Friday, October 5, 2012

Google-HTC patent purchase agreement under pressure in Delaware

This is a follow-up to a post I did in July on clues to the terms of a Google-HTC rent-a-patent agreement that had only one purpose: to give the Taiwanese device maker some temporary ammunition to use against Apple. A few months ago, the ITC already threw out five of Google's nine loan patents and indicated that it was too late for Google to join the investigation of HTC's complaint (which went to trial this summer) as an additional complainant.

The other four loan patents are still pending in federal court in Delaware. Apple and HTC agreed that it made sense to sort out the issue of standing before proceeding with this litigation. This week, public redacted versions of Apple's recent motion to dismiss the four-patent federal lawsuit for lack of standing and its more recent reply brief became available. I previously saw a public redacted version of HTC's opposition brief. Now that all of the parties' related pleadings have become available, I wanted to summarize my impressions and conclusions. It's obviously very difficult to glean information from heavily-redacted documents, but with all that's going on in the industry, patent purchase agreements (true transfers as well as deals that come down to purpose-specific rental agreements) will continue to be struck, so I believe it makes sense to try to find out as much as possible about where the ITC and federal courts draw the line between a genuine patent transfer and a rent-a-patent scheme.

Since the ITC decision is not binding on the Delaware-based court, the parties have to argue the same issue again, which is an opportunity to learn more about the deficiencies of the agreement in question.

Based on the redacted ITC documents, it was already clear that Google had retained a far-reaching (allegedly unfettered) right to sublicense the patents-in-suit to third parties. That fact was the safest conclusion from those documents, and the Delaware filings confirm it. The standing issue that such a continuing right to sublicense patents to new parties raises is simply that HTC could sue a given party but that party could, at any stage during the lawsuit, obtain a license from Google, which would pull the rug from under the infringement action. The mere possibility of this course of events is sufficient to deny that the nominal acquirer has all the substantial rights and suffers actionable injury. HTC, of course, continues to disagree.

I already suspected based on the ITC documents that the terms of the agreement included a buy-back provision. Having read the Delaware filings, I'm convinced that this is the case. There's more to this allegation than Apple merely suspecting that Google and HTC had an informal understanding of a retransfer following HTC'S use of those patents against, or envisioned settlement with, Apple.

It's still unclear whether the agreement itself specifically addresses HTC's assertion of these patents against Apple. Like in the ITC dispute, there are statements in both parties' pleadings that make Apple-specific provisions a possibility, but there's no conclusive evidence since the related wordings might also refer to Apple as only the relevant party in a specific context, as opposed to the only party with respect to which the agreement sets forth any particular rights, limitations, and obligations.

There can be no doubt that Google and HTC exchanged some Apple-specific information in the build-up to the deal. Interestingly, HTC doesn't want this information to be considered by the Delaware court. It asserts the common interest privilege, which Apple notes is all by itself an indication of Google having retained a legal interest in the formally-transferred patents. HTC argues that the privilege is a discovery issue that is unrelated to the substantive question in this case, but at the very least the court will wonder how one can reconcile a privilege that requires a common defense interest with a claim that these patents are now HTC's and only HTC's.

What's also quite telling is that HTC apparently paid only a nominal amount, possibly as little as one dollar. HTC cites to decisions in which a one-dollar consideration was considered good and valuable. If it paid more than one dollar, it could argue that a positive decision on a one-dollar deal supports its argument, but if it had paid an arm's-length market price and not just a nominal sum for these patents, it wouldn't even have to make the one-dollar argument. HTC argues that Google gets other benefits out of the agreement than the purchase price, but it's unclear what those are -- or, in a way, it is clear: Google's key motivation is to have HTC sue Apple over them.

The structure of the parties' legal arguments is consistent with their ITC dispute. HTC once again argues that it does own all the substantial rights, arguing mostly on the basis of the title and those terms of the agreements that, if taken out of context, would support such proposition, but ultimately the court will have to look at those terms in light of the significant restrictions and limitations the agreement also imposes. Another déjà-vu HTC argument is that if HTC didn't have standing to sue Apple over those patents, nobody else would. And if there is a standing issue, HTC at least wants to have the opportunity to cure it by having Google join as a co-plaintiff in this action or after refiling. Apple, of course, wants the relevant infringement claims dismissed with prejudice, period.

With the limited information available to me, I don't doubt that the Google-HTC agreement goes far beyond a mere license agreement. It's not just a license to use patents. It's meant to be a license to sue Apple in the form of a "purchase" in name only. But the threshold question here is not whether HTC is more than a mere licensee. In between a licensee and a holder of all substantial rights, there are many shades of gray that simply aren't enough to have standing.

With a narrow focus on the Apple-HTC dispute, one might argue that it's desirable to have Big Brother Google lend a few patents to its partner HTC in order to have leverage for a cross-license agreement. But there are two overarching reasons for which it would not be in the public interest to lower the standard for standing only in order to create more of a balance between Apple and HTC:

  • If rent-a-patent schemes work, there will ultimately be much more patent litigation in this industry. There are already too many patents out there. If patents can be rented out to different parties over time for different lawsuits, the average number of litigations per patent will increase substantially.

  • It's irreconcilable with the notion of intellectual property that a patent can effectively belong to more than one party at one point in time. It's perfectly appropriate to sell such property, but a sale must be a true sale. Otherwise innovators who assert patents (homegrown or legitimately acquired ones) will face counterclaims over patents that are just passed around as a tactical weapon.

While I believe that the Delaware court is likely to agree with the ITC that the "patent purchase agreement" is a misnomer, there are differences between ITC proceedings and federal lawsuits. Google and HTC may be given a chance to remedy the shortcomings identified. A dismissal without prejudice would allow them to address the issues and refile, and this may be the outcome. We'll know soon.

In a parallel Delaware action, Apple is suing HTC over six patents it previously asserted in Miami and is now fighting hard to avoid a stay. All other Apple-HTC patent infringement cases pending in Delaware besides the one with the standing issue and the ex-Florida case are currently on hold. All in all, HTC has to defend itself against 32 Apple patents in Delaware sooner or later, but the question is when. In a worst-case scenario for Apple, it could take many years before most of those claims come to judgment.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Share with other professionals via LinkedIn: