Thursday, May 21, 2015

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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