By Roy Strom
If the average American has ever heard of a "patent troll," there is a good chance he or she doesn't know what it is.
The problem may be big, but it's not necessarily in your face — even for most lawyers.
A lawsuit winding through Chicago's federal court system could change that.
Troll lawsuits demand a fee from big companies for a product that the troll — or whoever is filing a lawsuit — does not make. Instead, it claims the privilege to make the product by owning patents.
Law professors have written hundreds, if not thousands, of papers on patent trolls. And lawmakers have intermittently, if unsuccessfully, tried to tame them.
But the average consumer's apathy can be explained in part because intellectual property issues are hard to understand. The fact that companies, not individuals, are being sued plays a role as well.
Patent trolls also remain abstract to the public because of how they impact bank accounts: A big company gets sued for patent infringement. It fights and loses or it settles the case. The big company then raises prices on its products.
And finally, American consumers pay a fraction more each time they open their wallet at Best Buy or make a purchase on Amazon.
This dynamic, and the legal fees that accompany it, directly cost American businesses $29 billion in 2011, according to one study by two Boston University professors.
The lawsuit in Chicago — which could do more than put that number into context for the average American — implies that possibly every household with a Wi-Fi connection is, in essence, a thief.
If the patent troll, or more politely, the nonpracticing entity (NPE), that brought the case — Innovatio IP Ventures LLC — decided to send those Wi-Fi users a letter like the one it sent to 8,000 to 12,000 businesses demanding roughly $2,500 to keep surfing the Web, patent trolls would be thrown into the public consciousness.
To be sure, Innovatio's lawyer, Matt McAndrews of Niro Haller & Niro, said it does not intend to do that. He said there is "widespread infringement" of Innovatio's patents that possibly extends to anyone using a cellphone, tablet or computer that connects to a Wi-Fi network. But he added that he does not intend to pursue "individual use."
Still, the accusation exists that at least 60 percent of American households could be patent infringers — that's how many homes use Wi-Fi, according to a 2012 survey by Strategy Analytics.
And that number doesn't even take into account all of the Wi-Fi-enabled cellphones, tablets and computers in this country.
The breadth of the lawsuit and the fact that it targets users of Wi-Fi who would be better off paying Innovatio's demand as opposed to spending magnitudes more to fight it has caused a negative reaction to the case and to Innovatio's tactics.
But the case is notable for more than that.
It highlights a slew of misunderstandings and simplifications that surround the patent troll — or NPE — debate, according to Michael Risch, an associate professor at Villanova University School of Law and a University of Chicago Law School alumnus.
"What's being missed is that we're focusing on the owners of the patents rather than on the activities of the patent owners," he said. "The question is why would the behavior of a nonpracticing entity be better if it was a company doing it instead?"
As the Innovatio case makes clear, in the convoluted and nontransparent world of patent litigation, it can be hard to tell the difference between a big company and a patent troll — and the lines may only continue to blur if cases like Innovatio's become more common.
The Innovatio team
The particular case — In re Innovatio IP Ventures, LLC, No. 11-cv-09308 — is a consolidated lawsuit currently before Chief Judge James F. Holderman that includes Cisco Systems Inc., Motorola Solutions and other companies that make routers or other equipment to set up what are known as wireless LANs, or local area networks.
The case began when Innovatio sent 8,000 letters — Cisco lawyers put the number around 12,000 — to businesses that provide Wi-Fi hotspots to consumers or put it to use for their own employees, court documents show.
Citing likely infringement of at least some of 31 patents it owns and says are crucial to Wi-Fi technology, Innovatio asked for $2,500 or slightly more from individual locations of Starbucks, Caribou Coffee, Home Depot, various hotel chains, Dominick's supermarkets and Panera Bread Co.
The price would be discounted if they struck a deal with Innovatio within 30 days, one letter says.
Patent law allows the user of an infringing product to be sued. Innovatio did that by targeting the end users of Wi-Fi products — like wireless routers — made by Cisco, Motorola and others.
To protect their customers from those lawsuits and themselves from possible indemnity claims (i.e. Cisco and others being asked to pay for selling the alleged infringing products), Cisco, Motorola and the others filed a counterclaim against Innovatio.
