Patent trolls aren’t all they are cracked up to be

IP Finance is pleased to welcome back Keith Mallinson, whose guest posts on patents, standards and FRAND licensing in the telecom sector have been read with great appreciation.  This piece takes a look at the realities of licensing through the prism of Judge Randall Rader's "trolls and grasshoppers" analysis. Keith ends by calling for patience while existing licensing practices under the current law work things out.

"Patent trolls aren’t all they are cracked up to be 

There is a lot of pending patent litigation in mobile communications with 3G and smartphone technologies. This includes standard-essential and other patents, practicing entities that produce products and non-practising entities (NPEs) who do not. Numerous suits and countersuits in several nations between Apple and Android device producers Samsung and Motorola Mobility are particularly prominent. In addition, for example, NPE IPCom acquired a portfolio of mobile phone technology patents from defunct mobile phone manufacturer Bosch; and has vigorously pursued HTC, Nokia and others for royalties.

Smartphone ecosystem participants are jockeying for position in a new order with a rapidly changing and expanding ecosystem. This indicates an industry in rude health, not malaise. Following lacklustre mobile phone market developments beyond voice and text until the mid 2000s, the smartphone revolution began in earnest with the introduction of Apple’s iPhone in 2007. Previous smartphone market leaders Nokia and RIM have been completely up-ended by the rise and new leadership from Apple and Google’s Android including its many licensees. Meanwhile, this IP-rich industry is flourishing: innovation continues, customer choice is increasing and sales are booming for smartphones and other smart devices such as tablets. Smartphones and tablets are becoming the primary means of Internet connectivity with applications, services and usage levels that were unthinkable just a few years ago.  

Yet there are interventionist moves afoot to prevent allegedly harmful behaviour by patentees, particularly with respect to enforcing their rights in standard-essential patents (SEPs). In addition to interested parties and commentators, European and US competition authorities are also weighing-in publicly on this matter. Knee-jerk reactions by the latter that would overturn long-standing legal rights and remedies would be a grave mistake. The patent system including licensing of (F)RAND-based SEPs has worked extremely well. There is no reason to presume that current levels of smartphone IP litigation are more than a transient phenomenon, or that licensing offers prior to consummated agreements are anything abnormal in the cut-and-thrust of licensing negotiations that typically result in concessions, compromises and cross-licensing. There is no evidence of consumer harm--suspension of sales through injunctions has been minimal--or that outcomes, following the machinations of negotiation, litigation and in some cases commercial court rulings will be unfair, unreasonable or discriminatory. 

Trolls and grasshoppers 

NPEs that are solely in the business of asserting patents, typically acquired from others, are politely referred to as Patent Assertion Entities (PAEs) and disparaging as patent trolls when demands are regarded excessive and unreasonable. However, the latter are somewhat like the fantasy creatures after which they are named: they cause a lot of commotion and scare some folk, but tend not to receive what they demand and ultimately get their comeuppance. The troll in the Billy Goats Gruff tale hid under a bridge to ambush the goats and threaten to “gobble them up” as they tried to cross the stream. However, the troll met his match with the largest of the three goats who threw the troll into the stream out of harm’s way and never to be seen again.

Remarks by Court of Appeals Chief Judge Randall R. Rader in a conference speech last fall provided an astute perspective on extreme behaviours and outcomes in patent cases including trolls and their opposites the “grasshoppers”. 

“Of course, before we can control trolls and grasshoppers, we have to know who they are. And again, OF COURSE, that is the difficulty! Even some Supreme Court justices have referred to the non-practicing entity, the proverbial NPE. We also all understand that the NPE designation sweeps in some unintended “culprits” like universities and research clinics and can also extend to almost every corporation and business because they practice only a fraction of their patent portfolio. For that reason, I have always preferred an alternative definition of a “troll,” namely, any party that attempts to enforce a patent far beyond its actual value or contribution to the prior art.

