[Commons-Law] fun with patents

[Vinay Aravind]

Following piece from FastCompany.com....the beautiful American patent
system steps in to provide occupation, and revenues, for an otherwise
useless company.  Read and weep.

vinay



Patently Aggressive

Forgent Networks sues software giants for patent infringement. Is it
protecting inventors--or driving a stake through the heart of innovation?
From: Issue 102 | January 2006 |  Page 79 By: Jennifer Reingold

It's a gorgeous sun-soaked day in southwest Austin. At a generic glass
office building in a random corporate park, the indoor waterfall gushes a
merry greeting. In the light-filled boardroom of Forgent Networks, CEO
Dick Snyder, a trim, freckled man with a broad smile, puts out a friendly
hand.

It sure doesn't seem like the gates of hell. But for a lot of people in
the software industry, this is Hades, and the seemingly mild-mannered
Snyder is the three-headed dog at its door. That's because Forgent, which
used to be an enterprise software company, has a new and quite profitable
business strategy: Sue, sue, sue, and when all else fails, sue again.
Forgent holds patents, the most significant of which, Patent No.
4,698,672--fondly known as just '672--is allegedly being violated by
virtually every company that has ever used JPEG image compression, from
camera manufacturers to software designers to cell-phone makers.

In the three years since Forgent decided there was more gold in subpoenas
than in software, the company has collected a staggering $105 million in
licensing fees from the likes of Sanyo, Sony, and 48 other companies. Many
of those that haven't paid up--a panoply of household names including
Microsoft, Google, IBM, and Hewlett-Packard--have found themselves part of
a massive, 41-company lawsuit that will begin proceedings later this year.
Forgent has filed another suit covering a different patent related to the
digital video recorder against 15 major companies including Time Warner
and Comcast; that will go to court in 2007.

At a time when rampant piracy, the open-source movement, and the spread of
technological expertise abroad have led to collective national
hand-wringing over the state of American innovation, it's worth thinking
about another challenge: the ever-increasing legal battles over who owns
an idea. Forgent and its ilk--sometimes snidely referred to as "patent
trolls"--have roiled the software industry. (The troll epithet has also
been hurled at companies such as Acacia Research and NPT Inc., the latter
of which is suing Research in Motion, maker of the BlackBerry [see
Squashing the BlackBerry?]). "I always thought 'patent gangster' was more
appropriate," says Scott Watkins, a patent attorney at Steptoe & Johnson,
speaking generally. "It's the old protection racket."

Some say Forgent's fight-back approach is the only recourse for small
innovators against rich companies that try to steal their intellectual
property. Others see Forgent as the exploiter, taking advantage of
antiquated laws to hold creative enterprises up for ransom. "The Forgent
business model has caused people to stop innovating," says an inventor in
Forgent's market who didn't want to be identified for fear of legal
retaliation. "It has had a chilling effect on anything new."

Back in the bright boardroom, it's hard to believe that this deserted
suburban office is ground zero in the war over intellectual property. The
place looks like it should have tumbleweeds rolling through it, with just
20 employees working out of an office building that once held 300 (most of
the space has been subleased). It doesn't feel like a normal business, and
that's because it isn't--a point made crystal clear when the
public-relations guy turns on a tape recorder to ensure there's evidence
should I accidentally misquote anyone.

    "The ones that scream the loudest are also the ones on the other side
. . . asking people to pay them for their patent work."

Believe me, I won't. Though Snyder, a 61-year-old former executive at HP
and Dell, has a slow, folksy patter, he's also a competitive triathlete
who thinks the infamous "Escape From Alcatraz" race, featuring an
open-water swim in the 50-degree San Francisco Bay, is a great stress
reliever. His big adversaries, he points out, are plenty aggressive when
it comes to defending their own intellectual property. "The ones that
scream the loudest," he says calmly, "are also the ones on the other side
of the fence asking people to pay them for their patent work or asking
them not to infringe on their patents." Snyder says he's simply doing his
fiduciary duty by capitalizing on his shareholders' assets.

Not that there are so many assets to pick from these days. Forgent's
previous incarnation, a videoconferencing company called VTEL, fell on
hard times in the late 1990s. In 2001, board member Snyder was brought in
to right the company. He dropped videoconferencing and tried to reinvent
Forgent as a software business, but that didn't work too well either. The
company lost $6.1 million in fiscal 2002.

Cash-crunched, he and his board essentially began rummaging through the
company closets--and found a treasure. Inventors working for Compression
Labs Inc., a company VTEL bought, had registered for patents on a process
that Forgent now claims is used in JPEG compression.

