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 this era context, a special group
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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 what NPE 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 behavior based perspective, namely the behavior of how an entity manages patents and 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 commercialization of 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, operational corporate 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
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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 that Patent 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 an operative 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 whole
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social and economic impact brought by NPEs and the attitudes tend 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 that the US patent system should be thoroughly reviewed and repaired appeal. For example, there is an affective study showing that during
1990-2010, NPEs caused $500 billion lost to U.S. listed public companies and 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 safer that 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 patent based 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 regulation institutes?
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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 American antitrust authorities and/or courts stepped in. a) Ex-ante investigation
In 2011, there were two patent trading cases that aroused sensationalism and triggered heated discussions in the patent community. The first one was the patent auction case of the bankrupted Canadian telecommunication carrier Nortel in July 2011. In this case, the coalition of Rockstar led by Apple, Microsoft and other big players in the industry beat 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
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various regional or national antitrust authorities. The Nortel case was scrutinize by the
U.S. Department of Justice (DOJ) while the second case experienced antitrust investigations in 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 to ex-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 corresponding merger or transfer actions of the involved patents. To be more specific, in the IPCom case, Nokia alleged IPCom (a
German NPE company) failed to comply with the original patent holder’s (German
Corporation Robert Bosch) FRAND commitment and submitted antitrust complaint.
Because of the European Commission's mediation thereafter, IPCom compromised and promised to comply with the FRAND commitments which the EU expressed its appreciation [11]. On the other hand, the Mosaid 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 NPE company). Before Google’ allegation, Nokia
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and Microsoft transferred some 2000 wireless communications patents (where 1200 were so called standard essential patents, i.e. SEPs) to Mosaid, and after the transaction Mosaid made robust and open statements that it would actively exploit these patents with the aim to obtain returns higher than the total the company had ever 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 cases and 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 before the
Northern District Court of California that the five enterprises of Dell, 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 notice a 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
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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, alleging IPCom’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 aggressive
NPE) and RPX (a self-described defensive NPE) with almost opposite business models, cooperated with one another. Even more interesting was that those companies competing with each other appeared (and cooperated) within the same 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 behaviors are 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
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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 investigations done 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 based patents. 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 hijacking problem may happen and thus require relieving solutions.
3 NPE antitrust challenges
From the foregoing discussions we are able to derive that when carrying out antitrust
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investigation on NPEs or PAEs and their patent based behaviors, there are 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, comprehensive and 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 as monopoly agreements , abuse of dominant market power and exclusion/limitation of competition from market should 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
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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 models are 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 studies indicating [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, Digitude alleged patent infringement against operative companies like
RIM, HTC, LG, Motorola, Samsung, Sony, Amazon and Nokia of the smart phone and other personal electronic product business 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
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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 NPE to attack or hijack competitors. 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.
The issued just discussed above relates to the subject matter problem, and in fact there is another substantially important problem regarding the scale of patent deals. So far, there are only ex-ante antitrust investigations on large scale patent acquisition deals, and even not every one of them undergoes investigation. For example, there have been many large scale patent deals. However, there are only limited numbers of publicly known cases such as Novell case, Nortel case and MMI case that have been investigated by antitrust authorities. These investigated cases underwent antitrust examination mainly because they all involved so called SEPs and all belonged to currently popular ICT (information and communication technology) industry where there were hundreds of patent litigations going on and on. While at the same time, other also large scale patent deals like the Kodak case and the AOL-Microsoft case in
2012 were not scrutinized from an antitrust perspective.
One of the most challenging problems when facing NPE related patent acquisition activities and trying to conclude whether there is antimonopoly behavior or not is the hidden nature of NPEs. It should be pointed out that it is much less often to see cases like Nortel and Kodak cases where NPEs participated publicly in those large scale patent acquisition deals. The more often seen situations are, as suggested in some
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studies, NPEs often run their businesses and competing in patent acquisitions via so called shell companies. It is said that Intellectual Ventures has more than 1,200 shell companies and other big NPE player Acacia also has around 250 subsidiaries. By using shell companies and hiding the true nature and real interest parties, PAEs
(normally large NPEs) can accumulate voluminous patent portfolios and grow their patent sources to an extent that are capable enough to expel or limit competition in certain related markets. Antitrust authorities should be quite alerted as to PAEs’ such potential ability to expel or limit competition. The simple and obvious reason is that the non-happened act of expelling or limiting competition does not mean it will not happen for ever.
