The Motley Fool offered the “Lowdown on Patent Shakedowns” and talked about the rise of the patent terrorists in a recent article. It seems that the rhetoric has really ratcheted up a notch recently – there must be some intense lobbying going on.

The term patent terrorists (or the more polite, patent trolls) has been showing up quite a bit lately in the news. This refers to any person/entity that owns a patent or patents but never develops products based on them but threatens others with litigation with demands for payment of license fees.

What’s interesting is that the article seems to draw a distinction between the business of licensing patents – described as a legitimate enterprise – and patent terrorism, a form of licensing that does not follow an established code of conduct. I don’t know where this code is posted but if someone has a citation, please send me a link, I’d like to see it.

From the article, patent licensing apparently means licensing if done by a large company (the article mentions IBM and TI), which for some reason is OK even though it is described as generating huge revenue streams for companies, revenue that must come from someone. Yet, the Fools say there is definitely a code of conduct for the licensing of innovative ideas here in the U.S., and patent terrorists often cross this time-honored line.

I realize they’re fools and all but what the eff are they talking about? And why do the Fools even care? If one is concerned primarily with investments in companies — companies that could be on either side of the equation — don’t you just want the company that reaps the greatest profit? Couldn’t a company that decides to license a product without commercializing it be a good investment? And how did the Fools come to be the arbiters of what practices in licensing patents will be considered legitimate?

The Fools seems to think that licensing is acceptable only if there is some form of return in kind, that is, cross-license agreements. The other “acceptable” scenario is if a company pays licensing fees to a patent owner and the ideas can give the company a significant boost in either time to market, profitability, or competitive advantage. The Fools say that in this case, the inventors “often provide consulting, design services, or other forms of technical assistance.” Both of these forms of patent licensing are good because they represent collaborations between two parties.

Patent terrorism, though, is an evil presumably because it doesn’t include either cross-licensing or help for the licensee with product development. Therefore, the result is not legitimate but is instead, a shakedown. The Fools even mention the target’s “so-called ‘infringing’ products.”

I’m not sure how the Fools would classify Ampex Corp., whose share price rocketed from $1 to $40 (now $32). Founded in 1944, it had been one of Silicon Valley’s greatest innovators. Ampex then hit a long, money-losing slump until it started aggressively enforcing its patent portfolio. Ampex filed lawsuits against large consumer-electronics companies, including Sony and Eastman Kodak, for infringing a patent on a method for displaying digital images. Royalties from that patent helped Ampex generate a profit of $47.1 million in 2004 on revenues of $101.5 million

Does that make it illegitimate? It’s funny that the Fools often recommended tobacco stocks in the past because of the massive return on investment and have now come out against licensors for asserting their rights. While the Baristas aren’t sure what the Fools have been smoking, they can’t help but notice the coincidence that this article came out just as Intel’s patent attorney is on a road show campaigning against those pesky patent trolls.


Update: I received this Ampex response to BusinessWeek from Dan McGlinchey, Senior Vice-President, Emerging Growth Equities Ltd.

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  1. Great article–here’s a edited version of my running dialogue with the Business Week reporter who authored this-

    He finally admitted that a company like Ampex might like, yeah, actually own IP and be entitled to, like, collect on it.

    Patent trolls is a neat little term the Intels of the world have come up with–but I guess people who steal IP are still just patent thieves, correct?
    Sent: Friday, April 08, 2005 5:28 PM
    To: Ante, Spencer
    Subject: RE: re ampex

    Re Shulman–my point was that he is often hired to defend infringers, so he does have an ax to grind with his perspective. What is ironic is the Wilson Sonsini handled the IPO for Dolby Labs recently, a company with a very similiar business model to Ampex, although much larger. As you may know, Ray Dolby was at Ampex in the 50’s. His brother Dale worked at Ampex for years. As a matter of fact, he is named on some of the patents Shulman is so exercised about. I wonder if Tom DeFilipps, who is the partner out of the Palo Alto office advising Dolby, will appreciate Mr. Shulman’s rheotoric.

    From: Ante, Spencer []
    Sent: Fri 4/8/2005 4:11 PM
    Subject: RE: re ampex

    Thanks for your thoughts. There’s no conflict with Shulman given that he’s making negative comments about Ampex, not Kodak.

    Your point about the time it takes to commercialize technology is a good one. But again, I did not take a position on Ampex and whether it was a patent troll. I merely reported the two sides of the debate, and impressions of others.


    Original Message
    From: Sent: Friday, April 08, 2005 11:43 AM
    To: Ante, Spencer
    Subject: RE: re ampex

    Hope you will disclose that Ron Shulman lost a very high profile case against Kodak for patent infringement just this past October representing Sun who had to bring in somebody else.

    Does the fact that patents created for their products introduced to the professional market in the early to mid 90’s took until the early 2000’s to be used in mass consumer products somehow negate the fact that it is their intellectual property and that they should be paid for its use?

    Also, here is a list of royalty collections over the past years. Does not include 2004. Hardly a “dusting off of patents” .

    Royalty Income by Year

    Sources: Annual Reports by Year
    Income (millions)


    Original Message
    From: Ante, Spencer []
    Sent: Friday, April 08, 2005 11:30 AM
    Subject: RE: re ampex

    Thanks for your note.

    I did not take a personal stand on this issue but several lawyers I spoke with seemed to feel that this was a legitimate point/perception, especially in Silicon Valley.

    One lawyer I spoke with, Wilson Sonsini’s Ron Shulman, called Ampex a “slightly more civilized version of a patent terrorist.”

    The reason according to him is that Ampex, though it was innovative in the past, has not really done anything of import for a long time.

    We will be posting an interview with Shulman on the Web site soon.

    Anyway, as the story shows, there are other issues to be concerned about with Ampex as well from an investor’s perspective.



  2. I just don’t get it. Large companies regularly enforce their IP even though such IP is not central to their business activities (IBM). How is that different than a holding company’s enforcement activities, especially if they shares royalties with the inventor who otherwise would never be rewarded for their efforts? I think we are hearing the infringer’s PR department pitch.

    Be careful.