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This was previously posted to the Center for the Protection of Intellectual Property Blog on October 4, and given that Congress is rushing headlong into enacting legislation to respond to an alleged crisis over “patent trolls,” it bears reposting if only to show that Congress is ignoring its own experts in the Government Accountability Office who officially reported this past August that there’s no basis for this legislative stampede.

As previously reported, there are serious concerns with the studies asserting that a “patent litigation explosion” has been caused by patent licensing companies (so-called non-practicing entities (“NPEs”) or “patent trolls”). These seemingly alarming studies (see here and here) have drawn scholarly criticism for their use of proprietary, secret data collected from companies like RPX and Patent Freedom – companies whose business models are predicated on defending against patent licensing companies. In addition to raising serious questions about self-selection and other biases in the data underlying these studies, the RPX and Patent Freedom data sets to this day remain secret and are unknown and unverifiable.  Thus, it is impossible to apply the standard scientific and academic norm that all studies make available data for confirmation of the results via independently produced studies.  We have long suggested that it was time to step back from such self-selecting “statistics” based on secret data and nonobjective rhetoric in the patent policy debates.

At long last, an important and positive step has been taken in this regard. The Government Accountability Office (GAO) has issued a report on patent litigation, entitled “Intellectual Property: Assessing Factors that Affect Patent Infringement Litigation Could Help Improve Patent Quality,” (“the GAO Report”), which was mandated by § 34 of the America Invents Act (AIA). The GAO Report offers an important step in the right direction in beginning a more constructive, fact-based discussion about litigation over patented innovation.

The GAO is an independent, non-partisan agency under Congress.  As stated in its report, it was tasked by the AIA to undertake this study in response to “concerns that patent infringement litigation by NPEs is increasing and that this litigation, in some cases, has imposed high costs on firms that are actually developing and manufacturing products, especially in the software and technology sectors.”  Far from affirming such concerns, the GAO Report concludes that no such NPE litigation problem exists.

In its study of patent litigation in the United States, the GAO primarily utilized data obtained from Lex Machina, a firm specialized in collecting and analyzing IP litigation data.  To describe what is known about the volume and characteristics of recent patent litigation activity, the GAO utilized data provided by Lex Machina for all patent infringement lawsuits between 2000 and 2011.  Additionally, Lex Machina also selected a sample of 500 lawsuits – 100 per year from 2007 to 2011 – to allow estimated percentages with a margin of error of no more than plus or minus 5% points over all these years and no more than plus or minus 10% points for any particular year.  From this data set, the GAO extrapolated its conclusion that current concerns expressed about patent licensing companies were misplaced. 

Interestingly, the methodology employed by the GAO stands in stark contrast to the prior studies based on secret, proprietary data from RPX and Patent Freedom. The GAO Report explicitly recognized that these prior studies were fundamentally flawed given that they relied on “nonrandom, nongeneralizable” data sets from private companies (GAO Report, p. 26).  In other words, even setting aside the previously reported concerns of self-selection bias and nonobjective rhetoric, it is inappropriate to draw statistical inferences from such sample data sets to the state of patent litigation in the United States as a whole.  In contrast, the sample of 500 lawsuits selected by Lex Machina for the GAO study is truly random and generalizable (and its data is publicly available and testable by independent scholars).

Indeed, the most interesting results in the GAO Report concern its conclusions from the publicly accessible Lex Machina data about the volume and characteristics of patent litigation today.  The GAO Report finds that between 1991 and 2011, applications for all types of patents increased, with the total number of applications doubling across the same period (GAO Report, p.12, Fig. 1).  Yet, the GAO Report finds that over the same period of time, the rate of patent infringement lawsuits did not similarly increase.  Instead, the GAO reports that “[f]rom 2000 to 2011, about 29,000 patent infringement lawsuits were filed in the U.S. district courts” and that the number of these lawsuits filed per year fluctuated only slightly until 2011 (GAO Report, p. 14).  The GAO Report also finds that in 2011 about 900 more lawsuits were filed than the average number of lawsuits in each of the four previous years, which an increase of about 31%, but it attributes this to the AIA’s prohibition on joinder of multiple defendants in a single patent infringement lawsuit that went into effect in 2011 (GAO Report, p. 14).  We also discussed the causal effect of the AIA joinder rules on the recent increase in patent litigation here and here.

The GAO Report next explores the correlation between the volume of patent infringement lawsuits filed and the litigants who brought those suits.  Utilizing the data obtained from Lex Machina, the GAO observed that from 2007 to 2011 manufacturing companies and related entities brought approximately 68% of all patent infringement lawsuits, while patent aggregating and licensing companies brought only 19% of such lawsuits. (The remaining 13% of lawsuits were brought by individual inventors, universities, and a number of entities the GAO was unable to verify.) The GAO Report acknowledged that lawsuits brought by patent licensing companies increased in 2011 (24%), but it found that this increase is not statistically significant. (GAO Report, pp. 17-18)

The GAO also found that the lawsuits filed by manufacturers and patent licensing companies settled or likely settled at similar rates (GAO Report, p. 25).  Again, this contradicts widely asserted claims today that patent licensing companies bring patent infringement lawsuits solely for purposes of only nuisance settlements (implying that manufacturers litigate patents to trial at a higher rate than patent licensing companies).

