Thursday, June 20, 2013

FTC preparing broadbased Section 6(b) cost-benefits analysis of patent assertion entities

I just listened (via webcast) to a special keynote address by FTC Chairwoman Edith Ramirez on "Competition Law & Patent Assertion Entities: What Antitrust Enforcers Can Do". As previously reported by the New York Times, the Chairwoman made clear that there will soon be a Section 6(b) study of activities by patent assertion entities (PAEs). Section 6(b) inquiries are all about information gathering, though the collected information may be used in different ways ranging from competition enforcement to policy-making. And indeed, this is going to be a broadbased investigation that can have all sorts of direct and indirect effects further down the road.

Chairwoman Ramirez's speech included various data points that suggest harm to consumers and innovation from PAE activities, and her agency clearly sees more evidence of negative than positive effects. While the starting point is clear (it can be described as profound skepticism), the official focus is that the agency wants to analyze the "costs and benefits" of PAEs and their activities because there's still not enough information available (which I guess is the agency's justification for using its investigative powers). Based on today's speech it's still a foregone conclusion that the ultimate finding will be that the costs caused by PAEs outweigh their benefits as monetizers helping inventors obtain fair compensation.

There were many statements and opinions in the Chairwoman's speech that I like and share, but there are also some parameters and positions on which I tend to disagree based on my monitoring of intellectual property enforcement surrounding smartphones and tablet computers.

In this post I'm going to focus on items I view differently. Those of you who have read other posts of mine will already know the ones on which I agree (patent quality, transparency in ownership etc.). It would be great if the study contributed to a further increase in patent quality and in more transparency (the Chairwoman noted the practice of using shell companies for patent assertions, but transparency is also an issue with operating companies that don't disclose their holdings).

The term "patent hold-up" came up, and the cost of defending against claims. In my opinion the FTC's proposed Google (Motorola) consent decree is an example of a context -- standard-essential patents -- in which there's a massive hold-up problem, but the FTC could have come up with a more efficient solution. The decision of the ITC -- one of the FTC's sister agencies -- to order an import ban against older iPhones and iPads over a Samsung standard-essential patent and Google's continued pursuit of injunctive relief against Apple raise serious issues and show that a lot more work needs to be done to combat SEP abuse before the focus can shift to PAEs. I hope that PAEs won't serve as an excuse for less enforcement in connection with SEPs.

I struggle with terminology. It's hard to see a distinction between patent assertion entities and non-practicing entities. The way the FTC tries to define the term PAEs, if I understood it correctly, is that the "business model" is about "asserting" patents. This doesn't make sense to me, at least not without further explanation. I watch a lot of litigation but I've never seen any entity that truly considers the "assertion" of patents a "business model" -- but anyone (whether we're talking about an operating company fighting reckless copycats or a university-owned research firm or a "troll") will always prefer that the target of a patent assertion settles on the patentee's preferred terms. Going to court is always just a means to an end. The end is licensing most of the time, and in a minority of cases in which operating companies want to ensure product differentiation, it's exclusivity. Licensing and even exclusivity can be achieved without litigation. There's really only one category of patent troll lawsuits in which assertion itself is the "business model", and the Chairwoman mentioned nuisance lawsuits that are "cheaper to settle than to litigate". But the FTC's definition of PAE is not limited to such nuisance lawsuits, and then I wonder how they're going to distinguish PAEs from other NPEs.

The Chairwoman pointed to something I also dislike: patent infringement lawsuits against little guys such as "coffee shops", "retailers that do business online", and "restaurants with websites". But what's the right answer? In my view, the solution is that large players whose technology is at issue in such infringement actions stand by their customers and developers. I consistently demanded that Apple and Google do more than just intervene and seek patent reexaminations with respect to Lodsys, but they didn't. I think the solution must come from companies (and from customers who demand indemnification from their vendors) and so far I can't see an antitrust approach to this problem.

In connection with "privateering", it's simply a fact that many patent transfers are formally structured as purchases but make mockery of the concept of a sale or purchase. But is this problem PAE-specific? Google did such a deal with HTC, and neither company meets the FTC's definition of a PAE (nor mine). This is, interestingly, the only case so far in all of the patent lawsuits I watch in which a patent transfer was agreement found by a judicial authority (in this case, the ITC) to be anything but a genuine patent sale/purchase.

I may talk more about patent purchases on some other occasion. I think there would be fewer such deals if large companies could enforce legitimate IP more effectively in the U.S., where plaintiffs often see their lawsuits transferred to and consolidated in a single venue, where they are then forced to focus on a small number of patents-in-suit or else they won't get their day in court anytime soon. I'm convinced that this sometimes leads patent holders to partner with NPEs for the purpose of monetization.

It's too early to tell whether the FTC will actually identify anything in a Section 6(b) study that will give rise to competition enforcement activities. I may or may not change my opinion on this as the process unfolds, but in today's speech I saw signs that this is very much a political initiative, at least for the most part and possibly in its entirety. For example, there were multiple references to functional claiming. In my view this is a question of patent quality, not of competition enforcement. There's nothing the FTC can do about the patent granting process other than provide ammunition to policy-makers.

Such a study can also result in some surprises. So let's stay tuned.

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