4 Measures recommended
The antitrust policy in the field of intellectual property has reflected the complexity of antitrust issues, when coupled with the unique entity type of NPEs the problem becomes even more complicated. In order to respond to the potential monopolistic danger brought by NPEs, it is suggested in this paper that there should be innovative application of relevant laws and regulations based on traditional antitrust investigation practices, embracing more flexibility and agility. Specifically, the following measures are recommended as references:
1) Subject matter clearance: a clear understanding of who should be investigated defines the scope of to be invested subject matters. In patent merger and acquisition situations, antitrust investigation should not be limited to the acquisition deals only between operative business entities, but should also include corporate entities
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covering operative companies and non-operative entities like NPEs as well that are included in related merger or transfer of patents;
2) Investigation timing schedule: because of the complexity of patent acquisition deals and not all patent acquisitions are as famous as cases like MMI case, Nortel case and Kodak case as discussed before. It is just impossible for the antitrust authorities to examine every patent transactions ex-ante. Even when there is a threshold which when exceeded, an acquisition deal should apply for antitrust investigation, not every deal that satisfied such condition was examined in practice. With the increasing recognition of IP/patent as an asset, deals where patent or patent portfolio will be traded as assets are supposed to increase and so for the transaction amount as well.
Therefore, it is more reasonable and applicable that ex-post supervision and investigation regarding patent acquisition deals be used (more often) whenever necessary rather than ex-ante investigations. But, of course, for those patent related deals that have obvious and profound affects, an ex-ante investigation should prevail.
3) Information disclosure mechanism: potential antitrust threats brought about by patent acquisition and merger deals lie in different aspects. For example, the problem around patent licensing fee or royalty is often the source of those problems. NPEs’ main purpose of acquiring patents directs to extracting monetary profits by exploiting the patent property rights, this is unlike the traditional exclusive functionality of patents. After the transfer of patent rights to NPEs, whether the price asked by NPEs as licensors for the patents exceeds normal market price, there seems to be no clear benchmark. Even under the so called FRAND principle, there are diverge perspectives
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as to what is REASONALBE level. However, suppose for a specific industry, the licensing provisions regarding fees or royalties are publicly available and a corresponding royalty fee or license fee database or standard can be established, this can largely suppress the potential ‘excessive price asking’ phenomenon (such over high price asking in face equals patent hijacking or patent hold-up). In addition, information disclosure should also include substantial stakeholder information disclosure. This relates to one of the most often used strategies used by NPEs. As stated before, NPEs commonly use shell companies to execute businesses. In many cases, the licensee or responding party is hardly able to determine who the ‘real’ party in the proceedings is. Although there are suggestions that it is possible to resort to consulting companies specialized in information tracing to determine who is the real help, so far its efficacy is not clear yet. Disclosed information regarding real part in interest is very valuable for determining whether a patent acquisition deal by NPE may constitute antitrust threat or not. For example, one operative company may transfer its patents to an NPE, and then the NPE can bring aggressive licensing or litigation to competitors of the operative company, thus through the hands of NPE, the operative company can hide itself behind the screen, strike on the competitors and even profit much from such actions at the same time. The sample case mentioned before where Nokia sold its patents to the NPE company Mosaid, and meanwhile,
Nokia and Mosaid have intimate relationship with one another in profit sharing aspect.
Then Nokia’s such behavior of transferring patents to Mosaid should be brought in front of the antitrust authorities’ eyes. All in all, the aim of setting up an information
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disclosure mechanism is to overcome the information asymmetry problem in the patent related market to the maximum extent.
4) Traditional initiatives: while we may want to focus on the special problems that exist in patent related deals, traditional initiatives should not be discarded at all. Basic principles from antitrust investigation practices from out the patent field should also be considered when reviewing patent related deals (no matter involving NPEs or not).
For instance, the motivation and ability principle should also be applicable when dealing with NPE and patent antitrust merger investigations. The motivation of NPE’s patent acquisition and the ability the NPE may have after the acquisition should both be evaluated to see whether there is potential detrimental to competition. Such a rule should be used as a canon when deciding whether ex-ante investigation is required and what antitrust examination decision should be made.
5 Summary
The antitrust problem in the field of intellectual property, particularly in the field where NPEs are involved, is newly emerged phenomenon and challenge both to the business world and to the antitrust regulating authorities as well. Because of the complexity and uniqueness of the patent related market, there is yet no globally uniform antitrust investigating practice. However, those limited number of related cases in Europe and US have shown that there are big challenges in applying existing antitrust regulations on patent deals, and one of the key challenges is of how to define those key elements when doing antitrust investigations. Nevertheless, since patent deals also fall within the scope of business, so long as such deals pose potential threat
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to competition in market, exclude or limit competition, then it can fall under the antitrust investigation scrutiny based on relevant legal provisions. What deserve special attention in do so is that in order to better doing NPE antitrust reviews, initiatives such as innovative application of law, subject matter clearance, investigation time schedule, establishment of auxiliary information disclosure and sharing platform to address the problem of information asymmetry should be figured out and put into practice.
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