Manufacturers building Android-based smartphones, mobile phones, tablets, e-readers, notebooks and other consumer devices have two choices: Sign Microsoft licensing agreements, or risk being sued for patent infringement. Eleven Android device manufacturers representing 70% of the U.S. smartphone market have signed such agreements, which include provisions for per-device royalty payments to Microsoft. Some holdouts—namely Barnes & Noble and Motorola Mobility—ended up being sued. Is Microsoft just protecting its patents, or is it making an anti-competitive play against Android?

Patents, like copyrights and trademarks, are property rights. Patents allow their holders to exclude others from making, selling, using or distributing an infringing product in a particular jurisdiction. In exchange for the limited-time property right (twenty years from filing, although the term can be extended), the inventor must publicly disclose the invention.

Microsoft’s position is that it is simply protecting its property. When Microsoft sued Motorola Mobility, Microsoft’s corporate vice president and deputy counsel Horacio Gutierrez wrote in a blog, “Our action today merely seeks to ensure respect for our intellectual property rights infringed by Android.” Previously, he and general counsel Brad Smith stated, “We are protecting our investments on behalf of our customers, partners and shareholders—just as other companies do.”

Based on its history of aggressive business practices, some, such as Barnes & Noble, have called Microsoft’s tactics “anticompetitive” or “oppressive.” Intellectual property attorneys say Microsoft’s aggressive moves are no surprise for a large company with a formidable patent portfolio.

“[Microsoft] is a mature company with mature technologies,” said Bill Hulsey, principal at Hulsey Intellectual Property Lawyers. “It is a natural progression for them to diligently enforce their patent rights and other intellectual property rights.

“Are they being aggressive in the acquisition of property rights? They probably are. Does that run afoul of antitrust or market control considerations? That’s for the Department of Justice to deal with, and I think they will. Microsoft has a long legacy of how to push and recognize the boundaries of antitrust laws.”

The duty of a public company to protect its patents is greatly overstated, according to Andy Updegrove, founder of Gesmer Updegrove, a Boston law firm that represents technology companies, standards consortia, and open-source foundations, including the Linux Foundation.

“Protecting your patents doesn’t automatically mean asserting them,” he said. “Patent litigation is extremely expensive, so unless the likelihood of success, the cost (in management time as well as cash) and the damages you seek to gain, or damage you hope to avoid, is significant, you’ve got no business proceeding to court.

“Second, there are many reasons why you might be better off not suing. For example, [if] you’re infringing the target’s patents, your suit could provoke one in response. Third, your patents might not be very strong, and if you assert them and lose, then you’re worse off than when you started, because your existing licensees will quit paying.”

Most patents are never asserted, and of those, few are actually litigated. Out of Microsoft’s current universe of patents (nearly 20,000 granted and more than 23,000 pending), 25 were the subject of Android-related litigation as of Sept. 28, 2011, according to a blog post by Microsoft’s Gutierrez. He added, “Microsoft is not a company that pursues litigation lightly. In fact, [the Motorola Mobility case] is only our seventh proactive patent infringement suit in our 36-year history.”

Updegrove said that up until recently, Microsoft didn’t even bother to file many patents.

“[Microsoft] had many more trademark filings than patent registrations,” he said. “It does, however, make frequent public statements alleging infringement, and has contacted specific companies, both large and small, stating that if they are using open-source software, such as Linux, that they are infringing Microsoft patent claims.”#!
Cashing in
In 2003, Microsoft initiated an IP licensing program that now includes about 1,100 licensees. Today, 1% of those agreements are specific to Android and Chrome OS devices.

“Clearly, [Microsoft is] focusing more on making money from its patent portfolio,” said Jon Hyland, shareholder at Munsch Hardt Kopf & Harr, a large, Texas-based law firm with several practice areas, including intellectual property. “They’ve spent tens of billions of dollars on R&D in the last few years, and I really think they’re trying to turn that into a revenue stream now.”

Chris Rourk, a partner at Jackson Walker, one of the oldest and largest Texas-based law firms whose vast practice areas include intellectual property, agreed, adding that Microsoft is taking advantage of patent laws to the extent any corporation creating intellectual property would be advised to do.

