Is this the end? RIM's future has never looked bleaker

While RIM's patent dispute drags on, its competitors are getting ready to tear a strip off its wireless e-mail supremacy.

Television may be the opiate of the modern-day masses, but the corporate world is addicted to something just as engrossing. At last count, more than four million users were hooked, most of them tapping into their drug of choice at work, often subtly under tables, in elevators or while taking a phone call. It's got so bad that the B.C. legislature has banned its use during sessions. But it's not just the rank and file who can't get enough. Megastars Mariah Carey and Naomi Campbell are heavily into the stuff, not able to stop long enough even (reportedly) to enjoy dinner at a fancy restaurant.

This is, after all, the age of the CrackBerry–the nickname of Research In Motion Ltd.'s popular mobile e-mail gadget known as the BlackBerry. The BlackBerry is, of course, a much-heralded Canadian success story, but the trail-blazing device is in real danger of being snuffed out in the United States. A six-year-old dispute with a tiny American patent house over who owns the guts of RIM's system is finally coming to a head in the courtroom of Judge James Randolph Spencer of the U.S. District Court in Virginia. Worst-case scenario? Spencer throws the book at RIM in a ruling widely expected in late February, and pulls the plug on BlackBerry services in the States. What happens to Canada's superstar tech company then–not to mention its three million U.S. subscribers–is the stuff of rampant speculation.

One can imagine the wails of despair when Mariah and Naomi actually have to, gulp, use a phone. More seriously, though, companies who have invested heavily in the BlackBerry will lose a valuable communications tool–not to mention all the money they've spent. It's dire enough that the U.S. government–which has roughly 300,000 BlackBerry users–has demanded that it not be affected if Spencer calls for an injunction against selling and using the RIM service in the United States.

It's not just CrackBerry-heads who are jittery. Investors have been dumping their stashes of RIM shares as the company's court losses have mounted. The stock (TSX: RIM) hit a high of $105.39 on June 1 and then slumped 41% over the next five months, to its 52-week low of $62.01 on Oct. 26. Seemingly confused about the company's future, investors have since been jumping in or out of RIM with every court or patent-office ruling. When the U.S. Supreme Court met in January to consider (and ultimately dismiss) RIM's contention that Spencer erred in his judgment that U.S. patent law applies to companies whose operations and technology are based in Canada, RIM's stock nosedived by nearly $7.

But this case is about more than the future of BlackBerry service and, by extension, the future profitability of RIM, which has a swarm of giant competitors (think Microsoft and Nokia) nipping at its heels. It's also a rare glimpse into the machinations of patent power, how companies exploit intellectual property not just for their own use but also to stop–or, increasingly, wring money from–others who might be infringing on their inventions. It's a case that also highlights the inadequacy of understaffed patent offices to respond to infringement disputes. (The U.S. Patent and Trademark Office alone now has a backlog of 1.3 million cases; even though it has fast-tracked RIM's, it can't do that with all of them.) And it illustrates the rising price of innovation in the knowledge economy, where millions of dollars are spent trying to establish and defend IP–costs that are passed on to consumers. “Inevitably, there is a concern about whether this drives up the cost of innovation and drives up the cost of technologies downstream that industries purchase,” says Anthony Williams, executive research adviser specializing in intellectual property and innovation at New Paradigm, a Toronto think-tank. “There is a cost to the broader economy.”

For RIM, the immediate fear is a court-imposed ban on BlackBerry use. But no matter which way Judge Spencer goes in late February–despite his famously being quoted as saying, “I've spent enough of my life and time on NTP and RIM,” the judge could still decide to wait for the U.S. patent office to issue a final ruling on the very NTP patents he is considering, which could take at least a couple of weeks and maybe more–the case has already been “a parasitic drag on RIM's present and future,” says Carmi Levy, a senior research analyst with Info-Tech Research Group in London, Ont.

