A Grammy-Class Outcome to the Rockstar Patents

Today’s definitive agreement for purchase of the Rockstar patents by a subsidiary of patent clearinghouse RPX Corporation, with simultaneous licensing of the portfolio to more than 30 technology companies, including Cisco, represents a victory for common sense. It also puts to rest a wayward and misguided business model that threatened to add costs to industry and consumers with no benefits to innovation or economic development.  This step should also send a strong message to companies who toy with the idea of “monetizing” their patent portfolios through transactions with private equity and non-practicing-entities, or by shaking down other industry participants: They will find themselves isolated. In short, they will end up as net losers if they initiate a game based on short-sighted greed.

We’re taking a different approach. Working with RPX, we devised a licensing model where even those who chose not to join with more than thirty of their peers in this purchase will still have the chance to license on comparable and fair terms.  Kent Walker, the general counsel of Google, was instrumental in pulling this together. Brad Smith and Bruce Sewell, the general counsels of Microsoft and Apple, deserve huge credit for working with the other Rockstar members – Blackberry, Ericsson and Sony – to reach a consensus that produced this positive result.

The origins of “Rockstar” are found in the smartphone patent wars that began several years ago. While we have no quarrel with companies using their patents to stop the copying of differentiating features without permission (and in fact commented favorably on the direct Apple-Samsung litigation), the driving up of patent valuations as each side in the war sought to bulk up for battle ended up serving no one other than lawyers and middlemen. Rockstar’s litigation strategy turned out to be inconclusive, keeping many lawyers very busy but with little money changing hands to date.

The model we developed with RPX has two stages:

In Phase 1, all were welcome to participate in supporting RPX’s purchase of the portfolio. Working with Jim Millstein, the Treasury’s former Chief Restructuring Officer who saved AIG and GMAC, and who is one of the country’s most creative restructuring bankers, we developed a plan that minimized the chance for squabbling over relative contributions and free ridership (this is harder than it sounds!). Almost thirty companies ended up participating on this basis. With that collective effort, RPX, including its own contribution, raised sufficient funds to negotiate a fair transaction with Rockstar.

In Phase 2, all who did not participate in Phase 1 will continue to be welcome on reasonable and non-discriminatory terms designed to be consistent with what the original participants paid. Importantly, Phase 2 will last at least several months, to allow companies with complex internal processes to make a decision and participate

We hope this provides a model for future cross-industry actions to address the scourge of non-practicing entity patent assertion.  Along with springing licenses (which Google pioneered in the technology industry) whereby competitors hold their patents vis a vis each other, with a license “springing” into existence if a patent is sold to a non-practicing entity, this approach can help limit the supply of patents to a model that beggars all participants. We will also work hard through counteractions to make sure that companies who seek to monetize their patents by selling them off to NPE’s pay a price many multiples of what they sought to gain.

What is most critical, however, is changing the law to level the playing field and restore a patent system that rewards innovation, not litigation gamesmanship. The chance will come later this spring to enact meaningful patent reform. We will be there as advocates, and hope you will be too.

Note: Cisco took a financial charge in its first quarter of fiscal year 2015, as disclosed in our earnings documents and 10Q, based on the expected resolution of the Rockstar-associated litigation, so there is no financial impact to Cisco as a result of today’s announcement.