Innovatio's lawyer, Matt McAndrews of Niro Haller & Niro.
Photos by Ben Speckmann.
McAndrews of Niro Haller & Niro — a firm where senior partner Raymond P. Niro holds the title "the original patent troll" — decided who should receive some of Innovatio's letters, wrote some of them and sent some.
Niro Haller & Niro is one of the best known contingency fee patent law firms in the country. It represented the most plaintiffs among all law firms last year — 100, almost double its closest competitor, according to Corporate Counsel Magazine.
Joining Niro Haller & Niro in this case is another familiar name in Chicago patent litigation — McAndrews Held & Malloy, a firm that gets its first name from Matt McAndrews' father, founding partner George P. McAndrews.
Matt McAndrews left his family firm about 10 years ago to work at Niro Haller & Niro with his high school classmate and longtime friend, Raymond P. Niro Jr., who also represents Innovatio.
"Trading time for an hourly wage is great. I mean, my former partners (at McAndrews Held & Malloy) make a wonderful living. Certainly at my young level at the time, I made a good living (there)," McAndrews said.
"But I wanted to explore the other possibility, of really leveraging and seeing if taking a substantial and immediate stake in the outcome of the matters on which I was working made sense for me."
He said it does. Moving his office three blocks east across the Chicago River and trading a billable hour for a contingent fee practice clicked with the former technology salesman's personality.
But contingent fee lawyers who represent NPEs sometimes get a bad name — see, "patent troll."
To counter the argument that litigation such as the Innovatio case is akin to a corporate shakedown, McAndrews and Ray Niro Sr. said 90 percent of the NPEs they represent are owned by inventors, created by inventors or set up so the inventors get a portion of the recoveries. They said the work they do helps keep the country's innovative spirit alive.
"What's so bad about that?" Niro said. "A judge says, 'Well, you're an NPE.' No. I'm an American inventor."
Despite some recent developments making life more difficult for NPEs — including a tougher threshold for them to levy a sales ban on a company that makes products — McAndrews said it's a profitable business.
"We adjust our sails," he said. "And we try to stay ahead of those trends."
Adjusting sails has to do with what McAndrews calls the "metrics" — a kind of risk/reward calculation he applies to each case.
Sometimes, he said, there is one patent being infringed on by one company. That patent needs to be important and the infringement needs to be large for a case like that to make money. For example, consider a company that had stolen a new invention and made billions off of it. Suing that company would make sense because McAndrews and the patent owner could try to recover those billions.
Innovatio lies at the far opposite end of that type of case, McAndrews said. It is a case where multiple patents are being infringed by near-countless infringers.
"In terms of the metrics, frequently but not necessarily, those add up simply because you've got a potential claim against, if not an (entire) industry, dozens, hundreds, sometimes thousands of infringers," he said.
McAndrews said he enjoys the work he does structuring deals where his firm often rakes in close to 40 percent of the proceeds. The risk-taker inside of him — "My sales personality," he said — was always drawn to the concept.
"In our view, it's a calculated risk," he said. "Because we're good at what we do. And if you're good at what you do, it's otherwise a sound model and you perform well, you should … reap the benefits of the leverage."
That may explain why prior to the Innovatio litigation, McAndrews and his family firm — which its Chairman Emeritus George P. McAndrews said is not necessarily designed to operate in a leveraged fashion — had never partnered on a piece of contingent litigation.
Innovatio's licensing campaign created an opportunity to do that for the first time. It worked out for at least two reasons, McAndrews said.
First, the litigation is so big — at least three Fortune 500 companies are now actively involved in the case — that it requires "not just a lot of horsepower, but talented horsepower."
The second reason McAndrews Held & Malloy is involved is also the aspect of this case that begins to blur the line between seeing Innovatio as another large, aggressive NPE and something possibly much different.
Rather than a garage, basement or other stereotypical home for a patent troll, Innovatio owes its existence to Broadcom Corp., an international computer chip maker that took in $8 billion in revenue in 2012. The 31 patents Innovatio owns all came from the giant tech company.
McAndrews Held & Malloy had long represented Broadcom — even appearing as the legal counsel on some of the patents the company filed years ago and are now owned by Innovatio. The firm had "intimate familiarity" with what is now Innovatio's patent portfolio, McAndrews said.
