For the past two years, Cox Communications has spent hundreds of thousands of dollars fending off a lawsuit involving a fingernail-sized microchip that the MSO uses in its data services.
Cox, AT&T and five other distributors have been distracted by this infringement lawsuit, which seeks patent licensing fees based on data usage involving tiny photonic integrated circuits used to deliver Internet service to millions of subscribers over a six-year period.
The suit, from Yorba Linda, Calif.-based Cambrian Science Corp., is part of a new wave of patent litigation aimed at cable operators and other technology users, rather than equipment vendors, the traditional target of such actions.
In legal parlance, Cambrian is a “non-practicing entity,” or NPE. To cable operators and other big tech firms, NPEs have a more familiar name: patent trolls. In the last five years, the top five cable operators have faced roughly 200 patent-infringement suits costing millions of dollars in legal fees. Overall, media companies may spend up to $5 billion this year to fend off trolls, also known as “patent-assertion entities,” or PAEs. Congress has also ramped up its role, with omnibus patent troll legislation introduced in the House and Senate during the past two weeks.
Several analysts expect that cable’s increasing reliance on software and its move to cloud delivery will create more targets for troll attacks on operators as technology users.
Another wave of legal assaults against cable operators is brewing, according to communications attorneys who requested anonymity. Rockstar Consortium, an NPE that paid $4.5 billion in 2011 for the Nortel Networks patent portfolio, has contacted cable operators threatening to sue for patent infringement, legal experts familiar with the situation said. Rockstar, jointly owned by Apple, Microsoft, Blackberry, Ericsson, Sony and EMC Corp., may have better heritage than other socalled trolls, but its strong-arm approach to cable operators will be just as threatening and costly, attorneys said.
American Cable Association president Matt Polka recalled a recent “patent predator” assault that affected many of his trade group’s small, independent members as well as “larger MSOs.”
“The threat of patent trolls is a huge concern for our members,” Polka said, citing recent litigation in which Acacia Media alleged that cable operators violated “a patented process for delivery of digital signals” that Acacia had acquired. Operators “were threatened with litigation if they didn’t pay up and agree to Acacia’s alleged extortion — ‘license agreement,’ as they called it,” Polka recalled, noting that the case dragged on for nearly three years.
“A number of [operators] did agree to pay, unfortunately, to avoid the litigation costs,” he adds, declining to identify the cable companies. Eventually, “Acacia lost some pending cases and, as a result, lost some steam, but the agreements … are still good and they are still getting paid.” Polka voiced concern that “other opportunistic patent trolls” could launch similar assaults.
“The threat by these trolls is the cost of litigation and costs of extorted settlements that take away the means for our members to launch more significant digital and broadband services,” Polka said. Such threats are behind ACA’s support of “legislative, regulatory or administrative efforts to limit the ability of patent trolls … to strong-arm our members.”
The latest acceleration was NPE Custom Technologies’s August patent assault on the broad “on-demand presentation” systems used by cable operators. Custom Technologies challenged Comcast, Cox and Charter Communications, among other multichannel video-programming distributors.
Cambrian Scientific’s pursuit of Cox is typical of a new trend, as NPEs and PAEs go after sources of ongoing revenue — communications carriers, in these cases — rather than one-time payments from vendors to settle technology licenses.
David Long, a patent specialist at Kelley Drye & Warren who represents Cox in this case, noted that the technology encompasses voice, video and data communications services — all of which are troll targets.
“MSOs traditionally were not targets because they generally do not develop technology themselves, they just purchase it from a vendor,” Long said.
Legitimate vendors would normally “leave their MSO customers out of patent suits,” he added. But “non-innovating, non-practicing patent assertion entities” have no qualms about suing technology users.
“Rather than go after equipment vendors in which a licensing fee or damages award would be a one-time payment based on the cost of the equipment,” Long said, PAEs and NPEs “prefer to go after the MSO that purchased the equipment and get some running royalty based on a percentage of the revenue generated from using the equipment.”
Despite the increasing attacks, many cable-industry officials and organizations are loath to discuss the festering patent-troll situation. They cite factors ranging from confidentiality to concerns that Wall Street may downgrade the cable industry if the patent attacks become more frequent.
The National Cable & Telecommunications Association and CableLabs — two industry groups involved in regulatory and legislative strategies to stem the troll assaults — declined to comment for this report.
One view commonly held by attorneys who asked not to be quoted is that “one man’s ‘troll’ is another person’s hero.” PAEs, NPEs and “Patent Monetization Entities” (PAEs) — another recently coined phrase — claim to be the saviors of small investors and creative innovators who deserve financial rewards for infringement by global corporations.
Whatever the rationale, there is no question that PAE suits against cable firms have required significant, costly attention. Since 2008, MSOs have become enmeshed in hundreds of patent-related lawsuits. According to the Westlaw database of patent proceedings, Comcast has been involved in 48 such cases (five in 2013 so far); Time Warner Cable has faced 31; Charter Communications 34; and Cablevision Systems 16. Cox Communications ranks first, involved in 72 patent cases since 2008.
Overall, media companies last year faced just slightly fewer lawsuits than the highly contentious “mobile communications and devices” sector, according to the 2012 NPE Activity Report compiled by RPX, a San Francisco firm specializing in patent research and litigation.
Most of the cases are brought by NPEs and PAEs, which acquire underutilized patents and then seek payments from operating companies that use technology or systems which, they claim, are covered by them.
