A string of successful settlements by Network-1 undermines FTC’s definition of ‘litigation PAEs’

“An IP Camera Powered by Power Over Ethernet” by Olli Niemitalo. Public domain.

Network-1 Technologies, Inc. (NYSEMKT:NTIP), is a company whose activities are focused upon the licensing and protection of its intellectual property assets, which include 28 patents covering various areas of technology including data networking, telecommunications, media content identification and document stream operating systems. Along with licensing the IP assets it owns, Network-1 also works with independent inventors to aid them in the development and monetization of their own patent assets.

On Tuesday, October 4th, Network-1 announced a settlement with San Jose, CA-based telecom firm Polycom, Inc. (NASDAQ:PLCM) which successfully ended a patent infringement case involving a remote power technology owned by Network-1. Under the terms of the settlement, Polycom will pay Network-1 a license initiation fee of $5 million for past sales of Polycom’s “Power over Ethernet” products. $2 million of the licensing fee is due within 30 days of the settlement and the rest is to be paid in installments until October 2020, unless all claims of Network-1’s patent are deemed invalid.

Network-1’s patent-in-suit was U.S. Patent No. 6218930, titled Apparatus and Method for Remotely Powering Access Equipment Over a 10/100 Switched Ethernet Network. It claimed an apparatus for powering equipment in a data network which includes a data node adapted for data switching, an access device adapted for data transmission, a data signaling pair transmitting data between the data node and the access device, a main power source supplying power to the data node, a secondary power source supplying power via the data signaling pair from the data node to the access device, sensing means for delivering a low level current from a main power source while sensing a resulting voltage level on the data signaling pair and control means adapted to control the power supplied by the secondary power source to the access device in response to the determined voltage level. The innovation is designed to provide high power levels to data communications equipment which may be widely distributed from a centrally powered system which can be protected during a power outage and determine if a remote piece of equipment is accepting power. The patent, issued in April 2001 and assigned to Merlot Communications, was transferred to Network-1 in November 2003.

Anyone who has followed recent developments in the U.S. patent landscape, however, might note something interesting occurring in this particular case. According to the recent patent assertion entity (PAE) report put out by the Federal Trade Commission (FTC), Network-1’s business activities would seem to put it in the category of what the FTC calls a “litigation PAE.” All PAEs are businesses that acquire patents from third parties and generate revenues by asserting those patents against alleged infringers. As per the FTC’s study, litigation PAEs have a much higher tendency to file a patent infringement suit before reaching settlement than what the FTC calls “portfolio PAEs,” entities which license large patent portfolios without first filing suit in U.S. district court.

However, the terms of the licensing agreement Network-1 negotiated with Polycom flies in the face of the FTC’s key findings on litigation PAE activity. In its report, the FTC claimed that, while litigation PAEs account for 96 percent of PAE patent lawsuits and 91 percent of PAE patent licenses, they only accounted for 20 percent of the total revenue earned through these licenses. The FTC also claimed that the majority of litigation PAE licenses were for $300,000 or less, leading directly to the following declaration: “Given the relatively low dollar amounts of the licenses, the behavior of Litigation PAEs is consistent with nuisance litigation.”

Unfortunately for the FTC, Network-1’s license agreement with Polycom is horribly inconsistent with the agency’s findings on the exact business model that Network-1 seems to employ. And the Polycom settlement isn’t the only multi-million license on the ‘930 negotiated by Network-1 this year alone. In early August, the company announced the successful negotiation of a $6 million license initiation fee for the ‘930 patent with American information technology firm Dell Inc. (NYSE:DVMT). In June, Network-1 announced another license agreement with Japanese tech giant Sony Corporation (NYSE:SNE), although the exact money amount of that agreement seemed to be undisclosed. As of the recent Polycom license agreement, Network-1 reports that the ‘930 patent alone has generated more than $90 million in revenues between May 2007 and June 2016.

Network-1 has negotiated multi-million dollar amount licenses for other patents it owns. In July, the company announced the settlement of patent litigation against Apple, Inc. (NASDAQ:AAPL) for a $25 million license fee agreement to practice technology covered by U.S. Patent No. 6006227, which is titled Document Stream Operating System. The patent protects methods which allow for unified search, indexing, displaying and archiving of documents, which can include text, pictures, animations or other types of data, in a computer system. Last November, Network-1 announced a settlement to its patent litigation against Microsoft Corporation (NASDAQ:MSFT) in which Network-1 received $4.65 million from Microsoft to license the technology covered by the ‘227 patent.

Despite Network-1’s tendency to enter into litigation before licensing patents through settlements, its corporate revenues are strong, again undermining the FTC’s assertion that highly litigious PAEs necessarily reap lower revenues. In mid-August, Network-1 announced strong earnings results for the second quarter of 2016, during which it earned revenues of $20.4 million. Patent licensing revenues increased year-over-year from $1.7 million during the second quarter of 2015 up to $2.9 million during the most recent quarter, an increase of 69 percent. Network-1’s press release on the earnings report indicates that this increase in licensing revenues is due mainly to a settlement reached in June, the same month in which the company announced it had settled its aforementioned litigation against Sony for the ‘930 patent.

The FTC’s recent study attempts to describe the activities of an entire sector of the U.S. economy, but it only looks at data from 22 corporate entities responding to the survey. One of the FTC’s key findings is that litigation PAEs reap low-money licenses from small portfolios and thus it tags all litigation PAEs with this concept of “nuisance litigation.” However, it should be clear to anyone looking at the recent successes of Network-1, which has asserted few patents in cases which have earned multi-million dollar settlements, that something in the FTC’s methodology could very well be misinforming the overall conversation on PAE activities.