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The old tale of David versus Goliath has been given a new twist: Small companies, often with nothing to offer but their intellectual property, are seemingly attacking whole industries with a volley of letters and lawsuits. Brandishing their licensing demands, these companies are marching into battle on multiple fronts. Perhaps no one better personifies the “dukes up” approach than Russel “Cap” Beatie Jr. A partner at New York’s Beatie and Osborn, the 66-year-old trial lawyer had never litigated a patent dispute before taking on the Patriot Scientific Corp. as a client. Now his firm has foot the bill for nearly three years of licensing negotiations that in December became a court battle. Patriot, a little San Diego company, has sued five of the world’s largest personal computer makers plus the semiconductor giant Intel Corp. A self-described misanthrope and published Civil War author, Beatie says that he fired up a cigar to mull taking on the Patriot work and warned himself, “If I take this case, it will eat me alive.” But he took it because “I like a good fight, I hate people who behave badly, and it’s an extraordinarily fascinating case.” It didn’t start as an all-out war against the PC makers, but, Beatie says, he isn’t surprised by the development: “I thought they would give us all the bird, and they did.” Beatie concluded that a court fight was inevitable and that he would need to show the PC makers that there was a price to be paid for not agreeing to license Patriot’s IP. “The only way we’ll ever have a licensing program,” he says, “is to be able to bring a guy into a meeting who has an ax wound in his forehead.” CRYING FOUL Naturally, this kind of talk does not sit well with defense attorneys. Increasingly common demands for licensing fees from the burgeoning cottage industry of companies who offer patents as their primary products have raised the ire of the defense bar. “A lot of people with dollar signs in their eyes are going out and asserting these patents against companies that don’t have a lot of options,” says Jason Kipnis, a Weil, Gotshal & Manges partner in Redwood Shores, Calif., who counsels companies on managing their IP. “They all want to find the 50-foot shark and live on it for the rest of their lives.” And defense lawyers gripe that the companies — and, by extension, their lawyers — are simply banking on the cost of one more license being less than the cost of fighting a lawsuit. “It’s more the idea of filing claims of questionable merit against people and recognizing the cost of defending those claims will often be prohibitive and therefore, extracting settlements,” Jonathan Singer, a Minneapolis-based Fish & Richardson partner, says. “It’s the personal injury game come to patents.” But Robert Berman, general counsel of Acacia Technologies Group, defends the practices of companies like his. Berman argues that Acacia’s licensing efforts are no different from those of any large company in trying to protect its intellectual property assets. “Companies have for years made money licensing their technology,” says Berman. “The difference now is that small- and medium-sized companies are getting into the fray.” “It’s, in essence, evening the playing field,” Berman says. TEXAS BONANZA Plenty of lawyers are willing to take on such cases — from the tiny IP newcomer Beatie and Osborn, to well-known patent boutiques like Chicago’s Niro, Scavone, Haller & Niro, to large national firms like Dallas’ Jenkens & Gilchrist. For some companies with potentially large future licensing revenues but currently small bank accounts, outside counsel are proving especially helpful. In order to share in that revenue, patent attorneys are taking these clients on a contingency basis: The clients get priceless legal work, and the lawyers take home one-quarter to one-half of any royalties they can generate. Consider the example of Austin, Texas-based Forgent Networks Inc. and its counsel, Jenkens & Gilchrist. Since mid-2002, the company’s licensing program has generated $90 million, says Michael Noonan, Forgent’s head of investor relations. In recent years, he says, licensing has represented 90 percent of the company’s revenue (Forgent also makes a software product). Of that $90 million, Jenkens & Gilchrist has received $45 million — by representing Forgent in a contingency deal that entitles the law firm to half of all the licensing revenue it produces. The company had dusted off its patent portfolio during a major restructuring and couldn’t afford to pursue a licensing program without some help. Jenkens agreed to take the work on a contingency basis because the company had been a longtime client. L. Steven Leshin, a Jenkens partner in Dallas, tries to downplay the firm’s bonanza. “This has been very successful, but by the same token, it’s been a lot of work,” he says. “It’s not all profit.” Indeed, Leshin says that his firm made a “multimillion-dollar commitment” each year it