As a patent lawyer based in Silicon Valley, Ron E. Shulman is one of busiest people in the tech industry. Shulman, a partner in the Palo Alto (Calif.) office of Wilson Sonsini Goodrich & Rosati, specializes in defending companies against infringement lawsuits. The value of intellectual property continues to rise in the Information Age, so patent lawsuits have doubled over the last decade.
Last year there were 3,075 infringement actions filed in federal court, up 9% over the previous year. Shulman himself is working on 11 cases. Spencer E. Ante, BusinessWeek's Computers editor, recently spoke with Shulman about patents and the flurry of suits filed by Ampex Corp. (AEXCA ). The following are edited excerpts of their conversation:
Q: What kinds of things can be patented?
A:A patent can cover a new method of doing something, or a device or a compound. It allows you to exclude everyone from using the patent.
Q: How long are patents enforceable?
A:[If the patent was filed before June 8, 1995], you have your choice: It's either 20 years from date of filing or 17 years from date of granting.
Q: What kind of damages can you collect from a patent infringement judgment?
A:If you win, you are entitled to an injunction. If the patent is expired, you don't get the injunction. If you win in the International Trade Commission court, you can get an "exclusion" order. [Because of that] you can collect damages going back six years from filing of the complaint. There are some exceptions. Damages don't begin until a company is on notice. If a patent owner lulled an infringer into thinking it wouldn't be sued, it is a defense. The damages include lost profits or a reasonable royalty.
Q: How can companies defend themselves against patent suits?
A:There are two defenses that involve prior art [the entire body of knowledge from the beginning of time to the present]. One is anticipation: Most commonly, the patent is invalid because the invention was anticipated. The second is obviousness: The invention would have been obvious. Another is called inequitable conduct, or fraud on the patent office. You can't, for example, withhold prior art or [fail to] fully disclose the background of the patent.
Q: Do you think Eastman Kodak (EK ), which Ampex is suing on patent infringement grounds, will settle?
A:Kodak is going to fight fiercely. If it has a future, it is in digital photography. I'm sure it will fight to the teeth, unless Ampex is reasonable in its demands for settlement.
Q: How do you determine royalties for a judgment?
A:The law lists a bunch of criteria for determining royalties. It is based on a "hypothetical deal" standard. In the electronics area, it's rare that you get more than a 10% royalty. Typically, it's 1% or 2% of sales. You should assume they are going after a royalty of 1% to 5%.
But it depends on what you decide is the royalty base. Is it the whole price, or part of the price? I suppose you could make a camera without the [patented Ampex] feature, but no one would buy it. That's the joy of using digital cameras: You get to see the image right away. Royalties may also include what are known as "convoid" sales. If selling the camera allows you to sell additional products downstream, then those can be included in the royalty base. That will certainly be explored by the plaintiff.
Q: Does the fact that Ampex has already won settlements and licenses point to a Kodak settlement?
A:Ampex will try and rely on that. [The past settlement history] is pretty persuasive stuff. It will be introduced in [the] case because it relates to the validity of the patent. It is some evidence of commercial success. And commercial success would be evidence of nonobviousness. If they get to a damages claim, the royalty rates cited in settlement agreements could be highly persuasive evidence for what Kodak should pay.
Q: In Silicon Valley, how is Ampex viewed these days?
A:Ampex is basically a research shop. Ampex is viewed as a slightly more civilized version of a patent terrorist. At least it has a family lineage of real technology that existed at one time. People respected Ampex. It did real stuff. [Now] what it is doing is no different from what other patent trolls do.
Q: Is so-called patent trolling on the rise?
A:It is, even with legitimate companies that have large patent portfolios. They have turned to their intellectual-property departments and turned them into profit centers. Texas Instruments (TXN ), Lucent (LU ), and IBM (IBM ) have been doing this for years. Plus, the damage awards are huge. [The practice] has grown more vigorously over the past 10 years. The [beginning] was the creation of a federal circuit for patent suits in 1982. Patents are a powerful economic weapon. People sue left and right. The outgrowth of that is patent holding companies. They're like venture funds. They go around holding people up for lots of money.
Q: What is the cost to society?
A:Most people suing didn't do any of the invention. Money isn't going to the inventors. There's no socially useful purpose. It's a waste of resources. Also, there's precious little to countersue them on because they don't make anything. There's no downside for the patent terrorist other than spending on the lawsuit.
Q: Is there any way to curtail the lawsuits?
A:Not without legislation. That would be very difficult to do. Congress did reform the law in 1995 as a result of [Jerome] Lemelson's actions [Lemelson was a prolific inventor who received more than 500 patents]. He did nothing but file patent applications. He has the largest number of issued patents. He acquired patents in key areas of technology such as bar codes. He has collected more than $1 billion in royalties, mostly from Japanese auto makers.
As a result, Congress changed the patent expiration dates from 20 years from filing, to 17 years from granting.
Q: Who else could Ampex sue?
A:The major digital photography companies will be targeted. Computer companies could be targeted. I can't say for sure since I haven't reviewed the patent. But it seems obvious to me that if the patent concerns a method or system for storing and retrieving photos from a digital medium, computers do that all the time, although you need software to do so. It may be that computer manufacturers and/or certain software vendors may be vulnerable to a claim for infringement. [Ampex] can go after Motorola (MOT ), Nokia (NOK ), Samsung and all those guys. It's hard to sell a phone that doesn't have a camera.