The Prior Art

Patent Player Acacia Takes a Hit

As anyone writing about patents quickly discovers, Acacia Research Corporation is a big name in a controversial business. Acacia makes money by getting companies to pay for licenses to its patents; those that won't pay often meet Acacia in court.

The Newport Beach-based patent-holding firm has filed dozens of patent infringement lawsuits against more than 100 defendant companies. But until last week, none of those lawsuits had been tested in a jury trial.

A Beaumont, Texas jury took only two hours Thursday to decide that Acacia’s lawsuit against Microsoft didn’t hold water, and tossed out Acacia’s patent to boot. The company’s stock has since lost more than a third of its value, dropping from $17.90 to just about $10.00 on Monday afternoon. Before closing arguments, an Acacia expert said Microsoft should be forced to pay $2.50 per copy of Windows XP, which various reports have pegged at between $600 million and $900 million.

Acacia's detractors say the company is a prime example of a "patent troll," using the threat of litigation  based on overly broad patents to make money off others’ hard work. Critics put the Newport Beach, Calif.-based company at the heart of a new industry they say abuses the patent system. Others have labeled their model "patent holdup" or even "patent terrorism."

The company does not share that view. Acacia officials say they defend innovation by helping small inventors and companies to outsource the difficult and costly business of licensing their patents.

"We’re the only really pure licensing company in the country that small technology companies can partner with," Acacia CEO Paul Ryan told me yesterday. "We have the expertise and experience—500 licenses including every major company in the country."

That gives the little guy leverage against big corporations that would otherwise blow off valid patents, said Ryan. Acacia's point of view is well articulated in this February 2007 profile, and in this 2006 interview with CNET.

Last week's verdict also leaves seven other East Texas lawsuits that Acacia filed last month in limbo, since they are based on the same patent asserted in the Microsoft case, 5,933,630. Ryan told me the company hasn’t decided whether or not to appeal the Microsoft verdict—which it would have to do to keep the other lawsuits alive.

The full story is in today’s Daily Journal, complete with some colorful quotes from Weil Gotshal & Manges partner Matt Powers, a Silicon Valley patent litigator who went toe to toe with a “dream team” of Texas plaintiffs’ lawyers to defend Microsoft. ("Defendant Microsoft Wins Big Patent Suit in Plaintiffs' Haven", 11/20/07) Marketwatch also has well-reported coverage of the lawsuit.

Computer Acceleration Corp. v. Microsoft Corp., 06-cv-00140, ED Tex.

Lawyers expecting the Eastern District of Texas to lose its pro-plaintiff luster shouldn't hold their breath. The day after its big win, Microsoft lost a round in the patent wars when the Federal Circuit upheld a $142 million ED Tex verdict against it for infringing a patent held by z4 Technologies.

A final note for blog readers--

The Battle in Beaumont was ultimately a dispute between two Washington State companies. The '630 patent originally belonged to eAcceleration, a software company located about 40 miles away from Microsoft headquarters in Redmond. eAcceleration CEO Clinton L. Ballard, who did not testify at the trial, is named as one of two inventors on the patent. Ballard's company was public but terminated its registration with the SEC on July 12, 2006, just six days after Microsoft was sued.

Congress to Universities: Stop the downloads, or else.

Not long after I arrived at the Daily Journal in July, Sen. Harry Reid, D-Nevada, tried to attach an amendment to the higher education funding bill that would have created a top-25 list of the universities with the most illegal downloads. The amendment was quickly ditched under pressure from education lobbyists; opponents complained that this would be a “hit list” authored by entertainment industry trade groups like the MPAA and RIAA.

Now CNET reports that a Congressional committee is set to pass a 747-page bill this afternoon that’s quite a bit kinder to Hollywood, and it looks like it will pass over the universities' objections. Also blogged yesterday at NYT.

Under the bill now being debated, universities would have to make some moves towards tighter control over peer-to-peer networks. Schools would have to support initiatives to help reduce illegal downloading (p. 476), start working on an "alternative" system, and explore “technology-based deterrents.” (p. 412)

Speaking of technology-based deterrents, I reported a few weeks ago that U.S. District Judge Stephen Wilson is mulling over the installation of a copyright filter on the Morpheus software used by StreamCast Networks. (“Shifting the Digital Media Landscape,” Daily Journal 10/25/07) StreamCast is the last defendant in the MGM v. Grokster litigation; the others went out of business after losing at the Supreme Court. MGM Studios Inc. v. Grokster Ltd., 01-8541.

Andrew Bridges, the Winston & Strawn partner who was formerly a lawyer for StreamCast but has since moved on, compared Wilson’s order to the civil-rights busing cases—“The court has scheduled its intention to take over a business,” he said.

Perhaps what we're seeing today is similar copyright activism from another branch of government. In the upper house, Sen. Leahy has revived a bill beloved by the content industries, which would allow federal law enforcement to file civil lawsuits for copyright infringement.

With universities and FBI agents on your side, who needs IP lawyers?