Every “troll” discussion, however, needs a note of balance. Just as trolls litter the patent system with marginally meritorious lawsuits, so the system also suffers from the IP “grasshopper.” The IP grasshopper is the entity that is quick to steal the “inventor-ant’s” work and research investment because he did no work himself and the winter of competition approaches. We can recognize the grasshopper because he refuses to pay any license fee until his legs and claws are held to the proverbial litigation fire. Once again, a grasshopper is hard to define, but I can venture a description according to the same basic notion that helped us identify the troll: A grasshopper is any entity which refuses to license even the strongest patent at even the most reasonable rates.

Frankly I am not sure who causes more meritless litigation—the troll asserting patents beyond their value or the grasshopper refusing to license until litigation has finally made it impossible to avoid. I am surer, however, that both the troll and the grasshopper tend to blame and feed off of each other. Neither deserves encouragement or tolerance.”

When NPEs attempt to enforce their patents beyond their worth they typically fare poorly with court judgments. For example, in the long-running telecoms patent dispute between Nokia and IPCom, the High Court for England and Wales has recently ruled that IPCom’s European patent (UK), which related to the handover of mobile phones between different base stations (e.g., when the mobile user is on the move), was invalid as originally granted. According to Nokia, and as reported by the IPKat, this “marks the sixtieth patent invalid as granted since IPCom began its aggressive campaign against Nokia and other industry players more than four years ago”. Academic research also indicates that NPEs almost never win their cases in court. A 2010 paper by Allison, Lemley and Walker indicates that whereas product-producing entities win 40% of their cases on the merits, NPEs win only 8% of their cases. Given that out-of-court settlement figures tend not to be disclosed publicly, it is anyone’s guess how large payments are in these cases. 

Even though the above should be reassuring for product companies, the nuisance factor and costs of litigation including discovery and other legal fees can, nevertheless, be quite onerous. Judge Rader expressed a need to bring discipline to the disproportionally high US discovery expenses in patent cases. He went on to state:

“…it is difficult to control the troll or the grasshopper in advance because they cannot really be identified until their abuse is already over—the troll has lost its case of little value or gotten negligible value for a nominally winning case; the grasshopper has finally accepted a reasonable license fee after dragging the court and the patent owner through years of litigation. The troll and the grasshopper only emerge after the case is over..”

He proposes that when the case is over and the court can identify a troll or grasshopper, there should be a full reversal of attorney’s fees and costs. This would, for example, discourage plaintiffs from using discovery (costs) as a tactical weapon. Costs defending meritless claims are generally significantly less outside the US. For example, in the UK the loser typically pays the costs and US-style discovery is not possible in continental Europe. 

Extreme demands by practising and non-practising entity patent owners seeking unreasonably large sums for weak patents and extreme resistance by product-makers who refuse to pay a fair price for the IP they exploit are mostly kept in check by the courts, as indicated by Judge Rader. Large payments can grab press attention, but these are the exception and can result from tactical blunders by defendants who could have settled sooner at lower cost. RIM’s agreement to pay the NTP $612.5 million in a “full and final settlement of all claims” is the most well-known NPE settlement in mobile communications patent litigation. This dispute was not about SEPs. RIM could have avoided paying so much if it had not painted itself into a corner with the imminent prospect of having its email system shut down to the detriment of anxious customers, such as the US Department of Defense with its concerns about maintaining national security. 

Unintended consequences 

Competition authorities should have the patience to let the existing patent laws, established licensing practices with bilateral negotiations and, when necessary, commercial courts, work things out. The smartphone marketplace is in significant flux. No company or companies have anything like market dominance or the large and stable market shares observed elsewhere, such as in PC operating systems or microprocessors. There is no proof of patent “hold-up”; in fact, aggregate SEP royalties have fallen as standardisation has progressed in mobile technologies. Absent proven market failure or consumer harm, the market should be left to establish absolute values in patent licensing, or relative values for SEPs versus other patents. Alternatively, regulators would be drawn to employ simplistic analysis that overlooks the money invested and value derived from IP versus commodity costs in hardware manufacture. They would likely impose arbitrary royalty rate caps and subjective patent evaluations of great inaccuracy. Competition authority intervention could cause distortions that undermine incentives to continue making the large investments in SEPs and other IP while tilting the playing field in favour of one vested interest group or business model to the detriment of others".

