Yet, while there was general agreement that an overhaul was badly needed, the law that was eventually passed did little to fix what is widely seen as the current system’s chief weakness: that it leads to the issuing of too many patents that lack real innovation and that clog up the legal system once their holders seek to enforce them against alleged infringers.

When the OSI first learned of this proposed transaction, we were alarmed that four companies with dominant market positions and a mixed attitude towards open source software could redeploy what the open source community had considered to be a friendly asset–Novell’s patent portfolio–into a weapon against open source software. We are delighted that you have made clear that the [german antitrust regulator] cannot allow a transaction that would create or strengthen a dominant position on markets in which such investors are active, and we are happy to provide the additional information you have requested about the proposed restructuring of this transaction.

The division’s continued monitoring of how competitors are exercising their patent rights will ensure that competition and innovation are unfettered in this important industry.

All three of the transactions highlight the complex intersection of intellectual property rights and antitrust law and the need to determine the correct balance between the rightful exercise of patent rights and a patent holder’s incentive and ability to harm competition through the anticompetitive use of those rights.

“Pretty much anybody out there is infringing… It would be hard for me to envision that there are high-tech companies out there that don’t use some of the patents in our portfolio.”

“A lot of people are still surprised to see the quality and the diversity of the IP that was in Nortel… And the fundamental question comes back: ‘How the hell did you guys go bankrupt? Why weren’t you Google? Why weren’t you Facebook? Why weren’t you all these things, because you guys actually had the ideas for these business models before they did?’ They were within a Bell Labs-y kind of environment, and maybe the wherewithal of turning them into businesses wasn’t necessarily there.”

1. Everyone in the IT industry infringes on his patents.
2. Because Nortel – his former employer where the Rockstar patents came from – had some ideas, but was less successful at implementing them, he has the right to hold the rest of the IT industry hostage.

Apparently, the purpose of the patent system is to allow unsuccessful companies the right to extract billions of dollars from companies that are more successful. (Again, how is this not a net drag on innovation?)

But the very fact that he claims EVERYONE in the IT industry infringes on his patents seems to be prima facie evidence that many, if not most, of these patents were not novel, and therefore invalid… unless he is contesting that every IT company stole Nortel’s ideas, which is laughable. But I digress…

What we do know now is that patent commitments made to competition authorities are suspect (and, of course, commitments are made to be broken), particularly when patents are controlled by NPEs outside of the direct control of the original purchasers.

Loose Nukes

To fully understand the problems posed by Intellectual Ventures’ involvement in this new consortium, one must also understand the tectonic shift in the underlying foundations of the patent system. Although the explosion of low-quality, poorly defined patents – particularly in the software space – has long been identified as a problem that greatly increases litigation risk and the overall deadweight loss to our economy, the problem has been largely isolated until recently. It was once thought that the threat of Mutually Assured Destruction (MAD to borrow the Cold War acronym), meant that the big companies with large patent portfolios would not sue their peers because they would be sued back and everyone would lose. However, the rapid growth of huge non-producing entities (NPEs) that exist solely to exert other people’s patents (usually acquired through bankruptcy) against successful companies greatly changed the precarious MAD equilibrium that once existed.

Some – admittedly clever – companies, such as Apple, recognized that they could acquire patents, take a perpetual license to them, and then sell them off to NPEs such as Intellectual Ventures (or as they have already done with Digitude), who are then incentivized to attack the original purchasers' competitors (because the purchasers have a license and its competitors don’t). This strategy allows the original purchaser to attack their competitors and make money off of the patent sale to the NPE (and often they take a cut of the litigation and settlement revenue as well) all the while insulating themselves from the threat of countersuit (the NPE is immune to the threat of counter-assertion because they don’t make products and therefore do not infringe on anyone’s patents).

To extend the nuclear war metaphor to encapsulate this new phenomenon, if the old paradigm was Mutually Assured Destruction where corporations, like nation states, refuse to attack each other because of the threat of personal annihilation, these new NPEs are akin to stateless terrorist entities with nuclear weapons, who are immune to direct threat of attack. Also, much like stateless terrorist organizations, these NPEs move in the shadows and cover their tracks. Intellectual Ventures, by one scholars account, has at least 1300 shell corporations – so its activities are difficult to track. So, we therefore see “states” discretely selling “nukes” to “terrorist cells” with the understanding that they will be used against their foes who cannot directly attack them back.

The bankruptcy portfolio auctions, however, are a variation on this theme, and are more similar to loose nukes from “failed states,” wherein weapons of business destruction flood the marketplace as one entity fails, and the remaining entities with the most to lose – enterprises that actually produce value – must scramble to keep these loose nukes out of the hands of less reputable actors.

DOJ Should Review Newest Auction with Recent Trends in Mind

These patent consortiums allow companies like Apple and Intellectual Ventures to work together to acquire more patents that will be used in the thermonuclear war against Android. As the case of the prior auctions make clear, the commitments that competition authorities have relied on in the past to ensure that these consortiums don’t use patents “anticompetitively” (which is semi-ironic, given that new patent thickets are valuable because they give you the right to harass your competition) are suspect at best, particularly because Intellectual Ventures will filter the patents through a network of “legally distinct” shell companies – companies that “companies” will likely claim prior commitments don’t apply to them – before they are used against Apple’s Android competitors, which they surely will be, given the incentives of those involved.

Given the Justice Department’s prior concerns and recent micro and macro trends in the patent ecosystem, it seems that it is completely appropriate for the DOJ (and competition authorities around the world) to review this upcoming transaction from a different lens than it did just 6 months ago. The world has changed.

Cross Posted from Project DisCo

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