Wednesday, July 18, 2012

Congressional hearing highlights concern over ITC import bans sought by trolls and FRAND abusers

Last week I reported on a Senate Judiciary Committee hearing on ITC import bans over standard-essential patents (SEPs). Today I watched (by webcast) a hearing organized by the Subcommittee on Intellectual Property, Competition and the Internet of the House of Representatives. You can find some general information on the hearing and links to the initial presentations of the five witnesses on this page.

Last week's Senate hearing was more focused on oversight than on near-term legislative plans, though some of the questions suggested that certain senators do believe legislation could help to address the problem. At today's hearing, the witnesses' presentations and the questions asked by various members of Congress indicated that Capitol Hill is concerned about whether the ITC is being increasingly abused by litigants who should instead bring their actions in federal court. Another key difference is that last week's hearing focused entirely on SEPs while today's hearing also touched on the problems caused by non-practicing entities (usually referred to as "patent assertion entities" at the hearing, or "patent trolls" in colloquial terms) as well as the overall competitive implications of patent litigation and patent hoarding by large organizations.

Four of the five witnesses (Santa Clara University's Colleen Chien, Ford's David Kelley, Cisco's Neal Rubin and the American Antitrust Institute's Albert Foer) strongly criticized the current state of affairs while one witness (Tessera's Bernard Cassidy, who mostly spoke on behalf of a patent-troll-friendly lobbying entity named "Innovation Alliance"), defended it.

A day before the hearing, IPWatchdog's Gene Quinn criticized the selection of witnesses in an article entitled "Infringer Lobby Seeks to Strip ITC of Patent Powers". While I don't think that companies like Cisco and Ford (nor the other two speakers who criticized the current situation) are against intellectual property, it is true that a majority of the witnesses want the ITC to either make itself less available to certain types of patent holders or would otherwise advocate reform of Section 337, the statute governing the trade agency's intellectual property enforcement.

Ford and Cisco told two stories that definitely add to lawmakers' concern. Cisco said that it had to defend itself against a Canadian non-practicing entity with only one employee in the U.S. (who was hired just to satisfy the ITC's domestic industry requirement) that had purchased patents from a failed Israelian company sued Cisco and others at the ITC. Because of some misconduct (they subpoenaed their licensees and paid them for their testimony), the case was dismissed, but it cost Cisco $13 million to defend itself. Cisco was a defendant in only one ITC action before 2010, and has had to defend itself in five cases since. This year it expects to spend approximately $20 million on its defense against ITC complaints. Ford was "hauled into the ITC" in a case involving GPS technology. A foreign patent assertion entity sued "every major producer of automobiles" in the United States, a group that collectively employs hundreds of thousands of Americans. According to Ford the cost of the defense was in the tens of millions of dollars.

Ford spoke out more strongly in favor of legislative intervention than Cisco. It appears that Cisco is mostly concerned about patent trolls. It previously expressed, in official statements, its concern over exclusion orders and other forms of injunctive relief based on SEPs. I guess that Cisco didn't want to lobby too aggressively for reform because it now has to regularly defend itself at the ITC. Clearly, Professor Chien and the AAI's Albert Foer advocated a broader reform agenda, and while they said that Congress should act only if the ITC doesn't change direction, I believe they think legislative measures are either inevitable or at least very likely to be necessary at some point. And they appear to have run out of patience. Professor Chien said that the ITC has recently received a lot of attention and may have opportunities to prove its adaptiveness over the next 6-12 months. This is almost like saying: "if things don't change before or shortly after the November elections, Congress should start to look at the issues identified during the early part of its next term."

Tessera's Bernard Cassidy did his best to state his non-mainstream positions in order to counterbalance the pro-reform majority. He's a great speaker but I don't think the arguments he made were persuasive. He categorically denied that there is a problem. He basically attributed the issues raised by others to the growing importance of intellectual property. In my view, denial doesn't help. At this stage, the best complement for the other four speakers would not have been someone who says that trolls are an important part of the U.S. economy, but someone who would have acknowledged the problems and promoted better solutions. There are few decision-makers who will believe, just looking at the recent increase in patent litigation in general and at the ITC in particular, that there's no room for significant improvement over the status quo.

The questions that lawmakers asked indicated to me that there is awareness for the fact that the ITC's patent enforcement activities need some adjustment -- either from within the ITC or through new legislation -- in order to realign the ITC with the original objective in this area: protecting domestic companies against unfair foreign competition.

There was consensus among most witnesses that three factors have contributed to the ITC's popularity among patent plaintiffs: as a result of globalization, more companies than ever import at least certain components and can be affected by import bans; the ITC is a faster venue than U.S. district courts (though not nearly as fast as certain German courts); and after the Supreme Court's eBay v. MercExchange ruling in 2006, patent trolls find it very hard to win an injunction in district court and expect to get more leverage at the ITC. Actually, the third point is also a big part of the reason why strategically-motivated owners of SEPs bring ITC complaints.

Rep. Darrell Issa (R-Cal.) was the only speaker to stress that some of the factors that have made the ITC such an attractive forum for many litigants could also be addressed by improving the way federal courts handle patent cases, especially in terms of speed. That's an interesting thought, and a holistic approach.

While concern was expressed over three issues (exclusion orders based on SEPs, patent trolls in general, and the strategic use of patents), it appears to me that the issues surrounding SEPs are the ones where there is the greatest degree of consensus in the Senate and in the House and among the witnesses. The AAI's Bernard Froer focused very much (though not exclusively) on FRAND-pledged SEPs in his statements. As I mentioned before, Cisco has taken clear positions on SEPs more than once. Colleen Chien and 18 other professors (of law as well as economics) filed a statement with the ITC that distinguishes problems involving SEPs from issues surrounding other patents. With SEPs, it's easier than with other patents to make the argument that the proper venue for each plaintiff is a district court that will award monetary compensation (unless, perhaps, a very few cases in which an infringer is not identifiable or for any other reason cannot be sued in the United States).

All in all, it would make sense for the ITC to close the door to assertions of SEPs rather than order import bans over SEPs (such as banning the iPhone or iPad over Motorola's or Samsung's patents), which could be a catalyst for major legislative reform. Lobby groups like the "Innovation Alliance" -- or even those who might express more balanced and realistic views -- wouldn't be able to successfully oppose reform if the problem got completely out of hand.

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