Patent Troll Business Models

How Non-Practicing Entities are Adapting

The idea of a patent assertion entity (PAE) (or non-practicing entity, patent troll) has become fairly well-known.  These firms adopt a business model of monetizing patents rather than practicing the technology covered by the patents; acquiring patents that enable them to target entire industries; and driving up the costs for legitimate competitors and consumers alike.  The Department of Justice’s Fiona Scott Morton further explains the business practices of non-practicing entities:

The [model] here buys large quantities of patents from others, and its business model is to monetize that intellectual property… the troll has invested in organizational capabilities to assess the value of patents and teams of people who are specialized in negotiating royalties. These teams find potential infringers and maximize revenue, using the outside options of litigation, injunctions, and exclusion orders to raise revenue, if those are possibilities allowed by the situation.

These descriptions are a useful summary of non-practicing entities, but they threaten to overlook some of the most problematic behavior in this space.  A PAE does not necessarily have to be an “aggregator” to become a disruptive anti-innovation force in the market.  In fact, there is no single business or litigation strategy common to all patent assertion entities embracing the entire panoply of harm to competition (other than asserting patents they do not practice).  Instead, the most problematic issue is that the patent assertion industry is populated by intelligent actors who are becoming increasingly creative, learning how to partner and proving successful despite increased scrutiny.

For a patent assertion entity the key to success is leverage.  For early PAEs leverage was easy to come by – patent litigation is expensive and paying a toll was economically sensible.  However, as PAEs are becoming more prevalent and aggressive this is no longer true.  The threat of royalty stacking distorts the economic incentives for the legitimate competitors who previously preferred to pay off the PAEs.  Because of dozens of PAE suits, there is a greater incentive for defendants to litigate the patents.  As Fiona Scott Morton explained in her speech, “Inefficient royalty stacking can therefore raise costs for widget makers; these higher costs will raise prices to final consumers, or in the longer run reduce entry into widgets or drive widget firms out of the market.”

Additionally, the speed of innovation is happening at a breakneck pace with firms constantly introducing new products to the market.  Each of these new products re-invites attention from PAEs.  Thus, what was once a toll has become an ongoing tax and has driven companies to address the growing problem of PAEs.  This in turn compels the PAEs to diversify their monetization models.

The following are four different models for asserting patents currently playing out in U.S. courts:

Sue Everyone and Hope for Positive Outcome – TQP Development

What do you do when you have one broad and abstract patent that arguably covers something fundamental to all companies in the technology space?  You sue everyone and hope no one can successfully invalidate your patent before you are able to reach some licensing agreements.

TQP Development owns patent number 5,412,730 entitled “Encrypted Data Transmission System Employing Means for Randomly Altering the Encryption Key” which covers, broadly speaking, encryption and authentication technology common in nearly every website.  In 2012, TQP Development sued 74 companies in the Eastern District of Texas ranging from technology companies to banks to retail companies.  TQP is so aggressive that ICAP Patent Brokerage, a patent auction firm, was auctioning off a “Covenant Not to Sue” from TQP Development.  There was literally a silent auction to allow one lucky legitimate company the opportunity to shed themselves of this one PAE.

Team up With Legitimate Competitors – MOSAID

MOSAID is a Canadian non-practicing entity that helped develop the patent monetization industry.  Founded in 1975 as a semiconductor company, MOSAID abandoned practicing patents for asserting them in the late 1990s.  In late 2011 MOSAID was acquired by US Private Equity firm Sterling Partners.  MOSAID thrived by asserting a host of patents covering technologies in the wireless, pseudo-SRAM, DRAM, SDRAM, Multi-level DRAM, Embedded DRAM and networking industries.

In September, 2011, shortly before Sterling Partners acquired the company, MOSAID acquired Core Wireless Licensing and announced that it will operate as a wholly-owned subsidiary of MOSAID.  Core Wireless Licensing held 400 patent families consisting of approximately 2,000 patents that had originally belonged to Nokia.  The transfer includes an agreement whereby MOSAID will continue to assert the patents for certain market participants, passing back two-thirds, and keeping one-third for itself.  This yields revenue for the market players retaining “a passive economic interest in the revenue generated from the licensing of those patents”, without exposing them directly to litigation.  Some of these arrangements have been alleged to violate competition law.

Equipped with more than 5,000 patents (according to its 2011 investor relations presentation), MOSAID has “moved quickly in calendar 2011 to implement intensified litigation strategy” and “MOSAID now owns one of the industry’s largest and strongest standards-essential patent portfolios.”  The presentation concludes “over the next five years, MOSAID estimates that companies unlicensed to the Nokia patents will generate US$500 billion in mobile device revenues.”  MOSAID has filed a Complaint as recently as November 5, 2012.

Unfortunately, the result of this will be consumers footing the bill with higher prices.

Leveraging Past Success – VirnetX

VirnetX describes its business as “licensing our patents and technology to other companies in order to reach a larger end-user base than we could reach through direct sales and marketing efforts; as such our business strategy and revenues will depend on intellectual property licensing fees and royalties for the majority of our revenues.”  VirnetX filed a Complaint against various companies, including Apple, Inc., on August 11, 2010 alleging infringement of four VirnetX patents.  VirnetX’s allegation included all Apple products released by Apple as of the date of filing.  On November 7, 2012 a jury in the Eastern District of Texas determined that Apple does infringe upon VirnetX’s patents, and awarded the company damages totaling over $360 million.

Two days later VirnetX filed a new Complaint in the same exact court, against the same exact defendant, asserting infringement of the same exact four patents.  This time, however, VirnetX alleges that Apple products released during the course of litigation – namely the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers – infringe upon these patents just as Apple’s past products did.  This type of doubling down is absurd, given the breakneck pace of new product development by companies like Apple.

Stealth Attacks – i2z Technology

i2z Technology owns patent 5,345,551 entitled “Method and System for Synchronization of Simultaneous Displays of Related Data Sources.”  This patent covers the display of two separate data fields on a screen, one of which is a map.  i2z has accused numerous companies of infringing upon this patent, and has initiated lawsuits against several, including a September 13, 2011 complaint against AOL Inc., CityGrid Media LLC, Google Inc., Hotpads Inc., Kayak Software Corporation, Move Inc., Property Maps Inc., RM Acquisition LLC, Redfin Corporation, Travelocity.com LP, TripAdvisor LLC, Trulia Inc., WebMD LLC, Yahoo! Inc., Yelp Inc. and Zagat Survey LLC in Delaware.

On June 21, 2012 i2z Technology sent a letter to Hipmunk, Inc.’s CEO asserting that Hipmunk infringes on the i2z Technology patent and demanding that Hipmunk obtain a license.  i2z suggested in this letter that many companies have agreed to take a license for this patent, and that it expects others who are currently involved in litigation to obtain a license shortly.  i2z asked for a response within two weeks.  The letter was sent to Hipmunk right after it secured $15 million in funding.  (This is sometimes called a “payday mugging.”)

Hipmunk has taken a novel approach to dealing with i2z’s stealth attack – it has filed a Complaint against i2z in its own home court of California seeking a declaratory judgment that it does not infringe upon the i2z patent.

This list is certainly not comprehensive, but it does demonstrate the various ways in which PAEs are asserting themselves against legitimate competitors.