Guest Post on Using the Antitrust Laws to Police Patent Privateering

Editorial by David A. Balto.  Mr. Balto is an antitrust attorney in Washington D.C. whose representations include high technology firms.  In addition to his practice, Mr. Balto was formerly a policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and an antitrust lawyer at the U.S. Department of Justice.  He has also published research and authored scholarship for Google on technology policy topics.

Using the Antitrust Laws to Police Patent Privateering

By David Balto

In the ongoing debate over patent assertion entities, increased attention is being paid to “patent privateering”: the practice of operating firms transferring patents to non-practicing entities in order to bring patent litigation against their rivals. As I explained in a recent article:

Privateering is the practice by which established operating companies arm trolls with patents and deploy them to engage in expensive, incessant litigation against competitors. This Trojan horse approach allows companies to accrue the benefits of the egregious troll conduct without incurring any of the risks. And more often than not it is used as a competitive weapon to try to raise costs and dampen competition from rival operating companies.”

Firms like Google, BlackBerry and Red Hat recently filed comments with the Federal Trade Commission and Department of Justice, explaining the substantial concerns that patent privateering raises from a competition perspective.

This begs the question: is there an antitrust solution to the privateering problem?

A recent article by Mark Popofsky and Michael Laufert provides a thoughtful roadmap on how the antitrust laws can be used to police privateering. It’s a must-read for businesses and policymakers concerned that patents are becoming strategic tools for anticompetitive conduct.

In the current patent ecosystem, large operating companies accumulate patents in part for defensive purposes.  Those companies are unwilling to use their patents in certain strategic fashions because they fear that the same will be done to them.  These patent portfolios help assure patent peace because they assure that any strategic conduct will be met with a similar response – so-called mutually assured destruction.

Popofsky and Laufert outline three concerns around privateering transfers to PAEs that upset that balance. Privateering lets operating companies evade “[mutual assured destruction] or reputational constraints to raising rivals’ costs” and “FRAND or other licensing commitments,” and provides a method for “strategic outsourcing to PAEs to hinder rivals.”  Essentially, privateering companies are use PAEs because they have the incentive and ability to engage in strategic conduct that is prevented by current market forces.

The article gives a prime example of these concerns: the well-reported patent transfer from Nokia and Microsoft to patent troll MOSAID. After the failure of Nokia’s open source Symbian mobile operating software, Nokia joined forces with Microsoft and adopted its Windows Phone 7 platform. Nokia had originally supported open source software and made numerous FRAND commitments, but these commitments became a hindrance when Android (open source) became Nokia’s chief competitor. Microsoft and Nokia orchestrated a transfer of 2,000 of Nokia’s patents, 1,200 of which were standards essential patents (SEPs) with FRAND commitments, to MOSAID for a nominal fee. As part of the deal MOSAID has to pay Microsoft and Nokia 2/3 of the patent royalties and meet strict “royalty protection provisions and milestone payments calculated to maximize . . . revenue.”

The MOSAID transfer exhibits all three of the anticompetitive concerns. MOSAID has the incentive and ability to engage in strategic patent litigation.  Nokia could not assert these 2,000 patents without breaking patent peace and risking counter-suits for patent infringement. MOSAID can use these patents without fear because MOSAID does not practice in the industry and immune to countersuits. The transfer also allows Nokia to evade a FRAND commitment not to charge more than 2% total royalty for all the wireless SEPs in Nokia's portfolio. MOSAID did not make this promise, and even if it honored Nokia's promise and only charged 2% for the 1,200 SEPs MOSAID received the total fees could still double for competitors.

Nokia later transferred portions of its SEP portfolio to patent trolls Sisvel and Vringo. These transfers could potentially quadruple the licensing cost of these SEPs. MOSAID also can’t collect royalties from “third parties implementing certain Microsoft software in their mobile devices.” However, MOSAID must meet revenue expectations or it risks activating a default provision in the transfer contract that would allow Nokia to take those patents back for only $10,000. This creates serious strategic interests for MOSAID to aggressively target Microsoft and Nokia’s rivals.

