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When Oracle Corp. decided to fight a patent infringement claim lodged against it by a tiny software firm, MangoSoft Inc., in 2002, the company was aware of the risks involved. The litigation could drag on for years, potentially costing the company millions of dollars in attorney fees. It could lose customers because the suit targeted one of Oracle’s core database products. There was also a chance it could lose the case and end up paying millions in damages and be subjected to a court injunction. But the alternative was a lot worse; pay a financially troubled software firm $500 million in licensing fees on a patent that Oracle believed it did not infringe and was invalid. Oracle went to court and earlier this month won a summary judgment of noninfringement. “They were willing to fight instead of cave in to a settlement because they wanted to send an important message: Enough is enough,” says Oracle attorney Douglas Lumish, a partner at Weil, Gotshal & Manges. Oracle is not the only company sending that message. Other Silicon Valley firms, many of which have become targets of patent infringement claims, are taking a tougher stance on what they consider frivolous claims. They are now much more willing to go to court, and some, like Oracle, are winning. “Some companies now feel strongly that they don’t have to succumb to baseless claims,” Lumish says. Last year, for instance, another Weil client, Cisco Systems Inc., successfully deflected a potential $3 billion infringement suit filed by StorageTek, a Louisville, Colo., maker of data-storage systems. The suit, filed in 1999, finally ended last June with a jury verdict of noninfringement. In both the Oracle and Cisco cases, the companies that sued were in financial trouble and were using their patent portfolios as leverage to force larger rivals to buy them out or provide some new revenue stream. MangoSoft was losing money in the two years leading up to its lawsuit against Oracle. Its last Securities and Exchange Commission filing, in 2002, reported losses of $3.8 million in 2001 and $2.3 million in 2002. It had 11 patents, however. StorageTek was also financially struggling when it sued Cisco; the company was looking for a buyer. Immediately after losing its six-year patent battle with Cisco, it sold itself to Sun Microsystems for $4.1 billion. Mark Chandler, Cisco’s general counsel, is blunt about his company’s policy on frivolous claims: “Just say no.” “When we don’t believe we infringe, we don’t pay,” Chandler says. “And our position is clear: We will fight these things.” But defending against patent infringement claims has become like playing high-stakes poker — deciding to hold ‘em or fold ‘em involves as much luck as strategy. COST OF WAR In patent litigation, proving you are on the right side of the law has a huge cost. In Cisco’s case the price tag was $10 million and six years of wasted company resources, Chandler says. “The potential for damages is so unrelated to the size of the business and so unpredictable that there’s no insurance product that provides reasonable coverage,” Chandler says. There is also a real possibility that a company could lose the case and end up paying millions of dollars in damages or be forced into a huge settlement under a threat of an injunction. A more recent example of this is the $612.5 million patent settlement by BlackBerry maker Research in Motion with NTP Inc. Still, despite the risks involved, lawyers say more companies like Cisco and Oracle are taking their chances in court, rather than negotiating with patent plaintiffs. The reason: exorbitant damage claims. “In a lot of these cases, plaintiffs are making very large demands, some over half a billion dollars,” says Robert Barr, executive director at the Berkeley Center for Law & Technology and former general counsel at Cisco. “So if you’re fighting against these kinds of demands, the high cost of litigation and large attorneys’ bills don’t seem prohibitive or unreasonable.” NTP reportedly demanded $1 billion in licensing fees before filing a lawsuit. The emergence of holding companies like NTP — those that buy and amass patent portfolios and file infringement suits against other businesses — has significantly changed the rules of the patent litigation game. Typically, companies suing for infringement have a competing product and they seek to obtain a court injunction to stop an infringer from further hurting their business. But when companies only have patents, their objective is quite different from protecting market share — they only want monetary damages. Most holding companies are backed by private investor money and represented by lawyers on a contingency-fee basis, with the investors and lawyers all waiting for a big payoff in the end. And the return on investment could be huge. Wiley Rein & Fielding, the Washington law firm that represented NTP in the BlackBerry case, took home $200 million in fees. The roughly $400 million left over from the settlement will be divvied up among about two dozen NTP shareholders. “Plaintiffs are going to look for numbers that are high even when there’s a chance their patents are not infringed,” Barr says. “There is just no incentive for them to settle the case right away.” ESCALATING HOSTILITIES Christopher Ottenweller, a partner at Orrick, Herrington & Sutcliffe, routinely defends clients against patent-holding companies. He says the number of companies fighting back against infringement claims has definitely increased, and they are responding to the lawsuits with different strategies. “They are really getting tired of being sued, and they are fighting back on several fronts,” Ottenweller says. One popular action is to seek patent re-examination at the U.S. Patent and Trademark Office. Although patent re-examination can only be ordered by the PTO director, companies can lobby for such action by sending the agency strong evidence of patent invalidity. In 2005 the patent office received 583 patent re-examination requests, up from 297 four years ago, and 563 of them were granted. Of those requests granted, 196 are subjects of litigation. Technology firms are not merely leaving their fates in the hands of courts and the patent office. Many have banded together to push for legislative patent reform. Cisco has joined other technology companies such as Microsoft Corp., Apple Computer Inc., Intel Corp., and Hewlett-Packard Co. in calling for a law that would curb frivolous patent claims. The group’s wish list includes developing a procedure for reviewing patents after they’ve been granted and limiting the ability of a patentee to get an injunction against an alleged infringer. “Cisco believes in the patent system. We have over 2,000 issued U.S. patents, and we have 4,000 applications pending,” Chandler says. “At the same time, we think that the patent system has become tilted in the last 20 years in a way that the potential damages are so unrelated to the value of the patents. “Because of that potential for a huge jackpot, people are willing to keep putting money to the patent slot machines to see what they get out of it,” he adds.
Xenia P. Kobylarz is a staff writer for The Recorder , the ALM publication based in San Francisco in which this article first appeared.

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