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A Patent Claim That May Cost Millions
From: Dave Farber <dave () farber net>
Date: Mon, 03 Nov 2003 12:31:33 -0500
Delivered-To: dfarber+ () ux13 sp cs cmu edu Date: Mon, 03 Nov 2003 08:55:36 -0500 (EST) From: provost () georgetown edu Subject: Chronicle article: A Patent Claim That May Cost Millions To: dave () farber net _________________________________________________________________ This article is available online at this address: http://chronicle.com/weekly/v50/i11/11a03501.htm - The text of the article is below - _________________________________________________________________ Finding it hard to keep up with all that's happening in academe? The Chronicle's e-mailed Daily Report keeps you up-to-date in a matter of minutes by quickly summarizing current events in higher education while providing links to complete coverage on our subscriber-only Web site. The Daily Report and Web access come with your Chronicle subscription at no extra cost. Order your subscription now at http://chronicle.com/4free?es _________________________________________________________________ From the issue dated November 7, 2003 A Patent Claim That May Cost Millions By SCOTT CARLSON Few people have heard of Acacia Research Corporation, but John H. Payne III has given the company a lot of thought ever since it threatened the heart of his courses at the University of Virginia. Acacia has sent Virginia and other colleges a letter making an audacious claim: that the company owns long-forgotten patents covering the use of sound and video on the Web and is entitled to 2 percent of the revenue from courses that use such technology. The patents, which expire in 2011, cover the concept behind storing and transmitting sound and video, not the technical details. "It's as though they claim they hold the patent on air," says Mr. Payne, who runs the university's distance-education program. He says online audio and video are integral parts of not just distance education but of many classroom-based courses. "Those technologies are being incorporated into libraries and general-studies courses on campus," he says. "In more-traditional courses, we archive a lot of materials, so if a student misses a course, they might be able to see the lecture online." If Acacia's 2-percent fee were applied to courses and programs all over the university, "that would add up to a whole lot," he says. The University of Virginia will earn about $240-million in tuition this year, although university officials don't know how many courses use online audio and video technology. Risks of Litigation Acacia's demands, which have also been issued to companies that use the technology, have made college officials wonder about the future of online video and audio, two Internet features that many have taken for granted until now. They say that Acacia's licensing demand, backed by the threat of lawsuits, would add a huge new expense to colleges' technology programs, which are already running under tight budgets. And officials say that such costs could force colleges to stop adding new media features to course sites, which could hamper innovation in higher education. College lawyers are scrambling to figure out how to respond to Acacia, and in the meantime they're saying little. It's possible that they will find a silver bullet that will shoot down Acacia's claims. But they don't seem to have found it yet, and more and more colleges are getting letters from the company. Some college lawyers have hinted that they might fight Acacia's patent in court, but doing so could be an expensive and risky process. Acacia has already won some battles outside of higher education: It persuaded dozens of online pornography companies, as well as a popular online radio station and a major pay-per-view video company, to sign licensing agreements that turn over portions of their revenues. Ben Rawlins, general counsel for the Oregon University System, which received letters from Acacia, says that although the licensing claims ask for only 2 percent of gross revenue, a seemingly small proportion, that fee would hit colleges hard. "When you're talking about your entire distance-ed budget, 2 percent of that on an annual basis would get up there," he says. Chilling Effect Acacia, based in Newport Beach, Calif., owns 5 U.S. patents and 17 international patents that it says cover the transfer of various kinds of media over the Internet, a process often called "streaming." Acacia says the patents cover many instances in which audio and sound files are digitized, compressed, stored on servers, and then streamed to other computers for decompression and playback. Millions of people listen to and watch streamed files every day with software like Microsoft's Windows Media Player, Apple's QuickTime, and RealNetworks' RealPlayer. Using those programs, motion-picture companies show the latest movie trailers to filmgoers. Rock bands offer music to fans. Even The Chronicle supplements some