In what may hopefully become the death knell of the patent privateering model, Rockstar has announced the sale of its 4,000 remaining patents to RPX.  Rockstar was a $4.5 billion boondoggle of a joint venture between several leading tech companies, including Microsoft and Apple, to buy Nortel’s patent portfolio out from under Google.  The goal of this strategic alliance was to create a patent privateer to initiate lawsuits against Apple and Microsoft’s main rival Google and the Android operating system.  

This goal was quickly realized when Rockstar sued Google and some of its Android partners in October 2013.  But Google settled the case and Rockstar sold its remaining patents for only $900 million soon after.  It’s quite clear Rockstar is no 21st Century Blackbeard.   Microsoft and Apple are certainly prosperous but no stockholder can welcome an investment that resulted in such an overwhelming loss, even when you factor in an undisclosed transaction fee and the fact that 2,000 of the patents had previously been distributed.

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Hopefully the brutal facts of the market will discourage future efforts at privateering.  But even if it may appear lucrative there are many reasons why these practices should be strongly discouraged.

Patent Privateering is Messy

Patent privateering seems simple on paper.  Often, a company can’t or won’t assert its patents against its rivals for fear of being countersued, to avoid upsetting mutual customers, to prevent bad publicity, or because it already has agreements in place to license its portfolio at a capped rate.  This company may think that all these problems will go away if it enlists a third party – a patent troll - to assert its patents for it. 

However, in practice patent privateering is incredibly messy.  Rivals, who are accustomed to patent peace and beneficial cross-licensing agreements, will often balk at new high fees.  This often leads to litigation, which is expensive and delays when the patent troll can earn revenue off its acquired patents. 

Patent Privateering May Not be Profitable

The Rockstar transaction shows that patent privateering does a poor job of actually making money.  Starting with the Nortel auction, the threat to operating companies of disruptive patent litigation drove the price of Nortel’s patent portfolio to a staggering $4.5 billion.  However, when Rockstar actually tried to assert the patents it was tied up in litigation for a little over a year and  faced a countersuit.  Rockstar ultimately settled and almost immediately sold its patents at what appears to be a significant loss.  This is the likely result when patent values are driven up due to their potential threat but aren’t easily monetized based on that inflated value.

Patent Privateering Can't Bully Everyone

Part of the way that 19th century pirates were defeated was through alliances between countries to build a united defense.  Similar models are being formed in the rough waters of patent litigation by innovative firms such as the defensive patent model used by RPX.  These new models diminish the attractiveness of patent privateering because they make it easier to fight against bad patent claims.  Defensive patent models have other benefits as well.  They are generally less expensive because patents can be purchased at their market value rather than at the inflated value caused by their threat and potential for harming rivals.  In addition, defensive models promote innovation.  Patent privateering is far less attractive when dealing with these new defensive models.

Patent Privateering Reduces Innovation

The next generation of tech is often built out of improving and combining already existing technologies.  This means that tomorrow’s innovators need access to today’s technology at reasonable fees.  Patent privateering disrupts this innovation because its very nature is to drive up patent fees in order to protect the company engaging in patent privateering from competition. 

Rockstar’s sale to RPX is a remarkable indicator of the future of patent practices in the tech industry.  Instead of selling its patents to another troll, Rockstar sold its patents to a defensive patent aggregator that has pledged never to file a lawsuit with its patents.  RPX’s model allows tech companies to focus on innovating rather than diverting important resources to litigation.

Only in movie theatres do people miss the loss of high sea pirates.  And no one will miss the hopeful loss of patent privateers.

Balto is a former policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and antitrust lawyer at the U.S. Department of Justice. He has been a senior fellow at the Center for American Progress and has worked with the International Center on Law and Economics, both of which receive funding from many organizations including Google. Balto has also published research and authored scholarship for Google on technology policy topics