throbber
Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 1 of 48
`
`
`
`WILMER CUTLER PICKERING
` HALE AND DORR LLP
`William F. Lee (pro hac vice to be filed)
`william.lee@wilmerhale.com
`Joseph J. Mueller (pro hac vice to be filed)
`joseph.mueller@wilmerhale.com
`Timothy D. Syrett (pro hac vice to be filed)
`timothy.syrett@wilmerhale.com
`60 State Street
`Boston, MA 02109
`Telephone: (617) 526-6000
`Fax: (617) 526-5000
`
`
`WILMER CUTLER PICKERING
` HALE AND DORR LLP
`Mark D. Selwyn (SBN 244180)
`mark.selwyn@wilmerhale.com
`950 Page Mill Road
`Palo Alto, CA 94304
`Telephone: (650) 858-6000
`Fax: (650) 858-6100
`
`WILMER CUTLER PICKERING
` HALE AND DORR LLP
`Leon B. Greenfield (pro hac vice to be filed)
`leon.greenfield@wilmerhale.com
`Amanda L. Major (pro hac vice to be filed)
`amanda.major@wilmerhale.com
`1875 Pennsylvania Avenue NW
`Washington, DC 20006
`Telephone: (202) 663-6000
`Fax: (202) 663-6363
`
`Attorneys for Plaintiff
`Intel Corporation
`
`
`
`UNITED STATES DISTRICT COURT
`
`NORTHERN DISTRICT OF CALIFORNIA
`
`SAN JOSE
`
` Case No.
`
`
`INTEL CORPORATION,
`Plaintiff,
`
`v.
`
`FORTRESS INVESTMENT GROUP LLC,
`FORTRESS CREDIT CO. LLC,
`VLSI TECHNOLOGY LLC, and
`DSS TECHNOLOGY MANAGEMENT, INC.,
`
`
`
`COMPLAINT
`
`
`
`JURY TRIAL DEMANDED
`
`Defendants.
`
`
`
`
`
`
`
`
`Plaintiff Intel Corporation (“Intel”) on personal knowledge as to its own acts, and on
`
`
`information and belief as to all other acts based on its own and its attorneys’ investigation, by
`
`
`and through its attorneys, alleges as follows:
`
`
`Case No.
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`
`
`
`
`
`COMPLAINT
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`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 2 of 48
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`INTRODUCTION
`Intel brings this action under Sections 1 and 2 of the Sherman Act and Sections 4
`1.
`and 7 of the Clayton Act, 15 U.S.C. §§ 1, 2, 15, and 18; under Cal. Bus. & Prof. Code § 17200 et
`seq.; and to prevent and restrain Defendants’ anticompetitive conduct and other violations of the
`law.
`
`Rather than promote the progress of science and useful arts, patent assertion entities
`2.
`(“PAEs”), including Defendants, that aggressively pursue meritless litigation have long been
`recognized to harm and deter innovation. For example, one study estimated that patent litigation
`brought by PAEs in the United States resulted in expenditures of $29 billion in 2011 for licensing
`fees, legal fees, and other costs of responding to PAE litigation.1 Another study found, by looking
`at the impact on stock price, that lawsuits by PAEs from 1990 through 2010 were responsible for
`the defendants losing half a trillion dollars.2 And those losses are not offset by corresponding
`gains to patent holders that promote innovation. One study found that the profits received by PAEs
`from litigation amounted to less than 10% of the lost share value of companies targeted by the
`PAEs.3
`Based on such studies, the President’s Council of Economic Advisers, the National
`3.
`Economic Council, and the Office of Science & Technology Policy warned in a 2013 report that
`“Patent Assertion Entities . . . focus on aggressive litigation, using such tactics as: . . . creating
`shell companies that make it difficult for defendants to know who is suing them; and asserting that
`their patents cover inventions not imagined at the time they were granted.”4 Further, the report
`concluded that PAEs “have had a negative impact on innovation and economic growth.”
