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JENKS IP LAW PLLC


1 William Jenks (SBN 212,609)
2 1629 K St NW, Suite 300
Washington DC 20016
3 Telephone: (202) 412-7964

5 Attorney for Amici Curiae

7 UNITED STATES DISTRICT COURT

8 NORTHERN DISTRICT OF CALIFORNIA

9
INTEL CORPORATION and APPLE INC.,
10 Case No. 3:19-cv-07651-EMC
Plaintiffs,
11 AMICUS CURIAE BRIEF OF
v. UNIFIED PATENTS, LLC,
12 CABLELABS,
Northern District of California

PATREON, AND
United States District Court

FORTRESS INVESTMENT GROUP LLC,


13 FORTRESS CREDIT CO. LLC, BITMOVIN, INC.
UNILOC 2017 LLC, IN SUPPORT OF PLAINTIFFS’
14 UNILOC USA, INC., OPPOSITION TO DEFENDANTS’
UNILOC LUXEMBOURG S.A.R.L., MOTION TO DISMISS
15 VLSI TECHNOLOGY LLC,
INVT SPE LLC,
16 INVENTERGY GLOBAL, INC., Hon. Edward M. Chen
DSS TECHNOLOGY MANAGEMENT,
17 INC., IXI IP, LLC, and
SEVEN NETWORKS, LLC
18
Defendants.
19

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1 Table of Contents
I. Interests of Amici Curiae ............................................................................................................... 1
2
II. PAEs Tax Innovation and Harm Competition .............................................................................. 2
3
A. PAE Litigation Is Ensconced in the Patent System ............................................................... 3
4 B. The PAE Business Model ...................................................................................................... 4
5 C. The New PAE Business Model: Mass Aggregation.............................................................. 6
D. Litigation Financing and Hidden Funding Sources Drive Mass Aggregation ...................... 8
6
III. Anticompetitive Patent Acquisition Schemes That Include Assertion of Intellectual
7 Property Are Subject to Antitrust Scrutiny ......................................................................... 12
8 IV. Defendants Have Combined the Mass Aggregation of Patents with Serial Enforcement
Campaigns to Harm Competition ........................................................................................ 14
9
A. Defendants Are Unquestionably Mass Aggregators ........................................................... 14
10
B. Defendants Have Asserted Patents in Nuisance Suits ......................................................... 15
11 C. Defendants Have Asserted Patents in Serial Suits .............................................................. 15
12 V. Conclusion .................................................................................................................................. 16

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1 Table of Authorities

2 Cases
Alice Corp. Pty. v. CLS Bank Int’l, 573 U.S. 208 (2014) .............................................................. 7, 8
3

4 Automatic Radio Mfg. Co. v. Hazeltine Research, 339 U.S. 827 (1950) ........................................ 13

5 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)............................................................................ 14

6 Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989) ........................................... 12
7
ChargePoint, Inc. v. SemaConnect, Inc., 920 F.3d 759 (Fed. Cir. 2019), cert.
8 denied, No. 19-521, 2020 WL 411896 (Jan. 27, 2020) ............................................................... 7

9 City of Columbia v. Omni Outdoor Advert., Inc., 499 U.S. 365 (1991) .......................................... 13
10
Commil USA, LLC v. Cisco Sys., Inc., 135 S. Ct. 1920 (2015) ......................................................... 4
11
eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006) ................................................................ 7
12
Eon–Net LP v. Flagstar Bancorp, 653 F.3d 1314 (Fed. Cir. 2011) .............................................. 5, 6
13

14 F.T.C. v. Actavis, Inc., 570 U.S. 136 (2013) ..................................................................................... 3

15 Iris Connex, LLC v. Dell, Inc., Civ. No. 15-cv-01915 (E.D. Tex.) ................................................... 6

16 Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc., 548 U.S. 124 (2006) .................................... 3
17 Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917) ................................ 2
18
Pope Mfg. Co. v. Gormully, 144 U.S. 224 (1892) ............................................................................. 3
19
Primetime 24 Joint Venture v. Nat’ l Broad., Co., 219 F.3d 92 (2d Cir. 2000) .............................. 14
20
Prof’l Real Estate Inv’rs, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49 (1993) ............. 12, 13
21

22 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) .............................................. 2

23 Unified Patents Inc. v. Uniloc 2017 LLC, IPR 2019-01126 (PTAB filed May 28, 2019) ................ 1
24 Unified Patents, LLC. v. Uniloc USA, Inc. et al., IPR2018-00199 (PTAB May 31, 2019) .............. 1
25
Uniloc USA, Inc. v. Apple Inc., 784 F. App’x 763 (Fed. Cir. 2019) ............................................... 14
26
Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011) ............................................. 7
27
Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172 (1965) ....................... 12
28
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2 Other Authorities
Alan Devlin, Antitrust Limits on Targeted Patent Aggregation, 67 Fla. L. Rev. 775 (2016) ..... 8, 13
3

4 Buford Capital, Patent & IP, available at https://www.burfordcapital.com/how-we-


work/expertise/patent-ip ............................................................................................................ 10
5
D. Dowd Muska, Dark Star: A Hedge Fund Transitions From Subprime Villain to Patent
6
Troll, (Feb. 28, 2020), InsideSources.com ................................................................................ 10
7
Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidelines for the Licensing of
8 Intellectual Property (2017) ........................................................................................................ 3
9
Fed. Trade Comm’n, Patent Assertion Entity Activity: An FTC Study (Oct. 2016) (“2016
10 FTC Study”) ............................................................................................................................ 5, 6

11 Fed. Trade Comm’n, The Evolving IP Marketplace: Aligning Patent Notice And Remedies
12 With Competition (2011) (“2011 FTC Report”) .......................................................................... 4

