Archives For intellectual property

Yesterday the Chairman and Ranking Member of the House Judiciary Committee issued the first set of policy proposals following their long-running copyright review process. These proposals were principally aimed at ensuring that the IT demands of the Copyright Office were properly met so that it could perform its assigned functions, and to provide adequate authority for it to adapt its policies and practices to the evolving needs of the digital age.

In response to these modest proposals, Public Knowledge issued a telling statement, calling for enhanced scrutiny of these proposals related to an agency “with a documented history of regulatory capture.”

The entirety of this “documented history,” however, is a paper published by Public Knowledge itself alleging regulatory capture—as evidenced by the fact that 13 people had either gone from the Copyright Office to copyright industries or vice versa over the past 20+ years. The original document was brilliantly skewered by David Newhoff in a post on the indispensable blog, Illusion of More:

To support its premise, Public Knowledge, with McCarthy-like righteousness, presents a list—a table of thirteen former or current employees of the Copyright Office who either have worked for private-sector, rights-holding organizations prior to working at the Office or who are  now working for these private entities after their terms at the Office. That thirteen copyright attorneys over a 22-year period might be employed in some capacity for copyright owners is a rather unremarkable observation, but PK seems to think it’s a smoking gun…. Or, as one of the named thirteen, Steven Tepp, observes in his response, PK also didn’t bother to list the many other Copyright Office employees who, “went to Internet and tech companies, the Smithsonian, the FCC, and other places that no one would mistake for copyright industries.” One might almost get the idea that experienced copyright attorneys pursue various career paths or something.

Not content to rest on the laurels of its groundbreaking report of Original Sin, Public Knowledge has now doubled down on its audacity, using its own previous advocacy as the sole basis to essentially impugn an entire agency, without more. But, as advocacy goes, that’s pretty specious. Some will argue that there is an element of disingenuousness in all advocacy, even if it is as benign as failing to identify the weaknesses of one’s arguments—and perhaps that’s true. (We all cite our own work at one time or another, don’t we?) But that’s not the situation we have before us. Instead, Public Knowledge creates its own echo chamber, effectively citing only its own idiosyncratic policy preferences as the “documented” basis for new constraints on the Copyright Office. Even in a world of moral relativism, bubbles of information, and competing narratives about the truth, this should be recognizable as thin gruel.

So why would Public Knowledge expose itself in this manner? What is to be gained by seeking to impugn the integrity of the Copyright Office? There the answer is relatively transparent: PK hopes to capitalize on the opportunity to itself capture Copyright Office policy-making by limiting the discretion of the Copyright Office, and by turning it into an “objective referee” rather than the nation’s steward for ensuring the proper functioning of the copyright system.

PK claims that the Copyright Office should not be involved in making copyright policy, other than perhaps technically transcribing the agreements reached by other parties. Thus, in its “indictment” of the Copyright Office (which it now risibly refers to as the Copyright Office’s “documented history of capture”), PK wrote that:

These statements reflect the many specific examples, detailed in Section II, in which the Copyright Office has acted more as an advocate for rightsholder interests than an objective referee of copyright debates.

Essentially, PK seems to believe that copyright policy should be the province of self-proclaimed “consumer advocates” like PK itself—and under no circumstances the employees of the Copyright Office who might actually deign to promote the interests of the creative community. After all, it is staffed by a veritable cornucopia of copyright industry shills: According to PK’s report, fully 1 of its 400 employees has either left the office to work in the copyright industry or joined the office from industry in each of the last 1.5 years! For reference (not that PK thinks to mention it) some 325 Google employees have worked in government offices in just the past 15 years. And Google is hardly alone in this. Good people get good jobs, whether in government, industry, or both. It’s hardly revelatory.

And never mind that the stated mission of the Copyright Office “is to promote creativity by administering and sustaining an effective national copyright system,” and that “the purpose of the copyright system has always been to promote creativity in society.” And never mind that Congress imbued the Office with the authority to make regulations (subject to approval by the Librarian of Congress) and directed the Copyright Office to engage in a number of policy-related functions, including:

  1. Advising Congress on national and international issues relating to copyright;
  2. Providing information and assistance to Federal departments and agencies and the Judiciary on national and international issues relating to copyright;
  3. Participating in meetings of international intergovernmental organizations and meetings with foreign government officials relating to copyright; and
  4. Conducting studies and programs regarding copyright.

No, according to Public Knowledge the Copyright Office is to do none of these things, unless it does so as an “objective referee of copyright debates.” But nowhere in the legislation creating the Office or amending its functions—nor anywhere else—is that limitation to be found; it’s just created out of whole cloth by PK.

The Copyright Office’s mission is not that of a content neutral referee. Rather, the Copyright Office is charged with promoting effective copyright protection. PK is welcome to solicit Congress to change the Copyright Act and the Office’s mandate. But impugning the agency for doing what it’s supposed to do is a deceptive way of going about it. PK effectively indicts and then convicts the Copyright Office for following its mission appropriately, suggesting that doing so could only have been the result of undue influence from copyright owners. But that’s manifestly false, given its purpose.

And make no mistake why: For its narrative to work, PK needs to define the Copyright Office as a neutral party, and show that its neutrality has been unduly compromised. Only then can Public Knowledge justify overhauling the office in its own image, under the guise of magnanimously returning it to its “proper,” neutral role.

Public Knowledge’s implication that it is a better defender of the “public” interest than those who actually serve in the public sector is a subterfuge, masking its real objective of transforming the nature of copyright law in its own, benighted image. A questionable means to a noble end, PK might argue. Not in our book. This story always turns out badly.

On December 6 the U.S. Supreme Court handed down its much anticipated decision in Samsung Electronic Co. v. Apple Inc.  The opinion deferred for another day clarification of key policy questions raised by the design patent system.

