What a successful patent troll looks like

[DontSayBanana]

http://arstechnica.com/tech-policy/2014/01/court-orders-google-to-pay-1-36-of-adwords-revenue-for-infringing-patents/

LAW & DISORDER / CIVILIZATION & DISCONTENTS
Court: Google infringed patents, must pay 1.36 percent of AdWords revenue
Holding company Vringo used old Lycos patents to wrest a win worth many millions.

by Joe Mullin - Jan 28 2014, 9:30pm EST
PATENTS

Vringo is a tiny company that purchased some patents from Lycos, an old search engine, in 2011 and then used those patents to sue Google. In December 2012, Vringo won $30 million in a jury trial, but that was far less than the hundreds of millions it was seeking.

Today, Vringo got the payout it was looking for: a 1.36 percent running royalty on US-based revenue from AdWords, Google's flagship program. US District Judge Raymond Jackson had already ruled last week (PDF) that the AdWords program, which was tweaked by Google after the Vringo verdict, wasn't "colorably different" from the old infringing program. He gave Google and Vringo one last session to hammer out a royalty rate, and when they couldn't, he went ahead and set it (PDF)—at almost exactly the rate Vringo was seeking.

Because some aspects of Google's revenue are opaque, it's impossible to know exactly what Vringo's win would be worth—and the company is a long way from cashing a check. But if the royalty rate were to be upheld on appeal, Google would surely have to pay hundreds of millions of dollars.

Whatever its worth, it will lift the hopes of patent-holding companies around the nation. A 2006 Supreme Court decision makes it almost impossible for so-called "patent trolls" to get an injunction that would knock a product out of commission; in the context of 2014 case law, a solid running royalty is a troll's dream come true. Jackson followed the methodology laid out in an East Texas case in which Yahoo was found to infringe an online advertising patent owned by famed patent troll Acacia.

The math is a little confusing. Today's order sets a royalty rate at 6.5 percent, on a "royalty base" of 20.9 percent, for an overall rate of 1.3585 percent. The royalty base is supposed to calculate what the Vringo-owned patents add to Google's search system.

"My reaction is pretty darn positive," said Jeffrey Sherwood, the lead lawyer on Vringo's trial team. In Vringo's view, the patents describe Google's ad-filtering system, which ranks various possible advertisements against each other in an auction. "They have a huge inventory of ads, and they have to get it down to the few that are the most relevant to their users. These patents describe a way to do it. And our position is, that's the way Google does it."

Jennifer Polse, Google's lead patent lawyer on the Vringo case, said that the company has already appealed the jury verdict and will appeal today's royalty award as well. "We believe strongly in our pending appeal in this matter, and we anticipate seeking Federal Circuit review of today's decision as well," said Polse in an e-mailed statement.

AOL, Gannett, Target, and IAC were named as co-defendants in the lawsuit for their use of AdWords. However, they've been indemnified in this case by Google, which is handling the litigation. Vringo brought the case under the name I/P Engine, a subsidiary it created to hold the two patents it purchased, numbered 6,314,420 and 6,775,664.

Vringo also sued Microsoft over ads in its Bing search engine. Microsoft settled that case in May, agreeing to pay $1 million plus 5 percent of whatever Google ultimately pays.

While publicly traded Vringo also has a "video ringtone" business, its financial statements describe its business as now being focused on patent assertion. The company has 28 full-time employees, has generated "no significant revenue to date," and had more than $10 million in legal expenses in 2012.

Vringo stock rose 13 percent before trading was reportedly halted.

Redesigned system wasn't different enough

In today's order, Jackson awarded Vringo almost exactly the royalty it wanted. The company's expert argued for a royalty of 5 percent, and Jackson chose to award 4.6 percent. Vringo wanted a 40 percent increase on the rate because Google was found to be a willful infringer, and Jackson agreed that was reasonable. Knocking up 4.6 by 40 percent comes out to 6.44 percent, which the judge rounded up to 6.5.

That's significantly more than the 3.5 percent royalty that the jury suggested, which was "only a starting point in the analysis," wrote Jackson in today's order.

Even though there was no evidence of copying—Vringo admitted as much—a willfulness adjustment was still appropriate, the judge found. "Defendants' misconduct continues presently and Defendants have taken no remedial action," wrote Jackson. "In fact, they have redesigned a system that clearly replicates the infringing elements of old AdWords."

In last week's order, Jackson said that Vringo had proven infringement of both the old and new AdWords systems. While he didn't go into the details of changes Google made, he did write that all Google had done was apply the "LTV" or "long-term value" score at a different point in the ad-selecting process. It was basically the same: "It is undisputed that new AdWords continues to use a candidate advertisement's LTV score that includes a predicted click-through rate in the process of choosing which advertisement will ultimately be shown to the individual performing the query."

