Rockstar’s Patent Trolling Conspiracy

The strangely named Rockstar Consortium has been in the news again, in part because some of its members just formed a new lobbying group, the Partnership for American Innovation, aimed at preventing the current political furor over patent trolls from bleeding into a general overhaul of the U.S. patent system. Yet Rockstar is perhaps the most aggressive patent troll out there today. Hence the mounting pressure in Washington, DC for the Justice Department’s Antitrust Division — which signed off on the initial formation of Rockstar two years ago — to open up a formal probe into the consortium’s patent assertion activities directed against rival tech firms, principally Google, Samsung and other Android device manufacturers.

Usually the fatal defect in antitrust claims of horizontal collusion is proving that competing firms acted in parallel fashion from mutual agreement rather than independent business judgment. In the case of Rockstar — a joint venture among nearly all smartphone platform providers except Google — that problem is not present because the entity itself exists only by agreement among its owner firms. The question for U.S. antitrust enforcers is thus the traditional substantive inquiry, under Section 1 of the Sherman Act, whether Rockstar’s conduct is unreasonably restrictive of competition.

Despite its cocky moniker, Rockstar is simply a corporate patent troll hatched by Google’s rivals, who collectively spent $4.5 billion ($2.5 billion from Apple alone) in 2012 to buy a trove of wireless-related patents out of bankruptcy from Nortel, the long-defunct Canadian telecom company. It is engaged in a zero-sum game of gotcha against the Android ecosystem. As Brian Kahin explained presciently on DisCo then, Rockstar is not about making money, it’s about raising costs for rivals — making strategic use of the patent system’s problems for competitive advantage. Creating or collaborating with trolls is a new game known as privateering, which allows big producing companies to do indirectly what they cannot do directly for fear of exposure to expensive counterclaims. Essentially, it’s patent trolling gone corporate. As another pro-patent lobbying group said at the time, Rockstar represents “a perfect example of a ‘patent troll’ — they bought the patents they did not invent and do not practice; and they bought it for litigation.” Predictiv’s Jonathan Low put it quite well in his The Lowdown blog:

The Rockstar consortium, perhaps more appropriately titled “crawled out from under a rock,” is using classic patent troll tactics since their own technologies and marketing strategies have fallen short in the face of the Android emergence as a global power. Those tactics are to buy patents in hopes of finding cause, however flimsy, to charge others for alleged violations of patents bought for this purpose. Rockstar calls this “privateering” in order to distance itself from the stench of patent trolling, but there are no discernible differences.

Today, Rockstar employs once-proud telecom engineers to help with the trolling operation. Rockstar produces no products and practices no patents. Instead, Rockstar employs a staff of a few dozen in Ontario, Canada, who reverse-engineer other companies’ successful products to find anything that Rockstar might use to extract licenses to its patents under threat of litigation. Among the companies ensnared in Rockstar’s patent litigation dragnet are customers and partners of Google who use the Android platform in their devices, including ASUS, HTC, Huawei, LG, Pantech, Samsung and ZTE — as AllThingsD described, “essentially all of the Android smartphone ecosystem.” (Ironically, because Rockstar is a legally separate entity, it can even sue companies its owners have patent agreements with. So although Apple and HTC signed a 10-year patent licensing deal, that didn’t stop Rockstar from filing an infringement lawsuit against HTC itself.) This unprecedented wave of infringement litigation “sent shock waves through an industry for which courtroom brawling has become the norm,” according to the Wall Street Journal. It’s also surprising because one member of Rockstar, Ericsson, actually stated that their reason for participating in the venture was “to ensure that the patents do not end up in the hands of a patent troll.”

In 2012, the Justice Department’s antitrust review focused on whether the new owners of the former Nortel patents would have the incentive and ability to repudiate Nortel’s commitments to license standard essential patents, or “SEPs,” under FRAND (fair, reasonable and non-discriminatory) terms. Apparently satisfied that the answer — at least then —  was “no,” DOJ allowed the acquisitions to go forward but warned that it would continue to monitor the use of SEPs in the wireless device industry. In short, Justice used admonitions of ongoing oversight to deter what it apparently concluded amounts to bad behavior.

That focus was narrow and short-sighted. While SEPs are important, the collective assembly of a patent war chest by all the otherwise competing rivals of a disruptive wireless innovator smacks of a horizontal conspiracy to raise rivals costs.

The litigation offensive unleashed by Rockstar against the Android OEMs last fall underscores what’s at play here. As the American Antitrust Institute explained, by acquiring the Nortel patent portfolio jointly through Rockstar, Google’s competitors have been able to wage war on Android at a lower cost. Because it does not face the threat of counterclaims and has no source of revenue except for its patents, Rockstar has an incentive to enforce its portfolio aggressively. At the same time, by outsourcing patent enforcement responsibilities to the consortium, Rockstar’s members are able to reduce the threat of counterclaims by Google and its allied device manufacturers.

The question that DOJ should focus on today is how the collective assertion of patents through infringement litigation, while its members as owners enjoy free licenses to the same technologies, affects innovation, competition and production costs in a very thin-margin business. A multi-plaintiff lawsuit by common owners of patents necessarily has those same horizontal competitors agreeing on lots of joint conduct, well beyond mere license terms. For starters, is the objective of such an initiative, as seems apparent, to kill Android by impeding its expansion? That’s a valid competitive strategy, standing alone, for any one company; yet it takes on a totally different antitrust and consumer welfare dimension when firms collectively gang up on one specific rival.

The FTC is engaged in a public, record-based study of patent assertion entities and their effect on innovation. But as FTC Chairwoman Edith Ramirez emphasized in a recent appearance, neither that study nor continuing debate in the Senate over patent law reforms addressing troll activities should deter enforcement action in an appropriate case. The Justice Department, the FTC’s sister agency, would be well-served to heed Ms. Ramirez’s advice and take a close, careful look at the impact of Rockstar, one of the largest and most troubling of all patent trolls in the United States.

Originally prepared for and reposted with permission of the Disruptive Competition Project.