online articles with, say, a snippet of a student film or a sample of a composer's music. For colleges, online audio and video have brought the classroom to the desktop computer. A recent survey by Gartner, a technology-research firm, indicates that 40 percent of college courses incorporate some sort of online audio or video. That figure could grow to more than half of college courses by next year. Sally M. Johnstone, director of the Western Cooperative for Educational Telecommunications, which seeks to integrate technology into teaching, says that colleges are using online audio and video in all areas of teaching. Acacia's patents might have a chilling effect, she says, not just on uses for existing technology, but on how quickly colleges adopt new ones. "If there is a whole new set of financial demands layered on top of what is already being paid, it's going to be really hard for colleges to continue to serve students in the way that they are," Ms. Johnstone says. "This is going to make people very nervous about what they should and shouldn't do." Jane Zahner, a professor of education at Valdosta State University, says that she uses audio clips in her distance-education courses to comment on students' papers. "Those are such basic tools," she says. "How could a company own them?" If administrators ask professors to limit their use of online media, she says, professors might still try to find a way to use it anyway: "There would be a fair amount of civil disobedience going on." Colleges' use of online audio and video isn't limited to education. Many admissions offices offer video tours of their institutions on college Web sites. College radio stations frequently transmit their signals over the Internet. And a number of major-college sports teams now offer video features. The University of Nebraska at Lincoln Webcasts entire games on HuskersNside, which has been up for a year and has more than 2,000 subscribers. Jeff Abele, who manages the site for the university, will not comment on what Acacia's claims might mean for the service, but he says many institutions have been eager to offer similar sports features. A Scent of Money Robert A. Berman, general counsel and senior vice president for business development at Acacia, says there is finally money to be made on his company's patents, which were granted in 1991 and sat idle through the Internet boom of the 1990s. "Money wasn't being made using streaming at the time," Mr. Berman says. "If you remember, everything on the Internet was free, and people were just figuring out how to use the technology." Acacia did not send letters to Apple, Microsoft, or RealNetworks, companies that have built businesses on developing and licensing online-media programs, for simple business reasons, Mr. Berman says. "It makes more sense from a business perspective for us to license the user of the technology that is receiving a recurring income stream from its use, rather than trying to license a software manufacturer that is giving away the software or licensing it for small amounts on a one-time sale," he says. He predicts that online video will become a main component of the courses that more and more colleges are selling online. "How good would their product be if it couldn't have audio or video content in it?" Mr. Berman asks. "In our estimation, it wouldn't be nearly as good. So frankly, on that basis, we might be entitled to much more of a royalty." But, he says, Acacia is reasonable and willing to negotiate. Colleges that cannot afford to give up 2 percent of their revenue or can't track their use of online video or audio might sign up for a fixed annual fee. He says Acacia's goal is not to put colleges out of business because if colleges don't make money from online media, Acacia won't make money. Making money through licensing has become an important goal for the company, which has been in the red over the past several years. A recent quarterly report noted that the company wants to acquire more technology patents and is serious about licensing those it already owns. If it doesn't, the report said, "our financial condition may be adversely impacted." So Acacia continues to send out letters to colleges. "Ultimately, we will get around to everybody," Mr. Berman says. "Our goal is to address these issues outside of court. We're not afraid to go to court if we have to." Last month lawyers from more than a dozen institutions set up conference calls to discuss Acacia's notices of infringement and how to respond to them. Calls have included lawyers from Azusa Pacific University, Georgia Institute of Technology, the Johns Hopkins University, the Montana University System, Seton Hall University, Stanford University, University of Maryland University College, the University of Pennsylvania, the University of Virginia, the University of Wyoming, and Valdosta State University. Most of the participants declined to comment on Acacia's patent claims. But one college lawyer, who asked not to be named, said that