By David Marcus
Updated 01:20 PM, Jan-30-2015 ET
RPX Corp.'s agreement to purchase 4,000 patents from Rockstar Consortium LLC in December for $900 million marked the end of a dramatic episode in U.S. patent law. Rockstar, a group led by Apple Inc. (AAPL), paid Nortel Networks Inc. $4.5 billion for 6,000 patents in July 2011 in a frenzied auction that included almost all of the major players in the technology industry. Google Inc. (GOOGL), the most prominent losing bidder, agreed six weeks later to pay $13 billion for Motorola Mobility Inc. in a transaction where Google got Motorola's smartphone business and the patents that went with it.
The two deals focused national attention on the U.S. patent system. Companies took a harder look at the value of their intellectual property. Critics claimed that the transactions were the product not just of competition in the smartphone industry but also of a legal regime that had come to overvalue patents thanks to decisions from the Court of Appeals for the Federal Circuit, the appeals court that handles patent cases, and the resulting rise of so-called nonpracticing entities or trolls, entities that buy patents and then seek to asset them against operating companies.
Three and a half years after the Nortel and Motorola Mobility sales, the patent landscape looks quite different. On Sept. 16, 2011, President Barack Obama signed the America Invents Act, a law that cut back on some of the most opportunistic behavior by trolls. The U.S. Supreme Court issued a series of decisions that reined in the Federal Circuit and further reduced the value that patent holders can extract by threatening or bringing litigation against alleged infringers. Intellectual Ventures, the most prominent NPE and an entity widely reviled in Silicon Valley, has faced challenges raising its latest investment fund and seems much less threatening than it once did. And perhaps most important, the smartphone wars have cooled as the technology has become ubiquitous, and the major players have entered an uneasy détente.
THE NEW ROCKSTAR DEAL reflects those factors, but it also highlights the emergence of RPX as a major force in the patent marketplace. The San Francisco company acts as a clearinghouse, buying patents and licensing them to more than 200 members that pay different licensing fees depending on their size and revenue. The company also buys individual portfolios and sells nonassertive, cooperative licenses to those patent portfolios for an additional fee to a subset of its members.
"This is the same exact concept on the largest scale for us thus far," said John Amster, RPX's chief executive. "That's the big difference. The scale on this transaction is really important. For this to be an important mechanism in the patent market, it needs to be applicable to really large transactions because those are the biggest problems."
The Rockstar deal is part of a shift away from aggressive assertion of patents, according to Nader Mousavi, a partner at Sullivan & Cromwell LLP in Palo Alto, Calif. "Where there are significant patent assets, there are more and more precedents for industries coming together to clear risk in a substantive way."
RPX was familiar with the Rockstar patents in part because the company participated in the 2011 Nortel auction. Nortel, a successor to Bell Canada, filed for bankruptcy in January 2009 but didn't sell its patents for more than two years, timing that turned out to be perfect because of the relevance of the Nortel portfolio to mobile telephony. Nortel had not been aggressive about licensing its patents before it filed for bankruptcy, which made them even more valuable. Google made a $900 million stalking horse bid in April 2011, and the bidding culminated in a frenzied four-day auction at the New York offices of Cleary Gottlieb Steen & Hamilton LLP in New York.
Apple teamed with Microsoft Corp., EMC Corp., LM Ericsson, Blackberry manufacturer Research in Motion Ltd. and Sony Corp. to beat out Google, Intel Corp., and a group led by RPX. The winners paid $4.5 billion for a portfolio of 6,000 patents, a third of which went to one or another member of the consortium, which was named Rockstar. EMC dropped out at that point, leaving the other five companies as stockholders in Rockstar. The Department of Justice approved the deal in March 2012 but placed significant limitations on the companies' hold on Rockstar — restrictions that made it hard for them to exert control over the portfolio, which was run by a group of former Nortel managers.
