Ladies and gentlemen, your attention please!

Good news! After 3.5 years of legal battles with patent trolls we have finally won a resounding victory! This was our first patent litigation battle in the US and we won! // Well, we needed to make up somehow for Russia’s poor display at Euro 2012 :)

Here’s a recap.

Four years ago the patent trolls suddenly came on the scene trying to prove that we were using technology that had been patented by somebody else.

Because we were expecting this sort of thing, and knew all about patent trolls – albeit in theory – our very own patent department had for a number of years been quietly working away preparing our patent firepower in readiness for a showdown with all types of various patent trolls and black hats.

And then this story began, in the United States District Court for the Eastern District of Texas. By the look of things, the situation was only going to get worse for us, but we had absolutely no intention of just giving in. Even if we lost, we were going to go down fighting and make it as brutal and bloody as possible for them.

And just a few days ago came the final denouncement.

The Court for the Eastern District of Texas announced its verdict in the case brought by IPAT and completely dismissed all the charges against us. What’s more, it did so WITH PREJUDICE, i.e. IPAT can’t bring any more claims regarding those patents!

But this is not just some ordinary legal victory.

For a start, an IT company beat a US patent troll on its home turf, playing by the rules. Secondly, we were the only company out of a total of 35 that didn’t cave in to the trolls and fought them every inch of the way. Third, we won a court case against a very powerful multilevel troll system that has successfully bullied lots of the “big guys” for a number of years now. Basically, we sent out a strong message that you can and must fight the patent trolls. Any out-of-court settlement is just going to make them greedier, encourage them to initiate new lawsuits and generally have a negative effect on the development of the IT industry.

And now for everything in chronological order.

In 2008-2009 trolls from IPAT filed two claims against us and 34 other companies, accusing of infringing two patents (this one, and this one). You see, there’s this national sport business in the US that’s based on the peculiarities of the country’s patent system. You can patent creations that are not yet ready, or even patent an idea in its broadest sense – it doesn’t matter if you actually go ahead and implement it or not. In the 1990s these “peculiarities” resulted in a significant number of patents being granted for various “technologies” that were formulated in such a way as to cover virtually any kind of innovation. For example, there was the case of emoticons, upgrading characters in online games, automated completion of web forms, activating products with an activation code, online purchases in 1-click…. Indeed, there are lots of other interesting stories around. Indeed, there are lots of other interesting stories around. It’s just as well nobody patented the Internet. Although you never know – it’s probably just a case of finding a defendant :)

In other words, nature abhors a vacuum.

Numerous parasites trolls came out of the woodwork as soon as they scented the potential for making money. Lots of money. In fact, very big, safe and easy money. Take the example of one of the most active patent trolls that goes by the respectable name of Acacia Research Corporation. In Q1 2012 it reported earnings of $99 million, of which $50 million was pure profit. RPX, a company related to our “old friend” IPAT, reported revenues of $44 million for the same period and $8.6 million in profit. Many patent trolls even successfully trade their shares on stack exchanges. Not bad, eh? Forget arms dealing, drug trafficking and cybercrime! Everything here is legal, squeaky clean, with an air of respectability! Our estimates put the overall volume of assets on this “market” at tens of billions of dollars, and it’s still growing. In 2011 the number of patent litigations rose by almost 100% compared to 2010, and in a period of 5 years the licensing contributions to the trolls have increased a staggering 650 times!

Growth in the number of patent litigations involving NPEs

It wouldn’t be so bad if that money went to the developers and creators and they defended the interests of genuine software vendors. However, trolls can be classed as an NPE (Non Practicing Entity), which don’t actually produce anything, do not risk anything and own nothing except patents. They also enjoy a level of lobbying support in the corridors of power. As a result, it’s difficult to fight them – you can’t hit them with counterclaims that they have no products and no patents are being infringed. This last point, by the way, is key to the patent equilibrium that exists between high-tech companies. Generally speaking: just try filing some empty claim against your neighbor and you’ll immediately be slapped with a counterclaim.

How the patent trolls work is a completely different story that warrants an entire saga along the lines of The Godfather. Yes, namely in this style, because if you scrape away the respectable veneer, you’ll find the troll system is no better than the rotten racketeering practice.

How does the patent troll system work?

The software patent trolls have evolved over 20 years. It’s no longer a small office somewhere dealing with minor issues, but a multi-tiered, well-thought-out scheme. It goes without saying that the main asset here is patents. Unlike us and other companies rightfully applying for patents, the trolls mainly convince the owners of existing patents to sue, buy them up and, as much as their intelligence allows, obtain questionable patents of their own. They carefully study the patents, make up a list of potential victims, assess their chances, work out their position and set the wheels of litigation in motion.

This is where it starts getting interesting.

There are “militant” trolls and then there are troll aggregators. The former file lawsuits, fight it out in court, have no problem with blatant extortion, insinuations, attacks on the defendant’s partners and so on. The latter group – the aggregators – is like the “good cop” that positions itself as defending against the first type. You get the picture. When the slipknot around the neck of the unlucky victim starts to tighten, the aggregators appear on the scene offering the chance to join their patent pool for a much more reasonable sum than the aggressive patent trolls are after. It just so happens that the aggregator has a licensing agreement with the bad militant trolls for that very same patent. As far as we know, the annual “licensing rates” for the use of the patent pool can range from tens of thousands of dollars to several million. The biggest figure that we know of is $7 million. It could well be higher.

I said to our lawyers back then in 2008 that there would be no backing down – go to court and fight it out with them, to the very last bullet…their bullet :) It was our first experience of a patent shootout and we decided to stand our ground, stand up for our rights.

At the end of the day, all’s well that ends well, even if it did cost us 3.5 years of work and $2.5 million plus lots of other resources. But we are now battle-hardened, so to speak, and we’ve sent a very clear signal to the patent trolls for the future. By the way, this is not the end of the matter – we’re mulling over the idea of striking back at the trolls. But anyway, I won’t bore you with the details or give away any of our strategic secrets.

We find ourselves in an interesting position. Basically, it wasn’t so much a fight with the patent trolls as a fight with the US patent system as a whole. Yes, officially it is supposed to defend and encourage innovation, but at the same time it turns a blind eye to the activities of patent trolls! By extorting tens of billions of dollars from high-tech companies each year, the patent trolls are effectively sucking money out of innovative research!

The US patent system has a very serious bug. If the troll business continues to evolve at the current rate, then instead of stimulating innovation it will actually act as a brake on technological progress.

To be honest, the software companies themselves are also to blame.

I can understand small companies, but why do the big boys like Microsoft and Apple settle out of court with the patent trolls? How are they any different from other blackmailers, the kinds who’ll latch on to you forever once they sense the slightest weakness? And they do so with impunity, even expanding their “business”! Why not take on the patent trolls and make their business unviable? In the long term this approach would kill off the trolls altogether – their litigations would become too expensive, drawn out with unpredictable outcomes. This would be especially true if you gradually chip away at them with counterclaims of patent invalidity and allegations of them applying pressure and resorting to extortion.

Instead, our dear industry colleagues do the opposite and settle out of court with the patent trolls. And here I’m specifically talking to the guys from the other 34 defendant companies – including Symantec, McAfee, F-Secure, Sophos, ESET, CheckPoint, and AVG – that signed up to the RPX patent portfolio!

Basically, don’t feed the troll … and save technological progress!