`Recognition of the threat posed by improper patent assertions has led to judicial
`4.
`determinations clarifying the law, and legislative changes with the potential to curb meritless
`
`
`1 James Bessen; Michael J. Meurer, The Direct Costs from NPE Disputes, 99 Cornell L. Rev. 387 (2014).
`2 James Bessen; Jennifer Ford; Michael J. Meurer, The Private and Social Costs of Patent Trolls, 34 Regulation 26
`(2011).
`3 James Bessen; Michael J. Meurer, The Direct Costs from NPE Disputes, 99 Cornell L. Rev. 387 (2014).
`4 Executive Office of the President, Patent Assertion and U.S. Innovation (June 2013).
`
`
`Case No.
`
`
`
`2
`
`
`COMPLAINT
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`1
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`3
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`5
`6
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`

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`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 3 of 48
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`
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`litigation. In 2011, the U.S. Court of Appeal for the Federal Circuit struck down the overreaching
`presumption that, as a rule of thumb, infringement of a single patent warranted twenty-five percent
`of the product’s profit. The same year, Congress enacted the Leahy Smith America Invents Act,
`including inter partes review procedures through which the Patent Trial and Appeal Board
`(“PTAB”) of the U.S. Patent & Trademark Office (“USPTO”) can be asked to review whether
`issued patents are actually valid. And in 2014, the Supreme Court held in Alice Corp. v. CLS Bank
`International, 573 U.S. 208 (2014), that inventions directed to abstract ideas could not be patented
`unless they contain an “inventive concept” beyond implementation of the abstract idea in computer
`code. These and other measures have started to level the playing field by making it more difficult
`for PAEs to impose leverage of inflated damages exposure and to assert invalid patents.
`In 2016, the Council of Economic Advisers returned to the subject of PAEs,
`5.
`observing that research since 2013 continues to show “that a substantial amount of patent litigation
`in the United States, often with little substantive merit, often arises from certain types of NPEs
`called ‘patent assertion entities.’”5 But the Council noted that legislative and judicial actions, such
`as those described above, are “promising in that all of them should reduce the level of frivolous
`patent litigation.”
`In the face of these challenges, PAEs have evolved. PAEs have increasingly been
`6.
`partnering with investment firms to fuel their litigation. Having deep-pocketed investment firms
`standing behind them has made PAEs only more aggressive. Indeed, to meet the expectations of
`their new investors for high returns, PAEs must act ever more aggressively. These new investors
`are content to incur loss after loss so long as they have the chance to hit a windfall reward that will
`justify their investment. Patent assertion thus becomes simply a numbers game disassociated from
`the merits of the underlying patents, with PAEs and their investors betting that serial assertions
`with aggressive demands will strike a jackpot eventually making up for many other losses. This
`
`
`5 Council of Economic Advisers Issue Brief, The Patent Litigation Landscape: Recent Research and Developments
`(March 2016).
`
`
`Case No.
`
`
`
`3
`
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`COMPLAINT
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`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 4 of 48
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`strategy of repeated assertions without regard to the merits of the patents requires aggregating a
`large patent portfolio.
`A central player in this emerging investment strategy is Fortress Investment Group
`7.
`LLC (“Fortress”). Fortress is an investment firm that went public in 2007. Fortress’s shares traded
`at over $35 per share after going public but one decade later, Fortress was struggling with poor
`returns and its share price had plummeted to around $5 per share in 2017. Fortress was acquired
`that year by SoftBank Group Corp. for $3.3 billion. Fortress contends it is “a leading, highly
`diversified global investment manager” and claims to have approximately $39.2 billion of assets
`under management as of March 31, 2019. One way in which Fortress has tried to turn around its
`performance and justify SoftBank’s investment in it is through increased speculation on patent
`assertions.
`Intel brings this complaint to end a campaign of anticompetitive patent aggregation
`8.