Becker, the Vringo expert who convinced the judge on most points, has testified as a patent damages expert in many cases, including past cases over AdWords. In 2010, he argued that Google should pay patent-holding company Bright Response LLC between $64 million and $128 million, because AdWords infringed its patents, as well. Google won that case. Last year, Becker served as the damages expert for TQP Development, which won a patent trial against Newegg.

Back-of-napkin math on the Vringo win

Google doesn't break out AdWords revenue clearly, but the company made $9.39 billion from "Google-owned sites" in the last quarter. The company will likely make more than $35 billion in 2013 in this area. The majority of that is surely AdWords, since estimates for YouTube range from $3.7 billion to $5.6 billion. Around 55 percent of the company's overall revenue comes from the US.

Accepting those estimates, an extremely rough calculation suggests US AdWords revenue is somewhere in the range of $15 billion to $18 billion annually. If that's right, it would place the Vringo royalty win somewhere in the realm of $200 million to $250 million annually. The patents expire in 2016, and Google is liable from November 2012, which is the date final judgment was entered after the trial.

And of course, if Google loses, it will owe interest on the whole shebang.

It's all pretty academic at this point; the numbers are clearly high enough that Google is likely to fight this tooth-and-nail through the appeal process, and the parties have agreed to stay earlier judgments until the appeal is resolved.

Still, a royalty award that could potentially push the billion-dollar mark—on old search technology that not even Vringo believes Google actually copied—could become additional fodder in the ongoing patent debates in Congress.

In an interview today, Sherwood emphasized that debates in Congress over "patent trolls" don't apply to Vringo.

"The criticism doesn't relate to cases like this," he said. "There are situations where plaintiffs are filing cases that have no merit and extorting money out of defendants, because it's cheaper to settle. Obviously, in this case, we had a very good federal judge and jury come to the opposite conclusion."

[DontSayBanana]

This is nuts; the patent system has gotten way too easy to abuse.  At this point, I'm for making patents transferable only to the inventor's immediate descendants.  Anybody else should have to apply to be added to the patent and prove that they're actually working on the system that they're buying the patent for, instead of being allowed to buy patent "portfolios" and strategically sue people that actually do the engineering work for their living.

[The Minsky Moment]

This is nuts; the patent system has gotten way too easy to abuse.  At this point, I'm for making patents transferable only to the inventor's immediate descendants.  Anybody else should have to apply to be added to the patent and prove that they're actually working on the system that they're buying the patent for, instead of being allowed to buy patent "portfolios" and strategically sue people that actually do the engineering work for their living.

So you are punishing the inventor by severely impeding the vendability of the property right, thus reducing its value.

There are a lot of potential criticisms of the patent system that could be made - is it too easy to prove infringement?  Should lay juries be making infringement conclusions?  Does the cost of litigation need to be reduced somehow?  Are royalty/damages awards out of control?  Is the willfulness standard too generous?Are patents too easy to get?  Is the scope of the patent right too broad or the term too long?  And others.

But the idea that the real problem with patents is the ability to transfer the right just as any other kind of IP right or other property right can be transferred doesn't seem that powerful to me.

[The Brain]

This is nuts; the patent system has gotten way too easy to abuse.  At this point, I'm for making patents transferable only to the inventor's immediate descendants.  Anybody else should have to apply to be added to the patent and prove that they're actually working on the system that they're buying the patent for, instead of being allowed to buy patent "portfolios" and strategically sue people that actually do the engineering work for their living.

[DontSayBanana]

So you are punishing the inventor by severely impeding the vendability of the property right, thus reducing its value.

Absolutely.  The invention, not the patent, should carry the vendability.  The patent should only serve to protect that for the inventor, not be used as a barely-regulated financial instrument.

[The Minsky Moment]

barely-regulated financial instrument.

??
It's not a financial instrument, anymore than a building is, or plant and equipment, or a pile of aluminum, or for that matter a trademark or a copyright or a trade secret.
All of which are freely transferable.

[DontSayBanana]

??
It's not a financial instrument, anymore than a building is, or plant and equipment, or a pile of aluminum, or for that matter a trademark or a copyright or a trade secret.
All of which are freely transferable.

I'll bite again.

A building or a plant are hardly analogous to a patent.  Maybe we would be onto something if we compare the deed to the facilities, but if patent licensees had half the protections that a statute of frauds gives a building lessee, these patent trolls would be far less numerous.

Equipment is material assets.  You couldn't have picked a worse analogy there.

Trade secrets, by definition, have to be in business use by the owner to be trade secrets.  Which brings me to trademarks.

I'm glad you mentioned them.  Trademarks' enforcement is how patents should be handled.  Trademarks have to be in business use for them to be enforceable.  If patents were treated the same as trademarks, this story never would have happened- Vringo's only operations are spammy video ads, which have nothing to do with the old Lycos AdWords.

