Can mobile phone innovation survive the patent trolls?

A recent study claimed "patent trolls" cost industry billions of dollars a year

Patent litigation among the world's leading mobile phone companies is on the rise.

Barely a week goes by without a development, whether it is Apple and Samsung trying to prevent each others' products from going on sale, or Microsoft forcing another handset maker to pay it a licence fee for the alleged use of its technologies in Google's Android software.

However the legal action is not limited to the big brand names.

Experts also point to a rise in activity of so-called patent trolls - a derogatory name given to organisations that aggressively defend patent libraries without releasing products of their own.

This, the second of two reports into the patent wars, starts by exploring their role.

Unsurprisingly, litigants try to avoid being associated with Scandinavian folkloric monsters wherever possible.

So the industry uses the term "non-practicing entity" to refer to organisations that own and license patents without producing goods of their own.

One of the best known is Intellectual Ventures, which has a library of more than 35,000 patents.

Set up by a former Microsoft executive, Nathan Myhrvold, it recently revealed it has earned over $2 billion through licensing its portfolio to others since 2000.

Like the phone makers it is willing to take legal action to protect its assets.

Earlier this month it sued Motorola Mobility, accusing the handset maker of using its technology to perform updates, file transfers and other functions on its Android phones.

Intellectual Ventures declined to contribute to this report, but previously referred to the case saying: "We will not tolerate ongoing infringement of our patents to the detriment of our current customers and our business."

Expensive

A recent study, called "The private and social costs of patent trolls" by Boston University law professor, James Bessen, suggests such cases are not uncommon.

He found NPEs initiated more than 2,600 lawsuits against US companies in 2010, more than five times the number than were filed in 2004.

Based on the resulting damage to the defendants' stock prices, he estimates the actions cost them more than $83bn a year over the last four years.

You might think that would act as an incentive for the technology giants to license patents from their inventors, rather than risk court action.

However, Professor Bessen says the reverse is true because successful claims are often the result of "inadvertent" infringements.

Since companies are having to put aside money to cover these lawsuits, he claims they then have less cash to pay for third party innovations.

"The defendants in these lawsuits are firms that already invest a lot in innovation," Professor Bessen said.

"Their losses make it more expensive for them to continue to do so and it also makes them less willing to license new technologies from small inventors."

Fight back

The rise of the NPEs has led to creation of a new type of business, which describes itself a "defensive patent aggregator".

Apple used the FRAND defence to prevent Samsung from banning sales of its iPhone in the Netherlands

One of the first examples is a company called RPX. It was co-founded three years ago by John Amster, an ex-employee of Intellectual Ventures.

Like NPEs, RPX owns a patent library which it licenses out. But it markets its service to others as protection against legal disputes, vowing never to launch a patent lawsuit of its own.

For an annual fee its clients are offered use of RPX's portfolio to help them countersue or settle third party claims. The firm then reinvests part of its earnings to further extend its patent collection.

The service appears to be popular. The firm's prospectus says its clients include Sony, Sharp, Samsung, Nokia and Google.

"The high transaction costs associated with NPE litigation are a tax on the tech industry," Mr Amster told the BBC.

"Today, nearly 50 cents of every dollar spent does not make it to the patent owner."

RPX's fees may help save its clients money in the long run, but it all adds to the costs of the patent wars.

The FRAND defence

Another way companies can limit their costs is to claim the technology involved is essential to an industry standard.

When a new technology - such as JPEG format photographs, or the GSM telephone network - is created, industry player agree to license related patents on fair, reasonable and non-discriminatory (FRAND) terms.

This means the patent owner's fee cannot be excessive and it is not allowed to discriminate who gets to use the innovation

The idea is to ensure different companies' products can communicate and share data formats with each other.

"Consumers benefit from this because standards promote interoperability of products and processes, as well as encouraging 'intra-standard' rivalry between multiple manufacturers who each want to be the best in that field, and beat the others," said Jonathan Radcliffe, a London-based partner at the law firm Mayer Brown.

Apple used the FRAND defence against Samsung in the Netherlands earlier this month when a Dutch court ruled that the South Korean firm's 3G patents were part of essential standards, and could not be used to ban iPhone sales.

However, enforcing FRAND standards opens the door to another set of potential abuses.

Companies may be tempted to over-declare their number of FRAND-type patents in order to attract extra fees. The more patents they declare as essential to a standard, the larger the number of license charges they can potentially claim.

Conversely, firms may prove coy at the declaration stage.

Mr Radcliffe said that in cases where the standard setting organisation fails to issue clear rules "some participants might be tempted to hold back some patents so they have a weapon to deploy against competitors to keep them off the market and/or to force a significantly higher payment".

Collateral damage

In September President Obama signed into law a bill reforming the US patent system. It is due to come into effect in March 2013.

The new rules allow businesses to examine newly granted patents and challenge the decision to grant them within a nine month window, potentially heading off the prospect of court action.

It also places new limits on NPEs, preventing them from launching infringement claims against multiple targets unless there is evidence of collusion. The new principle of "one defendant-one lawsuit" should mean they sue fewer firms.

However, other proposals to restrict the freedom to file lawsuits and limit damages awards were abandoned.

"It makes some useful technical changes, but does nothing to address the core problems," says Kevin Werbach, associate professor of legal studies and business ethics at the University of Pennsylvania's Wharton School.

"I worry about the overhead that large players will have to spend in defensive patent manoeuvres, and the innovative start-ups that will never get off the ground because of threats from patent holders."

It looks like the patent wars, and their fallout, are set to spread.