Tech Giants' New Way to Thwart Patent Suits

Frustrated by litigation costs, Microsoft, Sony, and Nokia are paying third-party patent acquirers such as RPX to fend off patent lawsuits

By Rachael King

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Forgive Microsoft CEO Steve Ballmer if he's frustrated by litigation. Aside from high-profile government investigations into the company's alleged monopoly power, Microsoft (MSFT) has been sued at least 49 times in the past six years for patent infringement by small shops that buy up patents from inventors and bankrupt companies, according to researcher PatentFreedom. Lawsuits from "patent trolls," says the software giant, are a costly blight on the technology industry. "[Patent litigation] costs the industry billions of dollars per year," says Horacio Gutierrez, corporate vice-president and deputy general counsel at Microsoft.

On Jan. 28, Microsoft signed up for patent insurance. It's not insurance such as you might get for your car or house, but a startup called RPX provided what's probably the closest thing to it for tech giants. Companies such as Microsoft, Sony (SNE), and Nokia (NOK) pay RPX annual fees to avoid patent-related litigation. The fees depend on each company's revenue and can range from $35,000 to $4.9 million per year. The 14-month-old RPX is one of the first companies to offer the service, It's already signed up 30 members, including IBM (IBM), Cisco (CSCO), Hewlett-Packard (HPQ), and Samsung.

RPX's approach doesn't guarantee that its members won't be sued. The company buys up patents that could be used against its clients, having spent to date $130 million to acquire more than 1,000 patents and patent rights in the mobile, Internet search, telecommunications, networking, and e-commerce areas. In return for yearly fees, member companies get licenses to all the patents RPX acquires. "By working together with entities such as RPX, the industry can collectively reduce the costs of this needless litigation," says Microsoft's Gutierrez.

Microsoft's settlements with Acacia

Patent trolls are extremely controversial in the tech industry. They're typically small firms that acquire patents from individuals or small companies and then try to extract licensing fees from companies selling products that infringe on those patents. The patent-licensing firms are more politely referred to as "nonpracticing entities" because they sell patent licenses to technologies they don't design, manufacture, or distribute. Microsoft is one of the most-pursued tech companies by these small firms, according to PatentFreedom. The patent disputes almost always start with a lawsuit. In 2009, one of every five of the 470 nonpracticing entity cases filed involved software defendants, according to RPX.

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