Antitrust Complaint Reveals New Details on Fortress-Uniloc Deal

March 19, 2021

Since late 2019, Apple and Intel have pursued claims against Fortress Investment Group LLC and a variety of affiliated NPEs, arguing in part that they have violated antitrust and unfair competition laws by aggregating and asserting a “massive but obscured” patent portfolio in order to charge supracompetitive royalty rates. The plaintiffs have now filed a second amended complaint (SAC) in that case, addressing certain pleading deficiencies flagged earlier this year by Northern District of California Judge Edward Chen but also adding a variety of additional facts providing context for the defendants’ alleged anticompetitive “scheme”. Perhaps the most significant newly disclosed information pertains to the 2018 deal in which Fortress acquired the assets and monetization business of Australian NPE Uniloc Corporation Pty. Limited—including key financial terms that Fortress and Uniloc had previously fought to keep under seal in other litigation.

As first reported by RPX, Fortress took over Uniloc’s assertion business in 2018 through a transaction in which Uniloc 2017 LLC, a Fortress subsidiary and one of the present antitrust defendants, acquired the bulk of the Uniloc patent portfolio from Uniloc subsidiary Uniloc Luxembourg S.à r.l. This represented an apparent strategic shift: while Fortress’s prior forays into patent assertion began when other NPEs defaulted on loan payments to Fortress, requiring them to hand over patents to Fortress that had been pledged as collateral—as was the case for Inventergy Global, Inc., also sued here by Apple and Intel—the Uniloc deal appears to be the first time that Fortress pursued a patent assertion strategy through such a broader acquisition.

However, after that 2018 agreement came to light during a dispute with Apple over standing in certain Uniloc suits filed before the deal, Fortress and Uniloc sought to redact a wide swath of information about their relationship from related court filings, including details pertaining to their licensing strategy and the financial terms of their arrangement. This attempt was ultimately unsuccessful for the most part, leading to multiple trips to the Federal Circuit and rebukes from District Judge William Alsup of the Northern District of California—although certain crucial pieces of financial data, including the amounts of money that had changed hands, remained under seal.

That has now effectively changed with the filing of the SAC by Apple and Intel, which discloses new information about the reasons behind the Fortress-Uniloc deal as well as the financial terms of the agreement. Specifically, the new complaint cites a Uniloc “Management Report of the Board of Directors for the fiscal year that ended June 30, 2017, which Uniloc produced to Apple in German litigation on a voluntary and nonconfidential basis”. That report explains that as a result of “significant doubt on [Uniloc’s] ability to continue as a going concern as [of] 30 June 2017”, Uniloc had agreed to sell “substantially all of [its] assets and liabilities” to Uniloc 2017, confirming the latter entity to be a “Delaware LLC owned and controlled by Fortress”. The report further stated that due to an “overall chill in the environment for companies operating in the patent enforcement space . . . opportunities may exist for consolidation among companies with complementary operations or competitive advantages”.

Additionally, the management report revealed that the consideration paid for that transaction was $17.6M, “plus the amount necessary to retire all the Fortress notes”. As the report purportedly stated elsewhere that Uniloc Luxembourg had borrowed $16M from Fortress, this put the total purchase price at $33.6M. Moreover, “[i]n addition to the purchase price, Uniloc Luxembourg received an entitlement ‘to receive additional payments of up to USD 25,000,000 upon the accomplishment of certain revenue milestones by Uniloc 2017 over the subsequent five years’”.

The SAC contrasts the $33.6M purchase price with the $6.3M outside valuation of Uniloc’s assets also disclosed in the report, a valuation that Uniloc counsel later described in litigation as “based upon largely the amount that they paid for the patents”. Fortress paid so much more for Uniloc over the valuation amount, argue Apple and Intel, “because it recognized that those patents would continue to provide multiples of value when Fortress solidified its control over them along with other substitute patents already under Fortress’s control, thus eliminating competition that had constrained Uniloc Luxembourg from asserting the patents and enabling Fortress and Uniloc Luxembourg to extract supracompetitive royalties”. (As detailed below, a key component of the plaintiffs’ antitrust claims is the alleged anticompetitive effect of Fortress amassing such a large portfolio, as defendants faced with infringement claims over some patents may find that the portfolio also includes “substitute” patents preventing them from designing around those initially asserted.)

