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Tom Shaughnessy is owner of SecretCaps.com, an independent investor and analyst. He has been investing in the stock market since the age of twelve. His style is comprehensive and includes multi-layered research on a concentrated set of stocks. Tom enjoys constructive dialogue regarding various... More
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  • Rockstar Rocks The Intellectual Property World 0 comments
    Nov 4, 2013 2:49 PM | about stocks: MSFT, GOOG, AAPL, VHC, MARA, SPEX, WDDD, BBRY, PRKR, VRNG

    Overview:

    Rockstar is a consortium, a group featuring Apple, BlackBerry, Microsoft, Ericksson and Sony that purchased Nortel's patent portfolio.

    The recent Rockstar lawsuit against Google (NASDAQ:GOOG) and the Android world was to be expected after the group featuring Apple (NASDAQ:AAPL), Blackberry (NASDAQ:BBRY), Microsoft (NASDAQ:MSFT), Ericsson and Sony bought bankrupt Nortel's patent portfolio for $4.5 billion dollars. The winning group of bidders originally formed Rockstar Bidco to bid on Nortel's patents. After winning, Rockstar Holding Company was formed as a consortium that is currently the entity suing the Android world. After purchasing the portfolio, the group branded it "Rockstar Consortium". The group is seeking a return on their expensive investment and the growth of their own brand by way of setbacks to their competitor's technologies. This may take place through the consequences of a possible winning lawsuit. There are several points regarding the lawsuit that I would like to discuss that may be more background issues although certainly interesting. The main problem here is that Apple, Microsoft and the rest of the group are acting as the entities that they have been critical of, namely "NPEs" or non-practicing entities (also branded as "patent trolls"). Rockstar does not make any products. Rockstar is suing the Android world for patent infringement. This is exactly the same process utilized by other entities that Rockstar has been critical of in the past. The Rockstar lawsuit rings the NPE bell. This is a hypocritical idea on Rockstar's part. Companies have requested more stringent laws regarding intellectual property lawsuits and NPEs. This article will discuss how the larger players in the field have taken part in exactly the same acts as the smaller players that they have been so critical of in the past. This relates directly to the larger players' backing of the Shield Act.

    Patent Trolls:

    Between 2009 and 2013, Apple has been the target of 171 "patent troll" lawsuits. Recently, WiLAN (NASDAQ:WILN) lost their suit against Apple and was branded a patent troll in the last sentence of the linked article. Apple owns over 15,500 patents. The reason that the Rockstar lawsuit is interesting is that it is an intellectual property lawsuit over patented technologies. This is the same type of lawsuit that the larger players have been so critical of in the past with regard to the smaller players. Moreover, since Apple and the gang are larger their products have saturated the market creating an inability for the smaller companies to market their proprietary products. So, in turn, the smaller companies sue for damages so as to be compensated for their inventions. This concept can lead to an injunction although that is a high bar to reach and is usually unlikely in the intellectual property world.

    Representatives in our government have proposed the Shield Act.Under this act, the loser of the patent fight will pay both sides' legal fees. This will act to deter a patent owner from using its small amount of capital to enforce its intellectual property ownership rights. The significance of the Rockstar lawsuit is that it has the ability to enforce two concepts:

    1. Apple, Microsoft and the larger players are held to a different standard. This is unjust as they are acting as NPEs.
    2. Larger players are unjustly deterring IP lawsuits due to the increased costs to the patent owners. This is stifling to innovation and invention as there is no reason to create something you cannot defend.

    Forcing the loser to pay both sides' legal fees could be disastrous to the small IP owner. The larger players would be the target of less lawsuits due to the fact that smaller players do not have the capital to assert their ownership. Innovation and invention should be defended no matter how large or small.

    In absolute theory the Shield Act would end pointless lawsuits from entering the courtroom. Then there is the patent owner who truly has ownership of intellectual property that is being infringed upon yet doesn't have the capital to assert ownership. This patent owner can partner with a larger "assertion company". These NPEs or assertion companies provide the capital that the small patent owner needs to assert. These assertion companies like IP Nav offer their services to the patent owner at a fee.

    Problems with the Shield Act

    The Shield Act has great intentions as well as several flaws that need to be discussed.

    IP Nav offers a comprehensive page that covers the problems that surround the Shield Act. One problem is that the larger players have called for the deterrent of troublesome lawsuits brought by NPEs,yet they themselves are acting as NPEs with the Rockstar lawsuit.

    "big operating companies (such as Google and Cisco) have convinced the bill's sponsors that the "explosion" in patent litigation originates with NPEs.

    The problem creates many problems that were not originally present and it has several questionable items.

    Problems: (From IP Nav's Page)

    1. The Bill Solves The Wrong Problems: "In the attempt to target NPEs, the bill misses two important considerations: 1) not all NPE litigation is without merit; 2) you don't have to be an NPE to file a meritless lawsuit."

    2. Problems For The Court System: "it creates an incentive for litigation over negotiation on the part of the party accused of infringement."

    3. Unintended Financial Consequences: "Reducing the value of patents will have the effect of reducing the incentive to innovate and hire inventors and engineers. Fewer innovations will mean fewer innovative products and potentially a loss of jobs."

    4. Harm To Inventors and Innovation: "For many smaller inventors, selling a patent to an NPE is the best vehicle for getting a return on their investment. By harming NPEs, the legislation harms the many inventors who currently sell their patents to NPEs."

