Fortress Patent Fight Shows Abusive Litigation Hurts Startups
By Abby Rives, Engine IP Counsel
This op-ed was originally published on Law360 on March 25, 2020
Last week, Intel Corp. and Apple Inc. responded to a motion to dismiss their case against Fortress Investment Group LLC.[1] That case centers around accusations of abusive patent assertion, but it is more than just a fight between big companies and wealthy investors.
Technology-based startups, which make outsized contributions to economic growth and productivity,[2] experience abusive patent litigation, too. And startups are harmed when firms like Fortress Investment Group — a large investment management firm — amass and/or control large portfolios of weak, overbroad patents that they monetize through actual or threatened litigation.
If anything, because startups operate on (much, much) thinner margins than Apple and Intel and are less able to absorb costs and risks of litigation, when they are sued — and they are — by Fortress-backed patent owners, the consequences are even more severe.
Last November, Intel and Apple filed an antitrust and unfair competition complaint against Fortress and several affiliates.[3] The gravamen of the case is that Fortress and patent assertion entities it owns or controls have stockpiled weak, overbroad patents and that Fortress and its affiliated PAEs seek to generate unjustified revenue by repeatedly suing or threatening to sue numerous companies for infringement.
By now the concept of the PAE is likely familiar. These firms “acquire patents from third parties and seek to generate revenue by asserting them against alleged infringers.”[4] PAEs do not make products or play an important role in the innovation ecosystem; instead they focus on mere assertion and litigation.[5]
PAEs cause relatively well-documented problems; for example, defendants spend an estimated $29 billion each year responding to PAE lawsuits, and such suits result in significantly scaled-back research and development spending.[6]
But Intel and Apple’s case is not just about garden-variety PAE behavior. Intel and Apple do not contend that patent assertion or monetization, alone, is unlawful. Rather, they allege that Fortress combines patent aggregation and aggressive, repetitive assertion tactics to seek more money than is justified by the quality and coverage of its patent portfolio.
Put another way, by controlling a vast portfolio of weak, overbroad patents, Fortress and its affiliates can monetize credible threats of serial, nuisance patent litigation untethered from the technical merit of any patents or infringement allegations.
As Apple and Intel explain in their complaint, when PAEs have “deep-pocketed investment firms standing behind them,” assertion:
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 [any losses along the way].[7]
The problem of investment-backed PAEs is not limited to Intel and Apple. Capital One Financial Corp. and Toshiba Corp., for example, have made similar antitrust complaints against Intellectual Ventures Management LLC.[8]
But this is also not just a fight between goliaths, with wealthy investors who control patents pitted against large companies tired of defending against costly (and often meritless) litigation. Abusive, investment-backed patent assertion creates direct problems for startups and smaller technology companies.
Uniloc USA Inc., a Fortress-affiliated PAE, is one of the most active PAEs in the country, having filed over 170 infringement lawsuits in one year.[9] Since 2014, when Uniloc and Fortress entered into a revenue-sharing agreement, Fortress has exercised increasing control and ownership of Uniloc’s patent assets.[10]
Throughout its existence, Uniloc has also been well-known for suing startups and smaller tech companies. A cursory search of Unified Patents' litigation data portal reveals that Uniloc entities have filed at least 99 lawsuits against small- or medium-sized companies.[11]
The scope of Uniloc’s assertion activity is even larger when you consider that, in many cases, Uniloc names multiple defendants per case — in some instances accusing more than 20 defendants in a single case.
This is, unfortunately, not surprising when one considers the value of weak, overbroad patents. Weak, overbroad patents — which Intel and Apple allege comprise a significant portion of the Fortress-controlled portfolio — are of questionable validity but have an expansive scope which allows their owners to cast a wide net for accused infringers.
By way of one example, Uniloc accused a small South Carolina-based tech company, Laminar Research, of infringement based on Laminar’s use of Google Inc.-provided copy- protection software to make its product available on Android.[12] The patent claims Uniloc asserted against Laminar have been invalidated,[13] but Uniloc accused at least 11, mostly- smaller companies of infringing that same patent.[14]
PAE litigation forces even startups to divert money from R&D to defense. But for startups and smaller companies, the consequences can be even more significant — PAE assertion leads to delays in hiring or meeting milestones, loss in valuation or shutting down business lines or entire businesses.[15]
Because startups generate significant economic value and innovation but face severe consequences when faced with frivolous patent assertions, this puts a finer point on the need to resolve problems of investment-backed PAEs.
