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It's the chips, not the cards

Google has learnt the hard way that volume matters with smartphone patents. The more you have, the more you can bet – and the longer you can stay in the game. Its aggressive moves to build its stake threaten to distort the patent market and affect more than just smartphones. By Karen Bolipata

It had been a rough couple of weeks for Google. Its mobile operating system Android was in trouble; "Google's loss" and "Google's blunder" shouted the headlines. It was early July, and the search engine's $900 million stalking-horse bid on the Nortel patents had been completely outmatched. A consortium of competitors – including rivals Apple and Microsoft – had together bid an unprecedented $4.5 billion for some 6,000 patents covering various wireless and digital communication technologies.

Publicly, Google would only say that it was "disappointing". But a clue that the company was planning something much bigger came just four weeks later. On August 3, Google's senior vice president and chief legal officer David Drummond, in a blog post titled "When patents attack Android", called the outcome of the Nortel auction a "hostile, organized campaign" against the smartphone platform. "Unless we act," he wrote, "consumers could face rising costs for Android devices – and fewer choices for their next phone." Two weeks later came another post, this time from CEO Larry Page at 4:35 am Monday morning: Google was acquiring Motorola Mobility.

The news spread quickly and with much speculation. Depending on who was talking, the company had either wisely armed itself against the surge of patent litigation targeting Android manufacturers or had just spent $12.5 billion on 17,000 junk patents. The one thing everyone did agree on was that, in an industry dominated by a few big players, Google needed a strong patent portfolio to guarantee its existence.

The players

Christopher Marlett, MDB Capital Group

In the mid-1990s and 2000s, a different kind of innovation permeated the cell phone market: the flip phone. Created by Motorola, the Razr line would propel the Illinois-based telecommunications company to best Samsung in 2005 as second in worldwide cell phone sales. The same players dominated the US market, with Motorola frequently having the most subscribers per quarter. Then in 2007, Apple unveiled the iPhone. Its sleek, multi-touch design and offerings did to the smartphone industry what the iPod had done for portable music devices. Just as everyone had feared. By spring 2011, Apple had become the world's largest handset vendor by revenue, while Motorola, at least in the form it had been known in the last 82 years, was gone.

Strong indications of Google's mobile-device aspirations can be traced to 2005, when it bought California-based software developer Android. In the ensuing years, commentators pointed to the company's so-called secret patent portfolio covering mobile device technology. But it wasn't until November 2007 that Google officially announced the creation of the Open Handset Alliance, a consortium of 84 telecommunications, software and hardware companies agreeing to open standards for mobile devices. Android was its mobile device platform, and Google released the majority of its code under a free software licence.

Fernando Torres, IPmetrics

A large community of developers would build on what Google had created – a business model unlike how Apple had developed its iPhone operating system, the iOS. The idea was for Android to be in as many phones as possible and so capture market share. "It doesn't matter what phone you're using, they want to sell ads," says IPmetrics chief economist Fernando Torres. "It's better for them to have more people, more manufacturers, more choices for consumers on their phones if they have Google Search as their default, Google Maps as their default." It worked. Android soon became the top-selling smartphone platform in the world.

As control moved from hardware to software, Apple and Google grew to own nearly 70% of the US smartphone market. Motorola, meanwhile, languished. Between 2007 and 2009, it lost $4.3 billion. The company split into two separate public companies in early 2011, with Motorola Mobility, its former handset division, striking out on its own. It was clear that unless they reformed their business models, other veterans like RIM and Nokia would keep losing ground to younger competitors. But there was also another, parallel realisation. With the smartphone's many components – it is at the least a phone, a digital camera and a web browser – there was significant opportunity for patent infringement. Patents could mean power.

Upping the ante

Art Monk, UBM TechInsights

A thicket is a dense growth that is difficult to penetrate. It can be applied to a tangle of small trees or a gaggle of reporters; but increasingly, in the phone market, it was referring to patents. A patent thicket occurs when multiple IP rights covering the same technology overlap. With thousands of patents covering hardware, software and design, there's a good chance the average smartphone infringes a number of patents owned by different companies.

