Another round in the patent wars

Two of three Intellectual Ventures lawsuits target semiconductor companies.

By Tam Harbert, Contributing editor -- EDN, February 22, 2011

Apparently the patent-infringement lawsuits recently filed by Intellectual Ventures (IV) were a surprise to no one in the patent market.

Even though this is the first time that the company -- which has raised billions of dollars and amassed some 30,000 patents since it was launched a decade ago by former Microsoft Chief Technology Officer Nathan Myhrvold -- has gone to court to assert its patents, many people in the industry felt that the other shoe had finally dropped.

"It was inevitable," said Dan McCurdy, CEO of Allied Security Trust, a non-profit organization that buys patents on the open market in an effort to defend its members from non-practicing entities (NPE). "I was surprised that it took them so long." At some point, IV had to sue in order to show it was serious about enforcing its patents, he noted.  "I suspect that there will be more such cases."

IV filed three suits on December 8, 2010, targeting multiple companies in three different technologies: security software, dynamic RAM and field-programmable gate arrays. The software lawsuit names Checkpoint Software, McAfee, Symantec, and Trend Micro, and alleges infringement of four patents. The dynamic RAM lawsuit names Hynix and Elpidia and alleges infringement of seven patents. The FPGA suit names Altera, Microsemi, and Lattice Semiconductor and alleges infringement of five patents.

Why IV picked these particular companies in these specific areas is a hot topic of speculation. Two of the FPGA companies being sued, for example, are relatively small. (Microsemi has about $500 million in annual revenue, while Lattice has around $300 million.) "It makes sense that IV wouldn't go after the big companies, because many of them are members of IV," said McCurdy. Even if a large company was not a member, "IV knows that big companies have the resources to fight much harder and for much longer."

The other FPGA vendor in the suit, Altera, has more than $1.9 billion in revenue. But the other major FPGA player and Altera's chief rival, Xilinx with about $2.3 billion in revenue, is conspicuous in its absence from the lawsuit, noted Jordan Selburn, principal analyst at IHS iSuppli.

IV does not identify its investors, but it's widely believed they include Microsoft, Intel, Cisco Systems, and Google. Some observers speculate that the big companies have influence over IV's decisions about what companies to sue. If that's true, then investing in IV holds the potential for competitive leverage. Microsoft, for example, just introduced its own security software, called Microsoft Security Essentials, noted Bruce Berman, CEO of Brody Berman Associates Inc, a management consulting and communications firm that focuses on the IP market. A Wall Street analyst recently predicted that Intel might acquire either Xilinx or Altera in order to expand its presence in the embedded and SOC markets.

Beyond specific motivations, however, the lawsuits are yet another sign of how murky the patent marketplace has become. Large companies used to complain about secretive NPEs -- derogatorily called patent trolls -- that surprised large companies with patent assertions designed to wring hefty license fees. Now, those lines have blurred, as large operating companies have co-opted the model.

Traditionally, it was frowned upon for large operating companies to sell patents into the open market, where they could be bought and then used by patent trolls against other companies. But those attitudes have started to change, according to an academic paper written by Colleen V Chien, assistant professor at Santa Clara University School of Law and published in the Hastings Law Journal. The paper, "From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications for the Patent System," explains the forces that have changed the patent marketplace over the last several years. Operating companies "increasingly have incentives to sell their unused patents to the marketplace," she wrote.

In late 2009, for example, Micron Technology sold 4500 patents, about a quarter of its patent portfolio, to John Desmarais, who is considered one of the top patent litigators in the country. Desmarais then formed his own patent-holding company, Round Rock Research LLC, and started asserting the patents. Some observers speculate that, in addition to proceeds from the patent sale, Micron might also get a share of the license fees that Round Rock generates by asserting the patents. The Micron sale is the largest corporate patent sale to date to an NPE, according to Chien's paper.  The patents cover semiconductor manufacturing, photo imaging, telecommunications, search engine technology, and radio frequency identification, according to published reports.

In another interesting twist, Desmarais is the attorney that IV picked to handle its lawsuit against the FPGA companies.

Corporations are watching Round Rock carefully. In the first eight months after it was created, the firm generated $200 million to $300 million in licensing revenue, said McCurdy. He believes the Micron portfolio could ultimately generate billions of dollars worth of royalties, an amount that would entice other operating companies to follow.

"It's pure bottom-line profit," McCurdy said. "A CEO and board may say, 'hey, if we could pick up an extra $500 million and not do damage to our patent portfolio, shouldn't we look carefully at doing this?'" After all, patents are assets that will expire. "If you've got a piece of fruit, you'd better know when to pick it and what to do with it, otherwise all you'll have is a rotten piece of fruit," he said.

If more operating companies follow this model, it could flood the market with patents that IV and other NPEs could buy and assert, possibly ratcheting up the amount of litigation. Even if an operating company doesn't sell patents directly to a troll, that's often where they wind up. One of the patents in IV's suit against the FPGA companies, for example, was originally granted to Advanced Micro Devices in the mid-1990s, according to the US Patent and Trademark Office.

One of the biggest impacts of the IV lawsuits may be the opportunity for the industry to learn more about IV, as defendants push for deep discovery into its inner workings. IV has "always been cloaked in significant secrecy," McCurdy said.  "I expect [the defendants] to be both creative and aggressive."