Technology Companies Turn Troll

If you can't beat the trolls, join them. That seems to be the conclusion reached by a growing number of tech companies which have been burnt in the industry's 'patent wars'.

Patent trolls – known more formally as NPEs, or non-practising entities – are concerns set up to acquire intellectual property rights that can be turned into cash. Lawsuits quickly follow if the patent trolls can't extract licence fees from big companies that they claim infringe on their rights.

Hit with lawsuits from opportunistic plaintiffs, companies like Nokia, Sony and Alcatel-Lucent have clearly become fed up with always being on the defensive. The result has been the emergence of the "corporate troll" – an odd creature on the IP landscape, created when a tech company transfers some of its patents to an NPE, providing another reminder of just how much is wrong with the US patent system.

Given the thicket of patents that has grown up around some "converged" technology platforms like the smartphone, lawsuits are often surprisingly easy to unleash. Frequently, defendants opt for a settlement rather than the uncertainties of a jury trial. That is particularly so if, as often happens, a case finds its way into the plaintiff-friendly courts of the Eastern district of Texas. To many embattled companies, that looks suspiciously close to blackmail. So why are they starting to use the same tactics themselves?

Take MobileMedia Ideas, a company set up early last year with patents from Nokia and Sony, each of which also took a minority stake. Barely two months after announcing it had opened for business and inviting other companies to license its technology, MobileMedia launched patent suits against Apple, HTC and Research In Motion, maker of the BlackBerry.

Nor was this just about the sort of intellectual property rights that you might expect companies like Nokia and Sony to consider of only marginal value to their underlying businesses, and therefore only too willing to shed. According to MobileMedia, its patents cover a wide range of functions, such as "call handling, speed dial functions, database searches, audio download and playback, and still picture and video processing."

This is far from an isolated case. Entities like Round Rock Research, which assumed more than 4,000 patents from Micron Technologies; Mulltimedia Patent Trust, backed by Alcatel-Lucent; and Smartphones LLC, holder of a batch of former PalmSource patents that had been acquired by Japan's Access, have all mounted licensing campaigns, with varying degrees of success. Most recently, Nokia returned to the fray, transferring 2,000 patents to Mosaid, a Canadian IP licensing firm. Under such deals, the sellers often keep a residual interest in any royalties or legal settlements.

With the value of technology patents rising, it isn't surprising that tech companies have been dusting off their unused IP. And, rather than taking aim with their own legal guns, it sometimes pays to subcontract. One advantage of using a corporate troll is that it removes the risk of an immediate countersuit. IP lawyers say they have received a blizzard of enquiries from companies looking to make extra cash from unused IP. Much of the interest comes from Asia, where companies often prefer transferring their rights to taking the overtly hostile step of suing in their own name.

There are risks. One comes from transferring away patents that might have value in some future battle. Companies that sell on their patents often take the precaution of also retaining a licence to the technology – but those licences do not give them the right to assert the patents themselves against any future adversary.

Keeping a deep portfolio of patents on hand for just this purpose can be a valuable precaution. When sued, the best defence is often to go on the offence and launch a legal counter-attack, according to Martin Korman, a partner Wilson Sonsini, one of Silicon Valley's leading law firm. That alone should give companies pause before resorting to patent M&A, he warns.

Nor is there any way to escape the hypocrisy that often lies near the surface in these forms of legal outsourcing. If unproductive patent trolls are indeed a scourge on successful tech companies, imposing a tax on their sales, then companies that co-opt the same tactics "the corporate trolls "themselves run a degree of reputational risk.

There is also a certain short-sightedness at work. Assigning fresh blocs of patents to the trolls amounts to throwing more fuel on to the fire. If some of the biggest names in the tech business consider this a valid tactic, why should anyone hold back?

Unfortunately, the money at stake and the flaws in the US patent system mean that the temptation is hard to resist, and suggest that corporate trolls will increasingly become a thorn in the flesh for the very industry they represent.

(Richard Waters is the Financial Times' West Coast Managing Editor)

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