Apple now suing Nokia itself on antitrust grounds; Nokia suing Apple over 40 patents in 11 countries

Yesterday, Apple's antitrust lawsuit in the Northern District of California against certain Nokia privateers (patent assertion entities that Nokia has fed with patents) became known. Then, Nokia announced its new wave of patent infringement suits against Apple. And I have now just found something very interesting in a court filing of the usually rather uninspiring kind: Apple has added Nokia Corporation, Nokia Solutions and Networks Oy (using a Texas address) and Nokia Technologies Oy to the defendants in its antitrust case. Here's the relevant part of the list of defendants (click on the image to enlarge; this post continues below the image):

What has happened procedurally is that the court rejected this proposed summons because it lists defendants not listed in the complaint. But that's just a clerical thing: no doubt Apple will amend the complaint accordingly. Apple's lead counsel, Wilmer Hale's Mark Selwyn, who is also a key player in Apple's protracted dispute with Samsung, has faced greater logistical challenges.

While the original complaint targeted Nokia in practical terms, it does make a difference that Apple decided, apparently in response to Nokia's patent infringement suits, to add three Nokia entities to the list of defendants. I can attribute it only to diplomatic considerations that Apple didn't do this initially. If you sue over an alleged conspiracy (the term itself is in the complaint, it makes sense to go after all conspirators, not just after some.

There's quite some escalation going on: a couple of hours ago, Nokia announced the filing of further complaints against Apple. The most notable changes are that Nokia has also filed an ITC complaint, seeking a U.S. import ban over eight patents, and that it's suing in nine more countries. Last time Apple and Nokia met at the ITC, neither made a lot of headway there; it turned out to be a patent graveyard. In addition to the U.S. (Eastern District of Texas, with a total of 18 patents in play, including H.264 video codec patents) and Germany (eight patents in Düsseldorf, four in Mannheim, and two in Munich, where the first hearings in this new dispute will likely take place in March or April), Nokia is now also asserting three patents in Helsinki, Finland; three patents in London; four in Turin, Italy; three in Stockholm, Sweden; one in Barcelona, Spain; three in The Hague, Netherlands; one in Paris, France;one in Hong Kong, China; and one in Tokyo, Japan.

According to Nokia's press release, there are 40 patents-in-suit, meaning that some patents are being asserted in more than one jurisdiction.

I watched Nokia's patent assertions against HTC a few years ago. There was significant escalation, but it took longer than one day. After more than a year and a half of litigation, that dispute spanned seven countries on three continents. With Apple, it took one day to go from two countries to eleven.

With HTC, this strategy paid off, and it was necessary since most of Nokia's patent assertions either failed or resulted in symbolic wins without commercial impact. I believe that what carried the day for Nokia in the end was that certain patents covered hardware designs and HTC suppliers Qualcomm and Broadcom couldn't easily have worked around them, at least not without cost implications. HTC did a very good job defending itself, but Apple will probably do an even better one and it will simply get more support from its chipset suppliers if it needs workarounds, simply because no one will want to lose Apple's business.

Nokia may find that it's barking up the wrong tree. This all-out war and global carpetbombing will probably not sit well with Cupertino. Normally Apple is willing to pay royalties and move on. Its dispute with Ericsson is an example. But Apple is ready, willing and able to litigate for years if it feels it has to. Nokia's decision-makers may believe that "brute force" is the way to get Apple to pay up quickly, but this approach may backfire. What if Apple now decides to prove that it can defeat one Nokia patent infringement claim after the other and get one Nokia patent after the other invalidated? Should that happen, Nokia will have to wait for its payday much longer than it might have thought. Its portfolio might be devalued in the end. And the return might be quite a disappointment. On top of all of that, Nokia risks being held to be an antitrust violator. There is considerable risk to the failed Finnish device maker.

Talking about antitrust, the U.S. lawsuit against Nokia's privateering could also, with or without a formal EU complaint by Apple, lead the European Commission to investigate Nokia. Commissioner Vestager will have to take some serious action against European tech companies for the sake of at least appearing to be more balanced than one would think based on her current focus on Apple, Google, and Facebook.

As for Nokia's chances of getting leverage over Apple, injunctions will be way more important than damages, but they'll be hard to come by. In the U.S. it's pretty hard to obtain an injunction over any patent. In Germany and some other European jurisdictions, injunctive relief is a legal remedy for infringement, but if a patent is standard-essential, special rules apply (after the CJEU's Huawei v. ZTE opinion), and if it isn't standard-essential, it can be worked around.

Today's announcement by Nokia shows how much of a troll it has become. Ericsson is not as bad as Nokia, but not fundamentally better. And the European Commission's innovation policy comes down to ridiculous claims, unrealistic plans, and in some cases rather questionable regulatory action.

As for Nokia's transformation into a troll, it's very telling that Nokia used to prefer the District of Delaware as long as it was a mobile device maker itself. Nowadays, it prefers the Eastern District of Texas. Sic transit gloria mundi.

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Enough is enough: Apple files antitrust complaint against multiple Nokia privateers

PatentlyApple was first to report on Apple's antitrust case against Acacia and other patent assertion entities (PAEs) that Nokia is using to extract, in the aggregate, excessive license fees from Apple and other companies. As a service to readers, I wanted to publish the complaint here (this post continues below the document):

16-12-20 Apple Complaint v. Acacia Et Al. by Florian Mueller on Scribd

For a long time I had hoped someone would finally do this. Last year I called out Nokia and others on their privateering ways, and it turned out that Nokia had industrialized the concept of privateering to a far greater extent than anyone else. My list of PAEs fed by Nokia contained all of the defendants in Apple's antitrust suit--Acacia and Conversant (technically, Apple is also suing particular subsidiaries of those)--and more. That post prompted attempts by Ericsson and Nokia to explain away their privateering ways.

