Canada’s Intellectual Property Law Firm

The smartphone patent frenzy

"Formerly, when great fortunes were only made in war, war was a business. But now, when great fortunes are only made by business, business is war!" — Christian Nevell Bovee, 19th century author and lawyer.

The above expression regarding the "business of war" was coined against the background of the Industrial Revolution, yet it remains true in the information age. In the smartphone industry, that war is increasingly being fought with a different kind of ammunition: patents.

It hardly seems that a day goes by without a new report of a high-tech company engaging in a patent dispute with a competing high-tech company in respect of some aspect of mobile device technology. Some of the world's best-known smartphone brands are currently involved in a complex web of patent-related legal claims. A snapshot of ongoing patent litigation in the mobile device industry as of the beginning of September 2011 is provided in the information graphic below. (In the illustration, each arrow points from the plaintiff to the defendant in a patent proceeding; only companies involved in two or more proceedings are shown. Companies marked with a trailing asterisk are so-called "non-practicing entities," which hold patents but do not manufacture any products of their own.)

The upsurge in patent litigation is not limited to the smartphone industry. Statistics show that the number of patent-based disputes has increased across a range of high-technology disciplines.

To be sure, the stakes in the patent war are high. Unsuccessful defendants can be required to pay substantial judgments, e.g., in the tens or hundreds of millions of dollars, or worse, can be blocked from the market altogether. Furthermore, the strategies being applied to threaten such outcomes are becoming more and more sophisticated.

For example, in the United States, patentees are increasingly supplementing conventional patent infringement lawsuits with complaints filed separately with the International Trade Commission ("ITC"). The ITC is an independent federal agency founded in 1916 for the purpose of regulating international trade. While the ITC cannot order an infringing company to pay monetary damages, it can issue so-called "exclusion orders," i.e., instructions to U.S. Customs and Border Protection to prevent the importation of products that infringe U.S. patents. One advantage is speed: on average, it takes about seven to 10 months to get a hearing at the ITC, versus about two years to get to trial in district courts. The threat of blocked imports is a serious one for smartphone companies, whose products are commonly manufactured abroad for sale in the United States.

In practice, most patent disputes are resolved by settlements and/or licensing agreements that are reached between the parties. The amount of money flowing between the parties and the rights that are exchanged are largely determined by the relative strength of the parties' patents. Thus, smartphone industry players have little choice but to fortify their patent portfolios to the maximum extent possible. And that is exactly what they have been doing, with great fervor, in recent months.

For example, as reported in the "Recent developments in brief" section of the July/August 2011 issue of IP Connections, the patent portfolio of former telecommunications leader Nortel Networks, which contains approximately 6,000 patents, was recently sold at auction for $4.5 billion. That amount not only far exceeded analysts' estimates of the value of the portfolio, but also exceeded the total amount that had been raised to date through the sale of all of Nortel's active businesses. The winning bid was submitted by a consortium made up of six companies: Apple, Microsoft, Research In Motion, Sony, EMC and Ericsson. Interestingly, some of the consortium members had initially been bidding on their own behalf but ultimately banded together with the others to ensure that their bids would remain competitive.

Just last month, Google made headlines by purchasing Motorola Mobility, the former mobile devices division of Motorola Inc., for $12.5 billion. A key motivator for the acquisition, which is Google's largest to date by far, was the portfolio of 17,000 patents and 7,500 pending patent applications that formed part of the purchase. Prior to the acquisition, Google had held relatively few patents for mobile technology and was considered to be exposed to patent disputes in that sector. The acquired portfolio provides ammunition for countersuits in the event that Google, or one of its manufacturing partners of handsets on which Google's Android operating system is run, were to be attacked. Indeed, almost immediately, Google transferred nine patents to its handset partner HTC, which in turn used those patents to amend patent infringement complaints against Apple.

Other large patent deals in the past year include Novell's sale of 882 patents to Microsoft for $450 million and the transfer of two collections of 1,000 patents each from IBM to Google for an undisclosed amount. Anticipated deals in the near future include the sale of InterDigital along with its stable of 8,800 patents in the mobile device space, whose value has been estimated in the billions.

Precise per-patent dollar valuation can be elusive due to uncertainty as to the value of non-patent assets in some of the deals. Nevertheless, per-patent values in recent transactions are estimated to be between $500,000 and $750,000. These amounts are among the highest in history and are certainly much higher than the cost of filing, maintaining and guiding the patent applications to issuance, which is typically less than $30,000 to $40,000 per patent over its lifetime (depending upon the jurisdiction). Interestingly, when the portfolio purchase prices are considered on a per-invention basis rather than a per-patent basis, the dollar figures are even higher. The reason is that each portfolio typically includes multiple patent families, each patent family comprising multiple patents for the same invention, with each patent of a family covering a different jurisdiction.

In view of the high valuation of patents in recent deals, some companies are mining their patent portfolios to identify patents that might be sold or licensed in order to generate much-needed revenue in a sluggish economy. For example, Kodak has identified a subset of its patent portfolio pertaining to digital imaging that it is considering selling to fund an overhaul of its operations. The value of the approximately 1,000 patents in the subset has been estimated at about $3 billion. Strangely, that value is significantly larger than the market capitalization of Kodak as a company, which is presently less than $1 billion. This shows that there can be a disconnect between the value of a company's intellectual property assets and the market value of the company as a whole.

At bottom, one truth resonates clearly from the recent patent frenzy: the importance of obtaining patent protection for valued inventions has never been higher than it is today.

The preceding is intended as a timely update on Canadian intellectual property and technology law. The content is informational only and does not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly.