Intellectual Property Law Resource Center
Non-Practicing Entities Face Financial Woes – our own David Pridham weighs in
by Joseph Marks
June 20 — This April, just over three years after Unwired Planet Inc. executives closed a patent deal they expected would yield hundreds of millions of dollars in revenue, the mobile technology licensing company acknowledged defeat. The 2013 deal brought Unwired Planet 2,185 patents from the Swedish telecom Telefonaktiebolaget L.M. Ericsson — many of them vital to 2G, 3G and 4G mobile data standards. The master sale agreement envisioned Unwired Planet paying Ericsson back with a cut of licensing sales that could grow past $500 million. Instead, Unwired Planet was selling off its entire patent business to Optis UP Holdings, LLC, for just $30 million at closing, plus an additional $10 million two years later.
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The 2013 deal brought Unwired Planet 2,185 patents from the Swedish telecom Telefonaktiebolaget L.M. Ericsson—many of them vital to 2G, 3G and 4G mobile data standards. The master sale agreement envisioned Unwired Planet paying Ericsson back with a cut of licensing sales that could grow past $500 million. Instead, Unwired Planet was selling off its entire patent business to Optis UP Holdings, LLC, for just $30 million at closing, plus an additional $10 million two years later.
Company CEO Boris Teksler, a former top licensing official for Apple Inc., blamed the sale on a legal system he says unfairly targets patent licensing companies, often called nonpracticing entities or, patent trolls by their detractors for their aggressive efforts against alleged infringers.
He also blamed companies for relying on those firms’ technologies but refusing to pay for them, and using courtroom delays to run out the clock.
“Defendants were appealing every decision,” Teksler told Bloomberg BNA. “When you know that you’ve lost [in a courtroom] on enough patents that you’re not going to get them flipped on appeal, the question becomes, ‘Why should you appeal?’ Because you can exploit the financial strength and balance sheet of your adversary. That’s a good business strategy, but that doesn’t make it right.”
Half a decade ago, newspaper headlines warned that patent trolls were peppering operating companies with unreasonable demands for licensing fees, using weak and overly broad patents to bully companies out of thousands or millions of dollars.
In Teksler’s telling, the pendulum has swung 180 degrees since then. Now, it’s NPEs—heavily invested in innovative technologies—that are being abused by operating companies who refuse to pay licensing fees for technology fundamental to their products, forcing NPEs into costly litigation. Ultimately, the cost of the litigation threatened to send the company into bankruptcy, he said.
Battered by Courts and Tribunals
“We spent a significant amount of capital litigating [in] various U.S. courts to develop a record of zero for 28,” Teksler told investors in a conference call. The cause, he said, was a legal environment that now favors companies that “refuse to pay licensing fees and use stall tactics to avoid reasonable settlement.” Battered by Courts and Tribunals Other NPE executives described a similar shift. They cite the chief reasons as the Supreme Court’s 2014 ruling in Alice Corp. v. CLS Bank International, which has made it significantly more difficult to defend the validity of software patents, and the administrative fast track to challenge, and often invalidate, patents at the Patent Trial and Appeal Board established by the 2011 LeahySmith America Invents Act.
One of the fast tracks, called inter partes review, allows anyone to challenge a patent as not truly original or because it describes something too obvious to be considered an invention. Since it was established in 2012, NPEs have comprised a substantial portion of defendants in those proceedings. Plaintiffs in those cases are typically operating companies that the NPEs have sought licensing fees from or filed infringement suits against in U.S. district courts.
The market also shifted after the Supreme Court’s 2006 decision in eBay v. MercExchange, which made it significantly harder to win an injunction to stop companies from selling infringing products. That means companies are more willing to go to court to fight infringement claims because they don’t have to worry about losing sales during the lengthy legal process.
“We’ve gone full circle from a very prolicensing environment to an antilicensing environment,” said David Pridham, former chairman of the large NPE IP Navigation Group LLC and now CEO of Dallasbased NPE Dominion Harbor Group, LLC. “A lot of companies can sit back and efficiently infringe and just ignore other folks’ property rights.
”The result is that NPEs are earning less in licensing fees from companies accused of infringing their patents, executives said. When they take those companies to court, they’re also more likely to lose, to have their own patents invalidated or to settle for a lower fee than desired.
Law firms are also less willing to represent NPEs in sending demand letters or filing lawsuits against alleged infringers, and more likely to demand payment upfront, Pridham said.
“We’ve just adjusted what we believe patents are worth,” said Jim Skippen, CEO of WiLan Inc., an NPE that deals in wireless technology, among other industries. “If a patent was worth $10 million 10 years ago, it’s probably worth half that now, and a license is worth a similar amount.
Down by the Numbers
Publicly traded nonpracticing entities have fared poorly in general during the past half decade, according to an index created by Kevin Klein, vice president for products and licensing at Austin, Texasbased Vorago Technologies Inc. Klein’s index, which he calls the Public IP Licensing Index, or PIPX, shows a basically flat stock performance for the 14 largest publiclytraded NPEs between the beginning of 2011 and the close of 2015, a result that vastly underperforms broader indexes such as the S&P 500.
