Hidden dangers of Bankruptcy in Licensing:
Patent Zombies in the making.
August 2012
Omer
Hiziroglu, CLP
Non practicing
Entities (“NPE”), otherwise known as patent trolls are now a well understood
phenomenon in the IP management ecosystem.
A NPE is a
patent holding company. It does not practice the technologies covered by the
patents (i.e.: turning the technology into a product) but rather seeks to
enforce such patents against technology companies usually through litigation or
the threat of litigation.
The trolls
have been around for a while and the business plan has shown some important
“successes”. One prominent case that comes to mind is RIM vs. NTP. NTP, a non
practicing entity, brought action against RIM in 2000 at the US District court
for the Eastern District court of Virginia, seeking to enforce a patent
covering a functional wireless email system against RIM (the producer of
Blackberry devices). With the threat of an injunction banning the sale of
Blackberry devices in the US, the case was eventually settled in 2006 where RIM
agreed to pay NTP over 600 million USD. While the amount is huge, the news of
the settlement was well received by Wall Street and RIM shares jumped from
72.00 USD per share to 86.30 following the announcement of the settlement.
NTP had
other major companies in its crosshair as it sued AT&T, Spring Nextel,
Verizon and T-mobile in 2007, Apple, Google, HTC, LG, Microsoft and Motorola in
2010. These cases were settled in 2012 but the terms of the settlement were not
disclosed.[i]
Several
major technology companies in the technology producing countries have been
targeted over the past decade by patent trolls and according to one study by
Boston University the NPE’s cost to the targeted companies totaled 29 billion
USD in 2011 in US alone[ii].
How do
NPE’s build their patent arsenal?
Typically a
NPE will seek to purchase patent portfolios in a target market from sole
inventors, universities, from technology companies who are not utilizing the
technology, in patent or in bankruptcy auctions.
Recently we
have seen large patent portfolios hitting the auction block as a result of bankruptcy
procedures. Nortel patent portfolio was sold for 4.5 billion USD to a
Microsoft, Apple, and Sony consortium. Apple and Google are currently fighting
over Kodak’s patent portfolio valued at 2.6 billion USD. While none of these companies can be deemed
to be NPEs, they clearly see the acquisition of these large portfolios as a strategic
defense in the ongoing patent wars in the mobile sector. For instance, when
Google bid, but ultimately lost, for Nortel patents, it was seeking to protect
its Android system from future legal[iii]
challenges especially from its competitors in highly competitive and very
lucrative market.
Having
large portfolios in their defensive arsenal can also turn out to be valuable
for the proud owners if and when challenged by a patent troll. Indeed, the
company may look in its portfolio to identify a patent that may cover the
challenged technology and introduce it as a defensive shield during the lengthy
and costly legal battle.
Most NPEs
will not have the breath to purchase such large portfolios, although I am sure
that they would love to. However as stated above, NPEs do often purchase more
modest portfolios offered for sale as a result of bankruptcy. There is nothing
new here. A much more recent situation is bit more novel to me. What happens
when the trustee in bankruptcy starts acting as patent troll (as opposed to
simply auctioning the patents) by enforcing the patents against third parties,
or much more interestingly against former licensees? The issue is getting quite
a lot of press attention from the specialized trade magazines lately.
Generally
speaking a trustee in bankruptcy is appointed by the court and his main duty
and fiduciary obligation is to maximize the assets of the company in bankruptcy
in favor of company’s creditors. While bankruptcy laws are obviously national
and specific applications change substantially from country to country the
general mechanism is worth a look.
First we
have to note that the trustee in bankruptcy will generally have the ability to
reject existing contracts between the company in bankruptcy and third parties
if certain conditions are met. License agreements are such agreements the
trustee may chose to reject if he believes that license revenues are
undervalued (i.e.: better value can be obtained elsewhere). The result is that
the licensee may find itself without a right to practice a technology that may
be critical in their business. US bankruptcy code has special provisions to
protect such licensee whereby the licensee can elect to retain the rights under
the license agreement[iv].
The same is not true for all major jurisdictions.
An
interesting multijurisdictional case is Qimonda AG (a German company) that
produced DRAM products with multiple licensees in the US. In 2011 a German
court appointed an insolvency administrator as Qimonda became insolvent. The
administrator filed with a Virginia court to seek assistance with ancillary bankruptcy
procedures to manage Qimonda’s extensive US assets and liabilities. The administrator
sought to terminate various US license agreements and to offer new licenses
under better (market) terms. The issue was, whether the administrator who
clearly had such authority (if not the duty) under German law could extend this
authority into US despite US licensees requests to retain the license under
section 365(n) of US bankruptcy code. On remand, US bankruptcy court found that
eliminating the application of 365(n) would be against US public policy. While
such a ruling is to the advantage of the US licensees, this case shows the
challenges of doing business globally. Indeed, these licensees are selling
their products globally and while the ruling of the US bankruptcy court applies
nationally to US patents (thus, these licensees may continue to use the
technology in the US), the licenses in Germany and elsewhere in the world may
be terminated according to applicable national laws.
Result is
that if a trustee in bankruptcy lawfully terminates the license, the licensee
may very well find itself in the difficult position to either stop utilizing
the technology covered by the license or be forced to face a possible
infringement action initiated by the trustee in bankruptcy of the licensor
company. While this issue brings forth the importance of drafting a solid license
agreement that addresses bankruptcy questions (taking into account the
application of national laws of countries covered under the license), even a
solid agreement may not be able to address all potential problems in a multijurisdictional
issue. So we may now see a trustee playing the role of a patent troll in all
but the name. Another interesting question is what happens if the trustees see
the most value in enforcing patents against independent third parties where he
might have a somewhat legitimate claim of patent infringement, thus acting very
much like a troll. The issue may even become more complex if the trustee is
acting on behalf of the creditors of the technology company who had contributed
patents to a standard setting patent pool. Will the trustee have an authority
to get out of the pool and sue to remaining consortium members for infringement?
Several
countries are trying to address several ethical and practical issues raised by
NPEs with legislation. In the mean time, several defensive aggregators against
NPEs are set up such as RPX Corporation, a NPE in itself but set up based on a
concept similar to insurance policy where members will receive a perpetual
license to a relevant technology to be counter-asserted against NPEs. We also
see major industry players where they pool their patent portfolios to be able
to mount a credible defense if one of the members is attacked by a troll.
The
Raise of Zombies
While those
who challenge NPE’s existence define NPE’s business plan as legal black mail
without much legitimacy the question is bit more challenging when we consider
the role of the trustee in bankruptcy acting as a troll but protected by the
very legitimate obligation under the bankruptcy laws.
It seems
likely that we will see further enforcement litigation initiated by trustees in
bankruptcy before the law makers eventually decide to tackle how to address the
uncertainty caused when a perfectly legitimate and well mannered company turns
into a troll (shall we try to coin the term “zombie”?)[v]
as it becomes insolvent. Going with the horror theme, I am reminded of the late
Michael Jackson’s Thriller video as the well mannered young kid turns into a werewolf
but has the presence of mind to warn his girlfriend to run for cover. Will
companies warn their licensees beforehand as they start feeling to noxious
blood of insolvency start running in their veins turning them into potential
zombies? Unlikely. Most likely though, before the legislators can address the
issue, market will come with a new business plan to address the problem.
[iv]US
bankruptcy code 11U.S.C. s 365(n)
[v] I have
come accross several reference to patent zombies on the internet but not in
this context, rather the term zombie seems to be used most often with business
method patents, patent owners blissfully unaware of several infringements until
after the expiration of the patent or “zombie patents” meaning patents that
should be clearly void as a matter of law.
