Apple vs. the Patent Trolls

By Kyle Spencer - August 28, 2012 | Tickers: AAPL, GOOG, HPQ | 0 Comments

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In the 1987 standup comedy film Raw, 26 year old Eddie Murphy recalled a confrontation in a nightclub that started with a single punch and escalated into a full scale brawl, "and at the end of the fight, everybody sued me."

Litigating Apple  (NASDAQ: AAPL) may be one of the great undeclared pastimes of the Information Age. Everyone from Xerox to Carl Sagan -even the Beatles!- have taken Apple to court. What makes Apple's current litigation woes unusual is the rise of a new class of claimants: non-practicing entities or NPEs, better known as patent trolls.

Over the past decade, the Patent system has begun to lag technological innovation. Technological products build and improve upon previous technologies by their very nature. In a sense, every new technological product stands "on the shoulders of geniuses." A single tablet computer may involve up to a quarter of a million component patents, each of which may or may not be valid. That being said, infringement upon a competitor's product is not to be treated lightly. Imagine for a moment if Apple had won its case against Microsoft in 1988. Windows 95 might never have existed.

The wrinkle is that patent troll NPEs don't invent new products. Instead, patent trolls buy their patents off of others for a discount in order to sue the companies that do make products for a cut of the action. A similar problem is companies who do develop products, but when their product fails, they change their focus to extracting money from more successful rivals. 

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Google's (NASDAQ: GOOG) Head of Patents and Patent Strategy said in March 2009: "Of the 20 patent lawsuits filed against Google since late 2007, all but two have been filed by NPEs." Litigation costs for technology companies like Apple have surged in recent years, from $6.7 billion in 2005 to $12.6 billion in 2008 to more than $29 billion in 2011.

NPE litigation was responsible for 5,842 trials in 2011 alone, with direct costs totaling over $29 billion, including the costs of non-litigated assertions. This isn't counting the loss in market share or the delays in releasing new products. Most of the litigation appears to consist of nuisance suits that settle for a few hundred thousand dollars, while other NPEs are whale hunters who go after settlements in the tens or hundreds of million dollars.

The tally of tech companies being pursued by non-practicing entities has been tracked by the group PatentFreedom. According to their count, Apple and Hewlett-Packard (NYSE: HPQ) are tied with 131 lawsuits filed against them since 2007. In more recent years, as Apple evolved from the role of resurrected wunderkind to technological superpower, NPEs have queued up to take credit for Apple's designs. In the three-year span from 2009 to the end of 2011, Apple faced a dozen more lawsuits from "NPE" groups than PC maker HP, making it currently the most-sued company in the industry.

The Keys To Sucessful Trolling             

Successful NPEs have found ways to remove traditional stumbling blocks to a suit. For example, NPE's typically don't communicate with the company they're suing, due to recent legal precedents that make it easier for patent defendants to challenge the patents over which they're about to be sued. Additionally:

• NPEs capture economies of scale in litigation, and lower their committed capital by using contingent fee lawyers. NPEs repeatedly show up in the same court districts and use the same counsel.
• NPEs use the same patents to sue different parties, essentially repeating the last trial over and over again with a new defendant every time.
• A patent that costs $25,000 to get, if valid and infringed in court, can lead to millions of dollars in damages.
• Many NPEs buy in bulk, holding large portfolios of patents, which gives them the ability to sue the same defendants. In an article titled 'Smartphone Industry in an Emergency Circumstance Due to Patent Trolls,' Korea's etnews.com report that InterDigital "has applied for 618 American patents and 155 in Japan."
• NPEs sue multiple defendants at the same time.
• Not making anything innoculates NPEs against counter suit claims of infringement. Having nothing to sell is an NPEs strongest asset, which is why patents are often worth more when a company is dead rather than alive, which would leave the NPE's open to counter-suit.

However, the best thing that ever happened to NPEs is trial by jury.

Manipulating The Jury

Ask twelve unqualified, untrained non-specialists what an inventor does and the reply you'll get will probably have more in common with Thomas Edison than G.E., the company Edison founded. (It will likely be a highly idealized picture, as well.) NPEs take advantage of these cultural misconceptions. The following chart gives the relative % of bench trials vs. jury trials over the last three decades, coinciding with the introduction of the PC, Internet and cellular phone, respectively:

As the U.S shifts from an industrial/services economy to a knowledge economy, information technology becomes more intertwined with the fabric of everyday life. This has naturally led to record profits, and with them record high pay outs. Non-practicing entities are taking full advantage of this long-term trend.

Conclusion

Publicly-traded NPEs cost technology and other firms more money than they could possibly transfer to inventors. NPEs are a net negative for the market as a whole because their endless litigation decreases the amount of money that firms of every side have available to invest in innovative new products. Technological advancement is the benchmark upon by which a society's development and affluence.

Translation? The surge in NPE litigation is slowing all of us down. 

For a comprehensive list of who is suing Apple, visit Patently Apple @ http://www.patentlyapple.com/patently-apple/patent-infringement/. It will make your eyes bleed. 

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