Sunday, May 5, 2013

Comments on the ongoing patent troll debate in the U.S. -- and don't forget about Europe

This blog is, and will continue to be, about litigation monitoring, including antitrust matters related to smartphone patent litigation. I did a fair amount of work on patent policy years ago, but haven't done any lobbying in this context since 2006 (and no lobbying of any kind since 2007). That said, I may from time to time comment on patent policy issues closely related to the disputes and processes I'm watching. This post is an example.

I don't blog much about lawsuits brought by patent assertion entities (PAEs) these days. I don't find the time for it anymore because there's so much going on between large operating companies (whose disputes haven't slowed down, though some key issues need to be resolved by appeals courts, where there's less noise and more signal than in trial courts). In my consulting practice, however, I occasionally observe and research certain PAE activities and strategies, particularly in connection with standard-essential patents (SEPs), writing reports for law firms. And beyond my consulting and blogging activities, I obviously read and hear about what's going on in that regard.

Last month the Federal Trade Commission (FTC) and Department of Justice (DoJ) published 68 submissions related to the agencies' joint PAE workshop. My first observation is that wholesale denial of the problem of excessive and overly aggressive PAE activity has gone out of fashion. There are a very few radical "no problem" type of voices among those who sent comments to the FTC and DoJ. One of them is the Innovation Alliance, a lobby group that also disputes the existence of problems with SEP hold-up at the threat of injunctive relief. Its submission claims that "the relevant studies (by Chien, Bessen & Meurer, and Jeruss, Feldman & Walker) may be methodologically flawed", suggesting in the next sentence that they appear "biased and politically-motivated". The organization wants to make the world believe that "patent litigation rates have remained relatively constant over time, despite periodic surges during periods of intense technological development" and "opposes attempts to change the law based upon anecdotes and assumptions that certain business models are harmful or anti-competitive". In other words, it's against reform because the current system works well for its backers -- which are, however, not representative of the wider economy.

The studies the Innovation Alliance disparages tackle complex issues and one can always imagine improvements (which the Innovation Alliance does not propose). But it's a fact that these studies are often cited by policymakers and stakeholders. In particular, the studies by professors Colleen Chien (see this very recent Reuters story, Patent claims cause companies to exit business lines - study) and James Bessen & Michael Meurer are quoted by commenters as diverse as Dell/HP/Adobe (footnotes 2, 10, 24, 26-28, 32, 34, 36, 43, 51-53, 73, 79, and 81), Google/BlackBerry/Earthlink/Red Hat (footnotes 20, 24, 34-35, 26-32, 37, 39-40, 42-43, 46-48, 61, and 65), and Microsoft (footnotes 6, 7, and 9).

A pro-patent, problem-denying submission that I find rather surprising was made by the World Intellectual Property Organization (WIPO). In paragraph 1 it proposes a distinction between NPEs and PAEs that I hadn't seen before -- these terms are synonyms. All references to a potential "problem" come with a subclause doubting the existence of a problem ("if there is a problem" etc.). And the paper says the following:

"From a multilateral perspective, there is a clear divide between the law in the United States and in the vast majority of other countries as far as the NPEs/PAEs-enforcers problem is concerned. In the United States, patents are granted as tools of protecting private property rights. In the rest of the world patents are instruments of industrial policy. The two systems are still coincident in that a patent is granted as recognition of an invention made. But the systems divide in that, in the majority of countries, actual manufacturing is necessary to keep the patent." (emphasis mine)

This is definitely not the law in Europe. I know countless cases in which NPEs/PAEs successfully enforced patents in different European countries and I'm not aware of a single case in which a case was dismissed, or a patent revoked by the EPO or a national patent office, over someone's failure to engage in "actual manufacturing" or anything like it. I also know of some successful NPE litigation in Japan. I don't know whether WIPO's claim is based on a huge number of poor and tiny countries that may apply a different standard. But in the major patent jurisdictions, there's no requirement to build products "to keep the patent". [Update] On Twitter Sujith Subramanian, a reader from India, has drawn my attention to the fact that India has a requirement for patent holders to file a statement of (commercial) working (i.e., implementation). See this ManagingIP article. [/Update]

At and near the other end of the spectrum there are various entities whose patent policy agenda goes far beyond issues specific to NPEs/PAEs. Such initiatives as the SHIELD Act or Senator Schumer's forthcoming proposal are only the starting point for them. In the long run, they pursue abolition of broad swaths of the patent system, if not the entire system. It's quite telling when someone supports a proposal, and makes additional proposals, while making clear all the while that "this is still not going to be enough".

