Tech giants offer startups free patents in bid to foil lawsuits

By: Susan Decker

Red Hat Inc. and Lenovo Group Ltd. are giving away free patents to any startup that joins a group of more than 200 companies devoted to keeping its members and their patents out of court.

It’s a carrot to entice startup companies to join the LOT Network, a non-profit created by Google and Canon four years ago to combat litigation by patent assertion companies, known derisively as “trolls,” that don’t make any products but seek royalties by challenging patents. By joining LOT, a company agrees that if they sell patents to such firms, all group members will have a free license to them.

“You’re binding yourself to the mast and saying ‘I’m not going to give in to the siren song of trolls,"‘ said Ira Blumberg, vice president of intellectual property and litigation for Lenovo.

The goal is to avoid or at least limit a repeat of what happened when the bubble burst nearly two decades ago. That left firms in bankruptcy court with little of value other than their patents, which were sucked up by speculators in hopes they would be tickets to big bucks. It contributed to a 47 percent increase in the number of patent complaints filed in the U.S. from 2000 to 2010.

While the number of suits is declining, it remains an issue for companies of all sizes, said Patrick McBride, senior director of patents for the Raleigh, North Carolina-based software company Red Hat.

“It is difficult to get a sufficient number of companies to coalesce around a single solution that will address the problem,” McBride said. “There is a mesh of overlapping efforts and LOT is a significant player.”

It’s easy to attract larger companies, said Ken Seddon, chief executive officer of LOT, which stands for license on transfer. The group’s members collectively own some 1.1 million patents and patent applications worldwide. That provides immunity from a fraction of the patents in force worldwide -- more than 347,000 were issued last year in the U.S. alone.

It’s still a big enough number that “I’m basically a patent litigation flu shot,” Seddon said.

Automakers including Ford and General Motors that are using more electronics in their vehicles joined as part of an overall strategy to eliminate the type of patent wars that engulfed the smartphone industry. Retailers like Bed Bath & Beyond and J.C. Penney get sued a lot over products they sell so it’s cost-effective to eliminate at least some potential threats.

Of the 224 members, about 75 count as startups and Seddon said he’s trying to increase that number. Investors in smaller companies may be wary of locking up patents in the future, fearing it will reduce their value, and may question the benefit of a group founded by large patent owners like Google and Canon.

Seddon’s pitch includes the free patents, no cost membership for companies with less than $25 million in annual revenue or financing, and an opportunity to network.

Limiting litigation is a concern of small companies focused on building their brand, said Alexandra Sepulveda, vice president of legal at Udemy Inc., a seven-year-old company that sells education videos taught by people with work-life experience.

“For any startup that gets to the success we have -- everybody comes out of the woodwork,” she said of the company’s decision to join LOT a year ago. “The last place you want to be is in front of your board answering questions about why you didn’t put preventative measures in place.”