How much is a law firm's trade mark practice worth?

A friend of this blogger, who wishes for professional reasons to remain anonymous, raises an unusual issue here:

"Reading bits and pieces on the exercise of trade mark valuation for various purposes, ranging from structuring balance sheets, IP due dilligence, company takeovers, intangible assets assignments to obtaining funding, bank loans or securing debts, I was thinking about how such an exercise could differ (if it in fact does) when the subject-matter of the transaction is trade mark portfolio management -- when a law firm 'buys' another law firm's trade mark 'bank'.

I wonder whether there exists some form of literature, guidance or thoughts on the matter which have somehow managed to escape the dark rooms of intra-lawyer transactions. I am pretty sure this is not a transaction which has never seen the light of day.

I would think that the factors involved in identifying the value of such trade mark responsibility take-over would be

* the depth and diversity (in terms of clients, classes and/or geographic region) of the portfolio;  

* the TM owners' profiles (are they large, are their operations international?); 

 * the TM owners' diversity of business; 

* the nature of the TM owners' businesses (would they require frequent filings or licence recordals?);  

* renewal maturity;  

* the possibility that some of the TM owners will not stick with the new law firm;  

* cross-selling possibilities (will the move benefit other departments of the law firm, which will get the chance to approach the client/TM owner?).

Is there a method of translating this into numbers? Or would one just say 'listen -- our TM prosecution practice has brought in X in the past 3, 5, 10 years and, based on this, its revenue projection for the next years is Z? And is that a "just" or are there specific rules for such projection too?".

Can any readers offer advice, or make some pertinent comments?

UK Budget - IP highlights

So what's in this year's Budget? Most of the new stuff in the Finance Bill we already know about (patent box, changes to R&D etc). Nevertheless, some new and useful things directly for IP came sidling out of the red box:

New creative industries relief
Much requested, here at last!

• Video games industry relief
• Quality TV ("Birdsong" was the Chancellor's example) relief
• TV Animation relief (aka the "Wallace and Grommit relief"

These reliefs are intended to come into play in Finance Act 2013 (so, probably, from 1 April 2013) – but will need EU State Aid approval, so this isn't writ in stone. There will be consultation over the summer but it wouldn't be highly surprising to see the new reliefs echo the existing film relief.

VAT relief for European Research Infrastructure Consortia (ERICs)
Secondary legislation will be introduced in autumn 2012 to provide VAT relief for European Research Infrastructure Consortia – no more details yet.

Patent box update
Various tweaks have been announced:

• the legislation has apparently (not yet published) been clarified to ensure that that worldwide income from inventions covered by a qualifying UK or European Patent Office patent is included.
• the heads of expenditure included in the amounts which have to be marked up have been clarified; and
• the small claims safe harbour that previously applied to all companies has been limited to companies making profits with residual profits of no more than £3 million.

R&D tax credits update
As announced late last year, there will be a new ‘above the line’ R&D tax credit in Finance Bill 2013 to encourage R&D activity by larger companies. The Government will consult on the detail (supposed to be published today, but no sign of it so far). It will ensure that SME R&D incentives are not reduced as a result of this change, thankfully.

Not specifically IP but useful to IP companies:
Investment – relaxing EIS & VCT rules
The EIS and VCT schemes allows small companies to raise cash with tax relief for the investors. The changes will widen the definition of shares which qualify for relief; and remove the £500 minimum investment limit.

Subject to State aid approval, legislation will also be introduced in Finance Bill 2012 to increase the thresholds for the maximum size of qualifying company for both EIS and VCTs and the maximum annual amount that can be invested in an individual company under all the venture capital schemes.

The quid pro quo, because there had to be one, is that the total investment which a company can receive in one year will be £5 million in total from any State-aided risk capital measure, including EIS and VCT.

Corporate tax rate
The company main tax rate is being cut again - it will be 24% from April 2012 (rather than the 25% previously announced) and will be 22% by April 2014 if the Chancellor doesn't cut it again!