Writing for a unanimous Court, Justice Sonia Sotomayor reversed and remanded a Federal Circuit decision upholding a $399 million damages award to Apple for infringement of its design patents by smartphone manufacturers.  Section 289 of the Patent Act  makes it unlawful to manufacture or sell an “article of manufacture” to which a patented design or a colorable imitation thereof has been applied and makes an infringer liable to the patent holder “to the extent of his total profit.”  A jury found that various smartphones manufactured by Samsung and other companies infringed design patents owned by Apple that covered a rectangular front face with rounded edges and a grid of colorful icons on a black screen.  Apple was awarded $399 million in damages—Samsung’s entire profit from the sale of its infringing smartphones. The Federal Circuit affirmed the damages award, rejecting Samsung’s argument that damages should be limited because the relevant articles of manufacture were the front face or screen rather than the entire smartphone.  The court reasoned that such a limit was not required because the components of Samsung’s smartphones were not sold separately to ordinary consumers and thus were not distinct articles of manufacture.  The Supreme Court rejected the Federal Circuit’s statutory interpretation, holding that an “article of manufacture,” which is simply a thing made by hand or machine, encompasses both a product sold to a consumer and a component of that product.  Because the term “article of manufacture” is broad enough to embrace both a product sold to a consumer and a component of that product, whether sold separately or not, the Court opined that the Federal Circuit’s narrower reading could not be squared with Section 289’s text.

The Court, however, declined to resolve the “big question” in this case, which had been discussed during oral argument – namely, whether the relevant article of manufacture for each design patent at issue here was the smartphone or a particular smartphone component.  In leaving resolution of this “and any other issues” to the Federal Circuit on remand, the Court in effect “punted.”  (The Justice Department suggested an inherently malleable and vague “four consideration test” to this question in its Samsung v. Apple amicus brief.)  Expert commentators have highlighted this issue (see, for example, here), which, because of the plain language of Section 289 (“extent of the total profit”), bears directly on the quantum of damages for which a design patent infringer may be held liable.  How the Federal Circuit deals with the “article of manufacture” question may have significant implications for incentives to obtain and protect design patents.

An even bigger unanswered question is the appropriateness of the federal legal structure for the protection of designs.  Design patents are fairly readily obtained – they do not have to satisfy the multiple requirements for patentability (centered on inventiveness, novelty, and advance over prior art) that must be met by utility patents (hurdles that have become even harder to surmount over the last decade due to a host of Supreme Court decisions that have made it harder to obtain and defend utility patents).  Moreover, unlike utility patents, other federal intellectual property laws, covering trade dress and copyright, offer protections similar in kind (albeit not exact substitutes) to that offered by the design patent system.  Accordingly, whether existing federal legal measures covering designs are suboptimal and merit being “redesigned” merits further study.  Stay tuned.

Last week, the Internet Association (“IA”) — a trade group representing some of America’s most dynamic and fastest growing tech companies, including the likes of Google, Facebook, Amazon, and eBay — presented the incoming Trump Administration with a ten page policy paper entitled “Policy Roadmap for New Administration, Congress.”

The document’s content is not surprising, given its source: It is, in essence, a summary of the trade association’s members’ preferred policy positions, none of which is new or newly relevant. Which is fine, in principle; lobbying on behalf of members is what trade associations do — although we should be somewhat skeptical of a policy document that purports to represent the broader social welfare while it advocates for members’ preferred policies.

Indeed, despite being labeled a “roadmap,” the paper is backward-looking in certain key respects — a fact that leads to some strange syntax: “[the document is a] roadmap of key policy areas that have allowed the internet to grow, thrive, and ensure its continued success and ability to create jobs throughout our economy” (emphasis added). Since when is a “roadmap” needed to identify past policies? Indeed, as Bloomberg News reporter, Joshua Brustein, wrote:

The document released Monday is notable in that the same list of priorities could have been sent to a President-elect Hillary Clinton, or written two years ago.

As a wishlist of industry preferences, this would also be fine, in principle. But as an ostensibly forward-looking document, aimed at guiding policy transition, the IA paper is disappointingly un-self-aware. Rather than delineating an agenda aimed at improving policies to promote productivity, economic development and social cohesion throughout the economy, the document is overly focused on preserving certain regulations adopted at the dawn of the Internet age (when the internet was capitalized). Even more disappointing given the IA member companies’ central role in our contemporary lives, the document evinces no consideration of how Internet platforms themselves should strive to balance rights and responsibilities in new ways that promote meaningful internet freedom.

In short, the IA’s Roadmap constitutes a policy framework dutifully constructed to enable its members to maintain the status quo. While that might also serve to further some broader social aims, it’s difficult to see in the approach anything other than a defense of what got us here — not where we go from here.

To take one important example, the document reiterates the IA’s longstanding advocacy for the preservation of the online-intermediary safe harbors of the 20 year-old Digital Millennium Copyright Act (“DMCA”) — which were adopted during the era of dial-up, and before any of the principal members of the Internet Association even existed. At the same time, however, it proposes to reform one piece of legislation — the Electronic Communications Privacy Act (“ECPA”) — precisely because, at 30 years old, it has long since become hopelessly out of date. But surely if outdatedness is a justification for asserting the inappropriateness of existing privacy/surveillance legislation — as seems proper, given the massive technological and social changes surrounding privacy — the same concern should apply to copyright legislation with equal force, given the arguably even-more-substantial upheavals in the economic and social role of creative content in society today.

Of course there “is more certainty in reselling the past, than inventing the future,” but a truly valuable roadmap for the future from some of the most powerful and visionary companies in America should begin to tackle some of the most complicated and nuanced questions facing our country. It would be nice to see a Roadmap premised upon a well-articulated theory of accountability across all of the Internet ecosystem in ways that protect property, integrity, choice and other essential aspects of modern civil society.

Each of IA’s companies was principally founded on a vision of improving some aspect of the human condition; in many respects they have succeeded. But as society changes, even past successes may later become inconsistent with evolving social mores and economic conditions, necessitating thoughtful introspection and, often, policy revision. The IA can do better than pick and choose from among existing policies based on unilateral advantage and a convenient repudiation of responsibility.

Neil TurkewitzTruth on the Market is delighted to welcome our newest blogger, Neil Turkewitz. Neil is the newly minted Senior Policy Counsel at the International Center for Law & Economics (so we welcome him to ICLE, as well!).

Prior to joining ICLE, Neil spent 30 years at the Recording Industry Association of America (RIAA), most recently as Executive Vice President, International.

