The Quest for the Gold Foil Stamp

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The way some people describe the process, you would think filing for a patent is like climbing a fire-spewing mountain in search of some mythical treasure.

Filled with harrowing damned-if-you-do-damned-if-you-don’t costs, patents are a nearly unavoidable issue in the technology field, including speech. They can protect original technology from being used by competitors (in rare instances preventing them from even entering a given market); they can add value to a company in the form of intellectual property that can be resold, used to lure investors, or leveraged in an acquisition; and, above all, they can be wielded like blunt trauma instruments to bleed or be bled of pint after pint of cash.

Moreover, the rules governing patents seem to be constantly changing, subject to the caprices of U.S. courts and Congress alike. Pending legislation in both the House and Senate could overhaul the entire system if it gains enough momentum. Likewise, a pending decision from the Supreme Court could eliminate an entire class of patents (see “Potential Patent Game Changers,” at right). 

How, then, can an enterprise make heads or tails of whether to file for a patent? And perhaps even harder to know is whether pursuing a patent is worthwhile for an enterprise in the first place. The answers are different for small and large businesses.

At its heart, a patent is an agreement between the U.S. government (or another foreign nation) and an inventor. The inventor is granted a temporary monopoly in exchange for a promise to make the inner workings of her invention public.

Small companies, often with limited resources, patent only core technologies—ones they intend to sell directly at some point in time. They are often less likely to seek patents in tangential fields. Some, however, are willing to take calculated gambles on areas they think might pay off in the long term.

“We’ve always been an embedded speech technology company, but we’ve felt for a long time that the real solution is going to be in client-server combinations,” says Todd Mozer, CEO of Sensory, which is based in Portland, Ore. “As early as 1995 and 1996 [almost at the company’s founding], we were doing patents in client-server interactions—which is pretty early for the space.”

To date, almost all of Sensory’s products have been strictly embedded, with the exception of its Bluetooth headsets. The pursuit of client-server interaction patents has moved almost entirely on Mozer’s vision for the past several years. “The strategic is the most important,” he says. “Second is its patentability.”

Also shaping the decision whether to file is the chance of success, especially for smaller firms with limited resources. If it’s a long shot, then small firms often won’t pursue a patent.

That is far less of a concern for firms on the scale of a Microsoft or IBM. IBM, in fact, leads the number of patents issued and is increasing its numbers every year, says Anthony Breitzman, principal and director of 1790 Analytics, an independent patent analysis firm. According to ASRNews, in April IBM obtained five patents in speech technology alone. And from 1993 to 2003, IBM collected $10 billion in royalties off its patents, IndustryWeek reports. So it’s not hard to see why the company is more than happy to file for patents left and right.

Something else that larger companies have to take into consideration is their vulnerability to lawsuits. Larger firms often perceive themselves as persecuted by suit after suit because they appear to have deep pockets—an easy mark for a quick litigation hustle—and thus, they file extensively for protection. Smaller firms also fear litigation, but they don’t pursue patents more aggressively because attorney fees for filing and prosecution of a patent can be prohibitively steep.

On average, lawyers generally charge from $5,000 to $15,000 for filing. These figures include the billable hours for research into prior arts and drafting (see  “To Prior Arts or Not to Prior Arts,” below). Prosecution through issuance from the U.S. Patent and Trademark Office (PTO)—which may include revisions and appeals, depending on the response of an examiner—could end up costing another $5,000 to $10,000, making the total cost $10,000 to $25,000 or more.

The process of writing and prosecution can also take a significant amount of time—around two to four months for drafting and then more time for revisions, which is one reason many inventors and vendors prefer to take the financial hit and outsource the work to attorneys rather than doing it in-house.

Another, and perhaps overriding, reason is the increasingly stringent rulings the PTO has been handing down in the past few years. The late 1990s and early 2000s are seen by many as a kind of Wild West for the patent space. An explosion of patents followed a 1998 federal circuit court ruling in State Street Bank & Trust Co. v. Signature Financial Group, Inc., which established that anything that “produces a useful, concrete, and tangible result” was patentable. Among these new patents were a myriad of so-called “business process patents” that allowed seekers to patent a vastly wider gamut of technologies, like specific online transactions.

At the forefront of this explosion was information technology, Breitzman says. By the turn of the century, anywhere from 35 percent to 40 percent of the patents granted were IT-related. Since then, according to 1790’s findings, the number of patents granted each year has risen from 9,087 to 22,536 (having reached a height of 23,621 in 2006), which is to say nothing of the total number of applications filed.

Likewise, the average time it takes to issue technology patents in computer software rose from slightly more than 30 months in 1998 to something approaching 60 months in 2008. The length of time to get telecommunications patents rose from around 25 months to nearly 50 months during the same time.