13 Fortress Inv. Grp. LLC, Subsidiaries of the Registrant (Exhibit 21.1) available at
https://www.sec.gov/Archives/edgar/data/1380393/000119312511051919/dex211.htm......... 14
14
H.R. Rep. No. 112-98, Pt. 1 (2011) ................................................................................................... 6
15

16 Herbert Hovenkamp, Prophylactic Merger Policy, 70 Hastings L. J. 45 (2019) ............................ 12

17 James Bessen and Michael J. Meurer, The Direct Costs from NPE Disputes, 99 Cornell L.
Rev. 387 (2014) ........................................................................................................................... 3
18

19 John R. Allison, Mark A. Lemley & David L. Schwartz, How Often Do Non-Practicing
Entities Win Patent Suits?, 70 Berkeley 235 (2017) ................................................................... 5
20
Jonathan Stroud, Miles to Go Before We Sleep, 41 Regulation 48 (Spring 2018) ............................ 8
21

22 Jonathan Stroud, Pulling Back the Curtain on Complex Funding of Patent Assertion
Entities, 12.2 Landslide 20 (Nov./Dec. 2019) (“Landslide”) ................................................ 1, 10
23
Josh Kosman, Softbank unit launches $400M ‘patent troll’ fund, N.Y. Post (May 21, 2018)........ 10
24

25 Kim Eun-jin, Patent Infringement Suit Filed Against Samsung Electronics’ Galaxy Fold,
Business Korea (Apr. 30, 2019) ................................................................................................ 15
26
Letter From James Madison to Congress, April 11, 1816 ................................................................. 3
27

28 Letter from Lisa A. Rickard, President, U.S. Chamber Institute for Legal Reform, to
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Rebecca A. Womeldorf, Sec’y, Committee on Rules and Prac. and Proc. of the Admin.
1
Office of the U.S. Courts (Jun. 1, 2017) .................................................................................... 11
2
Marathon Patent Group Inc., Annual Report (Form 10-K) (Mar. 31, 2014) .................................... 9
3
Marathon Patent Group Inc., Annual Report (Form 10-K) (Apr. 16, 2018) ..................................... 9
4

5 Marathon Patent Group Inc., Annual Report (Form 10-K) (Mar. 26, 2015) ..................................... 9

6 Marathon Patent Group Inc., Annual Report (Form 10-K), (Mar. 25, 2019) .................................... 9

7 Mark Paul, Dublin tech firm Data Scape sues Amazon and Dropbox, The Irish Times (Feb.
8 15, 2019) .................................................................................................................................... 10

9 N.Y.C. Bar, Report to the President by the N.Y.C. Bar Assoc. Working Group on Litigation
Funding (Feb. 28, 2020) ............................................................................................................ 11
10

11 Patent Security Agreement, U.S. Patent & Trademark Assignment records, Reel: 044839,
Frames: 0568–0695 ..................................................................................................................... 9
12
Richard Lloyd, Theranos back to the fore with Fortress assertion campaign against
13 diagnostics business, IAM (Mar. 10, 2020) ................................................................................ 9
14
Standing Order for all Judges of the Northern District of California, Contents of Joint Case
15 Management Statement (Nov. 2018) ......................................................................................... 11
16 Steve Brachman, Marathon Patent restructuring will put Fortress subsidiary in charge of
17 patent monetization, IP Watchdog .............................................................................................. 9

18 Timothy Au, US patent litigation on decline while PTAB breaks records and NPE
settlement amounts fall, Lexology ............................................................................................... 8
19

20 U.S. Congressional Research Service, An Overview of the “Patent Trolls” Debate (Apr.
16, 2013) (“CRS Report”) ....................................................................................................... 4, 5
21
Unified Patents, 2019 Litigation Annual Report ........................................................................... 1, 4
22

23 Constitutional Provisions
24 U.S. Constitution, Art. I, Section 8, clause 8........................................................................... 2, 3, 12

25

26

27

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1 I. Interests of Amici Curiae


2 Unified Patents, LLC is a membership organization dedicated to deterring patent assertion
3 entities, or PAEs, from extracting nuisance settlements from operating companies based on
4 patents that are likely invalid before the district courts and unpatentable before the U.S. Patent
5 and Trademark Office (“PTO”). Unified’s more than 250 members are Fortune 500 companies,
6 start-ups, automakers, industry groups, cable companies, banks, manufacturers, and others
7 dedicated to reducing the drain on the U.S. economy of now-routine baseless litigations asserting
8 infringement of patents of dubious validity.
9 Unified studies the ever-evolving business models, financial backings, and practices of
10 PAEs. See, e.g., Jonathan Stroud, Pulling Back the Curtain on Complex Funding of Patent
11 Assertion Entities, 12.2 Landslide 20 (Nov./Dec. 2019) (“Landslide”) available at
12 https://www.americanbar.org/groups/intellectual_property_law/publications/landslide/2019-
Northern District of California
United States District Court

13 20/november-december/. Unified monitors ownership data, secondary-market patent sales,


14 demand letters, post-grant procedures, and patent litigation to track PAE activity. See, e.g.,
15 Unified Patents, 2019 Litigation Annual Report available at
16 https://portal.unifiedpatents.com/litigation/annual-report.
17 Unified also files post-grant petitions challenging PAE patents it believes are
18 unpatentable or invalid. Thus, Unified is a deterrence entity that seeks to deter the assertion of
19 poor-quality patents. Unified acts independent of its members, including Apple, or any other
20 company. See, e.g., Unified Patents, LLC. v. Uniloc USA, Inc. et al., IPR2018-00199 Paper No.
21 33, 10 (PTAB May 31, 2019) (Unified members not real parties in interest to inter partes reviews
22 filed by Unified); id. (collecting PTAB decisions). In 2019, Unified was the fifth most frequent
23 petitioner before the PTO’s Patent Trial and Appeal Board (“PTAB”), and it was by far the
24 leading third-party filer. As part of this effort, Unified is and has been adverse to the Defendant
25 Uniloc. See, e.g., Unified Patents Inc. v. Uniloc 2017 LLC, IPR 2019-01126 (PTAB May 28,
26 2019). Unified has similarly been adverse to (1) Inventergy LBS, LLC, an entity apparently
27 related to Defendant Inventergy Global, Inc., (2) entities controlled by Marathon, whose patents
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1 are now controlled by Defendants, and (3) Divx LLC, a Fortress affiliate. Further, it may be fair

2 to say that Unified has been adverse to Fortress, given its control of the Uniloc Defendants and

3 other entities. See Cmplt. ¶¶ 51-56.

