NPE: Antitrust Challenges

Binqiang Liu

Master of IP Candidate, UNH School of Law

(Former Patent Examiner of State Intellectual Property Office of China, 2006-2013)

Abstract:

NPEs (Non Practicing Entities)and their patent trading deals are relatively new phenomena. Antitrust cases involving NPEs and related patent deals from EU and US set clear statement that NPEs and their patent trading behavior do fall under antitrust scrutiny. Due to the complexity and hard-to-trace nature of NPEs as well as the difficulty to define the effects brought to competition in related markets by NPEs' patent trading practice, antitrust investigation authorities face great challenges when dealing with NPEs. Innovative application is needed while current regulations and antitrust related laws are to be applied. Potential acts include a clear and extended definition of entities to be investigated, a combined ex-ante and ex-post investigation mechanism, and a platform established to provide extensive information related to patents and NPEs so that the information asymmetry problem can be relieved.

Keywords:

NPE, Patent Acquisition, Patent Deal, Antitrust

1 Introduction

21st century is considered to be knowledge based economic era, and along with the economic and technological development under thisera context, a special group emerged and its growth pace keeps increasing, they are well versed in the value of intellectual property rights, their main businesses reside on management of intellectual property, and particularly patents. By running the patent management business, this special group benefits hundreds and thousands of dollars revenues. Who are mysterious members of this special group? The answer is NPEs, the abbreviation form of Non Practicing Entities.

However, despite NPEs’ affect and effect in most recent time, there is no precise definition as to who or whatNPE is. And in many cases, due to people’s emotional attitude, the concept of NPE is mostly often confused with another infamous and also special entity group, i.e. Patent Trolls. For sake of justice, this paper argues that, with regard to the definition of NPE, it should be observed from a behaviorbased perspective, namely the behavior of how an entity manages patentsand the true nature thereof, rather than just labeling them. If an entity runs or manages a patent not for the purpose of development,implementation and/or commercializationof the patented technology, while its operational objective thereof is to seek profits from patents, then the entity that implements such patent operation acts can be classified under the category of NPE. Under such a possibly broad definition, NPE may involve a wide range of entities, for instance, under certain conditions, independent inventors, research institutions or universities, operationalcorporate entities and/or specialized patent operating companies can all be classified as NPEs.

More recently, with the growing concerns over NPE phenomenon from antitrust authorities like the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC),the authorities came about a new name of typical NPEs, namely PAEs (Patent Assertion Entities)[4].The routine business form of PAE is: PAE buys patents from existing patent holders, and then they try their best to license those related patented technology to "legal" (RIGHTFUL) businesses, or sue or threat to sue the targeted business enterprises when the license deal fails, thus maximizing their profits[5].Such a definition of PAE almost directs the antitrust authorities’ focus onto those specialized patent managing entities agencies or non-operative entities.

With the current debate in mind, the author would like to suggest that when discussing and analyzing NPE phenomenon in the patent management and commercialization field, one should not put too much attention on the name or title of involved entities, meanwhile one should focus more on NPEs’behaviors and the effect such behaviors may bring.For example, it is generally considered thatPatent Trolls are all specialized patent managing entities, such a viewpoint may be have its rationale in large part, since a large number of reported Patent Trolls are non-operative (producing no products or services) entities.However, just imagine for a second, if anoperative corporation entity owns (whether procured from the patent office of bought from outside) a patent but does not use the proprietary technology, rather, it exploits the patent only by means of initiating patent attacks on other operative business entities(whether the patent owner and the targeted businesses are competitors or not is not necessarily relevant) that deploy or use the patented technology. In such a circumstance, the patent owner’s behavior can also be deemed as patent troll behavior.

With the increasing impact of NPEs, people become inclined to question the wholesocial and economic impact brought by NPEs and the attitudestend to be negative. Maybe due to numerous cases involving NPEs, voice saying that NPEs are taxing our society by putting tax on innovation rather than enhancing innovation in the United States is very high, and such thatthe US patent system should be thoroughly reviewed and repaired appeal. For example, there is an affectivestudy showing that during 1990-2010, NPEs caused $500 billion lost to U.S. listed public companiesand annual loss of the last four years during that period was as high as $80 billion[6]. Still, there are more studies discussing and revealing NPEs’ excessively litigating, thus hindering technological innovation and economic progress of US [7], there are members from Congress frequently propose new amendments to the Patent Law [8] in order for more exact target against NPEs, and just recently, President Obama also proposed to use administrative means to suppress NPEs‘illegal’patent actions [9].

It is the author’s opinion that the impact of NPEs should not be generalized and one would better not take it as a question regarding either black or white. It could be much saferthat we deal with the NPE phenomenon effect on technology, economy and our society case by case.One should not be biased and recognize rightly that not every NPE is a black sheep and bears ill and ulterior motives when doing its patentbased business.Meanwhile, it should also be pointed out that the expressed disapproval for automatic veto against NPE does not mean that the NPE phenomenon is not worth raising concerns. When considering whether NPEs’ behaviors need to be regulated, the key lies in how to regulate especially when resorting to antitrust regulations? What are the challenges to be faced when deploying antitrust regulationinstitutes? What solutions are available or need to be developed? These are some of the questions this paper tries to provide a preliminary answer.

