Any global investor, or would-be innovator, might gaze across at the ice wall of patent knowledge surrounding US tech companies and conclude it cannot be breached. It seems that if any group creates a way around the existing engineering methods, they will only be torn to pieces by aggressive US lawyers.
But ice walls melt and legal systems can turn on technology monopolists. That happened to Thomas Edison with movie patents, AT&T with telephony, and may be happening now in the market for interactive voice response (IVR).
IVR is possibly the most annoying set of technologies ever developed: they control what you hear as you repeatedly bang down on the “0” attempting to get a human customer service representative.
For the past couple of decades, the IVR market has been dominated by Nuance Communications of Massachusetts. Nuance’s share price has risen by more than 118 per cent in the past year, as it has finally slipped into profit.
And why shouldn’t it be part of the monopoly-US-tech-stock-market? After all, as its investor relations web page says, Nuance has about 3,000 patents. A large number of those were acquired from, or licensed from, IBM. Others were acquired in the course of a 2005-18 acquisition binge carried out by Paul Ricci, Nuance’s former CEO.
Nuance acquired not just companies, but something of a reputation as an aggressive patent litigant. Just how aggressively the company uses its patent portfolio to pursue not only markets, but potential acquisitions is now the subject of two countersuits by IVR companies, MModal and Omilia.
They assert that Nuance engages in “sham patent litigation” which, if the courts agree with them, would mean that the legal monopoly conferred by patents is withdrawn, and Nuance can be charged with antitrust violations allowing its challengers to claim up to treble damages.
None of the current IVR litigants agreed to go on the record. But a reading of the filings in the lawsuits and discussions with legal experts show there seems to be four hurdles for succeeding at sham patent litigation proceedings.
First, there has to have been some negotiations over a deal with the alleged patent violator, with the monopolist counterparty threatening expensive infringement suits. Second, the defending company should have a good case on the face of it that the patents are too vague or otherwise inapplicable.
Third, the less monied technology competitor has to get some outside money that gives it confidence to outlast the patent-heavy monopolist. (MModal is now backed by 3M and Omilia by Grafton Capital of London.) Finally, it helps to have a record of other attempts by the alleged illegal monopolist to use patent holdings as a negotiating tool.
Most people who are not both lawyers and engineers are intimidated by patents. But many patents in the industries I have researched are so vaguely written, and cover “innovations” that are so similar to prior art, that they should not really be enforceable.
“Nuance values its patent portfolio quite highly, although I am not sure why. For example, without the technical talent that goes with the (IBM) patents, those have limited value to Nuance,” says Walter Tetschner, a long time consultant for the IVR industry.
In fact Nuance has already lost two patent suits, one in 2013 to a character-recognition company called ABBYY and another in 2011 to Vlingo, another IVR company.
It could be argued that the expensive companies acquired in Nuance’s merger binge protect the company’s management from takeovers, since Nuance’s $4.09 book value (against a stock price of $31) turns into a negative -$4.32 tangible book value when goodwill is subtracted.
I wrote to and called Nuance asking them for any examples where the company had won a final judgment on a patent lawsuit, and received no reply.
An investor in the IVR industry philosophically says: “Nuance is being a rational actor. If they had sufficient next generation products to maintain their $500m of recurrent revenue, they would. Instead they just defend the current products any way they can.”
How much of the US tech stock bubble represents true innovation, and how much represents the socially useless costs of an expensive legal system?
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