“IBM was maybe one of the first to use its large patent portfolio as a licensing revenue generator. Certainly, people were critical of those initial uses,” he said. “[People] called them ‘aggressive’ and ‘anti-competitive.’ Whether or not they are is really fact-specific.”

A September 2011 Goldman Sachs report estimated that Microsoft’s per-device royalty fees from Android device manufacturers who have licensed Microsoft IP are somewhere between US$3 to $6, and that the IP licensing fees for fiscal year 2012 would total $444 million dollars. (Other per-device estimates are higher, ranging from $5 to $15 per device.) At the time of the report, Microsoft had licensing deals with companies representing 50% of the U.S. smartphone market. That was before the LG deal.

After the LG deal, Microsoft touted (and taunted Google with the fact) that 70% of smartphones sold in the U.S. are now covered under Microsoft’s patent portfolio. That squares with comScore’s December 2011 report stating that LG’s U.S. market share was 20%.

Using Goldman Sachs’ September 2011 estimate as a baseline, the addition of LG to the Windows Phone licensee roster raises fiscal year 2012 licensing fees to $621.6 million just for the Android-related agreements.

“[Microsoft’s] IP budget for 2011 was $9.6 billion, which is incredible,” said Munsch Hardt’s Hyland. “Like I said earlier, it really wouldn’t surprise me to see them make patent licensing a bigger part of their business, because they’re in a position where the Windows platform for smartphones is less than [5%] of the market share.”

According to the December 2011 comScore report, Windows Phone market share slipped from 5.6% to 4.7% between September 2011 and December 2011. During the same period, Android’s jumped from 44.8% to 47.3%.

Sign on the dotted line
Microsoft’s overly aggressive reputation is not aided by the fact that it requires Android device manufacturers to sign non-disclosure agreements (NDAs) before they can learn which patents Android, Chrome OS or its product infringe. Whether that’s standard or not depends on which patent attorney you ask.

While NDAs are common before the details of patents, products sales, and distribution discussions ensue, Hyland said he has yet to encounter a situation in which an NDA precedes any type of notice of infringement.

“Typically they’ll send you a letter identifying the patents, because if you give somebody notice [and] if they are willfully infringing, then you can get enhanced damages,” he said. “Damages only start accruing as soon as notice is given, and notice can only be given by putting your patent number on your product or giving them actual notice of infringement. So, if you don’t actually tell [them] which patents they’re infringing, you can’t give them this kind of notice.”

Even though advanced notice may result in enhanced damages, it may also open the door to undesirable outcomes. For example, the company receiving the cease-and-desist letter can go to court and file for a declaratory judgment (a judgment that declares the rights, duties and obligations of the parties) in an effort to swiftly resolve the matter in its own jurisdiction.

“If someone sent [a cease-and-desist] letter to one of my clients, we could go a court where my client is located and file a declaratory judgment suit,” said Hyland. “We would petition the court for a judgment that says the patents aren’t infringed, they’re invalid and that’s something Microsoft is trying to avoid because it takes the choice of forum out of their hands. If the defendant gets to choose the forum, it’s going to choose one that’s more defendant-friendly and maybe a forum that has a long time to trial to try to stretch things out.”

The alleged infringer can also petition the patent office for a re-examination.

“[If] you disclose [which] patents [are infringed], and [the infringer thinks] they’ve found some prior art, they can actually petition the PTO for a reexamination,” said Hyland. “If you’re trying to license a patent and it’s in reexamination, its value goes down because it could end up getting invalidated.”

While Microsoft’s reasons for requiring an NDA up front are known only to those who have signed or read one, an NDA’s terms may bar alleged infringers from filing declaratory actions or filing for reexaminations.

“By using a non-disclosure agreement or other contractual agreement where the parties agree not to do that, then you can more freely explain why you think a license is needed,” said Jackson Walker’s Rourk. “If you’re planning on challenging the patents, then [signing an NDA] might prevent you from doing that. It’s not an uncommon practice.”