Levy, for one, doesn't believe that NTP will let an injunction happen. After all, it isn't in NTP's interest to shut down a service that will make its lawyers and beneficiaries rich beyond even the imagination of its founder, Thomas Campana Jr., an engineer who died of cancer in 2004 without seeing anyone license his e-mail technology. (NTP is run by co-founder Donald Stout, a lawyer.) “NTP just wants to goose RIM as far as it can because they want the settlement figure to be as high as possible,” says Levy. “Push them to the cliff, make it look as dire as possible, push them close to an injunction but not go all the way, because if they do, everything falls apart. They get nothing. We can sit here for days and talk about the impact that would have on the economy. It will be huge. It will be seismic.”

RIM is a rare Canadian tech success–a company that hasn't succumbed to the temptations of foreign takeover or collapsed under its own weight. It is also one of the few companies anywhere to essentially create a product category where none existed before. In less than a decade, the BlackBerry–confounding critics who dismissed it as a fad–has become the corporate symbol for connectivity, much the same way Kleenex is synonymous with tissue and Coke with cola. It's no wonder, then, that RIM already occupies a position of industry leadership. Its widely respected management team is actively involved in Canadian think-tanks such as the Perimeter Institute for Theoretical Physics and the Centre for International Governance Innovation, both in RIM's hometown of Waterloo, Ont. Now a small company based in McLean, Va., is calling all that success into question.

There are 17 companies with NTP in their name listed on; not one of them is in Virginia and not one is NTP Inc. In fact, the NTP in question has no warehouses or factories, no products, no payroll. It's little more than a pile of papers. But the company does exist, and that pile of papers–containing patent numbers 5,436,960; 5,625,670; 5,819,172; 6,067,451 and 6,317,592–is more important than it looks. That's something RIM found out the hard way.

Fewer than 5% of patent cases go to trial, but that's roughly twice as many as other civil cases. Most start with a polite letter from one company to another inviting them to license a particular technology, much like the letter NTP sent to RIM back in January 2000. RIM could have settled for a relative pittance back then, but it decided to fight. After all, it was the one that took a simple idea–using wireless and Internet technologies to send e-mails–and made it ubiquitous in a way that Thomas Campana could scarcely have imagined. But RIM lost the case in 2002; NTP was awarded US$53.7 million.

That doesn't sound like much today, especially when compared to the expected US$2 billion in revenue RIM will take in this year. But back then RIM was still a fledgling in the communications world, with revenues of roughly US$75 million a quarter. Since then, RIM has launched a series of appeals, trying to delay the case while the U.S. patent office figures out whether NTP's patents should have been granted in the first place. (RIM is also being sued in Great Britain by Inpro Licensing, a Luxembourg-based patent house, in a similar type of infringement case. But everyone's fixated on NTP at the moment.)

Generally affable and available, RIM co-CEOs Mike Lazaridis and Jim Balsillie aren't talking much these days, claiming they can't comment because of the ongoing legal proceedings. Instead of doing damage control, the company issues very carefully scripted news releases that reveal little about its legal strategy or proposed workaround in the event of a shutdown–letting customers wonder if such a technology trick is even workable. That has some inside the company frustrated that their side of the patent dispute isn't being told. It has also led to sometimes wild speculation about what might happen if Spencer decides to rule before the patent office has made its final decision, or what form a last-minute settlement might take.

RIM optimists believe the U.S. patent office will eventually wipe NTP's patents off the books, freeing RIM and other companies from any obligation to play ball. It could happen, but it might also take several years to shake out. The patent office has initially rejected NTP's patents, but that initial ruling isn't binding. The office has yet to make a final decision–a decision that NTP in any event would then be allowed to appeal, first to the patent office itself and then to the courts. Meanwhile, the District Court has to rule based on the evidence at hand, and like it or not, NTP's patents are valid at the moment.

That has RIM and NTP playing a game of corporate chicken. RIM can certainly afford to pay off NTP: it has earmarked cash for a settlement for a number of years, and has US$1.6 billion in cash and cash equivalents on hand. In court filings, NTP has asked for US$126 million for past infringement, plus an injunction or a lump sum based on a 5.7% royalty rate for sales until 2012, the date its patents expire. RIM, however, argues that a new trial should be held–or, at the very least, a much lower royalty rate given to NTP–because NTP's patents are weaker than they were at the start of the trial, given the patent office's initial rejections. RIM also argues that it's in the public interest that it not be shut down, since its planned workaround would be difficult to implement. (That's the same workaround the company has been trumpeting as its saving grace since November.)