Neil has spent most of his career working to expand economic opportunities for the music industry through modernization of copyright legislation and effective enforcement in global markets. He has worked closely with creative communities around the globe, with the US and foreign governments, and with international organizations (including WIPO and the WTO), to promote legal and enforcement reforms to respond to evolving technology, and to promote a balanced approach to digital trade and Internet governance premised upon the importance of regulatory coherence, elimination of inefficient barriers to global communications, and respect for Internet freedom and the rule of law.

Among other things, Neil was instrumental in the negotiation of the WTO TRIPS Agreement, worked closely with the US and foreign governments in the negotiation of free trade agreements, helped to develop the OECD’s Communique on Principles for Internet Policy Making, coordinated a global effort culminating in the production of the WIPO Internet Treaties, served as a formal advisor to the Secretary of Commerce and the USTR as Vice-Chairman of the Industry Trade Advisory Committee on Intellectual Property Rights, and served as a member of the Board of the Chamber of Commerce’s Global Intellectual Property Center.

You can read some of his thoughts on Internet governance, IP, and international trade here and here.

Welcome Neil!

On October 6, 2016, the U.S. Federal Trade Commission (FTC) issued Patent Assertion Entity Activity: An FTC Study (PAE Study), its much-anticipated report on patent assertion entity (PAE) activity.  The PAE Study defined PAEs as follows:

Patent assertion entities (PAEs) are businesses that acquire patents from third parties and seek to generate revenue by asserting them against alleged infringers.  PAEs monetize their patents primarily through licensing negotiations with alleged infringers, infringement litigation, or both. In other words, PAEs do not rely on producing, manufacturing, or selling goods.  When negotiating, a PAE’s objective is to enter into a royalty-bearing or lump-sum license.  When litigating, to generate any revenue, a PAE must either settle with the defendant or ultimately prevail in litigation and obtain relief from the court.

The FTC was mindful of the costs that would be imposed on PAEs, required by compulsory process to respond to the agency’s requests for information.  Accordingly, the FTC obtained information from only 22 PAEs, 18 of which it called “Litigation PAEs” (which “typically sued potential licensees and settled shortly afterward by entering into license agreements with defendants covering small portfolios,” usually yielding total royalties of under $300,000) and 4 of which it dubbed “Portfolio PAEs” (which typically negotiated multimillion dollars licenses covering large portfolios of patents and raised their capital through institutional investors or manufacturing firms).

Furthermore, the FTC’s research was narrowly targeted, not broad-based.  The agency explained that “[o]f all the patents held by PAEs in the FTC’s study, 88% fell under the Computers & Communications or Other Electrical & Electronic technology categories, and more than 75% of the Study PAEs’ overall holdings were software-related patents.”  Consistent with the nature of this sample, the FTC concentrated primarily on a case study of PAE activity in the wireless chipset sector.  The case study revealed that PAEs were more likely to assert their patents through litigation than were wireless manufacturers, and that “30% of Portfolio PAE wireless patent licenses and nearly 90% of Litigation PAE wireless patent licenses resulted from litigation, while only 1% of Wireless Manufacturer wireless patent licenses resulted from litigation.”  But perhaps more striking than what the FTC found was what it did not uncover.  Due to data limitations, “[t]he FTC . . . [did not] attempt[] to determine if the royalties received by Study PAEs were higher or lower than those that the original assignees of the licensed patents could have earned.”  In addition, the case study did “not report how much revenue PAEs shared with others, including independent inventors, or the costs of assertion activity.”

Curiously, the PAE Study also leaped to certain conclusions regarding PAE settlements based on questionable assumptions and without considering legitimate potential incentives for such settlements.  Thus, for example, the FTC found it particularly significant that 77% of litigation PAE settlements were for less than $300,000.  Why?  Because $300,000 was a “de facto benchmark” for nuisance litigation settlements, merely based on one American Intellectual Property Law Association study that claimed defending a non-practicing entity patent lawsuit through the end of discovery costs between $300,000 and $2.5 million, depending on the amount in controversy.  In light of that one study, the FTC surmised “that discovery costs, and not the technological value of the patent, may set the benchmark for settlement value in Litigation PAE cases.”  Thus, according to the FTC, “the behavior of Litigation PAEs is consistent with nuisance litigation.”  As noted patent lawyer Gene Quinn has pointed out, however, the FTC ignored the alternative eminently logical possibility that many settlements for less than $300,000 merely represented reasonable valuations of the patent rights at issue.  Quinn pithily stated:

[T]he reality is the FTC doesn’t know enough about the industry to understand that $300,000 is an arbitrary line in the sand that holds no relevance in the real world. For the very same reason that they said the term “patent troll” is unhelpful (i.e., because it inappropriately discriminates against rights owners without understanding the business model and practices), so too is $300,000 equally unhelpful. Without any understanding or appreciation of the value of the core innovation subject to the license there is no way to know whether a license is being offered for nuisance value or whether it is being offered at full, fair and appropriate value to compensate the patent owner for the infringement they had to chase down in litigation.

I thought the FTC was charged with ensuring fair business practices? It seems what they are doing is radically discriminating against incremental innovations valued at less than $300,000 and actually encouraging patent owners to charge more for their licenses than they are worth so they don’t get labeled a nuisance. Talk about perverse incentives! The FTC should stick to areas where they have subject matter competence and leave these patent issues to the experts.     

In sum, the FTC found that in one particular specialized industry sector featuring a certain  category of patents (software patents), PAEs tended to sue more than manufacturers before agreeing to licensing terms – hardly a surprising finding or a sign of a problem.  (To the contrary, the existence of “substantial” PAE litigation that led to licenses might be a sign that PAEs were acting as efficient intermediaries representing the interests and effectively vindicating the rights of small patentees.)  The FTC was not, however, able to comment on the relative levels of royalties, the extent to which PAE revenues were distributed to inventors, or the costs of PAE litigation (as opposed to any other sort of litigation).  Additionally, the FTC made certain assumptions about certain PAE litigation settlements that ignored reasonable alternative explanations for the behavior that was observed.  Accordingly, the reasonable observer would conclude from this that the agency was (to say the least) in no position to make any sort of policy recommendations, given the absence of any hard evidence of PAE abuses or excessive waste from litigation.

Unfortunately, the reasonable observer would be mistaken.  The FTC recommended reforms to: (1) address discovery burden and “cost asymmetries” (the notion that PAEs are less subject to costly counterclaims because they are not producers) in PAE litigation; (2) provide the courts and defendants with more information about the plaintiffs that have filed infringement lawsuits; (3) streamline multiple cases brought against defendants on the same theories of infringement; and (4) provide sufficient notice of these infringement theories as courts continue to develop heightened pleading requirements for patent cases.

Without getting into the merits of these individual suggestions (and without in any way denigrating the hard work and dedication of the highly talented FTC staffers who drafted the PAE Study), it is sufficient to note that they bear no logical relationship to the factual findings of the report.  The recommendations, which closely echo certain elements of various “patent reform” legislative proposals that have been floated in recent years, could have been advanced before any data had been gathered – with a saving to the companies that had to respond.  In short, the recommendations are classic pre-baked “solutions” to problems that have long been hypothesized.  Advancing such recommendations based on discrete information regarding a small skewed sample of PAEs – without obtaining crucial information on the direct costs and benefits of the PAE transactions being observed, or the incentive effects of PAE activity – is at odds with the FTC’s proud tradition of empirical research.  Unfortunately, Devin Hartline of the Antonin Scalia Law School proved prescient when commenting last April on the possible problems with the PAE Report, based on what was known about it prior to its release (and based on the preliminary thoughts of noted economists and law professors):

While the FTC study may generate interesting information about a handful of firms, it won’t tell us much about how PAEs affect competition and innovation in general.  The study is simply not designed to do this.  It instead is a fact-finding mission, the results of which could guide future missions.  Such empirical research can be valuable, but it’s very important to recognize the limited utility of the information being collected.  And it’s crucial not to draw policy conclusions from it.  Unfortunately, if the comments of some of the Commissioners and supporters of the study are any indication, many critics have already made up their minds about the net effects of PAEs, and they will likely use the study to perpetuate the biased anti-patent fervor that has captured so much attention in recent years.

To the extent patent reform is warranted, it should be considered carefully in a measured fashion, with full consideration given to the costs, benefits, and potential unintended consequences of suggested changes to the patent system and to litigation procedures.  As John Malcolm and I explained in a 2015 Heritage Foundation Legal Backgrounder which explored the relative merits of individual proposed reforms:

Before deciding to take action, Congress should weigh the particular merits of individual reform proposals carefully and meticulously, taking into account their possible harmful effects as well as their intended benefits. Precipitous, unreflective action on legislation is unwarranted, and caution should be the byword, especially since the effects of 2011 legislative changes and recent Supreme Court decisions have not yet been fully absorbed. Taking time is key to avoiding the serious and costly errors that too often are the fruit of omnibus legislative efforts.

Notably, this Legal Backgrounder also noted potential beneficial aspects of PAE activity that were not reflected in the PAE Study:

[E]ven entities whose business model relies on purchasing patents and licensing them or suing those who refuse to enter into licensing agreements and infringe those patents can serve a useful—even a vital—purpose. Some infringers may be large companies that infringe the patents of smaller companies or individual inventors, banking on the fact that such a small-time inventor will be less likely to file a lawsuit against a well-financed entity. Patent aggregators, often backed by well-heeled investors, help to level the playing field and can prevent such abuses.

More important, patent aggregators facilitate an efficient division of labor between inventors and those who wish to use those inventions for the betterment of their fellow man, allowing inventors to spend their time doing what they do best: inventing. Patent aggregators can expand access to patent pools that allow third parties to deal with one vendor instead of many, provide much-needed capital to inventors, and lead to a variety of licensing and sublicensing agreements that create and reflect a valuable and vibrant marketplace for patent holders and provide the kinds of incentives that spur innovation. They can also aggregate patents for litigation purposes, purchasing patents and licensing them in bundles.

This has at least two advantages: It can reduce the transaction costs for licensing multiple patents, and it can help to outsource and centralize patent litigation for multiple patent holders, thereby decreasing the costs associated with such litigation. In the copyright space, the American Society of Composers, Authors, and Publishers (ASCAP) plays a similar role.

All of this is to say that there can be good patent assertion entities that seek licensing agreements and file claims to enforce legitimate patents and bad patent assertion entities that purchase broad and vague patents and make absurd demands to extort license payments or settlements. The proper way to address patent trolls, therefore, is by using the same means and methods that would likely work against ambulance chasers or other bad actors who exist in other areas of the law, such as medical malpractice, securities fraud, and product liability—individuals who gin up or grossly exaggerate alleged injuries and then make unreasonable demands to extort settlements up to and including filing frivolous lawsuits.

In conclusion, the FTC would be well advised to avoid putting forth patent reform recommendations based on the findings of the PAE Study.  At the very least, it should explicitly weigh the implications of other research, which explores PAE-related efficiencies and considers all the ramifications of procedural and patent law changes, before seeking to advance any “PAE reform” recommendations.

Public comments on the proposed revision to the joint U.S. Federal Trade Commission (FTC) – U.S. Department of Justice (DOJ) Antitrust-IP Licensing Guidelines have, not surprisingly, focused primarily on fine points of antitrust analysis carried out by those two federal agencies (see, for example, the thoughtful recommendations by the Global Antitrust Institute, here).  In a September 23 submission to the FTC and the DOJ, however, U.S. International Trade Commissioner F. Scott Kieff focused on a broader theme – that patent-antitrust assessments should keep in mind the indirect effects on commercialization that stem from IP (and, in particular, patents).  Kieff argues that antitrust enforcers have employed a public law “rules-based” approach that balances the “incentive to innovate” created when patents prevent copying against the goals of competition.  In contrast, Kieff characterizes the commercialization approach as rooted in the property rights nature of patents and the use of private contracting to bring together complementary assets and facilitate coordination.  As Kieff explains (in italics, footnote citations deleted):

A commercialization approach to IP views IP more in the tradition of private law, rather than public law. It does so by placing greater emphasis on viewing IP as property rights, which in turn is accomplished by greater reliance on interactions among private parties over or around those property rights, including via contracts. Centered on the relationships among private parties, this approach to IP emphasizes a different target and a different mechanism by which IP can operate. Rather than target particular individuals who are likely to respond to IP as incentives to create or invent in particular, this approach targets a broad, diverse set of market actors in general; and it does so indirectly. This broad set of indirectly targeted actors encompasses the creator or inventor of the underlying IP asset as well as all those complementary users of a creation or an invention who can help bring it to market, such as investors (including venture capitalists), entrepreneurs, managers, marketers, developers, laborers, and owners of other key assets, tangible and intangible, including other creations or inventions. Another key difference in this approach to IP lies in the mechanism by which these private actors interact over and around IP assets. This approach sees IP rights as tools for facilitating coordination among these diverse private actors, in furtherance of their own private interests in commercializing the creation or invention.

This commercialization approach sees property rights in IP serving a role akin to beacons in the dark, drawing to themselves all of those potential complementary users of the IP-protected-asset to interact with the IP owner and each other. This helps them each explore through the bargaining process the possibility of striking contracts with each other.

Several payoffs can flow from using this commercialization approach. Focusing on such a beacon-and-bargain effect can relieve the governmental side of the IP system of the need to amass the detailed information required to reasonably tailor a direct targeted incentive, such as each actor’s relative interests and contributions, needs, skills, or the like. Not only is amassing all of that information hard for the government to do, but large, established market actors may be better able than smaller market entrants to wield the political influence needed to get the government to act, increasing risk of concerns about political economy, public choice, and fairness. Instead, when governmental bodies closely adhere to a commercialization approach, each private party can bring its own expertise and other assets to the negotiating table while knowing—without necessarily having to reveal to other parties or the government—enough about its own level of interest and capability when it decides whether to strike a deal or not.            

Such successful coordination may help bring new business models, products, and services to market, thereby decreasing anticompetitive concentration of market power. It also can allow IP owners and their contracting parties to appropriate the returns to any of the rival inputs they invested towards developing and commercializing creations or inventions—labor, lab space, capital, and the like. At the same time, the government can avoid having to then go back to evaluate and trace the actual relative contributions that each participant brought to a creation’s or an invention’s successful commercialization—including, again, the cost of obtaining and using that information and the associated risks of political influence—by enforcing the terms of the contracts these parties strike with each other to allocate any value resulting from the creation’s or invention’s commercialization. In addition, significant economic theory and empirical evidence suggests this can all happen while the quality-adjusted prices paid by many end users actually decline and public access is high. In keeping with this commercialization approach, patents can be important antimonopoly devices, helping a smaller “David” come to market and compete against a larger “Goliath.”

A commercialization approach thereby mitigates many of the challenges raised by the tension that is a focus of the other intellectual approaches to IP, as well as by the responses these other approaches have offered to that tension, including some – but not all – types of AT regulation and enforcement. Many of the alternatives to IP that are often suggested by other approaches to IP, such as rewards, tax credits, or detailed rate regulation of royalties by AT enforcers can face significant challenges in facilitating the private sector coordination benefits envisioned by the commercialization approach to IP. While such approaches often are motivated by concerns about rising prices paid by consumers and direct benefits paid to creators and inventors, they may not account for the important cases in which IP rights are associated with declines in quality-adjusted prices paid by consumers and other forms of commercial benefits accrued to the entire IP production team as well as to consumers and third parties, which are emphasized in a commercialization approach. In addition, a commercialization approach can embrace many of the practical checks on the market power of an IP right that are often suggested by other approaches to IP, such as AT review, government takings, and compulsory licensing. At the same time this approach can show the importance of maintaining self-limiting principles within each such check to maintain commercialization benefits and mitigate concerns about dynamic efficiency, public choice, fairness, and the like.

To be sure, a focus on commercialization does not ignore creators or inventors or creations or inventions themselves. For example, a system successful in commercializing inventions can have the collateral benefit of providing positive incentives to those who do invent through the possibility of sharing in the many rewards associated with successful commercialization. Nor does a focus on commercialization guarantee that IP rights cause more help than harm. Significant theoretical and empirical questions remain open about benefits and costs of each approach to IP. And significant room to operate can remain for AT enforcers pursuing their important public mission, including at the IP-AT interface.

Commissioner Kieff’s evaluation is in harmony with other recent scholarly work, including Professor Dan Spulber’s explanation that the actual nature of long-term private contracting arrangements among patent licensors and licensees avoids alleged competitive “imperfections,” such as harmful “patent hold-ups,” “patent thickets,” and “royalty stacking” (see my discussion here).  More generally, Commissioner Kieff’s latest pronouncement is part of a broader and growing theoretical and empirical literature that demonstrates close associations between strong patent systems and economic growth and innovation (see, for example, here).

There is a major lesson here for U.S. (and foreign) antitrust enforcement agencies.  As I have previously pointed out (see, for example, here), in recent years, antitrust enforcers here and abroad have taken positions that tend to weaken patent rights.  Those positions typically are justified by the existence of “patent policy deficiencies” such as those that Professor Spulber’s paper debunks, as well as an alleged epidemic of low quality “probabilistic patents” (see, for example, here) – justifications that ignore the substantial economic benefits patents confer on society through contracting and commercialization.  It is high time for antitrust to accommodate the insights drawn from this new learning.  Specifically, government enforcers should change their approach and begin incorporating private law/contracting/commercialization considerations into patent-antitrust analysis, in order to advance the core goals of antitrust – the promotion of consumer welfare and efficiency.  Better yet, if the FTC and DOJ truly want to maximize the net welfare benefits of antitrust, they should undertake a more general “policy reboot” and adopt a “decision-theoretic” error cost approach to enforcement policy, rooted in cost-benefit analysis (see here) and consistent with the general thrust of Roberts Court antitrust jurisprudence (see here).

The FCC’s blind, headlong drive to “unlock” the set-top box market is disconnected from both legal and market realities. Legally speaking, and as we’ve noted on this blog many times over the past few months (see here, here and here), the set-top box proposal is nothing short of an assault on contracts, property rights, and the basic freedom of consumers to shape their own video experience.

