Attack of the MP3 patent hoarders

A Texas chip design company broadcasts a warning to the world: Pay us now, or pay us later.

Published January 4, 2006 10:53PM (EST)

On Jan. 3, SigmaTel, a semiconductor chip design company based in Austin, Texas, circulated a press release announcing it had acquired "original MP3 player patents" and intended to use them to expand its "IP licensing program."

For those who were present at the dawn of the MP3 age, the news carried with it a certain nostalgic significance. The intellectual property at issue, known as the "Moon-Hwang patents," was incorporated in the first MP3 players ever manufactured, Saehan's MPMan and Diamond's Rio. (The two companies, one based in Korea and the other in the U.S., developed the players as part of a joint venture.) The products themselves have long been consigned to the dustbin of consumer electronics history, but the patents, issued in 1997, still have some years left to run.

Clearly, SigmaTel feels there's value to be gained. SigmaTel, like PortalPlayer, designs chips that run MP3 players, but making things is only one strand of its business plan. Like an increasing number of high-tech companies, SigmaTel aims to generate revenue from hoarding patents. SigmaTel's press release was a shot across the bow at the world's MP3 player manufacturers. You can pay us now, as part of our "IP licensing" program, or you can pay us later, after our platoons of lawyers have feasted on your corpse.

  • "SigmaTel will be targeting companies manufacturing MP3 players in China or distributing MP3 players in the United States who infringe SigmaTel's patents."

  • "SigmaTel intends to attempt in all cases to first employ its licensing strategy, but will not hesitate to resort to legal action if MP3 player and silicon manufacturers decline to participate in the program."

  • "The Moon-Hwang patents are the seminal intellectual property of the MP3 player market. The patents were granted to the individuals who invented the MP3 player, and those patents are now the property of SigmaTel," continued [SigmaTel CEO] Edgerton. "SigmaTel encourages all MP3 retailers and manufacturers to review these patents before selling any MP3 players."

Now, you will find no shortage of people who will argue that SigmaTel-style patent hoarding is a natural and admirable form of capitalism. The exploitation of intellectual property is a core part of the global economy and will only become more so. There are huge sums of money to be made licensing I.P., and the semiconductor industry is a pioneer in figuring out how to best do so.

But to others, patent hoarding and the ensuing litigation is little more than extortion, a parasitical kind of behavior that could hamper innovation in the industry in the long run. When companies end up spending more to defend themselves than they do on research and development, everyone may end up suffering. It's a topic that "How the World Works" intends to follow closely, and tracking SigmaTel's adventures in I.P. licensing looks like an awfully good hook for the narrative.

Because this isn't the first time I've been intrigued by SigmaTel. Last summer, I started paying attention to the company when I saw that it had filed a patent infringement complaint against the Chinese chip design company Actions, which also designs chips for MP3 players. The case is currently being heard before the International Trade Commission, a process that is costing both companies millions of dollars, and may have had a serious dampening effect on Actions' recent public offering.

I tried to interview executives from SigmaTel last summer, but the company never made anyone available to talk to me. The court proceedings are mostly confidential, so it's hard to judge whether the complaint has merit. But Actions certainly thinks it knows why SigmaTel sent in the lawyers.

In 2004, Actions gained signficant market share in China and its chips began appearing in some low-end MP3 players sold in the United States. According to Xue Wei, a spokesperson for Actions quoted in the Chinese press, Actions' success, and not the alleged infringments, were the real incentive for SigmaTel's broadside. Xue said SigmaTel had "intentionally" filed two lawsuits just before the world's two most important consumer electronics exhibitions, at which companies like Actions typically book the majority of their new orders.

"Twice, SigmaTel filed a lawsuit a few days before an event kicked off," reported the China Business Weekly, "and, as a result, some of our international clients withdrew their orders, over concerns rising from the lawsuits," said Xue.

Well, no one ever said joining the global economy was going to be easy.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Globalization How The World Works Intellectual Property