from the well-this-is-interesting dept
For years, I’ve argued that since patents and copyrights are government granted monopolies, it seems pretty straightforward to me that abusing those laws to stifle speech, innovation, or competition should be viewed as an antitrust violation. It’s taken a while, but earlier this decade, the Supreme Court actually agreed with regards to patents (it’s not there yet on copyright…).
So for all the talk about using antitrust laws against the tech giants, perhaps there’s a much better use of antitrust law in taking down abusive patent trolling operations. At least that’s the theory in a new lawsuit filed by Intel and Apple against patent troll Fortress Investment Group LLC. As the lawsuit notes, Fortress was a struggling company that was acquired by SoftBank in 2017 for $3.3 billion dollars, and then turned into a massive patent troll.
The complaint is a really good read on how patent trolls could violate antitrust laws. It even starts out by explaining how trolls violate the patent clause of the Constitution by not “promoting the progress.”
Rather than promote the progress of science and useful arts, patent assertion entities (?PAEs?), including Defendants, that aggressively pursue meritless litigation have long been recognized to harm and deter innovation. For example, one study estimated that patent litigation brought by PAEs in the United States resulted in expenditures of $29 billion in 2011 for licensing fees, legal fees, and other costs of responding to PAE litigation. Another study found, by looking at the impact on stock price, that lawsuits by PAEs from 1990 through 2010 were responsible for the defendants losing half a trillion dollars. And those losses are not offset by corresponding gains to patent holders that promote innovation. One study found that the profits received by PAEs from litigation amounted to less than 10% of the lost share value of companies targeted by the PAEs.
The complaint highlights, as we’ve detailed here over the years, how the Supreme Court has pushed back on excessive patenting and patent trolling, but also how patent trolls have “evolved” to deal with this:
In the face of these challenges, PAEs have evolved. PAEs have increasingly been partnering with investment firms to fuel their litigation. This trend is part of a larger trend in the growth of third-party investment in litigation generally. Although the precise scale of investment in litigation is unknown, estimates put it in the tens of billions of dollars.8 As one example, the largest litigation investor reported having investments of $2.8 billion in 2019.
Having deep-pocketed investment firms standing behind them has made PAEs only more aggressive. Indeed, to meet the expectations of their new investors for high returns, PAEs must act ever more aggressively. These new investors are content to incur loss after loss so long as they have the chance to hit a windfall reward that will justify their investment. Patent assertion thus becomes simply a numbers game disassociated from the merits of the underlying patents, with PAEs and their investors betting that serial assertions with aggressive demands will strike a jackpot eventually making up for many other losses. Consistent with this strategy, while the overall level of patent litigation may be declining, assertions by non-practicing entities are increasing.
And that brings us to Fortress Investment Group:
central player in this emerging investment strategy is Fortress Investment Group LLC (?Fortress?). Fortress is an investment firm that went public in 2007. Fortress?s shares traded at over $35 per share after going public, but one decade later, Fortress was struggling with poor returns and its share price had plummeted to around $5 per share in 2017. Fortress was acquired that year by SoftBank Group Corp. (?SoftBank?) for $3.3 billion. Fortress contends it is ?a leading, highly diversified global investment manager?11 and claims to have approximately $39.2 billion of assets under management as of March 31, 2019. One way in which Fortress has tried to turn around its performance and justify SoftBank?s investment in it is through increased speculation on patent assertions.