The shifting political mood toward aggressive patent enforcement hindered Rockstar's efforts to monetize its patents and may have pushed the companies to seek an exit from the joint venture. Apple, Microsoft and RIM all have different heads of intellectual property than they did in 2011, and the new leadership may not have been as wed to Rockstar as the executives who struck the initial deal.
A 2013 profile of Rockstar CEO John Veschi noted, "Given the head surrounding NPEs at the moment, diversification and continuation of the Rockstar business may not be in the game plans of Apple, Ericcson, Microsoft, et al." The profile suggested that Veschi and his executive team might eventually engineer a management buyout. But that would have required a private equity shop to invest in an unusual business with which it was unfamiliar. Intellectual Ventures at one point might have been a possible buyer of Rockstar, but it lacked the money to do such a deal. Apple and its partners had already taken the most desirable patents from the initial portfolio, making it unlikely that another company would pay hundreds of millions of dollars for the 4,000 patents held by Rockstar. Thus, RPX was perhaps the only viable exit for the Rockstar stockholders.
Nonetheless, Rockstar's patents could have been asserted against wireless carriers and were being asserted against original equipment manufacturers, semiconductor manufacturers, multiple system operators and other kinds of tech companies, which meant that there was a broad class of potential licensees. RPX began talking to Rockstar in early 2014, Amster said, and spent much of the year building a group of more than 30 companies that ended up taking licenses on the Rockstar portfolio. Those companies agreed to pay enough in licensing fees that RPX itself could buy the patents outright for $900 million. The company used Josh LaGrange and Carrie LeRoy, both counsel at Skadden, Arps, Slate, Meagher & Flom LLP in Palo Alto, for legal advice.
The $900 million price was 20% of what the Rockstar group initially paid for 6,000 Nortel patents, but the members did take a third of the patents outright, and the value of the rest was reduced by more than three years of depreciation, meaning the outcome wasn't as bad for the sellers as it might appear. Apple and the other Rockstar members also avoided years of uncertainty and moved on from an investment that could easily have become a political liability had Rockstar management started asserting patents aggressively.
THE WAY RPX achieved that outcome remains unclear because of the confidentiality agreements that many participants in the process signed, but Amster did offer some insight. "There was a lot of risk in those patents," he said. "Nortel did a lot of interesting research that affected a lot of industries. That meant a morass of all these industries trying to figure this out. On the user side, companies realized there were a lot of entities involved, and everyone involved should be paying something. That led to RPX in effect intermediating who should pay what. Obviously the sellers wanted to be paid a reasonable amount of money and being done with it and not having to litigate."
Mark Chandler, the general counsel of Cisco Inc., strongly endorsed the deal in a blog post on Dec. 23, the day the transaction was announced. On Nov. 11, Cisco had announced a $188 million charge related to the settlement of litigation with Rockstar, which in retrospect looks like money the networking giant spent to take a license on the Rockstar patents and send a signal to other tech companies to do the same, though probably for less money.
Chandler called the RPX deal "a victory for common sense" and added that it "should also send a strong message to companies who toy with the idea of "monetizing" their patent portfolios through transactions with private equity and nonpracticing entities, or by shaking down other industry participants: They will find themselves isolated." He praised the work of Google general counsel Kent Walker — a hat tip that suggests Google also plucked down a significant amount of money to take a license — as well as Brad Smith and Bruce Sewell, the general counsels of Microsoft and Apple, who presumably pushed for the deal.
"We hope this provides a model for future cross-industry actions to address the scourge of nonpracticing entity patent assertion," Chandler wrote. "We will also work hard through counteractions to make sure that companies who seek to monetize their patents by selling them off to NPEs pay a price many multiples of what they sought to gain."
That would be a further boost to RPX. "Part of our vision has always been that if we show people this is possible, people will be more willing to exchange patent value in a rational transaction, similar to other financial transactions," Amster said. "If we can do this on a $1 billion transaction, that's something that can dramatically change the market."
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