`by Fortress and a web of PAEs that Fortress owns or controls. Fortress has used its stable of PAEs
`to aggregate a massive portfolio of patents that purportedly read on high-tech consumer and
`enterprise electronic devices and components or software therein and processes used to
`manufacture them. By employing a network of PAEs that it either owns or controls, Fortress has
`created a web of entities that obscures Fortress’s puppeteering role in this scheme. Rather than
`enhancing efficiency, Fortress uses aggregation to undermine it by creating a structure in which
`Fortress and its PAEs benefit by asserting weak patents—i.e., those that never would have been
`asserted by their former owners—in order to stretch the resources of their targets and increase the
`possibility that those weak patents will improperly be found valid and infringed or the prospect
`that a target (like Intel) will agree to a license to resolve the threat posed by Fortress and its PAEs.
`Thus, rather than promoting the procompetitive benefits of the patent system by increasing
`innovation and output, Fortress’s scheme has the opposite effect. Fortress and its PAEs acquire
`and seek to monetize meritless patents that never would have been asserted by their original
`owners, imposing a tax on the electronics industry that increases prices, decreases output, and
`ultimately harms consumers. To the extent that Fortress and its PAEs have patents that would
`
`
`Case No.
`
`
`
`4
`
`
`COMPLAINT
`
`

`

`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 5 of 48
`
`
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`actually be of value to potential licensees, the transfer of those patents to Fortress’s control limits
`access to them because those patents are now held by entities that have no incentive to license
`patents in a way that captures royalties that are commensurate with their actual value. Instead,
`those entities have incentives to obtain excessive monopoly rents by exploiting patent portfolios
`that aggregate the valuable patents with many meritless patents.
`Through its anticompetitive aggregation scheme, Fortress has engaged in
`9.
`anticompetitive conduct in creating a portfolio of patents that purportedly read on electronic
`devices and components or software therein and processes used to manufacture them that allows
`it to charge far more than the value of the inventive contributions (if any) of the patents and of
`competitive prices for licenses. Fortress and its PAEs seek to use that ill-gotten power to extract
`and extort exorbitant revenues unfairly and anticompetitively from Intel, and other suppliers of
`electronic devices or components or software for such devices and ultimately from consumers of
`those products. Fortress’s aggregation is thus intended for an anticompetitive purpose—to invest
`in patents at costs lower than the holdup value of the patents to ensnare as many potential licensees
`as possible and to allow it and its PAEs to assert as many possible claims of infringement to tax
`the commercial use of existing technology at rates beyond the actual value (if any) of the
`aggregated patents.
`In furtherance of the anticompetitive scheme, Fortress and its PAEs have deployed
`10.
`patents in waves of lawsuits against their targets without regard for the merits of the claims. Rather
`than licensing and litigating based on the merits of the patents, Fortress and its PAEs operate based
`on volume and repetition, targeting the resolve of the targets instead of establishing the merits and
`value of the patents. Given the size of the portfolio, Fortress and its PAEs can deploy patent after
`patent in case after case against their targets with the threat of ever more patent assertions and ever
`more litigation. Faced with this threat, many victims have agreed to settle rather than to challenge
`Fortress and its PAEs for amounts that reflect not the merits of the underlying patents but the
`effectiveness of the Fortress model. Thus, Fortress and its PAEs foreclose the possibility—which
`existed before aggregation—that litigation can be an economic alternative to licensing patents.
`
`
`Case No.
`
`
`
`5
`
`
`COMPLAINT
`
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`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 6 of 48
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`
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`Intel brings this action to remedy the harms that it has already suffered from
`11.
`Defendants’ violations of federal antitrust and state unfair competition laws and to prevent further
`harm to itself, the broader electronics industry, and U.S. consumers.
`PARTIES
`Plaintiff Intel develops, manufactures, and sells integrated digital technology
`12.
`products. Intel is a corporation organized and existing under the laws of the State of Delaware,
`having its principal place of business within this District at 2200 Mission College Boulevard, Santa
`Clara, California.