And the underlying issues in this case: Fortress has set up a ton of shell operations, and constantly shake down all sorts of companies actually making stuff:
Intel and Apple bring this complaint to end a campaign of anticompetitive patent aggregation by Fortress and a web of PAEs that Fortress owns or controls. Fortress has used its stable of PAEs to aggregate a massive portfolio of patents that purportedly read on high-tech consumer and enterprise electronic devices and components or software therein and processes used to manufacture them. By employing a network of PAEs that it either owns or controls, Fortress has created a web of entities that obscures Fortress?s puppeteering role in this scheme. Rather than enhancing efficiency, Fortress uses aggregation to undermine it by creating a structure in which Fortress and its PAEs benefit by asserting weak patents?i.e., those that never would have been asserted by their former owners?in order to stretch the resources of their targets and increase the possibility that those weak patents will improperly be found valid and infringed or the prospect that a target (like Intel or Apple) will agree to a license to resolve the threat posed by Fortress and its PAEs. Thus, rather than promoting the procompetitive benefits of the patent system by increasing innovation and output, Fortress?s scheme has the opposite effect. Fortress and its PAEs acquire and seek to monetize meritless patents that never would have been asserted by their original owners, imposing a tax on the electronics industry that increases prices, decreases output, and ultimately harms consumers. To the extent that Fortress and the other Defendants have patents that would actually be of value to potential licensees, the transfer of those patents to Fortress?s control limits access to them because those patents are now held by entities that have no incentive to license patents in a way that captures royalties that are commensurate with their actual value. Instead, those entities have incentives to obtain excessive monopoly rents by exploiting patent portfolios that aggregate any valuable patents with many meritless patents.
I wouldn’t normally quote so much directly from such a complaint, but it’s so clearly stated and easy to understand that it’s useful. The complaint makes it clear that this is an attempt to “extort” money from operating companies, and that the whole game is based on volume, rather than any validity to the claims:
Through its anticompetitive aggregation scheme, Fortress has engaged in anticompetitive conduct by creating a portfolio of patents that purportedly read on electronic devices and components or software therein and processes used to manufacture them that allows it to charge far more than the value of the inventive contributions (if any) of the patents and of competitive prices for licenses. Fortress and its PAEs seek to use that ill-gotten power to extract and extort exorbitant revenues unfairly and anticompetitively from Intel, Apple, and other suppliers of electronic devices or components or software for such devices and ultimately from consumers of those products. Fortress?s aggregation is thus intended for an anticompetitive purpose?to invest in patents at costs lower than the holdup value of the patents to ensnare as many potential licensees as possible and to allow it and the other Defendants to assert as many possible claims of infringement to tax the commercial use of existing technology at rates beyond the actual value (if any) of the aggregated patents.
In furtherance of the anticompetitive scheme, Fortress and the other Defendants have deployed patents in waves of lawsuits against their targets without regard for the merits of the claims. Rather than licensing and litigating based on the merits of the patents, Fortress and its PAEs operate based on volume and repetition, targeting the resolve of the targets instead of establishing the merits and value of the patents. Given the size of the portfolio, Fortress and its PAEs can deploy patent after patent in case after case against their targets with the threat of ever more patent assertions and ever more litigation. Faced with this threat, many victims have agreed to settle, rather than to challenge Fortress and its PAEs, for amounts that reflect not the merits of the underlying patents but the effectiveness of the Fortress model. Thus, Fortress and the other Defendants foreclose the possibility?which existed before aggregation?that litigation can be an economic alternative to licensing patents.
The complaint details some of Fortress’ practices in pushing for more and more patent trolling in the operations it supposedly “invests” in:
Fortress describes its investing approach as ?making control-oriented investments in cash flow generating assets.? When it comes to patent investments, Fortress has taken its ?control-oriented? approach to an extreme. Fortress?s model is to condition its investments in PAEs on terms so severe that the PAEs have no choice but to make aggressive and reckless patent assertions to attempt to generate the revenue required to meet their obligations to Fortress. When they fail to do so?as is often the case?Fortress steps in and assumes even more control and/or ownership of the patents, allowing it to ratchet up the aggressiveness of the assertions. In other instances, such as with VLSI, Fortress has skipped this intermediary step of finding a partner to do its bidding and acquired patents through a subsidiary outright from the start. The result is that Fortress has either acquired or controls a portfolio of well over a thousand U.S. patents for high-tech consumer and enterprise electronic devices and components or software therein and processes used to manufacture them to deploy against its targets.