Sovereign Immunity at Street Level

The Wall Street Journal's Peter Lattman had a great story yesterday about criticism of a recent decision by the nation’s top patent court that the University of California can’t be sued for patent infringement, even though UC regularly files patent lawsuits against others.

"Sovereign immunity came from the king not wanting to be sued by his subjects and it ended up in our jurisprudence," Susan King, a deputy attorney general in California who argued the case, told the WSJ. "It's not fair but it's the current state of the law."

A lower-profile Tuesday headline caught my eye that’s also about sovereign immunity, though less obviously.

Nevada Highway Patrol officer Joshua Corcran killed four people last year when he rear-ended their car while driving 113 mph—not on a call, just in a hurry to get home. Their families will get $50,000 each.

That's probably the most they can get, because Nevada is one of several states that impose limits on how much can be paid out to citizens who are hurt or killed by the government or its officers. Those damage caps also descend from the idea of "sovereign immunity."

The first time I heard the term was on the floor of the Nevada State Senate, where I covered the most recent legislative session for the Associated Press. Corcran’s bloody accident spurred the introduction of a modest proposal: Senate Bill No. 66, which proposed to raise Nevada’s damage caps on tort claims against government entities from $50,000 to $100,000—the first such increase since 1979.

The Las Vegas school district and just about every local Nevada government had opposed the bill, saying that raising the caps would bust their budgets. A Senator from rural Nevada asked the bill's sponsor, a Democrat, if he would consider keeping a lower cap for the rural counties. (It’s common practice in Nevada to pass laws that apply differently to less-populated counties--most famously, of course, the rural counties have legal prostitution)

“I considered that,” said Sen. Terry Care, a Las Vegas attorney. “I don’t know how life could be worth $100,000 in Clark County and life in Lincoln County could only be worth $50,000.”

Care's proposal passed and ultimately became law. The debate was an interesting example of an issue where an issue seemed to break down along certain professional, rather than party lines. The five Republican senators who broke ranks and supported the bill included two attorneys--neither they nor Sen. Care do personal injury work--and a former EMT, who pointed out that $50,000 doesn’t even pay for a typical hospital stay.

Lawyers get $7.5 million to call off Texas patent attack

LeapFrog's third quarter financial results, filed with the SEC Friday, reveal that the Emeryville company agreed to pay $7.5 million to get rid of a lawsuit brought by two local lawyers who style themselves "Tinkers & Chance."

It's a significant payday for Brian Marcus and Warren Heit, two Bay Area patent attorneys who claim they invented certain forms of child-computer interaction in 1995, and parachuted their California partnership into the Eastern District of Texas ten years later "specifically to enforce its intellectual property," filing a lawsuit the same day they moved.

How much of that will go to their legal team led by Haynes & Boone partner Phillip Philbin, I don't imagine I'll find out.

The check will come next year, but the educational toy company booked the payment immediately, tacking it on to the $2.8 million net loss it reported to investors last week.

LeapFrog notes in Friday's quarterly SEC filing that Tinkers & Chance made an earlier demand of $41 million plus interest and attorney's fees. While $7.5 million is a good deal less than that, and a mere 1.2 percent of the $625 million Heit suggested as a starting point in a 2004 letter, it doesn't buy much these days. Just a no-expenses-paid trip back to California, and the right not to be sued by Marcus and Heit until at least 2014.

I blogged yesterday about this story here, with documents, and the full story is in today's Daily Journal. ("Lawyer/Inventors Will Get $7.5 Million in LeapFrog Settlement", 11/13/07, subscription required)

A University Challenges Google

Saturday’s Boston Globe reports that Northeastern University is the latest plaintiff to sue Google for patent infringement. The University joined a small tech company, Jarg, which is owned by an associate professor, Kenneth P. Baclawski.

The idea of targeting Google with a lawsuit apparently came from a Boston-area law firm—Jarg president Michael Belanger refused to say which firm. Belanger also told the Globe that it took him 2 ½ years to find a firm that would take the case on a contingency basis.

The lawsuit was filed in the Eastern District of Texas, a popular venue with patent plaintiffs.

Northeastern University et al v. Google, Inc., 07-cv-00486-TJW.

Companies that make no products, but sue others for patent infringement, are often derided as “patent trolls” by their critics, who say this “license or lawsuit” approach amounts to a patent holdup, a tax on true innovation. But like beauty, trolldom is in the eye of the beholder, or the defendant, as the case may be. Often, the folks who call “troll” are connected to big companies, especially big tech companies, that are getting deluged by patent infringement lawsuits.

The phrase itself is controversial. While I have used it several times during my short time here on the IP beat, I’ve kept it in quotes (literally or figuratively), following the style of WSJ's Law Blog and letting others do the dirty work of directly applying this "popular pejorative phrase." 

Universities occupy a problematic middle ground in this debate. They typically don’t have products or services in the areas their patents cover, but still insist on getting paid by those who use their patented technologies, and few question their right to do so. Many critics who would lambaste a patent-holding company for suing in pro-plaintiff East Texas don’t have any problem with the University of California or MIT bringing a lawsuit in San Francisco or Boston.

