At 7:30 pm on December last year, when New York City was getting ready to celebrate the end of 2013, Anthony Hayes was driving to the offices of Sichenzia Ross Friedman Ference LLP, a securities law firm based in the city’s financial district. The chief executive officer of Spherix Incorporated had worked through the holidays to finalize the purchase of 101 networking-related patents from Rockstar , a consortium of leading technology companies, such as Apple and Microsoftand was formed after Canadian telecom giant Nortel went bankrupt in 2011. The consortium has been in the news recently for filing complaints against Google.
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“People at Rockstar literally brought their laptop computers to New Years Eve parties so they could review and edit documents,” he says. Worth $60 million, the transaction was the largest patent deal last year and makes Rockstar the biggest shareholder in Spherix, an IP monetization firm that was a pharma drug company less than a year ago.
Those patents, along with the eight patents that Spherix bought in July last year, set the stage for another round of potent patent wars in the networking industry. The stakes this time are higher because Spherix’s lucrative trove is worth an estimated $20 billion and includes several standards-essential patents or patents that have been used in setting protocols and standards in the networking industry.
An “Interesting” Space That Could Potentially Yield $20 Billion
Hayes says Spherix became interested in the sale because Rockstar’s patents were in an “interesting” space. Elaborating further, he says they deal with the specifics of movement of traffic, including video and data, across a network and cover a broad swath of networking-related areas from access to voice communication networks. In addition, they include technologies that are at the heart of networking such as switching, vLAN and Multicast.
For example, telecom companies such as Verizon and AT&T routinely use switches to regulate and intercept traffic across the Internet. Similarly, Rockstar’s patents also included patents that deal with control and operations of subnets and message segmentation (or the process by which messages are broken up into packets at the origin and reassembled at the target domain).
“The industry standard nature of the patents crystallizes the importance of monetization,” says Hayes, whose firm actively seeks out inventors to help them monetize patents. A majority – seventy nine, to be precise – of the patents have already been granted whereas twenty one are being evaluated. The patents also have a broad geographical spread from the United States to Europe.
According to a Rockstar press release, the patents have a total addressable market or TAM of $20 billion. Within a business context, TAM refers to the total numbers of possible audiences or users for a product. In this context, however, Hayes explains that this figure refers to the “estimated total amount of revenue generated by potentially infringing activities and products sold in 2013 alone.”
Revenue in this case refers to the “reasonable royalty rate” per patent, a complex figure that is calculated based on several variables such as duration and term of the patent, product profits made using the patent and commercial relationship between the licensor and licensee.
The average rates for patents depend on the industry and nature of patents. However, even if one assumes a two percent royalty rate per patent, the figure still works out to $4 billion for Spherix’s patent trove. That’s still a healthy 67 percent return for an investment of $60 million.
Hayes says the company has been examining potential infringers but refused to disclose specific names. However, Rockstar’s document advertising its patents provides a clue; according to the document, the patents are extensively used in the telecommunications and networking area. Some pretty big names, such as telecom and cable providers come to mind, when one thinks of these industries.
The Case For Patent Litigation
Standards-essential patents have always been a potent tool for technology companies to crush competition. The cases have been abrasive where giants such as Google were left with mud on their face when EU judges found them guilty of patent abuse. But the Apple-Samsung case last year proved an exception to the norm. Back when it was the biggest company in this space, Microsoft routinely used such patents to litigate or financially weaken competitors. However, the Redmond-based company is on the other side now. Last year, it formulated a policy that emphasizes negotiation and licensing over lawsuits.
In recent times, there has been talk of reforming the patent system to discourage trolls. I asked Hayes if he was of the same opinion since Spherix Incorporated could be mistaken for a similar company attempting to earn cash from a now-defunct company.
However, Hayes has a different take on the matter. “The fact that the company failed doesn’t mean that the people who were involved in the creation of those patents shouldn’t be compensated (for their time and effort in developing the industry standards),” he says. He explains the situation with the analogy of the situation that arises when a famous building (such as the Empire State Building) declares bankruptcy. “No one thinks renters (in the building) need to stop paying rent when something like this happens,” he says. “If a company fails, everyone expects the company’s assets to be put to use for return on investment for people who created that property.”
Based on his several years experience as a litigation lawyer, he says negotiation and licensing is preferable but doesn’t always work. “I have been personally and routinely blown off by companies (when he tried to negotiate with them),” he said.
Given the nature and potency of the current set of patents, that might not be the case this time.