Thursday, April 14, 2011

Lawsuit reveals Charles River Ventures' lobby in patent reform

By Galen Moore

The storied Waltham venture capital firm Charles River Ventures (CRV) has placed itself at the center of a debate over patent reform, investing in a trio of companies finding new ways to earn money off patents.

Now, as patent reform makes its way through Congress, a Washington, D.C., lobbyist’s lawsuit has revealed how the crown jewel of that portfolio, Intellectual Ventures Management LLC (IV),  lobbied to preserve hefty patent-lawsuit damage awards. The awards are proving to be the fuel for a fast-growing, but controversial, after-market in intellectual property.

Some have called Intellectual Ventures a patent troll. But IV has sought to distance itself from the slur. With more than $5 billion in capital raised since its founding in 2000, it has bought patents from inventors and bankrolled new inventions in-house, amassing a portfolio out of which it has reaped license fees and spun out new companies. One such company is TerraPower LLC, in which CRV is invested.

Then, in December, IV filed three lawsuits, and patent troll watchdogs cried foul. The credible threat of litigation helped make 2010 the company’s most successful year, financially, said CRV managing director Izhar Armony, who has led CRV’s intellectual property investing strategy. Last month, IV co-founder Nathan Myhrvold disclosed the company had booked $700 million in revenue on the year.

“What we realized is that IP is an asset class,” Armony said in an interview this week. “It should be an asset class like real estate ... and there should be market mechanisms to drive great returns for inventors and investors.”

He declined to say how much CRV has invested in IV.

Much of the returns, Armony acknowledged, are predicated on the threat of a highly punitive courtroom outcome. For example, last week in Texas a federal judge upheld a $482 million jury award for a New Jersey radiologist against Johnson & Johnson (NYSE: JNJ) subsidiary Cordis Corp. in a stent patent case. Another Texas judge on April 5 vacated an October jury verdict that had ordered Apple Inc. (Nasdaq: AAPL) to pay $626 million to a Yale University computer scientist in a case involving three patents, the iPod and the iPhone.

A four-year lobbying effort paid for in part by Intellectual Ventures has helped keep language limiting such awards out of legislation passed by the U.S. Senate in March, according to a lawsuit filed last month by Washington, D.C., lobbyist Pat Choate. Choate complains Intellectual Ventures has left unpaid $495,000 — its share of a $790,000 bill for lobbying services the company and its representatives led the effort to secure.

Choate details the results of his work: “In March 2009, the Senate Judiciary Committee modified the bill in such a way that the damages provision that was so critical to (Intellectual Ventures) was made acceptably less damaging to them,” the complaint reads.

Intellectual Ventures had no comment.

However, the alleged result of its lobbying activity is also good for intellectual property litigators, said Richard Sanders, a former Testa Hurwitz attorney and a co-founding partner at Cooley LLP. “Because there’s no 100 percent rule on damages, the other side can’t do a risk assessment on what their damages should be if they’re found liable,” said Sanders, who is starting a patent risk consulting business called PatentLink LLC. “That provides an incentive to roll the dice and go through this process.”

Intellectual Ventures’ willing customers have included Vlingo Inc., a Cambridge speech-to-text firm that last July bought patents to countersue Burlington competitor Nuance Communications Inc. (Nasdaq: NUAN). Last week, Blackberry maker Research In Motion Ltd. (Nasdaq: RIMM) struck a deal with Intellectual Ventures to license 30,000 patents it needs to continue competitive R&D.

Meanwhile, a second Charles River Ventures portfolio company, RPX Corp., is in registration for an IPO. RPX has vowed never to sue anyone. Instead, for a fee, the company offers protection against lawsuits by working to round up stray patents before they fall into the hands of more litigious players. An editor at the technology news site TechCrunch has called the business “a protection racket.”

But Armony argues that for inventors, universities, startups and other producers of IP, there are few plays available to make money off inventions, especially when large incumbents are at the table. He supports patent reform, he said, but not if it weakens their hand.

“Weakening the patent system would be a huge mistake for the U.S.,” he said. “It’s almost the last thing left here.”

 

Article first appeared in The Boston Business Journal.