Startups need balance in patent law. The disparity in these cases is stark, where Fortress — a firm with over $40 billion in assets under management[16] — is directing lawsuits against startups and small tech companies for infringement of patents that (in many cases) are found invalid.[17]
But because Fortress and Uniloc own or control so many patents and have the funding to bankroll so many assertions, they continue to create dark clouds over startups, forcing them to either face the cost and risk of repeated litigation (which many simply cannot afford) or pay to license invalid patents they do not infringe.
Over the past several years, several positive developments in case law, legislation and policy have restored balance to the U.S. patent system. For example, with the Leahy-Smith America Invents Act, Congress created more affordable procedures whereby third parties can ask the U.S. Patent and Trademark Office to take a second look at weak or overbroad patents and cancel those that should not have issued in the first place.[18]
And the U.S. Supreme Court’s decision in Alice Corp. v. CLS Bank International confirmed that abstract ideas are not patent eligible, opening doors for startups to resolve litigation over ineligible patents at the motion to dismiss stage.[19]
While those developments have slowed the overall pace of abusive patent litigation,[20] they have not and likely will not be enough to deter investment-backed PAEs. Firms with sufficient financial backing who have aggregated many (even weak) patents can weather the recent patent reforms that brought balance to individual disputes or single litigations.
If Fortress and Uniloc lose a few patents in one case, a few patents in another, they still own or control many hundreds (likely thousands) of assets that they can afford to assert against the same targets.
This reality makes Intel and Apple’s lawsuit that much more important, as another attempt to shed light on the problems caused by investment-backed PAEs. Fortress and Uniloc contribute to reductions in R&D and deterring investors, because their lawsuits draw resources away from innovation and toward litigation defense or settling meritless cases.[21]
The public would stand to benefit if it were not so easy for wealthy firms to continue to amass weak, overbroad patents and fill their coffers at the expense of innovative startups that help our economy thrive.
Abby Rives is IP counsel at Engine, a policy, advocacy and research organization.
Disclosure: Engine joined an amicus brief in the case of Intel Corp. v. Fortress Investment Group. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Endnotes
[1] Intel Corp. v. Fortress Investment Grp., No. 3:19-cv-07651-EMC (N.D. Cal.) [D.I. 75 (Dec. 13, 2019); D.I. 125 (Feb. 13, 2020)].
[2] John Wu & Robert Atkinson, How Technology-Based Start-Ups Support U.S. Economic Growth, ITIF (Nov. 18, 2017), https://itif.org/publications/2017/11/28/how-technology- based-start-ups-support-us-economic-growth.
[3] Intel Corp. v. Fortress Investment Grp., No. 3:19-cv-07651-EMC (N.D. Cal.) [D.I. 1 (Nov. 20, 2019)]; see also, e.g., Stephen Nellis, Apple, Intel File Antitrust Case vs SoftBank-owned Firm Over Patent Practices, Reuters (Nov. 20, 2019, 9:55 PM), https://www.reuters.com/article/us-intel-softbank-group/apple-intel-file-antitrust- case-vs-softbank-owned-firm-over-patent-practices-idUSKBN1XV09H.
[4] Federal Trade Commission, Patent Assertion Entities (PAE) Study, https://www.ftc.gov/policy/studies/patent-assertion-entities-pae-study (last visited Mar. 16, 2020).
[5] Patent Assertion and U.S. Innovation, Executive Office of the President (June 2013), available
at https://obamawhitehouse.archives.gov/sites/default/files/docs/patent_report.pdf.
[6] James Bessen, The Evidence Is In: Patent Trolls Do Hurt Innovation, Harvard Business Review (Nov. 2014), available at https://hbr.org/2014/07/the-evidence-is-in-patent-trolls- do-hurt-innovation.
[7] Intel Corp. v. Fortress Investment Grp., No. 3:19-cv-07651-EMC (N.D. Cal.) [D.I. 1 (Nov. 20, 2019)].