If the patent office rules in RIM's favour, any court injunctions in place will be set aside. But there's no guarantee that any money the company has paid NTP will be refunded. Indeed, “as far as damages go, I'm not sure the court would set that aside or require payback,” says one patent lawyer familiar with the case but not working on it, “because the court would have said, in effect, 'You had your shot at invalidating the patents–you didn't do it.'” That means RIM could pay millions it won't be able to recoup even if NTP's patents don't exist. During the past seven quarters, RIM has written off roughly US$392 million for legal costs and potential liability in the disputes.

To understand how the patent office and the courts can differ on the same case, you have to understand that the two bodies are separate and consider different evidence. While the court often waits for the patent office to make a final ruling, it doesn't have to if the case is dragging along. It's easy to see why the patent office is swamped. It received 406,302 patent applications and granted 165,485 of them last year, adding to a database of patents that numbers roughly seven million. In the RIM-NTP case, the office is looking at just eight patents, but there are 1,921 individual claims contained in them. If RIM's technology is similar to any one those claims, it's guilty of patent infringement.

The backlog and volume of patents being issued is creating an unworkable situation that could dry up innovation altogether. “It would be like dropping a vat of molasses onto the business community. Innovation would absolutely stop dead,” says Levy. “There would be no incentive for anyone to develop any new technologies because they would spend more money in litigation trying to protect IP and establish their ownership of it than bring it to market. It's already expensive enough–it's crazy.”

That's not NTP's concern. Nor is it RIM's, at the moment, although the company would certainly like everyone to believe it has been fighting this case for the greater good. In an open letter in December, Balsillie wrote that “leaders in the private and public sector should re-examine how we reconcile an overburdened system with the emergence of litigious and avaricious groups like NTP that are in reality a debilitating drain on the economy and at odds with the constitutional purpose of the patent system.”

Fancy words. But what RIM really wants is for NTP to go away, with or without a cash settlement, so that it can get back to business. RIM has had the luxury of being the first mover in the push-based mobile e-mail market, but it's no longer the only game in town. The reality is that the first company to break a technology rarely thrives, or even survives, once bigger companies get interested. Microsoft, for example, is famous for usurping control of particular markets, and it's going after RIM with its recent Exchange Server update–it includes a free push-based e-mail application. Hand-held makers Palm and Good Technology also have developed e-mail-friendly devices, and if Nokia, the world's largest manufacturer of handsets, converts the estimated 230 million basic units it sells a year over to smart-phone technology, it could wipe RIM out. That's why making NTP go away is more pressing for RIM all the time. “The longer this drags on, the worse it gets for RIM, because RIM is relatively small compared to these emerging players, and a company like Microsoft is perfectly willing to spend money and lose money on whatever solution it comes up with for years until it can prevail,” says Levy.

With the patent dispute unresolved, Levy adds, RIM's situation is “like playing a championship table tennis tournament with one hand tied behind your back.” And while you might be able to use your BlackBerry like that, it's no way to run a business when bigger and stronger competitors are gunning for your title.

If they pull the plug…

While a U.S. shutdown of Research In Motion's BlackBerry service may be unlikely, companies should still be prepared for the possibility. Here's a quick primer on what to do if your BlackBerrys fall off the vine, according to Carmi Levy, an analyst at Info-Tech Research Group, a technology research firm in London, Ont.

1. Figure out what mobile applications you are currently running on the BlackBerry and how easy it would be to move them onto another platform.

2. If you already have a contract or service-level agreement with RIM, challenge your rep about what the company plans to do in the event of an injunction. Ask how RIM intends to maintain continuity and service.

3. Build your response to a possible shutdown into your disaster recovery plan. Create a step-by-step process to manage your remote messaging needs.

4. Look at who else is out there. RIM was the first successful marketer of push-based mobile e-mail, but it's no longer the only option. Check the goods available from Microsoft, Good Technology and Palm.