A ‘Patent Troll’ Down-Under? Why Vringo Has Sued ZTE Australia

“It is a truth universally acknowledged, that a patent troll in possession of a good portfolio must be in want of a victim.”

– Jane Austen, Pride and Prejudice and Patent Trolls

I am on the record, on this blog and elsewhere, as being of the opinion that Australia is not a jurisdiction in which the ‘patent troll’ business model can work effectively.  I have expressed the view, in particular, that the US litigation system, and related patent laws, make that country an almost uniquely happy hunting ground for patent trolls.

So, you might expect that I would have been surprised to learn that US-based non-practising entity (NPE) Vringo Infrastructure Inc has commenced patent infringement proceedings in the Federal Court of Australia against the local subsidiary of Chinese telecommunications equipment manufacturer ZTE Corporation.

I confess I was a little surprised, until I remembered who Vringo is, and where I had seen the company’s name before, and realised that this lawsuit is not typical ‘troll’ activity, but is more likely part of a global patent licensing strategy conducted at least partly for the benefit of the very much practising entity, Nokia.

As I shall explain further, I do not consider Vringo to be a patent troll – at least not when it comes to the patents at issue in the dispute with ZTE.  However, I have to acknowledge that a number of online media outlets have used the ‘t-word’ in relation to Vringo, e.g. smartcompany.com.au and itwire.com (and again, here).

‘Patent Trolls’ – What’s in a Name?

The problem is that there is no established definition of a ‘patent troll’.  We could not even say that we all know one when we see it, because different people look at the same activity and see different things.  For some, any entity which asserts patents, however it came to be in possession of them, but which does not actually compete in the marketplace with its own products and services, qualifies for the epithet ‘troll’.  Thus, for people such as Ars Technica’s Joe Mullin, even a scientific research organisation such as Australia’s CSIRO is not entitled to monetise the results of its investment unless it has an active presence in the market for WiFi-enabled products.

For others, an organisation (such as CSIRO or ARM) which invests in R&D, and then commercialises its outcomes through IP licensing is a legitimate player, while an entity which acquires patents without generating any innovation of its own is merely a ‘troll’.  But even at this level, not all NPEs are created equal. 

In my view, we need to engage in a more nuanced conversation about NPE business models, because at one end of the spectrum the ‘troll problem’ is very real, at least in the US.  However, if we lack the ability to identify the problem with specificity, we will also lack the ability to address it effectively.

I now have personal experience with at least three different NPE models, on both sides of the fence.  One of Watermark’s clients is a well-known international ‘non-practising’ technology developer and IP licensor.  Another client is a licensee dealing with a number of patent pool operating companies.  And, most recently, I have worked with a client which was the target of an honest-to-goodness, American-as-apple-pie, patent troll (by anybody’s definition of the term).  Obviously I cannot provide any specifics of my work with these clients, however you can rest assured that my views on the patent troll issue are significantly informed by my experiences.

All Trolls are NPEs, But Not All NPEs are Trolls…

In 2011, Frauke Rüther gave a presentation at the Intellectual Property Research Institute of Australia (IPRIA) on her doctoral research into the operations of ‘patent aggregating companies’ (another of the many terms used to describe various NPEs).  Her dissertation is now available to purchase as an e-book (although, being an academic document, I imagine that some diligent searching might turn up a free copy somewhere).

Dr Rüther (as she is now) identifies eight different categories of NPE, distinguished by their reasons for aggregating patents, and the manner in which they deploy their portfolios.  Four types acquire patents to generate revenues by exploiting the patents:

1. Patent acquisition funds, which aggregate patents to generate revenues from every possible type of patent exploitation (e.g. exclusive and non-exclusive licensing, resale, defensive ‘memberships’).  The best-known entity in this category is Intellectual Ventures (IV).
2. Patent enforcement funds, which aggregate patents to generate revenues from a ‘stick’ licensing approach.  The best-known example of an enforcement fund is Acacia Research Group.  This is the category most likely to be identified with troll-like behaviour.
3. Patent incubating funds, which aggregate patents to exploit the underlying technology and to generate revenues from a ‘carrot’ licensing approach.  This generally involves conducting or funding additional R&D, and/or partnering with prospective licensees to commercialise new technologies.  IgniteIP is one example of this type of entity.
4. Patent trading funds, which aggregate patents to generate revenues from acquiring patents, bundling them to new portfolios, and selling (or licensing) these bundles at a higher price.  A 2008 blog post by IAM Magazine’s Joff Wild identified five such funds in Germany alone, although the fact that I cannot now find any information on these suggests that his scepticism about the viability of this business model may have been justified.

