Patent Monetization Entities Generally Asserting Ordinary "Meritfull" Claims?

The Recorder has published data and conclusions concerning a study of district court awards of attorney fees post-U.S. Supreme Court decisions Octane Fitness and Highmark.  Both Octane Fitness and Highmark concerned the availability of attorney fees.  In the United States, parties generally bear the cost of their attorney fees absent an exception.  For patent infringement, there is a statute specifically allowing for the award of attorney fees for “exceptional” cases.  The U.S. Court Appeals for the Federal Circuit interpreted that statute to require a very high standard for proving attorney fees.  Some believed that this high standard did not provide a strong enough disincentive to prevent so-called “patent trolls” from bringing weak nuisance suits for licensing fees.  In the Octane Fitness case (2013), the U.S. Supreme Court rejected the Federal Circuit’s high standard and ruled that “exceptional” merely meant a case that was out of the ordinary with respect to substantive litigation strength of position or how the case was litigated.

The study apparently finds that about half of the awards of attorney fees apply to competitor cases and the other half to non-practicing entities.  Interestingly, the awards against non-practicing entities “have often been against small individual inventors, not Intellectual Ventures, Round Rock Research, IP Nav and other 800-pound gorillas that monetized patent litigation.”  The article does discuss how Acacia Research Group, a supposed NPE, is exceptional with four awards against it for a total of around US $1.8 million.  The article appears to speculate that the awards against small individual inventors were cases where the small individual inventors (inexperienced players) apparently perhaps overvalued their case based on the law and facts. There appears to be a difference in awards based on the district in which the case was filed. It does, however, seem to make sense that in the current climate sophisticated monetizers would only bring relatively strong cases (maybe in the E.D. of Texas).  The article also notes that district court judges are mixed in considering the practicing status of the party in awarding fees. Finally, the article discusses a recent US $7.8 million award of fees in the Northern District of California against the Alzheimer's Institute to Eli Lilly and Elan Pharmaceuticals. Unfortunately, the data is behind a paywall; however it is not too expensive to access it. 

Intellectual Ventures: out of sight, out of mind, and maybe that is a good thing for the company

This blogger has begun to wonder whether the onset of late middle age carries with it a bit of clairvoyance. On several occasions over the past several months, he has recalled a person or entity, with whom he has had no contact or information for an extended period of time, only to be reconnected very soon thereafter. And so it was, once again yesterday evening. The object of his thoughts was Intellectual Ventures (IV). It seemed to him that the goings-on of IV were barely in the headlines (or even buried in an inside hard-copy page or on-line sub-link). “What is happening with the company?”, he thought, as he dozed off for the evening.

Lo and behold, he woke up to a brief item that appeared on Reuters.com, under the caption, “Capital One wins again against Intellectual Ventures patents”. And so it was reported:

“The increasingly aggressive litigation strategy of Intellectual Ventures, one of the world's biggest patent owners, took another hit on Wednesday as a U.S. court canceled two of its patents in a dispute with Capital One Financial Corp.

U.S. District Judge Paul Grimm in Greenbelt, Maryland, agreed with Capital One's attorneys from Latham & Watkins that the two patents related to business data processing were merely abstract ideas and could not be patented. He overturned the findings of a special master, who had previously recommended that the patents be found valid.”

Let’s try to put this into context. IV is well known for its strategy of purchasing tens of thousands of patents, partnering with various entities to obtain access to further patents, and maintaining an R&D staff whose goal is to generate further patents. In doing so, IV became the owners of the one of the largest portfolios of patents in the world. The primary aim in accumulating these points was to enter into licensing arrangements. At the outset, the company maintained a public position that litigation was not a preferred means of exploiting its patents. IV was either reviled or admired, depending upon whom you asked, in seeking to monetize knowledge in this manner. What was unconvertible was that IP was the subject of extensive media coverage.

And then—certain developments took hold. Outside observers began to question whether IV’s licensing model made business sense; perhaps as a hedge, the company has increasingly “ventured” into exploring how its patent knowledge can be used as basis for product development and creating new companies; the company announced substantial lay-offs about a year ago while in parallel establishing a network of approximately 25,000 independent inventors who submit proposals based on their idea with the goal that IV will monetize these ideas and pay the inventor a royalty, and the company has become more active in litigating its patents (as seen from yesterday’s report, not always successfully). Thus IV has seemingly become an object of less immediate media interest while it takes steps to become a slightly more conventional IP-based company.

The compelling question is whether all of this portends a brighter future or rather a grab-bag of measures adopted when the company’s original business model failed to pan out as intended. Ask Edward Jung, IV’s chief technology officer and co-founder stated, “We have built an engine that can solve big problems.” As such, the company is simply proceeding with its long-term plans. Under this view, whether or not the next phases of the company’s activities are as compelling, media-wise, would seem to be irrelevant. In the absence of any dramatic IV-based headlines in the near future, this blogger will likely call on his imagined powers of clairvoyance to revisit the issue.

Intellectual Ventures versus Symantec: when a troll is not a troll, and a victory is not a victory?