Fortunately, Popofsky and Laufert offer several ways to challenge these troubling transfers to patent trolls under the existing antitrust laws. This outsourcing of patent litigation might “form part of a scheme to maintain or obtain monopoly power” in violation of Section 2 of the Sherman Act which prohibits monopolization. A plaintiff would have to prove that transfers to patent trolls are a part of an exclusionary strategy to obtain or maintain monopoly power by raising rivals costs. The first part of the strategy is to create patent-holdup by making FRAND commitments to get patents into a standard and then evading those FRAND commitments through transfers to patent trolls. The second part of the strategy is to raise licensing fees by arming patent trolls that have no incentive to negotiate license rates because they have no risk of patent counter-suits or injury to their reputation. If proven, a private plaintiff could receive an award of treble damages and the government can secure injunctive relief.

The transfer can also be challenged under Section 7 of the Clayton Act which prevents mergers and acquisitions if they are likely to substantially lessen competition or tend to create a monopoly. Patent acquisitions can be challenged under Section 7.  The article notes that the Department of Justice has already used this power in 2011 to prevent Microsoft from acquiring Novell’s patents to which Microsoft already had a license. This agency action was made to prevent a transfer whose only logical purpose was to attack open source software. The government can continue to use its Section 7 power to block transfers to patent trolls and it can challenge these transfers before they inflict harm.

The Section 7 power should be fully explored.  The National Restaurant Association and Food Marketing Institute have suggested that the agencies need to increase their scrutiny of patent transfers to PAEs and they offer an important tool.  They suggest that the FTC and DOJ adopt regulations to make more of these transfers reportable under the Hart Scott Rodino Act. This would give the agencies far stronger tools to fully investigate and challenge these transfers.

The transfers could also be challenged as a restraint of trade under Section 1 of the Sherman Act. Michael Carrier has commented that the MOSAID transfer “could present a Section 1 concern similar to a pooling arrangement the Supreme Court declared per se illegal in Singer Manufacturing Co.” Transfers running afoul of Section 7 can also "be recast as violations of Sherman Act Section 1."

Finally, the FTC can also challenge transfers that seek to dodge FRAND and other commitments through Section 5 of the FTC Act. The FTC has already done this in a consent order with N-Data Solutions. The FTC Act gives the Federal Trade Commission the power to prevent "unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce."

The Popofsky/Laufert paper should be required reading for the regulators at the FTC and DOJ. Well conceived enforcement actions against transfers to trolls would be one of the most effective ways to deal with the growing privateering problem.

30 thoughts on “Guest Post on Using the Antitrust Laws to Police Patent Privateering

  1. 30

    BTW, I swear I’m not psychic, and I’ve never met the President.

  2. 29

    Agree with the first paragraph, but not the second, that “it should cost more to assert bad patents then you should reap.” In fact, it is quite possible to reap lots of money for bad patents.
    Because, patent trolls only need to prove infringement, with a normal burden, patent suit defendants have a burden of clear and convincing evidence on almost all other issues, unlike normal litigation. Likewise, trolls have almost no discovery response burdens, while defendants can have lots of discovery costs imposed on them. Until now, reexaminations have been too slow to provide a viable alternative.

  3. 27

    LOL – you mean like enforce the no 1ying on Patently-O policy? Or the policy about posts only being of a personal nature?

    C’est La Vie

  4. 26

    The problem is that it is wearing. It takes a lot of time to work out how they have misrepresented the facts or law.

    It is a pain and there isn’t a lot of reward for doing so. Apparently Stanford doesn’t even care if Lemley commits academic integrity violations. Now if the shills got burned down from my labor that would make it worth the effort.

    Hard to compete with shills that are getting paid to generate lies particularly when there is no consequence to them when they are caught.

