How Korean Industries Should Prepare for Patent Troll Attacks

• by MOON KIM

When Worlds.com filed a patent for its invention of a system and method for enabling users to interact in a virtual space (US patent 7,181,690), it might not have even conceived of 3D virtual Internet and on-line gaming. Recently, however, Worlds.com claimed to hold a patent dating back to 1995 that could apply to every 3-D online world currently in existence. In fact, Worlds.com has already initiated litigation against NCSoft claiming infringement on its patent.

Recently patent litigations became a big issue to large Korean consumer electronics companies and industries, and even the Korean government recognizes the importance of IP protection.

Patent rights protect an inventor's right to exclude others from exploiting the invention defined in the patent's claims, and patent statutes make clear that patents, like any other personal property, can be exchanged, purchased, sold, and licensed.

In 2008, more than 2,400 patent lawsuits were filed in the United States. The majority of these cases were filed by legitimate invention-owning and product-producing companies. Unfortunately, a growing share of Intellectual Property (IP) lawsuits are now being generated by patent trolls, non-patent practicing entities (NPEs) which purchase intellectual properties and patents for the sole purpose of licensing and asserting their patent rights.

Patent troll litigation has been growing rapidly in recent years due to the emergence of start-up venture finance. The current modus operandi of the patent troll is to purchase a patent, often from from bankrupt firms, academic institutions or individual inventors, and then sue another company by claiming that one of its products infringes on the patent. Patent trolls attempt to claim patent rights against purported infringers. Notably, what patent troll companies have in common is that they do not produce products relating to the inventions whose IP rights they own, and they neither own nor facilitate product manufacturing-related R&D.

Patent trolls operate much like well-known large R&D companies. Most well-known companies like IBM and GE manage their intellectual properties resourcefully by organizing, protecting and exploiting their patent portfolios, as do the patent trolls. However, a patent troll's focus is on generating revenue from existing applications. They monitor products for potential infringement of their technologies by paying very close attention to intellectual property intelligence: reviewing company product manuals, patent filings and business analysis. Patent trolls then wait until the competitor's product is on the market. They may begin issuing warnings to the competitor company. Patent trolls then may sue a small-sized company that lacks the financial capability to spend the large amounts of money necessary to defend itself in litigation. Patent trolls hope to receive a settlement quickly and then pursue other competitor companies in litigation or for licensing. Their end game is ultimately to go after large revenue-making companies like Samsung and LG, hoping to generate a huge windfall.

The average cost of mounting a defense against a patent infringement suit in the US in 2004 was approximately $1 million pre-trial, and $2 to $3 million for a complete defense, even if the defense was successful. Because the costs and risks are high for a small or medium-sized company to face full-fledged trial preparations, companies settle with patent trolls for hundreds of thousands of dollars, even though they believe the suit to be frivolous and the patent troll's IP not directly related to their product IP. By taking advantage of the lengthy trial process and enormous operational burdens that a small or medium-sized company faces for an uncertain trial outcome, patent trolls force many such companies into a quick settlement.

If this is the case, how can a company protect itself from patent trolls, and what best practices exist to strengthen a company's defenses?

Defensive measures should begin at the stage of IP management and engineering practices. Several well-known companies such as Microsoft and IBM have been engaging in defensive measures for many years and have established well-tuned IP management procedures. Their IP managers understand the competitive advantages gained by protecting the company's key products and technologies with a portfolio of patents. The IP Management process is an important foundation of their business practice, and engineering (R&D) usually constitutes the driving force behind this initiative.

IP management teams, which usually consist of technical professional leaders (such as IBM's Master Inventors) and legal professionals, initiate periodic reviews to examine a company's IP policies and the mechanics of IP generation, valuation and use of patents continuously. This effort, combined with an analysis of the company's patent portfolio and patent intelligence, allows an IP management team to identify the weakest area of company's IP portfolio, providing them with valuable information on how to quickly and efficiently fill gaps in the company's IP protection. Profitable patent licensing businesses also play an important role in IP management, bringing multiple billions of dollars of revenue to the company every year.

Often, the responsibility of managing a company's patent defense strategy lies with the company's IP department. For a well-managed company, however, the first line of IP defense comes from the company's technology developments, which often arise as a response to its competitors. These activities include:

• Creating a core technology and protecting it by filing broader IPs to surround it. The company understands its core business and understands how these core technology patents can better support the company's future business
• Creating strategic IPs: Although this may sound a bit futuristic, companies must know what will be important in their industries in 5 to 10 years. Companies must then create inventions and file IPs to protect their future business
• Alternate Design Approach: This approach entails inventing an alternative to a patented invention that does not infringe on the patent's claims. An intensive search provides ample prior art invention information which serves as an excellent resource for development engineers to use as a guide for developing an alternative that does not infringe the original patent
• Better Search capability: depending on the search capabilities of the prior art search, the quality of the search results may vary. It is important to imbed a quality search process in the patent reviewing and filing process to ensure that higher quality patents are filed with broader claims
• IP Intelligence: Companies (IP department and engineering) routinely monitor new patents and patent applications, most of which are published, to determine if any are relevant to their business activities. It is common practice for product and service R&D companies to circulate the results of their IP Intelligence to the appropriate top technical leaders. Defensive patents may be filed if the company discovers weaknesses in certain technology areas; alternatively, a company may purchase patents or patent rights from patent holders so that the intellectual property does not end up in the hands of a competing company
• IP Product Clearance Search: this is a standard business operation when a new product is introduced. The search will cover important features of a potential product, before the commercial product's introduction in the market place. This reduces the possibility that a company may subsequently face patent litigation by exhibiting that the company was diligent in making sure that it did not infringe any patents. Such a search might result in a clearance opinion, which is typically a written report identifying the relevant patents discovered during the search, in many cases discussing each independent claim and detailing why the product does not infringe. The search should be conducted extensively by the respective institution.

Although these defensive measures will place a company in good stead against an attack, sometimes these well-planned efforts may still prove insufficient to protect a company from patent troll attacks. Some patent trolls have very deep pockets and extensive resources at their disposal. Due to increasing patent troll activities, however, companies are organizing patent defense companies in order to counteract problems in the high-technology industry. Allied Security Trust (AST) is an example of a member-based patent holding company that will help protect its members from patent infringement lawsuits. The goal of AST is to identify and obtain key patents before they fall victim to the patent trolls. Another such company is the RPX Corporation. This company is also a member-based defense patent aggregation service that mitigates members' risks against litigation from patent trolls. They provide a variety of services to protect patent rights that directly impact members' businesses.

In conclusion, well-managed companies must have strong IP management processes in place in order to preemptively defend themselves from patent troll attacks. The first line of IP defense should begin at the stage of development and engineering processes. Such measures must be set in place at the earliest stages of technical development, where it is most effective. Once a company is hit with patent infringement litigation, irreparable damage will have been done to the business.