The PIPX includes a variety of NPEs, ranging from companies that haven’t developed any of their own technologies, often called patent assertion entities, to companies with substantial research and development wings, to the defensive patent aggregator RPX Corp. RPX buys patents on behalf of a consortium of large tech firms so those patents can’t be used in infringement suits against them.
All but one of the NPEs in Klein’s index lost value during 2015, with some of them down 50 percent or more. One of the worst hit was Acacia Research Corp., which noted in its most recent annual Securities and Exchange Commission filing that it suffered a net loss of $160 million for the year. The company is currently valued at about $240 million.
Private NPEs Fare Poorly Too
Publicly traded firms make up only a small portion of the NPE market. The largest firms, such as Washington statebased Intellectual Ventures Management LLC, are privately owned and significantly less transparent about their revenue. Industry observers, however, say the performance of public NPEs reflects troubles within the industry at large, especially for firms that focus exclusively on licensing existing patents rather than on research and development.
Matthew Rappaport, cofounder of the intellectual property consultancy IP Checkups Inc., pointed to declining patent prices and the rate of patents being invalidated at the Patent Trial and Appeal Board as signals that privately owned IP firms are suffering as well.
Out of roughly 3,000 patent challenges filed at the PTAB between 2012 and the end of April, the tribunal determined all patent claims were invalid just short of a quarter of the time—a total win for the challenger, according data from Bloomberg BNA’s PTAB Challenge Navigator. It’s sometimes difficult to pick a clear winner in PTAB case because the parties don’t reveal details about settlements. Overall, patent owners and patent challengers each came out ahead in about onethird of cases, with the remaining cases ending in settlements that might have benefited one party or the other.
Another indicator of poor financial health among private NPEs is a 2014 round of layoffs at Intellectual Ventures, among the largest and most active NPEs, Rappaport said. The company let go about 20 percent of its roughly 700 employees, according to a Bloomberg report.
Intellectual Ventures declined an interview request for this article.
Still Plenty of Litigation
Executives with the defensive patent aggregator RPX agreed that major NPEs have suffered financially since 2011, but argued the industry is still preying on innovative companies, especially smaller ones that can’t afford lengthy legal battles.
RPX Senior Vice President Dan McCurdy suggested poor performance by firms at the top of the NPE ladder belies a thriving industry among smaller NPEs that go after large rewards.
The total number of patent infringement cases filed in U.S. district courts jumped to 5,219 in 2015 after declining the year before, according to an RPX study. NPEs filed more than 3,600 of those cases, roughly twothirds of the total. Companies with less than $100 million in annual revenue, which are less able to weather large legal bills, made up more than 60 percent of defendants in those cases.
“They’re doing things like buying a couple patents and asserting them against a large number of companies,” McCurdy said of the smaller NPEs. “If they settle for $100,000 or $200,000 apiece and do that to 20 or 30 companies…They can invest a couple hundred thousand and get back 30 times that. The stock market is not providing that kind of return”
McCurdy also noted that financial straits suffered by some NPEs may simply be a result of more firms entering the market. The total number of NPEs tracked by RPX has risen from around 100 to more than 1,000 since the company’s 2008 founding, he said.
“People used to think they’d start an [NPE] business and readily make billions of dollars,” he said. “Now people think they can start NPEs and make tens or hundreds of millions. But if there are more of them chasing that, the cost to the industry is still likely to be extraordinarily high.”
Different Strategies
NPEs that remain in business have responded to the downturn in different ways. IP Navigation Group founder Erich Spangenberg—who’s famously been referred to as “one of the most notorious patent trolls in America”— signed on in April to be acquisitions, licensing and strategy director at Marathon Patent Group Inc., which acquired many of IP Nav’s assets. His strategies at Marathon include focusing on licensing and litigation in Europe and China rather than in the U.S.
“Previous to the America Invents Act in 2011, I think Europe was less favorable [for patent assertion],” Spangenberg said. “Post America Invents, selected European venues are much more favorable. China’s a clear TBD but trending in the right direction.”
“Companies that are using a 2007 playbook to extract value out of IP are just, by definition, going to fail,” he said.
The wireless NPE WiLan has shifted from buying patents outright to licensing and litigating patents on behalf of inventors—but without paying for the patents themselves unless they’re successfully licensed.
“Today, a perfectly rock solid patent that’s infringed, you can still lose in court,” CEO Jim Skippen said.
Opportunities at the Market’s Bottom
There may be a bright spot for NPEs at the bottom of the patent market, executives say. Longtime patent watchers have seen the pendulum swing between patent owners and licensees before, and now see opportunities to cheaply buy up useful patents if they’re undervalued.
Indeed, Klein’s PIPX report for the first quarter of 2016 showed a 13 percent hike, the index’s most significant rise since it was established, perhaps signaling a rebound. That’s a far better performance than the S&P’s performance during the quarter—a less than one percent jump—but it remains to be seen if the growth is sustainable.
To contact the reporter on this story: Joseph Marks at jmarks@bna.com To contact the editor responsible for this story: Mike Wilczek in Washington at mwilczek@bna.com
For More Information on the PIPX index here