A further four types of aggregation company acquire patents to serve their members, their customers or society, and their objective may not be wholly commercial:

1. Defensive patent funds, which aggregate patents to provide attached producing companies an insurance against patent litigation lawsuits initiated from other NPEs.  One prominent example in this category is RPX Corporation, which (in)famously provided the biased data sample which formed the basis for Bessen and Meurer’s ‘$29 billion troll-tax’ study.
2. Non-commercial patent funds, which aggregate patents to neutralise licensing issues and make the patents available for a broad range of users.  An example in this category is the Eco-Patent Commons.
3. Patent pools, which aggregate patent rights which are collectively required to implement particular technologies (often standardised, such as video codecs, mobile communications or optical discs) to avoid problems arising from patent thickets.  The best-known patent pool operator is perhaps MPEG LA.
4. Patent securitisation funds, which aggregate patents as security for capital which they provide to patent owners.  For example, some investment funds, such as Paul Capital Healthcare, will invest in a company in exchange for all, or part, of the future royalties resulting from its intellectual property.

All of the above are NPEs, but not all are patent trolls.  Indeed, many of these business models do not involve litigation at all.

Furthermore, some of the most prominent trolls of recent times barely qualify for any of the above classifications.  For example, Project Paperless, LLC, which has gained notoriety by demanding royalties of US$1000 per employee from companies using network scanners, appears to be a shell company, owned by another layer of limited liability companies, which exists for the sole purpose of enforcing a handful of patents originally obtained by inventor Laurence C Klein and Imagination Software.  There is no ‘patent aggregation’ here – this is a single-purpose company, and that purpose is shakedown!

Patent Abuse vs Litigation Abuse

It is often said that patent trolls abuse the ‘patent system’.  For the layperson this might seem like a reasonable statement.  However, for those of us intimately involved with the process, there is no such thing as ‘the patent system’.

In fact, there are numerous patent systems.  Each country (or, in some cases, region) has its own patent system.  There is also an international system of treaties and agreements that ties all of these individual national and regional systems together, without actually creating any great level of harmony!  A ‘patent system’, in this sense, is a collection of processes and procedures for filing, examination, registration and maintenance of patents.  It is largely administrative in nature, and it is overseen by organisations such as IP Australia, the US Patent and Trademark Office (USPTO), and the European Patent Office (EPO), among dozens of others.

Patent systems are therefore concerned with how patents are ‘made’.  How they are used once they are registered is as much a matter for the courts and general litigation rules in each country as it is a matter of the substantive patent law.  For the most part, the administrative bodies responsible for granting patents play no part in any subsequent enforcement.

In this sense, then, the ‘patent system’ is exactly the same for inventors, practising corporations, NPEs and trolls.  Patent trolls, in particular, as well as most aggregators, have little to do with the ‘system’, because they rarely acquire the patents until long after they have been granted.

In my view, patent trolls do not abuse patent systems as such.  Rather, they abuse litigation processes.  Patent laws enter the picture insofar as variations in the scope and strength of rights conferred in each country influence the power patent-holders have to use and abuse litigation to achieve their commercial ends.

The commercial objective of a patent troll is simply to make money.  The troll model generally involves demanding a once-off, up-front lump sum licence fee in exchange for a non-exclusive licence to use the patented technology for the life of the patent.  The troll does not care what happens to its victim one the ‘highly-confidential’ licence agreement is signed, and the money paid.  The troll does not care what becomes of the patent once all of the potential licensees have been shaken down.  The troll does not wish to be bothered with ongoing royalty payments, or the continued success (or otherwise) of the licensee’s business – that would only involve more work monitoring and auditing its licensees, which would just be an expense coming straight off the bottom line!