`Defendant Fortress Investment Group LLC claims to be a Delaware limited liability
`13.
`company. Fortress does business and maintains an office within this District at One Market Plaza,
`Spear Tower, 42nd Floor, San Francisco, California.
`Defendant Fortress Credit Co. LLC (“Fortress Credit”) claims to be a Delaware
`14.
`limited liability company with its principal place of business at 1345 Avenue of Americas, 46th
`Floor, New York, New York. Fortress Credit is registered with the California Secretary of State
`to do business in California and also maintains an office within this District at One Market Plaza,
`Spear Tower, 42nd Floor, San Francisco, California. Fortress Credit is an affiliate of Fortress.
`Defendant VLSI Technology LLC (“VLSI”) claims to be a Delaware limited
`15.
`liability company with a registered office at Corporation Trust Center, 1209 Orange Street,
`Wilmington, Delaware.
`Defendant DSS Technology Management, Inc. (“DSS”) claims to be a Delaware
`16.
`corporation with a principal place of business at 1650 Tyson’s Boulevard, Suite 1580, Tyson’s
`Corner, Virginia.
`
`JURISDICTION AND VENUE
`This Court has jurisdiction over the federal claims alleged under 28 U.S.C. §§ 1331
`17.
`and 1337(a). This Court has jurisdiction over the unfair competition claims arising under state law
`pursuant to 28 U.S.C. § 1367(a). The Court may grant declaratory relief in this action pursuant to
`28 U.S.C. §§ 2201 and 2202.
`
`
`Case No.
`
`
`
`6
`
`
`COMPLAINT
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`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 7 of 48
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`Venue is proper in this District pursuant to, at least, 15 U.S.C. § 22 and/or 28 U.S.C.
`18.
`§ 1391(b) and (c) because, during the relevant period, Defendants resided, transacted business,
`were found, or had agents in this District, and/or because a substantial portion of the affected
`interstate trade and commerce described herein has been carried out in this District. In particular,
`Intel has addressed Defendants’ anticompetitive conduct described herein from its headquarters in
`this District, including addressing licensing demands and coordinating the defense of Defendants’
`litigation, much of which has occurred in this District. Further, Eran Zur, a Managing Director in
`Fortress’s San Francisco office, runs Fortress’s Intellectual Property Group, which has directed
`and controlled the anticompetitive conduct described herein.
`This Court has personal jurisdiction over each Defendant based on its national
`19.
`contacts with the United States as a whole pursuant to 15 U.S.C. § 22, as well as Defendants’
`relevant contacts with this judicial district. Defendants have conducted and continue to conduct
`business in this District and/or have engaged in continuous and systematic activities in this District,
`including licensing activities, demands, negotiations, and litigation directly or through their agents.
`Defendants have minimum contacts with this forum such that the exercise of jurisdiction over them
`would not offend traditional notions of fair play and substantial justice.
`INTRADISTRICT ASSIGNMENT
`The appropriate intradistrict assignment is in the San Jose Division. Under Civil
`20.
`Local Rule 3-2(c), a civil action shall be assigned to the division “serving the county in which the
`action arises.” An action “arises in the county in which a substantial part or the events or omissions
`which give rise to the complaint occurred.” Civ. L.R. 3-2(c). Here, a substantial part of those
`events or omissions occurred in Santa Clara County, where Intel is headquartered and where a
`substantial portion of the events set forth in this Complaint have a locus. As described above, Intel
`has addressed Defendants’ litigation and licensing demands from its headquarters in Santa Clara
`County. Civil actions arising in Santa Clara County “shall be assigned to the San Jose Division.”
`Id. at 3-2(e).
`
`
`Case No.
`
`
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`7
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`COMPLAINT
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`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 8 of 48
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`
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`I.
`
`FORTRESS’S ANTICOMPETITIVE PATENT AGGREGATION SCHEME
`Fortress describes its investing approach as “making control-oriented investments
`21.
