Legal risk of cloud computing

Cloud space litigation
A recent study revealed that US patent litigation involving cloud technologies has increased by 700% over the past four years (for further information please see “Cloud computing patent litigation on the rise”). This drastic surge was mainly driven by patent assertion entities (PAEs), which purchase patents (eg, from a bankrupt firm) and then sue other companies by claiming that one of their products or technologies infringes on the purchased patent. As cloud computing applications are regularly integrated into complex cloud systems, companies must ensure that their cloud-based solutions are not inadvertently infringing patented inventions.

Legal risk analysis
We analysed alleged infringers (ie, defendants) in cloud computing patent litigation in order to clarify the legal risks involved in using and integrating cloud technologies.

First, we identified litigation where no PAEs were involved. Our analysis revealed that plaintiffs and defendants were from the same industries and likely had competing products and services. Further, these companies were roughly the same size in terms of revenue. Such litigation is often the result of increased competition in emerging industries as new players enter the market.

We then analysed litigation where PAEs were plaintiffs. While PAEs tend to focus on specific technologies, their assertion strategies target multiple industries. As Figure 1 illustrates, the defendants in this type of cloud computing patent litigation originated from various industries and targeted the financial, internet and retail sectors.

Figure 1: target industries of defending entities

Alongside their target industry, each defendant’s annual revenue (fiscal year 2016) was considered. As Figure 2 illustrates, over 50% of defendants were multi-billion dollar companies. Defendants involved in multiple cloud-related patent litigation included:

  • Microsoft;
  • Google;
  • AT&T;
  • Wal-Mart;
  • The Home Depot; and
  • Bank of America.

However, the defendants that were sued by PAEs included:

  • almost every major US internet or software company;
  • every major US bank; and
  • almost every US high street retailer.

The results confirmed that PAE litigation in the cloud space clearly targets industry leaders, and that a wide range of industries is involved in cloud computing patent litigation. The data also showed that for each litigated patent, PAEs target at least three major industry verticals. Patented cloud technologies are not only relevant for internet-based businesses, but are also increasingly used in retail and financial services. Further, the increased litigation in retail and financial sectors indicates that cloud technology integration seems to have a significant impact on a company’s revenue, since PAEs are unlikely to target niche products.

Figure 2: annual revenues of defending entities ($ million as of fiscal year 2016)

Cloud technologies often provide the basic technological platform for server-based applications (eg, a retailer’s payment system or a bank’s accounting system). Many of these cloud server technologies were developed and patented several years before cloud computing was widely adapted for multiple industries.

Nevertheless, a company’s cloud-based applications or services may still relate to those early patents. To capture this relationship, we searched for patents that had been cited by cloud-related patents and identified those that had been the subject of US litigation.

As Figure 3 illustrates, an increasing number of cloud-related applications and services are being designed using patented cloud technology that was once subject to litigation. Recalling that cloud computing services and products often operate using multiple systems and technologies, the data suggests that these services and products have an increased risk of litigation, since the patented cloud technologies at their core were once subject to legal action.

Figure 3: cloud computing patents citing litigated patents as to year of publication

To identify the companies risking litigation for their cloud technologies, we identified the patent portfolios that cited US-litigated patents. As Figure 4 illustrates, these companies include the largest cloud computing providers (eg, Amazon, Microsoft, IBM and Google), and companies with business models which rely heavily on cloud computing technologies (eg, Salesforce, Facebook and Cleversafe).

Figure 4: patent portfolios citing US-litigated cloud computing patents

A growing number of applications and services integrate cloud computing technology. State-of-the-art cloud technologies, as well as core cloud server technologies that were developed several years ago, are highly patented. Our research suggests that these patented cloud technologies are increasingly subject to litigation, often involving PAEs that sue multi-billion dollar corporations across all industries. The results confirmed that cloud computing technologies are increasingly incorporated in products and services that are reliant on technologies which enable communication and processing in the Cloud. As broadly written cloud-related patent claims may cover an unforeseeable range of solutions that run on the Cloud, companies which use cloud computing technologies face an unpredictable level of legal risk.

This research is an extract of an ongoing study around patent activities in the space of cloud computing. The analysis conducted by IPlytics intends to shed light on the potential legal risks for cloud technology users.

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

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