Wednesday, July 11, 2012

RIM's latest letter to the ITC should have investors worried about the value of its patents

It's almost an understatement to say that BlackBerry maker Research in Motion is in very bad shape. Not only is there serious doubt about whether RIM can survive as an independent company (unless it becomes a patent troll) but analysts increasingly wonder whether it's heading for the fate of another icon of the Canadian telecommunications hardware industry: a bankruptcy proceeding culminating in an auction of its patent portfolio.

Two days ago, the International Business Times noted that the value RIM officially attaches to its patent portfolio now corresponds to approximately 85% of the declining company's total market capitalization. But the net book value of $3.37 billion of RIM's 3,357 patents is a number that investors should view with a great deal of skepticism to say the least. The number is simply inconsistent with what RIM is doing with its patents (if it really believed it had such a treasure trove of patents, it wouldn't have been consistently on the receiving end of infringement lawsuits, including that Nokia just hit it with three more patents in Munich) and the positions it just took in a letter to the US International Trade Commission. Apart from reflecting that the company doesn't appear to believe much in the future of its product business, that letter also shows that RIM sees far less value in its non-standard-essential patents than in the relatively limited number of standard-essential patents (SEPs) it owns. As an investor, I'd be profoundly worried.

The letter I'm talking about was sent by Sarah Guichard, RIM's vice president of patents and standards, to the ITC on Monday and entered the public record late on Tuesday. The letter was one of numerous submissions that stakeholders made in connection with the ITC investigation of Google subsidiary Motorola Mobility's push for an import ban against Apple's 3G-capable products based on standard-essential patents (SEPs). I will report on the other submissions later.

The positions that RIM takes in that letter constitute a thinly-veiled, radical departure from what the company stated on these issues as recently as last year. RIM accused Motorola of FRAND abuse a few years ago (a dispute that got settled before any ruling came down) and used to advocate reasonableness in connection with SEPs for years, usually together with companies like Cisco and HP (1, 2), but its alliance with the good guys is a thing of the past. At this stage, RIM is looking for cheap excuses to pursue import bans and other forms of injunctive relief.

The positions that RIM took in the past made sense for a company that actually wanted to focus on its product business. Companies that want to sell stuff don't want to face the threat of devastating injunctions over SEPs. The positions that RIM takes now -- telling the ITC "a hard and fast rule rejecting exclusion orders in all cases involving standard-essential patents would harm economic welfare" -- are totally aligned with those of non-practicing entities like InterDigital, another company that wrote to the ITC this week in support of injunctions over SEPs. There isn't always a binary distinction between businesses that are 100% product-centric and trolls that are 100% patent-focused: there are many shades of gray. Generally, companies that are doing well in the marketplace still want their investments in innovation to be reasonably protected but oppose the abuses of the patent system. The more a company believes that it depends on its patents as a revenue source and/or an exit strategy, the more it tends to downplay the problems of abusive enforcement.

What's even more worrying for RIM's shareholders than its increasing focus on patents rather than products is that the company appears to be much less confident in the strength of its patent portfolio than it would have Wall Street believe. By now it's become pretty clear that the value of SEPs is limited in general, and RIM doesn't even have a huge number of them. After a handful of device makers including Motorola and Nokia ruled the market for many years, RIM was the first new entrant to become a major player. While it has participated in some standard-setting processes, it's not the first company that a strategic buyer would look to buy if the objective is to acquire SEPs. Instead, one would usually think that the value of RIM's portfolio lies primarily in its mobile email patents, which are not standard-essential. That's what I, too, used to think. But RIM itself doesn't appear to think so. The objective of its whole eight-page letter to the ITC is to maximize the strength of SEPs relative to non-standard-essential patents.