Acacia's demand would significantly hurt colleges, and that they wouldn't rush to sign the licensing deal. "I think our folding is highly unlikely," the lawyer said. The Oregon University System, also a participant in that meeting, got three letters -- for infringement at Portland State University, Western Oregon University, and the Oregon Institute of Technology. Mr. Rawlins, the system's general counsel, says a patent lawyer is reviewing the letters. He is also investigating whether the colleges already license streaming software through companies like Microsoft or RealNetworks. Depending on what their contracts say, those companies might have some responsibility for helping to defend the university from a lawsuit. Officials at Apple and Microsoft say they know nothing about Acacia's letters. But Mr. Rawlins says, "When we go back and look at the contracts and the threads through them, we could have a lot of interesting people on our side." Acacia has sent its letters to many small and midsized institutions. Western Oregon University and the Oregon Institute of Technology are the two smallest colleges in the Oregon system, Mr. Rawlins says. "You could also theorize that the smaller ones do not have the funds to fight," he says. In this, Acacia seems to have followed classic tactics for winning patent-infringement cases. Lawyers and patent experts say that patent holders often send notices of infringement to smaller companies first, hoping that such companies would rather sign small licensing deals than go through risky and expensive litigation. The risks of going to trial are considerable. One observer who requested anonymity suggests that colleges might be playing into Acacia's hand by banding together to fight the company. If the colleges were to lose in court, the observer says, the case would set a strong precedent that the company could use in seeking payments from other institutions. As court battles go, patent fights are among the priciest, costing several million dollars on average. A patent dispute can involve hiring researchers to invalidate the claims, getting experts to testify, and filing and sorting through reams of documents. And patent lawyers, who must pass special bar exams, are among the most expensive to retain. Mr. Berman says that Acacia is not using the threat of expensive litigation to bully smaller colleges. "There is no question that the cost of litigating is a disincentive, but we are not using that as a tactical advantage," he says. "We think that our patents stand on their own, and that our technology greatly enhances their online curricula, and that that speaks for itself." The Search for 'Prior Art' Patents can be struck down in court if they are deemed too broad or if the defendants can show that the patent came after closely related research or inventions -- what is called "prior art." Lawyers and experts who have looked at Acacia's patents say that because the patents appear to be so broad, they have a hunch that prior art exists. But that does not mean that a college or company could beat Acacia in court. The company hired Gregory Aharonian, a technology-patents expert, who says: "There could be some prior art where you can make a subtle argument, but it just gets tricky in a court before a judge. When you get in front of a jury with dueling experts, which is what I think this would come down to, a lot of patent litigators don't like that. You don't know what the outcome is going to be." Many companies facing a patent-infringement suit would settle and sign up for a licensing deal in such a case, he says. Ieuan G. Mahony, an intellectual-property lawyer who often works with the United States Distance Learning Association, says that colleges can unite to share the costs of litigation. "A patent holder might want to divide and conquer," he says. If institutions start signing up for licenses, Acacia can make a "lemmings argument" in court against those who hold out. "They can say, 'A whole bunch of smart people have paid me to license these, so how can you say that these are invalid patents?' It's a domino effect," Mr. Mahony explains. "If there are weak links in the industry, that buttresses Acacia's case as well." Once a company starts sending out notices of infringement, the "juggernaut is rolling," Mr. Mahony says. A defendant might stall, betting that the patent holder's claim is not as strong as it's billed to be. A patent holder, meanwhile, is betting that the defendant would rather negotiate a deal than fight in court. "It's a big, elaborate, expensive game of chicken," Mr. Mahony says. Taking on TV Acacia has played that game before, although it hasn't always won. The company owns a patent for video- and audio-censoring technology that Acacia officials say covers the V-chip. A standard component of televisions today, the V-chip allows a parent to block violent or sexual television programming. In the past few years, Acacia has been pursuing claims on that patent and managed to sign $23-million