As long as there is symmetry among companies' patent portfolios, this won't necessarily result in litigation. Semiconductor companies, for instance, cleared a patent thicket in the 1980s by amassing huge patent portfolios that led to cross-licensing discussions. "There was a scramble to file thousands of patents, and you can see the same thing going on in the smartphone area now," says Terry Ludlow, founder and CEO of Chipworks.

Patent portfolios, in this context, are used for defensive purposes as an accused patent owner can assert its own patents in counterclaims. Since no one knows which patents will be useful in litigation, having a large portfolio is a big advantage. "It's like a game of poker. Often it's not the guy with the best hand that's in control – but the guy with the biggest stack of chips," says MDB Capital Group CEO Christopher Marlett. "That's why you have to have the patents to be able to trade with."

This ultimately could result in a leveling off of power, or, as analysts refer to it, a position of mutually assured destruction (MAD). While the smartphone market seems to favour new entrants, the path to MAD typically favours the veterans. "You've got the old line – the computer hardware guys, the Motorolas, Nokias – who have all the patents, and in the new space – Apple and Google – who need to bulk up," Ludlow says.

In smartphone wars targeting the iOS or Android, it was a veteran that struck first. In late 2009, Nokia sued Apple over 10 patents it insisted were essential to the GSM (2G wireless), UMTS (3G wireless), FPRS and EDGE standards. A few weeks later, Apple countersued, asserting 13 of its own patents with claims that included a "real-time signal processing system" and "GMSK signal processors". Nokia then asserted its patents against Apple in the ITC, and Apple in January 2010 filed its own ITC complaint against Nokia over nine patents.

A swift alternative to litigation with the power to block products from being imported into the US, the ITC has become the preferred venue for smartphone manufacturers. Apple is involved in 11 pending Section 337 investigations as either plaintiff or defendant against HTC, Motorola, Samsung, Kodak and others. It's another reason why large patent portfolios are necessary, says Brian Kahin, a senior fellow at the Computer & Communications Industry Association in Washington, DC: "It's a big lottery. You have to buy these portfolios because you're basically buying a bunch of lottery tickets. The winning ticket is the one that blocks the competitor before the ITC."

Google for the most part watched from the sidelines as its Android partners were hit by infringement suits. Then, in August 2010, Oracle sued Google over seven patents related to Java programming language in Android – patents the company had acquired from Sun Microsystems. IP analyst and Foss Patents blogger Florian Mueller says this suit could restructure the Android in economic and technical terms, as a result of failed licensing talks with Sun years before Oracle acquired it. "Even in purely financial terms, there's serious doubt as to whether Google would be able to meet Oracle's requirements while continuing to make Android available without charging a per-copy licence fee," he writes.

Analysts speaking with Managing IP frequently pointed to an imbalance of power, one in which Google was on the losing end. Says Torres: "I think Google finally realised that if it wanted to be serious and have enough patents to defend the growth of Android, it had to spend money."

The crown jewels
Patents asserted against Apple by Motorola, and now owned by Google
PatentVenueDate case filedTitle
5359317ITCOctober 6 2010Method and apparatus for selectively storing a portion of a received message in a selective call receiver
5636223ITCOctober 6 2010Methods of adaptive channel access attempts
6246697ITCOctober 6 2010Method and system for generating a complex pseudonoise sequence for processing a code division multiple access signal
6246862ITCOctober 6 2010Sensor controlled user interface for portable communication device
6272333ITCOctober 6 2010Method and apparatus in a wireless communication system for controlling a delivery of data
7751826ITCOctober 6 2010System and method for E911 location privacy protectino
5710987Southern District of FloridaOctober 6 2010Receiver having concealed external antenna
5754119Southern District of FloridaOctober 6 2010Multiple pager synchronization system and method
5958006Southern District of FloridaOctober 6 2010Method and apparatus for communicating summarized data
6008737Southern District of FloridaOctober 6 2010Apparatus for controlling utilization of software added to a portable communication device
6101531Southern District of FloridaOctober 6 2010System for communicating user-selected criteria filter prepared at wireless client to communication server for filtering data transferred from host to said wireless client
6377161Southern District of FloridaOctober 6 2010Method and apparatus in a wireless messaging system for facilitating an exchange of address information
5311516Western District of WisconsinOctober 29 2010Paging system using message fragmentation to redistribute traffic
5319712Western District of WisconsinOctober 29 2010Method and apparatus for providing cryptographic protection of a data stream in a communication system
5490230Western District of WisconsinOctober 29 2010Digital speech coder having optimized signal energy parameters
5572193Western District of WisconsinOctober 29 2010Method for authentication and protection of subscribers in telecommunications system
6175559Western District of WisconsinOctober 29 2010Method for generating preamble sequences in a code division multiple access system
6359898Western District of WisconsinOctober 29 2010Method for performing a countdown function during a mobile-originated transfer for a packet radio system