4 CableLabs is a non-profit non-stock company qualified under the National Cooperative

5 Research and Production Act. CableLabs has over 60 member companies worldwide, including

6 members who represent approximately 85% of U.S. cable subscribers. The cable industry

7 supports over 2.9 million jobs and contributes $421 billion to the U.S. economy.

8 CableLabs’ members have faced numerous PAE suits. They understand PAE litigation,

9 the evolving PAE business model, and the uncertainty caused by the opaque use of third-party

10 funds to establish and invigorate PAE shell companies.

11 Patreon is a membership platform that helps artists and creators get paid by their fans.

12 Since being founded in 2013, Patreon has sent over $1 billion in payments to over 150,000

13 creators. During that time, Patreon has been sued, or threatened with suit, by PAEs.

14 Bitmovin, Inc. is a private, venture-backed company, which develops best in class video

15 solutions that enable its customers to create memorable digital experiences. Over the past two

16 years, Bitmovin has faced numerous low-quality PAE claims. In response, the company has

17 adopted an aggressive strategy to defend against such meritless suits.

18 Amici are concerned with the increasingly prominent role mass patent aggregators, and

19 litigation funders like Fortress have taken in bolstering the PAE model and in driving the

20 widespread assertion of low-quality patents under dubious infringement theories. Amici will

21 detail the evolving business models, capitalization sources, and strategies of PAEs like

22 Defendants and place those practices in the antitrust context.

23 II. PAEs Tax Innovation and Harm Competition


24 “[T]he primary purpose of our patent laws is not the creation of private fortunes for the
25 owners of patents but is ‘to promote the progress of science and the useful arts[.]’” Quanta
26 Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 626 (2008) (quoting Motion Picture Patents Co.
27 v. Universal Film Mfg. Co., 243 U.S. 502, 511 (1917) (quoting U.S. Const., Art. I, § 8, cl. 8)).
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1 This bedrock principle is turned on its head by PAEs that purchase and assert patents

2 while taking no part in creating the underlying invention or the development or production of

3 new products. PAEs “deter innovation by raising costs without making a technological

4 contribution.” 2011 FTC Report at 51. The collective cost of PAE litigation creates a significant

5 “tax on innovation.” See James Bessen and Michael J. Meurer, The Direct Costs from NPE

6 Disputes, 99 Cornell L. Rev. 387, 416 (2014) (estimating a multi-billion dollar tax on innovation

7 in 2011 from all non-practicing entity (“NPE”) suits); Cf. Lab. Corp. of Am. Holdings v.

8 Metabolite Labs., Inc., 548 U.S. 124, 126 (2006) (Breyer, J., dissenting from dismissal)

9 (“[S]ometimes too much patent protection can impede rather than ‘promote the Progress of

10 Science and useful Arts.’”) (quoting U.S. Const., Art. I, § 8, cl. 8) (emphasis in original). “Not

11 much of this [tax payment] goes to inventors or innovators.” Bessen and Meurer at 416. Most of

12 the money goes to the assertion entities and the lawyers. Id. at 416-17. Today, the financiers—

13 often hidden, controlling suits through shell entities—get their cut.

14 Competition drives the U.S. economy, and it is protected from patent overreach. “It is as

15 important to the public that competition should not be repressed by worthless patents, as that the

16 patentee of a really valuable invention should be protected in his monopoly.” Pope Mfg. Co. v.

17 Gormully, 144 U.S. 224, 234 (1892). PAEs harm competition when anticompetitive practices

18 drive patent valuation well above the price available in a functioning technology market. See

19 Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidelines for the Licensing of Intellectual

20 Property § 3.2.2 (2017); see also F.T.C. v. Actavis, Inc., 570 U.S. 136, 141 (2013) (patent

21 settlement agreements subject to antitrust).

22 A. PAE Litigation Is Ensconced in the Patent System


23 Infringement suits by PAEs, sometimes called “patent trolls,” were not unknown in
24 history; our founding fathers warned of wrongful claimants motivated to wrongfully obtain
25 patents to extract fees. See Letter From James Madison to Congress, April 11, 1816 (“I
26 recommend . . . that further restraints be imposed on the issue of patents to wrongful claimants,
27 and further guards provided against fraudulent exactions of fees by persons possessed of
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1 patents.”) available at https://founders.archives.gov/documents/Madison/99-01-02-5064. But

2 they grew into a substantial share of patent cases around the turn of the 21st century. See U.S.

3 Congressional Research Service, An Overview of the “Patent Trolls” Debate 1, 4 (Apr. 16, 2013)

4 (“CRS Report”).

5 To better understand PAEs, Unified prepares annual patent litigation reports. See Unified

6 Patents, 2019 Litigation Annual Report available at

7 https://portal.unifiedpatents.com/litigation/annual-report (“2019 Litigation Report”). The reports

8 compile district court patent suits by party and distinguish between practicing companies, PAEs,

9 and traditional plaintiffs—such as universities, small companies, and individual inventors—that

10 patent inventions but do not market products. Id.; see also CRS Report at 4 n.28.

