Zombie Companies: When Businesses Die, Their Patents Live On
By Matthew S. Yungwirth and John R. Gibson
August 11, 2015
p>Lycos, one of the early pioneers of search engines, recently announced that it is selling its "large portfolio of innovative-patented technologies ranging from search engine technology to on-line advertising and online gaming."
In announcing the sale, Lycos became the latest example of what some have dubbed "zombie companies": companies that appear to be dead in the marketplace but nevertheless survive for one last breath by selling their patent portfolios. These patents will have one of two fates: They will either be sold to an entity intent on utilizing them as offensive weapons to extract licensing fees or litigation victories against alleged infringers, or bought for defensive purposes as a potential "mutually assured destruction" deterrent or to pre-emptively remove them from potential adversaries' arsenals.
The Dawn of the Dead
Turn on your television in the early part of this decade and you were bound to see a zombie. Around this same time, many of the world's biggest technology companies were engaged in battle. Dubbed the "smartphone wars," Apple's iPhone was pitted against Google's legion of Android devices, with Microsoft, Samsung and many others playing starring roles in litigation and licensing deals. Instead of armies of flesh-eating zombies, this war's weapons of choice were patents, and rather than a last stand at a deserted shopping mall, battles were playing out in courtrooms and boardrooms across America.
One of the largest litigation campaigns began when Nortel, the once-mighty Canadian networking company, searched for value in its 2009 bankruptcy. The asset that simultaneously frightened and provoked awe was Nortel's trove of approximately 6,000 patents and patent applications. Because these patents purportedly touched upon all aspects of the mobile, networking and telephony fields and were to be auctioned off to the highest bidder, they were dubbed "patent warheads."
Google—hoping to "create a disincentive for others to sue Google"—opened the auction with a $900 million bid. Eventually, however, a consortium of tech companies dubbed Rockstar Bidco—tech stalwarts Apple, BlackBerry, Ericsson, Microsoft and Sony—was announced the winner, with a final bid of $4.5 billion. This equated to approximately $750,000 per asset and was nearly five times Google's opening bid.
Google quickly regrouped and purchased Motorola Mobility for $12.5 billion. Commentators widely viewed the purchase as a play for Motorola Mobility's estimated 24,500 patent assets. Google reinforced this perception, citing the portfolio's ability to "help protect the Android ecosystem" as one of the deal's two key benefits.
World War Z
Following its purchase of the Nortel patents, Rockstar Bidco assigned 4,000 of the patents into a patent assertion entity dubbed "Rockstar Consortium." Outside observers quickly predicted that Rockstar Consortium's patents would "be enforced against mobile phone companies—Google, for example—in the coming months."
These predictions came true in 2013, when Rockstar Consortium brought suit against Google and its Android handset partners, among others. In late 2014, Rockstar ended the litigation campaign by selling its patents to RPX—a member-funded patent aggregator that purchases or licenses patents for the benefit of its members, as part of a defensive effort to resolve lawsuits and foreclose future lawsuits—for $900 million, with both sides praising the deal as representing a win.
For its part, Google eventually sold off most of the operating assets of Motorola Mobility. Although it retained the vast majority of Motorola Mobility patents, analysts estimated the final cost at approximately $6 billion.
Thus ended a particularly bloody chapter of the smartphone wars, not with a battle royale but rather with participants withdrawing to their respective camps.
The Walking Dead
Immediately after the Nortel and Motorola Mobility deals, the attention of Wall Street and the tech world turned to BlackBerry, maker of the once-ubiquitous mobile device that fell on hard times after the introduction of the iPhone and Android smartphones. In 2013, speculation was rampant that the only way for BlackBerry to unlock its true value was for it to sell off its patents.
With an estimated 44,000 worldwide patent assets—approximately 7,500 of those being U.S. assets—valuation estimates varied from $2 billion to $3 billion, with some predicting even more. To date, however, no deal has been announced and BlackBerry has continued to live on in the marketplace.
Lycos presumably has no notion of having its patent assets reach such lofty valuations. The smaller size of Lycos' portfolio—estimates peg the number of in-force patents at 28—may work against Lycos receiving top dollar for its portfolio. This is because, unlike with BlackBerry's vast portfolio, analysts and lawyers will be able to explore in-depth the validity and strength of every one of the assets.
Fear the Walking Dead
Since the Nortel and Motorola Mobility deals, a string of changes in the patent world appear to have fundamentally altered the landscape for sellers of large patent portfolios. For example, the America Invents Act ushered in a new era of cheaper and more efficient methods to invalidate patents. The Supreme Court's decision in Alice v. CLS Bank similarly provided judges with the ammunition to more readily invalidate questionable patents in the early stages of litigation and may be deterring some lawsuits from being instituted. And, in Commil USA v. Cisco Systems, the Supreme Court recently took the opportunity to "stress that district courts have the authority and responsibility to ensure frivolous cases are dissuaded."
On the other side, defensive-minded patent aggregators like RPX are continuing to buy patents before they can be used for offensive purposes. Companies are also more open to the purchase of patents before they can be bought by potential adversaries.
Google recently announced its "Patent Purchase Promotion," in which it invited patent owners to "tell Google about patents they're willing to sell at a price they set."
From a financial perspective, it is easy to see why companies are stockpiling patents: It may simply be cheaper to buy and hold a patent than to be on the receiving end of a patent infringement suit. With litigation costs easily rising into the millions, and the fear (whether justified or not) of a runaway jury, preemptive purchases of patents may be viewed as the best defense.
It is likely for this reason that more and more companies and patent aggregators are taking to the marketplace to purchase patents, thereby effectively cutting off their potential foes' lifeblood at its source.
Let Sleeping Corpses Lie
So what should one make of Lycos' announcement? Is it really two years late to the party, as some have suggested? It seems highly unlikely that Lycos will strike a per-patent deal anywhere near the numbers seen with the Nortel or Motorola Mobility deals.
On the other hand, as long as a company may, in the words of the Supreme Court, "use patents as a sword to go after defendants for money," even when the allegations are "designed to obtain payments that are based more on the costs of defending litigation than on the merit of the patent claims," patents will continue to be sold to the highest bidder when death comes knocking at their owner's door.
For the zombies, it matters little whether that highest bidder intends to use the patents for offensive or defensive purposes; they get their pound of flesh either way.
Matthew C. Gaudet, a Duane Morris partner in Atlanta, contributed to this article. Cited references available on request.
Reprinted with permission from Daily Report, © ALM Media Properties LLC. All rights reserved.