Although it’s impossible to know which patents the trolls are hoarding, the past few years have shown that such outfits will go after any target they can find. Despite a new Federal Trade Commission investigation into PAE activities launched last month, the litigation-minded trolls have plenty of opportunities to continue their attacks and are unlikely to back off since they have almost nothing to lose, according to lawyers involved with cable firms under attack.
Companies and law firms decline to put a precise cost on cable patent litigation and settlements; many such cases are sealed.
Overall, these patent attacks may cost the media industry nearly $5 billion this year, based on research that puts an $80 billion annual price tag on patent suits overall and indicates that 6% of the cases involve “media content and distribution” firms. (The $5 billion figure is an estimate based on the vastly different sums paid in various sectors to handle the patent cases, but represents a reasonable range, according to knowledgeable observers.)
COST FOR CABLE COMPANIES
Paperwork is a major expense for cable companies defending against NPE. For example, in its suit against Cox and others, Cambrian Science claimed that “getting billing statements was ‘critical’ to their case,” Long said. Compiling such billing information, then redacting customers’ personal data, would have been extraordinarily costly for the defense, Long said.
After extended legal maneuvers in late 2012 and early this year, the U.S. District Court for the Central District of California in Los Angeles ruled that Cox and other providers did not have to produce that billing minutiae, despite Cambrian Science’s insistence that such data was essential for its damages model.
Cambrian was fishing for anything it could get, Long said, using a common NPE tactic: Making the cost of defense so expensive that carrriers would find it cheaper to pay Cambrian to go away.
“NPEs don’t have the restraint that practicing entities would have,” Long said. “They want to be able to throw a big dollar figure in front of a jury and say, ‘We just want a small portion.’ ” Moreover, non-producing companies such as Cambrian Science can request overly burdensome discovery without “having to worry about responding in kind,” he noted.
“They are not looking to enter business relationships with the target company,” Long said. “Their only business goal is to maximize financial return on the patent — take the money and run.
“Litigation is not disruptive to their business because litigation is their business,” he added. “In contrast, a target operating company, such as an MSO, may have thousands and thousands of documents and many witnesses.”
Long calls such litigation “a distraction” from the operating company’s core business, as well as a major expense.
Mark Chandler, general counsel of frequent troll target Cisco Systems, took it a step farther. He called the NPE lawsuits a “tax” because they are “an extraction that is unrelated to any product that is provided.”
“If you can credibly tax an end user of a service that includes a semiconductor, you can get more money than if you sue the company that actually makes the semiconductor,” Chandler said. “The bad news is that these suits are proliferating; the good news is that the courts have caught on” and may soon curtail egregious suits.
The attacks on MSOs have upped the ante for vendors such as Cisco.
“We have a number of cases in which we’re indemnifying customers,” Chandler said, underscoring the extended financial impact of the PAE’s attacks on the cable industry.
WASHINGTON STEPS IN
As cable operators fend off patent attacks in court, Washington is accelerating efforts to curb abuses. At least a half-dozen patent-reform bills are moving through Congress; the Federal Trade Commission has launched an investigation into PAE practices; and the White House and Government Accountability Office have also weighed in.
In late September, the FTC initiated an investigation of 25 PAEs, seeking to “better understand how they impact innovation and competition.” The agency’s examination surfaced barely a month after the GAO recommended in its report Intellectual Property: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality” that the U.S. Patent and Trademark office “improve patent quality and examination” procedures to reduce abusive lawsuits.
In early June, the Obama Administration issued a five-point “Patent Assertion and U.S. Innovation” report to improve incentives for “future innovation in high-tech patents.” The White House plan also seeks to curb abusive patent litigation.
Congressional anti-troll action has accelerated. Last week, Sen. Orrin Hatch (R-Utah) introduced the Patent Litigation Integrity Act, a companion to Rep. Bob Goodlatte’s (R-Va.) bill introduced a week earlier that would make it harder for PAEs to attack legitimate businesses. For example, Goodlatte’s plan would protect “covered customers” (such as cable operators) from being drawn into infringements suits against manufacturers. The proposal would also require PAEs to specify infringement claims, rather than broad fishing expeditions, and would require PAEs to bear court and attorney costs if they lose the suit. Such approaches would be disincentives for frivolous suits, supporters have claimed.
Cisco’s Chandler said he sees “more momentum for patent reform than in the past half decade” and expects Congress to act as a “broad swath of customers [are] now affected” by patent abuses.”
“Patent trolls” are increasingly targeting the largest cable operators and their subscribers as the FTC launches an examination and Congress steps up reform efforts.
MSOs Under Attack
Among the most recent patent troll attacks on cable companies:
Custom Media Technologies LLC has accused Comcast, Cox Communications, Charter Communications, AT&T and DirecTV of violating a patent on distribution of customized video-on-demand and audio presentations. Custom Media seeks a “reasonable royalty” plus other damages. It claims that the patents which it acquired cover presentations of “on demand” content from a centralized location delivered via cable networks, the Internet, a broadcast TV network or a satellite system in a bandwidth-efficient manner.
Brilliant Optical Solutions LLC sued Comcast, Time Warner Cable, Cox and others for infringing on a “fiber-optic information- transmission system” patent filed in 1996 by a now-deceased inventor. Brilliant is a subsidiary of Acacia Research of Newport Beach, Calif. Acacia and its subsidiaries filed 212 patent suits last year. Both cases are in early-stage litigation.
— Gary Arlen