Wednesday Feb 06, 2008

The best offense...is a good defense.

I recently shared dinner with a few other GCs of local technology companies. It was a nice evening in which we were able to relax and share insights (and commiserate) about topics of common interest. During the course of our meal while we were discussing rising legal costs, one of my table mates made a statement that I found somewhat bothersome. He said that when faced with patent "troll" litigation, he knows he is going to pay something to get rid of the lawsuit and so he economizes on the use of defense counsel. After all, the thinking goes, if your intent is to settle a case, why spend money on a strong defense?

His view is completely contrary to how we think about this problem at Sun. It's also symptomatic of the way many companies view this issue as a quarterly "cost of doing business" without considering the long term consequences of settlement both for individual companies and our industry.

Before going further, let me state that we respect the intellectual rights of third parties. When a third party claim has been clear and the terms reasonable, we have entered into licenses. However, those situations are easily distinguished from the cases that make up almost all of our present docket of patent litigation. These lawsuits have usually been filed with no advance notice, by plaintiffs that don't commercialize their patents (i.e. create and sell products) and in venues considered favorable to them. It's also almost always the case that these plaintiffs have done little or no investigation to ascertain whether our products infringe prior to filing their lawsuit.

Let me provide an example. Last year, I described a patent litigation brought against Sun by a company named Exponential Solutions LLC. I use the term "company" in the broadest sense as Exponential Solutions does not appear to make any products or offer any services. It is purely a patent holding company consisting of two individuals: Raymond Ratcliff (inventor) and Frank Benevento (investor and decision maker for Exponential).

Exponential filed its complaint against Sun in the Southern District of Florida. The case alleged that the Sun Grid service infringed two patents: 6,996,548 ("Method and apparatus for providing a reward for the use of a processor in a parallel processing environment") and 7,127,437 ("Method and apparatus for receiving a reward for use of a processor in a parallel processing environment"). These patents describe the use of distributed computing and payment to people for use of their home computers connected to a network.

The first we were aware of this suit was after it had been filed. Several months later, we had our first real communication with Exponential when they proposed that Sun pay them an amount with many, many zeros or a large ongoing royalty on our products and services. We declined. While it would have been easy to make the safe decision and pay a license fee to avoid the cost of litigation, we chose to invest in defending ourselves. Invest not just in showing that we did not infringe - we were confident that we did not - but also in identifying prior art to demonstrate that these patents should be invalidated. Our investment yielded results.

Specifically, we found a great deal of prior art that appeared to anticipate Exponential's patents including, a book co-edited by Exponential's own technical expert. More interestingly, we found evidence that suggested another piece of prior art relating to the SETI@home project had been known by Exponential's attorneys, but not produced to the U.S. Patent and Trademark Office when the application was made. In November 2007, the court allowed us to amend our complaint to include an inequitable conduct claim based on these facts.

We had further success when, in December 2007, the court entered a Markman ruling supporting Sun's view that key claims in the patents should be construed narrowly. We were also successful in getting the Court to order Exponential's expert to testify and produce documents that we believed would support our view that the patents were invalid. The court went even further and ordered that all communications between the expert and plaintiff's attorneys be produced. Perhaps, it was the combination of these events that made Exponential begin to rethink the merits of its case.

As we headed for a February trial date, Exponential's demands got smaller and smaller until, ultimately, they agreed to a dismissal with prejudice - meaning they can't bring the case against Sun again,or against our customers, partners and vendors. And, Sun didn't pay a dime in settlement. In fact, the biggest impediment to a final settlement was not our unwillingness to pay, but rather our demand that terms of the settlement NOT be confidential. Why? Because as much as companies would like to have our legislators solve this problem, we also need to consider what we can do. This includes not only investing in a defense when facing these types of plaintiffs, but also by openly sharing information about these cases.

I encourage other in-house legal departments to do the same.

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