If there are no other certain signs, here is how you can tell you are dealing with a troll:

If the party asserting the patent has no interest in discussing the actual value of the allegedly infringing products or services; if it has no interest in evaluating the contribution actually made by the patented technology to the commercial success of the products or services; if it is not interested in talking about net profits, but only about gross revenues; and (here’s the clincher) if talk rapidly turns to how much the litigation will cost, rather than how much the patent is actually worth, then you are dealing with a troll!

And right there is where the litigation abuse lies.  This is not a licensing negotiation, this is extortion.  The troll is basically saying that the strength of the infringement case is irrelevant, the validity of the patent is irrelevant, and even the profit margin and contribution made to actual product sales is irrelevant.  All that matters is (a) how much you can afford to pay, based on your revenues, and (b) that if you do not pay you will be dragged into expensive litigation that you may not be able to afford.

Australia is not a Troll’s Playground

Legitimate NPEs can, and do, operate successfully in Australia.  There are numerous companies offering products and services based on patent licences acquired from universities, the CSIRO, and aggregators such as patent pools.  Such licences typically generate ongoing revenue streams from royalties paid in relation to actual products or services sold by the licensees. 

The licensors therefore have an ongoing interest in the success of the licensees, and in negotiating licence agreements that are fair, reasonable and workable in all of the circumstances.  Even so, if the licensors needed to use the court system to enforce their rights, they could do so.  There would be costs involved, of course, but these would need to be weighed up on a commercial basis against the future income from a successful licence agreement.

But the Australian system does not support the troll’s business model.  Remember, the troll wants to extract a one-off payment – typically on the order of a few tens of thousands of dollars – and then move on.  In the US, the troll faces very little risk in pursuing this model.  Its US patent is presumed valid, and can only be invalidated by ‘clear and convincing’ evidence.  Furthermore, in the US court system each party to a dispute is normally required to bear its own costs.  Even if the troll loses, it will only be liable for its own legal costs (which may be very low if its lawyers are in-house, or working on a contingency basis).  The victim, on the other hand, is up for the full costs of mounting its defence, against a presumed-valid patent, and in front of an inherently unpredictable jury, whether it wins or loses.

The Australian system is completely different.  Here is what the troll faces:

1. the competent court for all patent infringement matters is the Federal Court of Australia – a court in which many of the judges have patent law expertise comparable to the judges of the US Court of Appeals for the Federal Circuit, and in which many patent claims have been found invalid over the years;
2. under section 6 of the Civil Dispute Resolution Act 2011, an applicant to the Federal Court must file a ‘genuine steps’ statement, setting out ‘the steps that have been taken to try to resolve the issues in dispute between the applicant and the respondent in the proceedings’ – noting that the court will take non-compliance into account when exercising its case management powers, and also in exercising its discretion as to costs;
3. the typical cost for commencing proceedings in the Federal Court, including court and attorney fees, is in the range of A$10,000-A$20,000;
4. the court will quickly set a date for a first ‘directions hearing’, typically within four to eight weeks of filing of the application, at which both parties will be required to appear, and where the judge will set down a timetable for at least the initial steps in the proceedings;
5. it is almost invariably the case in Australia that costs (i.e. attorney fees) will be awarded against a losing party – for this reason, a company without a genuine and substantial Australian trading presence will usually be required to post security for costs at an early stage in the proceedings (i.e. pay a bond or obtain a bank guarantee to cover costs in the event of a loss), typically being an amount in the hundreds of thousands of dollars or more for a patent infringement action;
6. there is absolutely no prospect that an NPE will obtain a preliminary injunction – as the law currently stands, even a trading company (such as Apple) cannot obtain an initial injunction against a direct competitor (such as Samsung) except in extraordinary circumstances;
7. the Federal Court of Australia is very enthusiastic about alternative dispute resolution, and in particular is likely to strongly encourage the parties in a dispute over patent licensing to resolve their differences through formal mediation;
8. if the matter proceeds to trial, and the alleged infringer challenges the validity of the patent, there is no ‘presumption of validity’ – the court will review evidence of invalidity afresh, and make a decision on the usual civil standard of ‘balance of probabilities’ without deference to the work done by the patent examiner; and
9. finally, even if the troll wins it has no realistic prospect of receiving an inflated damages payout – the judge will look at the respondent’s evidence of the real commercial value of the patented technology, and determine a reasonable royalty rate on this basis.