2 Reviews of Typical Cases and Practices in Europe and America

Before going any further, let’s take a quick look at several typical patent acquisition related and NPE-related cases that European and Americanantitrust authorities and/or courts stepped in.

a) Ex-ante investigation

In 2011, there were two patent trading casesthat aroused sensationalism and triggered heated discussions in the patent community.The first onewas the patent auction case of the bankruptedCanadian telecommunicationcarrier Nortel in July 2011. In this case, the coalition of Rockstar led by Apple, Microsoft and other big players in the industrybeat another alliance made up of other companies led by Google and RPX, by paying up to $4.5 billion price for the 6,700 patents and applications owned by Nortel. And the second is another patent transaction focused acquisition case between Google and Motorola Mobility generous (MMI) in August 2011, just about one month later after Google’s failure of obtaining the Nortel patents. In the MMI case, Google spent as much as $12.5 billion for this acquisition, mainly for the patents and applications owned by MMI so that Google can enhance its competency in the smart phone business for its Android system.

These two cases were widely analyzed and reported and even plain people became familiar with them to some extent. Despite of this,not all people may be aware that these two acquisitions both went through antitrust reviews and examinations in various regional or national antitrust authorities. The Nortel case was scrutinize by the U.S. Department of Justice (DOJ) while the second caseexperienced antitrust investigationsin numerous important market places such as the United States, the EU, China and others[10]. What should be worth noting is that the two cases were both highly related with patents acquisitions and transactions, and antitrust regulating departments carried out ex-ante investigations where the authorities conducted the reviews of the corresponding mergers and acquisitions in order to determine whether the implementation of the M&A could be executed or not.

b) Ex-post investigation

Relative toex-ante investigations, there were also a number of so called ex-post antitrust investigation cases in Europe and America., of which were two famous cases of the 2008 IPCom case and the 2012 Mosaid case. These two cases were antitrust investigation cases that occurred after correspondingmerger or transfer actions of the involved patents. To be more specific, in the IPCom case, Nokia allegedIPCom (a German NPE company) failed to comply with the original patent holder’s (GermanCorporationRobert Bosch) FRAND commitment and submitted antitrust complaint. Because of the European Commission's mediation thereafter, IPComcompromised and promised to comply with the FRAND commitments which the EU expressed its appreciation [11].On the other hand, theMosaid case seemed to be much more complicating. There were two main parties involved.One side was represented by Google, who proposed antitrust appeals to EU, and the other side related to Nokia, Microsoft and Mosaid (a Canadian NPEcompany). Before Google’ allegation, Nokia and Microsoft transferred some 2000 wireless communications patents (where 1200 were so called standard essential patents, i.e. SEPs) to Mosaid, and after the transactionMosaidmade robust and openstatements that it would actively exploit these patents with the aim to obtain returns higher than the total the company hadever earned before, and the desired return profits were supposed to be shared among with Microsoft and Nokia [12]. Google accused Nokia and Microsoft’s conspiracy in so doing by transferring those patents and escaping FRAND obligations, thus increasing competitors’costs of patent licenses and ultimately the smartphone end-users’ costs as well) and demanded EU antitrust investigation[13] .

c) Other casesand discussion

Besides cases happened between NPEs and operative companies, other cases exist, too. One recent example is a case that happened between two NPEs in US.It was in March 2012, an NPE company called Cascades Computer Innovation sued beforethe Northern District Court of California that the five enterprises ofDell, HTC, LG, Motorola and Samsung declined to license in Cascades’ patents through boycott formed by defensive patent risk solution provider RPX and thus violated Section 1 and 2 of the Sherman Act [14] . Although the judge ultimately dismissed Cascades’ appeal due to unclearness, the court allowed it to resubmit its complaint after re-organization of the grounds of appeal in future [15].

When we take a review of the cases introduced before, we may noticea very interesting phenomenon, particularly the subject matter of plaintiffs and defendants involved.The parties in those cases are so diversified that one may apply an advertisement slogan here that Anything Is Possible!For example, in the Mosaid case, where antitrust claims were raised, on one hand operative companies like Nokia and Microsoft cooperated with typical NPE firm Mosaid.While on the other hand, Nokia filed antitrust complaint against another NPE company IPCom, allegingIPCom’s failure to fulfill its FRAND obligation. As to these points, one may wonder whether Nokia was both ‘victim’ and ‘burden-producer’ as well.And still, the typical cases we have reviewed so far also reflected some other important points, especially the complex relationships among entities involved in those cases in the patent world. One can see that in one case, even competitors can become partners in such patent related deals. And an outstanding example was last year's Kodak patent auction case [16]. In this patent transaction deal, two NPEs, Intellectual Ventures(a typically aggressiveNPE) and RPX(a self-described defensive NPE) with almost opposite business models, cooperatedwith one another. Even more interesting wasthat those companiescompeting with each other appeared (and cooperated) withinthesame consortium (Intellectual Venture or RPX).

