Courts play host to NPE global licensing strategies

The patent system has received much critical attention recently due to the activities of patent 'trolls' or, less pejoratively, non-practising entities (NPEs). In the United States, the issue has even attracted the attention of the White House and various legislative proposals have been brought before Congress in efforts to address the (real or perceived) problem posed by NPEs. The most recent proposal, Congressman Goodlatte’s Innovation Act 2013, appears to have the best prospects so far of producing meaningful reform in patent litigation to curb the activities of the worst-offending NPEs.

However, looking at the bigger picture, NPEs operate across a spectrum of different business models, within which the activities of true patent trolls – which amount to little more than litigation extortion, as defined by Chief Judge of the US Court of Appeals for the Federal Circuit Randall Rader – represent only one extreme. Other patent-holding or licensing entities perform a more useful function, facilitating access to patented technologies and reducing technology transfer costs. For example, patent pool operators may acquire, or secure sub-licensing rights to, patents obtained by numerous innovators, which are collectively required to implement industry standards, such as MPEG video compression or DVD technologies. In the absence of such aggregators, companies wishing to implement the standards would need to negotiate and obtain licences from each of the individual patent owners, resulting in significant additional overhead costs for licensors and licensees alike.

Much of the NPE-related patent litigation commenced to date has been in the United States. This is particularly true of the most extreme forms of patent troll activity, which is almost exclusively confined to that country. Arguably, this is a result of various features of the US litigation system – some of which are addressed by the Goodlatte legislation – that are particularly conducive to extortionate demands for payment based on the cost of litigation as opposed to the real value of the asserted patents or the accused products.

It is therefore noteworthy that Vringo Infrastructure Inc – an NPE which has itself been accused of troll-like behaviour after suing Google in the United States for infringement of search-related patents acquired from Lycos – has commenced litigation against Chinese telecommunications equipment manufacturer ZTE Corporation in Australia (as well as in the United Kingdom, Germany and France). The new litigation is based on patents relating to mobile communications system that were acquired by Vringo from Nokia at a relatively modest upfront price of US$22 million. However, the deal also gives Nokia a 35% share in all licensing income received once Vringo has recouped the initial purchase price.

Why Australia?
The extortionate patent troll business model is most profitable in the United States, where the size of the market is large and the cost of litigation – even for a successful party – is high.  The environment in Australia is very different. With a population of under 23 million, and a federal court system in which a patent case might be defended for a quarter of the cost of equivalent US litigation – and where the court will award costs (including attorneys' fees) against a losing party – the prospect of profiting from the assertion of questionable patents is generally quite poor.

Yet Vringo has chosen Australia as one of four jurisdictions in which to commence proceedings for patent infringement against ZTE. While the private motivations and strategic decision making within Vringo are necessarily matters for speculation, a number of factors may have influenced the selection of Australia as a venue for litigation against ZTE:

• While ZTE supplies hundreds of operators across the globe, including Australia’s largest carrier, Telstra, it has little market presence in the United States – perhaps due to suspicion about the company’s close ties to the Chinese government and military.
• The Nokia patent portfolio acquired by Vringo spans numerous jurisdictions. One consequence of this is that Vringo can afford to be selective and strategic about those countries in which it actually commences litigation.
• Apple's high-profile decision to commence patent infringement proceedings against Samsung in Australia in 2011 – and its initial success in obtaining an injunction keeping the Galaxy Tab 10.1 off the Australian market for nearly six months – put the Australian system of patent litigation, and the relative sophistication of the Australian Federal Court, in the global spotlight.

Unlike a typical patent troll, Vringo is not interested in a one-off payment. Rather, it is seeking long-term licensing deals which will see it secure a return on its investment in the Nokia patents – and which will also produce a further income stream for Nokia. Indeed, it is likely that the acquisition of the patents from Nokia came with strings attached, in the form of minimum performance targets from licensing activities. Presumably, the litigation was preceded by failed negotiations with ZTE over the terms and royalty rates of a licence to the patents. In this context, Vringo's infringement actions must be seen as a form of leverage to compel ZTE back to the negotiating table in search of a settlement deal.

Strategically, then, the primary requirements for a litigation venue are that there be some real prospect of damage to ZTE’s business interests in the event that it loses the case, and that the courts be perceived as sophisticated and experienced in the application of the patent laws. This latter requirement is important because a win by Vringo must be seen as being indicative of a likely outcome in comparable jurisdictions (eg, the European and North American countries).

Comment
The strategic goal of Vringo’s litigation in any single country is not to obtain an injunction and/or an award of damages in relation to ZTE’s activities in that country alone. Rather, it is to secure a global licence agreement in settlement of all existing and future infringement worldwide. This would be accompanied by the hope that success against one supplier would result in others falling into line by taking licences to the portfolio. 

Vringo’s actions suggest that Australia is starting to be viewed as a jurisdiction in which these objectives can be advanced. Whether this will have a good, bad or neutral outcome for the country and its federal judicial system remains to be seen.