As patent suits proliferate, so do worries

You’re wondering whether to tell the boss that his BlackBerry e-mail handheld could become an expensive paperweight because of a patent suit against Research in Motion by NTP.

Your legal team is poring through software license contracts with your Linux vendor trying to find out if you should stick with that arrangement – and face a patent lawsuit from The SCO Group – or take the new licensing deal that SCO is offering.

You see that Microsoft has been ordered to pay a $521 million infringement award for adding code that lets Internet Explorer run applets and plug-ins, and that eBay must pony up $30 million because the “Buy it Now” feature on its Web site infringed on patents. Your mind turns to the software-based business methods you’re exposing on your own Web site through those nifty new Web services, and about how these services are interacting with services on someone else’s Web site.

Suddenly the terms “patent protection” and “patent infringement” take on a whole new meaning.

Data compiled by Aon Corp., which sells intellectual property and infringement insurance, shows a surge in patent litigation cases, costs and judgments. Part of the reason is vendors are more serious than ever about protecting intellectual property of all kinds, including patents. They’re more serious because there’s more money at stake.

“There’s a realization by a lot of companies … that they had this patent portfolio and they could go off and turn it into a profit center,” says Jason Mirabito, a partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo in Boston. He started the intellectual property practice at his firm six years ago with four lawyers. Today, there are 70 lawyers. Companies with lots of patents, such as IBM and Lucent, he says, began systematically identifying companies that might be infringing. The next step was negotiating license arrangements or hauling them into court.

Patents cover more areas than ever before, especially in high tech, and their potential effect on a company is correspondingly greater.

“Patents used to be intended to cover [mainly] gadgets,” says Jeffrey Neuburger, a partner in Brown Raysman Millstein Felder & Steiner, a New York law firm with a large intellectual property practice. “But patents have broadened on the basis of some relatively new case law to cover business processes. Most software patents today are business-method patents.”

Lawsuits over such patents often boil down to one party paying the other. Losers such as Microsoft and eBay – once appeals are exhausted – simply pay the judgment, along with any damages, or agree to a license fee. The direct effect on their customers is minimal.

But it’s not just traditional software applications that are affected by the evolution of patent litigation. In January, Microsoft alerted the Organization for the Advancement of Structured Information Standards, a nonprofit group that designs e-business standards, that several Microsoft patent applications included elements that might be needed to implement the group’s Web Services Security specification. In a statement, Microsoft pledged to provide a royalty-free license to implementers.

Similarly, companies might face the need to protect internal business methods from being hijacked or to defend them against infringement lawsuits, as their methods become available to outside customers and business partners through Web services. Web services is a new software model based on standards and interfaces found in Microsoft .Net or in Java. They can be thought of as a simple, standard way for accessing and using what in many cases had been an internal software application or even a single function in an application, such as order tracking, inventory checking or customer profiling. In effect, a company is making available its own intellectual property or possibly making use of someone else’s.

“We’re seeing a confirmation of [increased] patent-filing activity in this field,” says Thomas Bergert, a partner specializing in intellectual property law for Williams Mullen, Clark, and Dobbins in Richmond, Va. “Companies publishing Web services or somehow creating online business efficiencies should – at a minimum – be aware these creatures [the patent applications] are out there and get informed about them.”

Lawyers acknowledge that abuses of the patent system are rife.

“There is a lot of tension between patent rights and antitrust,” Neuburger says. “The patent holder has the right to assert their patent rights, but not to engage in ‘patent misuse’ – to extract concessions that might violate the antitrust laws.”

“Why do some people sue for pain and suffering?” says Ralph Taylor, chair of the intellectual property litigation group at Dorsey & Whitney, a Washington, D.C., law firm. “Because some are out to get a buck, and some really have been injured.” The same is true for patent cases, he says. “You hope the court can sort them out.”

The abuses could have an effect in an arena that’s often overlooked, but one that could affect enterprise users: standards groups. Such groups typically have policies that require participants to disclose any patents or patent applications that could be infringed by the implementation of the standard being created, such as one for Web services security or a radio modulation technique in the IEEE 802.11 wireless LAN standard.

Participants usually agree to declare these patents and give up certain rights, says Andrew Updegrove, a partner with Lucash, Gesmar & Updegrove, a Boston law firm that specializes in working with standards groups. The firm just filed a “friend of the court” brief with the U.S. Supreme Court in Rambus v. Infineon, a patent case that’s been dragging on for a decade. Updegrove and others contend that Rambus participated in a group that creates standards for memory chips, then withdrew at the last moment and revealed several patents that it claimed were being infringed. Insiders call this a “submarine patent” because it surfaces out of nowhere. 

If Rambus prevails, Updegrove says, patent holders will hesitate to join standards-setting efforts or abandon them altogether.

In May, the Worldwide Web Consortium, a nonprofit group that oversees Web standards, formally adopted a royalty-free patent policy. The policy requires all participants to agree to license, without royalties, any patents that threaten to block interoperability.

Many of these issues and decisions are beyond the control of network executives. But they can take steps to protect their companies.

One key measure is to incorporate a very good indemnity agreement in contracts with your high-tech suppliers, Mirabito says. If a patent holder forces you to pay a license fee, the indemnity clause will let you get repaid by the vendor.

With software, especially, “ensure the software is not infringing” on anyone’s patent,” Taylor says. “There are contractual provisions that you can put into a software license that can give you some protection against this.”

Consider patent infringement insurance, Mirabito says. But be prepared to pay for the protection it offers. “It’s relatively expensive,” he says. “But it protects you if you get sued by paying the legal fees and so on.”