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IP, Patent, Risk Mangement, RPX

Patent Aggregator RPX Accused Of Extortion, Racketeering & Wire Fraud

The word “extortion” is often used by patent infringers (and their apologists) to describe licensing activity carried out by patent owners.  In reality, however, the patent owner often does nothing more than exercise the basic right of enforcing a patent through civil litigation.  Some suggest that these patent owners rely on dubious arguments or enforce patents that are likely invalid.  However, patents enjoy a presumption of validity as a matter of federal law, and characterizing a lawsuit as frivolous requires more than just disagreeing with the infringement theory (which often turns out to be the case).  While some patent owners might bluff, actually resorting to litigation requires convincing attorneys to put their reputations on the line by affirming that an adequate investigation was conducted.

However, RPX doesn’t always (or ever, if you ask them) threaten litigation over patents they own.  In fact, due to its non-assertion pledge, RPX avoids the free-rider problem by offering freedom from patents asserted by others. Of course, if it turns out that RPX is orchestrating enforcement of patents outside of its personal pool and simultaneously offering a “risk management” solution to the patent enforcement “problem,” the business model no longer resembles patent licensing at all.  In early February, I suggested that their free-rider solution was not without an element of risk in itself:

When it comes to patent risk management, the difference between a perfectly legal licensing business and an illegal racketeering enterprise may be subtle nuances in execution of the day-to-day operations, rather than the stated policies and objectives of the organization.   

(From the post: Free Rides, Acquisitions And Sustainability After The RPX IPO)

Little did I know that just days earlier, on January 24, 2011, two representatives of Kaspersky Lab wrote a letter addressed to the White Collar Crime Division of the FBI, asking the agency to open a criminal investigation into the business activities of RPX.  A copy of the letter obtained from a GametimeIP reader, and embedded below, details an alleged conspiracy involving RPX, a pattern of patent litigation and use of mail and electronic communications to solicit membership fees from Kaspersky.

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For anyone who attended or viewed RPX’s retail roadshow, the letter paints an entirely different picture of the company’s solicitation efforts.  CEO John Amster beamed publicly about how his firm could engage in friendly, productive and frank conversations with prospective subscribers since RPX was not threatening their clients with litigation.  In stark contrast, Kaspersky’s letter alleges that

… RPX suggest[ed] that there is no other option to license [certain patents] except to join RPX, and threatening that RPX was currently negotiating the acquisition of a portfolio that might be a threat to Kaspersky.

Another conversation Kaspersky interpreted as a threat reminded the company that:

… were Kaspersky to ever sue an RPX member, RPX would make the patents in its pool available to that member to defend or counterclaim against Kaspersky or to attack Kaspersky.

Of course, the “catch and release” aspect of RPX’s business model was also allegedly communicated to Kaspersky:

RPX suggest[ed] that even though it pledged not to use its patents offensively, RPX could sell its patents to third parties to be used in litigation against non-members. The messages also stated that a company-defendant which does not contribute financially to the release from litigation “would harm its relationships with its industry peers”.

Of course, this is an entirely one-sided account, and many of the statements Kaspersky refers to may be taken out of context.  In addition, in more than four months since the date of this letter, there’s been no apparent attempt to seek an indictment of the company or its principals.  In its prospectus, RPX identified “interpretations of current laws” as one of the risk factors potentially affecting the company’s profitability, although there’s no indication that it feared racketeering was on the table:

Our business, prospects, financial condition and results of operations may be harmed if our operations are found to be in violation of any existing laws or any other governmental regulations that may apply to us. … Even if our business practices are ultimately not affected, we may incur significant cost to defend our actions, incur negative publicity and suffer substantial diversion of management time and effort.

Working against RPX is the vaguely worded extortion statute (18 USC 1951) which, when combined with a zealous and motivated prosecutor, could at least result in the “negative publicity and … substantial diversion” mentioned in the prospectus.  Kaspersky uses strong language to describe RPX’s actions:

Beginning no later than December 8, 2009, and continuing through the present day, employees, officers, and agents of RPX were involved in a course of conduct in violation of sections 1341, 1343 and 1951 of Title 18 of the United States Code, using a legally formed entity, RPX, as a vehicle for receiving financial gain from their wrongful activities. Their actions pose a threat of indefinite duration to non-members, including Kaspersky, of incurring significant economic harm from frivolous patent litigation. Furthermore, the actions of RPX significantly affect interstate and foreign commerce.

Ultimately, however Kaspersky’s complaint centers around the fact that it considers the threatened legal actions to be “frivolous,” which is very much in the eye of the beholder.  Companies accused of infringing patents may believe that they don’t infringe, or that they can prove the patents invalid, but that, without more, does not make the action frivolous. More significant than Kaspersky’s specific allegations is the fact that such a strongly worded letter was sent in the first place.  Certainly, as RPX expands both vertically and horizontally (in financial and technical terms), they’ll encounter additional firms with similar reaction to Kaspersky.  How they react, and how successful they are in converting these leads into clients may be part of the sustainability puzzle.

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Discussion

7 thoughts on “Patent Aggregator RPX Accused Of Extortion, Racketeering & Wire Fraud

  1. When I was writing about RPX for a UK patent law blog, one commenter noted that RPX sounded like a “protection racket.” Apparently, Kaspersky isn’t the only one who views RPX’s business model as marginally legal; therefore, the company should pay heed to its public image and to (as you say) every detail of the execution of its policies.

    Posted by patent litigation | June 6, 2011, 5:21 pm
  2. If you own a patent, but you do not use the patented invention in a product or service, you are still entitled to enforce your patent. You are known in the world of patents and patent enforcement as a “non-practicing entity” or “NPE” — or more rudely put, a “patent troll.”

    Posted by Jared | June 7, 2011, 5:05 pm

Trackbacks/Pingbacks

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