It also highlights how Fortress’ own execs more or less admit that this is the game plan:
Fortress has targeted suppliers of high-tech consumer and enterprise electronic devices or components or software for such devices because they provide attractive targets for repeated and meritless assertions. An article co-authored by Eran Zur, Managing Director of the Intellectual Property Finance Group at Fortress, observes that courts can grant ?oversized awards? in the technology sector that ?stem from the sheer complexity of interoperable components and systems sold as part of functional units, if not integrated devices.? Further, the article notes that ?because technology invention tends to be incremental, to the extent an individual patent owner can be awarded damages on the price of the entire end product as opposed to their specific patent claim, a litigation incentive arises.? That litigation incentive is coupled with what the article notes are ?the substantial legal costs to defend a patent infringement suit,? creating a situation in which ?speculative behavior drives an ever-inflating price ceiling (given the possibility of oversized damages) [and] a price floor becomes set by the extreme expense of litigation defense, marked at just under nuisance value.?
It then highlights how this abuse of monopoly power is anti-competitive:
Aggregating patents in the way that Fortress has done harms competition. First, by aggregating patents covering technologies that are actual or potential alternatives for one another, Fortress injures competition in the same way as any merger or combination of competitors. Before aggregation, when multiple parties held such patents, those parties competed with one another to license the patents, and licensees benefited from that competition through more favorable licensing terms. Multiple holders of substitute patents were forced to compete with each other to offer better terms to secure licensees. Once the patents were aggregated and controlled by Fortress, however, that competition was eliminated.
Second, Fortress introduces a new cost to suppliers of electronic devices and the components and software for those devices that dampens incentives for product suppliers to invest in research and development to drive innovation, thereby further undermining competition and harming end consumers. Exposing the targeted suppliers to another cost benefits their competitors by making the targeted suppliers? products more expensive and/or less innovative. Those competitors might have previously owned some of the patents aggregated by Fortress but were unable to impose such high costs on suppliers using technologies claimed by the patents when the patents were not aggregated into a massive portfolio. Fortress?s aggregation thus undermines competition in the sales of electronic devices and components and software for those devices.
Third, the higher royalty payments that Fortress and its PAEs generate reward the creation of patents that are not actually inventive or are not actually used. Thus, the higher royalties that patent aggregation generates do not lead to welfare-enhancing additional innovation.
Fourth, Fortress?s hold-up power is amplified by the uncertainty it creates through the size of the portfolio it controls and obfuscation regarding the scope of that portfolio. After aggregation, potential licensees lose the ability to decipher the extent to which Fortress controls patents that they may actually have wanted to license ex ante or that would be substitutes to asserted patents. By way of example, Fortress employees are listed as managing members or directors of companies that otherwise have no publicly known ties to Fortress. Mysterious patterns emerge such as entities with names connoting an unspecified relationship with Fortress, by a prefix ?CF.? District court judges have gone so far as having to compel Defendants to reveal the ownership history of the asserted patents and the degree to which Fortress held rights in, and control over, those patents. The effect is that the hold-up power of asserted patents is imbued on other patents Fortress controls. Thus, rather than fostering pro-competitive patent licensing, Fortress?s aggregation scheme reduces potential licensees? ability to obtain licenses to any patents they might be interested in licensing while simultaneously elevating the value of weak patents.
There’s a lot more in the complaint. As you can hopefully see from the above quotes, it’s written in an extremely clear and readable fashion, unlike many lawsuits. It goes into details of all of the Fortress-connected defendants and the various shakedown attempts they’ve made, as well as some of Fortress’s “lending” practices that effectively force patent trolling on recipients.
There’s a lot in the 57-page complaint (even if parts are redacted). I have no idea what chance it actually has in court. Indeed, I’d guess that courts are unlikely to accept the idea that asserting a patent, or even the overall process of patent trolling in this manner is an antitrust violation, but at the very least, it makes a compelling case as to how government-granted monopolies can be used in an abusive manner that appears to violate antitrust laws, and that clearly go against the stated purpose of patents in the Constitution. This should be a case worth following.