How Carbonite, EMC Beat a Patent Troll Tied to Intellectual Ventures

6/3/13Follow @curtwoodward

[Updated 6/4, see below.] Intellectual Ventures, the controversial patent licensing company headed by former Microsoft technology chief Nathan Myhrvold, is under the microscope again. And a pair of Boston-area technology companies are part of the courtroom drama.

This weekend, NPR and public radio program This American Life delved into the U.S. patent system again, following up their award-winning 2011 report on the issue. Once again, Intellectual Ventures was at the center of the story.

The public radio reporting has focused on Intellectual Ventures as an window into problems with the broader patent system, which has spawned companies that do nothing but buy patents and sue other businesses over alleged infringement, looking for lucrative legal settlements.

Those companies are known as “patent trolls” because of their singular money-harvesting goal.

In its latest report, This American Life follows up on a company called Oasis Research, which appears to exist solely to extract patent licensing fees from other companies (in the original 2011 story, the radio reporters couldn’t even find a functioning office for Oasis Research).

In one case, it used a patent that was purchased from Intellectual Ventures to sue a bunch of tech companies that offered online data backup services, saying it had the legal rights to the idea.

That’s where the Boston tech sector comes into play. Even though several other companies settled with Oasis Research, computer-backup provider Carbonite (NASDAQ: CARB) and data storage giant EMC (NYSE: EMC) declined to cut a deal.

They took the case to court and won, getting the patent thrown out because it didn’t properly list all of the inventors who worked on the idea.

“What our lawyers were saying is, `It’s going to cost us millions of dollars more to take this to trial, and if we lose, we’re really screwed,’” Carbonite CEO David Friend said. “And I was sort of like, `Well, because we’re not in violation of their patents. Why should we pay them anything, not even a nickel?’”

As This American Life points out, the case was particularly notable because it revealed some of the financial terms in play—something that usually gets shuffled into the background during legal settlements.

Oasis Research wanted Carbonite to settle, Friend and his lawyer said, for $20 million up-front and a percentage of the company’s ongoing revenues. And even though Intellectual Ventures sold this patent to the company doing the suing, it still had an interest: This American Life reports that Myhrvold’s company still got 90 percent of the licensing fees from the patent in question.

Intellectual Ventures has long said that it’s in the patent-licensing game because it wants to change the way patents are handled in American business. The company says it’s trying to establish a new “middleman” class in the patent wars, where inventors and companies can turn to properly license intellectual property, like any other commodity.

The company downplayed allegations in the original This American Life report, saying that some unspecified characterizations were “frankly absurd.” Myhrvold has also stepped up his public efforts to defend Intellectual Ventures’ practices in recent months, saying that before firms like his came around, big tech companies would quietly license patents to each other and essentially ignore other people’s inventions, essentially daring little guys to take on big guys in court.

But in listening to the story of this one infamous patent, it’s hard not to feel for a guy like David Friend, who had to spend plenty of money and take a big risk just to convince a jury that his company shouldn’t have to shell out to someone who worked on an old, abandoned project to back up data over phone modems.

“As a businessman, I’m put in this situation where my board is saying `You should settle,’ and my lawyers are saying `You should settle,’ and everybody else is settling,” he said. “I felt like we were being extorted.”

[Updates with Intellectual Ventures response.]
On Tuesday, Intellectual Ventures responded to the public radio report with a lengthy statement on its blog. The company emphasized that Oasis Research is a separate, independent company that had licensed former Intellectual Ventures patents.

It also said “back-end” deals, where a patent seller gets a piece of the future licensing revenue, are pretty common in the industry—but Intellectual Ventures says two-thirds of its patent sales are for cash up-front.

In addition, Intellectual Ventures said that it doesn’t use shell companies for lawsuits: “We do litigate and when we do, you can find that information on our website and our name will be in the filing.”

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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  • Christopher Noble

    In the world of journalism, simple good-guy/bad-guy stories sell. In the real world, Carbonite is not the White Knight and Intellectual Ventures is not the Evil Lord. Both companies are businesses that make use of our existing patent laws, which need reforming, and companies quite legally take advantage of an underfunded US Patent Office. For example: It is ironic that Good Guy Carbonite had the whole patent thrown out, not on the merit of the invention claims, but by arguing that the list of inventors was incorrect. Inventorship can be a notoriously difficult question to determine when teams are working together, and sometimes inventorship quite properly changes as the content of the patent claims change. By all means, we should provide a process to change and challenge the inventorship of patents. But using that argument as a way of throwing out the patent itself is an example of a weakness in our patent laws, and exploiting those weaknesses legally is one of the things that corporations do. Let’s get away from the entertaining but unhelpful Good-Guy Bad-Guy stories and look at the real, underlying problems and their potential solutions. Our 21st century economy and national competitiveness will be affected.

  • http://www.delivra.com/ Cody Sharp

    Ethically, this is not a gray area. IV’s entire patent-hoarding business model is legally allowed but should be no longer. Extortion is a very good term for what is being done at an incredibly high level. The fault lies not only at the feet of companies like IV or the Chris Crawford’s of the world but also with the patent office for allowing incredibly broad patents and a system that has been manipulated for years.