[8] Mike Swift, Counterclaims against Intellectual Ventures could establish role for antitrust law in some ‘patent troll’ cases, MLex (Nov. 23, 2015), https://mlexmarketinsight.com/insights-center/editors-picks/antitrust/north- america/counterclaims-against-intellectual-ventures-could-establish-role-for-antitrust-law- in-some-patent-troll-cases.
[9] Malathi Nayak, Google Amazon, Apple Are Targets of Uniloc Lawsuit Blitz, Bloomberg Law (Nov. 23, 2010, 11:55 AM), https://news.bloomberglaw.com/ip-law/google-amazon- apple-are-targets-of-uniloc-lawsuit-blitz; see also, e.g., Jonathan Stroud, Pulling Back the Curtain on Complex Funding of Patent Assertion Entities, 12 Landslide 20, 22 (2019) (describing rise in Uniloc filings from 2014-2017), available at https://www.americanbar.org/groups/intellectual_property_law/publications/landslide/20 19-20/november-december/pulling-back-curtain-complex-funding-patent-assertion- entities/.
[10] Jonathan Stroud, Pulling Back the Curtain on Complex Funding of Patent Assertion Entities, 12 Landslide 20, 22-23 (2019) (describing rise in Uniloc filings from 2014-2017)
[11] Search results available at https://portal.unifiedpatents.com/litigation/caselistplaintiff=Uniloc+USA%2C+Inc.&plaintiff=Uniloc+Luxembourg+Sa&plaintiff=Uniloc+2017%2C+LLC&plaintiff=Uniloc+Licensing+USA%2C+LLC&plaintiff=Uniloc+SingaporePrivate%2C+Ltd.&plaintiff=Uniloc+2017&sme_an notation=SME&sort=-filed_date.
[12] Catherine E. Tucker, The Effect of Patent Litigation and Patent Assertion Entities on Entrepreneurial Activity, 6 (June 12, 2014), available at http://www.ccianet.org/wp- content/uploads/2014/06/Tucker-Report.pdf; Details of the Uniloc Lawsuit, X-Plane, https://www.x-plane.com/x-world/lawsuit/details/ (last visited Mar. 16, 2020).
[13] Distinctive Developments Ltd. et al. v. Uniloc, IPR2013-00391, at 26 (Dec. 3, 2014), available at https://s3-us-west-1.amazonaws.com/ptab-filings%2FIPR2013-00391%2F39.
[14] Search results available at https://portal.unifiedpatents.com/litigation/caselist?patents=6857067&sort=-filed_date.
[15] See, e.g., Colleen Chien, Startups and Patent Trolls, 17 Stan. Tech. L. Rev. 461, 462 (2014); Colleen Chien, Patent Assertion and Startup Innovation, Open Technology Institute (Sept. 2013), available at https://static.newamerica.org/attachments/3894-patent- assertion-and-startup-innovation/Patent%20Assertion%20and%20Startup%20Innovation_updated.62ca39039688 474e9a588fc7019b0dde.pdf (reporting survey results of VCs, startups, litigators, counsel, and other respondents).
[16] Overview, Fortress, https://www.fortress.com/about (last visited Mar. 16, 2020).
[17] See, e.g., D.I. at 27-33 (describing weak cases filed by Uniloc against, inter alia, Apple).
[18] Pub. L. No. 112-29, 125 Stat. 284 (2011), available at https://www.uspto.gov/sites/default/files/aia_implementation/20110916-pub-l112- 29.pdf.
[19] Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014), available at https://scholar.google.com/scholar_case?case=7784134755284986738&hl=en&as_sdt=6 &as_vis=1&oi=scholarr.
[20] See Patent Review is Working for Startups, Innovate Without Fear, https://innovatewithoutfear.engine.is/wp-content/uploads/2020/01/IPR-is-working- one-pager.pdf (aggregating data from https://portal.unifiedpatents.com/litigation/analytics).
[21] See, e.g., Robin Feldman, Patent Demands & Startup Companies: The View from the Venture Capital Community, 16 Yale J.L. & Tech. 236 (2014) (VCs report that patent demands deter investment), available at https://digitalcommons.law.yale.edu/yjolt/vol16/iss2/1/.