In sum, the GAO Report reveals that the conventional wisdom today about a so-called “patent troll litigation explosion” is unsupported by the facts (see also here and here).  Manufacturers – i.e., producers of products based upon patented innovation – bring the vast majority of patent infringement lawsuits, and that these lawsuits have similar characteristics as those brought by patent licensing companies.

The GAO Report shines an important spotlight on a fundamental flaw in the current policy debates about patent licensing companies (the so-called “NPEs” or “patent trolls”).  Commentators, scholars and congresspersons pushing for legislative revisions to patent litigation to address a so-called “patent troll problem” have relied on overheated rhetoric and purported “studies” that simply do not hold up to empirical scrutiny.  While mere repetition of unsupported and untenable claims makes such claims conventional wisdom (and thus “truth” in the minds of policymakers and the public), it is still no substitute for a sensible policy discussion based on empirically sound data. 

This is particularly important given that the outcry against patent licensing companies continues to sweep the popular media and is spurring Congress and the President to propose substantial legislative and regulatory revisions to the patent system.  With the future of innovation at stake, it is not crazy to ask that before we make radical, systemic changes to the patent system that we have validly established empirical evidence that such revisions are in fact necessary or at least would do more good than harm. The GAO Report reminds us all that we have not yet reached this minimum requirement for sound, sensible policymaking.

Below is the text of my oral testimony to the Senate Commerce, Science and Transportation Committee, the Consumer Protection, Product Safety, and Insurance Subcommittee, at its November 7, 2013 hearing on “Demand Letters and Consumer Protection: Examining Deceptive Practices by Patent Assertion Entities.” Information on the hearing is here, including an archived webcast of the hearing. My much longer and more indepth written testimony is here.

Please note that I am incorrectly identified on the hearing website as speaking on behalf of the Center for the Protection of Intellectual Property (CPIP). In fact, I was invited to testify soley in my personal capacity as a Professor of Law at George Mason University School of Law, given my academic research into the history of the patent system and the role of licensing and commercialization in the distribution of patented innovation. I spoke for neither George Mason University nor CPIP, and thus I am solely responsible for the content of my research and remarks.

Chairman McCaskill, Ranking Member Heller, and Members of the Subcommittee:

Thank you for this opportunity to speak with you today.

There certainly are bad actors, deceptive demand letters, and frivolous litigation in the patent system. The important question, though, is whether there is a systemic problem requiring further systemic revisions to the patent system. There is no answer to this question, and this is the case for three reasons.

Harm to Innovation

First, the calls to rush to enact systemic revisions to the patent system are being made without established evidence there is in fact systemic harm to innovation, let alone any harm to the consumers that Section 5 authorizes the FTC to protect. As the Government Accountability Office found in its August 2013 report on patent litigation, the frequently-cited studies claiming harms are actually “nonrandom and nongeneralizable,” which means they are unscientific and unreliable.

These anecdotal reports and unreliable studies do not prove there is a systemic problem requiring a systemic revision to patent licensing practices.

Of even greater concern is that the many changes to the patent system Congress is considering, incl. extending the FTC’s authority over demand letters, would impose serious costs on real innovators and thus do actual harm to America’s innovation economy and job growth.

From Charles Goodyear and Thomas Edison in the nineteenth century to IBM and Microsoft today, patent licensing has been essential in bringing patented innovation to the marketplace, creating economic growth and a flourishing society.  But expanding FTC authority to regulate requests for licensing royalties under vague evidentiary and legal standards only weakens patents and create costly uncertainty.

This will hamper America’s innovation economy—causing reduced economic growth, lost jobs, and reduced standards of living for everyone, incl. the consumers the FTC is charged to protect.

Existing Tools

Second, the Patent and Trademark Office (PTO) and courts have long had the legal tools to weed out bad patents and punish bad actors, and these tools were massively expanded just two years ago with the enactment of the America Invents Act.

This is important because the real concern with demand letters is that the underlying patents are invalid.

No one denies that owners of valid patents have the right to license their property or to sue infringers, or that patent owners can even make patent licensing their sole business model, as did Charles Goodyear and Elias Howe in the mid-nineteenth century.

There are too many of these tools to discuss in my brief remarks, but to name just a few: recipients of demand letters can sue patent owners in courts through declaratory judgment actions and invalidate bad patents. And the PTO now has four separate programs dedicated solely to weeding out bad patents.

For those who lack the knowledge or resources to access these legal tools, there are now numerous legal clinics, law firms and policy organizations that actively offer assistance.

Again, further systemic changes to the patent system are unwarranted because there are existing legal tools with established legal standards to address the bad actors and their bad patents.

If Congress enacts a law this year, then it should secure full funding for the PTO. Weakening patents and creating more uncertainties in the licensing process is not the solution.

Rhetoric

Lastly, Congress is being driven to revise the patent system on the basis of rhetoric and anecdote instead of objective evidence and reasoned explanations. While there are bad actors in the patent system, terms like PAE or patent troll constantly shift in meaning. These terms have been used to cover anyone who licenses patents, including universities, startups, companies that engage in R&D, and many others.

Classic American innovators in the nineteenth century like Thomas Edison, Charles Goodyear, and Elias Howe would be called PAEs or patent trolls today. In fact, they and other patent owners made royalty demands against thousands of end users.

Congress should exercise restraint when it is being asked to enact systemic legislative or regulatory changes on the basis of pejorative labels that would lead us to condemn or discriminate against classic innovators like Edison who have contributed immensely to America’s innovation economy.

