Tuesday, May 1, 2007

From Niro, Scavone, Haller & Niro(On patent infringement)

Timothy J Haller and Sally Wiggins, Niro Scavone Haller & Niro

Trolls are mythological figures in folklore – so where do so-called ‘patent trolls’ come from? The term was first used in July 2001 when Brenda Sandburg wrote an article for American Lawyer publication The Recorder entitled “Trolling for dollars”. On page one of the article there was a picture of Intel’s then Assistant General Counsel Peter Detkin holding a troll doll. The second page showed attorney Raymond P Niro, of Chicago firm Niro, Scavone, Haller & Niro, with the caption “Patent power”. The accompanying article began with the storybook ‘once upon a time’ claim that: “In the sleepy village of Santa Clara, there lived a very wealthy but very frightened giant named Intel. Intel was plagued by a fearsome band of evil trolls – patent trolls to be exact – who wanted a glittering pot of gold in exchange for doing absolutely nothing. They were very powerful because they said they owned the patent on some of the magic Intel used to become rich.”

Intel cried foul because it had been sued for patent infringement and defamation after publicly calling a client of Niro’s firm an “extortionist”. Thereafter, Peter Detkin coined the term ‘troll’ to avoid more lawsuits: “We were sued for libel for the use of the term ‘patent extortionist’ so I came up with the ‘patent trolls’,” Detkin said. “A patent troll is somebody who tries to make a lot of money from a patent that they are not practicing, have no intention of practicing and in most cases never practiced.”

After this incident Detkin became the managing director of Intellectual Ventures, a company that buys patents by the hundreds. In a Newsweek article Intellectual Ventures founder Nathan Myhrvold said: “If giant corporations are making billions of dollars from my ideas, I want something for it.” The same article goes on to define Intellectual Ventures’ business model as follows: “With this large bankroll, the company is out buying existing patents in droves. [Myhrvold will not comment on these activities, but sources say he has already purchased about 1,000 patents.] The strategy is to set up a sort of patent marketplace. Patent owners get money upfront for the dusty ideas sitting on their shelves, the investors get the rights to use the ideas without being sued and Myhrvold gets to rent those same ideas to other companies that need them to continue creating products.” (Newsweek, “Factory of the future?”, B Stone, November 22 2004.)

This certainly seems to satisfy Detkin’s definition of a ‘patent troll’. Indeed, others have even referred to Intellectual Ventures as a “patent troll on steroids, stockpiling patents to hold entire industries hostage”. (IP Law & Business, “Going once?”, L Lerer, October 2006.)

The background behind patent trolls

Famous criminal defence lawyer Percy Forman once claimed that he sometimes had to try a case against the victims of the crime to divert the jury’s attention from his client’s bad acts. When TechSearch sued Intel for patent infringement, Intel characterised itself as the victim to mask a different story. TechSearch, a company engaged in the business of purchasing, licensing and enforcing patents, had purchased a patent from International Meta Systems Inc (IMS) in January 1998. IMS did not have the resources either to license or enforce its patent, but retained an interest in the patent in the hope of paying off its debts.

The IMS patent grew out of its efforts to develop a microprocessor chip that would emulate Intel’s fastest chips. Unfortunately, IMS could not get funding to continue its operations and filed for Chapter 11 bankruptcy. The principal reason that IMS failed was that prospective partners in the industry (eg, Compaq) were unwilling to help IMS as Intel had threatened to cut chip allocations to any company that supported competing technology. Since IMS was not yet capable of supplying chips at high volumes, companies like Compaq simply could not risk being cut off by Intel. Shortly after it acquired the patent, TechSearch notified Intel that certain of its products infringed the IMS patent. Intel refused a licence and TechSearch filed suit alleging that Intel’s Pentium Pro and Pentium II lines of products infringed its patent. Based upon Intel’s public filings, Intel was making approximately US$8 billion a year in revenues from these products.

As the lawsuit progressed, Intel (using a shell company called Maelen Limited) tried to buy the TechSearch patent. Maelen Limited filed a motion asking a bankruptcy court to approve the bringing of an avoidance action against TechSearch to recover the patent for the estate. In an avoidance action the bankrupt estate may recover an asset that was transferred within the previous year if it can show that the purchaser of the asset paid less than a reasonably equivalent value for the asset. Maelen offered to pay the trustee’s administrative costs and fund the cost of litigating the avoidance action with TechSearch. Maelen further proposed that if the estate recovered the patent, it would be auctioned and Maelen would make a minimum bid of US$325,000 for the patent.

