Why the mobile patent wars got so hotSeptember 13, 2011: 2:57 PM ET
Intellectual property law sounds like fodder for think tanks and PhD candidates — so why is Silicon Valley suddenly tearing itself apart over a seemingly sleepy subject?
By Daniel Roberts, reporter
FORTUNE -- If you feel like you've been seeing more news about patents than ever before, you have. In July, a consortium that included Apple, RIM and Microsoft made a move on Nortel's patent portfolio, outflanking Google. In August, Google hit back by proposing to acquire Motorola Mobility in a $12.5 billion deal, largely for its massive cache of patents. HTC and Apple continue to spar in court over patent infringements. And now, Kodak and InterDigital are being eyed for their intellectual assets. Patent lawsuits in the U.S. rose to 2,833 in 2010, up nearly 25% from a decade earlier, according to IP litigation research firm Lex Machina. The 2011 total will almost certainly be higher.
What exactly is going on? How did a seemingly sleepy subject like patents suddenly become an active fault line in American business?
Tech companies have long sparred over patents. Major players like Microsoft (MSFT) and Apple (AAPL) have known the value of a hefty portfolio for years. And, at first blush, Google's (GOOG) move to take over Motorola (MMI) is in line with decades of defensive business strategy. What's changed, in part, is the speed and intensity with which firms feel they have to make such moves. "Patents were meant to encourage innovation, but lately they are being used as a weapon to stop it," blogged Google chief legal officer David Drummond less than two weeks before the company announced its Motorola deal.
Patent suits between competitors -- often distracting and costly skirmishes -- are suddenly much more likely, according to Dennis Crouch, a professor of patent law at the University of Missouri. "The right to shut down or limit the operation of a competitor is especially valuable when parties are competing over platforms," he says. "The result of a successful patent lawsuit is still typically an injunction to stop ongoing infringement." That can mean pulling products from store shelves and hurting fledgling digital marketplaces.
It is also very easy to file such lawsuits and countersuits because there isn't any lag-time between acquiring a patent and wielding it as a legal weapon. A company being sued by a patent holder today can buy a set of patents tomorrow that allows them to counter sue immediately. "This aspect really does make it a game," says Crouch. "The whole idea in the smart phone business now is to puff yourself up in a way that wards off lawsuits."
Complicating the mix are NPEs, or non-practicing entities -- dubbed "patent trolls" by many for the way they seek out valuable patents and buy them, often without intention of using them to innovate. Nathan Myhrvold's firm Intellectual Ventures, which has an arsenal of 35,000 patents that it uses mostly to extract licensing royalties from big companies, is one of the most prominent in the field. He defends the practice, saying, "If people who are good inventors aren't necessarily good businessmen or marketers of their product, they still deserve to be paid for their invention."
Experts say that lawsuits from NPEs are now almost always settled with a licensing royalty before they even get to court. Big companies resent them but have nonetheless come to view the fees like a tax. It's litigation from competitors that can really bring down a business thanks to damaging injunctions. Such is the case with Apple, which recently won a major injunction that should bar HTC from conducting much of its business in the U.S. HTC, meanwhile, has filed a number of lawsuits against Apple using patents purchased from Google. (Google has taken some heat for standing idly by while its Android partners suffer a barrage of lawsuits.)
There may be a way out of this legal morass. Once firms perceive that no one has any short-term patent advantage anymore, competitors may just cross-license intellectual property with each other. After all, Silicon Valley has as long a history of cooperation on technical standards and technology-sharing consortiums as it does rancorous lawsuits. "They absolutely are talking and are going to talk," says professor Crouch. "This communication is going on. So I'm hopeful on some settlement of the patent front."
The only problem: it is unlikely the NPEs will be willing to play along. No matter how the biggest firms resolve their differences, lawsuits from NPEs will likely continue. "All that's new here is that companies like Apple, Microsoft and Google, who had never been part of the wireless game before, are treating patents like an essential business tool," says Myhrvold. As he says, this may not exactly be a new war, but the same war with new players and tactics. "And I don't see any reason for it to ever stop."
[Check back at Fortune.com on Thursday for an extended interview with Myhrvold.]