Swedish telecommunications pioneer Ericsson is the latest in a line of big companies turning to patent assertion entities (PAEs) to make a quick buck at the expense of competition and innovation. As TechCrunch first reported, Ericsson entered into a Master Sale Agreement with Unwired Planet to sell 2,185 patents and patent applications. The transaction with Unwired Planet, formerly Openwave Systems, is yet another example of savvy patent holders using unscrupulous PAEs and insidious licensing terms to wreak havoc on the high-tech industry.
It is as if Ericsson wanted to provide a single case study to display the ways the patent system can be abused by a well-armed incumbent. The themes are familiar but worth repeating. Patent privateering is growing as a business model. Ericsson is not the first privateer, just the most recent (for instance Apple has a similar deal with Digitude, and Carl Icahn tried to force Motorola to monetize its patent portfolio). These arrangements make things worse in two ways: Ericsson is able to target competitors without the fear of countersuit, and Unwired Planet is able to leverage older and low-quality patents against new or weaker competitors who lack either the resources or wherewithal to fight back.
The arrangement features many of the hallmarks of a troubling patent acquisition by a small assertion company from a large operating entity. Ericsson has also introduced some new contractual terms that have the effect of perpetuating and protecting the arrangement through the creation of a patent pipeline and a “Sale Payment.”
Unwired Planet Produces Nothing
Unwired Planet is a publicly held PAE that licenses out patents covering core technology in the mobile communications industry. Despite claiming that “Unwired Planet invented the mobile internet,” the company in fact “is pursuing a multi-pronged patent monetization strategy, which ranges from direct licensing of its patents, litigation, and partnering with an Intellectual Property specialist.” Unwired Planet’s SEC filing states the company’s business model: “Our goal is to seek additional licensing opportunities.” Naturally Unwired Planet does not fear being the target of similar litigation because it is nothing but a clearinghouse for patent assertion.
Contractual Obligations to Perpetuate and Protect the Conspiracy
There are two notable portions of the Master Sale Agreement that portend future patent disputes. First, Ericsson commits to grant to Unwired Planet “for no additional consideration” 100 patents each year, at least some of which must be U.S. patents. In essence Ericsson has not only aligned with a notorious PAE, but has committed to keeping it supplied with a “pipeline” of new patents throughout the course of the relationship. There are already too many patents, and the result is a modern Cold War in which an emphasis on armament replaces any incentive to genuinely innovate or compete. Ericsson’s agreement with Unwired Planet embodies this concern, and is reminiscent of an agreement between Intellectual Ventures and Campinas State University in Brazil. In “Giants Among Us,” Tom Ewing and Robin Feldman describe how Intellectual Ventures locked in a constant flow of new patents through an agreement with the Brazilian university. Unwired Planet has accomplished the same by aligning itself with an operating entity capable of filing for and obtaining patents at a steady clip. Ericsson’s arrangement to create a “pipeline” of patents to Unwired Planet ensures the pair’s ability to continue exploiting the system well into the future, unless something is done to curb PAEs and operating entities that deal with PAEs.
Second, Ericsson built in an escape hatch into the contract in the event Unwired Planet is purchased by a competitor. In this scenario, Ericsson may elect to receive a “Sale Payment.” If this occurs within three years, Ericsson will receive no less than $1.05 billion. This effectively prevents an Ericsson competitor from beating it at its own game and using these patents against Ericsson or its business partners. The Sale Payment is so prohibitively high that a subsequent takeover of Unwired Planet is impossible. Thus, not only does Ericsson manage to harm competition by equipping a PAE with an arsenal of patents, but it freezes the market from adopting a remedy by buying out Unwired Planet.
Selling Company Maintains Financial Interest in the Successful Assertion of the Patents
Ericsson stands to gain from the aggressive assertion of these patents against Ericsson’s competitors. The agreement provides for the following payoff: (i) 20% of the amount of Cumulative Gross Revenue, until the Cumulative Gross Revenue equals $100 million; plus (ii) 50% of the amount of Cumulative Gross Revenue in excess of $100 million, until the Cumulative Gross Revenue equals $500 million; plus (iii) 70% of the amount of Cumulative Gross Revenue in excess of $500 million. Lest there be any hope that Unwired Planet or Ericsson does not intend to use these patents as a means of extorting revenue from competitors, the payment schedule should clarify that extortion is indeed the purpose of this transaction. Ericsson has a clear revenue stream as long as Unwired Planet is successful at monetizing the patents, and the escalation schedule incentivizes Ericsson to continue sharing both numerous and high quality patents with Unwired Planet. It is a clever solution to ensure that both parties remain committed to the arrangement.
Ericsson obviously intended for its patent portfolio to go to the PAE that would most aggressively assert and monetize the patents. It is likely that Unwired Planet had to convince Ericsson that it is especially aggressive in order to win the contract. Unwired Planet likely experiences extreme diminishing marginal cost for asserting each additional patent, whereas Ericsson must work very hard to obtain each additional patent. Therefore it makes sense for the scale to tilt towards Ericsson as the revenues increase – it will be Ericsson working hard to file and obtain the patents that equip Unwired Planet’s extortion efforts.
Selling Company Gains a Global License to the PAE’s Patents
Ericsson maintains access to its own patents and gains a license to all of Unwired Planet’s preexisting patents. This allows Ericsson to relinquish the patents to the PAE without worrying that they will come back to haunt it. Furthermore, the Master Sale Agreement states that the Ericsson patents are “subject to certain encumbrances relating to existing Ericsson licensees” meaning that Ericsson’s preferred business partners are likely also safe from the Unwired Planet crosshairs.
Unwired Planet Has Demonstrated Willingness to Litigate
Unwired Planet has been aggressive in asserting its patents in the United States. In August of 2011 Openwave filed suit against Apple and RIM in both the District Court for Delaware and at the International Trade Commission. The ITC case issued a ruling which undermined of Unwired Planet’s infringement claim, and the company is now focusing its efforts in Delaware.
In September of 2012, Unwired Planet filed two companion cases in Nevada against Apple and Google, alleging infringement of 10 different patents against each. This is the quintessential lottery ticket infringement suit: Unwired Planet is maximizing its chances for a ruling on validity and infringement, which it can then assert against every other mobile telecommunications firm.