Apple’s Aura of Invincibility Takes a Hit After Patent Settlement with Marathon and RPI

Apple Inc.’s (APPL) aura of invincibility took a hit this week when it agreed to pay $24.5 million to settle an enforcement action filed by Marathon Patent Group (MARA) and Rensselaer Polytechnic Institute over patents related to the Siri personal assistant application.

The company’s willingness to settle reveals a truism that is often underappreciated today in the U.S. patent market where many patent owners feel outmaneuvered and outgunned.

Patent Quality and the Strength of the Case matter a great deal, especially to so-called patent trolls or non-practicing entities.

While the anti-patent troll movement has been dominant for several years now and won significant victories through the America Invents Act, NPEs can still win settlements when their patents are strong and when their cases are even stronger.

The Marathon/RPI settlement was perhaps made possible by the comparison with the Wisconsin Alumni Research Foundation’s case against Apple, which resulted in a $234 million verdict in WARF’s favor.

Apple is appealing that verdict, which is its right. It’s wise to do so because the Court of Appeals for the Federal Circuit’s skepticism of large damages awards means the award will almost certainly be reduced.

The same is likely true with the $625.6 million verdict VirnetX Holding Corp. (VHC) won against Apple. The computer giant already successfully threw out a $368 million award for VirnetX and a $533 million award for SmartFlash LLC.

In addition, Marvell Technology Group (MRVL) surprised many in the patent market when it agreed to settle an enforcement action brought by Carnegie Mellon University for $750 million after a seven year litigation battle.

To be sure, the strength of a case also is critical. Marathon rival Vringo Inc. (VRNG) used a multitude of missteps by Chinese telecommunications giant ZTE Corp. to force a $21.5 million settlement in December.

The missteps occurred in a breach of nondisclosure agreement case Vringo filed against ZTE in U.S. District Court in Manhattan. Among the missteps by ZTE were discovery delay tactics designed to conceal that its chief counsel refused to be deposed in New York because he feared being detained by the FBI in connect with a criminal probe of alleged violations of trade sanctions against Iran.

ZTE also was accused of breaching the NDA by sharing it with Google Inc. and several public relations agency allegedly in an effort orchestrate a scheme to publicize information that would hurt Vringo’s stock price.

In addition, ZTE failed in an attempt to change the venue of the NDA dispute with Vringo. The same day ZTE was engaged in settlement talks with Vringo in New York, its attorneys were filing a complaint against Vringo in U.S. District Court in Wilmington, Delaware, citing breach of contract in connection with Vringo’s alleged unwillingness to negotiate a license to its patents on fair, reasonable and non-discriminatory or FRAND terms.

To companies like Apple, ZTE, Marvell and Google, anyone who brings an enforcement action against them is a troll, whether it’s an operating company, a university or an NPE.

Juries sometimes agree and sometimes they don’t.

“ZTE has been involved in a lot of enforcement actions for a company of its size,” said Sanjay Prasad, principal of Prasad IP, a Los Altos, Calif.-based IP advisory firm. “The settlement may have been reasonable based on a cost benefit analysis. They’re likely looking at their overall litigation docket and allocating limited resources.”

Apple, on the other hand, “has unlimited resources,” so the cost of litigation of any given case isn’t really an issue, he said.

“A $24.5 million settlement of a case where they concluded the patents were strong and where their chances of winning were slim may have been a smart choice. Otherwise, it could be have been hit with a big judgement.”

“It’s all about the specifics of the case. It’s about patent quality. NPEs can be successful. A lot of the losses have come in weak cases and the law has changed to make such cases less winnable.”

Patent market observers say that NPEs typically can expect to win at best about a third of their cases, which means defendants win two-thirds of the time.

Every year, Apple is near the top of the list of companies targeted with enforcement actions by NPEs. A former Apple executive once told me he could have wallpapered his office with demand letters and that it understandably, if not justifiably, made him angry.

Despite this fact, Apple has carefully cultivated a reputation for fighting NPEs and has spent tens of millions of dollars defending against NPE litigation.

“It’s not really true that they fight everything,” said the former Apple licensing executive who spoke on condition of anonymity. “They fight the ones they think they can win.”

Apple wants to have a track record of wins in order to act as a deterrent to more NPE litigation.

“To have a good track record you need to win a lot of cases. Typically, a good track record is to win two out of three cases. But if you start losing a third of your cases you’re going to look like a good target.”

That’s why the cases against Apple keep coming, including ones by thinly capitalized Voip-Pal Inc. in February in U.S. District Court in Las Vegas, which is seeking $2.84 billion in damages.

Apple also is facing an enforcement action filed by Daisy Washington-Gross, a 68-year-old Detroit, Michigan-based poet and inventor who claims to have a patent pending for a detachable beeper disc digital gym shoe. Washington-Gross, who filed her complaint in federal court in Detroit, is seeking $3 billion from Apple.

By settling what it considers its weakest cases for relatively modest amounts, Apple can focus its legal firepower on the stronger cases that matter more and preserve its aura of invincibility.

To be sure, invincibility is in the eye of the beholder and can be quite relative.

Newegg Ltd., the online computer retailer whose chief legal officer Lee Cheng has a reputation for fighting NPEs to the mat, has been successful at defeating all the NPE litigation it’s faced. Its been much less successful, however, in winning motions for exceptional case fees, which are seen as a deterrent to NPE cases.

Moreover, “patent trolling” is a behavior more than an identity and defendants can be just as troll-like as NPEs and other plaintiffs. Take ZTE’s over the top behavior for example in the dispute with Vringo.

Apple and other large companies can’t expect to win all their cases and they don’t.

Marathon and Vringo are perhaps showing the way NPEs can beat the big companies by being scrupulous both about the quality of the patents they enforce and about their enforcement tactics.

To reach the reporter responsible for this story, please contact Dan Lonkevich of The Patent Investor at 707 318-7899 or dan@thepatentinvestor.com.

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