has worked on Forgent’s licensing program. The work may start biting deeper into the profits with the latest lawsuit, filed in April against 31 companies. Still, Forgent has paid for itself and for past losses in not-so-successful cases that the firm took on contingency, Leshin says. In the latest round of their joint efforts, Forgent sued those 31 companies in the Eastern District of Texas for allegedly infringing on its patent for moving digital images over the Internet. Forgent’s technology aids in the process of compressing, encoding, and decoding digital images. The defendants include the likes of Apple Computer Inc., Gateway Inc., and the Eastman Kodak Co. (Spokesmen for each of the three companies say their policy is not to comment on pending litigation.) Leshin gets a steady stream of inquiries from companies hoping to enlist Jenkens & Gilchrist in similar arrangements. So far, he hasn’t bitten and takes a somewhat skeptical view of the overtures. “It tells me that people don’t want to pay legal fees and they’d rather let the law firm take the risk,” says Leshin. “Or play the lottery with someone else buying the ticket.” ATTACK AND COUNTERATTACK Larger law firms are certainly better equipped to absorb the cost of drawn-out litigation. The bottom-line pressure must pinch seven-lawyer Beatie and Osborn a bit more sharply. Nonetheless, Russel Beatie, with the help of seasoned IP litigator and longtime friend Daniel Osborn, is pressing forward for Patriot Scientific against some high-powered opponents. Patriot alleges that the PC makers named in its suit — Sony Electronics Inc., Toshiba America Inc., Fujitsu Computer Systems Corp., NEC Solutions Inc., and the Matsushita Electric Corp. — are infringing on Patriot’s patent for a component that enables microprocessors to operate at speeds greater than 120 megahertz. John Flock, the Kenyon & Kenyon partner in New York who represents lead defendant Sony, declined to comment on the pending litigation. Patriot’s dispute with the PC makers has also incurred the wrath of Intel, which filed its own suit against Patriot asking for a declaratory judgment. “Rather than wait for them, we decided to step forward,” says Chuck Malloy, a spokesman for Intel. “If they claim our product infringes in our customers’ systems, we concluded eventually Patriot would come and file the same sort of patent infringement claim against us.” Intel’s decision to sue Patriot separately is proving costly for Beatie’s firm. Beatie says that he tried to get Intel’s claims added to the suit against the PC makers, but that Intel has refused. Malloy says that he was not privy to strategic discussions about the case. ENTERTAINMENT FOR ADULTS While Forgent has big numbers and Patriot faces daunting foes, their licensing battles haven’t received as much attention as Acacia’s. That’s because Acacia has got sex. The Newport Beach, Calif.-based company is locked in a legal tussle with 17 online adult entertainment companies over its claim to own the patent for sending compressed data over the Internet, or streaming media. Last month, Acacia brought similar infringement claims against several, more mainstream media companies, including the Comcast Corp., Cox Communications Inc., DirecTV Group Inc., and the Echostar Communications Corp. The 25-employee company, which also licenses the V-chip technology that lets parents filter television content, is well capitalized and can pay for its own lawyers without splitting revenue, says Robert Berman, its general counsel. Acacia, which started out as a venture capital fund, had already licensed its data compression technology to media companies outside the adult entertainment world as well as to larger porn purveyors, Berman says. But a handful of smaller, Southern California companies balked at Acacia’s licensing demands and pooled their money to hire Fish & Richardson. A Markman hearing, in which the judge must interpret Acacia’s patent claims before the suit proceeds, began in February. Edward “Spike” Goldberg, who runs Home Grown Video, one of the companies sued by Acacia, says that he’s suspicious of Acacia’s decision to pursue a politically unpopular industry — especially small, online porn providers. After all, Goldberg argues, “They have made broad, sweeping claims that would make everybody in the world infringe on their patents.” Fighting the lawsuit is taking a toll on the group, says Goldberg. In all, their combined revenue is roughly $10 million, he says, and some of the larger companies have had to subsidize the smaller companies in paying the litigation price tag, which has topped $1 million. Fish & Richardson’s Jonathan Singer, who is defending the companies, contends that his clients’ battle with Acacia cuts to the heart of some painful shortcomings at the U.S. Patent and Trademark Office. The problem, Singer says, is that the PTO has a hard time evaluating software patents. “One of the hardest things about examining those types of patents is that the