Conclusion

In conclusion, the benefits or costs of patent licensing to the innovation economy is an important empirical and policy question, but systemic changes to the patent system should not be based on rhetoric, anecdotes, invalid studies, and incorrect claims about the historical and economic significance of patent licensing

As former PTO Director David Kappos stated last week in his testimony before the House Judiciary Committee: “we are reworking the greatest innovation engine the world has ever known, almost instantly after it has just been significantly overhauled. If there were ever a case where caution is called for, this is it.”

Thank you.

The Center for the Protection of Intellectual Property is hosting a teleforum panel on end-user lawsuits in patent law on Thursday, August 29, at Noon (EST). Here’s the announcement with the program information:

End-User Lawsuits in Patent Litigation: A Bug or a Feature of Patent Law?
A Teleforum Panel
(Free and Open to the Public)

Thursday, August 29, 2013
Noon – 1pm (EST)

In the patent policy debates today, one issue that has proven a flash point of controversy is patent infringement lawsuits against consumers and retailers, such as coffee shops, JC Penney, and others.  These are now called “end-user lawsuits,” and various bills in Congress, including the Goodlatte Discussion Draft released last May, would mandate a “stay” of such lawsuits in favor of suing upstream manufacturers.  The federal judiciary currently vests stay decisions within the discretionary authority of trial judges, who have long controlled and directed complex litigation in their courtrooms.  While anecdotes of cease-and-desist letters against “mom-and-pop stores” abound in public commentary, there has been no discussion of the systemic effects of the proposed mandatory stay provisions.  Are end-user lawsuits a recent phenomenon or are they a longstanding feature of the patent system?  Why has approval of a motion to stay litigation rested within the discretionary authority of a trial judge?  Are there are any unintended consequences of adopting a mandatory stay rule for end-user lawsuits?  This teleforum panel brings together scholars and representatives from the innovation industries to discuss the history, function and policy implications of end-user lawsuits within patent litigation.

This is a live, in-person panel presentation in which the panelists and audience members participate via a conference bridge.  It is free and open to the public (audience members simply call the 800 number below).  Audience members will be able to ask questions of the panelists in an interactive Q&A format.  The teleforum panel also will be recorded and posted as a podcast.

PANELISTS:

Christopher Beauchamp, Assistant Professor of Law, Brooklyn Law School
David Berten, Founder and Partner, Global IP Law Group
John Scott, Vice President of Litigation, Qualcomm Inc.

Moderator: Adam Mossoff, Professor of Law and Co-Director of Academic Programs of the Center for the Protection of Intellectual Property, George Mason University School of Law

PROGRAM INFORMATION:

Thursday, August 29, 2013
Noon – 1pm (Eastern Standard Time)

CONFERENCE BRIDGE INFORMATION:

Telephone Number: (800) 832-0736
Access Code: 1346613

 

[Cross Posted to the Center for the Protection of Intellectual Property]

In its recent decision in Douglas Dynamics v. Buyers Products Co. (Fed. Cir., May 21, 2013), the Federal Circuit was forced to reverse a district court’s abuse of its discretion because the trial judge injected an anti-patent bias into the legal test for determining whether a patent-owner should receive a permanent injunction against an infringer. As highlighted in a blog posting, the Federal Circuit explained that district courts should not read the eBay four-factor test such that it eviscerates “the public’s general interest in the judicial protection of property rights in inventive technology” (to quote from the Douglas Dynamics opinion).

A scant two months later, the Federal Circuit again reversed another district court’s denial of an injunction and again had to explain why the equitable test for issuing injunctions should not be applied in a way that undermines the property rights secured in patented innovation.  In Aria Diagnostics, Inc. v. Sequenom, Inc. (Fed. Cir., Aug. 9, 2013), the Federal Circuit reversed a district court’s denial of the patent-owner’s request for a preliminary injunction, holding that the district court improperly balanced the multi-factor test governing issuance of preliminary injunctions. 

In Chief Judge Randall Rader’s opinion for a unanimous panel in Aria Diagnostics, the Federal Circuit criticized the district court’s denial of Sequenom’s request for a preliminary injunction against Aria Diagnostics.  In this case, Sequenom countersued Aria Diagnostics following Aria Diagnostics declaratory judgment lawsuit against it, alleging that Aria Diagnostics infringes its patented diagnostic test for identifying trisomy disorders (U.S. Patent No. 6,258,540).  Trisomy disorders are genetic disorders that can result in a range of complications during and after pregnancy—from death of a fetus to down syndrome in a newborn.  The evidence submitted to the district court established that Sequenom’s patented tests eliminated the need for risky amniocenteses and “presented fewer risks and a more dependable rate of abnormality detection.”

Following its countersuit for patent infringement, Sequenom requested a preliminary injunction and the district court denied its request.  In the proceedings below, as the Federal Circuit explained, the district court rejected Sequenom’s request for a preliminary injunction because it simple assumed that Sequenom would not suffer irreparable injury given that it would easily profit from its radically innovative test.  On the basis of this assumption, the district court concluded that “the erosion to Sequenom’s price and its loss of market share were not irreparable.”

