The Patent Troll

Erich Spangenberg makes a fortune suing major corporations for infringing on patents he owns. Is he exploiting a legal loophole or is he a modern-day Robin Hood? A look at one very unusual and vilified profession.

It’s 4:30 p.m. on an overcast day in Minneapolis, and Erich Spangenberg is ready for a drink. He started his day in his hometown of Dallas, stopped for business in Chicago, and just landed in Minnesota an hour ago. Now, he is seated at the bar on the fourth floor of the Graves Hotel, a swanky, upscale place appointed in dark wood, frosted glass, and bizarre modern sculptures.

Arranging this meeting was complicated, due to Spangenberg’s wariness of reporters, as well as his constant city-hopping and shifting schedule. He doesn’t seem to stay in any city for long, nor does he sit still for very long. When he orders a vodka tonic and wants a specific Minnesota-made vodka, he jumps up and walks to the bar to peer at the bottles. “I can tell you what it is,” he tells the waitress. “I’ve had it a million times.” Then he tells her to “just put in a little vodka” before sitting down and leaning toward me with a wide, white-toothed smile. He sports a black turtleneck, jeans, black Nikes. He is short and compact with close-cut brown hair. He exudes a quick, snapping energy.

The small tape recorder I’ve placed on the table between us seems to rankle. “So you’ll destroy that tape afterwards, right?” he asks. The request strikes me as odd, but I agree and he is pleased. “Perfect,” he says, then leans to take a sip of his fresh drink, and pops a few wasabi peanuts in his mouth.

You’d think we were about to discuss trade secrets or a dark, sordid past. Instead, we chat for over an hour about ordinary things: where he grew up, his parents, his education, his wife and son. Much later, after vodka, after two bottles of Evian, and more wasabi peanuts, we will get to the reason we are here: his profession.

Spangenberg is a patent troll. At least that’s what his victims like to call him, and his victims are all giants: Microsoft, Ford, Oracle, GM, Cisco, and Hewlett-Packard to name a few. “Patent troll” is a controversial term that emerged in the early 1990s to describe an individual or company that buys up patents for the sole purpose of suing other companies for patent infringement, or “idea stealing.” Typically, patent trolls have no operations or products, and they are not inventors. They survive solely by litigating against other businesses.

Spangenberg does not like the term, and considers himself more of a hybrid because he is involved in other business ventures as well, but he is well-known, even notorious as a troll. Google his name and many articles pop up, most denouncing his patent practices, his “shell” companies. One MarketWatch article claims Spangenberg has been publicly named as the “nemesis of the technology industry.”

Spangenberg estimates there are about 100 patent trolls—non-practicing entities is the more technical term—in the United States. And though they may be few, their impact is significant. In a recent Senate hearing on the the Patent Reform Act of 2009, the CEO of Micron Technology made the case for reforming the patent system to discourage lawsuits by trolls. He stated that last year alone Micron spent $30 million on patent litigation, mostly defending the company’s many patents against NPEs. He also noted a significant rise in these types of suits, as well a sharp increase in the amount of money they award. According to testimony, there was only one patent-damages award in history larger than $100 million prior to 1990. In the past seven years, there have been at least 15 judgments and settlements in that category, with at least five topping $500 million.

Under current law, what Spanenberg and others do is not in any way illegal. But many believe it is unethical. Not Spangenberg, though, who considers the question of whether trolling is right or wrong irrelevant. “That doesn’t matter,” he says. “It’s economically right.”

When most companies are sued by patent trolls, they settle out of court. Others will fight back, as Hyundai recently did. They lost to the tune of $34 million.

Trolling works something like this: First a shell company, which is incorporated but has no significant assets or operations, is created. Orion IP is one of Spangenberg’s many shell companies; others of his include Plutus IP, Taurus IP, and Gemini IP, to name a few. Next, this shell company purchases a patent or a patent portfolio, typically from a failing company and sometimes from an inventor. Once the shell company has researched which operating companies are using similar technology to the patents it owns, it files lawsuits claiming patent infringement. And if you’re Spangenberg, you file lots of lawsuits.

In March of 2007, Orion IP filed suit against 46 companies—including Xerox, Williams-Sonoma, Pottery Barn, and Nordstrom—over two patents covering electronic product proposals and sales. In April of the same year, Gemini IP filed suit against six companies: Hewlett-Packard, Cisco Systems, Adobe Systems, Avid, Pinnacle, and Corel. In August, Taurus IP filed suit again Ford, Mazda, and Volvo. Spangenberg estimates that he currently owns about 65 patents and typically has eight or nine lawsuits going at any given time.

