32 Comments

Summary:

Apple and Microsoft are up to no good says antitrust lawyer David Balto. Dropping even the pretense of fairness and competition, the unlikely team have enlisted one of the most aggressive patent trolls to go after the Kodak patent portfolio.

troll_Goosemouse
Editor’s note: Before publishing this article. we asked a representative for the author whether the author had ever had a commercial relationship with Google, paid or unpaid.  The representative said no. It turns out that was untrue. The author, in fact, has been paid by Google to write pro-Google white papers. Had we known of that fact, we would never have published this piece. We apologize to our readers.

Apple and Microsoft are at it again. Emboldened by their successful purchase (via the consortium Rockstar Bidco) of Nortel’s patent trove in February, the would-be competitors have allegedly teamed up with the notorious patent troll Intellectual Ventures (IV) to bid for Kodak’s patents. With IV serving as the “attack dog,” Apple and Microsoft can go after their competitors in the mobile device market without opening themselves up to countersuits or public backlash. As an antitrust expert, I find this anticompetitive behavior particularly alarming.

We’ve seen this before. In the patent world, the best defense against frivolous patent litigation is a strong portfolio of your own. In the Nortel auction, Google signaled early on that it was interested in buying the patents to help level the playing field. To thwart Google’s defensive maneuver, Apple and Microsoft formed Rockstar Bidco with RIM, Erickson, Sony and EMC to win the auction with a staggeringly high bid of $4.5 billion — five times Google’s initial bid, and well beyond the estimated value of the patents. Microsoft was a strange addition to the bidding partnership, because it already had a licensing deal covering Nortel’s patents. Although the purchase was obviously targeted at suppressing Android, the Department of Justice still cleared it, largely because Google’s subsequent acquisition of Motorola Mobility (and their patents) seemed to even things out.

After the successful Nortel bid, Rockstar Bidco’s members founded and funded a new troll entity, Rockstar Consortium. Apple and Microsoft transferred certain key patents (which Wired called “warheads”) to the consortium, which serves its members by attacking their competitors with frivolous patent infringement lawsuits as a way of bleeding other companies dry. The organization also pays a percentage of its licensing and royalty revenue back to the founding companies.

The Department of Justice’s approval of the Nortel transaction, and its subsequent inaction in light of the transfer, appears to have had the unintended consequence of sanctioning the use of patent trolls. These firms no longer see the need to create shell operations. Instead, Apple and Microsoft have cut to the chase and openly enlisted the most aggressive and troubling of the patent trolls to collect and wield patents against their competitors.

Apple’s participation in this new unholy trinity is especially hypocritical. In litigation before the International Trade Commission earlier this year, the company alleged, and convinced the ITC, that various patents in the Kodak portfolio are invalid. Now, despite its past representations, Apple wants to acquire these patents to attack the Android ecosystem.

Meanwhile, a rival bidding group has formed in the Android ecosystem. Its members include HTC, Samsung, LG Electronics, Google and the patent aggregator RPX Corporation, whose business model is devoted to defensive patent licensing to fend off attacks from trolls.

The decision to pursue the Kodak patents should put to bed any argument that Apple and Microsoft are merely protecting their own innovations. These companies are working together to stockpile patents from other innovators to not only prevent Google and its partners from defending themselves, but also to mount further attacks against Android through transfers to patent trolls.

Ultimately, consumers will suffer if Apple, Microsoft and IV are successful. An even distribution of patents means more cross-licensing deals between competitors with little to no money changing hands, keeping the cost of products down. But when two large competitors team up with patent trolls to buy a dominant share of the patents, they can limit competition to the point where companies struggle to, or can no longer, compete fairly.

If the Apple-Microsoft consortium wins the bid for the Kodak patent portfolio, it will no doubt empower them to continue and expand their strategy of filing predatory patent lawsuits against Android handset makers. It is imperative that we take a stand against collusive intellectual property abuses and the devious use of patent trolls to target competitors. Otherwise, we risk litigating ourselves out of innovations in mobile telecommunications technology, while prices continue to skyrocket.

Hopefully the Department of Justice and Federal Trade Commission are taking notice this time.

David Balto is a former policy director of the Federal Trade Commission, attorney-advisor to Chairman Pitofsky, and antitrust lawyer at the Department of Justice. He currently works as a public interest antitrust lawyer in Washington D.C.

