Litigation as a means of return investment

Litigation is used extensively in the technology market to protect and exploit value. Over the course of 2011, the smartphone and tablet market was flooded with litigation relating to patents. WiLAN, Lodsys and other non-practicing entities, colloquially referred to as ‘patent trolls’, moved in on the smartphone market, with all of the main players facing or having already battled through lawsuits over patent infringement. With all of the key producers facing litigation, the question of patents was suddenly brought to the fore and soon companies such as HTC, Google, Apple and Motorola were all counter-suing each other. Any smartphone or tablet contains hundreds of separate components, from the software to the hardware, and companies were and still are facing expensive and potentially very damaging lawsuits to protect the smallest elements of their overall products.

The technology market is highly unique due to the fast paced and extremely competitive environment in which it operates. Market leaders can be displaced if a rival firm develops a new technology which creates and satisfies a consumer need. For example, Blackberry used to be the market leader as email was the driver and it was the first phone to allow email use on the device. However, Apple then created a phone which allowed everything to be done on the same device, with a better internet interface and the introduction of apps and the App Store that allowed greater personalisation. Apple has stuck to producing one phone, as opposed to Samsung or HTC, and the iPhone has become probably the most iconic smartphone to date. With the introduction of new technologies such as Siri, Apple is trying to secure their position in the market whilst facing increasingly fierce competition from their rivals.

The high value of portable device technology patents is routed in the fact that companies overlooked patenting the smaller and more intricate technologies that allow their devices to run. Whilst the devices themselves were protected, this protection is no use if they no longer hold the rights to the software or components they run off and are therefore subject to litigious action against them which can lead to financial damages which in turn damages their market position. Mobile device technologies were being created fast as companies fought to keep up with one another and protecting these technologies was somewhat forgotten. Another problematic factor is that patenting takes considerable time, before applications are granted and it is possible that legal teams were simply not able to keep up with the pace at which development was happening.

WiLAN started out in 1992 commercialising technology inventions to help provide low-cost, high-speed wireless networking. In 2006, however, the company realised the value of its intellectual property and chose to focus its business on protecting and monetising patented inventions. This is proving to be problematic for companies such as Apple and Google who developed their technology extremely quickly without patenting key ideas, and are now facing law suits from WiLAN and similar companies who are capitalising on the value of these intricate  technologies through patent ownership. WiLAN initiated litigation against Apple, Dell, HP, HTC, Kyocera, Alacatel-Lucent, Novatel and Sierra Wireless America in September 2011 for infringing on 2 of its US patents relating to CDMA & HSPA technology and to Wi-Fi & LTE. This is not the first time WiLAN has acted in an aggressive manner, having previously taken out law suits against almost every company selling portable devices over a Bluetooth software related patent. The defendants included Apple, Dell, Sony, Toshiba, Acer and Motorola amongst others.  In a recent $8 million acquisition, WiLAN acquired a global portfolio of over 1400 patents mostly relating to digital TV and video displays from an undisclosed company. WiLAN’s portfolio now contains more than 3000 patents and they have a dedicated team who find those companies infringing their patents and seek legal action against them to gain capital returns.

Moves by NPEs to litigation have forced mobile technology companies to begin buying up patent portfolios themselves to protect their products and assets and to stops their market competitors from buying them instead. A trend of legal suits grounded in patent wars has struck the technology firms and they are desperately trying to protect themselves, willing to pay well over the odds for this protection. In a recent acquisition Google bought Motorola Mobility for $12.5 billion in order to gain their 1700 patent portfolio. The move also served to give them a mobile platform to allow it to compete on the same level as others. Google paid 63% over the closing share price which highlights the way that patents are increasingly being used as a shield. Patents can be used as a way to block competitors in the market or generate returns through licensing agreements, with Microsoft reportedly collecting license fees on 50% of Android devices.

In another such example, the sale of Nortel’s 6000 strong patent portfolio and applications gathered significant interest and financial return, with the Nortel chief strategy office George Riedel stating “the size and dollar value for this transaction is unprecedented, as was the significant interest in the portfolio among major companies around the world.” In this instance, it took a consortium to purchase the portfolio comprised of Apple, EMC, Ericsson, Microsoft, Research In Motion and Sony. Google slammed the collaboration, accusing it of being anti-competitive as they collectively blocked Google from winning the bid. The $4.5 billion acquisition is another testament to the value of the patents and the huge competitive advantage that holding them can bring.

The technology market is in fact one of the most diluted in terms of key players, perhaps fuelling the fierce patent battle. It is usual to see a clear front runner in markets with a key secondary player and rarely any other notable competitors. In the smartphone market this is not yet the case and whilst HTC and Samsung currently hold the largest portion of the market this position is not a secure one. This perhaps explains the fact that not only do the technology firms face threats from NPEs such as WiLAN, but they are posing a great threat to each other. In the Nortel example several companies clubbed together to ensure Google did not win the patent portfolio however this is an extremely rare event. It’s an unusual move to see other companies working together simply to undermine a competitor, which may well give indication of the threat Google poses to other smartphone producers.

What is evident from the huge increase in litigation in the smartphone sector is that companies need to question how valuable a patent that they hold may grow to be and protect it with the same level of importance as an element of the company that is already worth a great deal. Failure to do so can mean that companies produce an incredibly valuable product but face lawsuits across the board and could face having the products barred for sale in the most extreme of cases. HTC’s battle with Apple has resulted in a halt on sales in Germany and whilst they are appealing against the ruling, the interim period will be incredibly damaging for the firm.

When lawsuits occur, a company needs to understand and justify the specific value of a patent and how integral it is to the product and its functionality. The importance lies in the return that has to be paid out to a competitor or NPE which is based on how important it is to the running of the device. The patented technologies are often over what is seemingly the most minute of details; the recent victory by Apple was over a technology which allows the touching of a phone number or email address to dial or find the address on a map. HTC are being forced to remove this feature from their new devices, which leaves Apple with a competitive advantage as HTC struggle to modify products and remove features that other smartphones offer to the consumer.

When creating a product, companies need to be aware of both their own patents and those relating to the product in question. What’s more, they need to ensure to create a strong brand or trademark for their good so that when patents related to a product expire, the product remains protected. This requires companies to take an integrated approach, considering the value of patents, protecting those patents appropriately and branding their products. With the rapid expansion of technology, devices and software were being produced at such a fast rate that patents were largely forgotten. The marketing, production and legal teams need to talk to each other to patent not just the device but everything that goes into the functioning of that device to prevent NPEs snapping up the rights to their technology and aggressively pursuing them.

Many technological patents are very similar and the differences can hinge on the most minor of details, for example Samsung announced four new patents in its case against Apple, including one that involves a method of entering an emoticon on the screen. Many of the cases being brought about may not actually have arisen from intentional patent infringement, but rather two different companies with different teams working on products may have thought of the same thing. The crucial difference is that one of the company’s will have applied for the patent first or may not have checked whether that patent existed and was already in use. The sheer volume of lawsuits is indicative of a greater problem, which is that many of the technological patents that were approved very likely should not have been. Allowing companies to patent technologies already in use only allows NPEs further power and blurs the line between legitimate intellectual property theft and attempts to cash in on lucrative products. More than ever, companies need to ensure they are aware of their intellectual property and protect it appropriately or else they could find themselves very quickly caught up in multiple lawsuits.

It is clear that the extent of lawsuits in technology underpins substantial wealth creation in terms of patents and other IP. Strictly speaking, the main purpose of a patent is to prevent others (by lawsuit if necessary) from using and profiting from the patented object.

Thayne Forbes is joint managing director of Intangible Business.