!052094 Two electronics patent deals: Motorola, and ATT/Interdigital Here are two electronic patent news stories from the Information Law Alert. Greg Aharonian Internet Patent News Service *********************************************************** Information Law Alert ||||||||| || |||| * a voorhees report * || || || || * * || || || || * 718-369-0906 * || || ||||||||| * voice * || || || || * 718-369-3250 * || || || || * fax * ||||||||| |||||||| || || markvoor@phantom.com* *********************************************************** 411 First Street, Brooklyn, NY 11215-2507 May 13, 1994 IN THIS ISSUE JUSTICE TAKING CLOSE LOOK AT MOTOROLA'S RADIO DEALS Do Keiretsu-Like Relationships Between Supplier And Provider Violate Antitrust Laws? AT&T-INTERDIGITAL LICENSING DEAL CHANGES DIGITAL LANDSCAPE Industry Big Foot Decides That A Pesky Irritant Deserves Pocket Change. The $64 Question: How Much? Analog's D-Day HAYES MAY GO TO MAT ONE MORE TIME OVER MODEM TECHNOLOGY "The Patent Is Invalid," Says Penril's Lawyer WHY FEAR THE PHONE COMPANY? Antitrust Case Between Southwestern Bell And Directory Publisher Reveals Danger Of Monopoly INTERNET DEFAMATION SUIT:OLD WINE IN NEW BOTTLE Defendant Meeks Will Likely Have Same Protection As Traditional Print JournalistDDAnd Maybe More -------------------- AT&T-INTERDIGITAL LICENSING DEAL CHANGES DIGITAL LANDSCAPE Industry Big Foot Decides That A Pesky Irritant Deserves Pocket Change. The $64 Question: How Much? InterDigital Communications Corp., the Rodney Dangerfield of cellular communications, is finally getting some respectDDand making its competitors awfully nervous. The anxiety attack has been caused by InterDigital's licensing deal with AT&T Corp., in which it receives $2.4 million upfront for its digital cellular technology. The deal is InterDigital's first license in more than a year of trying. It gives the company much needed cash, instant cachet, and the confidence to push forward with patent suits in three courts. When AT&T Corp. signs a licensing deal, competitors get jittery, especially when it's a cash deal. After all, if the big foot itself can't find a way around another company's patents, who else can? A well-known high-tech lawyer recalls visiting AT&T on behalf of a client who wanted royalties from the company. The visitor mentioned the possibility of an infringement suit. His guest escorted him into a room of patent lawyers and politely said, "See this room. We'll devote all of them to the case." The two sides shortly worked out a cash-free cross-licensing deal. AT&T's willingness to pay cash to InterDigital, which has been long on promise and short on delivery of digital phone systems, stands the world on its head. As recently as three months ago, an InterDigital spokesman said the company would have to win an infringement case in court before licensing revenues began to flow. The license covers the two forms of digital communications that are now competing for market acceptance. One is based on squeezing calls into time slots (TDMA); the other relies on codes to achieve spectrum efficiency (CDMA). AT&T and InterDigital have agreed not to talk about the deal, and so it is difficult to know the details of their mating dance. But lawyers and engineers who have dealt with AT&T say it does not act precipitously or cavalierly. "AT&T is a sober, serious company when it comes to patents," says George Calhoun, a former InterDigital executive, who tried to sell a license to AT&T three years ago. The license "probably represents a vote of confidence. But it is a small step in a long war." So far, Motorola and Ericsson, the other two major cellular equipment manufacturers, don't show any signs of signing rather than fighting. Both of their suits to declare InterDigital's patents invalid are still on track. There are a couple theories about why AT&T acted now rather than wait on the sidelines. The cynical view is that InterDigital gave the company a long-term offer it couldn't refuse, even if there is an upfront payment. InterDigital needs cash badly. AT&T's $2.4 million will certainly come in handy. But the wording of the release announcing the deal leaves unclear whether the sum is a lifetime membership, or simply a down payment. The $2.4 million will be applied against future royalties, the release says, "if additional royalty payments become necessary" (emphasis supplied). If that means AT&T is unlikely to pay more than $2.4 million and if InterDigital wins its court battles, AT&T is getting a bargain. From others, InterDigital is seeking 5 percent of sales of all cellular towers being installed in major markets and all digital handsets. It reportedly sought tens of millions of dollars upfront from Motorola. The more benign view is that AT&T is simply doing the right thing at the right time. Under this reading, AT&T has determined that InterDigital's work in both TDMA and CDMA was groundbreaking and deserves to be recognized. Moreover, AT&T could do well to burnish its reputation with customers. The Baby Bells are lobbying against the AT&TDMcCaw Cellular merger on the grounds that it will encourage AT&T to discriminate against the Baby Bells using AT&T cellular equipment. Since they say they are locked in to AT&T as an equipment vendor, AT&T could easily raise prices or withhold service, giving an edge to McCaw. By taking a license from InterDigital, AT&T is shielding the Baby Bells from any potential harassment and threats of infringement from InterDigital. In either case, AT&T did not act unknowingly. Its licensing deal last year with another small fry, Spectrum Information Technologies, backfired. Spectrum's bragging about the deal led to securities fraud litigation into which AT&T was sucked as a witness. It was an unseemly affair that hovered above the InterDigital negotiations as a reminder. Mindful of the confidentiality agreement, Robert Bramson, president of InterDigital Technology Corp., the licensing arm, won't make Spectrum's mistake. He says he is "tickled pink" but is careful about overplaying his