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When Martin Singer took the helm at Pctel Inc. in late 2001, the company, a Chicago-based provider of Internet technology, was in crisis. The tech bubble had burst, Pctel’s profit margins were shrinking, and its patents were being infringed by competitors. “It was clear that the company was headed for a tumble,” says Singer, Pctel’s chairman and chief executive officer. But Singer was able to use Pctel’s patents to engender a dramatic corporate makeover. The key to his strategy was selling the company’s core business — manufacturing and selling modems — but keeping its core patents. Since Pctel was no longer selling modems, it could sue its former competitors without risking its business. Alleged infringers couldn’t countersue and ask for an injunction — Pctel had no modem business to enjoin. And Singer was able to aggressively, and so far successfully, pursue patent infringers. Using money the company earned through patent licensing, Singer moved Pctel into the wireless arena. “We’ve funded our transition with revenue from royalties,” says Singer. “Our efforts are paying for themselves.” Since Singer revamped Pctel’s IP strategy, the publicly held company has pulled in $18 million in royalties and signed valuable cross-licenses in patent settlements with Broadcom Corporation and Intel Corporation. While Pctel’s 2003 revenue of $45 million is not close to the $76 million it earned in 1999, the company’s profit margins tell a different story: Pctel’s gross profit in 1999 was $37 million; last year it was $34 million. Patents made that possible. Pctel’s first patent, for a host signal processing (HSP) modem, issued in 1988 and changed the modem business. The technology, invented by Pctel founder Peter Chen, made it possible to produce the modem that has become an integral part of most personal computers today. Before Chen’s invention, a modem was an expensive piece of hardware. But Chen discovered a way for many of the traditional modem functions to be handled by software and by the computer’s processor. So-called soft modems were quickly adopted by the industry and became standard equipment in personal computers. From the time he came on board in 2001, Singer believed competitors were infringing on this and other Pctel patents (that year the company held about 80). He was convinced that an innovative IP strategy was key to the company’s success. Initially Singer was leery of pursuing rivals who might counter with lawsuits and injunctions that would prevent Pctel from selling its modems. So he was slow to file suit. “I concluded that the only way we could commercialize our intellectual property was to first shed our modem business,” he says. Singer didn’t reach this conclusion alone. He held a strategy session and invited attorneys from Pctel’s law firm, Pillsbury Winthrop, to attend. At that meeting Pctel established the course that led it to drop the modem business and change its focus to IP licensing — and wireless networking. The company made a few important acquisitions in the wireless arena, including the purchase of CyberPixie, a Chicago-based wireless access company that specialized in Wi-Fi software. In May 2003 Pctel sold its modem business — but not its patents — to Conexant Systems Inc., a large soft modem vendor. In that deal, Pctel received about $19 million in cash and royalties from Conexant, and came away with an additional 46 patents. “We now had about 130 patents or patent applications and were suddenly more formidable,” Singer says. With its modem business no longer vulnerable, Pctel became aggressive. Singer started pursuing licensing agreements from some of Pctel’s biggest rivals, including Agere Systems Inc., Broadcom, Intel, Lucent Technologies Inc., U.S. Robotics Corporation, and 3Com Corporation. Intel and Pctel reached an agreement without litigation: Pctel took a cross-license to Intel-owned patents that relate to Pctel’s existing businesses, the rights to 29 additional patents, and a onetime $13.5 million payment. The other companies were less amenable to licensing, so in 2003 Pctel, represented by Pillsbury Winthrop, filed suit in the Northern District of California alleging patent infringement. To date, only Broadcom, represented by Finnegan, Henderson, Farabow, Garrett & Dunner, has settled, agreeing to pay $3.5 million and license Pctel’s technology. The other cases are pending. In Pctel’s SEC filings, the company estimates it will spend $3.5 million a year on pending litigation. To date, the litigation has cost about $5 million. The suit is not Pctel’s first. Back in 2000, the company filed a complaint with the International Trade Commission alleging that two competitors, ESS Technology Inc. and Smart Link Ltd., were selling software-based modem solutions that infringed Pctel’s patent. The administrative law judge overseeing the trial at the ITC made an initial determination in Pctel’s favor, and the case settled. Pctel received cross-licenses and additional technology from both companies. Despite the positive outcome, Singer is critical of that effort. The company’s licensing program at the time was ad hoc, he says, and the suit was a response to sales pressures. “It was also against our smaller competitors,” Singer says. “And in a case like that, even if you win, you lose because there’s not enough in royalties to justify the expense.” In a roundabout way, however, that first suit may prove helpful in Pctel’s current court battle. Before the trade commission case settled, Pctel’s opponent, ESS, asked the Patent and Trademark Office to reexamine Pctel’s patent — the same patent currently at issue in Pctel’s case against Agere and Lucent. The reexam didn’t go smoothly for Pctel. Initially the PTO examiner rejected the company’s claims, convinced that some of the 45 instances of prior art submitted by ESS — primarily earlier patents and published technical articles — invalidated the patent. The Pillsbury partner that handled the reexam, Jim Eakin, went to Washington, D.C., twice from his Palo Alto office to meet with the examiner. Despite his efforts, the examiner continued to reject Pctel’s claims. Instead of waiting for a final rejection, Eakin filed an appeal with the Board of Patent Appeals and Interferences, the administrative body within the patent office that hears appeals. It was a smart move. In July 2004 the examiners conducting the internal review announced that they were so completely persuaded by Eakin’s appeal brief that they concluded that there was no need to go on with further briefs and hearings: The patent was upheld. Thanks to the reexamination, Pctel believes it is now at an advantage in its current litigation. Because none of the 45 instances of prior art submitted to the PTO affected the patent, defendants Agere and Lucent will have trouble fighting infringement unless they can come up with different prior art, says Kirke Hasson, the San Francisco-based Pillsbury partner heading up the litigation team for Pctel. Neither Pctel nor its attorneys will say whether a settlement is imminent. Agere and Lucent’s attorneys — from Kirkland & Ellis — did not return calls. But Singer was upbeat. “The ruling definitely strengthens our case,” he says. This article originally appeared in Corporate Counsel’s sibling publication IP Law & Business.

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