LeapFrog dodges a Texas showdown

In today's Daily Journal: Emeryville-based LeapFrog reached a last-minute settlement Monday before facing a jury trial for patent infringement in Marshall, Texas, Judge T. John Ward, presiding. ("LeapFrog, Bay Area Lawyers Settle Patent Case," Daily Journal 11/9/07)

UPDATE: LeapFrog revealed the settlement terms: $7.5 million. Blogged here.

It’s no surprise that a Bay Area company would prefer not to roll the dice in front of a jury in the Eastern District of Texas, a famously pro-plaintiff district feared by defendants worldwide.

The plaintiffs in this case aren’t typical, though. They’re two Bay Area patent lawyers, Brian Marcus of Vierra Magen Marcus & DeNiro, and Warren Heit, a partner at White & Case.

Marcus and Heit, who declined interview requests, have acquired a group of patents that cover devices where children use blocks or other easy-to-handle objects to control computers. They’ve asserted those patents against at least four toy companies over the past several years. (Zowie Intertainment, Publications International, Small World Toys, and LeapFrog.)

Subscribers can read the full story in the newspaper. Here on the blog, I'll point out that this story brings up several issues I’ll continue to look at in the future:

Lawyers with "patents on the side"

At what point does a big firm lawyer’s own patents become a potential problem or conflict of interest? I’ve written a few articles about Scott Harris, the former Fish & Richardson partner now embroiled in a lawsuit with his former firm. (Patently-O has a good synopsis here). Whereas Harris tried to distance himself from his patents under pressure from his firm, Marcus and Heit actually got help from a White & Case colleague in one case. Publications International, Ltd. v. Tinkers & Chance, 05-cv-03256-MHP (ND Cal). 

Venue Reform and the Eastern District of Texas

Early in the litigation, LeapFrog lawyers said Tinkers & Chance’s last-minute Texification was a "sham," noting the case involved “two California lawyers suing a California business relating to an invention conceived in California and products developed in California.” LeapFrog still wasn’t able to escape. LeapFrog lead counsel Henry Bunsow said it's an "open question" whether the company's motion to transfer would be denied today, given new case law. 

At Patently-O, Dennis Crouch suggests ED Tex may soon be on the wane; the anonymous Patent Troll Tracker strongly disagrees.

The Cost of IP

How much did LeapFrog's last minute ticket out of Marshall, Texas cost? Publicly traded LeapFrog will make some disclosure about the settlement in the future. How much disclosure, and when, I don't know but would like to.

For now, it’s confidential. Bunsow told me it’s “far less” than the original request.

Good thing, since the suggested retail price of the Marcus-Heit patents was $25 million plus $600 million over the life of the patent. A discount was available "for a limited time." (see Heit’s letter below)

Marcus and Heit settled with New World Toys for $250k plus $100k annually, per this email.

Far less than $600 million could still be a lot more than that. SEC records show LeapFrog sold $502 million of product last year, and my cursory reading shows the struggling company has not seen any net profits for a couple years.

Documents

Tinkers & Chance v. LeapFrog Enterprises, Inc., 2:05-cv-00349-TJW-CE, (ED Tex).

Tinkers & Chance Fourth Amended Complaint
LeapFrog's Motion to transfer (denied by Judge Ward)
Tinkers & Chance marketing brochure
LeapFrog’s chart of Marcus and Heit's group of patents, with a common ancestor
Heit's letter to LeapFrog citing his patents' MSRP of more than $600 million (cropped to cut address)

Metaphor watch: 'Pirate' label survives Radiohead

As of last week, half a million users had downloaded Radiohead’s new album over the BitTorrent network, even though it was released as a “pay what you want” album that could be downloaded from the band's web site-- legitimately--for free.

I've noticed that some news outlets have continued to call unauthorized downloads of the new Radiohead album "stolen" or "pirated" even though the band clearly knew they were throwing at least some of their mp3's overboard, so to speak.

"Free? Steal it anyway," quipped Forbes, in a piece that exposed the "hard-core music pirates" who "chose to steal music they could legally download for any price."

Are these still the right terms to use? The copy editor within me (deep, deep within) wonders. Forbes seems to think there's no freebies allowed in capitalism. Like no crying in baseball.

Other news outlets pointed out that much of the "stealing" may have happened when Radiohead's web site was overwhelmed with traffic. It appears that other British musicians will follow Radiohead's lead, hard-core pirates notwithstanding.

A new project

This blog will feature notes and extras from my coverage of intellectual property and related topics at the San Francisco and Los Angeles Daily Journals.

The Daily Journal is California's leading legal affairs newspaper. It's published Monday through Friday and can be read online (by subscription) here.

On days when I have a story in the paper, I'll post about it on the blog (posts connected to print stories are categorized under "DJ Articles"), and will try to add something extra here. I'll also blog about various IP news and issues that catch my attention but don't make it into my stories.

Over time, I'll add notes on my some of my already published articles as well.

I'm new to blogging, and still fairly new to the IP beat, so comments, criticism, suggestions, and story tips are welcome. I look forward to joining the lively online conversation about IP legal issues.

Cheers
Joe Mullin