UK Patent Box: further details expected

The UK's Coalition Government is expected to announce further details of the Patent Box regime in this Wednesday's Budget. The Patent Box regime, which will be effective as of 1 April 2014, taxes profits arising from qualifying IP rights, mainly patent rights, at a reduced rate of 10% (this compares favourably with the current 26% rate of UK corporation tax).

Although the introduction of this regime is evidence of the Government's stated intention of ensuring that the UK has the most competitive tax regime in the G20, whether the regime will attract businesses to the UK is moot. However, it should make patent-rich businesses think twice before leaving or investing outside the UK.

The details of the regime have been the subject of consultation for over a year now, and interested parties have persuaded the Government of the benefit of certain amendments to it. These include extending the benefits of the regime to supplementary protection certificates and data exclusivity. However, the Government have made it clear that it does not want to extend the benefits of the regime to IP rights related to branding and marketing: profits relating to such rights are explicitly excluded.

Fuller details of the Patent Box can be found here.  Updates during and following the Budget can be found here.

Reading as a Public Experience: Reading "Romantica" Anonymously

During the rise of digital connectivity in the 1990s, one of the issues that most preoccupied copyright scholars was the convergence of reproduction and reading. Prior to the digitization of contents, the act of reproduction (i.e., the production and distribution of a tangible book) was wholly separate from the act of reading the contents contained in the book. Copyright protected the terms and conditions by which protected contents could be published, but copyright played no part in the right to read those contents.

The online, digital world changed all of this because, in the digital world, reading contents on a computer involved the act of storing those contents in digital form in computer memory, and such storage was deemed an act of reproduction of a literary work under the copyright law. The upshot was that one could not read digital contents without also reproducing those contents in a copyright sense. Copyright owners sought to take advantage of this convergence through the development of digital rights management. In turn, scholars took aim at DRM and the use of copyright to monitor the right to read, most famously perhaps, in Professor Julie Cohen's seminal article--"A Right to Read Anonymously: A Closer Look at 'Copyright Management" in Cyberspace" here.

While this critique on the implications of this convergence on the right to read was insightful, it did not address an equally significant change in modern reading culture, namely the extent to which reading is also a shared experience. The culture of the book, something that could be held, displayed and exchanged, meant that there was a certain public aspect to the reading enterprise. I can think of no better example of this public dimension that the presence of the English translation in 2009 of the book Alone in Berlin, by Hans Fallada here. Published in German in 1947, the book became an international best-seller in English several years ago. And how did I become familiar with the book? I remember distinctly. While in London, I noticed the book on display at several bookstores; I also noticed a number of people reading the book on the Underground. This double validation was good enough for me and I went to purchase a copy (and what a great read it was!). I am not certain that I would have encountered the book except this public aspect to the culture of reading.

 This private/public duality came to mind in reading an article by Katherine Rosman that appeared in the March 14th online edition of wsj.com. Entitled "Books Woman Read When No One Can See The Cover" here, the article described the rise of the "romantica" genre of e-reader contents. Rosman describes romantica as "an old-fashioned love story and pop-culture references like those found in "chick lit." Plus, there is sex—a lot of it. Yet unlike traditional erotica, romantica always includes what's known as "HEA"—"happily ever after." The e-reader has become what Brenda Knight from Cleis Press, of Berkeley, California, calls the "ultimate brown paper wrapper." Stated otherwise, sitting on the train or bus, or lounging on a beach chair, no one can see what you are reading. As one reader mentioned in the article stated, "the digital format helped her get over her embarrassment." Without the e-reader, she would have refrained from being seen in public while reading contents of this kind--"Some of the contents are very explicit."

Some data show the success of "romantica." According to the article, nearly 40% of new books in the "romance" area are sold online; the amount sold for "erotica" may be even higher. Cleis Press is now up to 60 titles. Indeed the romance genre, broadly defined, constitutes 17% of sales of adult fiction. The reason is not hard to understand. Said Adam Nevill of Mischief Books, "[i]t used to be a long walk to the counter with an erotica selection, but that's a thing of the past." Moreover, for a prospective reader who was undaunted by Nevill's long walk to the check-out counter, it was not even easy to find the "erotica" category. The e-reader makes that problem a thing of the past.