11 PAE complaints peaked as a percentage of overall cases in 2015. See 2019 Litigation

12 Report. But they remain historically high. The last two years have seen an equilibrium. In 2018,

13 of the 3,657 patent suits filed in the district courts, 1,179 were brought by PAEs; in 2019, it was

14 3,573 patent and 1,212, respectively. PAE assertions remain about one-third of U.S. patent suits.

15 PAE (and overall) activity is still near historic highs, despite new PTO procedures designed to

16 reassess patents.

17 B. The PAE Business Model


18 PAEs rarely research, innovate, invent, produce, or sell products. They simply buy and
19 assert patents against companies that do—companies with no ex ante knowledge of the patents.
20 PAEs typically sue only ex post, “after defendants have independently invented and begun using
21 technology allegedly covered by their patents.” CRS Report at 4.
22 PAEs can file ex post lawsuits, threatening fulsome damages, because patent infringement
23 is a strict-liability offense. Commil USA, LLC v. Cisco Sys., Inc., 135 S. Ct. 1920, 1926 (2015).
24 This allows PAEs to demand that innovative companies license and pay royalties (or damages)
25 on acquired patents even when the companies independently developed their products. See Fed.
26 Trade Comm’n, The Evolving IP Marketplace: Aligning Patent Notice And Remedies With
27 Competition 50 (2011) (“2011 FTC Report”). If the patent claim has merit, damages from a
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1 successful suit can reach into the billions.

2 But far too often PAE suits are of little or no merit—either the patent is invalid, or the

3 asserted infringement theory expansively misreads the asserted claims. Professors Allison,

4 Lemley, and Schwartz reviewed a large sample of concluded patent cases and found that PAEs

5 that take their cases to conclusion win less than 10% of the time. See John R. Allison, Mark A.

6 Lemley & David L. Schwartz, How Often Do Non-Practicing Entities Win Patent Suits?, 70

7 Berkeley 235, 270 (2017). PAEs were three times less successful than product-producing

8 companies and universities; and less successful than other non-practicing entities. Id. Simply

9 put, “PAEs performed the worst.” Id. at 271.

10 So why do PAEs sue? The high cost of defense makes assertions profitable, regardless of

11 merit

12 The “vast majority” of PAE suits end in settlement often for nuisance value, i.e., an

13 amount just below the cost of defense. CRS Report at 1. As paper pass-throughs, PAEs have

14 much lower litigation costs—particularly in discovery—than do operating companies, see, e.g.,

15 Eon–Net LP v. Flagstar Bancorp, 653 F.3d 1314, 1327 (Fed. Cir. 2011). And with zero at risk,

16 little prevents them from leveraging even the most questionable claim. The Federal Trade

17 Commission pegged the nuisance litigation threshold at roughly $300,000—i.e., the low-end

18 estimate for defending a patent case through discovery. Fed. Trade Comm’n, Patent Assertion

19 Entity Activity: An FTC Study 43 (Oct. 2016) (“2016 FTC Study”). Perhaps only in patent

20 litigation is $300,000 considered a nuisance. And the FTC’s numbers only consider attorney’s

21 fees—productive companies generally experience “internal business disruption” during suit,

22 preventing or delaying product development. 2016 FTC Study at 20. Defending a suit may

23 require multiple depositions of engineers and supervisors; occasionally, patent suits may lead to

24 investor panic, cancellation of contracts, or loss of investments. When timed shrewdly, suits can

25 affect IPO valuation or block mergers that depend on prompt due diligence. In contrast, PAEs

26 suffer no harm from suing. Quite the opposite—lawsuits are their business.

27 When poor-quality patents are asserted, defendants are forced to settle for less than the

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1 cost of vindication—a cash payment is the rational response, regardless of patent quality. The

2 same calculus holds true when PAEs allege patent infringement by asserting claim constructions

3 outside the reasonable scope of the invention. In Eon–Net, for example, the Federal Circuit

4 understood that the difference between defendant-appellee’s cost of litigation and plaintiff’s

5 settlement offers drove almost every other defendant to settle the 100+ lawsuits filed by plaintiff

6 and related entities. 653 F.3d at 1327. Given that difference, it was “apparent why the vast

7 majority of those that Eon–Net accused of infringement chose to settle early in the litigation

8 rather than expend the resources required to demonstrate to a court that the asserted patents are

9 limited to [non-infringing processes].” Id.

10 Finally, PAEs are often purposefully cash-poor corporate shells (typically LLCs),

11 effectively immune to monetary sanctions. See 2016 FTC Study at 4. For example, in Iris

12 Connex, LLC v. Dell, Inc., the court took the rare step of piercing the corporate veil revealing that

13 the plaintiff Iris was “the first level of two shell corporations which were intended to shield the

14 real actor … from personal liability.” Civ. No. 15-cv-01915, Dkt. No. 149 (E.D. Tex. Jan. 25,

15 2017). The responsible individual, the court held, “exploited the corporate form to operate

16 largely in secret and to insulate the true party in interest from the risk associated with dubious

17 infringement suits.” Id. at 4. This only came to light after costly postjudgment discovery and

18 after Iris and its parent shell company both declared bankruptcy in an attempt to stall

19 proceedings. Id. at 12-14.

20 C. The New PAE Business Model: Mass Aggregation


21 In recent years, Congress and the courts have sought to curtail PAE litigation. Congress
22 modified the PTO’s review of issued patents, creating procedures like inter partes review. 35
23 U.S.C. §§ 311-319. These allow parties to test patents in the PTO, and to reduce the glut of
24 costly patent litigation in the district court over “patents that should not have been issued.” See
25 H.R. Rep. No. 112-98, Pt. 1 at 39-40 (2011).
26 The courts have also responded, ruling that injunctions are not automatically available to
27 successful patent plaintiffs that are not market competitors, citing PAEs as a concern. eBay Inc.
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1 v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006); see also id. at 396–97 (Kennedy, J.