Another reason to seek an NDA before identifying patents is to keep secret specific claims that are supposedly being infringed.

“[If specific claims are made public], then everyone could start looking into whether those patent claims are valid (e.g., are they ‘novel’ or have they been ‘anticipated by prior art?’ ” said Updegrove. “If it looks like [the patent claims may be invalid], they can petition the PTO for a reexamination of the claims. There’s an old open-source software saying, ‘Many eyes make all bugs shallow.’ That goes for prior art as well, and it’s acknowledged by just about everyone that there are many, many software patents that should never have been granted.”

The reason why patenting software is attractive to companies and individuals is because software functionality can easily be copied.

“Copyright will cover the specific code that is used to implement that specific functionality, but not the functionality itself. Microsoft also relies on copyright protection for their code,” said Rourk.

“They don’t release the source code, but if someone were to get it, they would have a hard time trying to use it without violating Microsoft’s copyrights. What Microsoft can’t prevent someone from doing with copyrights is duplicating their system functionality just by observing how it functions and writing a new set of code, so they turn to patents for that.”#!
Effect on Android
David Drummond, Google senior vice president and chief legal officer, blasted Apple, Microsoft, Oracle and others for waging “a hostile, organized campaign against Android” in an August 2011 blog post that criticized the companies for acquiring patents for anticompetitive purposes and driving up the costs of Android licenses, Android devices, and even patents. The following day, he updated the post, adding that the U.S. Department of Justice (DOJ) forced Microsoft to sell the patents it bought and demanded that the winning group (Apple, EMC, Microsoft and Oracle) grant a license to the open-source community on the grounds it was “necessary to protect competition and innovation in the open-source community.”

Since the post, Android has continued its impressive rise, and Google’s patent portfolio will be getting a significant boost since the DOJ approved its $12.5 billion acquisition of Motorola Mobility. That said, Google is not alone in opposing “the Microsoft tax” that’s being imposed on an operating system Google provides for free.

The attorneys interviewed for this article said that Microsoft’s licensing agreements and related litigation haven’t noticeably affected Android-related innovation, if Android’s market share and the explosion of Android apps are any indication.

“If Microsoft is trying to destroy Android, it’s doing a terrible job,” said Munsch Hardt’s Hyland.

Jackson Walker’s Rourk concurred. “There’s really not a lot Microsoft can do to cripple open source, and by extension, Android innovation,” he said.

“Versions of Linux compete with Windows. There are countries where the governments give preferential treatment to open source, and avoid licensing software that is not open source. There’s a lot of commercial activity going on around the world that involves open source, and Microsoft can’t stop that with U.S. patents. The real test of whether Microsoft is having any impact on Android innovation will be if the Android operating system develops outside of the U.S. or other countries where Microsoft owns patents to be measurably better than the U.S. versions.”

Updegrove said that trying to hold back Android and open-source innovation is akin to the story of Danish King Canute commanding the tide to turn. The most Microsoft can hope for is that a court will order some vendors to pay licensing royalties to it.

“Anyone with as dominant a position as Microsoft would want to defend it using every legal means at its disposal,” said Updegrove. “This would hold true in particular for Microsoft, because despite its very long history (for a software company) and its huge resources, it hasn’t been very successful in replicating its early successes. It would be hard to count how many initiatives have failed, from MP3 players to its earlier mobile operating systems.

“The core of Microsoft’s value lies in its control of the Windows server/desktop operating system, but the huge upside in global growth lies in mobile devices. It would be impossible to overestimate the threat to Microsoft’s ongoing value if it doesn’t have a piece of, let alone control of, mobile device operating systems.”

Hyland concurred. “If I were in [Microsoft’s] position, where 70% of smartphone manufacturers had to pay me a royalty, I’d be a huge fan of Android because Microsoft’s financial success is now linked to the Android platform,” he said.

“And, when you look at the success of the Android market, it really pushes Windows phone out of the market, so for every Android phone that gets sold, there’s a Windows 7 phone that doesn’t get sold. So I think Microsoft at least at this point is losing the phone war, but they have a hook where they can make money even if Android ends up being victorious in the smartphone market.”#!
Playing offense and defense
Given the staggering pace of technology innovation, patent infringement happens. One way to at least minimize patent-related problems is to understand the patent system and become familiar with relevant patents.