The Federal Circuit pointedly identified the implicit anti-patent bias in the district court’s rarefied reasoning from such misguided and unproven assumptions:

While the facts may show that damages would be reparable, this assumption is not sufficient. In the face of that kind of universal assumption, patents would lose their character as an exclusive right as articulated by the Constitution and become at best a judicially imposed and monitored compulsory license. (original emphases)

In short, district courts should not read the multi-factor tests for injunctions so as to eviscerate the constitutional fact that a patent is a property right, and thus de facto convert a patent into merely a regulatory entitlement to a compulsory license. Property rights secure more than just a “reasonable” rate of profit as determined by either a court or a regulatory agency. As pointed out in Aria Diagnostics, the case law on injunctions have well established that “price erosion, loss of goodwill, damage to reputation, and loss of business opportunities are all valid grounds for finding irreparable harm,” which can and should justify an injunction (after these harms are appropriately balanced against the harms to the alleged infringer) to secure a property right in innovative technology.

The Federal Circuit further criticized the district court because, while finding that a preliminary injunction might put Aria Diagnostics out of business as a justification to deny Sequenom’s request for the injunction, the “district court made no findings on the harm that would accrue to Sequenom’s R&D and investment in the technology, undermining work and money spent developing, validating, and commercializing any covered product.”  The Federal Circuit emphasized that the balance of hardships in the legal test for issuing an injunction requires courts to not only assess harm to alleged infringers, but also to assess the harms to the patent-owner, such as “price erosion, loss of goodwill, damage to reputation, and loss of business opportunities.” 

In short, the district court failed to weigh the relevant harms to both the patent-owner and the alleged infringer, and instead the district court relied solely on the harm to the alleged infringer (Aria Diagnostics) as balanced against its pure conjecture of massive profits for Sequenom in some undetermined future. Thus, the district court denied Sequenom’s request for a preliminary injunction. But this was an entirely inappropriate application of the equitable inquiry required in issuing or denying a preliminary injunction.  In effect, the district court placed a large thumb on the judicial scale in favor of the alleged infringer in its equitable analysis—a violation of the fundamental principles of equity. For this reason, the Federal Circuit reversed and remanded the case back to the district court for it to make the appropriate fact findings under the appropriate application of the multi-factor test for issuing a preliminary injunction.

The significance of Aria Diagnostics is that the Federal Circuit continues to push back against the ongoing misinterpretation of the equitable tests for issuance of injunctions in patent infringement cases, whether by academics, federal officials or district courts.  In doing so, the court is providing some much-needed guidance to district courts in what facts they should consider in assessing the relevant harms to each party in issuing or denying an injunction.

 

[Cross posted at The Center for the Protection of Intellectual Property]

In a prior blog posting, I reported how reports of a so-called “patent litigation explosion” today are just wrong.  As I detailed in another blog posting, the percentage of patent lawsuits today are not only consistent with historical patent litigation rates in the nineteenth century, there is actually less litigation today than during some decades in the early nineteenth century. Between 1840 and 1849, for instance, patent litigation rates were 3.6% — more than twice the patent litigation rate today.

(As an aside, we have to hold constant for issued patents in computing litigation percentage rates because more patents are issued now per year than twice the total population of New York City (NYC) in 1820 — 253,315 patents issued in 2012 compared to 123,706 residents in NYC in 1820.  Yet before someone says that this just means we have too many patents today, as Judge Posner blithely asserts without any empirical evidence, one must also recognize that the NYC population in 2013 is 8.3 million, which is far beyond merely double its 1820 population — NYC’s population has grown by a factor of 67!  A simple comparison to population growth, especially taking into account the explosive growth in the innovation industries in the past several decades, could as easily justify the claim that we haven’t got enough patents issuing today.)

Unfortunately, the mythical claims about a “patent litigation explosion” have shifted in recent months (perhaps because the original assertion was untenable).  Now the assertion is that there has been an “explosion” in lawsuits brought by patent licensing companies.  I’ll note for the record here that patent licensing companies are often referred to today by the undefined and nonobjective rhetorical epithet of “patent troll.”  In a recent study of patent licensing companies that exposes many of the unsound and unproven claims about these much-maligned companies – such as that patents owned by these companies are of lower quality than those owned by manufacturing entities – Stephen Moore first explained that the “troll” slur is used today by academics, commentators and the public alike “without a universally accepted definition.” So, let’s dispense with nonobjective rhetoric and simply identify these companies factually by their business models: patent licensing.

As with all discriminatory slurs, it’s unsurprising that this new claim about an alleged “explosion” in so-called “patent troll” lawsuits is unproven rubbish.  Similar to the myth about patent litigation generally, this is just another example of overwrought and empirically unsound rhetoric being used to push a policy agenda in Congress and regulatory agencies. (Six bills have been on the Hill so far this year, and FTC Chairwoman Edith Ramirez has announced that the FTC intends to begin a formal § 6(b) investigation of patent licensing companies).

How do we know that patent licensing companies are not the sole driver of any increases in patent litigation?  Contrary to the much-hyped claim today that patent licensing companies are the primary cause of most patent lawsuits in district courts in 2012, other serious and more careful reviews of the litigation data have shown that the primary culprit is not patent licensing companies, but rather the America Invents Act of 2011(“AIA”). The AIA created numerous new administrative proceedings for invalidating patents at the Patent & Trademark Office, which created additional incentives to file lawsuits in certain contexts.  Moreover, the AIA expressly prohibited joinder of multiple defendants in single lawsuits.  Both of these significant changes to the patent system has produced the entirely logical and expected result of more lawsuits being filed after the AIA’s statutory provisions went into effect in 2011 and 2012. In basic statistics terms, the effect of these statutory provisions in any study of patent litigation rates that does not take them into account is referred to as a “confounding variable.”

