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"People will patent, or try to patent anything," says Parker Bagley, a partner in the IP group at the New York City office of law firm Milbank, Tweed, Hadley & McCloy LLP. "It's a problem for a lot of deep-pocketed companies." Not only are they facing infringement claims from competitors in their own industries, but increasingly they are attracting so-called "patent trolls"which Bagley defines as "small holding companies, or individuals, who generally have no business other than exploiting their patents."
"It's not fair to say that everybody's a troll," says Christopher Gerardi, a New York City-based senior managing director in the forensic and litigation consulting practice at FTI Consulting Inc. "Some companies have legitimate technology and have tried to develop a business model around it. But other companies' only model is to knock on doors, collect a licensing fee, and walk on to the next one."
Hundreds of patents have been awarded on e-commerce techniques across a range of industries, but the trend goes further: A Las Vegas casino has gone to court over a method for tracking frequent-gambler points. Procter & Gamble Co. has a pair of patents pending on two related methods for "media targeting"i.e., using research to define a brand's target consumers and the best communications vehicles to reach them.
A Danbury, Conn., logistics company has been granted a patent on any integrated logistics system that manages multiple shippers using multiple carriers. And a Chicago-based chain of restaurants specializing in breakfast cereal has a pending patent on its methods, which include "displaying competitively branded food products" and adding "a third portion of liquid."
"Some of these are utterly obvious," complains Jim Shepherd, vice president of research at AMR Research, in Boston. Business methods such as Amazon's 1-click purchase and Priceline.com's reverse auction methoda computer-assisted variation on the Dutch auction, which has been around for centuriesdon't deserve patent protection, he says. "I have no issue with granting copyrights to the code, to the software, but granting a patent on a business process is ludicrous. Inherently, I think that it damages competitiveness and limits innovation," he adds, noting that patent law was intended to do the opposite.
"This is one of those things where it seems like the pendulum has swung too far," agrees Bill Krivoshik, chief technology officer at Thomson Financial, the New York City division of Thomson Corp. that delivers information and workflow software to Wall Street and other financial services clients.
"If it becomes an environment where every process can be patented, and you end up spending more time arguing over cases that have no merit, then it's going to be a big drain" says Krivoshik, who joined Thomson earlier this year from Citigroup Inc. "The big guys like the Citigroups are targets to begin with just because of their size," he says, "and if you don't fight these things, you're making that target even bigger."
Fighting is just what Citigroup is doing in its legal battle with Ronald A. Katz Technology Licensing LP. Unlike most of Katz's corporate targets, which avoided or quickly settled litigation by licensing its portfolio of some 50-plus patents that cover, among other things, automated call-center operations, Citigroup has said it intends to vigorously defend the lawsuit, though a spokeswoman declined to comment further. A handful of companies have challenged Katz in court, including Verizon, West Corp. and AT&T, before settling for reportedly hefty sums.
Earlier this year Citigroup was rumored to be among dozens of companies that joined together in various industry coalitions to fight the Katz patents, coordinating efforts to search for so-called "prior art" and lobbying the PTO to reexamine the Katz portfolio. And last March the director of the PTO, Jon W. Dudas, ordered reexamination of four of Katz's patents, representing about 350 separate claims.
Meanwhile, the list of more than 100 companies that have licensed the Katz portfolio reads like a who's who of corporate giants: Bank of America Corp., Capital One Financial Corp., Dell Inc., Delta Air Lines Inc., Hewlett-Packard Co., HSN LP, Merrill Lynch & Co. Inc. and Microsoft Corp.
At an average cost of between $2 million and $3 million per case, according to FTI's Gerardi, fighting an infringement claim in court is the most expensive defense, except for, say, scrapping a multimillion dollar call-center upgrade or abandoning a seven-figure SAP implementation that streamlines a vital, but patented, business process. "Think about the thousands upon thousands of business methods that are encapsulated in the software from an SAP or a Microsoft," says AMR's Shepherd. "I don't know if what we've got there isn't a ticking time bomb."
Indeed, Citigroup's decision to contest the latest Katz lawsuit is the exception rather than the rule. As the laundry list of Katz licensees suggests, many companies choose the expedient and less costly path of settling patent claims. And patent law experts agree that companies need to make a sound business decision case by case. Yet paying license feeseven those that are a fraction of the cost of litigating an infringement claimcan be more costly in the long run.
Spending $200,000 for a license instead of spending $2 million and two years in litigation may seem like a sound business decision. "But it's really not," Gerardi says. "Once it's known that company XYZ paid $200,000 to some patent holder to walk away, somebody else will come knocking at the door."