Tech Firms Wield Big Stick of Litigation to Protect Patents ... and Rake in Bucks

It's common practice for large technology companies to develop a Fort Knox-sized roster of patents and trademarks, spending millions in the process. So it drives them crazy when another company swoops in and steals business using what appears to be its patented technology.

The answer? Bring in the lawyers.

Tech stalwarts such as Compaq (CPQ), Texas Instruments (TXN) and Lucent (LU) are increasingly resorting to intellectual property litigation to not only protect their investments but also to actually generate revenue, mainly through the licensing agreements the suits spur. The suits have the added benefit for the plaintiffs of eating up the time and money of smaller competitors.

"Corporate law firms are screaming into this area like hyenas going after a carcass," says Ronald Coolley, an intellectual property lawyer in the Chicago office of Arnold White and Durkee.

While the U.S. Patent and Trademark Office doesn't track the number of cases filed, Coolley estimates that they have more than doubled in the last five years.

This whole process even has a name: It's called "patent mining," says Jim Pooley, a patent attorney with Gray Cary Ware and Freidenrich of Palo Alto, Calif. "It's actually quite an effective system," he says. "Patent miners respond that they don't intend to gouge, just take a very modest royalty."

In one of the latest examples, Apple (AAPL) last month filed suit against soon-to-be-public PC maker eMachines, seeking an injunction to stop the company from selling its eOne PC, which bears a bit of a resemblance to Apple's 1-year-old iMac. eMachines is jointly owned by South Korea's TriGem and Korea Data Systems.

Compaq is also suing eMachines, which operates out of Irvine, Calif., on 13 counts of patent infringement. "What's the point of innovating if eMachines is just going to take our ideas?" says Keith Rutherford, a Compaq senior intellectual property attorney. "It gives them an unfair advantage."

Rutherford notes that Compaq has 7,500 patents worldwide, and it plans to enforce them. eMachines is in a quiet period before its IPO, so it declined to comment.

Compaq knows this territory well. It sued Packard Bell in a bitter case of patent infringement in the mid-1990s. A court in 1996 decided that Packard Bell, an NEC (NIPNY) subsidiary, would have to pay an undisclosed amount in licensing fees to Compaq through 2001.

Texas Instruments this summer signed a 10-year cross-licensing agreement with Hyundai, under which it expects to receive royalty payments of more than $1 billion. In the fine print of the press release, however, you'll find the real reason for the "agreement" -- TI filed a number of patent infringement cases against Hyundai in May 1998 and the cross-licensing agreement settles these suits. "We license, but we don't give away," says a TI spokeswoman.

So, much like technology companies used to expect a return on investment of 7 times their R&D expenses per project, they now are using litigation as another way of generating similar returns, says John Allcock, who also works at Gray Cary Ware.

Other tech titans are scrambling to dust off old patents stored in the bowels of their R&D labs to force competitors to pay licensing fees, or simply to put a young upstart on the defensive. Foreign companies, says Allcock, are especially intimidated by the U.S. legal process.

Take Canada's Newbridge Networks (NN), which is the defendant in a multiple patent litigation suit with Lucent. The case has been going on for almost three years, and the cost has reached nearly $2 million per party, says Coolley, who's representing Newbridge. Next month, it's scheduled to go to trial. Lucent isn't commenting on the case. Spokesman Jeff Baum declines to say how much Lucent is seeking from Newbridge, nor will he say how much the company derives from licensing revenue each year from intellectual property litigation.

But it looks like Lucent wins either way. It could wrangle fees out of Newbridge as part of a settlement. Even if it fails to do that, Newbridge could think twice before entering Lucent's rather large swath of patented terrain. Due to the case's large costs, "what Lucent has been using as a twig against us as a weapon has turned into a club," says Coolley.

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