Although much of the impulse driving the Chairman to tilt at set-top box windmills involves a distrust that MVPDs could ever do anything procompetitive, Comcast’s recent decision (actually, long in the making) to include an app from Netflix — their alleged arch-rival — on the X1 platform highlights the FCC’s poor grasp of market realities as well. And it hardly seems that Comcast was dragged kicking and screaming to this point, as many of the features it includes have been long under development and include important customer-centered enhancements:

We built this experience on the core foundational elements of the X1 platform, taking advantage of key technical advances like universal search, natural language processing, IP stream processing and a cloud-based infrastructure.  We have expanded X1’s voice control to make watching Netflix content as simple as saying, “Continue watching Daredevil.”

Yet, on the topic of consumer video choice, Chairman Wheeler lives in two separate worlds. On the one hand, he recognizes that:

There’s never been a better time to watch television in America. We have more options than ever, and, with so much competition for eyeballs, studios and artists keep raising the bar for quality content.

But, on the other hand, he asserts that when it comes to set-top boxes, there is no such choice, and consumers have suffered accordingly.

Of course, this ignores the obvious fact that nearly all pay-TV content is already available from a large number of outlets, and that competition between devices and services that deliver this content is plentiful.

In fact, ten years ago — before Apple TV, Roku, Xfinity X1 and Hulu (among too many others to list) — Gigi Sohn, Chairman Wheeler’s chief legal counsel, argued before the House Energy and Commerce Committee that:

We are living in a digital gold age and consumers… are the beneficiaries.  Consumers have numerous choices for buying digital content and for buying devices on which to play that content. (emphasis added)

And, even on the FCC’s own terms, the multichannel video market is presumptively competitive nationwide with

direct broadcast satellite (DBS) providers’ market share of multi-channel video programming distributors (MVPDs) subscribers [rising] to 33.8%. “Telco” MVPDs increased their market share to 13% and their nationwide footprint grew by 5%. Broadband service providers such as Google Fiber also expanded their footprints. Meanwhile, cable operators’ market share fell to 52.8% of MVPD subscribers.

Online video distributor (OVD) services continue to grow in popularity with consumers. Netflix now has 47 million or more subscribers in the U.S., Amazon Prime has close to 60 million, and Hulu has close to 12 million. By contrast, cable MVPD subscriptions dropped to 53.7 million households in 2014.

The extent of competition has expanded dramatically over the years, and Comcast’s inclusion of Netflix in its ecosystem is only the latest indication of this market evolution.

And to further underscore the outdated notion of focusing on “boxes,” AT&T just announced that it would be offering a fully apps-based version of its Direct TV service. And what was one of the main drivers of AT&T being able to go in this direction? It was because the company realized the good economic sense of ditching boxes altogether:

The company will be able to give consumers a break [on price] because of the low cost of delivering the service. AT&T won’t have to send trucks to install cables or set-top boxes; customers just need to download an app. 

And lest you think that Comcast’s move was merely a cynical response meant to undermine the Commissioner (although, it is quite enjoyable on that score), the truth is that Comcast has no choice but to offer services like this on its platform — and it’s been making moves like this for quite some time (see here and here). Everyone knows, MVPDs included, that apps distributed on a range of video platforms are the future. If Comcast didn’t get on board the apps train, it would have been left behind at the station.

And there is other precedent for expecting just this convergence of video offerings on a platform. For instance, Amazon’s Fire TV gives consumers the Amazon video suite — available through the Prime Video subscription — but they also give you access to apps like Netflix, Hulu. (Of course Amazon is a so-called edge provider, so when it makes the exact same sort of moves that Comcast is now making, its easy for those who insist on old market definitions to miss the parallels.)

The point is, where Amazon and Comcast are going to make their money is in driving overall usage of their platform because, inevitably, no single service is going to have every piece of content a given user wants. Long term viability in the video market is necessarily going to be about offering consumers more choice, not less. And, in this world, the box that happens to be delivering the content is basically irrelevant; it’s the competition between platform providers that matters.

The Global Antitrust Institute (GAI) at George Mason University’s Antonin Scalia Law School released today a set of comments on the joint U.S. Department of Justice (DOJ) – Federal Trade Commission (FTC) August 12 Proposed Update to their 1995 Antitrust Guidelines for the Licensing of Intellectual Property (Proposed Update).  As has been the case with previous GAI filings (see here, for example), today’s GAI Comments are thoughtful and on the mark.

For those of you who are pressed for time, the latest GAI comments make these major recommendations (summary in italics):

Standard Essential Patents (SEPs):  The GAI Comments commended the DOJ and the FTC for preserving the principle that the antitrust framework is sufficient to address potential competition issues involving all IPRs—including both SEPs and non-SEPs.  In doing so, the DOJ and the FTC correctly rejected the invitation to adopt a special brand of antitrust analysis for SEPs in which effects-based analysis was replaced with unique presumptions and burdens of proof. 

o   The GAI Comments noted that, as FTC Chairman Edith Ramirez has explained, “the same key enforcement principles [found in the 1995 IP Guidelines] also guide our analysis when standard essential patents are involved.”

o   This is true because SEP holders, like other IP holders, do not necessarily possess market power in the antitrust sense, and conduct by SEP holders, including breach of a voluntary assurance to license its SEP on fair, reasonable, and nondiscriminatory (FRAND) terms, does not necessarily result in harm to the competitive process or to consumers. 

o   Again, as Chairwoman Ramirez has stated, “it is important to recognize that a contractual dispute over royalty terms, whether the rate or the base used, does not in itself raise antitrust concerns.”

Refusals to License:  The GAI Comments expressed concern that the statements regarding refusals to license in Sections 2.1 and 3 of the Proposed Update seem to depart from the general enforcement approach set forth in the 2007 DOJ-FTC IP Report in which those two agencies stated that “[a]ntitrust liability for mere unilateral, unconditional refusals to license patents will not play a meaningful part in the interface between patent rights and antitrust protections.”  The GAI recommended that the DOJ and the FTC incorporate this approach into the final version of their updated IP Guidelines.

“Unreasonable Conduct”:  The GAI Comments recommended that Section 2.2 of the Proposed Update be revised to replace the phrase “unreasonable conduct” with a clear statement that the agencies will only condemn licensing restraints when anticompetitive effects outweigh procompetitive benefits.