In case you missed out, Intellectual Ventures (IV) reached a milestone of sorts last Friday, when a jury in Delaware ordered Symantec, the computer security giant, to pay IV $17 million in damages for infringing two US patents. It marked the first time that IV had received a favourable jury verdict. Remember the days when Intellectual Ventures talked about litigation as the least desirable business alternative? That may have been true before 2010, but since then the company is reported to have filed more than 50 lawsuits. So is IV changing business course, with greater emphasis placed on litigation to complement its on-going licensing business? Probably not.  After all, IV claims that it has received $3 billion in licensing revenue, while the jury verdict amounted to "only" $17 million. Still, this jury verdict is significant enough to warrant further comment.

As reported by artstechnica.com, the case at issue involved three US patents, two of which were found by the jury to have been infringed, while a third was not. The infringed patents are #6,073,142, filed by Utah's Park City Group in 1997 and #6,073,142, filed in 1999, and which later found its way to AT&T before being purchased by IV. A third patent, #6,460,050, was held not to be infringed. Winning on two out of three patents does not seem too bad. But consider that IV is reported to have asked for $299 million in damages, which means that IV was awarded less than 6% of the amount sought in the complaint. Moreover, the jury declined to award IV ongoing royalty payments. Against this backdrop, did IV really win? It depends who you ask. The head of litigation at IV, Melissa Finocchio, after thanking the jury for its verdict, stated:"We remain committed to defending inventor rights and protecting the interests of our investors and customers." To the contrary, a spokesperson for Symantec said in an email that "[w]e are pleased the verdict came back for substantially less than the amount that Intellectual Ventures was seeking, and are considering our options to reduce the damages even further." Stated otherwise, both sides seem to have been satisfied with the verdict.

When considering this jury verdict in light of the broader IV patent litigation context, one gets the feeling that, whatever the award that IV ultimately banks from Symantec, there is something "oh so yesterday" about IV's litigation strategy. Recall that IV filed suit against Symantec and other defendants in late 2010. Some major companies, such as Check Point and Intel's McAfee division, are reported to have settled with IV. Symantec refused to do so and it received the jury verdict finding the company liable for infringement. Another company, Trend Micro, will have its day in court in May 2015. To round off the picture, the case against Motorola Mobility ended up as a mistrial when the jury could not reach a unanimous verdict. A retrial is set for next month. The upshot is that IV has won some cases and lost some cases in seeking to enforce these patents, but the amounts appear to pale in comparison with the amounts that it has has allegedly obtained by non (or less) litigious means."Oh, so yesterday", unless the increased interest in litigation is a signal that IV's business model resting on non-litigious means is faltering.

Moreover, one wonders just who much IV wishes to be portrayed in the media as exploiting its huge patent portfolio via litigation. Notably, bbc.com reported that the judge barred Symantec from using the term "patent troll" in the context of the case, showing just how toxic the term has become. This is so, despite the fact that mass-scale patent aggregation per se is not equally decried. One can point to defensive patent aggregators, such as RPX, which buy up patents and then announces that it will not assert those patents against the company's member subscribers. Litigation is (at least up to now) not part of the business model of the defensive patent aggregator. Also, some respectable commentators have suggested that patent aggregation may have value as a means for reducing transaction costs in the context of commercial transactions. IV probably cannot remake itself (back to the future?) as a defensive patent aggregator. But perhaps it can try to take steps whereby it becomes better known as a facilitator of IP transactions than patent litigation -- if, of course, IV ultimately cares.

Latest on the Nortel bidding war

The deadline for submitting bids for the Nortel patent portfolio is clearly drawing near and "informed" leaks are appearing. Presumably intentionally to drive up the price. The latest leak is reported on the fierce wireless website and lists Apple, Google as well as the Chinese companies Huawei and ZTE as potential bidders. Nothing surprising there. The Nortel portfolio includes a number of gems which any company operating in the wireless space would love to have - if only to act as a bargaining chip in licensing and negotiating deals. Neither Apple nor Google have an extensive telecoms patent portfolio and so they would love to build the portfolio. Huawei and ZTE are starting to build massive portfolios, apparently subsidized by the Chinese government. Indeed Huawei is now one of the bigger PCT patent filers and ZTE claims to hold 10% of the essential LTE related patents. However, whilst they have many pending patents, their granted portfolio is much smaller.

Intriguingly two consortia including patent licensing firms are also in the running. One consortium apparently consists of Intellectual Ventures and InterDigital. IV is known for its accumulation of patents, whilst InterDigital possesses several patents that are relevant to mobile telecommunications standards (but has also lost some court disputes). The other consortium includes RPX - a patent aggregator that acts on behalf of several major companies to take patents "out of the market". RPX is currently planning its IPO as reported here and here. Will it be using some of the proceeds to purchase the Nortel portfolio.

These two consortia could clearly push the price of the portfolio up tremendously. Neither has much interest in cross-licensing since they do not actually make any products as such. RPX is aiming to buy up problematic patents to support their membership base (as explained here). No doubt having a ripe bag of telecoms patents will "encourage" a few more companies to sign up and help the IPO on its way. IV has until recently not been known for enforcement of its patent rights, whereas InterDigital has been active. So it will be interesting to see how that works out if they win the pot of gold. Both companies will have an interest in "monetarising" their new assets.