Furthermore, the plaintiffs argue that this strategy includes “reliance on a proprietary software platform, Centurion, to aid in accomplishing profitable acquisitions by identifying candidate patents”, according to the management report—technology that, as described publicly by Uniloc CEO Craig Etchegoyen, had allowed Uniloc to acquire patents at low cost and “then to augment their value through internal development of additional complementary patents”. (Deposition testimony has independently confirmed that Uniloc 2017 now owns Centurion.) This technology, argue Apple and Intel, has facilitated the acquisition of market power by Fortress: “Centurion has thus aided Uniloc in pursuing a strategy of creating a portfolio of patents comprised of substitutes and complements, which, as further described below, has helped Fortress to create market power in certain relevant patent markets”.

The Apple-Intel complaint also interprets the Fortress-Uniloc transaction against the backdrop of the aforementioned standing dispute, in which Apple had alleged that under certain earlier agreements between Uniloc and Fortress—agreements related to a prior funding arrangement between the two—Uniloc had defaulted by failing to meet certain revenue targets, triggering a provision that automatically transferred certain patents back to Fortress. That default, Apple argued, meant that Uniloc lacked sufficient rights in certain asserted patents, such that it did not have standing to sue. Relevantly, Fortress argued during the course of the standing dispute that it had “never believed them to be in default” (as argued by a Fortress executive), and that its decision to give Uniloc additional capital showed that the debt had been satisfied.

In their latest antitrust complaint, Apple and Intel point to Fortress’s reaction to Uniloc’s default as evidence of their anticompetitive “scheme”: “Fortress’s willingness to overlook and abrogate its rights under its agreements with Uniloc USA and Uniloc Luxembourg further demonstrates that Fortress and Uniloc USA and Uniloc Luxembourg have not simply engaged in an arms’ length transaction, but instead have found common cause in exploiting the benefits of aggregation—a path that Fortress deemed more beneficial than obtaining its full rights under the agreements with Uniloc Luxembourg and Uniloc USA”.

More broadly, the SAC highlights Uniloc 2017 as an example of how “Fortress’s use of a web of separate PAEs to disperse and enforce the portfolio also ensures that no single entity can offer a comprehensive license to the Fortress portfolio and thereby increases the number of transactions necessary for licensees to attempt to secure patent peace or the number of litigations that Defendants can bring.”


Additional Background on the Plaintiffs’ Antitrust Claims—and Their Latest Complaint

As previously detailed by RPX, the present antitrust dispute began in October 2019 with a complaint filed by Intel alone, but the company dismissed that case soon after in favor of a broader action cofiled with Apple (3:19-cv-07651). The original complaint in that second case accused the defendants—including Fortress and several NPEs associated with it—of stifling competition in the electronics market by aggregating a patent portfolio so large that it both encompasses substitute patents, preventing companies from designing noninfringing alternatives; with the portfolio’s size enabling serial litigation that either forces defendants to “capitulate to supracompetitive licensing demands” or contend with burdensome litigation expenses. The plaintiffs also accused them of unlawful and unfair conduct by acquiring SEPs and demanding royalties that were not fair, reasonable, and non-discriminatory (FRAND), thereby evading FRAND commitments to standard-setting organizations (SSOs).

However, Judge Chen dismissed this first complaint in July 2020, holding that while the plaintiffs’ “general theory of antitrust liability was not inherently implausible”, the antitrust market they defined for their patent aggregation claims—the “Electronics Patents Market”—was “vague and overbroad”. Judge Chen further found that within that market, the plaintiffs had not provided specific examples in which the lack of substitute patents had forced an accused infringer to pay a supracompetitive royalty. The court additionally rejected the defined “Input Technology Market” cited for the SEP claims for a similar reason.

Apple and Intel then amended their complaint in August 2020, identifying 13 “narrower product markets” within which the defendants’ conduct had allegedly resulted in competitive harm. That first amended complaint (FAC) also provided specific examples within those markets of Fortress NPEs having asserted certain patents and making allegedly outsized demands, further identifying substitutes for the patents within the same Fortress portfolios.

Nonetheless, Judge Chen dismissed the FAC in January 2021, again due to pleading issues, though with leave to amend. While acknowledging the greater specificity provided with respect to market definitions, Judge Chen found that just three of the 13 markets (“network-based voice messaging”, “remote software updates”, and “MOSFET channel fabrication) were sufficiently pled, as they were defined in a manner that did not cover a general technical field (as the others did). Judge Chen also dismissed with prejudice as to four markets in which Fortress had not yet asserted patents.