Thereafter, it was learned that Maelen was a Cayman Island shell corporation owned by the Bank of America for the account of Intel. Intel had acquired Maelen in August 1998, shortly after TechSearch sued Intel for patent infringement. Maelen came on the scene solely for the purpose of acquiring the patent from IMS. In short, Maelen was formed by Intel to keep its identity secret from TechSearch, the bankruptcy court and the creditors, and to manipulate the bankruptcy court into taking action that would undermine TechSearch’s ability to prosecute the patent infringement case against Intel.

Maelen’s motion to bring an avoidance action was heard before Judge Frank R Monroe in the bankruptcy court in Austin, Texas. TechSearch’s attorney argued that Maelen’s failure to disclose to the court and the creditors that it was a front for Intel was fundamentally improper, since Intel had an adverse interest to the estate (the estate held a financial interest in any recovery by TechSearch against Intel in the patent infringement action). In the bankruptcy court, Maelen claimed that the patent was worth far more than TechSearch paid for it, while in the patent case Intel stated that the patent was clearly invalid and threatened TechSearch with sanctions if it did not abandon its lawsuit. In an extraordinary action, the US trustee (who had not been told of Intel’s involvement with Maelen) made an appearance before the court in support of TechSearch’s position, stating: “The lack of disclosure I think is fatal to the trustee and Maelen going forward with the motion. I think the creditors are entitled to know about the relationship. It’s a significant fact and it was not clearly disclosed at all.”

After hearing all the testimony and arguments, the judge issued a ruling denying Maelen’s motion and finding that Intel was being deceptive: “I would submit that neither Maelen nor Intel give a damn what this estate gets out of that [avoidance] litigation if, as and when it’s brought, and that their sole interest is in defending the [patent infringement] lawsuit in California, and that they are using this estate in an attempt to bring leverage upon TechSearch in the litigation in California. That is so clear from this evidence that I can’t reach any other result or conclusion.”

He concluded that Intel (and its shell Maelen) had an actual conflict of interest in representing the estate, which was so “clear and pervasive” as to require disclosure and, when disclosed, to require that its proposed agreement with the estate not be approved.

In a Wall Street Journal article that followed, Intel was taken to task for its tactics: “Initially, Intel didn’t disclose its involvement in the bankruptcy case. But after it admitted its ownership of the Cayman company in court, Judge Frank R Monroe, who is overseeing the proceedings, concluded that Intel and the Cayman company had portrayed themselves as trying to help the bankrupt debtor when they were in fact really out to undermine the patent case. ‘They are using this estate in an attempt to bring leverage upon TechSearch and the litigation in California,’ the judge said, describing the manoeuvre as totally inappropriate.” (Wall Street Journal, “Intel’s bold steps to thwart foe in patent case”, D Takahashi, April 16 1999.)

Chuck Mulloy, an Intel spokesman, acknowledged the company’s use of Maelen. However, he said Intel was using “tactics appropriate to the plaintiff in this matter”, calling TechSearch a “patent extortionist”.

Charles Wolfram, a Cornell University law professor and ethics expert, said Intel appeared to disclose its role only when a “gun was to their heads” under the pressure of discovery rules. “I am distressed by this,” Wolfram said. “What is a big company like Intel doing sneaking around like this?”

Ironically, TechSearch was called a “patent extortionist” by Intel as a justification for Intel trying to buy secretly the very patent it argued was invalid. In contrast to Intel, TechSearch was at least trying to help a company that had effectively been driven out of business by Intel. So the evil trolls were not so evil after all. From this background emerges the so-called ‘patent troll’.

Since when are non-manufacturing inventors bad?

So what do these patent trolls do that is so wrong? Apparently, the answer is that patent trolls do not manufacture the technology that is embodied by the patents that they seek to enforce. But is this really wrong? The answer to this should be a resounding ‘No’. Consider the names of some individual inventors who ultimately formed companies to exploit their ideas, yet initially manufactured nothing: Westinghouse (air brake), Ford (car), Gillette (razor), Otis (elevator), Goodyear (synthetic rubber), Kellogg (grain harvester), DuPont (gun powder), Owens (glass) and Fermi (neutronic reactor). This list represents just a few of the individuals who, in most cases, worked alone and without corporate support, yet created not just new inventions, but whole new industries that today employ millions of people.