In the IT space, however, a five-year wait can be deadly. An inventor might find his patent irrelevant by the time it receives a gold foil stamp from the PTO.
There are ways of expediting a patent, of course. Gregory A. Nelson, a patent attorney with Novak Druce + Quigg, explains that most of these are unpalatable to patent owners because they put them at a disadvantage. To expedite the process, a filer must offer more information—explanations of the relevance of references and the manner that they affect the claims. This is potentially damaging because, as Nelson explains, “The more that the applicant does and says, the more at risk he is in litigation.”

Laying Claim
Because of the growth in patent litigation, the PTO has become backlogged with claims. A number of court decisions aimed at rectifying this have at least partially reversed the State Street Bank decision, giving the PTO more ammunition to aggressively reject broad claims—especially in IT. This has, in turn, led to increased dissatisfaction among filers who are seeing their claims narrowed or rejected in review.

According to Nelson, an increasing number of patent appeals continue to be filed with the PTO—even with the additional fees that come with legal representation.

Given the cost and time, is seeking a patent worth the effort? For many, not having a portfolio of patents could end up costing more. “In technology markets, the role of patents is generally defensive,” says Joseph Bentzel, chief marketing officer at SpeechCycle. “That’s the case because in most technology markets the leader has an agenda of growing the overall market and enabling partners and other participants to benefit while the market is in a growth state. If the market is not in a growth state, then the role of the patent becomes aggressive.”

With the recession already hitting  speech—a sector that some erroneously thought to be recession-proof—companies are becoming more aggressive.

Bentzel cites the acquisitions of Envox by Syntellect and VoiceObjects by Voxeo—“pretty much for a dime”—and the licensing of IBM’s technology to Nuance Communications (interpreted as the computing giant’s exit from speech) as strong indicators. “The market is not sustaining new innovators or innovative vendors,” he says. “There are specific issues related to how a category leader conducts itself in a growth market. You absolutely don’t see those things happening.”

In these acquisitions, larger companies  sometimes use their patents to swallow smaller firms. An infringement suit can be used as leverage in coaxing a deal.
According to Nelson, a minimum for patent litigation through trial is $2 million to $5 million. Suing a competitor, therefore, necessarily forces a company to choose between spending millions on defense with no guarantee of winning and entering a money-generating settlement rather than seeing things through to the end of costly litigation.

This could explain why Chief Judge Paul R. Michel of the U.S. Court of Appeals for the Federal Circuit noted in his keynote address to the Federal Trade Commission in December that only 10 percent of infringement cases filed actually make it to court—the rest being settled, presumably. Once in court, the median damage award is about $5 million, with only 10 percent per year exceeding $50 million, the judge said.

If these figures are accurate, then the legal fees alone could almost double the median award if a case is seen to its conclusion. It also suggests that plaintiffs, if they pursue cases to the end, would see most of their winnings eaten up in fees.

The threat of this in particular explains why one would want to settle into acquisition. Some have singled out Nuance Communications’ seeming litigation strategy as an effort to stifle competition.

“The way that Nuance is attempting to use their patents is a violation of the constitution and antitrust laws,” writes Walt Tetschner, an independent consultant and publisher of ASRNews, in an email to Speech Technology.

Using the company’s 2007 acquisition of VoiceSignal as a model, Nuance hasn’t sued companies in its opening acquisition salvo. Instead, it makes a traditional bid first. Should that fail, the company has sought legal recourse in a patent infringement suit.

“What it did was drain VoiceSignal’s resources—money on lawyers—and they can’t afford that, so they ultimately settled,” Tetschner says. “Part of the price of the sale was that they didn’t have to spend money defending the patent. The patent gets settled.”

Nuance’s acquisition of Zi followed a similar narrative. In August 2008, Zi rejected Nuance’s takeover offer. Shortly thereafter, Nuance brought suit against Zi, saying the company had infringed on two patents.

“This notice is clearly a tactic employed by Nuance in light of its failed proposal to acquire Zi last week at a low valuation. The timing of this motion is highly suspicious and is an unnecessary legal tactic by Nuance,” Zi’s president and CEO Milos Djokovic said in a statement at the time.

Ultimately, Zi was acquired by Nuance for $35 million, which was more than $5 million less than the first offering.

In 2004, Nuance’s predecessor, ScanSoft, similarly filed a patent suit against Advanced Recognition Technology of Israel, and ended up acquiring the company.

Despite having filed a number of other high-profile lawsuits, as of  2008, Nuance had never won a suit, according to the Gerson Lehrman Group.

Nuance declined to comment for this story.

Not Paying to Play
Such aggressive action, according to some vendors, has had a chilling effect on technology. Some have eschewed  entering certain fields of play—mobile telecommunications in particular—in part because of the track record of lawsuits.

