A Texas Tale of Intellectual Property Litigation (A Watering Hole for Patent Trolls)

The New York Times has a fascinating article about Marshall, Texas, which seems to be a prime location for venue-shopping patent trolls. Your are a couple paragraphs from the article. Then I will make the connection with Texas Instruments, by providing an extract from my book, Steal This Idea.

Creswell, Julie. 2006. “So Small a Town, So Many Patent Suits.” New York Times (24 September).

“In Marshall, an oft-told joke is that the passage of tort reform was when many local lawyers made the trip from P.I. to I.P. — that is, they moved out of personal injury and into intellectual property.”

“The testing of Marshall as a patent battleground began nearly two decades ago, when Texas Instruments, which has its headquarters in Dallas, embarked on an aggressive strategy to make rivals license its patents. If a company would not capitulate or at least negotiate, a Texas Instruments team of lawyers would drag it to court — increasingly, down the road to the uncluttered courtrooms of Marshall.”

“What’s behind the rush to file patent lawsuits here? A combination of quick trials and plaintiff-friendly juries, many lawyers say. Patent cases are heard faster in Marshall than in many other courts [a quirk of a local judge, sort of a speed trap for intellectual property]. And while only a small number of cases make it to trial — roughly 5 percent — patent holders win 78 percent of the time, compared with an average of 59 percent nationwide, according to LegalMetric, a company that tracks patent litigation.”

Here’s the extract. Notice the connection with Texas Instruments:

The history of the semiconductor industry exemplifies this trend toward changing the legal structure to aid firms in gaining a competitive advantage from intellectual property rights rather than from developing an edge in productive capabilities.

As late as 1981, Roger S. Borovoy, vice-president and chief counsel for Intel Corporation, declared, “In the electronics industry, patents are of no value whatsoever in spurring research and development” (Anon. 1981). A recent study published by the Philadelphia branch of the Federal Reserve System describes the dramatic transition that came soon after Mr. Borovoy’s evaluation of the importance of the patent system to his industry:

Within the U.S. semiconductor industry, reverse-engineering was a well-established practice. But by the late 1970s, American firms objected to similar behavior by Japanese firms when they began to increase their market share in the more standardized products, such as computer memory chips. The level of competition eventually became so intense that, by the mid 1980s, most American companies abandoned these segments entirely.

When it became clear they could no longer dominate Japanese firms on the basis of production technology alone, American firms attempted to consolidate their comparative advantage in research and development. To do this, they would have to find ways of reducing their competitors’ ability to reverse-engineer their products. To that end, American companies began to lobby Congress to increase intellectual property protection for their semiconductor designs. In 1984, Congress created a new form of intellectual property right, called mask rights, especially tailored to address the needs articulated by the industry. [Hunt 1999, pp. 19-20]

During this period, both Texas Instruments and National Semiconductor were both tottering on the verge of bankruptcy. Irving Rappaport, former vice-president and associate general counsel for intellectual property at National Semiconductor recalled:

‘I’m not exaggerating when I tell you that National Semiconductor was only weeks away from bankruptcy in late 1990 …. All the papers had been signed before it was decided to continue the business and give licensing a more aggressive push. And without a doubt, patent fees bought us valuable time in which to complete our restructuring process. For a while there, in fact, three-quarters of our revenues came from patent licenses.” [Rivette and Kline 2000, pp. 125-26]

Texas Instruments struck first. Typically license fees ran about 1 percent of revenues. In 1987, Texas Instruments raised its royalties on chips to 5 percent (Dwyer et al 1989, p. 79). The company filed a suit against one Korean and eight Japanese semiconductor companies, accusing them of infringing semiconductor patents. The settlements yielded the company more than $600 million in payments, according to a 1990 report. The company became so aggressive in seeking royalties that by 1992 it earned $391 million in royalties, compared to an operating income of only $274 million (Warshofsky 1994, p. 111).

In effect, these companies are beginning to transform the semiconductor industry from a manufacturing industry to a service industry, just as the postindustrial utopians would have them do it. According to one industry insider, James Koford of LSI Logic, “Silicon Valley and Route 128 are worlds of intellectual property, not capital equipment and production. Most of the employees of U.S. high technology live in southeast Asia” (cited in Kenney and Florida 1990, p. 237).

That ends the extract.

Finally, the article has a statement from the chief patent counsel for Time Warner, complaining about the expense of intellectual property litigation. Yeah. Right. Time Warner wants to cut back on intellectual property litigation.

“Companies spent 32 percent more on outside counsel for intellectual property litigation in 2003 than in the previous year, Chuck Fish, the chief patent counsel for Time Warner, told the House Judiciary Subcommittee on Courts, the Internet and Intellectual Property earlier this year. Spending for all other litigation rose a mere 1 percent during that time, Mr. Fish said.”

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