Most companies, when they’re sued by patent trolls, will settle out of court for undisclosed amounts. Others will fight back, as Hyundai recently did against a suit by Spangenberg, but the law is not often on their side. Hyundai lost to the tune of $34 million, which should give you an idea of the amount Spangenberg rakes in every year from lawsuit settlements.

“GM was the first [company Spangenberg sued]. Then Ford. Everyone settled except for Hyundai. There was a jury trial there and they lost. I have no idea what they were thinking.”

Spangenberg wasn’t always so wealthy. He was born in the late 1950s in Buffalo, New York, to working-class parents. His father worked in a factory, then joined the Army and eventually used the G.I. Bill to get his education and become a shop teacher at the local high school. His mother was a telephone operator.

He didn’t grow up dreaming of becoming a patent troll. Mainly, he liked numbers and knew he wanted to make money. “Where I grew up,” he says, “either you joined the union and became a construction worker—and I came this close to that—or you went to college and were going to be a doctor, a lawyer, or a teacher. What Color is Your Parachute? didn’t make it to Buffalo.”

The only entrepreneurs he came in contact with were store owners, and they intrigued him. “I remember telling my dad I wanted to own a restaurant and he said, ‘Well you can’t because you’re not Greek or Italian.’ It wasn’t racist. He just literally believed that, because the people who owned restaurants were Greek or Italian.”

Spangenberg didn’t graduate from high school, but did well enough on the ACT to get into the University of Delaware. He soon transferred to Skidmore College, where an economics teacher later encouraged him to apply for a scholarship to the London School of Economics.

He loved London and “really got into the whole British thing. I thought ‘Hey, they are smarter and better than us,’” he says with a laugh. After graduation, he switched gears, got a law degree, then went to work for the firm Jones Day in Texas where he was first exposed to patents while working with Texas Instruments.

“They were having severe financial difficulties at the time and realized in order to survive they needed to use their intellectual property. They weren’t really making anything. They were making some things, but they were also licensing [their patents or intellectual property] in areas where they weren’t making anything. Unfortunately I was too young, and didn’t get the importance of that at the time,” recalls Spangenberg.

It was during this period that Spangenberg met his wife, Audrey, who was working for the financier and notorious takeover artist T. Boone Pickens as an accountant. Spangenberg had decided he was done with bachelorhood so he signed up to participate in a charity bachelor auction and “decided just to go on as many dates as I could until I met the best one.” Audrey was date number 33. “She’s a very mathematical person too,” he explains, “so when she heard about all the dates before hers she didn’t mind at all. She said ‘Yep, that makes perfect sense to me.’”

In addition to falling in love with Audrey, Spangenberg also became a big fan of T. Boone Pickens and his sharp and ruthless business sense. “People were saying these horrible things about him, that he was a raider, that he was just looting the company, but I was thinking ‘Isn’t this what we want?’ You know, efficient deployment of assets? For the first time I got to see people who were really in business.”

His BlackBerry, resting on the plush cushion beside him, rings now and he jumps up and excuses himself, explaining “This is the only number that rings. I have to take it.” He paces the high-ceilinged foyer beyond the bar, talking with great concentration. I wonder which number is programmed to ring. His wife’s? His son’s? T. Boone Pickens’s?

He returns to the dim bar and sits back down on the edge of the couch, looking as if he might pounce, every nerve alert and ready. He explains that he has to take a break and work out—“which means going on the stair climber until I pass out,”—then we can eat dinner at a new place down the street where he knows the chef.

Spanenberg met his first patent troll before he’d ever heard the term. Visiting the guy’s office, he recalls, “was like walking into Versailles. When I sat in the chair in his office, my feet didn’t touch the ground.”

It turns out he doesn’t exactly know the chef. He met him in the restaurant’s bar last time he was in town on business, and they started talking over drinks. Spangenberg promised to try out his food the next time he was in Minneapolis. True to his word, we are eating at Chambers, a restaurant with white walls, couches, and a strange, avant-garde bust in the lobby.

During the meal he never asks to speak to the chef or try and curry favor with the waitress for having met him, and it strikes me that he’s simply doing what he told this virtual stranger he would do: eat at his restaurant. That’s been my experience with him so far as well: He has been where he said he would be. He has done what he said he would do.

He orders a red wine, and he knows the owner of the vineyard where it was made—a man named Joseph Phelps, who used to own a construction company in Colorado—and now has a successful line of wines. I’m beginning to think he will know the man who killed the duck for the curry he ordered, and the person who caught the fish in his sashimi hors d’oeuvres.

