Patent Wars and Blackmail in Silicon Valley

With reality television all the rage, viewers may wonder why there’s been no reality series about the inbred high-tech ecosystem of Silicon Valley. There should be, because the reality of how our technology bastion really competes today — namely by patent litigation and acquisitions — is astonishing.

Last year Google, Apple, Intel and other leading Silicon Valley companies were targeted by federal antitrust enforcers for tacitly agreeing not to hire each other’s key employees. Such a conspiracy could have landed top executives in jail. This year Apple, Samsung, Google, Nokia and others have all been battling over back-and-forth claims that smartphones and wireless tablets infringe each others’ U.S. patents. Now, just weeks after Google’s general counsel objected that patents are gumming up innovation, the search behemoth has announced its own $12.6 billion acquisition of Motorola Mobility, and with it their own portfolio of wireless patents, just a fortnight after purchasing a relatively few (“only” 1,000 or so ) wireless patents from IBM.

While the executives at Google have nothing to fear personally from these patent wars, others seem to have a lot at risk. That is because, according to the Wall Street Journal, the U.S. Justice Department’s Antitrust Division is investigating another possible conspiracy among Silicon Valley companies. This one arises out of the collective bid in the late spring of nearly every wireless phone operating system manufacturer, except Google, for a portfolio of 6,000 cell phone patents formerly held by bankrupt Canadian company Nortel. Simply put, Google started the bidding at about $1 billion, but the others joined forces to lift the price to an astounding $4.5 billion and win the prize.

That’s the legal background to Google’s just-announced Motorola Mobility acquisition, and it’s one that could have serious anticompetitive consequences. If the curiously named “Rockstar Bidco” consortium — which includes Microsoft, Apple, RIM, EMC, Ericsson and Sony — refuses to license the erstwhile Nortel patents to Google for its Android wireless operating system, they will be agreeing as “horizontal” competitors not to deal with a rival. Classically such group boycotts are treated as a serious antitrust no-no, and a criminal offense. If the group licenses the patents, on the other hand, they could be guilty of price fixing (also a possible criminal offense), since a common royalty price was not essential to the joint bid and would eliminate competition among the members for licensing fees.

If the Rockstar Bidco companies decide to enforce the patents by bringing infringement litigation against Google, things could be even worse. Patent suits themselves, unless totally bogus, are usually protected from antitrust liability so as not to deter legitimate protection of intellectual property assets. (That does not mean they’re competitively good, since patent suits are often just a means of keeping rivals out of the marketplace.) Nonetheless, a multi-plaintiff lawsuit by common owners of patents would have those same horizontal competitors agreeing on lots of joint conduct, well beyond mere license rates. For starters, is the objective of such an initiative to kill Android by impeding its market share expansion? That’s a valid competitive strategy, standing alone, for any one company; it takes on a totally different dimension when firms collectively controlling a dominant share of the market gang up on one specific rival.

Google’s broader complaint that patent litigation in the United States is too expensive, too uncertain and too long may well be right. This bigger issue is being debated in Washington, DC as part of what insiders call “patent reform.” The high-stakes competitive battles being waged today in the wireless space under the guise of esoteric patent law issues like “anticipation” by “prior art” suggest a thoroughly Machiavellian approach to the legal process, just as war is merely diplomacy by other means. They inevitably color the perspective of policy makers, who watch with regret as a system designed to foster innovation gets progressively buried with expensive suits, devious procedural maneuvering and legalized judicial blackmail.

Even the biggest companies, though, would find it hard to compete if their largest rivals were allowed to form a members-only club around essential technologies to which only they had access. Microsoft’s own general counsel countered two weeks ago that Google was invited to join an earlier consortium bid but declined before the Nortel auction. Embarrassing, yes; dispositive, no. If the offer were still open, now that it is clear Google’s principal wireless rivals are all members, things would be different. Indeed, there’s even an opposite problem of antitrust over-inclusiveness where patents and patent pools are concerned. If everyone in an industry shares joint ownership of the same basic inventions, where’s the innovation competition? Google’s defensive purchase of Motorola is a desperate, catch-up move that does not really change this “everyone-but-Android” reality.

Silicon Valley’s patent wars are for good reason not nearly as popular as Bridezillas or So You Think You Can Dance. Yet they are far more important, economically, to Americans addicted today to their smartphones and spending hundreds of dollars monthly on wireless apps and services. Whether the Justice Department will challenge the Rockstar Bidco consortium or give it a free pass remains to be seen. From a legal perspective, it is just a shame the subject is too arcane, and certainly way too dull, to make a reality TV series.