`in cash flow generating assets.” When it comes to patent investments, Fortress has taken its
`“control-oriented” approach to an extreme. Fortress’s model is to condition its investments in
`PAEs on terms so severe that the PAEs have no choice but to make aggressive and reckless patent
`assertions to attempt to generate the revenue required to meet their obligations to Fortress. When
`they fail to do so—as is often the case—Fortress steps in and assumes even more control and/or
`ownership of the patents, allowing it to ratchet up the aggressiveness of the assertions. In other
`instances, such as with VLSI, Fortress has skipped this intermediary step of finding a partner to
`do its bidding and partnered with NXP B.V., NXP USA, Inc., and their related entities
`(collectively, “NXP”) to acquire the patents through a subsidiary outright from the start. The result
`is that Fortress has either acquired or controls a portfolio of well over a thousand U.S. patents for
`high-tech consumer and enterprise electronic devices and components or software therein and
`processes used to manufacture them to deploy against its targets.
`Fortress has targeted suppliers of high-tech consumer and enterprise electronic
`22.
`devices or components or software for such devices because they provide attractive targets for
`repeated and meritless assertions. An article co-authored by Eran Zur, Managing Director of the
`Intellectual Property Finance Group at Fortress, observes that courts can grant “oversized awards”
`in the technology sector that “stem from the sheer complexity of interoperable components and
`systems sold as part of functional units, if not integrated devices.” Further, the article notes that
`“because technology invention tends to be incremental, to the extent an individual patent owner
`can be awarded damages on the price of the entire end product as opposed to their specific patent
`claim, a litigation incentive arises.” That litigation incentive is coupled with what the article notes
`are “the substantial legal costs to defend a patent infringement suit,” creating a situation in which
`“speculative behavior drives an ever-inflating price ceiling (given the possibility of oversized
`damages) [and] a price floor becomes set by the extreme expense of litigation defense, marked at
`just under nuisance value.”
`
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`Case No.
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`8
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`COMPLAINT
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`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 9 of 48
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`Further, aggregating a massive portfolio of electronics patents allows Fortress and
`23.
`its PAEs to amass a range of patents that are both substitutes for and complements to one another.
`When a firm wants to build an electronic device, such as a smartphone, there are many ways to do
`so. Each alternative requires multiple technologies. However, the alternatives do not require the
`same combination of technologies. For example, Alternative 1 might require technologies A, B
`and C, while Alternative 2 might require technologies D, E and F. The technologies used for
`Alternative 1 (A, B and C) are complements: they are each needed to create the device using
`Alternative 1. Similarly, the technologies used for Alternative 2 (D, E, and F) are economic
`complements. The technologies comprising Alternative 1 are also a substitute for the technologies
`comprising Alternative 2, because the bundle of technologies used in Alternative 1 can be used as
`a substitute for the bundle of technologies used in Alternative 2.
`There are many possible permutations of complement and substitute technologies
`24.
`for electronics patents. For instance, Alternative 3 might require technologies A, C and D. In that
`scenario, the technologies bundled in Alternative 3 are a substitute for the technologies bundled in
`Alternatives 1 and 2 respectively; A, C, and D are complements in the production of Alternative
`3; and technology D is a substitute for technology B. Technologies can thus be both substitutes
`and complements. If Alternative 4 used technologies A, B, and D, then B and D are complements
`for Alternative 4, and substituting D for B changes Alternative 1 to Alternative 3.
`Some of the technologies that can be used to make the device might be patented.
`25.
`But even with the most diligent approach to assessing the patent landscape for a product, it can be
`challenging to determine whether the technologies included in the device are patented, including
`because the scope of patent claims may be uncertain prior to litigation, as well as the validity and
`enforceability of such claims.
`26. When this array of patents is held by multiple owners, each patent owner would
`only assert a patent if the expected value of doing so was net positive. “Weak” patents that have
`questionable validity, infringement, enforceability, and/or are easily designed around, and
`
`
`Case No.