best prior art tends not to be written in publications. [The PTO] isn’t set up to search the world for prior art that was in use in actual systems,” says Singer, echoing a common criticism. Singer says that his clients are utilizing technology that has been in the public domain and in use for years. “What’s at stake here is the free and unencumbered use of the Internet,” he argues, “[and] whether or not you’re going to have to pay these folks who invented absolutely nothing.” Acacia’s Berman says that the smaller companies in the adult entertainment business were the only ones to ignore his letters and refuse to buy licenses. “Ultimately, whether we sue somebody is generally not our decision,” says Berman. “We will not let our technology continue to be used without a license.” PRICKING THE GIANT Pinpoint Inc., based in Fort Worth, Texas, is another small IP company whose primary product is patents. It’s taking on Internet heavy Amazon.com Inc. and the companies that sell products on Amazon’s Web site. The July 2003 suit, filed in the Northern District of Illinois, alleges that Amazon and a handful of companies that sell products on its site are infringing on Pinpoint’s patent for making personalized recommendations. The company has signed on well-known Chicago plaintiffs firm Bartlit Beck Herman Palenchar & Scott. Daniel Henderson, president of Pinpoint, declines to comment on pending litigation. But Fenwick & West partner Lynn Pasahow, who is representing Amazon, contends that Pinpoint’s claims are overly broad and encompass technology that has long been widely used. Pasahow, who is based in Mountain View, Calif., notes that IP companies like Pinpoint have become a more challenging opponent for operating companies because IP companies don’t have day-to-day operations to complicate the licensing dispute. “It changes the dynamic,” says Pasahow. “The plaintiffs don’t have to do a lot of discovery. They don’t have to worry about the fact that litigation interferes with what companies usually do. And they don’t have to worry about their executives being tied up.” Pinpoint’s lawsuit may go to trial in August. TEMPERS FLARE The idea of riding into battle against industry powerhouses — and beating them — for a gutsy little company just trying to reasonably profit from its patents has undoubted appeal to IP litigators. And defense claims that a patent in question is overbroad or invalid are standard fare — albeit sometimes true. But occasionally these disputes get ugly. Take the case of Chicago-based Solaia Technology LLC. Solaia has sued 40 companies seeking licensing fees, but just three suits, against 12 companies, remain pending. One involves Rockwell Automation Inc., a prominent Midwestern maker of factory automation equipment. Solaia alleges that Rockwell is infringing its patent on a software process that manages and monitors factory machines. That dispute has ballooned into a nasty tussle, with law firms on both sides being named as plaintiffs. In December 2002, Rockwell responded to Solaia’s patent infringement suit by suing Solaia and its law firm, Niro, Scavone. Rockwell alleges that Niro, Scavone is trying to interfere with its business by contacting its customers and telling them that the Rockwell products they’re using infringe on Solaia’s patent. Also named in the suit was Schneider Automation Inc., a Rockwell competitor that originally sold the patent to Solaia. Niro, Scavone and Solaia returned fire with a lawsuit in October 2003 naming both Howrey Simon Arnold & White, Rockwell’s law firm, and Fish & Richardson, which represents a handful of Rockwell customers. Lawyers from both firms did not return several calls for comment. A Rockwell spokesman also declined to comment. Raymond Niro, the senior partner at Niro, Scavone, dismisses the allegations against his firm as an attempt to take the focus off the underlying patent dispute. “It’s ludicrous to think that lawyers can’t represent their clients without being sued,” says Niro. “What’s emerging is big law firms have gotten into the IP litigation business, and they have brought with them a complete lack of civility in the pursuit of these cases.” Russel Beatie would only partially agree. There may be a lack of civility in the world of IP litigation, but based on his experience, the longtime players have rudeness down pat. “There will be disagreements over the time of day,” says Beatie, “based on the behavior I have seen so far.” Certainly, a lot of people on both sides of these licensing wars don’t seem to be feeling very civil. What may be different is the money at stake today, and the reality that anybody with a patent and a lawyer can make a fortune with a lawsuit. So David and Goliath may be meeting in court for years to come. Renee Deger is a former senior writer at The Recorder , an American Lawyer Media newspaper, and currently a public relations consultant at MessageCast Inc. in Redwood City, Calif.

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