worth of licensing deals with major television manufacturers like Hitachi, JVC, Philips Electronics, and Samsung. Acacia took other companies to court. But in September 2002, the U.S. District Court for the District of Connecticut granted a summary judgment to the Consumer Electronics Manufacturers Association and the Consumer Electronics Association, saying that their V-chip technology did not violate Acacia's patent. Acacia has appealed. Acacia's video- and audio-streaming patents were originally granted to Greenwich Information Technologies, a company whose main business was helping inventors secure patents. Before Acacia purchased Greenwich's patents two years ago, Mr. Berman says, his company hired law firms and researchers in the United States, Europe, and Japan to make sure the patents were strong enough to withstand a court challenge. In 2002 Acacia began firing off letters to companies that were making money on online video and audio: Internet radio stations, hotel pay-per-view companies, and, mainly, pornography companies. "We get a lot of patent-infringement-claim letters, and we throw most of them in the garbage," says Zack Zalon, general manager of Radio Free Virgin, the Internet arm of Virgin Records, which is owned by the flamboyant billionaire Richard Branson. But Acacia's letter "stood out," Mr. Zalon says. Virgin's patent lawyers examined Acacia's claims, talked with the company, and decided to strike a deal. "We felt that a drawn-out, protracted legal battle would end up in Acacia's favor anyway," Mr. Zalon says, "and that at the end of the day, we would be offered the same license after the lawsuit as before." He says that Acacia was open to negotiation and easy to work with. He won't offer details on the deal. Strange Bedfellows Acacia's interactions with pornography companies have been less amicable. Adult Video News, the pornography industry's trade publication, has run many stories over the past year quoting indignant members of the industry. Tom Hymes, the magazine's editor, asked his readers to "show the world that just because you peddle porn on the Net doesn't mean that you're going to roll over every time someone points a patent at your head." But without putting up a fight in court, more than 40 companies have already signed licensing agreements with Acacia, including important players in the pornography industry like Vivid Entertainment and LFP Inc., the production company of Larry Flynt, Hustler magazine's publisher. E. Michael (Spike) Goldberg, chief executive of HomegrownVideo.com, is leading 10 pornography companies in a fight against Acacia. He believes Acacia's patents are too broadly written and could be knocked down in court. The companies have hired Fish & Richardson, a prominent law firm that specializes in intellectual property, technology law, and patent defense. Mr. Goldberg says that Acacia thought the porn industry would be easy pickings, adding that Mr. Berman once called the industry "low-hanging fruit." "They think we're unsophisticated," he says. "The perception is that we're a bunch of guys sitting behind desks with oily chests and gold chains, but we're not. We're executives like everyone else." Mr. Goldberg says he is taking a calculated risk in fighting back, and he has hopes that colleges will take the gamble with him. His company and the companies who have joined him in the suit are relatively small -- his own HomegrownVideo grosses less than $5-million a year -- and bills from Fish & Richardson are a heavy burden. He fears that if he loses his suit, Acacia will bump up its licensing fee to between 6 and 10 percent. But Mr. Goldberg believes that his lawyers have found enough prior art to defeat Acacia in court, so he is pressing ahead. He has a message for administrators in higher education: "I know it's not comfortable to hear this from someone in adult entertainment, but join up with us. If we end up signing with Acacia, there goes all of the work we've done. It would be a shame to see that go to waste." HOW 'STREAMING' WORKS Acacia Research Corporation says its patents cover the transmission of video and audio files from remote servers--a process often called "streaming." The following summarizes the process described in five patents owned by Acacia: Step 1: A video or audio clip is put into a digital format. Step 2: The digital file is compressed to make it more easily transmitted and stored. Step 3: The compressed file is stored, perhaps on a server. Step 4: A request for the file comes in, and it is sent--over the Internet or via satellite--to the requesting computer. Step 5: That computer decom-presses and reads the file, then plays it. SOURCE: U.S. Patent and Trademark Office _________________________________________________________________ You may visit The Chronicle as follows: http://chronicle.com _________________________________________________________________Copyright 2003 by The Chronicle of Higher Education
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