  5. 25

    “you can’t trust the research of a shill (see Lemley) and you can’t debate with a shill”

    Come on NWPA, if you’re really a patent attorney that means you took a few science courses in your day, in which case you know that bad research can be empirically refuted. Which is exactly how you debate someone with whom you disagree, whether they advocate a particular policy b/c they get paid to do so or because they just happen to think it’s the right policy.

    So far, I haven’t single a single attempt in these comments to mount a substantive challenge to what Mr. Balto says.

  6. 24

    Horton: the point is that you can’t trust the research of a shill (see Lemley) and you can’t debate with a shill.

  7. 22

    He may be a shill, but that doesn’t preclude his points, some or all of them, from being valid. From where I sit, he raises some good ones. You wanna challenge those points on substance, go ahead.

  8. 20

    >> Patent infringement is easy to allege and >>expensive to disprove.

    I think this is true only if you have bad lawyers. The defense is a good position. One problem is that to assert a patent it is possible to reuse a lot of the work from previous lawsuits, which puts a lot of burden on the defendants.

    But, one way to solve this problem: (IMHO) is to get the economics right. Make it cost as much to assert as to defend. Then it would only pay to assert if have a good case.

  9. 19

    The problem with a lot of this is bad lawyers. If a client of mine receives a letter, there are lots of ways of dealing with it that don’t involve spending tens of thousands of dollars.

    Another thing: if these “trolls” are truly trying to assert bad patents, then it should cost more to assert bad patents then you should reap. Usually, in a lawsuit if your side is the weak side, you lose money.

  10. 14

    I agree. I think posters should have to reveal their sources of income. And, it would help quite a bit if we knew who the professional bloggers are.

  11. 13

    Re: “Privateering lets operating companies evade ..FRAND or other licensing commitments..”

    So assigning a patent to someone else strips away all prior license obligations from the patent?

    Where did we mere mortal patent attorneys go wrong in missing that tactic all these years?

  12. 12

    These are not the views of an unbiased observer. People shoud be aware that Google and CCIA pay Mr. Balto to express these positions, which would be fine if these were upfront about these associations. Mr. Balto — and his sponsers at Google and CCIA — should be more forthcoming, particularly on a site that is attempting to promote legitimate discourse around important policy and legal issues. It’s fine for individuals and companies to take positions, but its deceptive not to disclose associations.

  13. 11

    As one of my colleagues is fond of saying “never ask a barber whether you need a haircut.” It is, therefore, no surprise at all that a former government antitrust lawyer would suppose a violation to exist under every chair.

  14. 10

    It depends on the fact situation, of course. But I kind of like 6’s answer 😉

  15. 8

    Maybe not. We already have a requirement for listing the real party of interest.

    Way too much ‘troll’ bandwagon jumping going on.

  16. 7

    Plurality, what in your opinion makes the assignors real parties in interest, the retained interest in royalty income, or the contingent reversionary interest?

  17. 6

    Maybe we should start with mandatory recordation of assignments and a more thorough determination of real parties in interest during litigation.

  18. 5

    I for one, would like you to bring an action on your theory – and see a hard nosed judge – who understands anti-trust – level sanctions for such an ridiculous reading of anti-trust law and policy. I guess it benefits the true monopolies to see anti-trust law treated like a joke.

  19. 4

    Privateering lets operating companies evade ‘[mutual assured destruction] or reputational constraints to raising rivals’ costs’

    That’s a feature – not a bug (unless of course, you are Big Corp.).

  20. 3

    Starting a lawsuit just to harass is already covered under the FRCP.

    Before an attorney lavishes such accusations, I would hope that attorney has a firm basis for doing so (and not just because the sound byte sounds good).

  21. 1

    Nice try.

    What these folks are doing, clearly, is trying to money off. “Rembrandts in the attic.”

    It has nothing to do with monopolization or restraining trade.

    Whether FRANF applies depends on whether Those obligations run with the patents.

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