, Intuit, and Informix. IBM is also pressing a software claim against computer maker Sequent Computer Systems Inc.

So far, no lawsuits have been filed, but software companies aren't waiting. Several of them are launching a preemptive strike, hiring Silicon Valley's star litigator, Gary L. Reback, a partner at Wilson Sonsini Goodrich & Rosati. Two years ago, Reback took on Bill Gates. Representing a handful of Silicon Valley companies, he unsuccessfully tried to get the Justice Dept. to broaden an antitrust investigation of Microsoft Corp.

COUNTERATTACK. Now, Reback is hurling charges against IBM similar to those he leveled at Microsoft. "IBM shows up the same way someone might demand protection money," he says. Officials at the companies confirm that IBM has contacted them, but most refuse to talk publicly.

Collecting the patent royalties could add millions to IBM's net profits. In 1995--the last year IBM released figures--the company took in $650 million from royalties on all patents, software and hardware alike. Insiders say that senior managers believe IBM could collect $1 billion a year from its patents.

The software makers that have been contacted by IBM (table) aren't yet willing to help Big Blue reach that goal. They maintain that a lot of software patents--IBM's included--are too broad and never should have been issued. IBM's pursuit of royalties, they argue, is an abuse of a patent system that is too lax and does not require an applicant to really prove that the software invention is unique.

IBM contends it's just trying to protect its intellectual property and get a fair return on the $5 billion yearly tab it runs up on research and development. "What Gary Reback is asking us to do is provide an R&D subsidy to our competitors, and we won't do that," says Marshall C. Phelps Jr., IBM's attorney in charge of intellectual property and licensing.

When IBM strikes a royalty agreement, it collects 1% to 5% of the retail price of a product using the covered technology. That's a sliding scale depending on the number of patents involved. If IBM can collect royalties from those companies using its approximately 2,500 U.S. software patents, it could reap almost as much from software as the $200 million in royalties it gets from PC makers. Reback says he was told IBM asked one software maker to pay $30 million to $40 million a year.

COSTLY PRECEDENTS? Indeed, some folks in the computer and software businesses fear that the whole industry could wind up paying a 1% to 5% tax to IBM. "It's hard to be in the computing business--hardware or software--and not infringe on a couple of dozen IBM patents, if not more," says Greg Aharonian, a patent consultant. Meanwhile, other technology companies are following IBM's lead. Says Richard A. McGinn, president of Lucent Technologies Inc.: "We've seen IBM become much more aggressive, and we are, too."

IBM has patented everything from the software to automatically return the cursor to the start of the next line on a computer screen to a state-of-the-art virus-detection program. So far, it has made claims against companies by invoking patents including a spell-check function and techniques for how a database program handles queries and runs on so-called parallel-processing computers.

Software companies aren't eager to settle. Intuit Inc., for one, rejected a patent license deal that IBM offered. Some companies are afraid that paying now will set a precedent, making it harder to say no later. "If we sign up with IBM today, then what happens in three or five years, when the patent agreement expires?" asks Oracle Corp. patent attorney Allen Wagner. With all the skirmishing that lies ahead, this dispute is still in Version 1.0.

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