Law360-mini Law360, New York (May 20, 2016, 11:33 AM ET) —

The patent wars that rage in the tech industry are full of high stakes and high drama: Corporations engage in messy, drawn-out fights and small companies find themselves unwittingly exploited by patent trolls.

The U.S. patent system isn’t perfect, and the current era in which “software is eating the world” has paved the way for legal chaos to ensue. According to the Boston University School of Law, over six times as many patent lawsuits are filed today as in 1980, and patent assertion entities are now responsible for over 84 percent of U.S. patent litigation.

This muddle has led some voices in the tech industry to call the value of patents into question. Technological advancement now moves at a breakneck speed and the argument is that this makes patents obsolete. If it takes two years to file a patent, what’s the point of expending all that time, money and effort, if two years down the road the technology is no longer relevant? Just execute better and faster and you will not need patents to succeed in the market. While there is some truth to the notion that patents are not a prerequisite for business success in the technology sector, they remain a vital strategic tool for companies to protect their value proposition, mitigate risk and to actually accelerate the pace of innovation as opposed to hindering it as argued by many in the industry.

Protecting Your Value Proposition

Generally speaking, there are two types of technology companies: those that develop new technology and bring it to market to drive their business versus others that primarily use one or more existing technologies to introduce new products and services.

Google Inc. and Tesla Motors Inc. are two examples of the former category of companies that have reshaped their respective market sectors and have achieved remarkable success through their research and development efforts. Accordingly, both have secured patents covering their technology because it represents their competitive advantage and the technologies developed and protected are likely to remain relevant well beyond the average length of time of two years that it takes to get a patent issued.

For technology innovators that are much smaller in size relative to the competition, patents may be the most effective way to protect their R&D investment. For example, Elon Musk pointed out in his blog post that Tesla initially built a patent portfolio despite his aversion to patents out of the fear that “big car companies would copy Tesla’s

[our] technology and then use their massive manufacturing, sales and marketing power to overwhelm Tesla.”

On the other hand, larger competitors can use their patent portfolios to sustain their competitive advantage against smaller upstarts who may try to disrupt their business by using the patented technology in more creative ways. That was the case when a startup called Modista built an impressive ecommerce website based on a technology that could recognize colors, shapes and objects, and could be used to provide online customers with similar product recommendations. A larger company with hefty venture backing — — had a similar, arguably lesser product offering, but it owned a patent on the underlying computer vision technology and it successfully used it against Modista to shut it down.

Mitigating Risk and Lowering Costs

We are in the midst of a cultural shift where tech companies are moving away from a mercantilist attitude of wanting to own everything and toward a paradigm of open innovation. Information today is readily accessible and widely distributed partly due to increased worker mobility, and most companies fall into the second category mentioned above that build their products or services by using multiple third-party technologies. In such a decentralized environment, patents can serve both as an attacking and counterattacking weapon against competitors as well as a bridge to collaborate with third parties to accelerate development of a company’s value proposition.

For example, perhaps Modista would remain a viable business by reaching a commercial settlement with competitor,, if it had the ability to gain some negotiation leverage by filing a countersuit using a patent of its own. Both Inc. and TomTom Inc. used that strategy successfully to negotiate settlements with Microsoft Corp., which has stepped up its patent monetization efforts in recent years.

Beyond risk mitigation and revenue generation, some companies use patents as leverage in negotiations with third parties including suppliers, partners, vendors and acquisition targets, to lower costs. Take Nuance Communications Inc., which used patents as part of its acquisition strategy of a smaller competitor. Nuance established itself as a leader in the speech recognition sector until it started facing some stiff competition from Vlingo Corp. After numerous failed acquisition attempts, Nuance finally brought four patent infringements suits against Vlingo before successfully acquiring the company at a lower valuation than originally contemplated.