What does the rise of the "romantica" category say about the public aspect of reading? As Rosman herself noted in an online interview accompanying her article,"reading is less social". That is true, in my view, but only to a point. The e-reader provides a form of anonymity with respect to the contents being read, even if the act of reading is taking place in a public space. As such, it is an example of how copyright has become subject to the process of privatizing (atomizing?) public space. To some extent, as well, the public function of books, such as my experience with Alone in Berlin, is being eroded. That said, and as the article itself points out, there are developing alternative forms of social validation -- either via book reviews or online viral messaging about popular new titles. While not "public" or "social" in the bricks and mortar sense, it is not a private and anonymous act in the 1990's sense of "the right to read anonymously." Like so many other aspects of the creation, distribution and consumption of contents in the online world, the old rules are being rewritten, even if not wholly discarded.

Yahoo versus Facebook: not so inexplicable after all?

Yesterday's news is today's comment and tomorrow's speculation -- at least when the news is the highly-publicised and well choreographed story of Yahoo's patent infringement action against Facebook.  The report in the Guardian is typical of the genre:

"Yahoo is filing a lawsuit against Facebook claiming infringement of patents covering advertising, privacy controls and social networking, following through on a threat it made last month.

In a court filing , the former web giant - which has been reduced to a shadow of its former self as internal strife and the rise of Facebook have eaten away at its position - said that Facebook, founded in 2004, infringes 10 of its patents.

Yahoo had first threatened the suit last month. It demanded that the giant social network, which is preparing to go public in what may be one of the largest public offerings ever, should license the patents [Yahoo is definitely not a "non-practising entity", but some may feel that its status as a "former web giant" qualifies it as a sort of wannabe-troll now that patent licensing revenue is a more appealing and/or easier proposition than regaining lost territory on the internet].

Facebook, in response, pledged to defend itself vigorously against what it called "puzzling actions" by Yahoo. "We're disappointed that Yahoo, a longtime business partner of Facebook and a company that has substantially benefited from its association with Facebook, has decided to resort to litigation," the company said in a statement.

The patent claims could cast a spotlight on Facebook's vulnerabilities as the company tries to complete an initial public offering of stock this spring. At the end of 2011, only 56 US patents had been issued to Facebook. That's a relatively small number compared with other big tech companies. Yahoo, founded in March 1996, has filed more than 1,000 patents covering various aspects of its operation [In an ideal world, the quantity of patents held would be irrelevant; their significance would be in what they covered and how likely they were to stand up to invalidity challenges]. ...

Yahoo, which has seen its revenue fall steadily over the past three years, made hundreds of millions of dollars from a patent settlement that it reached with Google just before that internet search leader went public in 2004 [Behaviour which is profitable is likely to be repeated ...]. That covered the system used to generate the advertisements seen beside search results: Yahoo owns Overture, the company which first came up with the idea of keyword-targeted adverts to go with searches.

Yahoo will be hoping for a similar result this time round. It has been steadily losing share to Facebook in online display advertising: in 2008 it hit a high, when Yahoo's share of US display revenues peaked at 18.4% and Facebook had just a 2.9% share. According to eMarketer, in 2011 Facebook's share of overall US display advertising revenues grew to 14%, up from an 11.5% share in 2010, while, Yahoo's share of US display ad revenues fell to 10.8% in 2011 from 14% in 2010 ...[Other than returning to giant-hood, there's no way that Yahoo's existing business model is likely to reverse this slide, which makes a business founded on patent licensing revenue more attractive. The trouble is that it's unlikely to be sustainable unless new giants keep emerging, decide to public and have to buy off the turbulence that a multiple patent infringement action creates at the time a share price has to be determined]".

At least one clever person saw this coming.  In "Yahoo-Facebook: Brace for the countersuit" Tech Fortune's Roger Parloff reports how IP analyst Erin-Michael Gill (MDB Capital) predicted this last November. Gill now says that Facebook will respond by countersuing Yahoo, asserting patents it has acquired in anticipation of this type of attack. Be that as it may, Gill says Facebook will probably strike a cross-licensing deal that will require it to pay a "substantial sum" to Yahoo.

