Forgive Microsoft CEO Steve Ballmer if he's frustrated by litigation. Aside from high-profile government investigations into the company's alleged monopoly power, Microsoft (MSFT) has been sued at least 49 times in the past six years for patent infringement by small shops that buy up patents from inventors and bankrupt companies, according to researcher PatentFreedom. Lawsuits from "patent trolls," says the software giant, are a costly blight on the technology industry. "[Patent litigation] costs the industry billions of dollars per year," says Horacio Gutierrez, corporate vice-president and deputy general counsel at Microsoft.
On Jan. 28, Microsoft signed up for patent insurance. It's not insurance such as you might get for your car or house, but a startup called RPX provided what's probably the closest thing to it for tech giants. Companies such as Microsoft, Sony (SNE), and Nokia (NOK) pay RPX annual fees to avoid patent-related litigation. The fees depend on each company's revenue and can range from $35,000 to $4.9 million per year. The 14-month-old RPX is one of the first companies to offer the service, It's already signed up 30 members, including IBM (IBM), Cisco (CSCO), Hewlett-Packard (HPQ), and Samsung.
RPX's approach doesn't guarantee that its members won't be sued. The company buys up patents that could be used against its clients, having spent to date $130 million to acquire more than 1,000 patents and patent rights in the mobile, Internet search, telecommunications, networking, and e-commerce areas. In return for yearly fees, member companies get licenses to all the patents RPX acquires. "By working together with entities such as RPX, the industry can collectively reduce the costs of this needless litigation," says Microsoft's Gutierrez.
Microsoft's settlements with Acacia
Patent trolls are extremely controversial in the tech industry. They're typically small firms that acquire patents from individuals or small companies and then try to extract licensing fees from companies selling products that infringe on those patents. The patent-licensing firms are more politely referred to as "nonpracticing entities" because they sell patent licenses to technologies they don't design, manufacture, or distribute. Microsoft is one of the most-pursued tech companies by these small firms, according to PatentFreedom. The patent disputes almost always start with a lawsuit. In 2009, one of every five of the 470 nonpracticing entity cases filed involved software defendants, according to RPX.
In late January, Microsoft settled two patent disputes for an undisclosed amount with subsidiaries of a nonpracticing entity called Acacia Research (ACTG). One lawsuit involved a patent for software compilers and the other involved technology that can be used by interactive Internet maps. RPX conducted a study of the top 60 technology companies in the U.S. and Asia and discovered that 80.6% of all patent cases against them were filed by nonpracticing entities. "Today the preferred path is litigation," says John Amster, CEO of RPX. "It's a highly inefficient, friction-filled way of conducting business," he says.
ShoreTel (SHOR), which sells business phone systems, is one of the companies looking for a more efficient solution. The company signed up as an RPX member because of high—and unpredictable—patent litigation costs. "Our payments in a quarter to a patent troll can take us from being profitable to unprofitable," says Ava Hahn, vice-president and general counsel at ShoreTel. "We look at it as an insurance policy," she says.
"not a wolf in sheep's clothing"
RPX's approach is attracting venture capital backing, too. Its investors include Charles River Ventures, Kleiner Perkins Caufield & Byers, and Index Ventures. "There ought to be a market-based mechanism for inventors to be paid for their inventions without having to build products or to sue," says Izhar Armony, a general partner at Charles River Ventures. That company has invested in four companies in the intellectual property market, including Nathan Myhrvold's Intellectual Ventures. Intellectual Ventures both acquires patents from companies and comes up with its own inventions.
Still, it's unclear how much a firm like RPX can do to prevent litigation. "It's unrealistic to say you could buy up all the patents that may be asserted against you in the future," says Professor Mark Lemley, director of the Stanford Program in Law, Science, and Technology. "There's a very thin line between a patent troll and a company [that] buys up a bunch of patents and says: 'For a fee we won't sue you,'" he says.
For its part, RPX says that it doesn't sue or threaten to sue companies with the patents it has acquired, even if they're not members. That would run counter to its approach and could cost it customers. RPX has even pledged in its charter not to sue anyone. "We can buy rights to protect our members," says Amster. "Companies are getting comfortable that we're not a wolf in sheep's clothing."