Patent Aggregation: Models, Harms, and the Limited Role of Antitrust

0525-0568_ORR_081313 (DO NOT DELETE) 9/11/2013 1:47 PM PATENT AGGREGATION: MODELS, HARMS, AND THE LIMITED ROLE OF ANTITRUST Justin R. Orr † In what the Wall Street Journal called “the largest intellectual property auction of all time,” a consortium of technology rivals including Apple, Microsoft, Sony, and Research in Motion outbid Google for a portfolio of 6,000 patents auctioned as part of Nortel Networks’ liquidation for $4.5 billion in July 2011.1 One month later, Google dwarfed the Nortel deal with its purchase of Motorola Mobility for $12.5 billion, a deal that many believe was directed toward acquiring Motorola’s 17,000 existing patents and 7,500 pending patent applications.2 Although practicing technology companies like the household names listed above own some of the world’s largest patent portfolios, large non-practicing entities (“NPEs”)3 like Intellectual Ventures, © 2013 Justin R. Orr. † J.D. Candidate, 2014, University of California, Berkeley School of Law. 1. Sven Grunberg & Don Clark, Phone Rivals Gang Up, Outbid Google, WALL ST. J. Jul. 21, 2011, http://online.wsj.com/article/SB10001424052702304584004576418962301 518284.html. 2. When announcing the Motorola acquisition, Larry Page stated, “Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.” Larry Page, Supercharging Android: Google to Acquire Motorola Mobility, GOOGLE OFFICIAL BLOG (Aug. 15, 2011), http://googleblog.blogspot.com/2011/08/super charging-android-google-to-acquire.html. See also, e.g., Marguerite Reardon, Google Just Bought Itself Patent Protection, C-NET (Aug. 15, 2011), http://news.cnet.com/8301-30686_320092399-266/google-just-bought-itself-patent-protection/; Matt Richtel & Jenna Wortham, Motorola’s Identity Crisis, N.Y. TIMES, Aug. 21, 2011, http://www.nytimes.com/2011/08/22/ technology/after-google-motorola-to-face-identity-crisis.html; Shira Ovide, Google-Motorola: It’s All About the Patents, WALL ST. J., Aug. 15, 2011, http://blogs.wsj.com/deals/2011/ 08/15/google-motorola-its-all-about-the-patents/. 3. The term “NPE” generally encompasses all patent owners who seek to monetize their patents without practicing the technologies themselves—a group that includes singular inventors as well as research universities and companies specializing in research. See Mark A. Lemley, Are Universities Patent Trolls?, 18 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 611, 629–31 (2008). This Note, however, is primarily concerned with NPEs that serve as intermediaries, particularly those which aggregate patents invented by others. See Allen W. Wang, Rise of the Patent Intermediaries, 25 BERKELEY TECH. L.J. 159, 165–82 (2010) (separating intermediary activities into three categories: brokers, defensive aggregators, and offensive aggregators). The Federal Trade Commission has adopted the term “patent assertion entity” (“PAE”) to refer to “firms whose business model primarily focuses on purchasing and asserting patents.” FED. TRADE COMM’N, THE EVOLVING IP MARKETPLACE: ALIGNING 0525-0568_ORR_081313 (DO NOT DELETE) 9/11/2013 1:47 PM 526 [Vol. 28:525 BERKELEY TECHNOLOGY LAW JOURNAL Acacia Technologies, Round Rock Research, and RPX Corporation have become active purchasers from patent producers as well as at open auction.4 The largest of these NPEs, Intellectual Ventures, has acquired more than 70,000 patents, making it the fifth largest patent holder worldwide.5 Aggregating patents, whether by practicing or non-practicing entities, seems at first like a strange strategy: buyers often purchase or license a patent portfolio without analyzing the strength and validity of most of the individual patents within that portfolio,6 and they often have no intention of practicing the technologies underlying the patents.7 Although different entities aggregate patents for vastly different reasons, unique features of the current patent ecosystem are responsible for both encouraging and facilitating this aggregation strategy. In particular, due to the difficulty of evaluating the scope and validity of any given patent claim, an aggregated patent portfolio provides a stronger patent position than the sum of its patent parts—a kind of “super-patent.”8 Practicing entities thus enter a virtual “arms race” under which they seek to build portfolios that will deter potential infringement claims by signaling their ability to bring strong infringement counterclaims, thus encouraging would-be complainants to cross-license or settle disputes rather than resorting to costly and potentially disruptive litigation.9 PATENT NOTICE AND REMEDIES WITH COMPETITION 8 n.5 (2011), available at www.ftc.gov/os/2011/03/110307patentreport.pdf. PAEs represent a subset of NPEs that primarily seek to monetize patents on inventions that they themselves did not invent, and would therefore encompass offensive aggregators. However, because this Note also considers NPE activities not based around assertion, particularly defensive aggregation models, the term “NPE” will be continued throughout. 4. Robin Feldman & Tom Ewing, The Giants Among Us, 2012 STAN TECH. L. REV. 1, 2, 5 (2012) (describing patent aggregators generally, with special focus on explaining the activities of Intellectual Ventures, and estimating that the company amassed 30,000 to 60,000 patents over the span of five years). Intellectual Ventures has been estimated to have purchased three-quarters of all patents sold at auctions run by Ocean Tomo, the intellectual property auctioneer. Publicly Auctioned Patent Buyers: Intellectual Ventures & Others, AVANCEPT, LLC (Mar. 2010), http://avancept.com/iv-report-auction.html. 5. Our Patent Portfolio, INTELLECTUAL VENTURES, http://www.intellectual ventures.com/index.php/inventions-patents/patent-portfolio (last visited Dec. 19, 2012); see also Feldman & Ewing, supra note 4, at 5. 6. See infra note 76 (discussing the “ruler method” of valuing patent portfolios by the relative height of patent stacks). 7. By definition, NPEs do not actually make anything, and many practicing companies purchase patents not for technology transfer, but in order to deter against litigations from competitors, as discussed infra Section II.A. 8. See infra Part III; see also Gideon Parchomovsky & R. Polk Wagner, Patent Portfolios, 154 U. PA. L. REV. 1, 7 (2005). 9. See Colleen Chien, From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications for the Patent System, 62 HASTINGS L.J. 297, 308–10 (2010); Tom Ewing, Indirect 0525-0568_ORR_081313 (DO NOT DELETE) 2013] PATENT AGGREGATION 9/11/2013 1:47 PM 527 Patent-asserting NPEs may decrease transaction costs by offering licenses to entire patent portfolios, compressing costly negotiation processes for many related patents into a more efficient process. On the other hand, when patent aggregation confers a stronger right to exclude th (...truncated)