In its second footnote, the letter accuses companies advocating reasonableness in connection with SEPs of having "self-serving motivations", which RIM describes as "varied". It says that some companies "are rich in non-standards-essential patents but poor in standards-essential patents [and] may want to tilt the playing field in their favor by weakening standards-essential patents", and others are "new entrants to markets [who] seek to mitigate the costs for access to IP". Other companies allegedly "may want to achieve some tactical advantage in current patent litigation" or "may have been constrained by regulators to limit their enforcement". Let's be realistic: no company writes a letter to the ITC without having an agenda, which is what RIM calls "self-serving motivations". It doesn't even matter to what degree RIM's speculation about those motivations is correct. All that matters to policy makers (today the Judiciary Committee of the United States Senate is going to hold a hearing on exclusion orders based on SEPs) is what's in the public interest for overarching reasons. It's not about Apple v. Samsung, or Motorola v. Microsoft. It's not even about this particular industry. It's about the economy at large, and about the right framework for competition and innovation. RIM's allegations of "self-serving motivations" are irrelevant to the decisions that have to be made, but they do reveal that the company considers itself to be, relatively speaking, stronger on SEPS than on non-standard-essential patents.

A big part of the FRAND abuse problem is indeed that companies (like Samsung and Google/Motorola) that infringe non-standard-essential patents (held by someone like Apple) hope that they can get away with their patent violations by creating a scenario of "mutually assured destruction" through the abuse of SEPs. And RIM argues that seeking injunctions over standard-essential patents in order to neutralize non-standard-essential patents should be an option:

"In particular, for example, a firm should be allowed to defensively seek an injunction if faced with a second firm's failure to deal fairly, or with the trheat or filing of an injunctive action. Such a defensive action (or the credible threat of such an action) might be the only practical means by which the first firm could stave off an inappropriate accretion in market power by the second firm. In short, under such cirucmstances, the defensive suit would be procompetitive -- the first firm's injunctive ability would give the second firm an ex ante incentive to curb its inappropriate harmful practices. This would promote patent peace and thereby raise the effectiveness of smartphone competition."

Two footnotes further clarify this line of thought:

"This is not to say that it is appropriate to counter every injunction with an injunction using SEPs. However, a court is in the best position to decide if the assertion of one injunction is appropriate in the fact-specific circumstances. A blanket rule against injunctions does not take into account the realities of the patent thicket and the effects this has on companies' ability to achieve patent peace."

"If firms that primarily hold SEPs must continue to license on FRAND terms but face abusively high implementation patent rates or are even refused access to patents that are needed to bring a commercially viable product to the marketplace, implementation patents will become over-valued and SEPs undervalued."

From an antitrust point of view, that is nonsensical. These issues -- SEP litigation and assertions of non-standard-essential patents -- must be kept separate. If there are threats to competition because of assertions of non-standard-essential patents, then they have to be dealt with under the rule of law, be it by courts or regulators (possibly after some legislative intervention), not by companies taking the law into their own hands and using SEPs as nuclear weapons in order to discourage all patent enforcement. RIM's proposal would mean that companies that own SEPs should have a free pass for infringement, while all those who are not members of the club should be in a weaker position (further above I quoted that RIM believes new entrants now want to weaken SEPs -- but new entrants are the best sign of a functioning market).

If RIM believed that its wireless email patents, which are not standard-essential, are valuable, it would pursue the very opposite agenda -- the one it pursued in the past when it still believed that it had a future as an operating entity. In that case, RIM would want to make sure that its enforcement of wireless email patents isn't neutralized by those wielding SEPs (otherwise RIM could never monetize those patents in any dispute with a major player), and RIM would also be less concerned about being sued over non-standard-essential patents since it could always defend itself with its own non-standard-essential patents.

But RIM is concerned about the possibility of SEPs being "undervalued". RIM's lack of faith in the strength of its non-standard-essential patents is an extremely bad sign.

RIM's letter also complains about the possibility of companies selling SEPs to trolls, which RIM refers to as patent assertion entities (PAEs), and argues that "the ITC should decline to issue an exclusion oder under such circumstances". But this doesn't mean that RIM won't become a troll if it fails to salvage its operating business (or to be acquired). Even if RIM became a troll in practical terms (meaning that it will look at patent monetization as its primary revenue source), it would still continue to have at least a pro forma operating business. It would take many years before those who have to deal with RIM's patent assertions could really prove that RIM is also a "PAE". By then, most or all of RIM's current patents will have expired anyway.

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