Kara Swisher (AllThingsD) describes Yahoo's action as "what is either the boldest gamble of its history or the most boneheaded".  She points to Yahoo's claims that Facebook has been “free riding” on its intellectual property and that royalty payments alone will not suffice. Triple damages and injunctive relief are what it seeks [following the Supreme Court's ruling in eBay v MercXchange, it's by no means certain that a court would exercise its equitable jurisdiction over injunctions in a manner that would disrupt the lives of innocent third parties -- the vast proportion of the US population which depends on Facebook for so much of its information and social networking].

Closer to home, Myles Jelf (head of the Media Group at law firm Bristows) comments:

“Whilst the patent infringement proceedings brought by Yahoo against Facebook don’t on their face appear to raise any startling new legal principles, the fact of the litigation is interesting from a commercial perspective, in that in recent times Facebook has been something of a lifeline for Yahoo – bringing considerable traffic to Yahoo’s principal business at a time when the search engine market is increasingly competitive [But if Yahoo is saying a long goodbye to its principal business, perhaps it's not so surprising after all]. Some observers have already noted that the timing of the proceedings, coinciding with Facebook moving towards an IPO, may not be entirely accidental. Given the typical timescales and complexity of US patent litigation, it is unlikely that Facebook will be able to resolve the accusations through the courts before its IPO is to be completed – even if it believes they are entirely baseless [Presumably the IPO could be put on hold. This might even work to Facebook's advantage if it goes to the market later, having seen off Yahoo's patent challenge and/or acquired and/or merged with Yahoo following a settlement, and having acquired an enhanced patent portfolio of its own]. It is also no surprise that the litigation has been started in the US rather than elsewhere in the world, as the US patent system is still much more generous when it comes to granting patents over the business method aspects of technology than, say, patent offices in Europe [Indeed, it's curious that litigation in the US has a sort of winner-takes-all quality about it, when the European Union is twice its size]".

IP Finance will keep an eye out for major developments in this litigation.

Finance industry must find its own gTLD solutions, says ICANN

"No special treatment for financial industry over ‘.bank’ and ‘.fin’ gTLDs" is the title of Trevor Little's World Trademark Review blogpost today. Trevor writes, in relevant part:

" ... the European Banking Authority (EBA) recently urged ICANN to discontinue the availability of the ‘.bank’ and ‘.fin’ gTLDs. In response, ICANN has highlighted existing dispute resolution mechanisms, recommending that the EBA work with any potential applicants once these are made public.

In a letter to ICANN dated February 20 2012, Andrea Enria, chair of the EBA, urged that the potential availability of the ‘.bank’ and ‘.fin’ gTLDs for applicants be withdrawn, based on concern that these strings would be susceptible to “misuse by unscrupulous individuals”.

In addition to a potential rise in fraudulent and phishing activities at the second level, Enria also pointed to the subsequent need for legitimate financial institutions to “establish costly and complex legal or commercial initiatives in order to safeguard their trademarks from frauds and abuses”.

It has been reported that one applicant for the ‘.bank’ gTLD, BITS, stated that only financial services companies would be allowed to register domain names at the ‘.bank’ second level if its application if successful. However, at present it is not known who else may have bid for the TLD, hence the fear that a less discerning entity may prevail.  ... 

... in the formal response to the EBA, seen today by WTR, ICANN’s chief operating officer Akram Atallah has stressed that the EBA should consider the objection processes currently in place in the gTLD programme, encouraging it to both “actively monitor the ICANN website [once applications are made public] and consider what actions to take, as appropriate” and “to work closely with any known potential applicants for ‘.bank’ or ‘.fin’ to address any issues/concerns with regards the use of these particular strings”. ...".

This is not merely a trade mark matter.  The innovative side of the SME sector, which has a perennial need for funds and often struggles to find adequate backing and investment in new products which have no guarantee of success, is particularly vulnerable to the sort of frauds and unscrupulous activity that the EBA cites.  Regulation and effective processes for monitoring are all very well, but legitimate traders and finance companies have no monopoly on innovation and those who seek to abuse the new gTLD system have every incentive to do so.