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Why tech giants are spending billions on patents Add to ...

When 2011 comes to a close, it’s a good bet that at least three of the biggest deals in the technology sector this year will have involved the transfer of patents.

Last month, a consortium led by Apple , Microsoft and Research In Motion bid a whopping $4.5-billion (U.S.) for 6,000 Nortel patents. This week, Google offered $12.5-billion for Motorola Mobility , acquiring its war chest of 17,000 patents. Also this week, Canadian patent licensing firm Wi-LAN made a $480-million (Canadian) offer for another Canadian patent company, Mosaid .

To understand why the biggest technology companies are suddenly spending billions of dollars on patent portfolios, consider the case of Lodsys.

Little-known outside legal and technology circles, the Texas-based firm tries to generate revenue by enforcing four patents it own that relate to online interactions and payment methods. Like other patent firms, it has sued some of the largest tech companies in the world, including HP and Motorola.

However, Lodsys went a step further. Earlier this year, it began demanding settlements not just from big firms, but from individual (and often relatively tiny) app development shops. The move sent shock waves through an industry worried that the growing litigation would cripple the fastest-growing sector of the technology market – consumer mobile products such as smart phones and tablets. In this market, a single patent can apply to dozens of different (and lucrative) devices.

Apple and Google both stepped into the legal fray to fight back. Today, the Lodsys courtroom saga has sprawled into dozens of cases against at least 33 defendants ranging from Samsung to Best Buy, Adidas to the New York Times Company.

And that’s only one example. What was once a cold war, with companies stocking up on patents but rarely enforcing them, has turned hot. Not only are patent-licensing firms looking to cash in on their portfolios, but big companies such as Apple and HTC are involved in myriad patent cases around the globe.

“The thing that is a bit different is we have a sort of unprecedented patent war between many of the handset companies,” says Jim Skippen, chief executive officer of Wi-LAN. “That is something new, and it’s getting a lot of airplay.”

Patents have suddenly become the No. 1 issue for myriad large tech companies for two reasons: A host of patent firms such as Wi-LAN have become more aggressive – and, in many cases, successful – in pushing for licensing deals from companies they believe are using their patents.

But perhaps more importantly, major players in the tech space are increasingly using patents as a tool to fight competitors. This summer, Apple managed – albeit temporarily – to convince a German court to ban new shipments of Samsung’s Galaxy tablet computer throughout most of Europe. The court order showed just how disruptive a patent dispute loss could be for companies.

The threat of being banned from entire marketplaces is in large part why big companies have been so inclined to fight or try to settle patent disputes. Indeed, a major reason RIM paid Virginia-based patent firm NTP Inc. $612.5-million to settle a court case in 2006 was the potential consequence of a court-ordered injunction against BlackBerrys in the U.S.

Because of its size and its role as the epicentre of the industry, the U.S. is the most important jurisdiction for technology patent disputes. But given that cases can take years, and millions of dollars, to resolve, small-time inventors or businesses find it difficult to defend their patents.

Additionally, judges and juries in technology patent cases are often not technically inclined. “It’s not trivial to understand what a patent covers,” says Florian Mueller, a prominent patent expert and blogger. “The closest thing to a patent expert on the jury might be a grade-school teacher, but that jury will determine if a patent is valid and how much you’ll have to pay.”

The difficulties begin well before any parties see the inside of a courtroom. The first hurdle is simply identifying if, and by whom, a patent has been infringed. Whereas pharmaceutical industry patents, for instance, tend to use consistent and easy-to-search terminology, technology patent keywords can be as vague as “object” or “network.” And while a pharmaceutical product may potentially infringe on one or two existing patents, a single piece of hardware or software could infringe on hundreds.

“It’s complicated because the question in many of these cases is whether this patent that was issued 10 years ago, and it may have been a valid patent ... applies to an app on an iPhone today,” said Edward Naughton, a lawyer representing several app developers who recently received licensing demands from Lodsys.

The U.S. patent industry was on the verge of cataclysmic change earlier this year, thanks to a case that Canadian software firm i4i filed against Microsoft. The case alleged that a piece of code in Microsoft’s Word product infringed on i4i technology.

Microsoft took the case all the way to the U.S. Supreme Court, losing every decision along the way. Microsoft argued before the top court that it should be easier to have a patent declared invalid – something that would have had profound impact on the entire technology industry, had the Supreme Court not shot it down.

The software giant argued that the high standard required for invalidating a patent would stifle innovation, i4i argued that weakening that standard would do the exact same thing. In legal filings, many large technology companies sided with Microsoft, while many venture capital firms – which invest predominantly in small technology start-ups – sided with i4i.

Even though the Supreme Court decided to maintain the status quo, the argument over patent reform has become increasingly more high-profile (thanks in large part to frequent criticism of the current system by Google, a company that holds far fewer patents than many of its competitors). U.S. Congress has stepped into the fray, considering possible options for improving the system.

But unless there’s a major change in the system, it is likely the world’s biggest technology companies will continue to write billion-dollar cheques in order to stock up on as many patents as they can, if only to avoid the massive ongoing court costs. According to a recent prospectus filed by patent company RPX Corp., there were some 40,000 defendants named in U.S. patent infringement cases between 2005 and 2010, with total litigation costs in the tens of billions of dollars.

“That’s a big debate that’s under way in the legal and tech communities [as to how to fix the patent system],” says Mr. Naughton. “And it’s not an easy question.”

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