This is why I say they're being used as financial instruments.  They're being bought, the processes and items they mention are not being used as a part of business, but they're still drawing revenue from licensing schemes and settlements.  In other words, they have no value other than the fact of their ownership.

To go back to your first example of a building or plant facility, slumlords try this all the time, amassing properties they have no intention of maintaining while collecting rent checks- except they have the legal duty to maintain the property.  Patent owners seem to have no such duty.  They're simply trading in paper.  And isn't that exactly what a financial instrument is?

[The Minsky Moment]

I didn't make any analogies, I only denied that patents are a finacial instrument.  They are not.
Trademarks have to be in business use because by definition they use terms used to describe products, services, and businesses.  It is inherent in the thing.
Copyrights, which you elided, have no such requirement.  That is because copyright inheres in the act of creative generation and thus potentially prior to commercialization.  Kind of like patent.

[DontSayBanana]

And copyright trolls are causing at least as many problems as patent trolls.  What a wonderful poster child you've latched onto.

I'll go back on calling them financial instruments, but I stand by my point that simple possession should not be enough to enforce and monetize a patent.

Patents are supposed to protect the inventor by ensuring end-users are procuring genuine products or services provided by the inventor.  This is a legitimate patent, but the inventor is not involved, and the company owning the patent doesn't even provide the service in contention.  This case is a perfect example of why transference of a patent without requiring proof of business use is a bad idea.

[The Brain]

And copyright trolls are causing at least as many problems as patent trolls.  What a wonderful poster child you've latched onto.

I'll go back on calling them financial instruments, but I stand by my point that simple possession should not be enough to enforce and monetize a patent.

Patents are supposed to protect the inventor by ensuring end-users are procuring genuine products or services provided by the inventor.  This is a legitimate patent, but the inventor is not involved, and the company owning the patent doesn't even provide the service in contention.  This case is a perfect example of why transference of a patent without requiring proof of business use is a bad idea.

When you say inventor, do you always mean the human who has made the invention?

[Rasputin]

I have defended patent infringement claims and I have prosecuted them to include getting a permanent federal injunction against an infringer last year. Patent claims are difficult to prove and in the internet information era, it is much easier today to invalidate a patent based on prior art than it was a mere decade ago.

Should the inventor be able to make money on his novel creation? Yes. Thats what the patent system is for. What if the inventor does not have the capital to get the invention to market? Should he be allowed to sell it to someone else? Sure. This way the inventor gets the payoff and the product has a better chance to get it to market. Sometimes the purchaser (assignee) brings the product or process or design to market. Sometimes the purchaser doesn't and plans to solely make money off of licensing the invention to others better suited to get it to market. These people are called non practicing entities or "patent trolls" by some. If we devalue their property rights as asignee a whole category of buyer disappears from the market. Ultimately this hurts the Inventor whose market for his invention just shrunk.

All of the arguments against patent trolls seem so closed market and strangely moralistic. If I own a building no one judges me for renting it to others even if i dont live there.  What if my tenant rents the property for an entire year but never uses it? Shouldn't I still have the right to evict a squatter despite the fact that the building lay fallow? Why do people judge the patent troll for exercising his ownership rights or treat those rights as less real than the building owner or sublessor?

[Valmy]

Why do people judge the patent troll for exercising his ownership rights or treat those rights as less real than the building owner or sublessor?

Well for one you don't sue everybody else who wants to build a similar building and rent it out.  Sitting on a piece of technological innovation with the intent on making sure nobody does anything with it seems counter to progress to me.  We don't have that problem with the simple ownership of property.  I mean unless I guess you just buy up half of Florida with the intention of making sure nobody lives there and animals reclaim it.

I am not necessarily on team DSB here, just saying the analogy is a little weak.

[Rasputin]

Why do people judge the patent troll for exercising his ownership rights or treat those rights as less real than the building owner or sublessor?

Well for one you don't sue everybody else who wants to build a similar building and rent it out.  Sitting on a piece of technological innovation with the intent on making sure nobody does anything with it seems counter to progress to me.  We don't have that problem with the simple ownership of property.  I mean unless I guess you just buy up half of Florida with the intention of making sure nobody lives there and animals reclaim it.

I am not necessarily on team DSB here, just saying the analogy is a little weak.

you dont understand the patent troll

he wants people to use the invention...if no one uses the invention he makes no money...negotiated royalties are the trolls' livelihood

whats wrong with me buying a hundred acres of land by an exit ramp with the intent of never developing it ? nothing. isnt that my right as a property owner?

I fail to see your point valmy

[Rasputin]

either we accept that a patent is a property right or we dont. I continue to believe that by accepting that it is property and protectible, we incent inventors who know that their will be a payday for their delivering true novelty

[Josquius]

Well, nice to see google get stung by the patent system for once. Usually its them buying up everything and trying to stamp out competition.