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On April 30 Acacia Research Corporation lost a patent infringement trial when an 11-person jury in federal district court in Marshall, Texas–a venue generally considered friendly to patent-holding plaintiffs–invalidated three of its patents. At issue in the case: Acacia subsidiary IP Innovation’s claim that popular versions of the Linux open-source operating system offered by Red Hat Inc. and Novell Inc. infringed patents 5,072,412, 5,394,521, and 5,533,183. “We’ve demonstrated how you can stand up to a claim of a non-practicing entity, in their preferred jurisdiction,” says Rob Tiller, Red Hat’s assistant general counsel and head of intellectual property, adding that the verdict is the first ever reached by a jury in a patent infringement case regarding open source software. “We consider that a significant accomplishment.” Tiller isn’t the only one who feels that way. The verdict was cheered on Groklaw, a popular discussion forum about open-source legal issues, where supporters of the freely available software decry holding companies like Acacia and argue that software patents inhibit innovation. Acacia enjoys special lightning-rod status for a couple of reasons. First, as revealed in statistics collected by patent-defense company PatentFreedom, the holding company has filed more enforcement actions than any other so-called non-practicing entity or patent troll. Second, Acacia is one of a few publicly traded holding companies. The Red Hat/Novell verdict was just the latest trial setback for Acacia, which has litigated its way to licensing agreements with hundreds of companies. The company has now lost three of the four patent suits it has taken to trial since 2007. Its lone win came in Creative Internet Advertising v. Yahoo, which initially resulted in Acacia subsidiary CIA winning a relatively modest jury award of $6.6 million in May 2009; the final judgment entered last February rose to $12.4 million after enhancements for willfulness were added. (Acacia saw its patents invalidated in all three losses, including twice in East Texas, where juries rarely invalidate patents.) While Acacia has yet to see a big trial payday–and has never turned a profit since going public in 2001–the company’s financial performance is actually improving. Informing shareholders of its 2009 results in March [Acacia 10-K], it reported taking in license fee revenues of $67.3 million for the year–a 40 percent increase compared to 2008. Revenues for the first quarter of this year stood at a record high and the company’s stock price was just under $14 per share as of May 7–a level it hasn’t reached since mid-2007. Acacia’s first quarter filing also indicates the company is wielding its patents against more targets than ever before: It reached 40 new licensing agreements in the first quarter of 2010, compared with 29 the previous year. In the case of Red Hat and Novell, the two companies opted against signing such agreements and chose to go to trial instead. In doing so, they faced a hurdle common to defendants in patent trials: winning over jurors with little or no prior knowledge about the technology at issue in the case–open-source software, in this instance. In a recent blog post at opensource.com, an online discussion forum hosted by Red Hat, Tiller described how IP Innovation and its co-plaintiff, Technology Licensing Corp., argued that “open source software involved behavior that was, if not downright illegal, at least ethically dubious.” The software company’s strategy for countering that argument? Putting Red Hat executive Michael Tiemann on the stand and having him explain to the jury how an open-source software company works—by giving away software and source code for free, and profiting by selling its programmers’ expertise in supporting that software to its customers. “We thought that the story of free and open source software was one that was powerful and affecting, but they [the plaintiffs] thought the jury could be made to find it frightening, because it was unfamiliar,” Tiller said in an interview with The Prior Art. “They suggested that it was something that sounded kind of like communism.” (At one point during the trial, Tiller noted in his blog post, one of the plaintiffs lawyers even invoked the name of Karl Marx.) In the end, the plaintiffs’ arguments didn’t work. In addition to benefiting from Tiemann’s testimony, Red Hat’s lawyers were able to bolster their claim that the Acacia patents were invalid by booting up two computers from the mid-1980s—a Commodore Amiga and an older Apple Macintosh—and demonstrating how they relied on the same technology described in those patents, which related to using multiple workspaces on a computer at the same time. The business model of companies like Acacia–which makes money solely by acquiring patents and suing operating companies with the–is controversial in technology circles, but unfamiliar to jurors. At trial, Acacia’s lawyers from the Chicago-based patent firm Niro Scavone Haller & Niro told the jury that its business model helps the “little guy” monetize patents, says Mark Reiter, the Gibson Dunn & Crutcher partner who led Red Hat’s legal defense team. “But we said, that’s certainly not true in this case, because there is no small inventor in this case,” Reiter says. (Local counsel for Acacia was provided by Wes Hill of the Longview-based Ward & Smith law firm.) Red Hat was able to make that argument because the patents-in-suit had originated in the 1980s at Palo Alto Research Center, or PARC, a well-known Silicon Valley research laboratory owned by Xerox. Acacia and TLC acquired the patents, Reiter says, as part of an earlier settlement in a patent suit against Xerox. (Xerox had no role at trial. Reiter declined to say whether the company had a financial interest in the outcome of the trial.) Neither Acacia nor Niro Scavone partner Arthur Gasey, the company’s lead lawyer on the case, returned phone calls seeking comment for this story. Acacia and TLC–a Nevada patent-holding company controlled by J. Carl Cooper, a patent agent who has sued on many of his own patents over the years–sought close to $300 million in damages at trial. That figure was based on a demand for a royalty on every version of Linux sold, according to Reiter. The plaintiffs had a much larger damages demand before trial, but defense lawyers undercut it by winning an early motion banning certain expert testimony, he adds. “We explained to the jury that while the patent office works hard and the patent examiners are trying to do their best, they don’t have perfect information,” says Reiter. “The jury is as much a part of the patent system as examiners are.” A final note: The trial was before Judge Randall Rader, soon to be chief judge of the U.S. Court of Appeals for the Federal Circuit, who was sitting by designation. It’s one of five cases Rader took over late last year. Three of those cases have now been resolved, with two of them– IP Innovation v. Red Hat and PA Advisors v. Google–clearly in favor of the defendants.

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