Companies tired of defending themselves against what they consider to be baseless patent lawsuits are hoping a plan hatched by Google (GOOG) and Canon (CAJ) will limit their exposure to future claims and millions in legal bills. The two companies, among the top recipients of U.S. patents last year, have created the License on Transfer Network, an alliance of patent-holding companies that have been or could be the target of patent-infringement lawsuits. Members of the network will pledge that if they sell their patents, others in the alliance will automatically get a royalty-free license to the protected technology, making participants immune to patent claims. “The hope is, people will see the benefits of the network effect here, and the cycle of selling patents to licensing companies will end,” says Eric Schulman, the director of patents at Google.
Four other companies are participating in the program announced on July 9—software maker SAP (SAP), Internet retailer Newegg, data-storage company Dropbox, and Asana, a software designer started by Facebook (FB) co-founder Dustin Moskovitz. The six companies hold almost 300,000 patents and patent applications, Schulman says.
About 6,500 patent-infringement lawsuits were filed in 2013, according to PricewaterhouseCoopers, many of them by licensing companies that acquire patents primarily to sue technology companies for patent infringement and then demand licensing fees. Google has been sued 127 times over the past five years by such companies, according to researcher PatentFreedom.
For smaller companies, membership in the program may eliminate some concerns they have about costly lawsuits early in the life of the business. It’s a “no-brainer for startups” who want to limit their exposure to lawsuits, says Asana’s Moskovitz, whose company developed a program that allows teams to collaborate on projects. Brett Alten, head of intellectual property at Dropbox, says the program will lead companies of all sizes “to reach out and find ways to work with each other.”
The Senate shelved legislation to curb patent-infringement lawsuits in May. The bill had strong support from Google and other tech companies which are pushing to limit abusive lawsuits, but others, including Apple (AAPL), were concerned the legislation would hinder their ability to protect inventions from copycats.
Ericsson (ERIC), Panasonic (6752:JP), and Huawei Technologies are among the tech companies that have been selling patents, sometimes to litigious licensing firms (known as patent trolls) as they shift priorities and unload assets they no longer need. These and other companies have faced investor pressure to sell patents at a good price. “There’s a frenzy to try to monetize” these patent portfolios, says Nicholas Rodelli, a senior analyst at CFRA, a forensic accounting and legal research firm in New York.
About 70 percent of the patents at issue in litigation brought by licensing firms were once owned by companies that used them in their business, according to a report by RPX (RPXC), a patent risk management company. Companies are “under even tighter economic pressure and say ‘If we want to continue innovating, we’ve got to go beyond just getting money from our products,’ ” says Joe Beyers, CEO of licensing firm Inventergy Global (INVT). “Large companies are willing to open their portfolios to the right people.” Beyers’s firm buys patents from other companies, such as Nokia (NOK), Panasonic, and Huawei, and bundles them to create a single portfolio of licenses. While it has filed one lawsuit against software maker Genband, Beyers says the company’s goal is to negotiate licensing deals without litigation.
The success of the alliance will depend on scale, says Google’s Schulman, who predicts membership will rise quickly. “We’re optimistic it will be appealing to a large variety of companies,” he says. Still, patent sales by Nokia and Ericsson illustrate the split in the tech world. “When you have companies who license their technology, legitimate technology, it’s a perfectly legitimate business model,” says Paul Melin, chief intellectual property officer at Nokia.
