Apple patent dispute highlights case for trolls

Google and Apple are the most valuable companies in the world, and undoubted winners from the smartphone boom. In their wake lies Nokia’s handset business, which was sold to Microsoft and later wound down.

But, when it comes to defending themselves against the arsenal of patents Nokia built up in its years at the top, the US tech giants want the world to view them as victims of unfair and anti-competitive behaviour.

That rather delicious irony emerged this week, as Apple filed a private antitrust suit against two companies that have acted as enforcers of Nokia’s patent portfolio. Apple claimed that Nokia was taking advantage of a legal system that is ripe for abuse by carving up its patent holdings and passing them on to specialist firms. In the heated rhetoric of the IP industry, Nokia had become that most detested of animals: a patent “troll”.

Google took aim at the same arrangement in a complaint to European regulators four years ago. It accused the Finnish company and Microsoft of “colluding” to raise smartphone prices and sidestep patent concessions that are essential to the smooth running of tech markets.

Today, it is tempting to view all of this as a battle involving deep-pocketed companies that are more than capable of taking care of themselves. But it has thrown a spotlight on an important question for the tech industry at large.

At issue are “patent assertion entities” — specialised companies set up to buy and enforce IP rights. According to critics, these mercenaries feel no qualms about abusing a shaky legal system to demand excessive royalties, upsetting a delicate balance in the tech world between inventors and the companies that gain from their inventions.

Some aspects of the patent enforcers are more obnoxious than others. In a recent study, the US Federal Trade Commission generally approved of what it termed “portfolio PAEs” — companies that buy large bundles of patents — as they provide a useful economic function, and more than half of them share profits with the inventors.

True, they may be more willing to resort to legal action than tech companies with industry relationships to protect, and they are set up with the expertise and risk capital to go to war. But this by itself does not make them evil.

A second, more serious question is whether PAEs engage in asymmetric warfare. As off-the-shelf legal vehicles with no operating businesses of their own, they can sue without fear of a countersuit. They might also act as shell companies for the original patent owners, making it harder for defendants to press for legal discovery from the companies that first won the patent rights. These less welcome side-effects seem acceptable if they are outweighed by the benefits of outsourcing legal rights. But there are other, more pernicious results that may be harder to swallow.

One is the secrecy around some PAEs. When the ultimate beneficiary of a legal action is hidden, it is impossible for defendants to hit back with legal action of their own.

PAEs may also resort to dubious tactics, such as spreading a portfolio of patents through a number of different legal entities and then forcing a company like Apple to buy multiple licences to what amounts to the same technology. This practice is known in the industry as royalty stacking.

Another valid concern is whether some companies have used PAEs to escape their obligations to maintain open industry standards. When they own patents to technology that plays a part in industry standards, companies like Nokia accept limits on how aggressively they can enforce their rights. But, once the patents are held by an arm’s length company, the same restraints might not apply.

Apple’s claims would carry more weight if the company itself had not been accused of balking at the industry’s usual methods for dealing with technology standards. But one of Nokia’s suits charges the iPhone maker with refusing to license a set of patents used in the H. 264 video compression standard, even though many other tech companies have accepted the same terms. It is also questionable whether European competition regulators would race to the defence of US tech companies that have come under other scrutiny in Brussels.

With the amounts at stake rising — and patent enforcers now an entrenched part of the legal landscape — a closer look at their tactics appears overdue.

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