Privateering-related issues have been raised in other litigations, including a case involving Samsung and an Ericsson privateer in London, but this is now the major anti-privateering lawsuit. Without a doubt, all other major industry players focused on making products (as opposed to those who increasingly rely on patent licensing income) will join me in wishing Apple luck. This is not just about Apple, or about smartphones and tablet computers. It's a huge issue for automotive and other IoT (Internet of things) companies as well.

I just hope Apple will see this one through. There is a risk that Apple may settle (as it did with Ericsson, though I had hoped the case would provide clarity on the "smallest salable unit" approach to FRAND royalties). In a FOSS Patents guest post I published last month, top-notch analysts from Arete noted that "a critical [for Nokia] renewal at Apple [is] forthcoming." It could be that Apple will drop this antitrust suit as part of an overall agreement with Nokia on an extension of the license agreement originally agreed upon in 2011.

The story Apple tells the court is that Nokia, after failing as a mobile device maker, changed its positions on FRAND licensing of standard-essential patents and conspired with various PAEs in order to bring numerous royalty demands and infringement lawsuits against Apple and other industry players and with the objective of circumventing its original FRAND licensing commitments:

"21. With its cell phone business dying, Nokia began to seek out willing conspirators and to commence its illegal patent transfer scheme in full force; that scheme has continued in full effect to the present. The driving force behind Nokia's strategy was to diffuse its patent portfolio and place it in the hands of PAEs. Acacia and Conversant were its chief conspirators."

"24. [...] According to an expert report that Nokia submitted in a prior proceeding: '[T]he relationship between the number of patents and the total royalty rate is not linear. For example, a license to a single [SEP] may be 2.5% ... while a license to ten or more [SEPs] rarely exceeds 5%.' Thus, by creating a network of conspiring PAEs to hold slices of its former portfolio and sharing in the proceeds of the PAEs' assertions, Nokia seeks to work with PAE collaborators like Acacia and Conversant to extract royalty rents and tax product innovators in yet another way that would not have been possible had it kept its portfolio intact."

On the remedies side, it's worth noting that Apple, besides damages, wants those patent transfers to be declared illegal and to be undone. Also, one of Apple's prayers for relief relates to injunctions: it asks the United States District Court for the Northern District of California to order an anti-suit injunction against Acacia and Conversant. The most prominent case in which an anti-suit injunction actually issued was Motorola Mobility v. Microsoft (Western District of Washington); it got upheld by the Ninth Circuit, and that's the circuit court for this case, too.

In terms of positive effects on innovation, an Apple win over Acacia and Conversant would eclipse Microsoft's win over Motorola Mobility, and that one was also very significant and positive.

I plan on talking about this some more after the defendants have filed their answer to the complaint. Also, while it's a different field of law and a different jurisdiction, I've meanwhile read the 130-page European Commission decision on what the EU says is "state aid" Ireland gave to Apple, and I'll comment on it soon. Suffice it to say for now that it's far-fetched to say the least; the EU Commission may lose the case just simply because the arm's length principle for inter-company charges is not part of Irish tax law; and there is not even the slightest indication of any wrongdoing by Apple in that whole document (wrongdoing by the recipient of alleged subsidies is, of course, not a legal requirement, but I wanted to mention it anyway).

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Airbus (the COMPANY, not a plane) hijacked by patent extremists, joined trolls' lobbying entity named IP Europe

With respect to standard-essential patent licensing, my preferred European voice of reason(ableness) is the Fair Standards Alliance, an organization Google recently joined and which I'd like to see Apple and Samsung team up with at some point. On the other end of the spectrum, there's a lobbying group named IP Europe. While I personally know and respect two of the individuals working for that one, I fundamentally disagree with its policy positions and object to its false claim of supporting "innovatives SMEs." IP Europe advances the cause of patent trolls and of businesses that failed in the mobile phone business for a lack of innovation and increasingly resort to patent licensing as a revenue source.

Looking at IP Europe's member list, it's generally easy to see why each of those organizations expects to gain something from overpatenting and from an overcompensation of patentees, with a couple of exceptions, however.

Orange (France Telecom) is a carrier. In the U.S., mobile carriers are usually on the reasonable side (and sometimes go too far even for my taste when making public-interest arguments in amicus curiae briefs). Does the former France Teleom plan to engage in patent trolling like its British counterpart? I don't know, but it was most likely a mistake that Orange joined IP Europe.

The other, better-known and even more surprising member is Airbus Group. The only explanation I have for Airbus's decision to join IP Europe is that an IP-incompetent senior management has allowed the patent professionals running Airbus's IP department to hijack the company in order to advance the interests of their profession rather than defend the interests of their current employer.

In the airplane business, Airbus only stands to lose from excessive patent royalties. In the defense and space businesses, patents won't protect Airbus either. In 2012, Elon Musk already explained why SpaceX (which in a few years of existence has already achieved technically more impressive feats than Airbus in its much longer history) generally doesn't file for patents.

I want my Munich area-based startup to be very innovative in its niche, but generally speaking, Europe has a huge innovation gap versus Silicon Valley. California has Elon Musk. Europe has Tom Enders. Tom who? Well, the CEO of Airbus studied politics, started his career in politics, and at a heavily-subsidized intergovernmental joint venture like Airbus, political connections are more important than anything else. Elon Musk, despite all of his amazing talents, would never get a top job at an organization like Airbus. Fortunately, he doesn't need it.