2 concurring) (“[I]n many instances the nature of the patent being enforced and the economic

3 function of the patent holder present considerations quite unlike earlier cases. An industry has

4 developed in which firms use patents not as a basis for producing and selling goods but,

5 instead, primarily for obtaining licensing fees.”) (emphasis added). The Federal Circuit scaled

6 back some outsized damage awards by, for example, rejecting a “25 percent rule of thumb” as

7 “fundamentally flawed.” Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1315 (Fed. Cir.

8 2011).

9 Most recently, the Supreme Court held that claims to performing a traditional method of

10 doing business on a computer are not eligible for patenting. Alice Corp. Pty. v. CLS Bank Int’l,

11 573 U.S. 208, 226 (2014). Patent eligibility can be determined on motion to dismiss. See, e.g.,

12 ChargePoint, Inc. v. SemaConnect, Inc., 920 F.3d 759, 765 (Fed. Cir. 2019), cert.

13 denied, No. 19-521, 2020 WL 411896 (Jan. 27, 2020). Early dismissals have lowered the cost of

14 defense—and therefore, the nuisance value—of some suits.

15 The data bear this out; eBay and Alice have helped reduce the sheer volume and overall

16 litigation costs of meritless (or long-shot) patent litigation brought by PAEs. And inter partes

17 review forced PAEs—for the first time—to spend some money defending their questionable

18 assets in exchange for inflicting enormous costs on accused infringers. The early review

19 provided by PTO judges has helped counter some of the imbalance in litigation costs PAEs

20 exploit to extract settlements in patent cases.

21 So PAEs adapted. Once flush with cash, they now lacked the imbalances in litigation that

22 had for years fed their coffers in individual suits. Without that asymmetry, they could no longer

23 earn such large windfalls in every suit. One response, available to well-heeled PAEs, has simply

24 been to commoditize those smaller gains—i.e., mass aggregation. There is no dearth of patent

25 assets available, with over 3 million U.S. patents in force (a 1-million-patent increase since

26 2010). See World Intellectual Property Organization, Statistical Country Profiles, United States

27 of America available at

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1 https://www.wipo.int/ipstats/en/statistics/country_profile/profile.jsp?code=US.

2 Some successful PAEs grew into mass aggregators by accumulating hundreds or even

3 thousands of patents and using the combined threat of the purchased assets to threaten or file

4 serial suits seeking supracompetitive settlements—or has simply ground out the same gains

5 across a phalanx of subsidiaries. For example, IP Edge has dozens of subsidiaries and affiliate

6 assertion entities and is responsible for hundreds of litigations every year. See Jonathan Stroud,

7 Miles to Go Before We Sleep, 41 Regulation 48, 51 (Spring 2018) available at

8 https://www.cato.org/sites/cato.org/files/serials/files/regulation/2018/3/regulation-v41n1-3.pdf

9 (identifying 30+ IP Edge subsidiaries or affiliate litigation-vehicles); see also Timothy Au, US

10 patent litigation on decline while PTAB breaks records and NPE settlement amounts fall,

11 Lexology, available at https://www.lexology.com/library/detail.aspx?g=c4daf713-b1a5-4716-

12 984d-b6344083bad6 (noting that “IP Edge is still by far the most prolific plaintiff,” having sued

13 408 defendants in 2016 and 354 in 2017).

14 These large PAEs rely on the threat of virtually endless litigation and retaliatory

15 assertions to extract supracompetitive rates for patent licenses. While individual nuisance suits

16 are worth less than they once were, serial assertions of nuisance suits compound the PAE’s

17 profits and drive the cost of asserted patents up artificially. And given this deluge of complaints,

18 if forced to trial, the asserter only has to get lucky once. Devlin uses a statistical model to show

19 that the serial assertion of low-quality patents on dubious infringement theories—those with only

20 a 1% chance of success—eventually, inevitably leads to success. See Alan Devlin, Antitrust

21 Limits on Targeted Patent Aggregation, 67 Fla. L. Rev. 775, 821 (2016). If they lose one, they

22 have dozens, hundreds, sometimes thousands more. And given operating companies never know

23 which 1% case will succeed, they must address them all.

24 D. Litigation Financing and Hidden Funding Sources Drive Mass Aggregation


25 But aggregation costs money. Some high-profile PAEs were successful enough to be
26 publicly traded Fortune 500 companies and were looking to expand before Alice. For example,
27 Marathon Patent Group (NASDAQ: MARA) held 118 patents and was suing 57 active
28
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1 defendants at year-end 2013. Marathon Patent Group Inc., Annual Report (Form 10-K), at 1, 5

2 (Mar. 31, 2014). It had naturally “not expended funds for research and development” but wanted

3 to “add more patents and patent applications for the purpose of generating licensing revenues.”

4 Id. at 2, 5. By the end of 2014, Marathon had expanded its holdings to 378 patents and was in

5 enforcement actions against 77 defendants. Marathon Patent Group Inc., Annual Report (Form

6 10-K), at 2, 5 (Mar. 26, 2015). But expansion is costly, and sometimes an illiquid entity takes on

7 debt for an acquisition spree.

8 Enter the financiers. In January 2015, Marathon signed a series of agreements with

9 Defendant Fortress, including a “Fortress Purchase Agreement” and “Fortress Notes,” which

10 provided an influx of cash, with Marathon’s patents as collateral in case of default. Marathon

11 Patent Group Inc., Annual Report (Form 10-K), at F27-28 (Apr. 16, 2018). Over 2017-18,

12 business was nott good, and thus Marathon the PAE failed; they are now in the Bitcoin business.