The value of a portfolio

At $12.5 billion, the Google-Motorola acquisition stunned the industry. Some analysts predicted it would produce a formidable arsenal, while others scratched their heads at the companies' apparently divergent interests. David Martin, founder and chairman of asset management firm M CAM, says Google overpaid. "I think this was plainly a backlash from the perceived loss of the Nortel portfolio," he says.

But what determines how much a portfolio is worth? In numerous interviews Managing IP conducted with lawyers and IP analysts, the universal answer was: It depends. "It depends on who's holding the patent," says Kahin. "A patent in the hands of a troll is worth more, as a general rule, than in the hands of a practicing, producing company. The producing company can't assert the patent without the risk of a counter-assertion."

What exactly constitutes a patent troll also isn't clear, as those who have been identified as such would probably disagree. Typically, patent trolls do not invent anything (giving them the distinction as a non-practicing entity, or NPE), but hoard patents to assert them – or at least threaten to assert them – against companies that do. This strategy has yielded hefty licensing deals and monetary awards for NPEs in recent years, which Kahin says has driven up patent value. "It's the trolls that helped create the secondary market for patents," he says. "What has gradually happened beyond the troll is that companies are finding it lucrative to monetise portfolios."

A second category of buyers includes the likes of RPX, which aggregates and values patents to help clients avoid litigation or licensing. RPX's interest in the Nortel patents may have created a sense of urgency in the consortium that eventually won the auction.

A third category of buyers – including Google – looks at patents for strategic and business purposes. It compares itself to companies with vastly superior or weaker portfolios, and aims to increase market share. Also in consideration are potential licensing revenues and the possibility of freezing competitors out of the marketplace.

To look at a large portfolio, the prospective buyer typically gathers a large team of lawyers and industry professionals. The industry professional determines whether the technology related to the patents is still relevant, while the patent lawyers look at the strength and the claims of the patent, and how solid those are in the history of the US Patent and Trademark Office. The buyer, says Sughrue Mion's John Rabena, typically asks the seller specific information it wouldn't get from a superficial review of a patent. "It could be a patent that's about to expire," he says. "It could have weak claims while relating to technology that doesn't cover the industry." Google probably enlisted Motorola's help to identify which patents were the strongest.

Despite all this talk of amassing large portfolios, quality is still important. "Bigger is not always better," says Global IP Law Group partner Graham Gerst. "Having a giant portfolio with top tier patents in it, you're never going to end up talking about 90% of the patents. You want to make sure the 10% you're talking about are of high quality."

One way to assess quality is to look at the patents essential to industry standards. When commentators talk about an imbalance of power in the smartphone market, they are likely referring to certain companies that lack these essential patents, says Art Monk, vice president of patent brokerage firm UBM TechInsights. A database of more than 100,000 patents that comply with LTE and UMTS wireless standards can be accessed on the ETSI website. "Google didn't have that," Monk says. "Now, with the Motorola portfolio having almost 1,400 US essential patents, and worldwide something like 4,500, the company is no longer unprotected." Monk would even wager that Google is better off with Motorola's portfolio. Nortel declared 107 essential US patents, and Motorola has 1,369 patents that primarily adhere to LTE and UMTS standards.

A typical cross-licensing negotiation between two companies would involve a comparison of shipment volume (market share) and the number of essential patents each holds. "A balanced conversation is one in which the values turn out to be almost equal," Monk says. "In cases like this, where two large players are opposed, the values can come down to the point where they're within a few tens of millions of dollars of being equal to each other." In such cases, they will strike a cross-licence with some financial consideration moving from one party to the other.

