Getting patently offensive

Entrepreneurs often emerge from humble beginnings, like basements, where they work tirelessly to create new hardware or software applications that will push technology forward.

Some make it to the big time. Others are not so lucky. Although their technology may remain in the basement, many of these entrepreneurs have at least managed to protect their invention with a patent.

That patent could make all the difference. Close examination of recent legal activity points to one overriding conclusion:

		Special report Patent politics Microsoft wins the support--if not the sympathy--of nearly the entire software industry following a judge's ruling on the IE browser.

As the perceived probability of receiving a large damages award increases, patent-holding small businesses--already looking for opportunities--will, upon discovering infringing activity, find more value in filing suit against their larger competitors. With patent infringement litigation on the rise, these companies might just become household names.

More and more small businesses that hold so-called business method patents, which describe ways of performing business transactions--including Amazon.com's "one click" method of purchasing books on the Internet--are filing suits against tech giants. And they're winning big.

Let's look at last year's courtroom activity. In May, a federal grand jury found eBay liable for willfully infringing MercExchange's fixed-price sales method patents and awarded the company $35 million (later reduced to $29.5) in damages.

Smaller companies that failed to hit the big time in an earlier business climate see exploitation of their patents as the means to business success.

In August, a federal grand jury ordered Microsoft to pay Eolas Technologies--which owns patents on software technology that allows Web browsers to access interactive features on a Web page--$520.6 million for infringing its patents.

Microsoft recently settled another infringement case, concerning "whiteboard" technology, and Amazon.com has been sued for infringing on a technology that allows e-commerce operators to customize offers based on shoppers' history and preferences.

If these suits are any indication of an emerging trend, the smaller companies that failed to hit the big time in an earlier business climate see exploitation of their patents as the means to business success. Patent lawsuits will follow, and some of the small companies might win substantial awards that help them rise from the basement to the penthouse. In the end, we might just see these victorious Davids become the new Goliaths of the tech industry.

Consider a player betting to stay in a multiround poker game. The player keeps anteing up, anticipating that he'll get a winning hand. But he doesn't need to evaluate the entire game from the start; he can fold at any time. All he needs to do is evaluate the cost of taking the next step, balanced against the possibility of winning the entire pot.

The same logic drives the small patent holder in bringing an infringement suit--the company need not evaluate the entire lawsuit in order to play. Instead, the company only needs to evaluate the cost of moving to the next stage.

As the Davids defeat the Goliaths in court, more and more of their brethren will follow their lead.

At any point in the legal process, it may elect to fold. As long as the company owns a viable patent, it can decide for itself whether to ante up or to wait and watch.

On the other hand, if the company plays the game and wins the lawsuit, it could earn the level of capital it needs to get off the ground. More importantly, it would receive the precedent it needs to gain licensing agreements that lease out its technology to major players in the field--and yield massive revenue for the smaller company.

And the stakes keep getting higher. As the Davids defeat the Goliaths in court, more and more of their brethren will follow their lead. If the 2003 docket is any indication, more and more small businesses will find value in exploiting their patents through litigation--which may launch them right to the top.

Kenyon & Kenyon Partner William Wells and associate Clyde Findley contributed to this column.