    5. The Bill Is Discriminatory: "It would be a huge step backward to return to an era where certain property owners are treated preferentially compared to other property owners."

      Ip Nav closes that the bill has good intentions, such as curbing litigation and the costs thereof, yet it it has many flaws that need addressing.

    Thinking that Google, Microsoft and Apple should be held to a different standard is unfair and unjust. These companies defend their innovation and creations through the patents they have received for the intellectual property they own. These companies arose from humble beginnings which were defended through the ownership of their intellectual property. Market capitalization is not a valid defense although ownership is.

    Smaller Players:

    Asserting ownership for a smaller company in the area of intellectual property is not easy. They are up against industry goliaths. If these goliaths assert their patents against the smaller player it looks as if they are just defending their property, when in reality both sides are dealing with defense of their patents. Smaller players such as VirnetX (NYSEMKT:VHC), Vringo (NASDAQ:VRNG), Spherix (NASDAQ:SPEX), Parkervision (NASDAQ:PRKR), Marathon Patent Group (OTCQB:MARA) have a long road to proof of ownership. Let's take VirnetX as an example. Recently the company was the target of a shell company's demand for 10% of their final judgment against Apple in exchange for dropping its inter-partes review of VirnetX's patents. The real intention of the shell company's filing was most likely to allow Apple to piggyback the shell's IPR request. This because Apple was past the one year time limit for filing their request. This is my opinion. The shell company recently asked to terminate their request as discovery in the Eastern District of Texas (where all of VirnetX's lawsuits take place) was on the horizon. Apple is not able to oppose the shell company's motions to terminate their IPR requests.

    This is just one example of the hardships of that smaller players. The media may portray defending intellectual property as an annoyance to larger players. A shell company which files an IPR has the potential to undo a decade's worth of work by engineers. This does not include legal fees incurred with this type of litigation. Many of the lawsuits are outrageous yet the overreaching Shield Act can have unintended consequences on the intellectual property space for owners of valid inventions. My articles on New Bay Capital LLC and VirnetX can be viewed here and here.

    Real Life Example

    If you develop an invention and desire to patent it you have to pay tens of thousands of dollars dependent upon the complexity of the invention and the attorney fees. Individuals and small companies do not have endless amounts of capital to then defend their rights against industry giants when suing for infringement. In some cases a company can partner with a patent monetization firm like IP Nav that can provides capital to defend the owner's intellectual property. This is no easy course for the small company as the true owner may only get pennies on the dollar, years later.

    Implications Of Rockstar and The Shield Act

    • The Shield Act has been proposed to deter dubious patent lawsuits. This would require the loser to pay both sides' legal fees
    • Rockstar's recent lawsuit goes against what the larger players have been so critical of in the past - patent infringement lawsuits.
    • These two items are significant in the IP world due to the broad based nature of the Rockstar lawsuit. It provides ammunition for the smaller players in that it is a patent infringement suit. This borders on the NPE level that the larger players have criticized smaller companies for taking part in. The Shield Act will have negative and positive implications on the IP world depending on the final version that is enacted.
    • Lastly, the Rockstar lawsuit can have serious implications on Google and the Android world as the lawsuit develops - Google's search engine is even at risk in this lawsuit.

    Investor Implications:

    • Smaller players who attempt to assert their patent ownership in the courtroom can face having to pay both sides' legal fees. This could be disastrous to smaller, underfunded companies that then need to partner with patent assertion companies to assert their ownership in the courtroom. This would be the implications on the smaller company due to the Shield Act.
    • Larger players such as the Android world and Google are under direct attack with this lawsuit. Google's search engine is at risk, and so is the rest of the android family if this lawsuit continues to move ahead.

    Back To Rockstar

    Rockstar Consortium's lawsuit is seemed to be held to a different standard. Apple does not have a streamlined search engine yet the lawsuit attacks Google's search engine in the first few pages. Microsoft has Bing.com. Wouldn't that qualify? Why are Apple and others (through the Rockstar Consortium) trying to assert their intellectual property against Google and others when they do not have competing products?

    The above is just one example of the larger players being held to a different standard. The Rockstar Consortium's lawsuits may be a win for the smaller players in the field as the attack on the Android world will erode the nature of an overreaching bill that targets patent companies. The Rockstar lawsuit is a significant overlap by the larger players and the entities they have been at odds with. Time will tell how the Rockstar Consortium's lawsuit pans out. , The owners are looking for a monetary return on their $4.5 billion dollar investment. It is also looking to expand its brand power through impediments on its competitors through a winning lawsuit. The Shield Act is well intentioned although it is overreaching and flawed. It will certainly be interesting to see how this plays out and how the Rockstar Lawsuit affects the Shield Act moving forward. Many see the Shield Act as simply a defense of industry giants against NPEs. The biggest item at stake here is Google's search business if the patents are proven to be valid and infringed upon. Google bid up to $4.4 billion dollars after losing a bid for the Nortel patents. - This does not justify the patents' validity in a judicial setting.

    There are many devious lawsuits in the area that are a true annoyance in the industry that need addressing. In my opinion the other side of the debate is one that is under addressed. As new events come to fruition with this lawsuit I will provide a "part two" article as an update.

    Disclosure: I am long VHC.

    Additional disclosure: Always do your own research and contact a financial professional before executing any trades

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