Patently Aggressive

Enter the briefcases and cuff links. Snyder first aimed his guns at Japan, a less litigious place than the United States, in hopes of setting a precedent. Forgent sent letters demanding a one-time license fee to cover alleged past and future infringement. The strategy worked: Staying out of court, Sanyo paid $15 million and Sony more than $16 million in fiscal 2002. Emboldened, Snyder moved on to the U.S. market, going after more than a thousand companies that have used the JPEG in their products. For a while, Snyder used the settlements to fund other Forgent operations. After paying the lawyers their contingency fees of 50% or so, Forgent plowed much of the rest into its Alliance software business. But if '672 was a diamond, the software business was cubic zirconium. In fiscal 2004, Snyder finally wrote it down, and the company posted a $20.1 million loss.

Forgent was left with two businesses: the $3 million NetSimplicity, which offers meeting-planning software, and the lawsuit business. That means that for Forgent, licensing is the name of the game. Patent law allows a company to force a violator to stop producing the item in question and pay compensatory damages, which can be tripled in the case of willful infringement. But that would kill the golden goose. "We want everyone to use this thing," says Michael Noonan, Forgent's senior director of investor relations. "The more ubiquitous it is out there, the better for us."

That's what happened with Pegasus Imaging, which agreed to license Forgent's technology in October 2002. "One thing you have to do is to look at the risk," says Jack Berlin, Pegasus's president. "We could have been exposed to millions of dollars in claims. When you see that sort of ratio, it was a no-brainer."

No one really knows whether or not Forgent's patents will hold up in court; the company could collect anywhere from another $100 million-plus, according to an estimate from research firm J.M. Dutton & Associates, to zero. In October 2005 alone, three companies, including Research in Motion, decided to take out licenses from Forgent for undisclosed amounts.

Yet Forgent could also be bluffing, hoping that others will decide to fold first. If so, it has met a tough opponent in Microsoft, which sued Forgent even though Forgent hadn't yet sued it ("Microsoft is known to be very litigious," says Snyder, with no trace of irony). It charges that Forgent's patent was obtained fraudulently. "Microsoft did not come up with anything new," says Snyder. "I'd point to $100 million-plus that says other people recognized [the patent] was valid." Microsoft wouldn't comment.

Other opponents are coming out of the woodwork as well, such as the nonprofit Public Patent Foundation, which on November 16 filed its own request that the U.S. Patent and Trademark Office revoke the patent altogether. "I believe that the patent is invalid," says Dan Ravicher, the foundation's executive director, and it is "causing substantial public harm" by adding extra costs to an already taxed system for inventions and by threatening the JPEG standard that is now part of the public domain.

Some critics even question whether software patents like Forgent's ought to exist. "Software is a thought process," says Tom DeMarco, a fellow at the Cutter Business Technology Council, an IT consultancy. "To patent it is comparable to patenting induction or deduction." The European Union, for example, does not grant software patents.

That's hardly on the horizon in the United States. The number of patents granted has exploded to 187,170 in 2004, up from 66,176 in 1980. There has been a similar explosion in lawsuits, which usually cost at least $2 million to defend if they go to trial. "Now you can make the case that it's driving innovation offshore," says DeMarco. "If you want to start a new software company that does something imaginative and wonderful, you have every incentive to start that company in Slovenia or China or a place that doesn't have these rules."

In an attempt to stem the tide of patent-related lawsuits, in June 2005, Rep. Lamar Smith (R-Texas) introduced a bill, the Patent Reform Act of 2005. But the bill has stalled in the House, in part because--as Snyder points out--many companies benefit from the current laws even as they decry them. Microsoft has decided to pursue an aggressive strategy of filing for 3,000 patents in fiscal 2005 alone, either as a defense or in hopes of bringing in licensing revenue. And Nathan Myhrvold, Microsoft's former CTO, has created a company, Intellectual Ventures, that has purchased as many as 5,000 patents in the past few years.

For Forgent, though, the party is winding down. The good old '672 patent will expire in October 2006--after which Forgent can still collect for past infringement, but nothing going forward. "It's a past gravy train," says Watkins, "but they're not looking at a future gravy train." That's also why Forgent launched a new front in the battle in July 2005, suing 15 cable companies and cable-box manufacturers.

For all of Snyder's bravado, he seems a tad embarrassed that his job is more about litigating than innovating. "The whole notion that [we] are just a thorn in the side of humanity," he says, "I don't think they understand how we arrived here. I view this as a metamorphosis, a way in which to responsibly take the company through a period of time to generate resources and to become something else. If you said, 'Is this what you want to do for the next 15 years,' I'd probably say no." If he's right, thousands of software executives will probably wipe their brows in relief. But the lawyers will weep.

Jennifer Reingold (jreingold@fastcompany.com) is a Fast Company senior writer.