From the previous analysis we are already able to recognize that for the question of whether NPEs and their patent-related behaviorsare subject to antitrust regulation, the answer is YES. In order to further discuss how to regulate NPEs and their actions, the DOJ and FTC of US were paying increasing attention. For instance, in December 2012, DOJ and FTC held a special seminar on PAE (a special title DOJ and FTC came along with NPEs), where experts and authorities discussed PAEs’ impact and anti-monopoly regulation issues thereof. So far in Europe and US, the antitrust authorities are resorting to traditional regulations they use to scrutinize non-patent transactions (like company A&M deals) and so far there are no distinctive differences when the authorities carry out their investigations (see the cases reviewed above). To summarize briefly, the regulations or laws that antitrust authorities resort to are: Section 1 and 2 of Sherman Act, Section 3 and 7 of Clayton Act, and Section 5 of FTC Act in US, while in EU mainly TFEU A101/102, Reg1/2003, Reg139/2004.

Another important point one may notice for antitrust investigationsdone in US and EU was the focus on so called core patents or standard essential patents. This may be debatable. On one side, such a standard-related patent focused practice has its advantage, especially when we take into account that NPE phenomenon is a relatively new,antitrust investigation on NPEs and their behavior is also relatively new and antitrust authorities do not have much experience, by focusing on hot spot like standard-related patent deals and FRAND commitment disputes is a good option. Meanwhile, such practice also has its disadvantages, though highly targeted against situations where the monopolistic behaviors occur most,limitations are also obvious. It is not hard to imagine that monopolistic behavior may not be entirely due to the standard basedpatents. Because of patent’s inherent monopolistic nature, the‘hijacking’effect of patents does not necessarily dependent on whether those patents relate to standards or not. So long there is too high switching cost, patent hijackingproblem may happen and thus require relieving solutions.

3 NPE antitrust challenges

From the foregoing discussions we are able to derive thatwhen carrying outantitrust investigation on NPEs or PAEs and their patent based behaviors, thereare many challenges such as the limits on subjects/objects/contents to be investigated in existing antitrust examinations. The reason for existence of such challenges is largely due to the special nature of NPEs and their patent-related behaviors.In this paper, it is suggested that in order to set up more orderly, comprehensiveand targeting antitrust investigation procedures on NPEs and their behaviors, the following aspects need to be observed to full extent:

Firstly, there is the crucial question of defining monopoly or anti-competitive behavior regarding NPEs and their behaviors. When the antitrust authorities try to borrow experiences from traditional antitrust investigating practices, such definitions of typical monopolistic behaviors asmonopoly agreements, abuse of dominant market power andexclusion/limitation of competition from marketshould be defined, identified and applied in NPE related patent acquisition and/or transfer scenarios.Secondly, there is still a here proposed 3W1H question awaiting answer. For the purpose of carrying out a justifiable antitrust investigation, questions regarding who to be investigated, what to be investigated, when to investigate and how to investigate (i.e. to carry out investigation according what regulations) must be resolved.

Lastly, when investigating NPEs and their patent related behaviors, there are more problems that should be kept in mind, such as the wide spreading nature of subjects involved (there are so many NPEs out there, and so many patent owners involved), the hidden nature of parties of real interest (normally, large-scale NPEs operate via so called shell companies), and NPEs’ FRAND obligation related issues when standard essential patents are involved.

As already mentioned above, the relationships among entities involved in the patent field are very complex. With the increasing prosperity of the patent market and allures provided, NPEs’ business modelsare no longer so simple and directly observed. Nowadays, those massive and influential NPEs usually have very secretive, complex and delicate relationships with operative corporation entities. In fact, there are studiesindicating [18] complex relationship between NPEs and corporate entities in NPE related patent transactions. However, when observed from a purely commercial perspective and especially from the perspective that enterprises always pursue profit maximization,such delicate and complex relationships are easy to image and conceive. In other words, if we only analysis the possibility of these events’ taking place from the commercial point of view, it may become more natural and understandable. To illustrate this, see this following example:being a world-renowned brand, the Apple Company,well-known for its innovation capacity, once transferred some of its patents to a Patent Troll type NPE called Digitude[19].After the transaction, Digitudeallegedpatent infringementagainst operative companieslike RIM, HTC, LG, Motorola, Samsung, Sony, Amazon and Nokia of the smart phone and other personal electronic productbusiness in the United States International Trade Commission (ITC). Clearly, it is not easy to comment good or bad on Apple's such business action.If we observe only form a market viewpoint that market liquidity of the patent market should be dynamic and the commercialization of patent assets should be enhanced, and such actions are only pure business oriented behaviors pursuing profits, then such business deals should not be questioned.However,there might be another possibility that Apple's such behavior might be‘privateering’ action [20], namely by exploiting Patent Troll or NPEto attack or hijackcompetitors. If such hypothesis is possibly true, then Apple’s such behavior is not in line with the idea principle of fair and legitimate market competition.