However, Roberto Pieraccini, chief technology officer at SpeechCycle and a contributor to more than 10 patents, has no intentions of stopping innovation because he’s afraid someone will  threaten him or his firm with litigation.  “We truly believe in innovation, and if you’re educated about innovation, and you really know if something is new or not and how to protect it, you shouldn’t worry about that,” he says.

Generally, intercompany lawsuits rarely get filed. They are often mutually corrosive. If a company with a strong patent portfolio is sued, then it can make counterclaims, such as infringement on its own patents, against the company that initiated the suit.

Moshe Yudkowsky, president of Disaggregate Consulting, describes the patent game as a kind of Cold War nuclear arms race, with companies amassing patents or “weapons of mass destruction” in their arsenals with which to defend from or deter would-be litigants with “mutually assured destruction.”

More dangerous for vendors than other “nuclear” superpowers is when a nonpracticing entity (NPE)—a “patent troll” some would say—brings suit. NPEs are entities that derive the lion’s share of their revenue from licensing or enforcing their patents.

“The problem is when you have nonstate players, rogue nonstate actors who get a hold of patents,” Yudkowsky says.

These rogue terrorist actors are dangerous because their primary motive in litigation is to seek payment in court or through settlement, Yudkowsky says. But because they produce no technology, they cannot be countersued for infringement, he adds.

According to PatentFreedom, an advocacy group that tracks lawsuits by NPEs, the percentage of infringement suits brought by NPEs has increased steadily. The group found that NPEs filed 2.6 percent of the suits in 1998, but accounted for 16.9 percent in 2008.

“Patent trolls looking to enforce their patents are a bigger concern for us than a corporation,” says Irv Shapiro, CEO of Ifbyphone. “A corporation attempting to enforce a patent could end up using infringement litigation as part of a negotiation toward an acquisition. There could be a positive outcome for everyone—which is to say, lots of money to go around.”

What qualifies a firm as a troll remains contentious, for a number of reasons.  “The way some groups want to talk about patent trolls is that any [NPE] is a patent troll,” Breitzman says. “One of our studies for the [Small Business Administration] showed there are firms out there that have developed interesting technologies but do not have the wherewithal to develop them into products.”

He cites Immersion, a developer of vibrating haptics and tactile feedback for the gaming and medical fields, as an example. The company doesn’t build million-dollar tools or joysticks, but supplies the technology to firms that do, so it may be difficult to call it  a troll. It is an NPE, though, he says.

Taking Another Look
Should one be sued for patent infringement, though, there is recourse that is cheaper than settlement or litigation: re-examination. This is a process for testing the patentability and validity in a PTO proceeding. When re-examination is filed, it puts pending litigation on hold. If successful, the re-examination could yield an invalidating or narrowing of claims such that infringement no longer applies to the defendant in the original suit.

However, re-examination has its risks. The patent holder can amend claims during the process and, should the patent be upheld, walk away with a much stronger patent. Then, of course, the defendant in the lawsuit will have a bigger threat in court and will likely have to pay more in a settlement, lest it face full damages.

“Your alternative to settlement is litigation which we’ve already established is in the millions of dollars,” Nelson says. “Re-examination might be half a million—so, much cheaper.”

Every consideration in patent law seemingly comes with its own costs and trade-offs. There’s no golden cure-all, and though the system may change radically under the auspices of the Supreme Court or the Congress, whatever emerges will likely be full of its own compromises.

If there’s any take-away from this, though, it’s that while there may be a “cheaper” in litigation, there’s no such thing as “cheap.”

Potential Patent Game Changers: The Supreme Court and Congress

On June 1, the U.S. Supreme Court granted review of Bilski v. Doll, a case that has been described as potentially the most important patent case in 50 years.

At issue in the appeal is a decision made by the U.S. Court of Appeals for the Federal Circuit to apply the “machine transformation test” in determining the validity of a patent. In the decision, the court invalidated a patent on a process for hedging risks in the sale of commodities on the grounds that it was not tied to “a particular machine or apparatus” and did not provide for transforming “a particular article into a different state or thing.”

This is potentially disruptive to technology patents because many patents sought are for processes that bear no mechanical basis—that is, they are intangible.

At first, it seemed that the ruling called for redrafting so-called “process patents” in mechanical terms. In a March 2008 blog post by Frost Brown Todd attorney Stephen Albainy-Jenei, Bilski: Much Ado About (almost) Nothing, it was held that “clever attorneys can still get their ‘business method’ patents past [the patent office] by casting them in the form of machines that manipulate data.”

Albainy-Jenei went on to show that even the infamous Amazon “1-click” patent already had machine claims attached to it, establishing precedent for seeing data as an article transformed into a different state or thing.