When the CEO of a company that should be technology-driven is absolutely not a technologist (but a political scientist/historian), it just takes a self-serving IP department to make the company sign up with a lobbying group like IP Europe, thereby teaming up with highly litigious patent assertion entities (PAEs)/non-practicing entities (NPEs).

One of IP Europe's key priorities--if not its number one priority--is to fight against the "smallest saleable unit" approach to FRAND license fees. Do the bureaucrats in charge of Airbus even know what that means for their business? Presumably they don't. What if someone made a Motorola-like patent royalty claim and demanded a percentage of the sales price of an entire Airbus plane over a few WiFi, video or whatever patents?

Do those decision-makers realize that the number of potentially patented "inventions" in an Airbus that third parties hold account for a vast majority of all patentable "inventions" in a modern airplane? It has been estimated that 250,000 patents are embodied in a smartphone. In practical terms, the digital entertainment and communications technology installed in today's planes is increasingly like that, and actually much bigger.

To many of you this may seem obvious, but let me explain this for the rest: there is no such thing as a software patent that guarantees stability and security. The reason: no matter what a patent may describe (with or without specificity), it can always be implemented in an unstable and insecure fashion.

Airbus has a software quality problem. Last year Airbus even admitted that a software configuration error caused the crash of a military transporter, and I vaguely remember a crash of a commercial Airbus plane many years ago that some experts attributed to a software issue. In terms of success factors in the airplane business, that is what Airbus should be focusing on. It has nothing to do with patents. Any code that is stable or unstable, secure or insecure, is protected by copyright (and trade secrets). Any configuration that is stable or unstable, secure or insecure, is a matter of quality assurance.

If Airbus focused on software quality, it wouldn't have to fear copycats. If someone copied great code, copyright (not patent) law would protect Airbus.

Airbus is the craziest example now of a company that builds highly multifunctional products and opposes the "smallest saleable unit" approach to patent license fees. But maybe Airbus is not really a company. It's more of an intergovernmental organization that is detached from economic realities because taxpayers will have to foot the bill if anything goes wrong.

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Nokia completes next stage of transformation into patent troll with sale of HERE to automotive consortium

Nokia has just made the following announcement:

"Nokia completes next stage of transformation with agreement to sell HERE to automotive industry consortium at an enterprise value of EUR 2.8 billion"

The buyers are Audi, BMW, and Daimler. I once did a consulting project, unrelated to this transaction and more generally about IP strategy, for one of them (I closed my consulting business about a year ago, however, in order to focus on app development). It's a really positive sign that these traditional industry players decided to join forces (they're on better terms with each other than major smartphone makers, but don't coalesce every day) and to outbid the likes of Uber.

All three of them--I know their products fairly well because I've repeatedly bought cars from two of them and driven long-term rental cars from the remaining one--have a lot of work to do to defend their turf against Silicon Valley companies like Tesla, Google, and Apple (AppleInsider's Mikey Campbell is a great source on that secretive project). It's ridiculous that, for example, Mercedes doesn't even provide its customers (I'm driving a 2014 S-Class) with frequent software updates the way Tesla does. And I've seen massive user experience deficiencies in the user interfaces of all three of them, including stuff of the kind that is as crazy as the removal of the Start button from Windows was but would presumably get people fired (or never even hired in the first place) at a company like Apple.

For example, the list of recent destinations of my car's navigation system, which has an ultrawide screen (two, actually, but I'm speaking of the one relevant to this problem here), often displays the city and even the county before the street, which means that the street name doesn't appear (for space constraints, even on an ultrawide screen) until I select a list entry. That just makes no sense in a country in which streets have fairly distinct names and one rarely has destinations with identical street names in two cities. Another example: the same button that can be used to select a phone number while using voice control will get the entire operation aborted if you hit it again in order to dial, though you would use that very button to dial without voice control. These examples show that a company like Daimler may understand wheels and brakes, but hasn't (yet) figured out screen layout and user interface design. Today's announcement is not the only indication of progress. The Mercedes F 015 is also very exciting.

With the F 015 being many years off, my next car will most likely be a Tesla, and I will definitely consider an Apple or Google car once available. Still I hope that those automotive companies, who have now demonstrated that they increasingly invest in digital technologies, will learn about user experience up to the CEO level, will change their development cycles and business model so they can deliver frequent and free updates to customers, will dump fossil fuels before customers dump their products, and and will do all of that in time before companies like Apple, Google and Tesla will, in a hypothetical worst-case scenario, turn them into the next Nokia.

Talking about the Nokia we know, I think the headline of this blog post is an accurate modification of the headline of today's Nokia press release: the "next stage of transformation" here relates to Nokia's trollification. By selling the HERE mapping business, Nokia has divested yet another product business. It was a licensing business, but a licensing business in which customers got something real and functional, as opposed to paying up for overbroad and often invalid (at least that's what German courts thought when Nokia sued HTC and ViewSonic a couple of years ago) patents.

Nokia's acquisition of Alcatel-Lucent has received regulatory clearance in the U.S. and Europe. Today's press release says the deal is expected to "close in the first half of 2016." It would be nice if this resulted in Nokia again focusing a bit more on actual products, but I'm very skeptical.

