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IP, IP Asset, Patent

Are Patent Assertion Companies In Business To Litigate?

There’s an adage that goes something like: if you give a man a hammer, everything looks like a nail.  Perhaps its time to add to that, and if you are a hammer, you’re doomed to pound your head against the wall.

Patent owner Eon-Net engaged Flagstar bank at least as early as 2005, when it sued the bank for infringement of Patent No 6,683,697.  The trial court in Seattle has been openly hostile toward Eon-Net, stating in 2007, and repeating in 2010, that “indicia of extortion” were present in its case.  (For a brief history of the sanctions imposed on Eon-Net and its attorneys, the Court of Appeal’s decision to remove the sanctions, and trial court’s reinstatement of the sanctions, see my earlier post: Punishment For Frivolous Patent Lawsuits.)

Eon-Net is still represented in its appeal by Jean-Marc Zimmerman, who has also personally been sanctioned by the Seattle court in connection with the Flagstar case.  On May 3 of this year, the Court of Appeals held an oral argument to address both the sanctions award and Eon-Net’s appeal of the claim construction.  A very brief, but interesting exchange occurred between Court of Appeals Judge Kimberly Moore and Mr. Zimmerman:

Judge Moore: Your client knows that it’s essentially in business to litigate.

Mr. Zimmerman: That’s correct

Admittedly, a lot of information could be inferred through the use of the qualifier “essentially.”  However, Zimmerman’s response was to this assertion was nearly instantaneous, and Judge Moore placed no perceptible  emphasis on “essentially” in her statement.  So what, exactly, is Mr. Zimmerman admitting by agreeing to this characterization so easily, and why did he do it?

Zimmerman’s client, the proprietor of Eon-Net, is co-inventor Mitchell Medina.  The company, like its predecessor Millenium LP, doesn’t appear to have any publicly disclosed business operations outside of patent licensing (no website, no press releases, and no media coverage beyond the context of various patent infringement lawsuits).  Judge Ricardo Martinez referred to Eon-Net as a “patent-holding” company.  From this, it is reasonable to infer that Eon-Net’s primary source of income is derived by licensing its patent portfolio. But does that mean it is “in business to litigate”?

Is Wal-Mart in business to acquire real estate and build expensive structures? Or is that an expense they justify because it’s the most effective means to sell their goods?  Is QVC in business to answer phone calls? Or are operators an expense QVC accepts because their sales would suffer under a fully automated system?

Just like Wal-Mart and QVC are “in business” to generate revenue by selling products through various commercial channels, EON-Net is “in business” to generate revenue by licensing its patents. As a result of the currently unsophisticated view of patents as solely legal instruments, the primary mechanism used to license patents is through litigation.  (This is a topic I’ve addressed extensively, but check out The $80,000 “Reasonable” Website Modification for an introduction).  Litigators are the tools used in the licensing process as its carried out today.  Yet somehow, they’ve convinced a large number of patent owners (and likely, themselves) that they’re the solution.

If you were to call up Mr. Medina and tell him that his company could acquire licensees without paying lawyers (either up-front, or on contingency) to file lawsuits, what do you think his reaction would be?  Patent owners likely won’t hesitate to close the door on litigation if a more efficient process is available.

There are still those who would tell you that patents are primarily legal instruments, but that’s like saying real estate is primarily a deed.  Patents are assets, and assets can be deployed to generate revenue.  The neat thing about patents is that you don’t even have to own the entire patent in order to build up a significant business. Just take a look at RPX. A large portion of their business model centers on “buying” nothing more than the ability to grant sublicenses to other companies, and investors were jumping all over themselves to hand over $160 Million for a small piece of the action. For other examples, take a look at Round Rock.  This company exchanged rights under its portfolio for $38.5 Million using an auction formatWalker Digital came close to doing the same thing.  Litigation can, and should be, the exception, not the norm in patent licensing.

An audio recording of the Eon-Net v Flagstar oral argument is available through the court’s website.

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Discussion

4 thoughts on “Are Patent Assertion Companies In Business To Litigate?

  1. Patrick, another excellent post. In the book Great Again, the authors point out that Edison licensed most of his patents – sometimes he had to litigate to get paid. In addition, most patents issued to independent inventors were licensed or sold.

    Posted by Dale B. Halling | May 9, 2011, 10:05 am

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