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High-Tech Companies Face Patent Pressure

A recent patent lawsuit against Apple's iPhone spotlights the legal plight of tech companies.

SAN FRANCISCO -- A patent-infringement suit against

Apple

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shows the dangers that tech companies face when rolling out products in today's thicket of intellectual property laws.

Last week, SP Technologies of St. Petersburg, Fla.,

filed a complaint against Apple alleging infringement on a patent that relates to the iPhone's touch-screen keyboard.

But SP filed its suit in the District Court of the Eastern Texas, where neither company is based or incorporated. Juries in this district have handed large awards to plaintiffs in patent cases, making it a popular place for plaintiffs to file complaints.

Also, SP Technologies doesn't manufacture anything with the intellectual property it holds. Instead, it uses its IP to bring suit against manufacturers. In the past, the company has litigated claims against

Nikon

and

Canon

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.

The complexity of their products and their use of prior innovations make tech companies vulnerable to claims of patent infringement from companies known derisively as "patent trolls."

Hewlett-Packard

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,

Cisco Systems

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and other household names from the tech sector say that existing laws make the problem worse by setting a low bar for finding willful infringement, offering outsized awards to plaintiffs and allowing them to "shop" their suits to courts seen as favorably disposed to their interests.

"High-tech manufacturers are being hit with multiple patent lawsuits from people all over the place," says Stuart Meyer, an intellectual property attorney and partner at Silicon Valley law firm Fenwick and West. "They're susceptible to patent-infringement claims related to hardware, software and manufacturing processes."

SP Technologies' complaint says that Apple infringed on a patent pertaining to the technology that lets users input data with a touch-screen keyboard. According to the compliant, SP Technologies warned Apple of its alleged infringement in a letter sent in February.

Apple did not return calls for comment, and SP Technologies could not be reached through its attorney, T. John Ward Jr.

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RIMM Shot

The poster child for the tech industry's legal woes is NTP, which won a $612.5 million settlement from BlackBerry maker

Research In Motion

(RIMM)

in March 2006.

NTP, a small company with no manufactured products, also sought to shut down RIM's network for BlackBerry's signature e-mail function.

Attorneys say that the threat of an injunction as in the case of RIM forces risk-averse companies to seek a settlement. Many also want to avoid having to pay a hefty damage award.

In cases where a judge or jury rules that a company willfully infringes on a patent claim, the plaintiff can ask for punitive damages that are three times the economic damages it claims to have suffered.

"The prospect of treble damages is so daunting that oftentimes companies will settle just to mitigate that risk," says David Isaac, director of government relations for H-P.

Cisco, H-P,

Microsoft

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and more than a dozen other companies have banded together to attempt to revamp patent laws. Chief legal counselors from these companies have testified before the Senate and House of Representatives.

The House and Senate judicial committees have recently approved the Patent Reform Act of 2007, introduced by Sen. Patrick J. Leahy (D., Vt.) and Rep. Howard Berman (D., Calif.).

The bill, which was backed by Republican senators and representatives, would reform the process for questioning the validity of patents. It also limits the chances for excessive damage awards and "forum shopping," which allows litigants to file complaints suit in courts where they think their chances for victory are highest.

"The explosion of litigation, the awarding of damages that are unrelated to the underlying patent, and forum shopping to get those awards have convinced Congress on a bipartisan basis that change is needed," says Mark Chandler, Cisco's chief legal counsel.

Chandler says that Cisco spends $3 million to $4 million for each lawsuit, and as much as $10 million if a case goes to court.

The possibilities for reform include a new method for assessing damages. Today, plaintiffs often calculate damages based on the total value of the product in which a patent is used, rather than on the value of the patent itself.

Another important change would be to revamp the process for reviewing patents. When defending against patent infringement claims, companies often dispute the validity of the patent at issue. This course of action often leads to costly litigation.

Earlier this year, the Supreme Court loosened the standard for "obviousness," which states that a patent is not valid if it covers a technical innovation that is sufficiently obvious to experts in a field.

Previously, defendants had to show documentation indicating that articles in technical journals or other documentation had proposed or alluded to the innovation.

This level of rigor is no longer necessary if defendants can show that experts in a field would have considered it obvious, for example, to combine two existing technical achievements.

The finding stemmed from a lawsuit in which an auto-parts maker disputed the validity of a patent on a car accelerator pedal that also adjusts to the driver's height. The company, KSR International, argued that the accelerator and adjustment feature were "ubiquitous" and joining them does not constitute an innovation that merits patent protection and royalty payments.

Fenwick and West's Meyer says that patent laws undergo periodic bouts of change as legislators and judges try to foster innovation through IP protection without stifling competition that makes technical achievements available and affordable to the general public.

"It's important to keep in mind that there is inherent volatility in what patent laws will cover," says Meyer. "Any laws enacted will eventually face a backlash that could set in motion another round of legislative and judicial review."