`
`
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`9
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`COMPLAINT
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`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 10 of 48
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`therefore have little or no meaningful value, are either not asserted, or are asserted to demand a
`license at an amount that is commensurate with the value of the patent’s merits.
`Faced with a patent asserted against its device, the supplier can typically either take
`27.
`a license to the patent or refuse to license and litigate the infringement claim. Regardless of which
`course is taken, the feasibility of designing around the asserted patent will affect the outcome
`because the supplier will not pay the patent owner a royalty greater than the cost to design around
`the patent.
`28. When patents are aggregated as Fortress has done, the dynamics for determining
`whether to assert a patent change and the options available to the target of the assertion also
`change—both of which have harmful impacts on competition.
`First, the scope of Fortress’s aggregation and its focus on electronics patents
`29.
`ensures that it can effectively exercise hold-up power by eliminating substitutes. Fortress has
`inevitably acquired substitute patents that, before aggregation, competed with each other. When
`the patents were held by their original owners, there was competition and a prospective licensee
`could choose between competing options (or forego those options and design its product in a
`different way). But now, under the control of Fortress, the prospect of competition disappears and
`so does the feasibility of redesigning products. Fortress and its PAEs can thus threaten a target
`with the serial risk that the next best alternative design to an asserted patent is also subject to a
`patent claim by one of Fortress’s PAEs.
`Second, aggregation elevates the value of asserting weak patents by Fortress-
`30.
`backed PAEs, untethered to the value of the patents themselves. Before aggregation, there would
`be no incentive to assert such patents because there would be no expectation of a positive return
`from asserting a weak patent because the patent could be expected to be proven invalid, not
`infringed, or unenforceable in litigation, or would be easily designed around. But, after
`aggregation, assertion of weak patents as part of a wave of assertions against a target generates
`economic value even if many of those assertions are defeated in litigation. By increasing the
`volume of assertions a target faces, Fortress and its PAEs cause targets to deploy licensing and
`
`
`Case No.
`
`
`
`10
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`COMPLAINT
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`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 11 of 48
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`litigation resources less efficiently and thereby increase the value of litigation to Fortress and its
`PAEs. In particular, Fortress and its PAEs increase the likelihood that a weak patent will slip
`through litigation and be found infringed, valid, and enforceable when it should not be. Further,
`this strategy creates incentives for targets to settle with Fortress-backed PAEs for amounts that
`exceed the value (if any) of their patents to put an end to this risk. In this manner, Fortress’s patent
`aggregation enables the use of weak patents to force targets to pay undeserved and inflated
`royalties.
`Patent aggregators often claim they are more efficient at enforcing patents than
`31.
`other licensors and that their greater efficiency results in higher payments to inventors and
`therefore in more innovation. But there is no efficiency associated with patent aggregation in the
`Fortress assertion model described above. To the contrary, patent licensing becomes less efficient
`with this type of abusive patent aggregation because the targets waste resources to defend against
`meritless assertions. Nor do the higher royalties that patent aggregation generates lead to welfare-
`enhancing additional innovation.
`Aggregating patents in the way that Fortress has done harms competition. First, by
`32.
`aggregating patents covering technologies that are actual or potential alternatives for one another,
`Fortress injures competition in the same way as any merger or combination of competitors. Before
`aggregation, when multiple parties held such patents, those parties competed with one another to
`license the patents, and licensees benefited from that competition through more favorable licensing
`terms. Multiple holders of substitute patents were forced to compete with each other to offer better
`terms to secure licensees. Once the patents were aggregated and controlled by Fortress, however,
`that competition was eliminated.
`Second, by creating a massive portfolio of patents aimed at the electronics industry
`33.
`and serially asserting those patents—including patents that would not have been asserted had they
`not been transferred—Fortress introduces a new cost to suppliers of electronic devices and the
`components and software for those devices. Introducing that cost dampens incentives for product
`suppliers to invest in research and development to drive innovation, thereby further undermining
`
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`Case No.