I guess it won't take long before numerous former Alcatel-Lucent patents show up in various lawsuits brought by patent assertion entities (PAEs). No company in the industry appears to be nearly as active and agressive in connection with privateering as Nokia. In May, Nokia and Ericsson sought to justify their privateering ways after IAM (Intellectual Asset Management) Magazine wrote about this topic, citing this blog.

Audi, BMW and Daimler will probably be among the targets of such patent assertions, given that cars are increasingly smartphones on wheels...

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Nokia and Ericsson seek to justify their privateering ways, defend patent transfers to NPEs

The debate over privateering (patent transfers by large operating companies to so-called non-producing entities or patent assertion entities) is in full swing, and it will be with us for a while. The week before last I made a call for input in an effort to build a smartphone-related privateering directory. This week, IAM (Intellectual Asset Management) magazine politely disagreed with my approach, and I respectfully disagree with them.

At the heart of that disagreement is the question of whether infringers unwilling to take a license are the real issue. IAM thinks so; I don't. When the "smartphone patent wars" started in 2010, and in the following two to three years, I also believed that more companies should take licenses and felt that certain right holders had a reasonable basis for asserting their IP in court. But what has come out of all those lawsuits so far does not support claims of massive patent violations: most smartphone patent lawsuits go nowhere and even the few assertions that do succeed usually don't have meaningful results. in this field of technology (which is a large one because smartphones are highly multifunctional) I can now understand each and every defendant who isn't impressed by claims to infringe many patents held by someone. I wouldn't have thought back in 2010 that Motorola still hasn't felt forced to take an Android patent license from Microsoft after four and a half years of crossjurisdictional litigation. But that's the way it is (unless there's a reversal of fortunes down the road) and I can't blame others for "doing a Motorola" when they face royalty demands.

Smartphone patent assertions are so vastly unsuccessful that I've arrived at the conclusion the term "intellectual property" is a propagandistic misnomer for smartphone patents. I still like IP as a term for patents in a field where the system may work, for copyright, for trademarks, and for certain other categories of rights that are reasonably reliable. IPRs will never come with the degree of legal certainty that real property provides and I understand that. However, when the vast majority of assertions turn out meritless and the few that have merit in a formalistic, legalistic sense are still unimpressive from a technical/commercial point of view, transaction costs are totally out of proportion and the value of most of those patents is not in the "innovation" they allegedly protect but in the ability to force someone to spend money on legal defense and in the off-chance that one of the asserted patents may beat the odds and have some real impact in the end.

Most right holders and IP professionals still claim that patents, even smartphone-related patents, should be treated like real property, but Congress wouldn't be looking at the reform proposals that are currently on the table if lawmakers truly believed that the patent system was all about the legitimate protection of innovation. No one would seriously make similar proposals with respect to real property. It's just for political reasons that even those favoring far-reaching reform frequently repeat the mantra of how beneficial the patent system is to innovation. Saying the opposite would be unwise with a view to international trade negotiations and would draw massive protest from various large organizations. But when even the largest and most well-known companies in the smartphone industry fail with most of their patent assertions, something is fundamentally wrong, the system is increasingly detached from the notion of protecting true innovators, and more reform is needed.

Just like patent enforcement is structurally different from the enforcement of real property rights, it also makes sense to treat (at least in this field of technology) patent transfers differently from other asset sales.

Nokia and Ericsson have issued statements to IAM (cited in the blog post I linked to in the first paragraph) on their patent transfers to patent assertion entities (PAEs). They basically told IAM that those deals are beneficial, but they don't explain why companies with such vast resources and enormous sophistication (in-house and externally, in legal and in technical respects) need help from little guys with a controversial business model to do license deals with the very same licensees with which they've already done deals before and do deals with all the time.

They also fail to explain why a number of major right holders generally don't sell patents to PAEs. For example, I'm not aware of Qualcomm doing this. Or IBM (all the IBM patent sales I know about were to operating companies such as Google and Twitter). Or even Microsoft. While Microsoft has been criticized by some for providing funding for the Nokia-Mosaid deal, for the way it structured its acquisition of Nokia's wireless devices business (sort of a "reverse privateering" deal) and for funding Intellectual Ventures even at a time when almost everyone else in the industry didn't want to be associated with it anymore, even Microsoft's critics can't deny that it has built an enormously successful licensing business with well over 1,000 licensees--and it runs this business itself, without having to transfer patents to trolls.

Privateering is a huge and important issue, and there's no way to discuss all of its aspects in one post. For the remainder of this post I just want to comment quickly on a few things Nokia and Ericsson said in their statements:

• Both companies say the acquirers of their SEPs (to the extent that SEPs are involved) have to fulfill their FRAND licensing commitments. The problem is not that the acquirers would claim the patents weren't encumbered. The key issue is that those companies have previously taken positions on the royalty rate for their portfolios. For example, on page 3 of this American Bar Association Document you can see that Nokia and Ericsson publicly announced a 4G (LTE) royalty rate of 1.5% each. But when such right holders sell parts of their portfolio to third parties, there's no longer a guarantee that the collective royalty demand implementers of the standard will face about the patents presently and formerly held by the respective right holder would still not exceed that limit. If a plurality of patent holders of what used to be a single portfolio makes a collective demand that is not FRAND, privateering becomes a means of circumventing or vitiating FRAND licensing obligations.

• Nokia touts its "relatively young portfolio" and continuing innovation but it has far fewer engineers on staff than it had a few years ago and in its dispute with HTC I saw it assert mostly very old patents.

