Companies Utilize Patent Lawsuits to Gain Advantage

By Heide B. Malhotra
Heide B. Malhotra
Heide B. Malhotra
August 2, 2010 Updated: August 2, 2010

Patent lawsuits have sprung up more frequently than ever before, especially among large corporations in lucrative industries such as high technology.

Patents are the mainstay of a company’s profitability, which takes a drastic dip when the patent expires, as competitors are ready to flood the market with products that mimic the formerly patented product.

Patent lawsuits are a way to keep competition out of a company’s territory. “Patent lawsuits distract competitors, drain capital and potentially derail product plans—all of which could be devastating to younger companies without adequate resources,” said R. Polk Wagner, a law professor at the University of Pennsylvania, in a Knowledge@Wharton (KW) article.

The life-cycle theory plays a prominent role in the patent lawsuit game. Established and mature companies use patent lawsuits to hold on to their market position. Also, companies who patented more recently developed products use patent lawsuits to gain market share and establish a competitive position.

“Mature companies that are no longer growing use patent litigation to increase their resources and cement their place in the competition,” suggests KW.

Eastman Kodak Co. filed a patent infringement complaint against Apple Inc. and Research In Motion Ltd. with the U.S. International Trade Commission (USITC) in January and concurrently against Apple in U.S. District Court for the Western District of New York, accusing the companies of patent infringement.

Kodak is a mature company that is experiencing a decline in profit. The company reported an 11 percent sales revenue loss from $1.8 billion to $1.6 billion in the second quarter of 2009.

Playing the Patent Lawsuit Game
Medium- and small-sized companies don’t have the resources to file a countersuit when attacked for patent infringement by a global company. A lawsuit could run into thousands if not millions of dollars. “For a smaller player, the cost of litigation is significant,” said Andrea Matwyshyn, a legal studies professor at the University of Pennsylvania, in the KW article.

“Litigation is a strategy established players use in addition to, and in place of, a product-focused market attack,” Matwyshyn said

Apple Inc. filed a lawsuit against High Tech Computer Corp. (HTC), a Taiwan-based manufacturer of smartphones, for patent infringement. Apple accused HTC of stealing inventions from 20 patents. The lawsuit was filed with the U.S. District Court in Delaware and the USITC.

“We can sit by and watch competitors steal our patented inventions, or we can do something about it. We’ve decided to do something about it,” Apple CEO Steve Jobs said in a March statement.

But experts believe that Apple is going after HTC because it is a relatively small company (in existence for about 13 years) that is in no position to hit back with a countersuit. Experts believe that the patent lawsuit strategy is playing into Apple’s hands, as HTC has scaled back its efforts to break into the iPhone market.

Wagner said in the KW article, “The one advantage of suing HTC is that the company doesn’t have a big patent portfolio to strike back with. … Apple is looking to take out a young upstart that can push the envelope and be more of a threat. In addition, the lawsuit is a [warning] to Google.”

The Lanier Law Firm filed a lawsuit for patent infringement on behalf of InNova Patent Licensing LLC in the U.S. District Court for the Eastern District of Texas in Marshall. This court is recognized as one of the most active courts in pursuit of patent infringement.

InNova named 36 global corporate defendants from different industrial sectors in its lawsuit, including AOL Inc., Apple Inc., Bank of America Inc., Dell Inc., J. C. Penney Co. Inc., Rent-A-Center Inc., Google Inc., Dr. Pepper Snapple Group Inc., and Frito-Lay Inc.

The patent infringement suit revolves around technology that recognizes the difference between a regular, legitimate e-mail and “spam.”

“Email as we know it would essentially stop working if it weren’t for InNova’s invention. … Unfortunately, the defendants appear to be profiting from this invention without any consideration for InNova’s legal patent rights,” said Christopher Banys, patent-infringement attorney at the Lanier Law Firm, in a July press release.

Patent Lawsuits Backlash
“Excessive vigilance over patents can come at a cost,” KW suggests.

The objective of a patent lawsuit is to retain market share and improve one’s financial position. The downside is court costs and attorney fees, which could run into millions, funds that could be used for future innovations.

Patent litigation is not the all-out panacea and absolutely should not be used as a permanent tool against competitors.

Have patents outlived their usefulness? This is a question asked by patent-infringement experts from different industries.

“Others note that the patent system itself needs an overhaul, and that too many companies are obtaining patents without the proper level of scrutiny,” states the KW article.

Experts claim that a number of patent submissions are not worth the paper they are written on. The U.S. Patent and Trademark Office (USPTO) has thousands of patent applications to be processed and, just as other government entities, is understaffed and lacking adequate resources to review applications.

There are not enough experts at USPTO who can differentiate between what is truly patentable and a product that has been built on or borrowed from existing technologies.

The call for patent reform is out. It just has not been strong enough to effect changes. There are those who even try to patent processes that have been around for ages through packaging them in ways that don’t pose questions.

“It’s hard to see how the current climate of lawsuits promotes innovation in any way commensurate with the massive direct and indirect costs. Patents exist to promote inventions, not to create new techniques to freeze the competition,” said Kevin Werbach, a legal studies professor at the University of Pennsylvania, in the KW article.