 Image courtesy of Flickr user Goosemouse.

  1. Gaurang Khetan Sunday, August 5, 2012

    David, my understanding was that Google’s consortium planned to purchase Nortel patents (and now Kodak patents) in order to use them in lawsuits and counter-lawsuits — even if used defensively they are effectively offensive because they are used to negate violation of other valid patents.

    Whereas Apple and Microsoft’s purchase of Nortel (and now Kodak) patents was to prevent Google from doing so and using them to avoid paying royalties on the valid patents they are infringing.

    My understanding is that at least Apple never asserted the patents they purchased from Nortel in lawsuits offensively to extract more royalties.

    And if not, I would say Google’s bid would be for more offensive purposes than Apple’s.

    Please explain my if I am wrong.

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    1. Yes, you are wrong. Apple and Microsoft are the ones going after Google’s Android manufactures.
      Google has never filed a lawsuit. Check for yourself. http://en.wikipedia.org/wiki/Smartphone_wars
      MS is causing FUD among android manufactures to settle and apple suing for many bogus patents including
      the rectangle design. A design Apple ripped off from Sony. http://www.neowin.net/news/judge-blocks-samsungs-sony-iphone-design-evidence

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    2. Gaurang, please understand, I feel no particular animosity toward Apple, but by aligning themselves with Intellectual Ventures, a patent troll that appears to be getting worse and worse by the month [see this article: http://articles.businessinsider.com/2012-03-01/tech/31115620_1_patent-troll-patent-holdings-intellectual-ventures%5D, I think it’s clear what side Apple has chosen.

      They’ve aligned themselves with the worst patent abusers, plain and simple. I think it’s important to understand the terms ‘offensive’ and ‘defensive’ in the patent context. When a company owns patents and initiates lawsuits for purposes of obtaining license fees, making business more difficult for a competitor, or driving up a competitor’s costs of operation, they are using their patents offensively. When a company competes in the marketplace and holds its patents only for ammunition as part of a countersuit in the event it gets sued, it is using its patents defensively. I want to see an open marketplace where Android and Apple/iOS compete on the qualities of
      their systems, not on their parent company’s patent arsenal. The fact of the matter is Apple has
      made it clear that its only mission with regard to patents is to use them to destroy Android. The harm caused by Apple’s patent conduct is compounded by the fact that Apple is teaming up with others in the smart phone industry, ostensibly colluding with competitors to target Android. Google’s interest in patents is only to try to defend Android from the forces aligned against it by deterring the initial patent infringement suits that are paralyzing the smart phone industry.

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      1. Frankly, this sounds a bit naïve to me. Google is not the “do good” Samaritan, nor are Microsoft and Apple evil villains trying to crush all that is wholesome and pretty in the Valley. Let’s not forget: Google spent $12Bn for Motorola to beef up its patent portfolio and catch up with its rivals. Given the size of the prize in the smartphone market, and the strength of Apple’s and Microsoft’s patent portfolio, that looked like a rational step (even if $12Bn seems a bit out of this world). It was also a good indication of Google’s determination to fight and get nasty. Google did not sue anyone because they probably couldn’t, not because they didn’t want to.

        From a shareholder’s perspective, and from the perspective of device makers, I think it is appalling that Google came so dangerously close to losing a hold on its Android platform because of IP. They almost lost to Oracle over Java APIs. They could not stop Microsoft from enforcing its patents on Android licensees. Neither problems spun out of control, but I would say they lucked out. They may not be that lucky in the future. E.g. if Samsung loses now to Apple over Galaxy designs, what would that do to other Android vendors? The case is about hardware design, but it is still hard to imagine Samsung going through this abuse if they used Windows or WindowsPhone in Galaxy. From the device makers’ perspective, Android’s IP position looks weak. That is a weakness for GOOG.

        If there were some kind of an open licensing or patent pooling arrangement, of course Google would be for it, while Apple and Microsoft will likely be against. That is not because Google is an angel. It is because they still have a weak hand. I bet they would want to close that weakness any way they can.