• Nokia claims that "the majority [of its patent divestments in recent years] have been to operating companies." That means they must have sold patents to many operating companies since at least ten deals with PAEs are documented. But the only Nokia patent sale to an operating company that I can find on Google is that certain design (not technical) patents were given to Microsoft along with the handset business. So the other deals are either secretive or they aren't talked about because it's the deals with PAEs that raise issues. Even if Nokia had publicly announced patent tranfers to hundreds of operating companies, that fact still wouldn't justify privateering in the slighest.

  (As for transparency, IAM says Nokia and Ericsson have been more transparent than, for example, BT. I don't see any indication for that. It's just that BT transferred patents to privately held entities, which don't have to make SEC filings, unlike Unwired Planet or Mosaid. And some of the transferred patents showed up in litigation or prosecution before any announcement had been made by anyone.)

• Ericsson says transferring patents to PAEs "is a way for innovators to get a fair return faster on their significant investment and contribution to the eco system." I could see an acceleration of a licensing business in a case where an acquirer makes a substantial upfront payment. But Unwired Planet received thousands of Ericsson patents without having to pay anything initially. Ericsson can't seriously say that this is a faster road to revenues. For example, Unwired Planet sued Samsung after Ericsson had agreed with Samsung on a new license deal. It would undoubtedly have been faster to include those patents in the deal Ericsson did with Samsung directly than to have Unwired Planet assert those patents against Samsung later.

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Privateering: let's name and shame companies that feed patent trolls -- please help complete the list

Privateering--the act of large companies giving patents to patent assertion entities (PAEs)--is (unfortunately) not illegal (yet), but it is abusive, antisocial behavior. It pollutes the legal environment and harms the economy. It has nothing to do with protecting legitimate innovation: legitimate innovators suffer from it because it drives up litigation and licensing costs, and deep-pocketed, sophisticated legitimate patent holders don't need third parties to strike deals with their industry peers. Privateering also gives patents in general and patent transfers in particular a bad name.

I'm asking you for your help to shed some light on this problem. Below you can find the first version of my list of known privateering deals, and if you're aware of any other verifiable transactions of this kind, please fill out this blog's contact form. I need a link to a press release or other public statement, a trustworthy media report, or a publicly accessible court filing. Sources won't be disclosed. The industry focus here is on everything relevant to smartphones (including mobile network infrastructure), tablet computers, and the various technologies they incorporate (such as operating systems and multimedia codecs).

There's no deadline for this. Depending on how much input I receive and when, I'll update the list, maybe once, maybe several times. In the very near term I may also add items to the list below.

So far it appears that no company has engaged in troll-feeding to nearly the same extent as Nokia (which celebrates its 150th anniversary today). By contrast, only one sale of Apple patents to a patent troll is known, and that was a long time ago, so privateering is not in Apple's DNA despite this regrettable but apparently isolated incident. So let's build a comprehensive list of privateering transactions.

• Apple

  • Digitude Innovations (sale of patents via Cliff Island LLC, a shell company)

• BlackBerry (formerly Research in Motion)

  • TIP Communications LLC (while described as a wholly-owned indirect subsidiary on page 77 of this financial report, RPX describes TIP as a non-practicing entity)

• BT (British Telecom)

  • Suffolk Technologies

• Ericsson

  • Optis Wireless (link points to patent application filed by Ericsson and taken over by Optis)

  • Unwired Planet

• Huawei

  • Inventergy

• Nokia

  • Acacia

  • Helsinki Memory Technologies (Nokia's patent deal with them is not about memory technology patents but covers wireless patents, including SEPs)

  • Intellectual Ventures

  • Inventergy

  • MobileMedia Ideas (with Sony)

  • Mosaid (now Conversant)

  • Pendrell

  • Sisvel

  • Vringo

  • WiLAN (patent acquisition agreement mentioned in connection with license agreement)

• Sony

  • MobileMedia Ideas (with Nokia)

• Panasonic

  • Inventergy

[Update] First, thanks to those who have already proposed additions to the list above (most of which I've already incorporated). Second, I got some reactions on Twitter from IP professionals taking issue with the term "patent trolls" and fearing that this was a "witch hunt." Let me assure you that I used the term "patent trolls" in the headline just to increase the likelihood of people seeing this on Twitter and contributing information to the list. Obviously the patent licensing/assertion entities listed above aren't all the same in terms of how they act. There are differences. As for the operating companies, I've bought products from most of them, used Ericsson products indirectly (their base stations) and have said positive things about another company's products just based on what I learned about them from reliable sources. This blog here is mostly read by people with a strong, typically professional interest in IP issues: an audience that I believe is for the most part interested in shedding light on privateering transactions, not in name calling. This "crowdsourcing" effort was my idea and I didn't even discuss it with anybody before I went ahead and did this post. The idea came up because I had a hard time finding out about how the scope and scale of Nokia's troll-feeding compared to that of others, though it was clear to me from the beginning that Nokia was the worst offender in this respect, by far and away. [/Update]

[Update 2] I've received an email from a reader who said "[a] patent privateer not only receives patents from an operating company to pursue competitors, but also returns money to that operating company." In some cases it is verifiable that this is the case (Unwired Planet, Mosaid). In other cases the contract terms are not known. Feeding "patent trolls" is a bad thing and harms the selling company's peers regardless of specific terms, though I do agree that pseudo-transfers such as in the Unwired Planet case are the most problematic deal type. If you're aware of more pseudo-sale type of deals, please point me to publicly verifiable information and I may (though I can't promise that I'll find the time, or when) talk about them the way I talked about Ericsson's contract with Unwired Planet. [/Update 2]

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Ericsson's pseudo-sale of patents to Unwired Planet and the rampant problem of privateering

In the first half of this decade, the biggest and most divisive issue in the information and communications technology (ICT) was FRAND: fair, reasonable and non-discriminatory licensing of standard-essential patents (SEPs). That issue hasn't gone away completely. Courts and regulators provided some clarification (in Microsoft v. Motorola, for example). Still, companies will continue to disagree on what constitutes a FRAND offer, on the proper royalty base, on the extent to which standard-setting organizations (SSOs) such as the IEEE should provide guidance, and on circumstances that may or may not warrant an injunction over SEPs. But all of this has a lower profile now.

