It’s a gorgeous sun-soaked day in southwest Austin. At a generic glass office building in a random corporate park, the indoor waterfall gushes a merry greeting. In the light-filled boardroom of Forgent Networks, CEO Dick Snyder, a trim, freckled man with a broad smile, puts out a friendly hand.
It sure doesn’t seem like the gates of hell. But for a lot of people in the software industry, this is Hades, and the seemingly mild-mannered Snyder is the three-headed dog at its door. That’s because Forgent, which used to be an enterprise software company, has a new and quite profitable business strategy: Sue, sue, sue, and when all else fails, sue again. Forgent holds patents, the most significant of which, Patent No. 4,698,672–fondly known as just ‘672–is allegedly being violated by virtually every company that has ever used JPEG image compression, from camera manufacturers to software designers to cell-phone makers.
In the three years since Forgent decided there was more gold in subpoenas than in software, the company has collected a staggering $105 million in licensing fees from the likes of Sanyo, Sony, and 48 other companies. Many of those that haven’t paid up–a panoply of household names including Microsoft, Google, IBM, and Hewlett-Packard–have found themselves part of a massive, 41-company lawsuit that will begin proceedings later this year. Forgent has filed another suit covering a different patent related to the digital video recorder against 15 major companies including Time Warner and Comcast; that will go to court in 2007.
At a time when rampant piracy, the open-source movement, and the spread of technological expertise abroad have led to collective national hand-wringing over the state of American innovation, it’s worth thinking about another challenge: the ever-increasing legal battles over who owns an idea. Forgent and its ilk–sometimes snidely referred to as “patent trolls”–have roiled the software industry. (The troll epithet has also been hurled at companies such as Acacia Research and NPT Inc., the latter of which is suing Research in Motion, maker of the BlackBerry [see Squashing the BlackBerry?]). “I always thought ‘patent gangster’ was more appropriate,” says Scott Watkins, a patent attorney at Steptoe & Johnson, speaking generally. “It’s the old protection racket.”
Some say Forgent’s fight-back approach is the only recourse for small innovators against rich companies that try to steal their intellectual property. Others see Forgent as the exploiter, taking advantage of antiquated laws to hold creative enterprises up for ransom. “The Forgent business model has caused people to stop innovating,” says an inventor in Forgent’s market who didn’t want to be identified for fear of legal retaliation. “It has had a chilling effect on anything new.”
Back in the bright boardroom, it’s hard to believe that this deserted suburban office is ground zero in the war over intellectual property. The place looks like it should have tumbleweeds rolling through it, with just 20 employees working out of an office building that once held 300 (most of the space has been subleased). It doesn’t feel like a normal business, and that’s because it isn’t–a point made crystal clear when the public-relations guy turns on a tape recorder to ensure there’s evidence should I accidentally misquote anyone.
“The ones that scream the loudest are also the ones on the other side . . . asking people to pay them for their patent work.”
Believe me, I won’t. Though Snyder, a 61-year-old former executive at HP and Dell, has a slow, folksy patter, he’s also a competitive triathlete who thinks the infamous “Escape From Alcatraz” race, featuring an open-water swim in the 50-degree San Francisco Bay, is a great stress reliever. His big adversaries, he points out, are plenty aggressive when it comes to defending their own intellectual property. “The ones that scream the loudest,” he says calmly, “are also the ones on the other side of the fence asking people to pay them for their patent work or asking them not to infringe on their patents.” Snyder says he’s simply doing his fiduciary duty by capitalizing on his shareholders’ assets.
Not that there are so many assets to pick from these days. Forgent’s previous incarnation, a videoconferencing company called VTEL, fell on hard times in the late 1990s. In 2001, board member Snyder was brought in to right the company. He dropped videoconferencing and tried to reinvent Forgent as a software business, but that didn’t work too well either. The company lost $6.1 million in fiscal 2002.
Cash-crunched, he and his board essentially began rummaging through the company closets–and found a treasure. Inventors working for Compression Labs Inc., a company VTEL bought, had registered for patents on a process that Forgent now claims is used in JPEG compression.
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 (email@example.com) is a Fast Company senior writer.