Even more important, when the data used in one of the most-referenced studies asserting a patent litigation explosion by patent licensing companies was tested by a highly respected scholar who specializes in statistical and empirical analyses of the patent system, he reported that he found no statistically significant results. (See Dave Schwartz’s testimony at the DOJ-FTC Workshop (Dec. 10, 2012), starting at approximately 1:58 at this video. Transcript available here.)  At least the scholars of this disputed study made their data available for confirmation, according to basic scientific norms. Other prominently cited studies on patent licensing companies have relied on secret data from companies like RPX, Patent Freedom, and other firms who have a very large dog in the litigation and policy fight, and thus this data has all of the trappings of being unreliable and biased (see here and here)

The important role that the AIA is playing in increasing patent lawsuits by patent licensing companies is ironic if only because the people misreporting the patent litigation data are the same people who were big proponents of the AIA (some of them even attended the AIA’s signing ceremony with President Obama in September 2011).  Among non-patent scholars, this is called trying to have your cake and eat it, too.  Usually such efforts fail, especially when children always try to get away with this logical fallacy.  It shows the depths to which the patent policy debates have sunk that the press, Congress, the President and many others don’t seem to care about this one bit and instead are pushing ahead and repeating – and even drafting legislation based upon – bad “statistics” with serious methodological problems and compiled from secret, unreliable data.

With Congress rushing headlong to enact legislation that discriminates against patent licensing companies, it’s time to step back and start asking serious questions before the legal system that makes possible the innovation industries is changed and we discover too late that it’s for the worse.  It’s time to set aside rhetoric and made-up “statistics” based on secret data and to ask whether there really is a systemic problem.  It’s also time to start asking serious questions about why these myths were created in the first place, what does the raw data actually say, who is providing the data and funding these “troll” studies, and who is pushing this rhetoric into the public policy debates to the point that it has become a deafening roar that makes impossible all reasonable and sensible discussion.

[NOTE: minor grammatical and style changes were made after the initial posting]

 

Over at the blog for the Center for the Protection of Intellectual Property, Richard Epstein has posted a lengthy essay that critiques the Obama Administration’s decision this past August 3 to veto the exclusion order issued by the International Trade Commission (ITC) in the Samsung v. Apple dispute filed there (ITC Investigation No. 794).  In his essay, The Dangerous Adventurism of the United States Trade Representative: Lifting the Ban against Apple Products Unnecessarily Opens a Can of Worms in Patent Law, Epstein rightly identifies how the 3-page letter issued to the ITC creates tremendous institutional and legal troubles in the name an unverified theory about “patent holdup” invoked in the name of an equally overgeneralized and vague belief in the “public interest.”

Here’s a taste:

The choice in question here thus boils down to whether the low rate of voluntary failure justifies the introduction of an expensive and error-filled judicial process that gives all parties the incentive to posture before a public agency that has more business than it can possibly handle. It is on this matter critical to remember that all standards issues are not the same as this particularly nasty, high-stake dispute between two behemoths whose vital interests make this a highly atypical standard-setting dispute. Yet at no point in the Trade Representative’s report is there any mention of how this mega-dispute might be an outlier. Indeed, without so much as a single reference to its own limited institutional role, the decision uses a short three-page document to set out a dogmatic position on issues on which there is, as I have argued elsewhere, good reason to be suspicious of the overwrought claims of the White House on a point that is, to say the least, fraught with political intrigue

Ironically, there was, moreover a way to write this opinion that could have narrowed the dispute and exposed for public deliberation a point that does require serious consideration. The thoughtful dissenting opinion of Commissioner Pinkert pointed the way. Commissioner Pinkert contended that the key factor weighing against granting Samsung an exclusion order is that Samsung in its FRAND negotiations demanded from Apple rights to use certain non standard-essential patents as part of the overall deal. In this view, the introduction of nonprice terms on nonstandard patterns represents an abuse of the FRAND standard. Assume for the moment that this contention is indeed correct, and the magnitude of the problem is cut a hundred or a thousand fold. This particular objection is easy to police and companies will know that they cannot introduce collateral matters into their negotiations over standards, at which point the massive and pointless overkill of the Trade Representative’s order is largely eliminated. No longer do we have to treat as gospel truth the highly dubious assertions about the behavior of key parties to standard-setting disputes.

But is Pinkert correct? On the one side, it is possible to invoke a monopoly leverage theory similar to that used in some tie-in cases to block this extension. But those theories are themselves tricky to apply, and the counter argument could well be that the addition of new terms expands the bargaining space and thus increases the likelihood of an agreement. To answer that question to my mind requires some close attention to the actual and customary dynamics of these negotiations, which could easily vary across different standards. I would want to reserve judgment on a question this complex, and I think that the Trade Representative would have done everyone a great service if he had addressed the hard question. But what we have instead is a grand political overgeneralization that reflects a simple-minded and erroneous view of current practices.

You can read the essay at CPIP’s blog here, or you can download a PDF of the white paper version here (please feel free to distribute digitally or in hardcopy).

 

On July 24, the Federal Trade Commission issued a modified complaint and consent order in the Google/Motorola case. The FTC responded to the 25 comments on the proposed Order by making several amendments, but the Final Order retains the original order’s essential restrictions on injunctions, as the FTC explains in a letter accompanying the changes. With one important exception, the modifications were primarily minor changes to the required process by which Google/Motorola must negotiate and arbitrate with potential licensees. Although an improvement on the original order, the Complaint and Final Order’s continued focus on the use of injunctions to enforce SEPs presents a serious risk of consumer harm, as I discuss below.