The biggest ICT patent issue in the second half of this decade is "privateering": the act of large companies feeding trolls with patents in order to maximize their patent monetization income and/or drive up their competitors' total cost of defense. Quite often this raises FRAND issues as well. Many privateering deals involve SEPs and are part of a scheme to circumvent FRAND licensing obligations.

Centuries ago, privateers were pirates who colluded with governments. I recommend two articles, a Bloomberg story from 2013 and a more recent blog post by the von Mises economic institute, that discuss the problem and start with how Queen Elizabeth I of England commissioned Francis Drake to plunder Spanish merchant vessels. Privateers had to share their booty with the governments that backed them.

Today's patent-based privateering is a rampant problem plaguing the industry. The Bloomberg article I just linked to mentioned transactions involving patents held by Alcatel-Lucent, BT, Ericsson, and Nokia--and those are just a few examples. Furthermore, privateering is one of the issues the U.S. Federal Trade Commission is investigating in connection with patent assertion entities (PAEs).

Patents are transferable assets. There are good-faith, genuine patent transfers--and there are transactions of the kind that is styled as a sale but in commercial terms comes down to an arrangement under which a patent assertion entity is essentially a licensing and litigation service provider to the operating company.

Let's start with what a genuine asset sale looks like. If a company or private person sells a used car, it ceases to have any ongoing interest in the car. Such an agreement doesn't restrict the ways in which the purchaser uses the car; it doesn't even prevent the purchaser from selling it to a third party; and the buyer has to pay a (specific) price.

Naturally, a patent transfer has certain additional aspects. If third parties have already been extended a license to a patent or a portfolio, the acquirer must know about and respect those licenses. Also, the seller may want to continue to use the patented inventions. And the purchase price may have a variable component that gives the seller some upside if the patents prove more valuable than originally expected. But apart from that, the structure of a genuine patent sale resembles that of a genuine car sale.

On the website of the Security Exchange Commission (SEC) of the United States I have found a filing--a redacted version of a "Master Sale Agreement" between Ericsson and Unwired Planet over more than 2,000 wireless patents--that is essentially a privateering case study. I looked this up since Unwired Planet's German lawsuits against Google, HTC, Huawei and Samsung over six of the related patents will go to trial in the coming months. It was much easier than I thought to google the deal terms.

I wish to point out that it's not my objective to engage in "Ericsson bashing." Just like last year, when I wrote about an Ericsson slide deck that explains the (bad) reasons for which the Swedish company doesn't extend patent licenses to chipset makers, it's about behavior that is by no means unique to Ericsson. Ericsson (or, in this case, Unwired Planet) just happens to be particularly transparent about it. Even Apple once sold patents to a non-practicing entity (which I believe Apple wouldn't do again since it has meanwhile had to defend itself against at least one privateer). The undisputed number one patent troll feeder in the world is not Ericsson but another Northern European company: Nokia has engaged in various such transactions, and if I were an antitrust regulator, I'd want to ensure that Nokia won't sell any of Alcatel-Lucent's patents to patent assertion entities after the closing of that acquisition. I'll talk some more about Nokia's privateering on another occasion.

I've read the redacted version of the Ericsson-Unwired Planet deal in detail. A couple of structural elements are clearly very different from a traditional sale.

Section 3, Purchase Price, does not state any amount Unwired Planet had to pay upfront. Instead, Ericsson receives a percentage of whatever revenue Unwired Planet will generate with those patents:

(i) 20% of the amount of Cumulative Gross Revenue, until the Cumulative Gross Revenue equals $100,000,000; plus

(ii) 50% of the amount of Cumulative Gross Revenue in excess of $100,000,000, until the Cumulative Gross Revenue equals $500,000,000; plus

(iii) 70% of the amount of Cumulative Gross Revenue in excess of $500,000,000.

The relatively low percentage Ericsson receives on the first $100 million makes it easier for Unwired Planet to recuperate its litigation expenses. Then the percentage goes up to 50%, and above $500 million (i.e., in the event of a significant licensing success), Ericsson receives the lion's share: 70%.

Percentages like that remind me of what I've read about agency deals. For example, when sports bodies commercialize the broadcasting rights related to their events through agencies, this kind of revenue sharing is normal. But this is just not the way a "sale" in the traditional sense works.

The agreement also comes with all sorts of restrictions on the acquirer's business, a right of first refusal on any sale of the patents to a third party, and a "poison pill" for the event of an acquisition: in the event of a change of control of Unwired Planet, Section 3.3 allows Ericsson to terminate the agreement and to demand a "Sale Payment" for its patents, which according to 3.3(c) shall "in no event [...] be less than an amount equal to (x) $1,050,000,000 minus (y) the aggregate amount of all Quarterly Payments actually received by [Ericsson before]." It can be even more based on a valuation of those patents at the relevant time.