13 See, e.g., id. at 5 (Apr. 16, 2018) (five subsidiaries; four lawsuits); Marathon Patent Group Inc.,

14 Annual Report (Form 10-K), at 4 (Mar. 25, 2019) (“As of December 31, 2018, we were not

15 involved in any active patent enforcement litigation.”). Marathon transferred the bulk of its

16 portfolio to Fortress to satisfy its debts. See id. at 32; Steve Brachman, Marathon Patent

17 restructuring will put Fortress subsidiary in charge of patent monetization, IP Watchdog (Aug.

18 15, 2017) available at https://www.ipwatchdog.com/2017/08/15/marathon-patent-restructuring-

19 fortress-subsidiary-patent-monetization/id=86737/. This modus operandi parallels that of

20 portfolios previously controlled by other Defendants. See, e.g., Cmplt. ¶¶ 51-56 (Uniloc); 61-69

21 (Inventergy). More recently, Fortress has acquired over 1000 patent assets from the troubled

22 diagnostics company Theranos through a similar loan-leads-to acquisition maneuver—and has

23 already asserted two of those patents (listing Elizabeth Holmes as an inventor). See Richard

24 Lloyd, Theranos back to the fore with Fortress assertion campaign against diagnostics business,

25 IAM (Mar. 10, 2020); see also Patent Security Agreement, U.S. Patent & Trademark Assignment

26 records, Reel: 044839, Frames: 0568–0695 available at http://legacy-

27 assignments.uspto.gov/assignments/assignment-pat-44839-568.pdf (assignment of a security

28
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1 interest in 1000+ U.S. and foreign patent assets owned by Theranos).

2 The aggregation of giant patent portfolios and the concomitant lawsuits come on the back

3 of a massive injection of capital from outside sources. Defendant Fortress, for example, has $40

4 billion under management. See https://www.fortress.com/about. It started its Intellectual

5 Property Fund in 2017 and raised $400 million to invest specifically in patent acquisition and

6 assertions. Josh Kosman, Softbank unit launches $400M ‘patent troll’ fund, N.Y. Post (May 21,

7 2018). This was in addition to continuing its lending to small-capitalization, patent-rich

8 companies in deals that often result in acquiring patent assets for much less than they might

9 otherwise fetch. Id. Fortress was acquired by and appears to have drawn funding for these

10 endeavors from the Softbank Group of Japan. See id.; Cmplt. at ¶ 8.

11 To be sure, Softbank and Defendant Fortress are not the only Wall Street firms funding

12 patent aggregation and litigation. Money has poured in from well-known sources like Burford

13 Capital, Westfleet Advisors, Bentham IMF, Palladium, Pravati Capital, Woodsford Litigation

14 Funding, and Verum Funding and newer entrants, foreign governmental funds, or older entities

15 hungry for investments not correlated with stock market volatility. See, e.g., Buford Capital,

16 Patent & IP, available at https://www.burfordcapital.com/how-we-work/expertise/patent-ip.

17 Magnetar Capital, known for questionable investments in credit default swaps during the

18 financial crisis, has recently emerged as the backer of multiple high-profile PAEs based in

19 Ireland, including SOLAS OLED, Neodron Limited, and Data Scape. See, e.g., D. Dowd Muska,

20 Dark Star: A Hedge Fund Transitions From Subprime Villain to Patent Troll, InsideSources.com

21 (Feb. 28, 2020), available at https://www.insidesources.com/dark-star-a-hedge-fund-transitions-

22 from-subprime-villain-to-patent-troll/; Mark Paul, Dublin tech firm Data Scape sues Amazon and

23 Dropbox, The Irish Times (Feb. 15, 2019) available at

24 https://www.irishtimes.com/business/agribusiness-and-food/dublin-tech-firm-data-scape-sues-

25 amazon-and-dropbox-1.3794361.

26 Third-party litigation funding was once disfavored or outright prohibited by U.S. courts,

27 though accepted in Europe (in part because of loser-pay economics). But today, U.S. litigation

28
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1 financing has gone mainstream. It is also widely publicized, at least to investors; there are annual

2 conferences with speakers from Burford Capital, Westfleet Advisors, and a host of others. See

3 The Litigation Funding Forum, The Agenda, available at

4 https://litigationfundingforum.com/agenda/ (scheduled for March 26, 2020); see also Third-Party

5 Litigation Finance Conference, Agenda, available at https://www.law.gwu.edu/third-party-

6 litigation-finance-conference (Nov. 2, 2018). But if third-party funding is here to stay, it should

7 be better regulated—or at a minimum, disclosed to the courts.

8 Private capital often funds litigation while keeping its interests hidden from accused

9 infringers and district court judges. This has led to repeated suggestions from the Chamber of

10 Commerce and dozens of other organizations that Rule 26 (1) be amended to require initial

11 disclosure of litigation funding. See, e.g., Letter from Lisa A. Rickard, President, U.S. Chamber

12 Institute for Legal Reform, to Rebecca A. Womeldorf, Sec’y, Committee on Rules and Prac. and

13 Proc. of the Admin. Office of the U.S. Courts (Jun. 1, 2017),

14 https://www.uscourts.gov/sites/default/files/17-cv-o-suggestion_ilr_et_al_0.pdf. On the other

15 side, a working group of the New York City Bar recommended against making any change, but

16 even they recognized that “certain types of investment in patent litigation may raise standing

17 issues that require disclosure to resolve.” N.Y.C. Bar, Report to the President by the N.Y.C. Bar

18 Assoc. Working Group on Litigation Funding, 72 (Feb. 28, 2020) available at

19 http://documents.nycbar.org/files/Report_to_the_President_by_Litigation_Funding_Working_Gr

20 oup.pdf.