R&D Markets:  The GAI Comments urged the DOJ and the FTC to reconsider the inclusion (or, at the very least, substantially limit the use) of research and development (R&D) markets because: (1) the process of innovation is often highly speculative and decentralized, making it impossible to identify all market participants to be; (2) the optimal relationship between R&D and innovation is unknown; (3) the market structure most conducive to innovation is unknown; (4) the capacity to innovate is hard to monopolize given that the components of modern R&D—research scientists, engineers, software developers, laboratories, computer centers, etc.—are continuously available on the market; and (5) anticompetitive conduct can be challenged under the actual potential competition theory or at a later time.

While the GAI Comments are entirely on point, even if their recommendations are all adopted, much more needs to be done.  The Proposed Update, while relatively sound, should be viewed in the larger context of the Obama Administration’s unfortunate use of antitrust policy to weaken patent rights (see my article here, for example).  In addition to strengthening the revised Guidelines, as suggested by the GAI, the DOJ and the FTC should work with other component agencies of the next Administration – including the Patent Office and the White House – to signal enhanced respect for IP rights in general.  In short, a general turnaround in IP policy is called for, in order to spur American innovation, which has been all too lacking in recent years.

As Commissioner Wheeler moves forward with his revised set-top box proposal, and on the eve of tomorrow’s senate FCC oversight hearing, we would do well to reflect on some insightful testimony regarding another of the Commission’s rulemakings from ten years ago:

We are living in a digital gold age and consumers… are the beneficiaries. Consumers have numerous choices for buying digital content and for buying devices on which to play that content. They have never had so much flexibility and so much opportunity.  

* * *

As the content industry has ramped up on-line delivery of content, it has been testing a variety of protection measures that provide both security for the industry and flexibility for consumers.

So to answer the question, can content protection and technological innovation coexist?  It is a resounding yes. Look at the robust market for on-line content distribution facilitated by the technologies and networks consumers love.

* * *

[T]he Federal Communications Commission should not become the Federal Computer Commission or the Federal Copyright Commission, and the marketplace, not the Government, is the best arbiter of what technologies succeed or fail.

That’s not the self-interested testimony of a studio or cable executive — that was Gigi Sohn, current counsel to Chairman Wheeler, speaking on behalf of Public Knowledge in 2006 before the House Energy and Commerce Committee against the FCC’s “broadcast flag” rules. Those rules, supported by a broad spectrum of rightsholders, required consumer electronics devices to respect programming conditions preventing the unauthorized transmission over the internet of digital broadcast television content.

Ms. Sohn and Public Knowledge won that fight in court, convincing the DC Circuit that Congress hadn’t given the FCC authority to impose the rules in the first place, and she successfully urged Congress not to give the FCC the authority to reinstate them.

Yet today, she and the Chairman seem to have forgotten her crucial insights from ten years ago. If the marketplace for video content was sufficiently innovative and competitive then, how can it possibly not be so now, with audiences having orders of magnitude more choices, both online and off? And if the FCC lacked authority to adopt copyright-related rules then, how does the FCC suddenly have that authority now, in the absence of any intervening congressional action?

With Section 106 of the Copyright Act, Congress granted copyright holders the exclusive rights to engage in or license the reproduction, distribution, and public performance of their works. The courts are the “backstop,” not the FCC (as Chairman Wheeler would have it), and section 629 of the Communications Act doesn’t say otherwise. All section 629 does is direct the FCC to promote a competitive market for devices to access pay-TV services from pay-TV providers. As we noted last week, it very simply doesn’t allow the FCC to interfere with the license arrangements that fill those devices, and, short of explicit congressional direction, the Commission is simply not empowered to interfere with the framework set forth in the Copyright Act.

Chairman Wheeler’s latest proposal has improved on his initial plan by, for example, moving toward an applications-based approach and away from the mandatory disaggregation of content. But it would still arrogate to the FCC the authority to stand up a licensing body for the distribution of content over pay-TV applications; set rules on the terms such licenses must, may, and may not include; and even allow the FCC itself to create terms or the entire license. Such rules would necessarily implicate the extent to which rightsholders are able to control the distribution of their content.

The specifics of the regulations may be different from 2006, but the point is the same: What the FCC could not do in 2006, it cannot do today.

Imagine if you will… that a federal regulatory agency were to decide that the iPhone ecosystem was too constraining and too expensive; that consumers — who had otherwise voted for iPhones with their dollars — were being harmed by the fact that the platform was not “open” enough.

Such an agency might resolve (on the basis of a very generous reading of a statute), to force Apple to make its iOS software available to any hardware platform that wished to have it, in the process making all of the apps and user data accessible to the consumer via these new third parties, on terms set by the agency… for free.

Difficult as it may be to picture this ever happening, it is exactly the sort of Twilight Zone scenario that FCC Chairman Tom Wheeler is currently proposing with his new set-top box proposal.

Based on the limited information we have so far (a fact sheet and an op-ed), Chairman Wheeler’s new proposal does claw back some of the worst excesses of his initial draft (which we critiqued in our comments and reply comments to that proposal).

But it also appears to reinforce others — most notably the plan’s disregard for the right of content creators to control the distribution of their content. Wheeler continues to dismiss the complex business models, relationships, and licensing terms that have evolved over years of competition and innovation. Instead, he offers  a one-size-fits-all “solution” to a “problem” that market participants are already falling over themselves to provide.

Plus ça change…

To begin with, Chairman Wheeler’s new proposal is based on the same faulty premise: that consumers pay too much for set-top boxes, and that the FCC is somehow both prescient enough and Congressionally ordained to “fix” this problem. As we wrote in our initial comments, however,

[a]lthough the Commission asserts that set-top boxes are too expensive, the history of overall MVPD prices tells a remarkably different story. Since 1994, per-channel cable prices including set-top box fees have fallen by 2 percent, while overall consumer prices have increased by 54 percent. After adjusting for inflation, this represents an impressive overall price decrease.