Let's connect the dots: Ericsson is convinced that the patents transferred under that agreement are worth, at a minimum, more than $1 billion, but it "sells" them to Unwired Planet based purely on a percentage of future revenues.

If Ericsson had kept those patents, it would have licensed them to other companies as part of its portfolio. That would have been most efficient for everyone, but Ericsson doesn't want to optimize efficiency: it seeks to maximize its patent monetization income, and it apparently believes that even a substantial de facto "agency fee" it pays to Unwired Planet is more than offset by the incremental bottom-line licensing cost to the likes of Google, HTC, Huawei, and Samsung. Ericsson may even think that its portfolio is so large that 2,000 patents more or less don't make any difference for the royalties Ericsson can obtain from licensees, but it's a large enough portfolio that Unwired Planet can go out and demand some additional percentage that is then shared with Ericsson.

Schemes like that give patent licensing--and patent transfers--a bad name.

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Growing industry coalition urges the EU (again) not to turn Europe into a patent trolls' paradise

While Apple and Samsung still haven't been able to settle their global patent dispute, they do agree that patent assertion entities (PAEs), or "patent trolls", cause serious "problems that continue to plague innovators". In September the world's two largest smartphone makers were already among an impressive group of signatories of an open letter to European policy-makers that warned against an increasing patent troll problem in Europe and, especially, the ways in which the problem could exacerbate as a result of shortcomings in the rules of procedure of the Unified Patent Court system that is at the preparatory stage.

Apple and Samsung's concerns were already shared back then by other major players such as (a non-exhaustive list in alphabetical order) adidas, Cisco, Deutsche Post DHL, Google, HP, and Microsoft. This morning the UPC Industry Coalition released another open letter addressing the issue, and notable new members include Broadcom, Dell, Huawei, and Vodafone. Here's the letter (this post continues below the document):

25 February 2014 - UPC Industry Coalition - Open Letter by Florian Mueller

Once again, these companies -- mostly but not exclusively tech giants -- stress their support of "an effective and balanced unified patent system", but they apparently think that more work still needs to be done on the rules of procedure in order for Europe to "achieve the stated purpose of the UPC to defend 'against unfounded claims and patents,' 'enhance legal certainty,' strike 'a fair balance between the interests of right holders and other parties,' and allow for 'proportionality and flexibility.'"

The signatories have read with concern "[r]ecent press reports suggesting that some PAEs welcome bifurcation within the UPC further show that a system with perceived loopholes has the potential to open the floodgates to a detrimental form of patent litigation", pointing to an IAM (Intellectual Asset Management magazine) article entitled "Why the US's most litigious NPE is a huge fan of the German patent system".

The two primary issues that have tech-producing and tech-using companies concerned are that without clarity in the procedural rules, the UPC might grant injunctions too readily, and especially do so over patents that shouldn't have been granted in the first place. The second problem, which exacerbates the first one dramatically, is also called "bifurcation": validity and infringement remedies are addressed on separate tracks, with validity often taking considerably longer and even a short window of opportunity to enforce an actually-invalid patent giving a patentee enough leverage to obtain a settlement (which then includes the withdrawal of the bogus patent, so it remains a threat to everyone else).

Programmers of multi-threaded software call this a "race condition": a system will work properly only if the worked performed by one thread (here, the invalidation proceedings) is indeed concluded before a certain critical stage of a second thread (here, the infringement proceedings that can result in a sales ban) is completed -- but the system will fail if, for whatever reason, the second thread gets ahead of the first one because, which is simply a flaw, there is nothing in the system that makes the second thread wait for the first if necessary.

I'd like to say something here about my personal experience in discussing patent policy matters with the European Commission years ago (and based on what I hear, things haven't really changed in this regard). There are some great people working for the Commission who perfectly understand the economic dimension of these legal issues and are committed to balance and reasonableness. But there are also some people who are very dogmatic about IP enforcement and, unlike most researchers, have not yet understood how serious certain problems caused by the excesses of the patent system (too many invalid patent, overly powerful enforcement) are -- or maybe they don't even want to understand because they have a strong interest in growing the patent (including patent litigation) industry, not so much the real economy. The ultimate, high-level decision makers will hopefully listen to those who have a strategic and economic perspective, not to the ones whose dogmatic approach is that if there's any problem about the patent system, the system itself will solve it anyway.

There are also some who deny that Europe faces a PAE problem and that things may get a whole lot worse. I will talk about this in more detail on another occasion. I'd just like to say that PAEs are definitely not a US-only phenomenon. Case in point, on Friday the Mannheim Regional Court will rule on three cases brought by patent licensing firm IPCom, two against Apple (including a case in which a "partial" damages claim of EUR 1.57 billion ($2.2 billion) has been brought) and one against HTC. I attended the combined trial in the two Apple cases and I believe the complaints will be rejected. The court was noticeably unconvinced of there being an infringement of the patent in its narrowed form, if properly construed, after a recent decision in an opposition proceeding before the EPO. IPCom is not seeking an injunction against Apple anyway. But if IPCom had done so, and if the case had not been stayed to await the outcome of the opposition proceeding, it could have won, due to the way patent litigation works in Germany, a sales ban against the iPhone and all 3G-capable iPads in Germany.

With the Unified Patent Court, unless sufficiently clear rules of procedure are put in place, such lawsuits could result in Europe-wide injunctions on a premature basis (i.e., before the validity of a patent-in-suit has truly been ascertained). This would make Europe a patent trolls' paradise, and the policy-makers who can rein in the extremists now should so so, lest they will be responsible for massive damage to the European economy that will also affect European consumers.