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`11
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`COMPLAINT
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`

`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 12 of 48
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`competition and harming end consumers. Exposing the targeted suppliers to another cost benefits
`their competitors by making the targeted suppliers’ products more expensive and/or less
`innovative. Those competitors might have previously owned some of the patents aggregated by
`Fortress but were unable to impose such high costs on suppliers using technologies claimed by the
`patents when the patents were not aggregated into a massive portfolio. Fortress’s aggregation thus
`undermines competition in the sales of electronic devices and components and software for those
`devices.
`Third, the higher royalty payments that Fortress and its PAEs generate reward the
`34.
`creation of patents that are not actually inventive or are not actually used.
`Fourth, Fortress’s hold-up power is amplified by the uncertainty it creates through
`35.
`the size of the portfolio it controls and obfuscation regarding the scope of that portfolio. After
`aggregation, potential licensees lose the ability to decipher the extent to which Fortress controls
`patents that they may actually have wanted to license ex ante or that would be substitutes to
`asserted patents. By way of example, Fortress employees are listed as managing members or
`directors of companies that otherwise have no publicly known ties to Fortress. Mysterious patterns
`emerge such as entities with names connoting an unspecified relationship with Fortress, by a prefix
`“CF.” District court judges have gone so far as having to compel Fortress’s PAEs to reveal the
`ownership history of the asserted patents and the degree to which Fortress held rights in, and
`control over, those patents. The effect is that the hold-up power of those patents is imbued on
`other patents Fortress controls. Thus, rather than fostering pro-competitive patent licensing,
`Fortress’s aggregation scheme reduces potential licensees’ ability to obtain licenses to any patents
`they might be interested in licensing while simultaneously elevating the value of weak patents.
`By placing its patents across a web of PAEs, Fortress ensures that the patents are
`36.
`held by entities with incentives to wield them aggressively. PAEs like VLSI face no risk to its
`reputation or ongoing business relationships by adopting abusive licensing or litigation practices.
`Nor does it face the risk of counter-assertions of its targets’ patents.
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`Case No.
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`COMPLAINT
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`Case 3:19-cv-06856-JSC Document 1 Filed 10/21/19 Page 13 of 48
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`37. Moreover, PAEs can benefit in litigation from having had no role in prosecuting
`patents that they obtained from operating companies—such as, described further below, VLSI
`receiving patents from NXP entities. Transferring the patents from an operating company to a
`PAE means that the holder of the patent prosecution evidence is no longer a party to the litigation
`but rather a mere third party, and one sometimes located outside the United States. The result is
`that it can be difficult for a defendant to obtain evidence and to mount a complete defense to a
`PAE’s assertion—thereby increasing the likelihood of a mistaken verdict of infringement or failure
`to find unenforceability. Accordingly, a PAE can bring lawsuits to enforce weak patents that a
`practicing entity would not assert because the PAE has different abilities and incentives to do so.
`Further, when the PAE risks losing its patents if it cannot generate sufficient revenue to meet its
`payment obligations to Fortress, the PAE is further incentivized to engage in abusive conduct to
`extort royalties.
`Fortress’s use of a web of separate PAEs to disperse and enforce the portfolio also
`38.
`ensures that there is no single entity that 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 and Fortress’s other PAEs can bring. Fortress
`and its PAEs benefit from increasing the number of transactions because the more transactions,
`the more opportunities that they have to extract anticompetitive royalties that are not reflective of
`the value of the patents being licensed. The same goes for litigation—the more cases that Fortress
`and its PAEs bring, the more opportunities they create for mistaken findings of infringement or
`coercive settlements.
`Distributing the patents across a network of PAEs, rather than having Fortress
`39.
`directly own and assert them, is also intended to limit the exposure of Fortress and the broader
`portfolio to potential blowback from aggressive assertions. For example, to the extent that one of
`Fortress’s PAEs is subject to an awa

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