But recent rejections from the U.S. Patent and Trademark Office (PTO) suggest that filings are being reviewed far more aggressively; many software patent claims that make reference to the Bilski case are being turned down.

“They’re extending the decision to say ‘Yes you’ve cited a machine in this claim; however, it’s just a formulistic recitation,’ says Ria Farrell Schalnat, a patent attorney at Frost Brown Todd.

How the Supreme Court will rule in the case is open to speculation. Many patent professionals feel that the court would not have decided to hear it unless it saw that changes needed to be made.

However, Gregory A. Nelson, an attorney with Novak Druce + Quigg, points out that a number of recent cases subject to Supreme Court review have limited patents. He doesn’t expect the case to be overturned or greatly changed.

“Then again,” he adds, “you have to ask, why did the Supreme Court accept Bilski? Is there something they want to change in this? Could it be they want to be more restrictive?”

The court is expected to hear the case in the fall and render an opinion in the spring of 2010.

The second potential disruption to the current patent state of affairs is pending legislation in Congress, S. 515 and H.R. 1260, or, collectively, “The Patent Reform Act of 2009.”

These bills seek to remedy a number of issues that have forced a backlog of more than 1 million patent filings and have led to the issuance of what some charge as “weak patents” during the past decade.

The bills, which would be the first major revision of patent law by Congress in 50 years and the first overhaul of PTO rules in more than 30, are the fourth attempt in five years by the legislature to resolve a number of issues. The first came in 2005, which was followed by tries in 2007 and 2008.

The legislative process has been complicated by the fact that divisions over the reform do not follow traditional party lines, but rather, come from divisions between industries, getting the business interests of individual states involved. Technology firms have, for instance, pushed hard for reform, while pharmaceutical firms have resisted change altogether, pitting traditionally Democratic states like California and New York against each other.

So far, the House and Senate bills both:

  • define “effective filing date of a claimed invention” as the filing date of patent or the application, establishing a first-to-file system;
  • replace the Board of Patent Appeals and Interferences with the Patent Trial and Appeal Board; and
  • revise rights and requirements related to damages, post-grant procedures, citations of prior art, inter-partes re-examinations, the regulatory authority of the PTO, and preissuance submissions by third parties, venue, and jurisdiction.

The House version, however, includes revisions concerning the residency of federal circuit judges, while the Senate bill includes language that shields financial institutions from infringement and establishes a revolving fund for the deposits of fees, received under specified provisions, for use by the PTO.
A second Senate bill, S. 610, introduces a post-grant review procedure.

Patent Alternatives

Patents aren’t the only legal protection available: Trade secret protection and copyright are two other options. For several reasons, these present their own problems, though.

Trade secrets are not generally viable for products that are sold and can be reverse-engineered. Once they become public, there is no protection unless they were improperly disclosed. In these cases, the recourse is to sue for breach of contract, but nothing prevents competing vendors from using a given vendor’s secrets. A company’s only protection is to seek damages from offending parties.

Likewise, copyright is available to programmers: They can copyright their source code, but this is often an inadequate protection. Copyright protection covers the expression of an idea, not the idea itself. Patents cover the idea. That means if someone independently writes code or a similar process but does it without copying the protected source code, there is no protection.

To Prior Arts or Not to Prior Arts

Another consideration that affects the amount of time and cost it takes to file for a patent is how much research one does into prior arts, defined as the relevant information on a filing already available in the public domain.

“The inventor is required to disclose to the patent office everything he knows about the prior arts. There is no law that says you have to look into it and research it before filing,” noted Paul Skiermont, an attorney at Bartlit Beck Herman Palenchar & Scott, during a session at Voice Search 2009 in San Diego.

This means one could potentially pull one over on the U.S. Patent and Trademark Office by forgoing extensive prior arts research. Often, examiners don’t have specific knowledge of a field and won’t necessarily find invalidating sources, given the backlog of applications. But, should you get one under those conditions, you emerge with a weaker patent, Skiermont warns.

“If there’s something that’s going to affect your patent, you’re going to want to know up front so you can determine if you really have an invention worth filing on,” adds Ria Farrell Schalnat, an attorney at Frost Brown Todd.

A weak patent could be invalidated in re-examination and would have a harder time standing up in court or to the scrutiny of investors. If a patent is at the heart of an enterprise’s portfolio and it collapses, it could mean serious jeopardy.

Choosing just how much research to do, though, requires a delicate cost-benefits analysis, Schalnat explains. The more time you spend on research, the more an application costs. “There are 7 million patents out there. If you researched all of them, plus all the graduate student theses written, plus all the commercial products and trade journals, you’d never do anything,” she says. “You’d spend a lifetime researching all this, and you still wouldn’t know if your idea is truly patentable.”

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