Another member of the Innovatio team shared that familiarity.
Noel Whitley, who McAndrews interchangeably refers to as Innovatio, was the former vice president of intellectual property at Broadcom. He was not available for an interview. Broadcom did not return phone calls requesting comment.
Whitley received all of Innovatio's patents on Feb. 28, 2011, two weeks after he formed the company, according to court documents.
Later, on March 8, Innovatio, using the Niro firm, filed its first lawsuit in the Northern District of Illinois. It asserted 14 of its patents against 10 defendants.
Innovatio does not line up well with the 90 percent of NPEs that Niro Haller & Niro said it represents, clients where inventors directly share in the recovery. Whitley and the Niro firm — neither of which invented Wi-Fi — appear to be the main beneficiaries, although the details of which is something they won't explain.
Broadcom "sold the patents" to Whitley, McAndrews said, and there is no money going back to Broadcom based on the results of Innovatio's litigation.
"I can also tell you that, absolutely, Broadcom is not using Innovatio as a front man here," he said.
It is also true, though, that "we don't have an inventor front-and-center any more than Broadcom did," he said.
But why did Broadcom sell the patents instead of forging its own licensing campaign? If it really is owed close to $2,500 from a near countless number of Wi-Fi users, how would it explain its decision to forego collecting that money to its shareholders? How much money could that have left on the table? Again, Broadcom did not return phone calls requesting comment.
Offering a general explanation, Ray Niro said this can be done because patents are a constitutionally protected piece of property that can be bought, sold and traded just like a piece of land. It is often the case, he said, that large companies sell patents to NPEs as a way to make money from them.
"I don't see anything wrong with that either," he said.
Jonathan Masur, a professor at University of Chicago Law School, does see a problem with it.
"It is fairly new and it's quite troubling," Masur said.
Putting patents in the hands of litigious entities that don't fear the public backlash their lawsuits create could lead to a kind of mutually assured destruction, he said.
"When Broadcom does this — when they transfer their (patents) to Innovatio — Cisco and Motorola are not stupid. They know these are Broadcom's patents," he said.
"They could turn right around and do the same thing. … You would think the Ciscos of the world would find ways to dissuade this from happening."
Allegations of fraud
Cisco, Motorola and NetGear attempted to do just that.
They sued Innovatio, accusing its first lawsuits of being "shams" — a long-standing legal term that the Supreme Court has even spent time considering.
Innovatio sued the customers of those companies' Wi-Fi products, such as Internet routers. Upon receiving Innovatio's letters warning them of their infringement, Mark Chandler, Cisco's general counsel, said many customers called his company.
Some told him they were on the verge of settling. Others asked Cisco if it planned to defend its product. Still more sought indemnity — basically insurance — against Cisco's allegedly infringing products, he said.
"And we explain to them, and I think it's the first time they've heard it, that Cisco's actually litigating this issue about whether our products infringe," Chandler said.
If the customers care to get into the details, Chandler would also explain that Cisco is litigating a lot more than the issue of infringement.
And in this case, it turns out, the details matter.
Cisco also argued Innovatio's lawsuits — and, importantly, the letters it sent — contained a series of "misrepresentations or omissions." Those led Cisco and the others to file charges of racketeering, unfair competition, civil conspiracy, intentional interference with prospective economic advantage and unclean hands.
"We don't think Innovatio's activity is any different than someone who sends letters to someone who says, 'You will not be able to collect your Social Security benefits unless you sign up with our service — and then we'll make sure you get your check every month,'" Chandler said. "We viewed it as precisely the same kind of scam."
Chandler finds two major flaws with Innovatio's letters and its licensing attempts.
For one, he said most of the patents that Innovatio is asserting were already licensed by Broadcom to a host of other companies. Because he believes they were previously licensed, Innovatio cannot try to collect that fee again, he said.
"That means any products that include those chips are already licensed," Chandler said. "That's how patent law works. So they sent these letters basically, we believe, knowing full well that probably a majority of the people who received these letters had no need for a license whatsoever."