hand. His work, he says, is only just beginning. "This is a three to five year process, and we're only a little more than a year into it," Bramson says. AT&T's $2.4 million alone won't get the company all the way there. ----- Cut here ----- Analog's D-Day HAYES MAY GO TO MAT ONE MORE TIME OVER MODEM TECHNOLOGY "The Patent Is Invalid," Says Penril's Lawyer The digital age may be just around the corner, but at least one detail from the analog era is dangling. It involves modems, money, and a holdout who is unwilling to pay the piper. For the last half of the 1980s, Hayes Microcomputer Products fought the rest of the modem industry over its demands for royalties on a patent that opponents say is invalid. The battle died down after Hayes won a court victory in 1991, and other competitors decided they did not want to be on the losing side of a multimillion dollar verdict. Now, action is heating up again, as Penril Datacom prepares a last-gasp effort to strike the controversial patent in court. A Penril victory would benefit all Hayes competitors. Once a patent is declared invalid, licensees can stop making royalty payments. Modems are those ubiquitous devices that allow computers to talk to one another through telephone wires. They will be obsolete when communications are digital from end to end. Until then, they are required to convert the 1 of 0s of computers into sounds to be carried on analog wires. It's a dirty job, but somebody has to do it. Hayes is determined to wring the towel dry of the last drop of royalties. Hayes's quest for royalties anticipated many of the patent disputes today in the telecommunications and computer industries. Back in 1991, Hayes won a $10 million willful infringement verdict, including attorney's fees and interest, in federal court in San Francisco The three defendants, Everex Systems, Ven-Tel Inc., and OmniTel Inc., later landed in bankruptcy court. Since then, Hayes has had a much easier time collecting royaltiesDDwith a few exceptions. Last June, Hayes sued 11 holdouts, Tandy Corp. and Global Village Corp.DDthe modem-maker of choice in the Macintosh worldDDamong them. Seven of the 11 decided it is better to settle than fight, encouraged undoubtedly by Hayes's threats to impose higher royalties on those who drag their feet. Three of the four remaining defendants are close to a settlement. That leaves Penril. Penril is in a tough place. Unlike many of the others, Penril does not have a safety net or a rich uncle. Several of the other defendants have shown that they use licensed chipsets made by AT&T, Rockwell International, and Intel. Cardinal Industries avoided a trial with Hayes late last year when its chipset makers stepped in to help fund the settlement. Penril, on the other hand, makes its own chips. The maker of big-ticket, industrial-strength modems, it is facing millions of dollars in potential liability, before trebling. Penril's lawyer is not starting from scratch. Don Tortorice, a partner in the Harrisburg office of Philadelphia's Duane, Morris & Heckscher, learned the ropes as Cardinal's counsel. Tortorice says he is undaunted that most of the leading lights of the industry have taken a license and that the Federal Circuit also has weighed in on the side of Hayes. "The patent is invalid," he says. A trial would be held in federal court in Atlanta before judge Orinda Evans. In comparison to demands today of some patent holders, who ask for millions up front and 5 to 10 percent of sales, Hayes's 1.75 percent royalty seems relatively benign and modest. But don't tell that to a company that must ante up for years of past infringement. There are executives and lawyers who will go to their grave persuaded that the Hayes patent was one of the first bad software patents. The patent in dispute is named after Dale Heatherington, who founded the company with Dennis Hayes. It covers the technology that lets a modem switch from transmitting data to accepting commands from the user. Without that ability, modems would not be nearly so useful and easy to use as they are today. It's one of the reasons modems became known as "Hayes compatible." Tortorice says the patent is obvious and therefore invalid. In his view, it boils down to pause-data-pause. When a modem encounters a pause of a specific length followed by a data stream and another pause, it switches from transmitting data to receiving commands. Penril plans to argue the method is covered by two pieces of prior art, a patent held by General Datacomm and a government protocol known as Autodin. In the San Francisco trial, the defendants focused less on obviousness and more on Hayes's failure to disclose the best mode of practicing the invention. "If that's the best he's got, we are not exactly quaking in our boots," says William Ragland, a partner of Atlanta's Powell, Goldstein, Frazer & Murphy, Hayes's longtime courtroom enforcer. Hayes has two powerful weapons in its pocket: the list of existing license holders and the 1991 jury verdict. While Penril will be unable to keep the list of licensees out of the courtroom, there will be a fight over admission of the outcome of the San Francisco case. Tortorice argues that introduction of the verdict would unfairly prejudice his client, Penril. Ragland says it is up to the judge whether the actual judicial order can be presented as evidence. In a worst case scenario, a witness such as Hayes himself will testify about the outcome of the San Francisco trial, which survived appeal, according to Ragland. ClIENT FIRM & LAWYERS ^^^^^^ ^^^^^^^^^^^^^^ AMT Hopkins & Thomas (George Thomas) INTERNATIONAL BEST DATA Sutherland, Asbill & Brennan PRODUCTS (Patricia Cunningham, J.D. Fleming) B.J. Powell (solo) CERMETEK Carr, McClellan(David McKim) MICROELECTRONICS PENRIL DATACOM Duane, Morris & Heckscher (Donald Tortorice) Panitch, Schwarze, Jacobs & Nadel (Joel Goldhammer) | Mark Voorhees | voorhees reports | | 411 first street | 636-8931 MCI Mail | brooklyn, ny 11215-2507 | | 1-718-369-0906 (voice) | markvoor@phantom.com | 1-718-369-3250 (fax)