Business buys patents, then sues to make money
Monday, March 20, 2006
One patent generated $108.4 million for Forgent Networks over the past three years.
AUSTIN, Texas -- While most technology companies make money by developing software, building hardware or providing services, Forgent Networks Inc. has taken a different route: It produces threats and lawsuits that try to cash in on ideas.
Forgent and other companies with similar strategies -- often called "patent trolling" by critics -- amass intellectual property portfolios and file suits against other businesses, accusing them of infringement.
With a skeleton crew of 30 employees and the help of a law firm, Forgent has built a business out of suing -- or threatening to sue -- companies, even though it offers no related products and does no development of the technology itself.
Though critics say such tactics curb innovation and drive up costs for consumers, Forgent CEO Dick Snyder insists he's merely providing maximum value to shareholders.
"This country was built on innovation, and in the Constitution there is a provision in there to protect innovation through patenting," said Snyder, a former executive at Hewlett-Packard Co. and Dell Inc. "It's the American way, and we're just doing what we believe is the right thing to gain value from what we own."
For Forgent and other companies, the business model is paying off.
In the quarter ended Oct. 31, 80 percent of Forgent's revenue came from licensing deals on just one digital image patent it obtained years ago in an acquisition.
Elsewhere, Research in Motion Ltd., maker of the popular BlackBerry e-mail device, this month settled its long-running patent dispute with NTP Inc. for $612.5 million. The Supreme Court, meanwhile, is expected to consider a patent dispute between eBay Inc. and patent-holder MercExchange this year.
Forgent's biggest earner -- generating $108.4 million in settlements and licensing fees in the past three years -- has been U.S. Patent No. 4,698,672, issued in 1987 and obtained years ago in an acquisition. At the heart of the so-called 672 patent is something ubiquitous in the technology world: the JPEG format for digital pictures.
Though used in countless electronic gadgets and software programs since the 1980s, it wasn't until two years ago that Forgent sued 44 companies, including some of the high-tech industry's largest players. It claimed they were using the patented compression technique covered in the 672 without paying a licensing fee.
Thirteen companies have settled, including Yahoo! Inc. More than 50 others not involved in Forgent's lawsuit have agreed to pay unspecified royalties for using the patent, including RIM, and Forgent has notified more than 1,000 other companies they may owe royalties.
Though a dollar figure wasn't disclosed, RIM spokesman Mark Guibert said negotiations with Forgent resulted in a "reasonable agreement."
The trial for the remaining defendants -- among them Apple Computer Inc., Dell, Hewlett-Packard, International Business Machines Corp. and Microsoft -- is still pending in the U.S. District Court in San Francisco.
Dan Venglarik, an intellectual property lawyer in Dallas who is not involved in the case, said Forgent's tactics have far-reaching impact. Many smaller companies especially will be more likely to settle than dispute Forgent's claim because of the high costs of litigation, which could easily top $3 million, he said.
"If the numbers make sense, companies are going to be inclined to settle to avoid the risk," he said.
The issue has led some lawmakers to call for changes to the nation's patent system.
Last year's Patent Reform Act, sponsored by Reps. Lamar Smith, R-Texas, and Howard Berman, D-Calif., includes changes that seek to cut down on lawsuits by people who take out patents on products, methods or ideas just so they can sue a company for infringement if it eventually produces something similar.
A draft proposal remains under review by a congressional subcommittee chaired by Smith, a spokeswoman for his office said.
Forgent's legal attacks haven't come without a fight.
The New York-based Public Patent Foundation Inc. recently won a request to have the validity of the 672 reviewed by the U.S. Patent Office, a process that could take years. The group claims Forgent's patent was incorrectly granted and should be revoked.
"I think it's stupid that this type of policy is legal and profitable," said Dan Ravicher, the group's executive director.
Forgent dates to the mid-1980s, when it was VTEL Corp., a maker and designer of videoconferencing equipment. VTEL performed a series of acquisitions, culminating in 1997 with Compression Labs Inc., which created and owned the 672 patent.
In 2001, the company was renamed Forgent, and executives decided to focus on intellectual property.
"At that juncture we really decided it was best from a shareholder perspective to at least for the foreseeable future, focus ourselves around being a patent company," Snyder said.
Forgent's earnings, largely dependent on revenue from the 672, have fluctuated wildly over the years. The company's stock has ranged from $1.10 to $3.27 a share in the last year and recently posted a second quarter loss of $500,000.
Forgent, which has about 30 other technology patents waiting in the wings, is already moving ahead with its next potential profit generator: U.S. Patent No. 6,285,746, which relates to how digital video recorders to allow playback during recording.
EchoStar Communications Corp., Motorola Inc., TiVo Inc. and 12 other companies have been named as defendants in the case. A federal judge has set a mediation date for next month in U.S. District Court in Marshall, Texas.
In Austin, Snyder, 61, sips from a coffee mug as he acknowledges the money won't come in forever. Though it will be enforceable retroactively, the 672 expires in October.
Snyder sees part of that future in the company's tiny NetSimplicity division, which makes scheduling software for businesses.
"Forgent's really a company that's in transition," he said. "We got ourselves into this current mode of licensing because it's been very fruitful for us. We see that as good return to the shareholder and good return on the R&D investment we made. But eventually, patents expire, so we will need a business in the future that's sustainable."
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