Enter the briefcases and cuff links. Snyder first aimed his guns at Japan,
a less litigious place than the United States, in hopes of setting a
precedent. Forgent sent letters demanding a one-time license fee to cover
alleged past and future infringement. The strategy worked: Staying out of
court, Sanyo paid $15 million and Sony more than $16 million in fiscal
2002. Emboldened, Snyder moved on to the U.S. market, going after more
than a thousand companies that have used the JPEG in their products. For a
while, Snyder used the settlements to fund other Forgent operations. After
paying the lawyers their contingency fees of 50% or so, Forgent plowed
much of the rest into its Alliance software business. But if '672 was a
diamond, the software business was cubic zirconium. In fiscal 2004, Snyder
finally wrote it down, and the company posted a $20.1 million loss.

Forgent was left with two businesses: the $3 million NetSimplicity, which
offers meeting-planning software, and the lawsuit business. That means
that for Forgent, licensing is the name of the game. Patent law allows a
company to force a violator to stop producing the item in question and pay
compensatory damages, which can be tripled in the case of willful
infringement. But that would kill the golden goose. "We want everyone to
use this thing," says Michael Noonan, Forgent's senior director of
investor relations. "The more ubiquitous it is out there, the better for
us."

That's what happened with Pegasus Imaging, which agreed to license
Forgent's technology in October 2002. "One thing you have to do is to look
at the risk," says Jack Berlin, Pegasus's president. "We could have been
exposed to millions of dollars in claims. When you see that sort of ratio,
it was a no-brainer."

No one really knows whether or not Forgent's patents will hold up in
court; the company could collect anywhere from another $100 million-plus,
according to an estimate from research firm J.M. Dutton & Associates, to
zero. In October 2005 alone, three companies, including Research in
Motion, decided to take out licenses from Forgent for undisclosed amounts.

Yet Forgent could also be bluffing, hoping that others will decide to fold
first. If so, it has met a tough opponent in Microsoft, which sued Forgent
even though Forgent hadn't yet sued it ("Microsoft is known to be very
litigious," says Snyder, with no trace of irony). It charges that
Forgent's patent was obtained fraudulently. "Microsoft did not come up
with anything new," says Snyder. "I'd point to $100 million-plus that says
other people recognized [the patent] was valid." Microsoft wouldn't
comment.

Other opponents are coming out of the woodwork as well, such as the
nonprofit Public Patent Foundation, which on November 16 filed its own
request that the U.S. Patent and Trademark Office revoke the patent
altogether. "I believe that the patent is invalid," says Dan Ravicher, the
foundation's executive director, and it is "causing substantial public
harm" by adding extra costs to an already taxed system for inventions and
by threatening the JPEG standard that is now part of the public domain.

Some critics even question whether software patents like Forgent's ought
to exist. "Software is a thought process," says Tom DeMarco, a fellow at
the Cutter Business Technology Council, an IT consultancy. "To patent it
is comparable to patenting induction or deduction." The European Union,
for example, does not grant software patents.

That's hardly on the horizon in the United States. The number of patents
granted has exploded to 187,170 in 2004, up from 66,176 in 1980. There has
been a similar explosion in lawsuits, which usually cost at least $2
million to defend if they go to trial. "Now you can make the case that
it's driving innovation offshore," says DeMarco. "If you want to start a
new software company that does something imaginative and wonderful, you
have every incentive to start that company in Slovenia or China or a place
that doesn't have these rules."

In an attempt to stem the tide of patent-related lawsuits, in June 2005,
Rep. Lamar Smith (R-Texas) introduced a bill, the Patent Reform Act of
2005. But the bill has stalled in the House, in part because--as Snyder
points out--many companies benefit from the current laws even as they
decry them. Microsoft has decided to pursue an aggressive strategy of
filing for 3,000 patents in fiscal 2005 alone, either as a defense or in
hopes of bringing in licensing revenue. And Nathan Myhrvold, Microsoft's
former CTO, has created a company, Intellectual Ventures, that has
purchased as many as 5,000 patents in the past few years.

For Forgent, though, the party is winding down. The good old '672 patent
will expire in October 2006--after which Forgent can still collect for
past infringement, but nothing going forward. "It's a past gravy train,"
says Watkins, "but they're not looking at a future gravy train." That's
also why Forgent launched a new front in the battle in July 2005, suing 15
cable companies and cable-box manufacturers.

For all of Snyder's bravado, he seems a tad embarrassed that his job is
more about litigating than innovating. "The whole notion that [we] are
just a thorn in the side of humanity," he says, "I don't think they
understand how we arrived here. I view this as a metamorphosis, a way in
which to responsibly take the company through a period of time to generate
resources and to become something else. If you said, 'Is this what you
want to do for the next 15 years,' I'd probably say no." If he's right,
thousands of software executives will probably wipe their brows in relief.
But the lawyers will weep.

Jennifer Reingold (jreingold at fastcompany.com) is a Fast Company senior writer