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Acacia, Eolas and Other IP Landmarks

U.S. Patent Law Is Under Review, Spurred Largely by Recent Trends in Digital Media

U.S. Patent Law Is Under Review, Spurred Largely by Recent Trends in Digital Media

They may sound like lovable characters from “The Lord of the Rings,” but to those in the intellectual property business, Acacia and Eolas represent two nasty cases that are giving fits to the world of patent law.

The IP actions of these two companies both involve digital media, but they are among several landmarks in a process that is likely to create fundamental changes in the workings of the entire U.S. patent process in general.

This may seem an arcane discussion to broadcasters. Yet it has critical impact on anyone involved in media technology, because the workings of IP law have profound effect on innovation. If companies cannot collect a fair return on their investment in technological development, or their legal burdens become onerous, they will be less likely to perform such work, and the industry as a whole – not to mention consumers – will suffer.

The Acacia case

Acacia represents a type of patent abuse that could become rampant, due to two primary factors.

The first involves the quality of patents granted to software developers by the U.S. Patent and Trademark Office. The PTO only began issuing software patents in the 1980s, so the level of experience among examiners in this area remains somewhat shallow and the database of prior art is relatively small. This means the PTO has granted numerous software patents that it probably shouldn’t have.

In fairness, it would have been hard to envision some of the changes that the Internet and digital media boom have subsequently brought about, and concepts that seem obvious now may not have been so when first filed. In any case, there are companies holding quite broad or vaguely defined patents filed during these earlier years that would never be granted today.

The second basis of the Acacia case stems from the attitude of the so-called “IP terrorist.” This refers to a company that holds patents but has no intention of developing products using them. Instead, the IP terrorist simply notifies other companies that it believes are infringing on its patent(s), and seeks licensing deals with them.

The clever IP terrorist seeks out target companies that have built their entire businesses around a technology in which the terrorist holds patents, so that in order to stay in business, the target company has to pay attention to the terrorist’s demands. The terrorist also seeks out companies that are technology “users” and not “developers,” so there is little likelihood that the target can come up with viable, non-infringing alternatives. (In some cases, the patents are so overly broad that no such alternative could exist.)

Other criteria for target selection used by IP terrorists include companies that are excessively risk-averse or otherwise unlikely to challenge the terrorists in court due to shortage of funds, concerns over potential negative publicity, fear of scaring off other deals in play or other reasons.

Careful target selection is critical to the IP terrorist’s strategy, because an overly broad patent may stand a good chance of subsequently being invalidated by a court. But this could only occur if a targeted company challenged or countersued the terrorist and the case went to trial, a process that could cost millions of dollars and take years.

The specifics of the Acacia case are a classic example of this process. The company was granted a patent for which it had applied many years earlier. Its claims cover the broad area of providing media content on demand over a digital network, so the company now feels that all Internet streaming media infringes its IP.

Acacia first targeted what it considered easy marks in the Internet adult content industry. These companies have built their businesses almost entirely on streaming media, and have become quite profitable at it. They were also unlikely to challenge an infringement claim because they would not be considered sympathetic plaintiffs in most courts, and generally preferred to stay below the radar in the legal environment. Acacia therefore was able quickly to collect licensing revenues on a per-user basis from the dozens of companies that it sued in this sector.

Interesting, Acacia also targeted another, different set of users in the online education and training field, including some university extension programs. These operators also relied heavily on streaming media for their revenue, but they would have a far more positive reaction in the courts than the adult content industry were they to challenge Acacia. So Acacia’s strategy was a bit different, contacting the operators with simple business correspondence rather than slapping them with an infringement suit.

n this case, the targets were generally averse to litigation based purely on its cost, so many agreed to pay royalties to Acacia as a straight business deal, without official legal action taken by either party. Naturally, this raised the net benefit to Acacia, which incurred minimal legal expenses in these actions.

Buoyed by these successes, Acacia raised its sights to bigger game, targeting major players in the mainstream online entertainment field such as Virgin Music and Universal Music Group. Here again, Acacia has realized some victories, with Virgin reportedly settling with Acacia on a 2 percent royalty. To date, Acacia apparently has secured around 50 licensing deals, and continues to pursue its actions in the streaming media content industry.

The Eolas case

Eolas is another company that has filed infringement suits over online technology, in this case claiming broad rights over any feature on a Web site that launches an embedded application.

Unlike Acacia’s approach of nibbling away at small online content providers, Eolas has gone straight for the jugular, and filed infringement suits against browser companies such as Microsoft (for whom this columnist works). Eolas succeeded in its case, and Microsoft was ordered to pay Eolas, essentially a one-man shop, $520 million. Microsoft appealed, but somewhat surprisingly, the World Wide Web Consortium – W3C, the standards body for Web content specifications – petitioned the PTO for re-examination of the Eolas patent. Even more surprisingly, the PTO agreed to do so, and that re-examination is now underway.

Such revisionist action by the PTO is not unheard of. In fact, an oft-cited precedent dates back to 1895, when the PTO awarded George Selden a patent for attaching the newly developed internal combustion engine to a chassis. Selden exercised the patent to collect royalties from all the early automobile manufacturers until Henry Ford and other implementers petitioned the PTO for relief, citing the “obviousness” of Selden’s patent and its cost burden on purchasers of cars. In 1911, the PTO substantially narrowed the scope of Selden’s patent, resulting in greatly reduced royalties paid by manufacturers, and thus, less expensive cars.

The battles now brewing in the software patent world indeed loom Tolkienesque, and the road goes ever onward. More on this epic saga and its possible resolutions next time.