Patents as a Tool for Cooperation and Collaboration

The tactics outlined above are somewhat traditional uses of IP where patents are used as a negative or exclusionary right. Some companies have used patents as a collaboration tool in the hope that it would stimulate innovation and move the industry forward. For example, Tesla open-sourced its portfolio of over 100 patents related to electric car technologies in exchange for a promise from companies to use the technology in “good faith.” They realized that their biggest competitive threat is the continued production of gasoline vehicles by their competitors as opposed to production of non-Tesla electric cars. “We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform,” the company said in a blog post. “We believe that applying the open source philosophy to our patents will strengthen rather than diminish Tesla’s position in this regard.” The “good faith” pledge is icing on the cake because it grants Tesla a cross-license to the patents of any company that uses Tesla technology in its own business. Such licensing arrangements are only possible and most effective when all parties involved own patents rights that they can contribute towards a common goal.

The Google and Verizon Communications Inc. patent cross-license deal in 2014 is another example of key industry players using their IP to protect their business turf while collectively reducing the threat of abusive patent troll litigation. Even though the cases involving such tech giants tend to attract the big headlines, the reality is that over 50 percent of the businesses targeted by patent trolls make less than $10 million per year. Defending a patent troll lawsuit can cost multiple millions of dollars, which is crippling to a small business. Rather than wipe out their cash reserves on litigation, most startups choose to settle.

The war against patent trolls will never be won if it is fought on a fragmented, case-by-case basis. Tech companies of all sizes have to join forces and patents are a key asset that can be leveraged in promoting cooperation and collaboration.

Organizations like Unified Patents, the Open Innovation Network and LOT Network bring businesses together to invalidate low-quality patents and cross-license portfolios so their members can get cheap access to key technologies and can use it to focus on growing their businesses without the fear of being blocked by patents that end up in the hand of bad actors.

Unified Patents is a subscription-based patent risk management organization that groups companies of all sizes into “micro-pools” or “zones” that protect a specific technology area. The subscription fees go toward defending each zone’s protected technology from patent trolls, such as by monitoring troll activity, investigating prior art, and challenging troll-owned patents in the U.S.

Then there is the Open Invention Network, which acquires patents and patent applications and makes them available on a royalty-free basis to any entity that agrees not to assert its patents against the Linux system, effectively creating a “patent no-fly zone” around essential Linux technologies. Members of OIN grant a license to the community for their patents that cover Linux-related technologies. In exchange, every member receives a cross-license from other OIN members for their Linux-related patents and from OIN for its entire portfolio. This allows companies to use and contribute to Linux technologies with minimal risk of IP litigation.

Another example is LOT Network, with LOT standing for “License on Transfer.” Members of the LOT Network obtain licenses effective upon the transfer of patents by other participants to patent assertion entities or trolls. If patents held by a LOT Network member are transferred to a troll through a triggering event, every active LOT Network participant is automatically granted a license to those transferred patents, rendering each LOT member immune to patent troll litigation using those patents.

Abolishing the patent system or software patents is not the answer to address the patent abuse that has been rampant over the last decade. Both run the risk of eliminating the incentive that spurs invention and drives technology and our economy forward. Recent judicial and legislative reform has moved the needle on restoring balance between defendants and plaintiffs in patent cases by making it easier and cheaper to defend against overbroad assertions by both practicing and nonpracticing entities. More is needed on that front but the industry also needs to realize the importance of acting as good corporate citizens and focusing on quality versus quantity when it comes to developing a patent portfolio.

When used responsibly, patents are one of the best ways to protect your company’s value proposition and accelerate its development because they can facilitate industry collaboration and provide access to technology development initiatives that might not otherwise be available to companies. Patents can also be a tool for preempting conflict and becoming a contributing participant in activities that ultimately help strengthen the tech industry as a whole. Far from being obsolete, they remain as relevant as ever for companies of all sizes.

—By Ayaz Hameed, Pegasystems Inc.

Ayaz Hameed serves as the global head of IP for Pegasystems.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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