        So is this patent scheme all fine and dandy? No. But the real problem for consumers, innovation, and “the industry” at large is the difficulty small players face in getting and staying in this market at any capacity. One way to read WebOS’s death is that HP did not have enough money and IP assets to fight a patent war. Would RIM? You talk about regulators and how they are not stepping in. Clearly, Apple, Google and Microsoft would all prefer that it gets harder for a new OS vendor to become relevant, not easier. For the regulators, that should be the much bigger worry, not how the three big dogs are barking and fighting one another.

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  2. This article is so bias. Why is the title apple and microsoft? It doesnt matter which company get the patents. If the android group get the patents, the result will be the same. Apple, microsoft or google etc. at the end rhe consumer is always the victim.

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  3. If Apple’s argument to the ITC is correct, then buying the Kodak patents is a waste of money except to prevent nuisance lawsuits. If Apple is wrong about those patents, then buying them is a good use of money, again to prevent extortion and nuisance lawsuits.

    To claim that RPX is not in the business of extorting concessions of fees or cross-licensing agreements cannot be accurate.

    If a patent is essential to a standard, then the holder gets a guaranteed income stream by agreeing to FRAND terms and participation in the consortium. If is not a SEP, then it is free to be a competitive advantage for the duration of the patent.

    It’s ok to not like Apple, but if you invent something, don’t you think it’s your right to keep it to yourself or get paid if you let someone else use it?

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  4. Its hard to fault Apple when the “rightful” defense of primary intellectual property is not upheld in court.

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  5. I disagree with all this. Its the copy-cat practice thats going to hurt innovation. Why innovate if you can’t protect all the hard work and $ you put into R&D? Whats the use? Why not wait for someone else to do it, then copy it.

    People have this all backwards. If companies didn’t copy-cat and the patent system was honored it would be better.

    I’m not saying there are things that couldn’t be better. Maybe some software patents are going a little too far – and certainly I don’t believe in the idea of buying up companies for patent ownership – but Google is as bad or worse than the others at this.

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    1. Lawrence D'Oliveiro Sunday, August 5, 2012

      As Thomas Edison said, anything worth achieving is 5% inspiration and 95% perspiration. The patent can only cover the idea (inspiration), not the execution (perspiration). Any fool can have an idea, and a lot of them do; but the really smart ones are those who successfully execute on the idea. Patents make no difference to them.

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    2. If Apple and Microsoft are so innovative, and if other companies are involved in copying their innovations, then why do Apple and Microsoft need to BUY patents? The only reason would be that they are not being copied ENOUGH.

      And if the patent system was honored there would be no competition. Every facet of technology would be locked up by some old company living of whatever innovations they may have mustered years ago when they were still young and relevant.

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  6. Too bad that $4.5 Million didn’t go towards new R&D.

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    1. New R&D which they would then be able to patent and defend, right? Or not. What’s the point of doing your own R&D or design if others can use it without paying?

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      1. I don’t believe that anybody objects to paying for IP.

        Also, the point in doing R&D would be to make innovative products and sell them at a profit. At the pace technology is going today, it matters very little if someone will implement similar features one or two years later. The 20 year period of exclusivity for technological patents is entirely arbitrary and way behind the times.

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  7. perhaps the most important article I’ve read to date on the whole apple v samsung patent fiasco (& I’ve read a pile of ‘em). well done, sir

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  8. Thank you for an excellent and informative analysis. It looks like it takes an untitrust attorney to understand and explain the threats of offensive patent use.

    Much too often laymen regurgitate the fodder that anti-competitive companies feed to them (no innovation without patents, and other such balderdash). They fail to realize that IP should be respected, but it\’s best for everyone if IP is evenly distributed amongst competitors so that they would crosss-license instead of pursuing injunctions in order to create artificial deficits.

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  9. So this is how a hit piece paid with Google’s 10x larger than Apple’s lobbying budget looks like.
    Interesting.

    Reality, of course, is exactly the opposite.
    Google, which has been pulling Motorola’s strings for a year now is being investigated on both sides of the Atlantic for anti-trust abuse of the 3G and H264 FRAND pledged patents.
    Samsung tried it too, but they stopped as soon as the EU commission came knocking.
    Google is much more brazen and shameless so they keep on pushing and this “article” is part of that push.

    The copycats are trying to use old trivial patents that have no value except that of being part of an international standard to hold up Apple and force them to cross licence the biggest innovations in the history of computing since the mouse and graphical UI.

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    1. You seem to agree that Motorola is using the FRAND patents defensively. And why exactly shouldn’t those “biggest innovations”, as you imply, be cross licensed?