After a couple of glasses of red, our conversation returns to Spangenberg’s career. He met his first patent troll before he had ever heard the term. In the late 1990s, when Spangenberg was CEO of a company called SmarTalk, a man named Ronald Katz sued the company for patent infringement. Spangenberg describes Katz as “the most successful patent pursuer living in the world.” When Spangenberg paid a visit to Katz’s offices, he recalls, “it was like walking into Versailles. When I sat in the chair in his office, my feet didn’t touch the ground. I got that. I’ve had psychology classes and I understood what he was trying to do.”

Spangenberg also got what Katz was trying to do with his patents. “His patent [against SmarTalk] was valid and I immediately settled with him.” When asked if he still talks to Katz, Spangenberg laughs and says, “No, we don’t have a predators’ ball yet.”

A few other patent infringement suits followed soon after. Then, one of Spangenberg’s wife’s companies was sued for patent infringement. “That one eventually went away, but I saw that method again,” he says.

All of these patent-related suits culminated in 2002 when Spangenberg tried to help a friend of his with a struggling company in need of assets. “One of the things the company had of value was their patent portfolio. This was 2002 and there was really no market for patents,” says Spangenberg. So he turned to his wife, Audrey, and convinced her buying these patents was a good business decision that would eventually “generate a ton of capital which she could redeploy into other businesses… About a month later, she bought the patents [for $1 million].” (Audrey’s company Acclaim Financial Group spent another couple million figuring out what they’d bought and what they were worth.)

Next, Spangenberg filed “a bunch” of lawsuits in Texas, where he lived at the time, and the companies started to settle. “GM was first,” says Spangenberg, “then Ford. Everyone settled except for Hyundai. There was a jury trial there and they lost. I have no idea what they were thinking.” Others were settled too: Oracle, Microsoft and SAP. “In general, we settle with multi-billion dollar companies. That’s the M.O.”

“Look, I make an unbelievable living. It’s insane, but I’m not going to apologize for it.”

Most people view excessive litigation with disdain, so it’s no wonder patent trolls are vilified. Big corporations that field several troll suits a year decry the practice, but Spangenberg argues that companies such as Microsoft and Ford know patent negotiation is one of the costs of doing business.

“A big company’s first hope is that something they’re doing is not patented; their second hope is that if it is patented, no one finds out. Third, if they do get caught they’ll just settle out of court. Is the general counsel going to tell you this? No, but that’s the mentality of a giant company,” says Spangenberg.

He adds that these corporations are similar to trolls in the sense that they make money off of other people’s patents. “Microsoft is sitting on tons of patents that they didn’t invent. In fact, they didn’t invent anything—someone who works for them did.”

Spangenberg predicts a day when corporations and trolls will live in relative harmony. He estimates that in the near future, litigation will be taken out of the patent equation, and people will buy and sell intellectual property in a way similar to the method now used to buy and sell works of art: auctions with built-in criteria to determine value.

He explains: “The courts are intermediaries for patents right now, and the courts are extremely inefficient. Patents will trade as a commodity in the next five to six years, and what I do won’t even exist.”

As evidence of this “new market,” Spangenberg points to the company Ocean Tomo that began holding large patent auctions in 2006, creating a forum for companies, inventors and, yes, trolls, to buy and sell patents. Approximately 500 IP and business professionals have attended past Ocean Tomo events.

Spangenberg said there are also steps being taken toward devising an algorithm to asses the quality of patents, and that developing patent metrics will help move toward a litigation-lite patent system. “Litigation is horrible,” Spangenberg says, “My objective is to eliminate it. Not entirely, because they’ve outlawed dueling, so as a last resort litigation is the right way to go, but right now it’s used as a primary resort and it’s expensive and a waste of everyone’s time. We’re not quite there yet, but we’ll get there.”

He doesn’t explain how a person with several lawsuits underway will help to eliminate litigation, but he does add, “Look, I make an unbelievable living. It’s insane, but I’m not going to apologize for it.”

Part of this “unbelievable living” comes from the other ways Spangenberg spends his time. Trolling is only a portion of his work. He also buys up failing companies and attempts to make them whole again.  Most recently, he purchased a company called iXmatch in Minneapolis and is pouring in funds and advice to get the company back on its feet.

One could argue that Spangenberg could, in some bizarre way, be considered a modern Robin Hood, stealing from the giants of corporate America to prop up smaller businesses. But he doesn’t see himself as a David to Big Business Goliaths.  “I see us as equals,” he says. “It’s a fair fight.”