And the fact is that no one buys set-top boxes in isolation; rather, the price consumers pay for cable service includes the ability to access that service. Whether the set-top box fee is broken out on subscribers’ bills or not, the total price consumers pay is unlikely to change as a result of the Commission’s intervention.

As we have previously noted, the MVPD set-top box market is an aftermarket; no one buys set-top boxes without first (or simultaneously) buying MVPD service. And as economist Ben Klein (among others) has shown, direct competition in the aftermarket need not be plentiful for the market to nevertheless be competitive:

Whether consumers are fully informed or uninformed, consumers will pay a competitive package price as long as sufficient competition exists among sellers in the [primary] market.

Engineering the set-top box aftermarket to bring more direct competition to bear may redistribute profits, but it’s unlikely to change what consumers pay.

Stripped of its questionable claims regarding consumer prices and placed in the proper context — in which consumers enjoy more ways to access more video content than ever before — Wheeler’s initial proposal ultimately rested on its promise to “pave the way for a competitive marketplace for alternate navigation devices, and… end the need for multiple remote controls.” Weak sauce, indeed.

He now adds a new promise: that “integrated search” will be seamlessly available for consumers across the new platforms. But just as universal remotes and channel-specific apps on platforms like Apple TV have already made his “multiple remotes” promise a hollow one, so, too, have competitive pressures already begun to deliver integrated search.

Meanwhile, such marginal benefits come with a host of substantial costs, as others have pointed out. Do we really need the FCC to grant itself more powers and create a substantial and coercive new regulatory regime to mandate what the market is already poised to provide?

From ignoring copyright to obliterating copyright

Chairman Wheeler’s first proposal engendered fervent criticism for the impossible position in which it placed MVPDs — of having to disregard, even outright violate, their contractual obligations to content creators.

Commendably, the new proposal acknowledges that contractual relationships between MVPDs and content providers should remain “intact.” Thus, the proposal purports to enable programmers and MVPDs to maintain “their channel position, advertising and contracts… in place.” MVPDs will retain “end-to-end” control of the display of content through their apps, and all contractually guaranteed content protection mechanisms will remain, because the “pay-TV’s software will manage the full suite of linear and on-demand programming licensed by the pay-TV provider.”

But, improved as it is, the new proposal continues to operate in an imagined world where the incredibly intricate and complex process by which content is created and distributed can be reduced to the simplest of terms, dictated by a regulator and applied uniformly across all content and all providers.

According to the fact sheet, the new proposal would “[p]rotect[] copyrights and… [h]onor[] the sanctity of contracts” through a “standard license”:

The proposed final rules require the development of a standard license governing the process for placing an app on a device or platform. A standard license will give device manufacturers the certainty required to bring innovative products to market… The license will not affect the underlying contracts between programmers and pay-TV providers. The FCC will serve as a backstop to ensure that nothing in the standard license will harm the marketplace for competitive devices.

But programming is distributed under a diverse range of contract terms. The only way a single, “standard license” could possibly honor these contracts is by forcing content providers to license all of their content under identical terms.

Leaving aside for a moment the fact that the FCC has no authority whatever to do this, for such a scheme to work, the agency would necessarily have to strip content holders of their right to govern the terms on which their content is accessed. After all, if MVPDs are legally bound to redistribute content on fixed terms, they have no room to permit content creators to freely exercise their rights to specify terms like windowing, online distribution restrictions, geographic restrictions, and the like.

In other words, the proposal simply cannot deliver on its promise that “[t]he license will not affect the underlying contracts between programmers and pay-TV providers.”

But fear not: According to the Fact Sheet, “[p]rogrammers will have a seat at the table to ensure that content remains protected.” Such largesse! One would be forgiven for assuming that the programmers’ (single?) seat will surrounded by those of other participants — regulatory advocates, technology companies, and others — whose sole objective will be to minimize content companies’ ability to restrict the terms on which their content is accessed.

And we cannot ignore the ominous final portion of the Fact Sheet’s “Standard License” description: “The FCC will serve as a backstop to ensure that nothing in the standard license will harm the marketplace for competitive devices.” Such an arrogation of ultimate authority by the FCC doesn’t bode well for that programmer’s “seat at the table” amounting to much.

Unfortunately, we can only imagine the contours of the final proposal that will describe the many ways by which distribution licenses can “harm the marketplace for competitive devices.” But an educated guess would venture that there will be precious little room for content creators and MVPDs to replicate a large swath of the contract terms they currently employ. “Any content owner can have its content painted any color that it wants, so long as it is black.”

At least we can take solace in the fact that the FCC has no authority to do what Wheeler wants it to do

And, of course, this all presumes that the FCC will be able to plausibly muster the legal authority in the Communications Act to create what amounts to a de facto compulsory licensing scheme.

A single license imposed upon all MVPDs, along with the necessary restrictions this will place upon content creators, does just as much as an overt compulsory license to undermine content owners’ statutory property rights. For every license agreement that would be different than the standard agreement, the proposed standard license would amount to a compulsory imposition of terms that the rights holders and MVPDs would not otherwise have agreed to. And if this sounds tedious and confusing, just wait until the Commission starts designing its multistakeholder Standard Licensing Oversight Process (“SLOP”)….

Unfortunately for Chairman Wheeler (but fortunately for the rest of us), the FCC has neither the legal authority, nor the requisite expertise, to enact such a regime.

Last month, the Copyright Office was clear on this score in its letter to Congress commenting on the Chairman’s original proposal:  

[I]t is important to remember that only Congress, through the exercise of its power under the Copyright Clause, and not the FCC or any other agency, has the constitutional authority to create exceptions and limitations in copyright law. While Congress has enacted compulsory licensing schemes, they have done so in response to demonstrated market failures, and in a carefully circumscribed manner.

Assuming that Section 629 of the Communications Act — the provision that otherwise empowers the Commission to promote a competitive set-top box market — fails to empower the FCC to rewrite copyright law (which is assuredly the case), the Commission will be on shaky ground for the inevitable torrent of lawsuits that will follow the revised proposal.

In fact, this new proposal feels more like an emergency pivot by a panicked Chairman than an actual, well-grounded legal recommendation. While the new proposal improves upon the original, it retains at its core the same ill-informed, ill-advised and illegal assertion of authority that plagued its predecessor.