The costs awarded to a winning troll are likely to be only 50-70% of its actual costs of running the litigation, leaving it tens, or even hundreds, of thousands of dollars out of pocket – far more than the typical payout expected from a small-to-medium sized target company under the typical troll business model.  It is unlikely that a troll could or would represent itself in an Australian Federal Court action, and unlikely that any experienced patent litigators in Australia would act for a troll on a contingency basis.  My own experience is that litigation funding agencies in Australia will not touch intellectual property cases, because the risks are too high, and the liability too difficult to quantify.

Thus, whereas a troll faces almost zero risk in pursuing its business model in the US, it faces a comparatively high risk in Australia.  Once projected returns have been discounted to account for the risk, I do not believe that the business model stacks up.  Even if a business case could be built, it would be so much less lucrative, and more risky, than operating in the US that no rational businessperson would bother pursuing a trolling venture in Australia.

So What is Vringo Doing Here?

As I said at the outset, I do not believe that Vringo is a patent troll.  Here is what I know about the background and the dispute with ZTE:

1. in August 2012, Vringo acquired a portfolio of patents from Nokia for US$22 million dollars up-front, in addition to which Nokia receives a worldwide licence to use the patented technologies in its own products, plus 35% of any royalties received by Vringo above the US$22 million purchase price;
2. in October 2012, Vringo filed a lawsuit against ZTE in the UK, alleging infringement of three European patents from the portfolio it acquired from Nokia;
3. in Australia, Vringo owns just seven patents, all of which were acquired from Nokia in last year’s deal (for the record, these are Australian patent nos. 2005268547, 2005212893, 2004309946, 773182, 755890, 716158 and 696034); and
4. the two Australian patents asserted by Vringo are AU2005212893 ‘Method and computer program for controlling radio resources, user equipment, radio network controller, and base station’ and AU773182 ‘Synchronization method and apparatus’;

While Nokia was once a leading handset manufacturer, it is fair to say that it has not performed well in the smartphone market.  The company has been looking to turn its fortunes around by monetising its considerable IP portfolio, and it appears that ‘patent privateers’ such as Vringo and Sisvel (which acquired 450 patents from Nokia in January 2012) form part of Nokia’s strategy.

In essence, Nokia wants to licence its patents, many of which are essential to the implementation of wireless communications standards, but does not wish to manage extensive licensing programs in-house.  Instead, it is effectively ‘outsourcing’ the licensing programs to companies, like Sisvel and Vringo, which specialise in this area.

And even though Vringo now owns the ex-Nokia patents, under its agreement with Nokia it is not acting solely on its own behalf.  Once it has earned more than US$22 million in global royalty income from the portfolio, Nokia will share in 35 cents of every additional dollar earned.  I dare say, in fact, that the agreement would impose obligations and performance targets on Vringo, possibly with an option for Nokia to re-acquire the patents if those targets are not met.

Conclusion – Still No Australian Patent Trolls

Vringo is not a patent troll.  It is probably best viewed as a ‘patent acquisition fund’ which, in the case of the former Nokia patents it is asserting against ZTE in Australia and the UK, has taken on the role of licensing the patents on behalf of itself and Nokia.

These are not patents of dubious origin or applicability to ZTE’s products.  They are patents relating to mobile communications systems, which were developed by Nokia as an active participant in the market for infrastructure and mobile devices – i.e. the market in which ZTE now competes globally against Nokia and others.

It is clear that Vringo is not looking merely to extract a toll from ZTE and move on.  The litigation, now on foot in two countries, is no doubt part of a global licensing strategy.  In this context, it does not matter whether the Australian proceedings are ‘profitable’ in their own right.  When (or if) ZTE signs on to a licence, it will be on a worldwide basis, not just for Australia.  Such a licence will produce ongoing royalties for the life of the patents in the global portfolio, and/or the life of the products covered by those patents.

Incidentally, the first directions hearing in the proceedings between Vringo and ZTE is set down for 22 July 2013.  It will be interesting to see what orders emerge from that hearing, which will provide a first indication of how the case may pan out.

Tags: Australia, Licensing, Patent litigation, Patent pools, Smartphone wars, Trolls