Second, Chandler said the fee Innovatio is seeking — near $2,500 each — should be closer to "something like eight cents" and be paid by the chip makers, not the consumers.
That's because the patents in question relate to what is known as a standard technology. In this case, the technical term for Wi-Fi is "IEEE 802.11 Wi-Fi."
For a patent to be part of a standard technology such as IEEE 802.11 Wi-Fi, the patent holder must agree to license the technology to anyone who wants to use it and do so for a "reasonable and nondiscriminatory" price, better known as RAND.
Innovatio, by asking individual users for more than the entire price they paid for their router, is not doing either of those things, Chandler said.
"Innovatio should be offering those patents for licensing to the chip makers that don't have a license already at a modest percentage of the chip value," Chandler said. "The chip may be a $5 chip, or an $8 Wi-Fi chip. The royalty would be something like eight cents."
Masur, from University of Chicago, said he expects more companies to attempt inventive defenses against NPEs similar to the fraud charges Cisco used in this case. But courts may be slow to agree with those claims, he said.
"Courts almost never credit those claims, just like Judge Holderman didn't," he said. "You can try to ask for attorney fees, but those requests almost never succeed. And so there isn't really much more to it."
A judge weighs in
Those two arguments — that Innovatio was ignoring prior licenses as well as its RAND obligation — made up a portion of the five fraud-based claims Cisco brought against Innovatio.
They failed to convince Holderman, who threw out those claims in February when he ruled Innovatio's letters did not make its licensing effort a sham.
Holderman disagreed with Cisco, saying Innovatio's letters did not contain material falsehoods. He said the claims — for example, that Innovatio's patents have generated more than $1 billion in licensing fees — were protected as part of presuit communications trying to broker a licensing agreement.
"The (plaintiffs') allegations, taken as true, do not establish that Innovatio's licensing campaign alleging infringement of the Innovatio patents is a sham," Holderman wrote. "Accordingly, Innovatio's campaign is protected petitioning activity under the First Amendment."
Furthermore, he said there was a "fundamental problem" with Cisco's claim that Innovatio's commitment to license its patents under RAND terms barred it from seeking damages.
Cisco and Motorola cannot use Innovatio's obligation to offer a RAND license as a complete defense against their potential patent infringement, Holderman wrote. It may ultimately limit the damages Innovatio is entitled to, but he did not rule on that in his February decision.
Still, Holderman ruled the case could go forward based on Cisco's argument that Innovatio breached its contract to offer the patents on RAND terms.
Other parts of Holderman's ruling hint at larger questions currently being asked about the patent system.
For instance, he notes the "muddled" issue of what constitutes a RAND license and what a RAND obligation really means.
The basic idea behind standard patents initially sounds like a rare, simplifying aspect of the patent system: It's supposed to create an easy way for companies to agree on the price of the most commonly used technologies.
But, in practice, it doesn't seem to always work that way. That is a key reason why the Innovatio case even exists.
Some patent holders withhold the fact that their patents are part of a standard, as Cisco alleges Innovatio did, Villanova's Risch said. Others disagree over the price for a given standard technology.
That raises questions. If standards are a way for everyone to know what they're buying and at what price, why isn't that information readily available? In other words, if RAND is a price everyone in the market is supposed to pay, why doesn't everyone in the market know what it is?
"The antitrust laws don't allow that," Villanova's Risch said. "That's price-setting. Yeah. Welcome to the wonderful world. Most licensing is done secretly. There's not a database of all the prior transactions that would let you negotiate against that. It's just agreements people have. But I agree they should be more open."
Cisco's lawyers said they hope this case will help answer the question of what a RAND agreement means in the context of Wi-Fi chips. Eventually, it is a question the court will need to answer, they said.
"We feel like when (Judge Holderman) gets to that, the importance of this case is going to be to hold the patent owner to that contractual obligation," said Neil Ruben, Cisco's vice president of litigation. "And the way it should play out here is that the damages should be de minimis."
McAndrews said the RAND question may be one the court needs to answer. But he points out the case does not revolve only around standard patents. Some of Innovatio's patents are not related to standard technologies, which allows his client "more latitude" in the licensing fee it is asking for.