“[First,] do all appropriate diligence to discern whether you infringed on somebody’s patent,” said Hulsey. “If you obtain software from a source, whether it’s modules or porting it in, very often in the code or in an agreement that relates to that software [there] will be the patent numbers that relate to the software and coding and such. Find out with the resources you’re working with to develop the code, what patent relates, the information on what patents are, where they are, [and] what the status is. [There’s more] information more available now than there’s ever been before both domestically and internationally.” That’s defense, he said.

Jackson Walker’s Rourk added that patent knowledge is particularly effective in cases where the parties are directly competitive.

“Competitor-vs.-competitor patent suits are considered to be the most serious because in that case, one company may be trying to shut down another company,” he said. “One of the reasons for having a patent system [is] to create an incentive for people to develop new inventions, so you see how your competitor is solving a problem by looking at their patents, and if you think of a better way to solve it that’s less expensive or faster or provides other advantages, then you implement that.”

One offensive strategy that applies to companies large and small (and even to individuals) is to acquire patents. While legal fees and patent application technicalities have historically been a barrier to small entities, Hulsey said that, for practically nothing, inventors can file for a provisional patent that’s valid for 12 months in the U.S.

“An inventor can just go onto the PTO website, upload his description, pay the $135 filing fee, and have a pending patent application for the software that he designed if he submits a writing that describes how to design and use the software,” he said.

“We have a number of clients that do this on their own. They’ve worked with the patent system long enough where they know what the level of disclosure is that they need to make, and they make the filing, and they come to us in the fifth or sixth or seventh month within that year period [to proceed] with a regular patent filing.”

There are a couple of benefits to filing a provisional patent: The first is the right to use the phrase “patent pending,” which can help startups to attract venture capital, Hulsey said. Another benefit is if two parties file competing applications, and the first to file the provisional application fails to file a regular patent application, that party loses its patent rights permanently.

As a result of patent reform, specifically the America Invents Act (AIA), the law has been changed to recognize the “first to file” rather than the “first to invent.” By default, the inventor who fails to follow a provisional filing with a timely regular filing loses his or her first-to-file status. Companies like Microsoft have an advantage here because they have infrastructures in place to avoid such errors.

Another reason to pursue patents offensively is to reduce the disparity of bargaining power as it relates to licensing. #!
“For startup companies and small inventors or a software developer, getting a patent or patents on your product can be a useful bargaining chip,” said Jackson Walker’s Rourk. “If a bigger company believes you’re infringing on its patents, and if your product really is outselling the other company’s product, or if it does something the other company’s product doesn’t do, you can negotiate with the company and cross-license, and potentially generate revenue from the cross-license.”

One challenge Google has had has been its relatively limited patent portfolio as compared to Apple and Microsoft. Google’s recently approved acquisition of Motorola Mobility will help because Google will own 24,500 more patents, 17,000 of which have been granted and 7,500 of which are pending.

“Google’s acquisition of Motorola Mobility will help them substantially. They’re acquiring an enormous patent portfolio with buying Motorola Mobility,” said Rourk.

Patent ownership can also affect the direction of licensing negotiations. “If a company has had success to the point where they’re in the marketplace and they have pursued patents, their discussion is going to be relevant to what they’re manufacturing and what they’re selling, not the entire portfolio of an entire large company like Microsoft,” said Hulsey.

“The dimension of those discussions can vary, but the company that has made the effort to be diligent in the identification of its patent rights and pursuing its patent rights is going to be in a better position. How do they do that? Our attack is to get as many early, inexpensive filings as possible, and so we use the provisional patent application.”

The choice of licensing and paying royalty payments (settling quickly or not) is a business decision. For some companies, the answer is based on a formula; for others, it’s a matter of reputation.

“One [solution] is to take more of the economic approach like the larger companies, which is the cost of litigation is X, so we’ll just settle for a percentage of X,” said Munsch Hardt’s Hyland. “I mean, there are significant costs; it can cost millions of dollars to take a case to court, even a small one.