[Update] I just saw this post on Google's EU policy blog by Catherine Lacavera, Google's litigation director, on "Curbing patent trolling in Europe", and also wish to recommend strongly this Technet blog post by Microsoft's deputy general counsel and corporate vice president Horacio Gutierrez who says very clearly that "[m]ore work [is] needed to protect [the] European Union from patent trolls" . [/Update]

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FTC preparing broadbased Section 6(b) cost-benefits analysis of patent assertion entities

I just listened (via webcast) to a special keynote address by FTC Chairwoman Edith Ramirez on "Competition Law & Patent Assertion Entities: What Antitrust Enforcers Can Do". As previously reported by the New York Times, the Chairwoman made clear that there will soon be a Section 6(b) study of activities by patent assertion entities (PAEs). Section 6(b) inquiries are all about information gathering, though the collected information may be used in different ways ranging from competition enforcement to policy-making. And indeed, this is going to be a broadbased investigation that can have all sorts of direct and indirect effects further down the road.

Chairwoman Ramirez's speech included various data points that suggest harm to consumers and innovation from PAE activities, and her agency clearly sees more evidence of negative than positive effects. While the starting point is clear (it can be described as profound skepticism), the official focus is that the agency wants to analyze the "costs and benefits" of PAEs and their activities because there's still not enough information available (which I guess is the agency's justification for using its investigative powers). Based on today's speech it's still a foregone conclusion that the ultimate finding will be that the costs caused by PAEs outweigh their benefits as monetizers helping inventors obtain fair compensation.

There were many statements and opinions in the Chairwoman's speech that I like and share, but there are also some parameters and positions on which I tend to disagree based on my monitoring of intellectual property enforcement surrounding smartphones and tablet computers.

In this post I'm going to focus on items I view differently. Those of you who have read other posts of mine will already know the ones on which I agree (patent quality, transparency in ownership etc.). It would be great if the study contributed to a further increase in patent quality and in more transparency (the Chairwoman noted the practice of using shell companies for patent assertions, but transparency is also an issue with operating companies that don't disclose their holdings).

The term "patent hold-up" came up, and the cost of defending against claims. In my opinion the FTC's proposed Google (Motorola) consent decree is an example of a context -- standard-essential patents -- in which there's a massive hold-up problem, but the FTC could have come up with a more efficient solution. The decision of the ITC -- one of the FTC's sister agencies -- to order an import ban against older iPhones and iPads over a Samsung standard-essential patent and Google's continued pursuit of injunctive relief against Apple raise serious issues and show that a lot more work needs to be done to combat SEP abuse before the focus can shift to PAEs. I hope that PAEs won't serve as an excuse for less enforcement in connection with SEPs.

I struggle with terminology. It's hard to see a distinction between patent assertion entities and non-practicing entities. The way the FTC tries to define the term PAEs, if I understood it correctly, is that the "business model" is about "asserting" patents. This doesn't make sense to me, at least not without further explanation. I watch a lot of litigation but I've never seen any entity that truly considers the "assertion" of patents a "business model" -- but anyone (whether we're talking about an operating company fighting reckless copycats or a university-owned research firm or a "troll") will always prefer that the target of a patent assertion settles on the patentee's preferred terms. Going to court is always just a means to an end. The end is licensing most of the time, and in a minority of cases in which operating companies want to ensure product differentiation, it's exclusivity. Licensing and even exclusivity can be achieved without litigation. There's really only one category of patent troll lawsuits in which assertion itself is the "business model", and the Chairwoman mentioned nuisance lawsuits that are "cheaper to settle than to litigate". But the FTC's definition of PAE is not limited to such nuisance lawsuits, and then I wonder how they're going to distinguish PAEs from other NPEs.

The Chairwoman pointed to something I also dislike: patent infringement lawsuits against little guys such as "coffee shops", "retailers that do business online", and "restaurants with websites". But what's the right answer? In my view, the solution is that large players whose technology is at issue in such infringement actions stand by their customers and developers. I consistently demanded that Apple and Google do more than just intervene and seek patent reexaminations with respect to Lodsys, but they didn't. I think the solution must come from companies (and from customers who demand indemnification from their vendors) and so far I can't see an antitrust approach to this problem.

In connection with "privateering", it's simply a fact that many patent transfers are formally structured as purchases but make mockery of the concept of a sale or purchase. But is this problem PAE-specific? Google did such a deal with HTC, and neither company meets the FTC's definition of a PAE (nor mine). This is, interestingly, the only case so far in all of the patent lawsuits I watch in which a patent transfer was agreement found by a judicial authority (in this case, the ITC) to be anything but a genuine patent sale/purchase.

I may talk more about patent purchases on some other occasion. I think there would be fewer such deals if large companies could enforce legitimate IP more effectively in the U.S., where plaintiffs often see their lawsuits transferred to and consolidated in a single venue, where they are then forced to focus on a small number of patents-in-suit or else they won't get their day in court anytime soon. I'm convinced that this sometimes leads patent holders to partner with NPEs for the purpose of monetization.

It's too early to tell whether the FTC will actually identify anything in a Section 6(b) study that will give rise to competition enforcement activities. I may or may not change my opinion on this as the process unfolds, but in today's speech I saw signs that this is very much a political initiative, at least for the most part and possibly in its entirety. For example, there were multiple references to functional claiming. In my view this is a question of patent quality, not of competition enforcement. There's nothing the FTC can do about the patent granting process other than provide ammunition to policy-makers.

Such a study can also result in some surprises. So let's stay tuned.

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