Anti-Troll Patent License Pact May Be More Risk Than Reward

July 11, 2014
Ryan Davis
Law360

Law360, New York (July 11, 2014, 7:41 PM ET) -- A patent licensing network created by Google Inc. and others to reduce litigation by so-called patent trolls is a creative approach to the issue, attorneys say, but companies that join will sacrifice some of the value of their patents in exchange for what may only be slight protection from troll suits.

Under the arrangement announced last week, dubbed the License on Transfer, or LOT, Network, all the companies that join get a royalty-free license to one another's patents, but only in the event the patents are sold to a company that is not part of the network.

The organizers, including Google, SAP AG and Canon Inc.. said that operating companies often sell their patents to nonpracticing entities, which in turn use them to file expensive lawsuits, and the network is designed to shield participants from such litigation.

However, experts said that including patents in the network will necessarily lower their value should the owners ever want to sell them, since the agreement limits the ways in which the patents can be asserted. Companies considering joining the network will have to decide whether the risk of future nonpracticing entity litigation is greater than the potential value from selling their patents outside the network, said John F. Martin, CEO of Innography Inc., which makes software that analyzes intellectual property.

"It's hard to say how many patent owners will want to give up their irrevocable rights for a potential patent sales benefit down the road," he said.

The companies that formed the network have not sold many of their patents in the past, and seem opposed to the practice of selling patents to nonpracticing entities. As a result, the network may not provide much protection from litigation unless many more companies join.

"The question is whether patent owners will join en masse, because that is what is really needed to substantially reduce the risk of NPEs getting patents they can assert," Martin said.

While patents that are part of the network may lose some of their value to potential buyers outside the network, participants can still license and enforce their patents as long as they retain ownership, since the network agreement is only triggered by a sale.

Although the network is not a perfect solution, Ken Horton from Kirton McConkie PC said it was a worthwhile attempt to address the issue of litigation by non-practicing entities by reducing the incentive to sell patents to them.
 
"Rather than waiting for the states or the federal government to address the problem, these companies are getting together to create a new business model," he said.

The seven initial participants in the network said that they collectively had about 300,000 patent assets, including 50,000 issued U.S. patents and many more applications. While that is a sizable number of patents that nonpracticing entities cannot buy and use against other members of the network, it is only a fraction of all the patents out there.

The network does nothing to shield participants from suits involving all the patents now in the hands of nonpracticing entities, or those that companies that aren't part of the network might sell to them in the future.

"This doesn't solve the patent troll problem; it really just takes a little bit of IP off the market," Horton said. "It reduces the risk, but it does not eliminate it."

Whether the network will be effective will depend on how many patents are included in it, said Bart Showalter of Baker Botts LLP.

"The more people that sign up, the more effective it will be," he said. "You can't remove every patent from circulation."

Joining the network might present more problems for smaller startup companies with only a few patents than for mature companies with large portfolios, said Adam Sanderson of Reese Gordon Marketos LLP.

When a startup patents an innovative invention that it later learns is being infringed by a larger entity, it may not have the resources to bring an infringement suit itself. Companies in that situation might consider selling the patent to someone else to bring the case, but being part of the network and reducing the value of the patents could tie their hands, Sanderson said.

"You would no longer have the option to transfer the patent to someone else like an NPE to wage the lawsuit fight," he said.

Particularly for small companies, the risk of undercutting the value of a patent to potential acquirers could outweigh the benefit of potential protection of nonpracticing entity suits, said David Mixon from Bradley Arant Boult Cummings LLP.

"The value of a patent is solely in its ability to be enforced," he said. "Anytime you give that up, you've got to be very careful that you're getting an adequate value in return."

In addition to reducing the value of patents, being part of the network may present other logistical headaches, even though the organizers have pitched it as a tidy solution that requires nothing more than signing an agreement and paying an annual membership fee of between $1,500 and $20,000, depending on the size of the company.

However, the agreement spans 26 pages of fairly dense language that covers a range of possible scenarios that make the arrangement more complex than it at first appears.

The deal includes exceptions in which the transfer of a patent will not trigger a license, such as when patents are transferred from one network participant to another or the transfer is part of what the organizers call a "legitimate" mergers and acquisitions or spinout activity.

Those exceptions will present some "real gray areas" that companies will have to consider before joining, Showalter said.  The exceptions raise questions like what constitutes a legitimate transfer and what happens if patents that are part of a transfer that doesn't trigger a license are later acquired by a nonpracticing entity.

"If you sell a patent to a patent troll, everyone else gets a license, that the easy case," he said. "But there are a lot of details to be worked out and it's not as easy as it sounds. The devil is the details on how you deal with these issues."

Despite the risks and complications, the network is still a clever attempt to reduce nonpracticing entity litigation, said Philip Swain of Foley Hoag LLP. Under the arrangement, companies with patents they are not using will still be able to sell them off, if at a reduced value, while getting some protection from troll suits, he said.

"I actually think it could be effective," he said. "If the idea is to prevent the members from allowing their patents to be used by trolls, this is a pretty good way to do it."

Attorneys