It can be argued, of course, that ultimately these inventors became manufacturing companies and that companies which merely buy patents from individual inventors contribute nothing. But what about small companies that are struggling to compete against corporate giants and need a strong patent system to level the playing field? As the inventor of the magnetic resonance imaging scanning machine, Dr Raymond Damadian, observed, small companies often provide the economic spark for new jobs: “Few US citizens realize that the great majority of new jobs created for the public are provided by small companies with fewer than 500 employees. From 1981 to 1988, companies with fewer than 500 employees contributed 11.7 million new jobs to the economy. In this period, US small companies generated two-thirds of all new employment.”
There is, of course, no section of the Constitution or the patent laws that reserves the right to obtain and enforce patents exclusively for large manufacturing companies. Moreover, as is often the case, it is all but impossible for an individual or small company to compete against a large company that uses patented technology and is willing to face the risk of litigation.
Lack of recourse for individuals and small businesses

Referring to the lawsuit between TechSearch and Intel, an Intel executive posed the following question before Congress: “If someone buys a patent for US$50,000 and their business model is suing people, should they be able to get an injunction?” This testimony was presented before an Senate hearing on April 21 2006 on patent reform. One must wonder whether Intel would be posing the same question had it bought the IMS patent (as it tried to do) and then sued its competitors for an injunction. Guided by the statements of corporate giants such as Intel, it is small wonder that Congress is now contemplating patent reform, which might more appropriately be dubbed anti-patent reform. As an example of such corporate influence, US Representative Lamar Smith, a Texas congressman, recently introduced the anti-patent bill in the House, stating: “I think patent trolls are abusing the system.” (“Congress targets rise in patent suits”, E Werner, June 9 2006.)

Who decides who is abusing the patent system? Did Xerox abuse the patent system when it obtained hundreds of patents on copier designs that it never intended to make? What about IBM, which reported US$1.7 billion in licensing revenues in its 2002 annual report, or Texas Instruments, which expects US$1 billion in licensing fees from a single patent licence with Hyundai Electronics? What about Intel’s own aggressive litigation tactics against its competitors? An individual inventor or small company that lacks the financial resources to take on the big guy in high-stakes litigation should not be forced to grant compulsory licences. Tellingly, the voices urging that the current patent system is unfair have yet to identify a single example where the issue of an injunction for a non-manufacturer was inappropriate under the circumstances.

The right to exclude is the essence of property. Without it, the playing field can never be levelled. Who fears a compulsory licence? Certainly not a corporate giant that can protract a lawsuit by as much as four to six years and afford to pay US$2 million to US$10 million in fees. The corporate giant wants a compulsory licence since, by eliminating the threat of an injunction, it can achieve a ‘heads I win, tails you lose’ situation. Of course, patent infringers should not be permitted to take a ‘heads I win, tails you lose’ approach to damages. If they lose at trial infringers are not treated like willing licensees. As one federal judge has explained: “[An] infringer would have nothing to lose and everything to gain if he could count on paying only the normal, routine royalty non-infringers might have paid.” (Panduit Corp v Stahlin Bros Fibre Works, 575 F 2d 1152, 1158 (6th Cir 1978), opinion written by former Chief Judge Markey of the Federal Circuit.)

By eliminating injunctive relief (or making it more difficult to obtain), a mandatory licence is, in effect, being granted. Therefore, the little guy will suffer. This is the strategy behind the corporate giants’ lobbying efforts in support of patent reform. Ironically, this reform will increase rather than decrease the burden on the judiciary as infringers, whether they be wilful or unwitting, will have little or no incentive to negotiate a settlement. In addition, in the debates about patent trolls and the appropriateness of injunctions, the important role played by trial judges is forgotten. Injunctions are discretionary, not mandatory, and if there is something amiss the trial judge can fix it.


So where does the idea of patent trolls arise from? No doubt the enforcement of patents can become abusive if a good-faith basis to assert a patent does not exist. However, that threshold applies to every individual or company, large or small, and regardless of whether they actively manufacture the technology embodied by their patents. In these discussions it must not be forgotten that it is the ownership of the patent that affords the constitutional right to enforce it against those who infringe. Arguments that attempt to circumvent or mask this notion, or to criticise the patent trolls who fully comply with the patent laws in enforcing the patents that they own, are wholly without merit.


Anonymous said...

An excellent article. In my view many times big business products are nothing more than a patchwork quilt of features and functions that they swiped from their smaller competitors. It really appears as if the big business boys can't stand to have someone hold them accountable because of their propensity to steal product.

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Scott S said...

Lawyers are a group of trolls in reality - to hell with myths and fiction. Furthermore, lawyers lie and need to be challenged at every level. Any lawyer from Chicago is not worth the concrete they will be buried in. So why anyone would even accept the documentation of any law firm as credible is about as sensible as chewing your own toe nails.
Lawlessness abounds thanks to lawyers (liars)