The sheer sums of money here are just mind-boggling. The size of the mobile telecommunications market is clearly massive, but it is also going to take a major investment for any company to justify the figures that are being talked about. It will not be unnoticed that none of the established players such as Nokia, Ericsson or Alcatel figure among the potential acquirers. They all have substantial portfolios of relevant patents - but then Nokia is known to be a backer of RPX and Ericsson purchased the LTE assets of Nortel some months ago and presumably got a license to the relevant IP thrown in with the deal. So they don't need the rights. Has this all been factored in? The IAM blog was sceptical about whether the bond purchasers who have pushed up the value of the Nortel bonds really understood the process.

Let's hope nobody has to see his car because of his Nortel patent portoflio.

Technorati Tags:
Nortel, Telecommunications

Patent Trolling doesn't pay, or does it.... in the long term?

An explosive tweet posted by compulsive innovator/investor Chris Dixon made the highlights of hip weblog TechCrunch last week and stirred a heated debate in the IP community. The co-founder of decision-making website Hunch found out in a report published by the University of Texas Management Company (PDF here) listing all of its private investments in venture funds and private equity funds and their results, that Intellectual Ventures – known by many as “IV” and considered by most to be the godfather of all patent trolls – has been severely underperforming notably with a negative internal rate of return (IRR) of 73% of their Invention Development Fund I and a negative IRR of their Invention Investment Fund II of 10%. As TechCrunch pointed out, this negative IRR does not necessary reflect the reality of the situation but it might suggest that the activity of patent trolling is not as lucrative as it appears to be. It also contradicts IV founder Nathan Myhrvold’s claim that his company, whose main goal is to build a large patent portfolio rather than developing new systems, is “turbocharging” the innovation process, especially when the performance of the two IV funds are compared with the ones of more traditional venture funds.

Joff Wild of IAM magazine, which has been posting regularly about IV and now certainly has a good understanding of the company’s business model, moderated the significance of Techcrunch’s claim in a recent blog entry:

"Before you can make any definitive statement on such a thing you have to know how old the funds are and what they are setting out to do. Acquired patents are rarely going to give you a quick return - they are slow boilers. So if you spend a lot of cash upfront on buying up portfolios, you may have to wait a few years before they start to pay dividends. Alternatively, if you are buying up "inventions" that have not yet even been patented - which is also something that IV does - then you have an even longer lead-in until potential monetisation can take place"

His point of view concurs with the answer of IV’s VP Finance Larry Froeber, who highlighted in a reply to Wild’s blog post that the method used by the University of Texas Management Company does not capture the true value of their business, as spending is the driving growth of IV.

I tended to agree with this view till I went through the comments of this blog entry (items posted on the IAM blog always generate a handful of insightful comments) and read what Tom Grew of Yu & Partners had to say:

"Interesting that, in current times as businesses focus more on delivering quarterly results and as a consequence reduce IP spend (and increase divestitures), we are allowed to say: It's ok, IV has a long term business model.
Will investors buy this though? Why should IV be special?
It's been running now for what, 10 years? Wouldn't you expect a ROI in that time - plenty of time to get a patent granted, and many of its investments have been already granted patents in any case. And isn't there a statistic that most patents take about 3-5 years to commercialize? This should be prime time."

In my opinion Tom Grew has a point here. A successful business strategy in the short term is a necessity to survive on capital markets and very few are the companies that managed to stand up after taking a heavy blow upfront. However it does not seem that IV lost the confidence of its investors, so does patent trolling pay and if it does when should investors expect a ROI? I guess we will only find out about it in a few years time.

Verizon borrows Intellectual Venture's IP

The Tangible IP blog recently reviewed the Economist's article on Intellectual Ventures (see here for the review). Head on the tails of the article follows a report that US telecommunications giant Verizon has exploited its USD 350 Million investment in Intellectual Ventures by having US Patent 5,410,344 assigned to it and then countersuing TiVo in its ongoing patent infringement suit (Verizon also allege in their counterclaim that TiVo infringe the following US Patents: 5,635,979, 5,973,684, 7,561,214, 6,367,078 which were already held by Verizon). The Assignment has not yet been recorded on the US PTO website which still lists an Intellectual Ventures subsidiary as the Assignee.

Intellectual Ventures has always maintained that it was not a "trolling" operation and here we have an example of the investment made by Verizon presumably paying off.

In another patent infringement dispute with Echostar, TiVo have been awarded damages of USD 200 million (down from the USD 1 billion claims by TiVo). The decision is being appealed according to a statement made by EchoStar. This was based on an assumed royalty rate of USD 1.25 per month per subscriber (according to the 10 Nov 2009 10-Q filing made by TiVo) Now I'm not certain of the market share of Verizon, but given it's size and reputation it may well be that the USD 350 million investment in Intellectual Ventures could easily pay off if the counterclaim against TiVo succeeds