21 It does not suffice that such information might be available in discovery—PAEs have

22 naturally fought such discovery. There is no principled reason to not simply require such

23 disclosure. Amici note that this court requires disclosure of any person funding the prosecution

24 of a claim or counterclaim in “any proposed class, collective, or representative action.” Standing

25 Order for all Judges of the Northern District of California, Contents of Joint Case Management

26 Statement, § 19 (Nov. 2018). Extending that to include patent cases would seem prudent. And

27 some district court judges, when aware a suit is financed, require the financier to attend

28
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1 settlement conferences, thus materially advancing settlement discussions.

2 * * * * *

3 In sum, PAE litigation today includes mass aggregations of patents assembled through

4 webs of confidential agreements designed to increase the aggregate value of patent settlements

5 and licensing through imposed litigation costs. These arrangements use serial litigation and the

6 threat of it to drive licensing royalties beyond what each patent merits. Are schemes of this type

7 immune to the antitrust laws? Defendants’ motion says yes, categorically. Amici disagree.

8 III. Anticompetitive Patent Acquisition Schemes Including Assertion of Intellectual


Property Are Subject to Antitrust Scrutiny
9
The Constitution’s “Patent Clause itself reflects a balance between the need to encourage
10
innovation and the avoidance of monopolies[,] which stifle competition without any concomitant
11
advance in the ‘Progress of Science and useful Arts.’” Bonito Boats, Inc. v. Thunder Craft Boats,
12
Inc., 489 U.S. 141, 146 (1989) (quoting U.S. Const. Art. I § 8, cl. 8). This balance engenders our
13
system’s reluctance to apply antitrust concerns to valid, enforceable patents claiming one’s own
14
inventions; and applies even to an unsuccessful suit aimed at protecting an anticompetitive
15
monopoly. Prof’l Real Estate Inv’rs, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49 (1993)
16
(unsuccessful copyright suit protected). Amici neither question nor seek to undermine this long-
17
standing principle. But it does not follow that business agreements, corporate shell companies,
18
funding, coordination, and patent acquisitions are sheltered from the pro-competitive free-market
19
principles embodied in our antitrust laws. The courts and commenters have cautioned otherwise.
20
Antitrust law protects the public from patents that repress competition beyond their
21
inherent scope. This is true when patents are obtained by fraud. Walker Process Equip., Inc. v.
22
Food Mach. & Chem. Corp., 382 U.S. 172, 174 (1965). Or when patents are aggregated to create
23
a monopoly where none existed before. DOJ Guidelines at § 3.2.2. “[P]atent law does not
24
recognize a right to create a market monopoly through means other than those contemplated in
25
the patent process.” Herbert Hovenkamp, Prophylactic Merger Policy, 70 Hastings L. J. 45, 66
26
(2019). Rather, patent acquisitions and licenses and any related contracts or other business are
27
subject to the full range of antitrust laws. Antitrust issues “can arise when a firm assembles a
28
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1 market monopoly by acquiring patents from outside inventors, or perhaps by acquiring firms

2 holding large patent portfolios.” See Hovenkamp at 66. Such acquisitions “may be assessed

3 under section 7 of the Clayton Act, section 1 and 2 of the Sherman Act, and section 5 of the

4 Federal Trade Commission Act.” DOJ Guidelines § 5.7.

5 PAEs harm competition when they create new, outsized market power through the

6 aggregation and anticompetitive assertion of patents. Mass aggregation of patents can create a

7 market where the product is litigation peace—i.e., freedom from the threat of serial assertion.

8 This “straw-into-gold alchemy” turns patent assets of little intrinsic value into a very valuable

9 part of inflicting continuing costs on operating companies through serial suits. See Devlin, 67

10 Fla. L. Rev. at 818. It allows the mass aggregator to charge supracompetitive rates for what

11 would otherwise be valueless or near-valueless patents, through multiple subsidiaries, based on

12 the threat of endless future patent acquisitions and assertions.

13 Defendants argue there is nothing inherently wrong with owning many patents or

14 obtaining patents through commercial acquisition. Mot. to Dismiss at 22. This principle,

15 however, is not without limits. The Supreme Court enunciated it in Hazeltine but was careful to

16 note that the record there did not support “charges that respondent uses its accumulation of

17 patents ‘for the exaction of tribute’ and collects royalties ‘by means of the overpowering threat of

18 disastrous litigation.’” Automatic Radio Mfg. Co. v. Hazeltine Research, 339 U.S. 827, 834

19 (1950), overruled on other grounds by Lear, Inc. v. Adkins, 395 U.S. 653 (1969). Here, the

20 Hazeltine court’s caveats appear to map readily onto Defendants’ practices.

21 Defendants also invoke Noerr-Pennington as a partial defense. Noerr-Pennington

22 protects legitimate individual patent suits from antitrust nullification. See PRE v. Columbia

23 Pictures, 508 U.S. at 51. But it does not protect anticompetitive behavior that is part of a scheme

24 that includes litigation. See City of Columbia v. Omni Outdoor Advert., Inc., 499 U.S. 365, 384

25 (1991). The Second Circuit addressed this in the copyright context, holding that a concerted

26 refusal to deal that would, “absent litigation, violate the Sherman Act … cannot be immunized by

27 the existence of a common lawsuit.” Primetime 24 Joint Venture v. Nat’ l Broad., Co., 219 F.3d

28
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1 92, 103 (2d Cir. 2000). The antitrust immunity given a single genuine patent suit cannot

2 immunize the acquisition of an anticompetitive arsenal of patent assets.