In principle, the value of a patent is based on the value of the underlying business made possible by that invention. But many say that didn't happen with Motorola and Nortel. "The prices being paid for these patents are driven by the scarcity of these large pools of unattached patents and by the intensity of the competition among a few well-financed companies," says Torres. "These companies are in markets that are not necessarily related to the actual technologies or the actual inventions of these patents."

Are these sales, then, indicative of a broader trend of patent inflation? Monk doesn't think so. "Once there's coverage and the hole is filled, the appetite for new acquisitions will drop off," he says. "Much of it is driven by the success of Android and its lack of protection."

In other words, Nortel's patents went for as much as they did and Motorola was acquired for as much as it was because of one company – Google.

Motorola and the Android ecosystem

Google approached Motorola Mobility in early July after the Nortel auction. The companies already had various agreements in place, most notably Motorola's decision some years before to use Android as its sole smartphone platform. According to an SEC filing by Motorola Mobility, senior executives spent the following weeks discussing how it might affect litigation on Android and whether Google could buy MMI's patents. The mobile device company thought it couldn't stand alone if it sold a large portion of its portfolio, and an unsuccessful public or private auction would have been "detrimental".



Recent smartphone cases
JurisdictionAppleHTC, Samsung, Motorola
GermanyApple sues Samsung for design infringement; won a temporary injunction against Galaxy tablet (August 2011)Samsung files against Apple in Mannheim at same time as Korea suit (April)
NetherlandsApple sues Samsung for patent infringement; won a temporary injunction against smartphones based on one patent infringed (August 2011)
ITCApple files ITC against HTC for infringing two patents in Android devices; wins determination (July 2011). Later files for infringing patents in HTC's Flyer tablet computers (pending)HTC sues Apple for infringing numerous patents in Delaware and files complaint at the ITC; later adds patents acquired from ADC and Google (pending)
ITCApple files complaint against Motorola for infringing three US patents for mobile devices and software (pending)Motorola files complaint against Apple for infringing six US patents for wireless communications, portable music and data processing devices (pending)
ITCApple files complaint against Samsung for infringing five utility and two design patents for electronic digital media devices and components (pending)Samsung files complaint against Apple for infringing five US patents for mobile electronic devices (pending)
AustraliaApple sues Samsung for patent infringement to prevent sale of its Galaxy Tab 10.1 tablet. Samsung withdraws the tablet (pending)Samsung sues Apple accusing it of infringing its patents covering wireless technology in its iPhones and Ipad 2 (pending)
KoreaApple sues Samsung for infringement of its smartphone and tablet related patents (June 2011)Samsung files a suit against Apple, citing five patent infringements (April). Reported that Samsung is planning to sue Apple for infringement of its wireless patents, to prevent the launch of the iPhone 5 in October
JapanApple sues Samsung for infringing its patents in its Galaxy S smartphones (September 2011 and pending)Samsung files against Apple in Tokyo at same time as Korea suit

On August 15, after some back and forth over the purchasing price, the companies agreed on a merger. Google was to pay $40.00 per share – a 63% premium over MMI's August 12 closing price of $24.47.

Mueller of Foss Patents says the deal was driven by mutual weakness, not by Google's desire to protect itself from Microsoft and Apple. Motorola Mobility in particular, he says, was desperate. "It was losing in the market. It was ceding ground to Samsung." Based on public statements by MMI's CEO, Mueller says there were indications the company was considering collecting royalties from other Android vendors with weaker patent portfolios. HTC was a likely target: "It's young," he says. "It's also basically a manufacturing operation. It's on the Android bandwagon and succeeded in answering the market, but it isn't really comparable to Motorola, which has a history of innovation."

If Google's goal was to save face after its failed Nortel bid, M CAM's Martin says the company didn't do its due diligence. For one thing, he says Motorola's patents cannot be enforced internationally. "They may afford a modicum of US protection, but the big threats are coming from what Nokia and Microsoft are doing, from what Apple is doing in China," he says. "The irony is Motorola is very heavily based in US-only patents."

But Torres says some of these patents "could be very powerful". The claims for patent 7,899,488 ("method and apparatus for extending network discovery range"), for instance, are written so broadly they could cover a wireless telecommunications device, a home cordless phone or a tablet. "It could be the case that these patents could be set not to be infringed on by the newer models that have enhanced radios, even though this particular patent was not directed at that originally," he says.