President Obama commented on patent trolls at a Google+ Fireside Hangout in February. While he recognized the troll problem, he said that "[we] also want to make sure that people's intellectual property is protected". I believe this was a clear message to those with broad anti-patent agendas that some issues will be addressed and hopefully fixed, but there's still going to be a robust patent system in place when all is said and done. Including patents on computer-implemented inventions.

Microsoft's submission reflects an effort to strike the balance the President talked about in February. Microsoft acknowledges some recent improvements but agrees that more must be done, just like the President conceded that "our efforts at patent reform only went about halfway to where we need to go". Still, Microsoft promotes a healthy patent system of the kind President Obama would like to see at the end of the poltiical process.

There's an unmistakable sign that Microsoft's position represents a middle ground: it gets bashed from both sides. There are still some who believe that Microsoft is the primary reason software patents exist and are enforced (though most software patents are actually held by companies in the manufacturing industries). At the same time, there are patent professionals who would prefer to avoid the further reform the President deems necessary (or at least keep it very limited), and who are uneasy about the fact that Microsoft has been promoting certain improvements. For example, a fellow blogger, who unlike me is a patent attorney, IPWatchdog's Gene Quinn, wrote on Twitter (in December) that "patent critics love to argue that Microsoft doesn't need software patents and even they rail against them and the US patent system". I don't think people accurately represent Microsoft's position this way, and I told Gene, who replied that he "tend[s] to agree, but [Microsoft] takes policy positions against long term interest" and "many critics mistakenly look to them for support", specifically referring to Microsoft's argument in favor of the preponderance standard (rather than the higher clear-and-convincing-evidence standard) for the invalidation of issued patents in the i4i case ("I'm talking specifically about wanting a lower presumption of validity at [the Supreme Court of the United States]").


Obviously, submissions to two U.S. governmental agencies focus on the situation in the United States. But the most important ones of the stakeholders who submitted comments also do business (or have members who do business) in other parts of the world, particularly Europe. I believe it's a major strategic mistake by some stakeholders to focus exclusively on the existing problem of rampant troll litigation in the United States instead of addressing before it is too late the risk of Europe becoming the new Eldorado for NPEs/PAEs/trolls. I'll go into more detail in some other post(s) in the not too distant future, but I do want to point out that almost all member states of the European Union recently agreed on the creation of a Unified Patent Court, which will have "exclusive jurisdiction for litigation relating to European patents and European patents with unitary effect (unitary patents)". A rapidly-growing number of stakeholders and professionals warn against the effect that this new patent judiciary will have unless the substantive and procedural rules are defined very reasonably.

Nokia recently warned that the unified EU patent system "might also impede innovation and competition in the UK and Europe", depending on details that have yet to be determined. To those of you with reading knowledge of German I'd like to recommend this April 27, 2013 Heise online article on a discussion of the UPC at a World IP Day conference.

The "nuisance value" business model of some U.S. patent trolls -- bringing more or less (but mostly more, not less) frivolous patent infringement actions only to settle for a license fee substantially below the cost of a proper defense -- doesn't work in Europe so far due to the "loser pays" approach of the most important jurisdictions. And PAEs have much better access to funding in the U.S., which is why they tend to focus on litigation in the U.S. and have in the past mostly acquired U.S. patents. But whether or not there will be some further, near-term patent reform in the U.S., Europe will increasingly experience PAE issues as well, especially after the UPC is put in place. The opportunity of winning a pretty much Europe-wide injunction will make this jurisdiction more attractive for certain PAE purposes than the United States. The threat of injunctive relief -- even if a defendant believes that a lawsuit is more likely than not to be dismissed -- provides PAEs in Europe with a kind of leverage they don't have in the post-eBay United States, in which even Apple was denied an injunction against Samsung despite a jury verdict identifying a multiplicity of patent infringements. In addition, bifurcation greatly increases the likelihood of injunctions being granted over patents later (too late for many defendants that come under immediate settlement pressure) shown to be invalid -- and those are typically extremely broad patents, so broad they're very hard and sometimes impossible to work around without a major loss of competitiveness.

These "opportunities" in Europe will ultimately attract investment capital. Whether U.S. investors fund European PAEs or whether U.S. PAEs use some of their funds to acquire and enforce European patents, market dynamics will ultimately result in exploitation of the opportunity. That's why I believe foresightful stakeholders should use their influence to ensure that PAE litigation in Europe won't explode in a few years with disastrous, and in some cases irreversible, consequences.

Again, I'll talk more about the European threat soon. As I follow smartphone patent litigation cross-jurisdictionally I see different kinds of rules at work.

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