Patent litigation has chilling effect on innovation and services, says critic of Wifi case

By Jonathan Bilyk | Nov 14, 2013

CHICAGO (Legal Newsline) - As a legal battle continues between some of the country's largest technology makers and a single company that claims the rights to some of the technology that makes wireless data communication possible, the owners of an array of smaller businesses - many of which have nothing directly to do with WiFi technology - have taken stock of the potential fallout.

And while the actual dollar amounts that are being demanded of them in this courtroom drama are relatively insignificant, it's the possibilities portended by the long term precedent that appears to have worried many of them enough to choose sides with the large tech firms and choose to fight this battle to a conclusion, rather than opt for a quick settlement.

"This time, it's WiFi," said Kevin Maher, senior vice president for governmental affairs with the American Hotel and Lodging Association. "But next time? What's it going to be?"

Since 2011, the operators of thousands of hotels, coffee shops, restaurants, retail stores, airlines, and others have defended themselves against legal actions brought by Innovatio IP Ventures.

Headed by a former executive with Irvine, Calif.-based tech manufacturer Broadcom, Innovatio has alleged in federal court in Chicago that numerous patents it purchased from Broadcom have been infringed by nearly anyone who has made, distributed, purchased, installed or operated many of the most common wireless routers and other devices used to support wireless data networks.

In seeking to recover damages for the infringement, Innovatio has since 2011 sent "demand letters" to at least 8,000 businesses - though lawyers for tech manufacturer Cisco place that number at least 50 percent higher, at closer to 13,000.

After receiving those letters, many of those being sued or from whom Innovatio has sought damages for the alleged patent infringement turned to large tech manufacturers, like Cisco, said Cisco General Counsel Mark Chandler.

In response, Cisco and others, including Motorola Solutions, SonicWall, Netgear and Hewlett-Packard opted to sue Innovatio, claiming, among other things, that Innovatio was nothing more than a "patent troll" engaged in fraud and had breached licensing agreements for the technology that was covered by the patents.

Cisco and the others also claimed that Innovatio could not demonstrate the patent claims were valid.

Attorneys for Innovatio declined to speak to Legal Newsline.

To date, U.S. District Court Judge James Holderman has rejected the fraud allegations, and allowed the case to proceed. However, the judge has yet to rule on the validity of the patents or set a trial date on the breach of contract allegations.

However, Holderman has ruled that the patent infringements, should any be found to have occurred, would be worth only 9.56 cents per chip, considerably less than the patent royalties asserted by Innovatio and on which the plaintiff had based its demands for damages from the hotels, coffee shops, restaurants and other "end users" of the wireless products.

Typically, Innovatio had sought damages of about $2,500-$3,000 from each end-user business to which it had sent a demand letter.

However, for the "end users" being sued, the amount of the damages likely was never really the concern.

Rather, it was the cumulative effect of a rising tide of litigation brought by so-called "patent trolls."

Since the mid-2000s, the landscape of patent enforcement litigation has changed markedly.

In decades past, patent legal fights may have typically involved inventors and their representatives against competitors or large manufacturers or other corporations who may have improperly appropriated an idea or invention to themselves, cutting the patent holder out of the equation and daring the patent holder to take them to court.

In more recent years, the courts have filled increasingly with other groups bringing infringement actions. Formally known by some as "patent assertion entities" or "non-practicing entities," these companies purchase patents from the original holder or inventor, and then assume the risks of enforcing the patents.

However, since the NPEs typically do not produce anything related to the patent, other than legal actions, to many in industry they are increasingly referred to as "patent trolls," summoning the image of a troll hiding under a bridge waiting to exact a toll on anyone seeking to cross.

Despite the harsh imagery, there remains a disagreement over the economic impact of such activity.

A study widely cited by many in industry and government notes that NPE-initiated litigation costs the US economy as much as $29 billion annually in direct legal costs, in addition to other as-yet undetermined indirect costs. That study, published by Boston University professors James Bessen and Michael J. Meurer, also indicates that the number of actions brought by NPEs has surged from about 1,500 in 2005 to almost 6,000 in 2011.

However, groups defending NPE patent enforcement actions point to studies, such as one conducted by PricewaterhouseCoopers in 2011, which they said showed that, overall, patent litigation has increased in recent years only at the same rate by which the U.S. Patent Office has increased the number of patents being issued.

A paper published on Oct. 31 by professors David Schwartz of the Chicago-Kent College of Law at the Illinois Institute of Technology and Jay P. Kesan at the University of Illinois College of Law challenged the assertions of Bessen and Meurer. They particularly took issue with how the Boston University professors defined NPEs, saying that the actual number of true "patent trolls" is far less.

Schwartz and Kesan also caution that too many have extrapolated moral judgments on NPEs from Bessen and Meurer's data.

"Our point is not to extol or criticize NPEs," Schwartz and Kesan wrote. "We believe the correct inquiry requires a focus on the actions of the parties and not on the nature or identity of the parties."

Those among the businesses being sued by NPEs, like Innovatio, however, say they do not care whether Innovatio's patents are valid or its actions legitimate.

They merely want to be protected from being the targets of potentially costly litigation over patent infringement in the future.

Maher, of the AHLA, said his member businesses and others now being targeted by Innovatio have already been targeted by other NPEs seeking to enforce patents on proprietary software used by businesses to help customers calculate reward points or even calories.

He said the increasing instances of patent litigation have had a chilling effect on the desire of some in industry to innovate or add products to improve customer service or experiences.

"When you're adding a service to your business, now you have to worry if there are patent issues involved in the product that you're buying," Maher said. "Or if you're going to be targeted."

He said businesses have expressed worry that, should these actions be allowed to continue, they will cost potentially billions of dollars in the future.

"It's the cumulative effect," Maher said. "The trolls are smart. They know what the breaking point is for our small businesses, what the maximum is that they can get out of it."

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