3 IV. Defendants Have Combined the Mass Aggregation of Patents with Serial Enforcement
Campaigns to Harm Competition
4
In considering a motion to dismiss, the court must take as true the factual allegations
5
contained in the complaint. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 572 (2007). Under that
6
standard, plaintiffs have shown a violation of the antitrust laws.
7

8 A. Defendants Are Unquestionably Mass Aggregators


Defendants are undoubtedly PAEs, but the size and scope of their business plan go well
9
beyond the typical PAE model. Likewise, the financial resources dedicated to the plan appear
10
unprecedented. Defendants have created an interlocking web of patent-holding entities. Cmplt.
11
¶¶ 51-81. But their full scope is obscured, aided by complex agreements hidden from the public,
12
from the PTO, and from most defendants. Fortress, for example, has a vast array of known
13
subsidiaries. See, e.g., Fortress Inv. Grp. LLC, Subsidiaries of the Registrant (Exhibit 21.1)
14
available at
15
https://www.sec.gov/Archives/edgar/data/1380393/000119312511051919/dex211.htm. But
16
knowledge of their patent holdings has only come to light through district court discovery almost
17
four years after their agreements were signed and systematic litigation commenced.
18
Defendants fought to keep these arrangements from the courts. For example, Uniloc
19
asserted its patents in the Northern District without acknowledging Fortress’s interests. See
20
Uniloc USA, Inc. v. Apple Inc., 784 F. App’x 763, 764-65 (Fed. Cir. 2019) (detailing lengthy
21
discovery struggle regarding ownership and licensing of Uniloc patents). Apple, once it learned
22
of Fortress’s interest, argued that Fortress was a necessary party to the case and moved to
23
dismiss. Judge Alsup denied that motion but only after admonishing Uniloc’s counsel for
24
holding back court-ordered discovery. Id. at 765. Apple also raised standing at the Federal
25
Circuit in one case on appeal. See id. at 766. The Federal Circuit declined to reach the issue, and
26
Judge Alsup declined to give an indicative ruling under Rule 62.1 because “[t]he instant mess is
27
one of [Uniloc’s] own making.” Id. at 766.
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1 It is only now that the relationship between Fortress’s funding and hundreds of U.S.

2 district court litigations against U.S. companies have come to light. See generally Landslide.

3 But the full extent of Fortress’s control is not yet known. From what is known, amici

4 conservatively estimate that Fortress and its associates are responsible for at least 3 percent of all

5 patent litigation in the district courts and at least 8 percent of all PAE litigation over the past

6 three years. Defendants unquestionably engaged in mass aggregation—accumulating and

7 sharing control of roughly 1500 known patents under the Fortress umbrella (not including the

8 assets recently acquired from Theranos). Cmplt. ¶¶ 54, 59, 61-63, 70, and 79. With these,

9 Defendants can file a near-endless number of suits.

10 B. Defendants Have Asserted Patents in Nuisance Suits


11 It is challenging to distinguish nuisance suits without discovery or disclosure of
12 confidential settlement offers. But the assertion of weak patents is typical of nuisance suits, and
13 the complaint demonstrates that Defendants have repeatedly asserted weak patents across
14 multiple suits. These assertions included:
15 • patents found invalid by other courts or unpatentable by the PTAB, Cmplt. ¶¶ 88, 90-91;
16 • patents found likely unpatentable by the PTAB, id. ¶¶ 89, 92, 98;
17 • a patent later voluntarily dismissed that Uniloc admitted was “probably commercially
18 worthless,” id. ¶ 88; and
19 • a patent that the prior owner had determined was not infringed by the accused infringer,
20 id. ¶ 93.
21 C. Defendants Have Asserted Patents in Serial Suits
22 The complaint likewise demonstrates that Defendants have engaged in campaigns of
23 serial assertions. Uniloc filed 25 suits against Plaintiff Apple in district courts between 2016 and
24 2019. Cmplt. ¶ 83. Fortress and Uniloc shared control of the asserted patents during that time.
25 Id. ¶ 51-56. Uniloc files serial suits. See, e.g., Kim Eun-jin, Patent Infringement Suit Filed
26 Against Samsung Electronics’ Galaxy Fold, Business Korea (Apr. 30, 2019) available at
27 http://www.businesskorea.co.kr/news/articleView.html?idxno=31395 (“Uniloc is a representative
28
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1 non-practicing entity (NPE) that has strengths in patents on computer electronics and mobile

2 communication devices. It filed a total of 52 lawsuits against Samsung Electronics and LG

3 Electronics last year alone.”); Cmplt. ¶ 83, 87.

4 Similarly, VLSI engaged in a serial assertion campaign against Intel. Between 2017 and

5 2019, VLSI filed six suits across three jurisdictions against Intel. Id. ¶ 98-104. Fortress

6 controlled VLSI during that time. Id. ¶ 58.

7 Defendant Inventergy also threatened additional suits against one accused infringer by

8 invoking Defendant Fortress. Id. ¶ 66. Fortress and Inventergy had a Revenue Sharing and Note

9 Purchase Agreement in place at that time. Id. ¶ 64.

10 These actions are most consistent with patent owners that believe their combined

11 portfolio is worth more for its serial nuisance value—as a constant threat of individual

12 assertions—than for any claimed technological advances.

13 V. Conclusion
14 At a minimum, Defendants’ patent aggregation and assertion scheme should be fully
15 examined under the Sherman and Clayton Acts. The court should deny Defendants’ Motion to
16 Dismiss.
17
Respectfully submitted,
18 /s/__William Jenks_________
March 19, 2020 William Jenks (SBN 212,609)
19 JENKS IP LAW PLLC
1629 K St NW, Suite 300
20 Washington DC 20016
Telephone: (202) 412-7964
21
Attorney for Amici Curiae
22

23

24

25

26

27

28
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