However, Judge Chen found that even for the adequately pled markets, the plaintiffs had not shown they had market power within each, finding that the FAC insufficiently alleged that “there was supracompetitive pricing and/or that such pricing was attributable to the aggregation of patent substitutes”. In particular, Judge Chen noted that the FAC lacked detail on what licensees had paid to Fortress due to confidentiality restrictions, and rejected other evidence and related arguments offered by the plaintiffs—including the notion that certain patents were shown to be worth less than the amounts sought by Fortress because their prior owners decided not to assert them. He also disagreed with the plaintiffs that supracompetitive pricing could be shown through litigation demands, which he characterized as having limited probative value—arguing that even if such a demand has “some nexus to reasonable royalties if rationally based . . . it is still only a demand; there is no indication that anyone has paid that demand or anything close to it”. Judge Chen further faulted the FAC for not showing how any anticompetitive effect occurred due to the aggregation of specific patents, nor how many substitute patents are available for such assets—stating that it was not clear if any asserted patents are “crown jewels”, which would have made it easier to determine if the defendants had the power to extract a supracompetitive royalty.

Additionally, Judge Chen dismissed the plaintiffs’ SEP-related claims with prejudice as barred by the Ninth Circuit’s decision in FTC v. Qualcomm, which held that the breach of a FRAND commitment to an SSO does not rise to the level of an antitrust violation, and is better addressed under contract law.

The SAC filed on March 8 pushed back on a number of these points, including Judge Chen’s holding that litigation demands are of limited probative value. On that front, Apple and Intel noted that the Federal Circuit requires that such a demand be a “good faith estimate of the perceived value of their patents in the relevant markets and the amounts” that a plaintiff “genuinely expect[s] to receive” should it prevail, while damages requests and contentions are among the court-ordered exchanges that fall within counsel’s ethical and professional duty of candor. Indeed, the plaintiffs argued that the $2.2B verdict recently issued for Fortress’s VLSI Technology LLC against Intel is proof that companies must take such demands “seriously”, as “the jury awarded VLSI close to what it sought from Intel, demonstrating that damages demands are not just requests”.

Apple and Intel also raised several points related to the litigation behavior of the prior owners of Fortress’s patents—noting that these include “sophisticated companies, many of which had experience asserting patents”, whose “behavior indicated a willingness to litigate when that litigation was in their profit-maximizing interests”. However, they argued that the “patents’ insufficient expected value [did not] make the assertions worth the costs to those prior owners”. In contrast, Fortress and the other “[d]efendants’ decisions to assert previously-unasserted patents demonstrates a post-aggregation increase in price and/or licensing value attributable to aggregation and the resulting elimination of competition”. To that end, in describing the previously unasserted patents litigated by Fortress within each antitrust market addressed in the complaint, the plaintiffs provided an overview of litigation that the patents’ prior owners did file, to underscore that they would have asserted the patents now being litigated by Fortress-controlled entities if they were “worth the cost of assertion”. Further bolstering those points were comparisons between the patents’ acquisition prices, cited as “reliable prox[ies] for the pre-aggregation value” of those patents, and the amount sought by Fortress NPEs in litigation, as compiled in an exhibit—details likely added in response to Judge Chen’s January ruling.

The SAC also made significant changes to most of the definitions of the antitrust markets remaining in the complaint. Apart from the three that Judge Chen found to be adequately pled in the FAC, the SAC redefined various markets much more narrowly, focusing more on specific features than on the general technical field. For instance, the plaintiffs defined one market as “mobile device-to-device communication” in the FAC, but as “mobile device-to-device communication through a network-coupled intermediary device” in the second. In another example, the plaintiffs redefined and clarified their prior “Cache Management Patents Market” to the “Preventing Stalls for Cache Misses Patents Market”. Moreover, the SAC specified key patents as well as both substitute and complementary assets for each market, again a likely response to an issue raised by Judge Chen.

Beyond those changes, the SAC offered new examples of the “harm to innovation that can arise from aggressive patent assertions made possible by eliminating competition as a result of patent aggregation”—in particular, focusing on Laminar Research, one of the companies sued by Uniloc within the “Remote Enabling and Disabling of Software Components” market. The SAC cites an open letter to Congress from Austin Meyer, Laminar’s president and creator of the popular flight simulator X-Plane, detailing the high cost of defending against Uniloc litigation filed against his company—and listing the other projects that could suffer due to his having to spend time and money on the litigation instead, including philanthropic efforts and other projects designed to advance the state of the art in flight safety.

For more on the earlier history of the Apple and Intel litigation—and for more background on Fortress’s patent monetization efforts—see here.