To Troll or Not? Apple Complains About Patent Trolls Yet It Funds One Anyway

Written by Gina Smith

The DOJ, FTC and Congress are scrutinizing patent trolls. Yet Apple complains about patent trolls yet financially backs Intellectual Ventures. It’s the latest in our continuing investigation into Intellectual Ventures and whether, as FTC and DOJ officials suggest, its activities and those of other so-called Patent Assertion Entities pose an anti-competitive danger to American business. commentary– Patent Assertion Entities — you know them pejoratively as patent trolls — continue to be under scrutiny by U.S. government watchdogs at the Department of Justice, Federal Trade Commission and among members of U.S. Congress.

Ed: This is part of our continuing series that looks at whether Intellectual Ventures and other patent assertion entities (PAEs) are indeed anti-competitive as some officials at the FTC and DOJ suggest. Check out Tom Ewing’s Dear Mr. President piece regarding patent trolls here.

It’s an interesting exercise to consider why tech companies fund companies who collect patents and litigate on them without inventing much of anything. Such patent aggregators pose a danger to American and global business, as Apple and other tech companies have testified before various courts.

Yet at the same time, Apple and other tech companies including Microsoft, Nokia, Verizon and many others quietly fund them — to the tune of millions. Click here to find a list of who funds Intellectual Ventures, according to court disclosurer docs IV fought hard to suppress.

A great example of what I mean is the relationship between Intellectual Ventures — a multibillion dollar organization founded by former Microsoft CTO Nathan Myhrvold and ex Intel IP chief Peter Detkin — and tech giant Apple.

These two are intertwined at the most fundamental level. The level of the U.S. dollar.

Though Apple execs have complained mightily in various settings about patent trolls and the dangers it believes such litigating entities cause the industry and its customers, Apple is revealed in court docs to be part of a group of big tech companies that fund Intellectual Ventures and, by proxy, share in its wealth.

IV has filed suit against a number of companies since it began collecting massive amounts of patents in 2000 — even against companies allied with Googe, which once invested in it.

Its targets have included Google’s Motorola Mobility, Symantec, Xilinx, Toshiba, Trend Micro, Canon and several Android hardware and software makers.

Interestingly, Samsung is immune, somewhat, because in 2010 it entered into a long term licensing arrangement with IV to gain access to the IV portfolio and prevent aggressive lawsuits from the firm.

Google originally funded Intellectual Ventures along with a Who’s Who of tech companies but has since pulled out, sources tell Not so with Apple. It has participated in at least two financial rounds with Intellectual Ventures since IV’s inception.

Consider: In testimony he gave before the U.S. House of Representatives in April 2005, now-retired Apple intellectual property chief Richard “Chip” Lutton spoke out bitterly against the now widespread practice of litigating patents for dollars.

In his testimony Lutton said, that “the IT industry, like so many others, is encountering the enormous costs of dealing with poor quality patents. We are also faced with a growing cottage industry of patent assertions, orchestrated by entities with no business other than acquiring and asserting patents.”

Intellectual Ventures is exactly such a business. Yet Lutton went on to say that:

Increasingly, [these companies] use the uncertainties of the civil litigation system as their primary bargaining chip. The result is that bad patents can cause … substantial litigation risks and costs. Defendants in these suits now must spend an average of $5 million defending themselves and, in some courts, the average is more like $8 million.

Apple, in addition to providing financial backing in a secret agreement with Intellectual Ventures, later went on to deal with other patent trolls and privateers, too. Patent records show that Apple provided at least two patents — via a company named Cliff Island — to Digitude Innovations, a Virginia-based patent aggregator that had as its major stakeholder Altitude Capital Partners, a New York-based venture capital firm.

Two of 12 patents that Apple transferred — Patent Nos. 6,208,879 and 6,456,841 — formed half the basis of Digitude’s February 2012 lawsuit (PDF) against Motorola Mobility Holdings, which Google since purchased.

Update: In 2012, publicly traded patent aggregator RPX purchased Digitude and the Apple patents for $46 million, ending the litigations brought by Digitude for 10 of RPX’s clients.

Apple is far from the only tech vendor to say one thing publicly about the danger patent privateering poses while working with and even investing in them.

The late Micron CEO, Steve Appleton, also lashed out at patent trolls in his March 2009 testimony (PDF) during a Senate Judiciary Committee hearing regarding the Patent Reform Act.

U.S. patent law encourages abuse of the system, Appleton said. He maintained that the system interprets current patent law so courts award royalties based on entire market value — and not based on a company’s share of that market.

Appleton slammed that philosophy. He said resulting awards could “exceed the … entire profit on the infringing product or service — making clear that the entire standard has no basis (whatsoever) in economic reality.”

He went on to say:

Such a royalty is by definition unreasonable, because a product manufacturer would stop making the product rather than pay it. But this legal rule authorizes (non-practicing entities, or NPEs) to pursue irrational damages demands with impunity…

Unlike companies that make or sell products, privateers “cannot be deterred from asserting opportunistic and unjustified patent claims by the counter-threat of infringement claims asserted by defendants back against them — their lack of any products or services prevents the assertion of such claims,” Appleton said.

“Because the patent system was designed with product manufacturers in mind, not NPEs, the NPEs are able to exploit the lack of clarity of the reasonable royalty standard in a way that manufacturing companies cannot.”

Just nine months later, in December 2009, Micron sold about 20 percent of its patent portfolio to Round Rock Research LLC, a Mount Kisco, NY-based patent aggregator. Micron’s patents to this day are the only ones that Round Rock holds, according to a search we performed in the U.S. Patent and Trademark database. Appleton was still Micron’s CEO when this sale occurred. He held that post until his untimely death in February 2012.

Tom Ewing, our IP expert and an intellectual property attorney who consults with the World IP Organization (WIPO) about intellectual property issues and the patent wars, has a theory. It’s simpler than you imagine.

“The corporate meme is, our patents are great and your patents suck,” Ewing told me. “It’s like willful naivete. It can’t be that companies (like Apple or Micron) don’t know, they just don’t own up to it. Like the disassociated self,” Ewing said.  “One part of a company does one thing and another part does another.”

Ewing published, with UC Hastings law prof Robin Feldman, a deep dive article into the practices of Intellectual Ventures and other giant companies that buy, sell and litigate on patents without inventing much of anything themselves.

The piece appeared last year in The Stanford Technology Law Review. Feldman recently penned the following letter to USPTO director David Kappos. In it, she urges more transparency.

Under such guidelines, Intellectual Ventures and other patent assertion entities wouldn’t be able to so handily sue inventors undercover.

USPTO Suggested Changes to Patent Assignment Records, Transparency uploaded by Gina Smith