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Copyright 2004 Newsweek  

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October 13, 2004 Newsweek Web Exclusive


LENGTH: 1128 words

HEADLINE: Plain Text: Patent Problems

BYLINE: By Brad Stone

Frivolous lawsuits are creating an unseen tax on American technology and hampering innovation. A new book offers ways to fix the system

Executives at Forgent Networks in Austin, Texas, understand that they aren't well loved in the circles of high technology. "We certainly get the impression that we are unpopular," shrugs CEO Richard Snyder. "But I think our shareholders are happy with us." Forgent is one of a growing number of small firms that have turned themselves into heat-seeking legal missiles aimed at claiming ownership to technologies once thought to be the open foundations of the Internet.

Forgent, founded in 1986, was once called Video Telecom Corp. It sold the bulky teleconferencing systems that connected meeting rooms around the world. But with the advent of the Internet, the industry changed rapidly in the 1990s, leaving the company and its hundreds of employees behind. It tried to keep up, renaming itself VTEL and buying a Silicon Valley company called Compression Labs to focus on the software used for desktop PC videoconferencing systems that were suddenly in vogue. But the rapidly evolving and consolidating industry had no room for little VTEL.

In 1999, a board member read an influential business book by consultant Kevin Rivette called "Rembrandts in the Attic: Unlocking the Hidden Value of Patents." The best seller urged companies to review their forgotten stores of intellectual property to see if there were any hidden gems--ownership claims on technology widely used by others. After the book was passed around the thinning hallways of VTEL, a high-powered law firm in Dallas was retained, and VTEL's intellectual-property vaults were scrutinized. "The shareholders really deserved for us to look at intellectual property as an asset and to utilize it fully," explains Snyder, a board member at the time who later became CEO.

Sure enough, one patent awarded to an engineer at the old Compression Labs in 1987 drew attention. Patent number 4,698,672 seemed to cover the image compression algorithm used in the JPEG format--a popular Internet technology used by Web browsers, digital cameras, camcorders, PDAs and scanners for rendering images.

The company took immediate action. In 2001, it began selling off most of its businesses, renamed itself Forgent, pared its staff down to a few dozen employees and subleased out its extra office space. Then it began telling the world's largest technology companies they would have to pay up to use JPEG technology--and it contracted with its law firm to evenly split the proceeds.
Snyder characterizes the tech industry's initial reaction as "disbelief." They thought the JPEG standard was open and available to all comers. Facing the prospects of fighting their claims in front of an east Texas working-class jury, two Japanese electronics makers, including Sony, paid millions to settle the claims. The rest dragged their feet. In April, Forgent sued a who's-who list of technology high fliers: Apple, Dell, Hewlett-Packard, IBM, Xerox, Canon--31 computer and electronics businesses in all. (As for buoying shareholder value: the company is worth about $34.8 million today, down from $44.3 million in October 2000.) The case is pending.

There's nothing particularly new about the kind of extortive patent claims that Forgent is pressing. But it is evidence of a system out of control. The patent process seems to incentivize pinstriped lawyers instead of white-smocked inventors. A litany of smaller firms such as Forgent, The SCO Group in Lindon, Utah, and Eolas Technologies of Chicago have become what their critics call "trolls"--companies with ambiguous intellectual-property claims whose only hope to enrich their bottom line is to strike it rich in court. Large companies are getting in on the act, too. Empowered by the lessons of "Rembrandts in the Attic" and the licensing success of companies like IBM and Texas Instruments, tech juggernauts like Microsoft and HP are now exploiting their own intellectual-property warehouses and demanding licensing fees under the threat of litigation.

So, why should we care? A timely new book by Adam Jaffe of Brandeis University and Josh Lerner of Harvard Business School makes a good case for how this is damaging America's innovation engine--and lays out a plan to fix the problems at the U.S. Patent and Trademark Office. "Innovation and Its Discontents: How Our Broken Patent System Is Endangering Innovation and Progress, and What to Do About It" (Princeton University Press. $29.95) argues that frivolous patent lawsuits are creating an unseen tax on technology products, clogging up the legal system and hampering innovation instead of encouraging it. "We can't add up all of the products that aren't on the market today because the company that might have marketed it decided that the risk of being dragged into patent litigation made it not worth it," says Jaffe.

Jaffe and Lerner identify a few key pressures on the patent system. One culprit: every year since the early '90s, the federal government has raided patent-office coffers for hundreds of millions of dollars to cover other government expenses. Stretched ever thinner for resources, the patent office strives to process patent applications quickly to generate more fees. Then there are the examiners themselves: they're asked to blend expertise in technology, law and business--for a measly average pay of around $40,000 a year. "All of this comes together to create pressure on examiners to issue patents and reduce the quality of review," says Lerner.

The authors make several intriguing proposals. They think the concept of a patent examiner, alone for hours researching a technically convoluted claim, is outdated. Instead, a patent application should be subject to the same kind of peer scrutiny as an article in a science journal. Other scientists and businessmen should be able to weigh in on the actual novelty of a new invention.

If they want to challenge the patent, Jaffe and Lerner want to see hearings within the patent office, not in front of a clueless jury. To ward off "game playing" by rivals who would scuttle any rival's patent, a challenger would have to foot the bill for the hearing if he lost.

The authors also think a jury trial unfairly favors plaintiffs such as Forgent. Jurors most likely won't grasp the finer points of digital-image data compression (heck, I don't understand them either) and will probably side with the home team. The authors want to give more power to judges--and the knowledgeable special masters they can appoint to advise them on a complex topic.

The proliferation of patent squabbles like the Forgent case are swallowing much of the time, money and risk-taking of America's technology firms. Patent law was meant to enable innovation, not discourage it. Reforming the patent system will help everyone get the picture.

LOAD-DATE: December 15, 2004