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      1. Standard essential patent can only request monetary compensation, in my knowledge.
        Otherwise SEP holdier can abuse thier position and can try to get valuable non SEP patent by stopping sales of such competitor’s product by using their trivial SEP.
        Rule prevent valuable one is forced to exchange not valuable one.

        But this is what Google and Motorola, and Samsung and HTC are trying now.

        “Deffensive” wording is nearly meaningless in many case, if we easily allow such excuse, copy without IP payment first, say next we are only using diffensively and they are offensive and evil, would be the normal course for me too companies.

        These are many cases just starting was wrong.

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      2. K, you still haven’t answered why “valuable” patents should be exempt from licensing. How do we benefit from having valuable technologies be exclusive to one or a few companies for arbitrarily long periods of time?

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      3. “K, you still haven’t answered why “valuable” patents should be exempt from licensing. How do we benefit from having valuable technologies be exclusive to one or a few companies for arbitrarily long periods of time?”

        To be clear, I write previous content again in different words, Google and Motorola cannot request cross license because they are using SEP. That is because their initial commitment at standard setting process. They promissed FRAND basis licensing, and because of this, everyone in industry use its SEP and they can be guaranteed to receive licensing fee income flow.

        It is right(guaranteed patent use and income flow)and obligation(must license appropriately) connection.

        Totally contrary, non SEP are not guaranteed to be used in industry, extremely, no one may use, and/or own use may generate no money, or may generate huge loss in that patent relational business.

        Many people forget this point, higher risk have to be higher return possibility, right should involve obligation in same time.
        Current system has such very natural connection in my understanding.

        If no one need to use, but everyone want to use some non SEP, such result came mainly from effort, capital, risk taking and ability of non SEP holder, didn’t it?
        In my opinion, there need appropriate reward. Otherwise, no risk taking, no innovating, just copying companies increase, and cannot expect future innovation.

        By the way, are there any company already negotiated with Apple about patent licensing? This time, Apple decided value about some of their patents in current trial, and there is no prohibition Apple cannot licensing.
        Free market thesis may be applied in some possibility.

        If someone propose enough licensing fee, which satisfy AAPL stock holders that economically licensing is better for them, Apple management may decide licensing to avoid sued by their stock holders.

        Reality would be, no such economical test was done yet, just intentional potential infringing is continuing currently until court conclusion.

        No offer made, and insist no method exist to access, is not at least persuasive logic.

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  10. Disagree with the headline of the article and the overall premise.

    When companies innovate as Apple did with the iPhone, the consumer benefits. Do you remember the mobile devices before the iPhone. They all sucked. The iPhone was true disruptive innovation.

    Android was and is a blatant ripoff of the iPhone. Just look at Android phones before iPhone was announced. They looked like a blackberry. Right after the iPhone was announced the Android phone started to look like the iPhone. http://iphone.pandaapp.com/news/10272011/192703822.shtml

    So i think Apple has every right to protect their innovation.

    Imagine you own a cupcake shop called Cupcake World. You created recipes that were your own invention. The cupcakes become very popular, and people pay $5 per cupcake.

    Now, if I were to open another shop named Cupcake World or Cupcake Galaxy right next to your shop and my shop looked similar to your shop, wouldn’t you be pissed? Not every customer would know that you were the famous shop and I am just a rip off.

    I am not a big Microsoft or Windows Phone fan but I give kudos to the company in that it atleast tried to come up with something original – The Windows Phone. And that is what is most important for consumers and for preserving innovation.

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    1. Anon and Anon Tuesday, August 7, 2012

      I don’t think anyone should be happy about a world where I own all cupcakes, because I popularised them.

      And that’s the problem here. Apple wants to own rectangles because they popularised them. Even though they were on old TV programmes. It is absurd. Apple owns its cupcakes alone. Just because they made cupcakes fashionable, they don’t get to own the trend.

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      1. It’s not about owning all the cupcakes, it’s about stealing a specific cupcake recipe.

        According to Samsung supporters this is ‘innovation’.

        Why don’t you create your own flavours of cupcakes?

        If the recent court decision is upheld that’s what you will have to do. This means that consumers will get more choice. I’m having trouble understanding how this is a bad thing for anyone other than the recipe thief.

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