Wednesday, July 25, 2007

Patent Pirates

From Forbes: Hedge funds and institutional investors are financing the latest wave of IP lawsuits.

"DeepNines is a tiny Dallas software maker that protects corporate computer networks from hackers and other threats. But in August it became an attacker, filing a lawsuit against McAfee (nyse: MFE - news - people ). The suit alleges that the security-software giant infringed on a DeepNines patent, one that combines an intrusion detection and prevention system with a firewall, in a single device. McAfee denies the charge, saying the patent relies on previously known technology, and is gearing up for a long and costly fight.

But DeepNines has found a way to fund its burgeoning legal bills. In January it sold an $8 million zero coupon note to Altitude Capital Partners, a New York City private equity firm, promising in return a cut of any winnings stemming from the lawsuit. The payout is based on a formula that grants Altitude a percentage that decreases with a bigger award.

This deal was dreamed up by Robert Kramer, who founded Altitude in 2005, raising $250 million from hedge funds and others to invest in intellectual property. So far Kramer has put $100 million to work in nine investments. He's got plenty of company in this new game. Coller Capital, a London private equity firm with a $2.6 billion fund, quietly formed Coller IP Capital with an eye toward investing $200 million a year. Rembrandt IP Management, a Bala Cynwyd, Pa. firm, has raised $150 million, and Northwater Capital, a $9 billion Toronto manager of funds of hedge funds, put together NW Patent Funding last year. Both exist solely to exploit patent lawsuits in the U.S...

Says Daniel McCurdy, a patent consultant in Warren, N.J., "They are the arms merchants in the new patent wars."

The threat of war is having an impact. Ebay subpoenaed Altitude in federal court in Virginia to figure out what Kramer is up to with one of his investments, MercExchange, whose main asset is a $25 million patent infringement verdict against the online auctioneer. The six-year-old suit claims Ebay's "Buy It Now" feature infringes on MercExchange's patents. Last year the case produced the Supreme Court decision that made it more difficult to get injunctions."

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