“[Others] don’t care if a company is asking for $50,000. They’ll fight them. They’re trying to build a reputation of being kind of tough about this stuff.”

While many companies may be threatened with patent litigation, the real targets are successful companies, not small companies or individuals whose meager assets are insufficient to satisfy a judgment.

Updegrove said that even though litigation may be brought against one entity, it’s not going to be brought against everyone. He cited SCO as an example.

“SCO sued four companies, if I recall (including two customers), but only engaged in protracted litigation with two vendors. The courts put the other two suits on hold, since it doesn’t make sense to litigate the same issues in multiple courts. And, of course, it’s very expensive,” he said.

Since a patent suit only relates to the laws of one country, the patent holder has to sue in another country if it wants to stop sales there as well. The cases take a long time to litigate and often settle in the end.

“The net result is that when you get a letter from a patent owner alleging infringement, the first thing you try and do is ignore it, because you may be one of a hundred companies that got the same letter,” said Updegrove.

“If that doesn’t work, then you might ask for more specific information about [which] products of yours the patent owner claims would infringe the patent, and often that letter will go unanswered. So it’s a little like why fish school together. Yes, one of them may get savaged by a shark, but the rest just swim around and never get touched.”#!
The case against software patents
Software is a relatively new addition to the patent system. Some say it never should have happened in the first place; others say it’s been going through growing pains.

“It’s a lunatic’s policy to allow patents to cover software features or software techniques,” said Richard Stallman, president of the Free Software Foundation. “One large program can contain thousands of ideas. Allowing patents to restrict the use of those ideas is begging for gridlock, and it should be no surprise that we see people blaming each other.”

Patents provide incentives to publish useful ideas, but the actual benefits fall short, Stallman said. “We have to ask what kind of harm they do, what price does society pay for this supposed incentive to publish useful ideas? In software, the price imposed by the patent system is tremendous since large programs combine so many ideas into one program,” he said.

Overbreadth is a problem
The patent system itself has been the cause of some patent disputes and litigation. For one thing, software patents are not as mature as manufacturing methods. As a result, the database of prior art has been relatively limited, which means that patent examiners have had a hard time determining what the proper scope of some patents should be. As a result, some patents are overly broad, which causes problems in and out of court.

Christopher Rourk, a partner at the Jackson Walker law firm, thinks that developers could be more aggressive in fighting software patents they don’t believe should have been issued.

“There are groups that file patent reexaminations against such patents, and the programming community is in a good position to find prior art for attacking such patents in the patent office, which is less expensive than doing so in court,” he said. “There are also new post-grant challenge procedures that should be implemented by the patent office later this year, if things go according to schedule, under the AIA. It would certainly make sense for companies or organizations that believe strongly in freedom from software patents and [free software] to set aside some funds and organize members to identify objectionable software patents, and to challenge them at the patent office.”

Patent protection or patent aggression?
Microsoft’s stance is that it is protecting its patents from infringement. Stallman calls Microsoft’s tactics and the tactics of other aggressive companies “patent aggression.”

“They’re a form of unjust aggression because software patents [are used] as something that is clearly not defense, and that’s enough to make it wrong,” he said. “I don’t want to draw distinctions about how far these companies go. Any use of a software patent for anything other than defense is wrong.”

To ensure that free software remains free, the Free Software Foundation put various clauses into the GNU General Public License (GPL), and even more of them into GPLv3, that protect code but not ideas.

“There can’t be a shield against patents,” said Stallman. “All we can do with our copyright-based licenses is impose the choice that a program will die rather than become non-free. We call this the ‘liberty or death’ clause. If free software were to be turned into non-free software because of a patent, that would be worse than if we had not written it at all. So we can save our programs from a fate worse than death—that is, being instruments to subjugate people.”

The best thing software developers can do to overcome the ill effects of software patents is to lobby against them, said Stallman. “Join to pressure for the abolition of software patents,” he said. “That’s the long-term solution. People should take a look at to see why software patents should be abolished.”