The electronics supply chain cannot afford to operate in an unfair business environment where a company's patents are subject to litigation from patent assertion entities (PAEs). These businesses don't manufacture products. Instead, they acquire patents solely to extract financial settlements through lawsuits based on questionable claims.
The Obama administration outlined its views in a June paper explaining the serious damage PAEs are inflicting on companies, including those in the electronics industry. According to the paper, the number of lawsuits brought by PAEs or patent trolls has nearly tripled in the last two years and now account 62 percent of all patent infringement lawsuits in America. Additionally, defendants paid $29 billion to PAEs in 2011 — a 400 percent increase from 2005.
PAEs affect the high-tech supply chain
The electronics industry has had its fair share of cases brought by PAEs, which sue not only original equipment manufacturers (OEMs), but also customers that use hardware and software products.
Supply chain executives in the high-tech sector should take note of recent court cases involving PAEs and OEMs. In June, Cisco Systems Inc. and Hewlett-Packard Co. filed separate lawsuits in the US District Court for the Western District of Texas against Innovative Wireless Solutions (IWS), a nonpracticing entity that filed 41 patent infringement lawsuits in April against Starbucks Corp. and many smaller end users of Cisco and HP wireless routers. Both companies want the court to rule that the three patents held by IWS are invalid or uninfringed.
Cisco is still reeling from a Chicago federal judge's decision in February to dismiss legal claims filed against Innovatio IP Ventures LLC by Cisco, Motorola Solutions, and Netgear Inc. That decision highlights the legal challenges electronics companies face as they combat patent trolls.
Innovatio sued approxiamately 20 businesses, including hotels and cafes, and demanded licensing fees. The Chicago company claimed their use of local WiFi networking technology infringed on its patents. Judge James Holderman ruled that Innovatio's aggressive licensing strategy against Cisco, Motorola, and Netgear customers is protected by the US Constitution. Claims from those three companies “do not establish that Innovatio's licensing campaign alleging infringement of the Innovatio patents is a sham.”
PAE litigation is expensive
Electronics companies are paying enormous sums of money to fight patent litigation, both from competitors and PAEs. Mark Chandler, senior vice president, general counsel, and secretary of Cisco, wrote in a blog post for The Hill last month:
Patent assertion entities have long brought frivolous litigation against large enterprises like Cisco in the hope of extracting settlements, but are now also targeting customers in attempts to extort small, hometown businesses including retailer and grocery stores, and startups in order to try to place a needless tax on the venture investment that is the lifeblood of innovation…
Cisco, despite allocating almost $6 billion a year to research and development in the U.S. and employing 20,000 engineers, spends almost $60 million a year on patent-related legal fees. Ten years ago we had a handful of patent cases, almost exclusively involving competitors. Today we are defending almost sixty, none with companies that actually make anything.
Action against PAEs
Though the PAE litigation threat looms large over the electronics supply chain, there are some encouraging signs of action to curb this activity. In June, President Obama issued five executive actions and seven legislative recommendations designed to protect innovators from PAE litigation.
The International Trade Commission, which deals with patent infringement cases, has created a pilot program to determine whether companies that sue for infringement are involved in production, licensing, and research on a large enough scale in the US to meet the requirements for using the courts. Congress is considering legislation that would curb PAE claims by requiring companies to be more specific about their patent definitions and to provide clarity about patent ownership.
Let's hope such measures will protect and reward those responsible for inventing products. Additionally, the technology industry must demand policies that spare the legions of electronics supply chain customers from unfair demands for licensing fees when they use technology manufactured by a company involved in a PAE lawsuit.
As the electronics industry seeks to improve the patent system, the industry must demand legislation to rein in PAEs. Such an effort will create more supply chain efficiency. It will also spur innovation.
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