Such broadly written patent claims can be used in litigation. Companies alleging infringement likely select the patents they think are the "most defendable from attack – the ones that have the broadest coverage in anything and everything that has a credible claim of infringement by the opposing party," says David Mixon, of Bradley Arant Boult Cummings.

There are 18 patents in Motorola's arsenal that could be its crown jewels – the ones it has asserted against Apple (see table on page 38). These method and apparatus patents run the gamut of different aspects of wireless technology, with the six asserted in the ITC potentially among the strongest of the group. Their titles include "system and method for E911 location privacy protection", "method and apparatus in a wireless communication system for controlling a delivery of data" and "methods of adaptive channel access attempts". Says Mixon: "You don't just select patents from your portfolio at random to assert against somebody. You do a lot of research, a lot of due diligence before you cross that threshold – especially against somebody like Apple."

Patent owners bringing these claims know it leaves the patents vulnerable to reexamination. In Motorola's case, at least two of the 18 – patents 5,490,230 ("digital speech coder having optimized signal energy parameters") and 6,008,737 ("apparatus for controlling utilization of software added to a portable communication device") – were issued a final rejection in prosecution. Motorola was permitted to amend claims and eventually received a patent in each subject area identified. These patents would probably not hold up in reexamination, says Martin, because "the thing that gets issued is not the patent originally filed". But a final office action is not necessarily an indication that a weak patent has been issued, says Rabena. "You can make amendments to claims throughout prosecution," he says. "They may be significant and they may not be." Claims amended during a reexamination proceeding, however, might suggest the former.

Litigation could also be used to buy time. By Managing IP's count, Motorola has asserted more than 15 patents against Microsoft in district court and the ITC. Had Google not bought Motorola, it's possible the mobile device company would have reached a settlement with Microsoft, says Mueller. Of 39 manufacturers that build Android devices with an official licence from Google, seven are known to have paid Microsoft royalties. A settlement with Microsoft would have been perceived as Motorola's admission of infringement. "That would have been disastrous to the rest of the Android ecosystem," Mueller says. "It would have been very discouraging for everyone else."

Rob Tiller, Red Hat

A dangerous game

Microsoft, which declined to comment on this story, responded to Google's allegations of anticompetitive tactics in fewer than 140 characters. On August 3, the same day Google posted "When patents attack Android", Microsoft's general counsel, Brad Smith, tweeted: "Google says we bought Novell patents to keep them from Google. Really? We asked them to bid jointly with us. They said no."

This was in reference to a joint patent agreement Microsoft struck with Novell in 2006. Google's Drummond updated the original post, claiming that accepting Microsoft's offer would have given all parties "a license that would have eliminated any protection these patents could offer to Android against attacks from Microsoft and its bidding partners".

The smartphone wars have spawned other partnerships. Just two days after its Motorola announcement, Google acquired more than 1,000 patents from IBM. The search engine company also recently sold patents to HTC, which it then asserted against Apple. Nokia transferred 2,000 wireless patents and patent applications to Mosaid Technologies, a licensing company based in Ottawa. A third of the money earned from the patents (through litigation or otherwise) will go to Mosaid, and the rest to Nokia and Microsoft. InterDigital and Kodak's anticipated patent auctions have led to murmurs of a Nortel-like consortium.

Should Google's acquisition result in a balance of power and a decline in the patent rush, this still only involves the big players. What of the small inventors who don't have the resources to buy a Motorola to protect itself?

"I believe it's possible the inherent risk that a software innovator now faces could discourage new innovation," says Rob Tiller, vice president and general counsel of open-source technology developer Red Hat. "I think if you're a developer and you understand anything you develop could already be patented, and there's no practical way for you to figure it out, you might decide you prefer a less risky line of endeavour."

This hasn't been lost on Google. In an April blog post announcing its Nortel bid, Google's senior vice president and general counsel, Kent Walker, wrote, "The tech world has recently seen an explosion in patent litigation, often involving low-quality software patents, which threatens to stifle innovation." Yet, "in the absence of meaningful reform", the company was putting nearly $1 billion on the line to amass potentially thousands of these very same patents.

For now, any kind of balance seems out of reach, as companies succumb to the demands of a market in which the power lies not in the invention, but in the patent that may or may not cover it.

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