The most significant modification in the new Complaint is the removal of the original UDAP claim. As suggested in my comments on the Order, there is no basis in law for such a claim against Google, and it’s a positive step that the FTC seems to have agreed. Instead, the FTC ended up resting its authority solely upon an Unfair Methods of Competition claim, even though the Commission failed to develop any evidence of harm to competition—as both Commissioner Wright and Commissioner Ohlhausen would (sensibly) require.

Unfortunately, the FTC’s letter offers no additional defense of its assertion of authority, stating only that

[t]he Commission disagrees with commenters who argue that the Commission’s actions in this case are outside of its authority to challenge unfair methods of competition under Section 5 and lack a limiting principle. As reflected in the Commission’s recent statements in Bosch and the Commission’s initial Statement in this matter, this action is well within our Section 5 authority, which both Congress and the Supreme Court have expressly deemed to extend beyond the Sherman Act.

Another problem, as noted by Commissioner Ohlhausen in her dissent from the original order, is that

the consent agreement creates doctrinal confusion. The Order contradicts the decisions of federal courts, standard-setting organizations (“SSOs”), and other stakeholders about the availability of injunctive relief on SEPs and the meaning of concepts like willing licensee and FRAND.

The FTC’s statements in Bosch and this case should not be thought of as law on par with actual court decisions unless we want to allow the FTC to determine the scope of its own authority unilaterally.

This is no small issue. On July 30, the FTC used the Google settlement, along with the settlement in Bosch, as examples of the FTC’s authority in the area of policing SEPs during a hearing on the issue. And as FTC Chairwoman Ramirez noted in response to questions for the record in a different hearing earlier in 2013,

Section 5 of the FTC Act has been developed over time, case-by-case, in the manner of common law. These precedents provide the Commission and the business community with important guidance regarding the appropriate scope and use of the FTC’s Section 5 authority.

But because nearly all of these cases have resulted in consent orders with an administrative agency and have not been adjudicated in court, they aren’t, in fact, developed “in the manner of common law.” Moreover, settlements aren’t binding on anyone except the parties to the settlement. Nevertheless, the FTC has pointed to these sorts of settlements (and congressional testimony summarizing them) as sufficient guidance to industry on the scope of its Section 5 authority. But as we noted in our amicus brief in the Wyndham litigation (in which the FTC makes this claim in the context of its “unfair or deceptive acts or practices” authority):

Settlements (and testimony summarizing them) do not in any way constrain the FTC’s subsequent enforcement decisions; they cannot alone be the basis by which the FTC provides guidance on its unfairness authority because, unlike published guidelines, they do not purport to lay out general enforcement principles and are not recognized as doing so by courts and the business community.

Beyond this more general problem, the Google Final Order retains its own, substantive problem: considerable constraints upon injunctions. The problem with these restraints are twofold: (1) Injunctions are very important to an efficient negotiation process, as recognized by the FTC itself; and (2) if patent holders may no longer pursue injunctions consistently with antitrust law, one would expect a reduction in consumer welfare.

In its 2011 Report on the “IP Marketplace,” the FTC acknowledged the important role of injunctions in preserving the value of patents and in encouraging efficient private negotiation.

Second, the credible threat of an injunction deters infringement in the first place. This results from the serious consequences of an injunction for an infringer, including the loss of sunk investment. Third, a predictable injunction threat will promote licensing by the parties. Private contracting is generally preferable to a compulsory licensing regime because the parties will have better information about the appropriate terms of a license than would a court, and more flexibility in fashioning efficient agreements. But denying an injunction every time an infringer’s switching costs exceed the economic value of the invention would dramatically undermine the ability of a patent to deter infringement and encourage innovation. For this reason, courts should grant injunctions in the majority of cases.

Building on insights from Commissioner Wright and Professor Kobayashi, I argued in my comments that injunctions create conditions that

increase innovation, the willingness to license generally and the willingness to enter into FRAND commitments in particular–all to the likely benefit of consumer welfare.

Monopoly power granted by IP law encourages innovation because it incentivizes creativity through expected profits. If the FTC interprets its UMC authority in a way that constrains the ability of patent holders to effectively police their patent rights, then less innovation would be expected–to the detriment of consumers as well as businesses.

And this is precisely what has happened. Innovative technology companies are responding to the current SEP enforcement environment exactly as we would expect them to—by avoiding the otherwise-consumer-welfare enhancing standardization process entirely.

Thus, for example, at a recent event sponsored by Global Competition Review (gated), representatives from Nokia, Ericsson, Siemens and Qualcomm made no bones about the problems they see and where they’re headed if they persist:

[Jenni Lukander, global head of competition law at Nokia] said the problem of “free-riding”, whereby technology companies adopt standard essential patents (SEPs) without complying with fair, reasonable and non-discriminatory (FRAND) licensing terms was a “far bigger problem” than patent holders pursuing injunctive relief. She said this behaviour was “unsustainable”, as it discouraged innovation and jeopardised standardisation.

Because of the current atmosphere, Lukander said, Nokia has stepped back from the standardisation process, electing either not to join certain standard-setting organisations (SSOs) or not to contribute certain technologies to these organisations.

The fact that every licence negotiation takes places “under the threat of injunction litigation” is not a sign of failure, said Lukander, but an indicator of the system working “as it was designed to work”.

