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By MICHAEL FITZPATRICK, a former Reuters correspondent who writes about technology

Ideas, or intellectual property, represent the crown jewels of any technology company. In a very real sense, the idea very often is the company.

With tens of billions of dollars in annual revenues at stake, there are bound to be disagreements over who really owns the idea in question. That goes to the heart of one of the most serious risks facing technology companies today--patent lawsuits.

"They're worried that something mission critical will all of a sudden be put into question by a patent holder who comes after them and said they are infringing the patent. That is really the key risk that companies face," said Dov H. Scherzer, a partner specializing in intellectual property matters at the Manhattan-based law firm of Olshan Grundman Frome Rosenzweig & Wolosky LLP.

In particular, technology companies are concerned with lawsuits filed by companies, often called 'patent trolls," whose main business is not the technology behind the patents, but rather patent litigation.

"Patent lawsuits filed by patent owners who do not manufacture or use the patented invention, but rather than abandon the right to exclude, seek to enforce their rights through license negotiation and litigation," pose one of the main risks to technology companies today, said Lori Jorgensen, senior director, finance for Microsoft Corp., in an e-mail response.

"These so-called Non-Practicing Entities generally seek money from existing uses rather than pursuing new applications for the technology," she said.

In the rapidly evolving technology industry, companies have to worry not only about the cost of patent litigation, but also the threat that adverse rulings may devastate their business.

For instance, Blackberry maker Research in Motion faced a federal court injunction in a long-running patent dispute that could have shut down its service and prevented the company from selling its highly popular smart phones in the United States. RIM agreed to pay $612.5 million in 2006 to settle the dispute with NTP Inc., a patent holding company based in Virginia.

Tech companies also are frequently embroiled in disputes with rivals or companies whose patents have cross-industry applications. Apple Computer Inc. agreed to pay $100 million to rival digital entertainment company Creative Technologies Ltd. in 2006 to settle a patent dispute over its iPod music player.

More recently, business software giant Oracle sued Google for patent and copyright infringement, alleging that Google's Android phone software violates patents for the Java software that Oracle acquired with its purchase of Sun Microsystems earlier this year.

Even disputes that don't generate headlines can be costly. The median cost of litigating a patent infringement suit was estimated in 2007 at $1.6 million, excluding awards and damages. That's for cases when $1 million to $25 million was at stake, according to the American Intellectual Property Law Association.

In addition to the federal courts, technology companies also have to worry about the U.S. International Trade Commission, which can block imports of products that it determines infringe upon patents.

In July, graphics chip maker Nvidia agreed to license technology from Rambus Inc. after the ITC ruled that its chips infringed three Rambus patents and barred their importation. At the same time, Nvidia said it would appeal the patent ruling.

A BRIGHT LINE BLURRED

This year, the technology industry closely watched a key U.S. Supreme Court ruling that could have excluded so-called "business method' patents that essentially describe a business technique or process.

In its June ruling in Bilski v. Kappos, the Supreme Court rejected the patent at issue--a means of hedging against price changes in energy markets--but also rejected the Federal Circuit Court's "machine or transformation" test that a patentable idea must be linked to a machine or the physical transformation of something.

Such a test could not only have blocked business methods patents, but also possibly cast into doubt many others as well, such as those for software. The Supreme Court held that a too-stringent test could harm future innovation.

"A lot of business method and software patents had been placed in doubt by the lower court's decision as to whether or not those patents could withstand scrutiny under this 'machine or transformation' test," Scherzer said

"Ultimately not all that much has changed in terms of corporate risk management post-Bilski," Scherzer said. "As a result, companies are in at least as much risk of being sued for patent infringement post-Bilski as they had been before."

Indeed, just a few days after the Supreme Court issued its patent ruling, NTP filed patent infringement lawsuits against Apple, Google, Motorola, Microsoft, South Korean consumer electronics maker LG Electronics and Taiwan-based mobile phone maker HTC, alleging violation of the wireless e-mail patents that were at issue in the Blackberry case.

In addition to the U.S. courts, technology companies have to deal with differing intellectual property regulations for their own products around the world. In some countries, software may not be eligible for patents.

"Globally those (software patents) are not recognized or they're not permitted in other countries," said Mari-Jo Hill, director of risk management at business analytics software firm SAS Institute Inc. "So we may have protection here in this country but as a global company that is potentially a risk."

Brian Klemm, legal counsel for SAS, notes, "The same issues apply to trademark and copyright. There are varying laws. This is a challenge not only to software companies but to any kind of global business. In particular those today that are marketing and distributing their products via the web."

AN EVOLVING MARKET

Because of the severe monetary risks and uncertainty associated with patent infringement, the insurance market for this risk has been slow to develop.

"I don't think insurance is going to be a solution for that any time soon. It's pretty much a trading dollars situation with insurance companies to buy patent infringement," Hill said.

Currently, there are only a few markets willing to take on patent coverage.

"There is a very limited market for patent infringement," said Emily Freeman, director of the technology, media and telecoms practice for brokerage Lockton Cos. in London. "(There are) only a very few sources of this kind of coverage and certainly severe limitations as well as to how much capacity or how much limits could be purchased, particularly if you're a U.S.-domiciled company."

This limited market leaves technology companies seeking alternatives.

"Mitigation (and) defense tactics are diverse and include such activities as patent litigation risk-sharing arrangements, defensive patent aggregation, joint-defense arrangements, design around, clearance searches, opposition proceedings, patent watch, etc.," said Microsoft's Jorgensen.

Among those strategies, defensive patent aggregation strategies involve partnering with companies that buy portfolios of patents that may be of interest to a particular company and paying a membership fee to share in the patent rights.

The insurance industry is, however, developing coverage for patent risks.

"The market has been limited in the past and continues to be somewhat limited. We're optimistic that in the coming months and years that more solutions will come to the forefront for clients," said John Brosnan, director of the intellectual property insurance practice at brokerage Aon. "This exposure is a huge issue, and it's an exposure that's not going to go away."

Brosnan said that patent coverage has become more affordable as insurers have become more comfortable with the risk.

"There are a lotof misconceptions out there about costs, or there is a sense that it was looked into three or four, five years ago and maybe it was more expensive than then it is today," Brosnan said.

"It wouldn't be considered cheap, but it has gotten significantly more competitive in terms of pricing."

Given the prevalence of mergers and acquisitions in the technology industry, specially tailored policies have become available to protect against intellectual property risk in such transactions, Freeman said.

"When you purchase a technology company, there could be a patent infringement or an intellectual property dispute, which could be expensive for financial damages and attorneys fees, but what happens if you lose the intellectual property case and you no longer own the intellectual property?" Freeman said.

The market for patent coverage, although small now, will continue to develop, Brosnan said.

"It's a really hot area, one of the hottest areas for many companies that we work with," Brosnan said.

"Eventually the insurance industry catches up with the demand, Right now you have a huge demand and a small supply. Sometimes the insurance industry moves slower than the demand; eventually they'll catch up."

September 15, 2010

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