e.Digital Corporation (fka EDIG)

[Tenderloin]

Forgent Networks, Inc., developer of scheduling software and holder of a number of technology patents, has settled with both Adobe and Sony for JPEG patent infringement and is going after numerous others to collect their fair share of royalties. The company also plans to go after PVR companies, including TiVo Inc, and MP3 player makers for other various patents they claim to hold. Sounds like more fun in the courts for everyone!"

http://www.forbes.com/technology/feeds/general/2004/08/09/generalcoxnews_2004_08_09_eng-coxnews_eng-....


Software company sees goldmine in patent cases
ROBERT ELDER JR., 08.09.04, 5:05 PM ET

AUSTIN, Texas _ Forgent Networks Inc. has a modest software business, but lately it's been showing a swagger reminiscent of another line of work: trial lawyers.

While it tries to build its line of scheduling software, Austin-based Forgent has been hiring lawyers to extract revenue from the company's store of old patents. Already, Forgent has reaped nearly $50 million by claiming that one of its patents covers JPEG, the popular standard for digital images. Sony Corp. and Adobe Systems Inc. are among the tech giants that have settled with Forgent.

More riches may be on the way: In April, Forgent sued 31 tech companies, most of them Fortune 500 members, in U.S. District Court in Marshall, Texas for allegedly infringing on the JPEG patent.

Two of Forgent's former lawyers say the company has only scratched the surface with the patent and that the potential payoff could be in the hundreds of millions of dollars.

Now Forgent is escalating its strategy. The company is demanding payment for a patent it says underlies the digital-recorder technology behind TiVo Inc. It's also hired the 650-lawyer Baker Botts law firm to examine 40 additional patents.

You can hardly fault Forgent's strategy. In the past two years, the company has made about 90 percent of its revenue from patent negotiations, and its software has yet to get much of a foothold.

Critics contend that Forgent is typical of small companies trying to enforce patents because their core business is failing _ in the process, clogging the court system and forcing companies to spend millions in legal fees.

"This is as much the class-action kind of lawyering you mostly hear conservatives criticizing, going after cases like asbestos litigation," said Jason Schultz, a staff attorney in San Francisco with the Electronic Frontier Foundation, a digital rights advocacy group. "It's just as much an opportunistic field for lawyers because the amount of money is so great."

Companies like Forgent, Schultz contends, have turned the patent system into an entrepreneurial venture instead of using it to defend the technology behind their products.

Forgent maintains that it's legitimately making money from patents developed by the company or companies it acquired.

"Technology is technology, whether it's software or intellectual property," company spokesman Michael Noonan said.

For Forgent, the next wave could be digital recording. TiVo General Counsel Matthew Zinn said Wednesday that Forgent has contacted him "on a number of occasions over the past two years" about the video patent. He declined to say whether negotiations are ongoing.

Zinn did say he believes Forgent's patent is a "continuation" _ a patent that expands on a previous one. The patent, Zinn said, is a continuation of one granted to Forgent for a videoconferencing answering machine.

"We don't think the TiVo system is anything close" to that device, he said. "Obviously, we have a disagreement."

Forgent would say only that news about the Tivo-style patent likely will come in the next few months.

Forgent likely wouldn't be around if it was just a software company. In its fiscal 2003, for instance, software sales were just 8 percent of the company's $53.9 million in sales.

Then there's Jenkens & Gilchrist, the Dallas-based law firm handling enforcement of the JPEG patent. Under a fee agreement, Jenkens receives 50 percent of the revenue from licensing the patent, plus some expenses. The law firm's take so far is an estimated $50 million.

Forgent CEO Dick Snyder wasn't available for comment Wednesday. In a statement Tuesday, he said the company expanded its patent strategy because it's committed to "providing significant shareholder value."

Shortly after the patent strategy was announced two years ago, Forgent shares rose 48 percent to $5.54, only to quickly retreat. On Wednesday, the first trading day after Forgent said it had hired Baker Botts to expand its patent strategy, shares lost 4 cents to close at $1.09.

Intellectual property experts say there's nothing inherently wrong with enforcing patents.

"You have the right to receive a reasonable royalty for inventions and ideas," said Matt Yarbrough, an intellectual property lawyer with Fish & Richardson in Dallas.

"The bigger question is, what do we think as a society about businesses set up for the sole reason of squeezing money out of other businesses?" Yarbrough said. "We're seeing a lot more of these cases filed around the country, by either small companies that have no revenue from their own products or those that have tried to mine their intellectual property for profit."

Forgent executives don't provide estimates of the money they expect to make from enforcing patents. But a court dispute between Jenkens & Gilchrist and two of its former lawyers provides some clues about the potential goldmine in the JPEG patent.

Forgent views the JPEG data-compression standard as possibly applying to MP3 players, according to documents filed in a Dallas County state district court lawsuit. The filing notes that Forgent also holds a patent for a "personal video recorder" device that could lead to claims against companies offering video-playback options.

The disclosures came in a court filing last week against Jenkens by two of the firm's former lawyers, Stuart Dwork and Roger Maxwell. Jenkens sued the lawyers in June, claiming they had threatened to reveal confidential information about the law firm and Forgent's strategy.

The ex-Jenkens lawyers filed a counterclaim to recover millions of dollars in past and possibly future fees they say they're entitled to as the architects of Forgent's patent-licensing strategy.

In their counterclaim, the lawyers say the firm "has not even explored all of the avenues for generating revenue" from the JPEG-related patent.

The law firm's share of revenue from licensing and enforcing that patent "could be in the hundreds of millions of dollars," the lawyers claim. That means Forgent would collect an equal amount.

Dwork and Maxwell have a financial interest in Forgent and Jenkens & Gilchrist getting as much revenue as possible from the patent. If they win their claims against Jenkens, they stand to receive tens of millions of dollars in legal fees for having established the legal framework for Forgent's claims.

Nonetheless, investors who are bullish on Forgent say the company is just beginning to tap the patent gold mine.

The Jenkens lawsuit "sheds more light on the future of the (JPEG) patent as well as opening the door on the personal video recorder-Tivo patent," said Carter Mannsbach, vice president of money-management firm Concord Equity.

"I believe this is just more proof that this David and Goliath story is just getting started," said Mannsbach, who said he holds close to 5 percent of Forgent's shares on behalf of clients.

Dwork declined to comment on the Jenkens lawsuit or the potential of other Forgent patents. But "to this day, he does not understand why more effort had not been made to develop a licensing effort" for the so-called Tivo patent, said his attorney, Michael Shore of Akin, Gump, Strauss, Hauer & Feld in Dallas.

Of course, Forgent's strategy depends on the risks inherent in the legal system.

When a company loses a big court case, Yarbrough said, it has "a chilling effect" on plaintiffs' lawyers who work for a contingency fee, as Forgent's lawyers are doing.

"When people lose lawsuits like this one, it does have a large impact," he said. "It can get really hard to find a plaintiffs' lawyer to take the next case."

Robert Elder Jr. writes for the Austin American-Statesman. E-mail: [e-mail]