Fortress’s Two-Billion Dollar Verdict Against Intel Highlights a Patent Litigation Gold Rush Among Investment Firms
Recent years have seen steady growth in investment firms entering the patent litigation space. Some diversify their investment portfolios with stakes in patent litigations or licensing entities; others direct their entire business toward patent litigation. Target companies have lamented the influx of plaintiffs and litigation capital. Recent verdicts in the W.D.Tex. highlight the growth of investment firm patent litigation, along with potential benefits and risks.
In March, a jury in W.D.Tex. returned an infringement verdict against Intel in favor of a Fortress Investment Group (“Fortress”) subsidiary, VLSI Technology LLC (“VLSI”), for $2.18 billion, the second largest patent verdict ever. VLSI Technology LLC v. Intel Corp., No. 6:21-cv-00299 (W.D. Tex.). One month later, Intel received a non-infringement victory in another VLSI suit seeking $3.1 billion. VLSI Technology LLC v. Intel Corp., No. 6:19-cv-00255 (W.D. Tex.). A third jury trial between Intel and VLSI is looming, with VLSI seeking another $2 billion. The patents involved relate to basic power processor technologies potentially applicable to millions of processors sold in the United States each year. VLSI v. Intel will likely drag on through appeals and post-grant review proceedings, but it illustrates the potential windfall investment firms may recover in patent litigation, and the risk of committing capital to a potentially worthless investment. In light of these cases and the growth of investment-firm patent litigation, it is important to understand the strategies firms employ to acquire and assert patents, and what potential targets are doing to fight back.
Investment Firm Strategies for Patent Assertion
Outright Purchase: VLSI v. Intel offers an example of an outright purchase. Fortress founded VLSI as a holding company. Intel Wins Trial Over Chips, Dodging $1 Billion-Plus Blow (1), Bloomberg Law, April 21, 2021. VLSI acquired the patents now asserted against Intel from NXP Semiconductors, which had acquired them by purchasing Freescale Semiconductors, which acquired some of the patents by acquiring SigmaTel. S. Decker, M. Bultman, Intel Told to Pay $2.18 Billion After Losing Patent Trial, Bloomberg, March 2, 2021. NXP Semiconductors will receive a portion of any damages or licensing fee.
The asserted patents were filed between 2000 and 2009 and expire between 2020 to 2027. They involve basic functions of modern computers such as power management. At the time of filing, mobile technology was emerging, and companies rushed to gain broad patents in the space.
Fortress located one of many basic computing patents, reached a deal to acquire those patents from a company with no interest in asserting them and that stands to profit from any verdicts and license deals. Fortress’s patents withstood early validity challenges and reached a receptive jury that was willing to validate its damages model.
Acquisition of Companies Holding Patents: Target companies take many forms, including targets licensing and asserting patents. One example is Fortress’s acquisition of Finjan Holdings, Inc., a NPE that owns, licenses, and asserts cybersecurity patents. Another common target holding patents is a failed (or sometime successful) startup. Some fail for reasons distinct from the quality of their technology; others fail for technological reasons, but nonetheless have strong patents. For example, Fortress leveraged its ownership stake in Theranos to emerge valuable patents despite Thernos’s legal troubles. Francine McKenna, Theranos Closes Deal with Fortress to Shut Down Embattled Firm, MarketWatch, Sept. 17, 2018.
Acquisition of Stakes in Companies Asserting Patents: Investment firms looking to share in patent litigation profits without full risk and cost can invest in patent assertion companies. For example, SEVEN Networks Inc. (“SEVEN”) is a closely held company owned by Fortress and other private equity companies. Since Fortress purchased a controlling interest in 2015, SEVEN has levied ten patent infringement suits against industry leaders including Google, which was represented by Quinn Emanuel. Most cases already have settled, and the shareholder private equity companies share a portion of each settlement.