This, said [Dan Hermele, director of IP rights and licensing for Qualcomm Europe], amounted to “reverse hold-up”. “The licensor is pressured to accept less than reasonable licensing terms due to the threat of unbalanced regulatory intervention,” he said, adding that the trend was moving to an “infringe and litigate model”, which threatened to harm innovators, particularly small and medium-sized businesses, “for whom IPR is their life blood”.

Beat Weibel, chief IP counsel at Siemens, said…innovation can only be beneficial if it occurs within a “safe and strong IP system,” he said, where a “willing licensee is favoured over a non-willing licensee” and the enforcer is not a “toothless tiger”.

It remains to be seen if the costs to consumers from firms curtailing their investments in R&D or withholding their patents from the standard-setting process will outweigh the costs (yes, some costs do exist; the patent system is not frictionless and it is far from perfect, of course) from the “over”-enforcement of SEPs lamented by critics. But what is clear is that these costs can’t be ignored. Reverse hold-up can’t be wished away, and there is a serious risk that the harm likely to be caused by further eroding the enforceability of SEPs by means of injunctions will significantly outweigh whatever benefits it may also confer.

Meanwhile, stay tuned for tomorrow’s TOTM blog symposium on “Regulating the Regulators–Guidance for the FTC’s Section 5 Unfair Methods of Competition Authority” for much more discussion on this issue.

Over at the blog for the Center for the Protection of Intellectual Property, I posted a short essay discussing the Federal Circuit’s recent decision in Douglas Dynamics v. Buyers Products (Fed. Cir. May 21, 2013).  Here’s a small taste:

The Federal Circuit’s recent decision in Douglas Dynamics, LLC, v. Buyers Products Co. (Fed. Cir. May 21, 2013) is very important given the widespread, albeit mistaken, belief today that the Supreme Court’s decision in eBay v. MercExchange (2005) established that damages and not injunctions are the presumptive remedy for patent infringement. ….

On appeal, Chief Judge Randall Rader resoundingly disagreed with Judge Conley’s belief that the “public interest” is always better served by the introduction of a new competitor who is selling cheaper products.  This is what happened in this case, as Douglas Dynamics and Buyers Products Company are competitors in the sale of snowplow blades.  Instead, Chief Judge Rader recognized that its act of infringement as such is what gave Buyers Products Company its market advantage in undercutting Douglas Dynamics’ prices.  Because it did not have to incur Douglas Dynamics’ ex ante expenses in engaging in innovative research and development, Buyers Products Company’s infringement permitted it the economic advantage of being able to undercut Douglas Dynamics prices’ and thus enter the allegedly “untapped market segment” of cheaper snowplow blades. It was precisely this expansion of a consumer market that the district court relied on in its denial of Douglas Dynamics’ requested injunction. In sum, the district court used an infringement-created expansion of the market to justify denying an injunction and awarding a compulsory license to the patent-owner, which effectively rewarded Buyer Products Company for its act of infringement.

In reversing the district court’s award of a reasonable royalty, Chief Judge Rader explained the basic economic principle of dynamic efficiency that animates the Patent Act in securing property rights to inventors in their patented innovation ….

As bloggers are wont to say, go read the whole thing.

Over at Law360 I have a piece on patent enforcement at the ITC (gated), focusing on the ITC’s two Apple-Samsung cases: one in which the the ITC issued a final determination in which it found Apple to have infringed one of Samsung’s 3G-related SEPs, and the other (awaiting a final determination from the Commission) in which an ALJ found Samsung infringed four of Apple’s patents, including a design patent. Here’s a taste:

In fact, there is a strong argument in favor of ITC adjudication of FRAND-encumbered patents. As the name suggests, FRAND-encumbered patents must be licensed by their owners on reasonable, nondiscriminatory terms. Despite Apple’s claims that Samsung refused to negotiate, this seems unlikely (and the ITC found otherwise, of course). What’s more, post-adjudication, the FRAND requirement associated with a FRAND-encumbered patent remains.

As a result, negotiation over license terms for FRAND-encumbered patents can only be more likely than for other patents on which there is no duty to negotiate. Agreement over terms is similarly more likely as FRAND narrows the bargaining range for patent holders. What that means is that (1) avoiding a possible ITC exclusion order ex ante is a simple matter of entering into negotiations and licensing, an outcome that is required by FRAND, and (2) ex post (that is, after an exclusion order is issued), reinstating the ability to import and sell otherwise-infringing devices is also more readily accomplished, likewise through obligatory negotiation and licensing.

* * *

The ITC’s threat of injunctive relief can impel negotiation and licensing in all contexts, of course. But the absence of monetary damages, coupled with the inherent uncertainties surrounding design patents, the broad scope of enforcement and the vagaries of CBP’s implementation of ITC orders, is significantly more troubling in the design patent context. Thus, contrary to many critics’ assertions, the White House’s recent proposal and pending bills in Congress, it is actually FRAND-encumbered SEPs that are most amenable to adjudication and enforcement by the ITC

As they say, read the whole thing.

Coincidentally, Verizon’s general counsel, Randal Milch, has an op-ed on the same topic in today’s Wall Street Journal. Notes Milch:

What we have warned is that patent litigation at the ITC—where the only remedy is to keep products from the American public—is too high-stakes a game for patent disputes. The fact that the ITC’s intellectual-property-dispute docket has nearly quadrupled over 15 years only raises the stakes further. Smartphone patent litigation accounts for a substantial share of that increase.