"We have many, many claims that are not simply directed to a wireless access point or a wireless terminal point," McAndrews said, noting the standard technologies in the case. "Instead, many of our claims go to the entire wireless network system."
Because some of the patents pertain to the entire wireless network, McAndrews said the only direct infringer is the end user of the technology — the person setting up the Wi-Fi network. That is part of the reason why Innovatio's lawsuits were filed against Wi-Fi users and not providers such as Cisco, he said.
When asked how his client came up with its licensing demand, McAndrews said: "At the end of the day, you try to come up with something that is, and I'm not using this as a term of art, something that's reasonable, something that makes sense to Innovatio and to a licensee. And you resolve your dispute."
According to court documents, McAndrews offered the manufacturers a 6 percent license on their products that use its standard patents — the 802.11 Wi-Fi standards. That offer was turned down. Innovatio also offered to discuss a license for its patents that do not relate to standards.
What does it all mean?
If it is true that 60 percent of Americans are unknowingly stealing at least a portion of their wireless Internet, there are at least a few options for how it happened.
Cisco, Motorola, NetGear and almost any other company that makes Wi-Fi products could have ignored Broadcom's patents — despite the fact that at least some of them were basically trumpeted from on high as part of a standard technology.
Or Broadcom — despite the fact that at least some of its patents were, again, basically trumpeted from on high as part of a standard technology — could have hidden them from Cisco, Motorola, NetGear and almost any other company that makes Wi-Fi products.
Both those scenarios seem unlikely.
More likely is that the money Broadcom and Innovatio thought they could make by selling the patents and suing end users, respectively, made it an enticing thing to do, two law professors said.
In addition to disagreeing with some of Innovatio's tactics as Cisco presents them, Risch, from Villanova, said that calculation is the aspect of this case that people should take offense to.
"There's a problem that patent owners have misaligned incentives that have nothing to do with whether they're patent trolls or not," he said. "The problem here is that these patents are being used in a way that's making money but is not necessarily creating value."
David L. Schwartz, an associate professor and co-director of the Center for Empirical Studies of Intellectual Property at IIT Chicago-Kent College of Law, wrote a paper examining the ecosystem of NPEs called "The Rise of Contingent Fee Representation in Patent Litigation."
One reason for the rise is that companies with large or expiring patent portfolios see the value in farming out or selling their patents to NPEs, he said.
"As companies see their competitors doing it, they feel like they should do it too," Schwartz said.
"These are sophisticated companies. My sense when they do it is they're trying to pick good managers. They're not just giving away the patents to some unsophisticated managers. They're trying to locate some really strong lawyer or manager who will enforce these patents in a manner which generates the most money."
And this is where Risch's point about the misunderstandings of the patent troll debate crystallizes.
Stopping NPEs from filing lawsuits — one common policy suggestion — could lead to workarounds, he said. Innovatio might start making a cheap Wi-Fi product overseas as a means to file a lawsuit. Or, without the option of selling their patents to an NPE, big companies might be more willing to sue one another. The lawsuits might not end.
"If Broadcom held these patents and sued Motorola, Cisco NetGear and the whole bit, we might say, 'Well here we go again,'" Risch said.
"But we wouldn't bat an eyelash. That's the same as the smartphone wars between Apple, Google, Samsung ... Now if all those companies decided to go after all the people who owned phones, then eyebrows might get raised. Then we'd probably see an outcry."
If more transparency about the price of patents and the cost for those that infringe them existed, the high price of litigation would not be as easy to use as leverage for extracting settlements, Risch said.
In the end, it seems easy to fault Innovatio.
Companies that try to make money through lawsuits don't usually win the popularity contest — even Ray Niro said he agrees with that.
But the person filing lawsuits would not even exist without the other actors in this play or the stage it is being performed on. Everyone is playing different roles that they think will make them the most money under the current patent laws.
So, it's not a story simply about patent trolls. It's a story about a system that makes complicated patent lawsuits such a valuable commodity, Risch said.
"If you take a step back from this story, the idea that this behavior suddenly becomes bad because it's Innovatio doing it — but if Broadcom did this it would somehow be OK — is very problematic," Risch said.
"It would be terrible if Broadcom did it in the same way it's terrible that these guys are doing it."