Litigation Funding: Third party funding (“TPF”) of patent litigation has grown as champerty and ethics laws have narrowed. TPF involves parties not involved directly in a matter funding a litigation and sharing in any profits. Funders do not own patents and have no right to assert them. Litigation funding typically differs little from other investment vehicles. Venture capitalists raise money from investors and issue shares that can be bought and sold like stocks. For instance, litigation funder LexShares specializes in creating a portfolio of lawsuits, of which investors can buy shares. Dan Packel, LexShares Opens New $100M Litigation Fund to Investors, The American Lawyer, June 10, 2020. The investors share in the proceeds stemming from those lawsuits.
Federal Court: A federal court challenge is the most common means for asserting patents. It allows for monetary damages and does not require that an asserting entity practice its patents. Choosing the federal court route, also, often allows patent owners to select plaintiff-friendly venues and jury pools.
International Trade Commission: The ITC is a quasi-judicial federal agency before which patents can be asserted. ITC challenges offer two major benefits: (1) the average time to resolution is faster than in district court – 18 months, Section 337 Statistics: Average Length of Investigations, United States International Trade Commission, April 16, 2021; and (2) ITC relief offers an exclusion order to prevent importation of infringing product, which is powerful leverage in forcing a settlement. ITC challenges are not without downsides. An ITC petitioner must show a sufficient domestic industry (“DI”) related to the patent. Investment firms that do not manufacture goods may struggle with the requirement. The Federal Circuit in InterDigital Communs., LLC v. ITC, 718 F.3d 1336 (Fed. Cir. 2013) held that DI can be satisfied through licensing. An investment must therefore find licensees before mounting an ITC challenge. In Certain Graphics Processors, DDR Memory Controllers, and Products Containing the Same, Inv. No. 337-TA-1037 (ITC 2017), in which Quinn Emanuel represented Qualcomm, complainant ZiiLabs relied on its license agreement with Intel to satisfy the DI requirement. The ITC’s speed and remedies can be a double-edged sword. Rapid proceedings can cause limited discovery, potentially reducing evidence for proving infringement. An exclusion order can be powerful leverage, but it can be designed around and the ITC cannot award monetary damages.
Targets Fight Back
Target Litigation Defense Strategies
Investment firms often have issues showing ownership of a patent, and therefore standing, and compliance with marking statutes. Patent ownership is highly technical and complicated by each patent sale. A mistake in chain of ownership can derail a plaintiff’s action. Investment firms, as non-originators of patents, require at least one purchase. Often, as in VLSI v. Intel, patents are sold several times prior to assertion.
Marking requires patent owners and their licensees to mark patent protected items. Failure to mark prevents a patent owner from recovering damages prior to when the defendant had actual knowledge of infringement. Investment firms aim to license their patents for profit. However, the more licensees, the more difficult to police licensee marking. Thus, early marking challenges can reduce damages and promote quicker settlements.
Defendants often emphasize that the investment firm is not an inventor. Jurors empathize with inventors, especially against corporations. Painting the plaintiff as a large investment firm can neutralize any juror tendency to support a patent owner. Emphasizing that an investment firm does not produce a product further engenders a negative reaction to the firm.
External Strategies: Win or lose, targets incur substantial expenses. Strategies that prevent or halt litigations are preferable. Inter Partes Review (“IPR”) offers one method for avoiding litigation. IPR allows a defendant to present prior art to the PTAB in the hope that the Board will find the invention obvious. However, the process is far from a sure thing. Intel attempted to employ IPRs against VLSI, but each time the Board denied institution, and thus the opportunity to argue the patents were obvious.
After the failed IPRs, Intel creatively filed an antitrust complaint against Fortress. The complaint alleges Fortress’s aggregation of patents “eliminat[es] competition . . . result[ing] in product suppliers having very few if any alternatives to [Fortress] to license patents . . . resulting in inflated royalties and reduced output in those markets . . . and for licenses to Defendants’ overall portfolio.” Intel Corporation v. Fortress Investment Group LLC, No. 3:2019-cv-07651 (N.D. Cal. 2021). The challenge faces a steep uphill battle. Antitrust is intended to prevent restraints of trade. Patent rights, in stark contrast, are designed to provide monopolistic control of an invention for a period in exchange for its disclosure. Intel will have to show that a monopoly on a single invention is allowable but purchasing a number of patents in the same field constitutes an unlawful restraint on trade.