Here are three instances under which the president should veto an exclusion order:

  • When the patent holder isn’t practicing the technology itself. Courts have routinely found shutdown relief inappropriate for non-practicing entities. Patent trolls shouldn’t be permitted to exclude products from our shores.
  • When the patent holder has already agreed to license the patent on reasonable terms as part of standards setting. If the patent holder has previously agreed that a reasonable licensing fee is all it needs to be made whole, it shouldn’t get shutdown relief at the ITC.
  • When the infringing piece of the product isn’t that important to the overall product, and doesn’t drive consumer demand for the product at issue. There are more than 250,000 patents relevant to today’s smartphones. It makes no sense that exclusion could occur for infringement of the most minor patent.

Obviously, the second of these is implicated in the ITC’s SEP case. But, as I have noted before, this ignores (and exacerbates) the problem of reverse holdup—where potential licensees refuse to license on reasonable terms. As the ITC noted in the Apple-Samsung SEP case:

The ALJ found that the evidence did not support a conclusion that Samsung failed to offer Apple a license on FRAND terms.

***

Apple argues that Samsung was obligated to make an initial offer to Apple of a specific fair and reasonable royalty rate. The evidence on record does not support Apple’s position….Further, there is no legal authority for Apple’s argument. Indeed, the limited precedent on the issue appears to indicate that an initial offer need not be the terms of a final FRAND license because the SSO intends the final license to be accomplished through negotiation. See Microsoft Corp. v. Motorola, Inc. (because SSOs contemplated that RAND terms be determined through negotiation, “it logically does not follow that initial offers must be on RAND terms”) [citation omitted].

***

Apple’s position illustrates the potential problem of so-called reverse patent hold-up, a concern identified in many of the public comments received by the Commission.20 In reverse patent hold-up, an implementer utilizes declared-essential technology without compensation to the patent owner under the guise that the patent owner’s offers to license were not fair or reasonable. The patent owner is therefore forced to defend its rights through expensive litigation. In the meantime, the patent owner is deprived of the exclusionary remedy that should normally flow when a party refuses to pay for the use of a patented invention.

One other note, on the point about the increase in patent litigation: This needs to be understood in context. As this article notes:

Over the last 40 years the number of patent lawsuits filed in the US has stayed relatively constant as a percentage of patents issued.

And the accompanying charts paint the picture even more clearly. Perhaps the numbers at the ITC would look somewhat different, as it seems to have increased in importance as a locus of patent litigation activity. But the larger point about the purported excess of patent litigation remains. I hasten to add that this doesn’t mean that the system is perfect, in particular (as my Law360 piece notes) with respect to the issuance and enforcement of design patents. But that may be an argument for USPTO reform, design patent reform, and/or, as Scott Kieff (who, by the way, finally got a hearing last week on his nomination by President Obama to be a member of the ITC) has argued, targeted reforms of the presumption of validity and fee-shifting. But it’s not a strong argument against injunctive remedies (at the ITC or elsewhere) in SEP cases.

Patent Activity by Year (in Terms of Applications Filed, Patents Issued and Lawsuits Filed)

Patent Activity by Year (in Terms of Applications Filed, Patents Issued and Lawsuits Filed)

Patent Lawsuits Normalized Against Patents Issued and Applications Filed

Patent Lawsuits Normalized Against Patents Issued and Applications Filed

Patent Activity by Year (in Terms of Applications Filed, Patents Issued and Lawsuits Filed), 5-year Moving Averages

Patent Activity by Year (in Terms of Applications Filed, Patents Issued and Lawsuits Filed), 5-year Moving Averages

The Federalist Society has started a new program, The Executive Branch Review, which focuses on the myriad fields in which the Executive Branch acts outside of the constitutional and legal limits imposed on it, either by Executive Orders or by the plethora of semi-independent administrative agencies’ regulatory actions.

I recently posted on the Federal Trade Commission’s (FTC) ongoing investigations into the patent licensing business model and the actions (“consent decrees”) taken by the FTC against Bosch and Google.  These “consent decrees” constrain Bosch’s and Google’s rights in enforce patents they have committed to standard setting organizations (these patents are called “standard essential patents”). Here’s a brief taste:

One of the most prominent participants at the FTC-DOJ workshop back in December, former DOJ antitrust official and UC-Berkeley economics professor Carl Shapiro, explained in his opening speech that there was still insufficient data on patent licensing companies and their effects on the market.  This is true; for instance, a prominent study cited by Google et al. in support of their request to the FTC to investigate patent licensing companies has been described as being fundamentally flawed on both substantive and methodological grounds. Even more important, Professor Shapiro expressed skepticism at the workshop that, even if there was properly acquired, valid data, the FTC lacked the legal authority to sanction patent licensing firms for being allegedly anti-competitive.

Commentators have long noted that courts and agencies have a lousy historical track record when it comes to assessing the merits of new innovation, whether in new products or new business models. They maintain that the FTC should not continue such mistakes by letting its decision-making today be driven by rhetoric or by the widespread animus against certain commercial firms. Restraint and fact-gathering, institutional virtues reflected in a government animated by the rule of law and respect for individual rights, are key to preventing regulatory overreach and harm to future innovation.

Go read the whole thing, and, while you’re at it, check out Commissioner Joshua Wright’s similar comments on the FTC’s investigations of patent licensing companies, which the FTC calls “patent assertion entities.”