July 22, 2002 4:30 PM PDT
Finding patent truth in JPEG claim
Austin, Texas-based Forgent Networks posted a press release to its site earlier this month claiming to own a patent covering the technology behind JPEG, one of the most popular formats for compressing and sharing images on the Internet. According to the firm, the devices covered by the patent include cameras, cell phones, camcorders, personal digital assistants, scanners and other devices.
It took a little more than a week for the statement to find its way to the Joint Photographic Experts Group (JPEG) committee, which denounced any attempts to derive fees from the standard.
"It has always been a strong goal of the JPEG committee that its standards should be implementable in their baseline form without payment of royalty and license fees, and the committee would like to record their disappointment that some organizations appear to be working in conflict with this goal," Richard Clark, managing director of U.K.-based Web software company Elysium and the head of the U.K. JPEG delegation, wrote on the committee's behalf.
Patent claims are common in the technology industry--the real trick is to persuade companies to pay royalties. Scores of dot-com companies, for example, claimed to own key e-commerce patents in the late 1990s, and their shares often soared when their patents were granted.
But most companies failed to generate enough royalties to keep them out of bankruptcy court, much less generate million-dollar paydays.
In Forgent's case, because the claim strikes at the heart of a widely used consumer technology, it sparked an immediate response from an array of people.
"Maybe this type of patent nonsense will finally get more companies to see that open standards are in fact a safer way to build their products," a member of the Slashdot community wrote in one of more than 1,200 comments posted on the tech news and discussion Web site.
Patent "in the ballpark"
So, is Forgent taking a shot in the dark at generating some royalty revenue or does it have a legitimate claim?
In this case, Forgent's patent No. 4,698,672--or "672" as it is being called--appears to stand up to initial technical scrutiny, said Rich Belgard, an independent patent consultant. It has both a solid technical pedigree--created by a research scientist well known in the image compression community--and apparently applies to the JPEG technology.
"It's in the ballpark of reality," Belgard said.
Moreover, the firm has been able to persuade two Japanese companies to ante up cash.
In April, it signed a deal to license the patent for $15 million with a large, though unnamed, Japanese digital camera player, according to company filings and to an industry expert.
In May, Forgent signed a "multimillion-dollar patent license" with Sony for the compression technology, the company said in a press release and in filings with the Securities and Exchange Commission. Jeffrey Dabbs, a research analyst with San Antonio-based financial research firm Kercheville & Co., estimates the actual fee to be between $17 million and $18 million.
"They think there is $100 million that they can get from Japanese companies," said Dabbs, who owns stock in Forgent.
A patent miracle?
The focus on patents is relatively new for Forgent, a company that for more than 20 years had been known as Video Telecom, or VTel, before changing its name in August 2001.
A patent deal nearly two years ago that resulted in $45 million payoff whetted Forgent's appetite for the world of intellectual property. Since then, a new management team has taken the company from a maker of videoconferencing hardware with declining revenue to a video technology firm focusing on software and patents. Its portfolio includes nearly 40 patents, with another 35 in the works.
The claim to JPEG technology ownership arose from a data compression patent that Forgent acquired from videoconferencing hardware maker Compression Labs in 1997, said Ken Kalinoski, chief technology officer for Forgent.
If he's right, it couldn't come at a better time for the company, whose revenue has hit the doldrums. In 1997, the company collected $200 million selling high-end video conferencing solutions and services, but for the latest year, ending July 2001, sales fell to $38 million.
In a corporate restructuring and management shakeup, the company exited the video hardware business in August 2000 and slashed more than 250 jobs.
Kalinoski believes patent 672 has incredible potential. However, while Forgent has gotten two companies to sign its licensing agreement, sooner or later the patent will be contested. Kalinoski believes the company is ready.
"This is not a willy-nilly scenario that has come up," he said. "There has been six months of due diligence as to what this patent is all about."
Patents filed on Internet technology and business practices have taken off in recent years and are nearly always contentious.
Two years ago, Unisys accelerated its program of collecting royalties on the Graphics Interchange Format, or GIF, another popular format for graphics on the Web. Unisys started pursuing licensing in earnest after the Web caught on with mainstream consumers, and it reached agreements with Microsoft and AOL in 1996.
Other companies have resorted to a controversial tactic of applying for patents while pushing the technology in question in standards committees.
In 1995, Dell Computer agreed not to enforce its patent rights for the technology included in the VL-bus graphics standards, as part of an agreement with the Federal Trade Commission. The FTC had charged Dell with pushing for the adoption of a technology in the standards committee, without disclosing when asked, that the company held a patent.
Sun Microsystems and Rambus have both been investigated for similar actions.
Who was first?
Forgent didn't do any of the original work of the patent that they now own; that was done by Compression Labs' Wen-Hsiung Chen and Daniel Klenke.
Chen, who joined Cisco after selling Compression Labs to Forgent and a second firm to the networking giant, published several papers in the 1970s and 1980s on image compression and transformation. Some experts credit him with the creation of a specific kind of image manipulation--the discrete cosine transform--used in the JPEG format.
Yet he or others may have published all the components of the 672 patent more than a year before the application date for the patent. Known as prior art, such publications can undermine a patent.
"There is a lot of work around that can predate the Forgent patent," said the JPEG's Clark. "Most of the JPEG standard was pretty well formulated by the time this patent came out."
While Chen and Klenke applied for 672 in October 1986, the same year that the Joint Photographic Experts Group was formed, the push for the standard had begun more than four years earlier. Three international standards bodies--the International Organization for Standardization (ISO), the International Telegraph and Telephone Consultative Committee (CCITT), and the International Electrotechnical Commission (IEC)--had begun the search for an image compression standard in 1982.
Clark of the JPEG group said Chen may have sat on one of the committees.
Chen could not be reached for comment, but Kalinoski of Forgent denied the claim and stressed that he believed that Chen never took part in any committees. "We have had those discussions with Wen and absolutely he has confirmed that he had no part in those standards discussions."
Even if he had, it's unlikely his participation would be considered improper, said patent expert Belgard.
"Even if he was on the committee, if there was no rule (prohibiting patent applications on the standard), then...it's not illegal," he said.
That leaves the question of prior art as the issue that will determine whether the patent is valid.
While the debate rages, Forgent refuses to slow its royalties effort. Kalinoski said the company is looking for more royalties from other digital camera makers and the company is looking at companies in other industries as well.
One certainty: Forgent has a wide swath of the Internet in its sights, as it will consider any company that doesn't pay to use JPEG a pirate.
"This is very analogous to the music industry, who have said that the people who have been using our methods and materials have been stealing our intellectual property and this needs to stop," Kalinoski said. "We are just asking for the same thing."