Tuesday, July 30, 2013

Senators are concerned about abuse of standard-essential patents, looking past iPhone 4 import ban

I just watched the live webcast of today's hearing of the Subcommittee on Antitrust, Competition Policy and Consumer Rights of the Judiciary Committee of the United States Senate on "Standard Essential Patent [SEP] Disputes and Antitrust Law". Here's a quick, first reaction:

There's profound concern, and some kind of legislative action may very well be taken, but things take time. In practical terms it's obvious that legislation can only change the framework for future cases and won't affect the import ban Samsung won from the ITC against certain older iPhones and iPads, which will take effect in a few days unless vetoed or stayed. That said, some of the testimony urged action, with only Qualcomm (who sent an incredibly smart, gifted and charming speaker who did his best to downplay the issue) arguing that FRAND works well except for problems at the margins that inevitably arise when competitors go to court, and there was apparently also a consensus among subcommittee members that there are indeed serious issues deserving attention. Whether these early-stage developments on Capitol Hill will influence the U.S. government's decision on whether to veto the ITC import ban is another question but they might.

I've spent a lot of time on FRAND issues (mostly, but not exclusively, in connection with SEPs, and when I hear people talk about it, I look for certain indicators of an understanding of the key issue -- indicators of whether they "get it" or are confused (like the majority of the ITC) by some of the propaganda relating to "reverse hold-up", or "holdout". I liked most of what I heard at today's hearing. When the chairwoman of the subcommittee, Sen. Amy Klobuchar (D.-Minn.), basically explained that standard-setting itself raises an antitrust issue -- she referred to "competitors deciding what technology becomes part of a standard" -- and explained the difference between pre-standard-setting competition and post-standard-setting lock-in, I immediately saw that there's tremendous awareness for the issue of SEP abuse. A witness from the FTC, the agency's chief IP counsel Suzanne Munck, and Intel's Sr. VP and General Counsel Douglas Melamed also emphasized this. They're obviously experts. But if politicians who deal with a multitude of political issues are aware of the core of the SEP abuse problem, then that's a really good sign.

Intel's Mr. Melamed said that SEP abuse is a tax on industry and innovation and noted that SEPs themselves are often insignificant except for their inclusion in a standard, which gives their owners leverage. As a litigation watcher I share this view. The inventive contribution made by the average SEP is typically so limited that the same patent would have very little, if any, commercial value as a non-SEP because it would be so easy to work around (often in superior ways) if there wasn't a standard that prescribed the use of a particular technique, ruling out all alternatives regardless of their technological merit. The Motorola SEPs at issue in the Microsoft v. Motorola FRAND contract dispute may be of exceptionally low value, but I was also underwhelmed by the other SEPs I've seen so far in the ongoing smartphone disputes. Intel also noted that most of the declared-SEPs asserted against it so far weren't actually found essential in litigation, an experience shared by Apple and others.

While I'm not enthusiastic in all respects about the FTC's just-finalized consent order and decree in the Google (Motorola) SEP case, which is useful in some ways and a missed opportunity in some other ways, I support pretty much everything that its chief IP counsel Mrs. Munck said at today's hearing. She, too, agreed that there is an issue that must be dealt with, and her testimony included a ringing endorsement of Judge Posner's position, relating to the eBay v. MercExchange standard, that a patent holder who makes a FRAND pledge will have a hard time showing that monetary compensation is inadequate and an injunction is needed. She explained the fundamental difference between the usual situation in patent law, which is a law set up for exclusive use, and a situation in which someone is willing to license broadly. Mrs. Munck said she was part of the team that submitted an amicus brief in support of Judge Posner's ruling. That appeal will be heard by the Federal Circuit on September 11, 2013.

It's clear that lawmakers and regulators would like standard-setting organizations to solve the problem so they don't have to do it themselves, but Intel explained that SSOs need a consensus (especially if they want to change FRAND licensing rules with expect to standards that were set years ago) and certain patent holders with an agenda to use SEPs aggressively make it impossible to reach that consensus.

The only thing I found really annoying at today's hearing were certain attempts to distract from the SEP issue by claiming that there are more fundamental issues, such as patent quality. I don't mean to suggest that everyone who raised those broader issues at today's hearing had an agenda to distract, but distraction was certainly the effect. Dr. John Kulick, a Siemens employee speaking only in his capacity as the chair of the IEEE's Standards Association Board, stressed the need for patent quality. Higher patent quality would obviously mean fewer patents and presumably fewer assertions of declared-SEPs of low quality. But SEP hold-up is unacceptable and pernicious regardless of quality. I'm all for patent quality and have criticized the quality of patents of all sorts (SEPs and non-SEPs alike) on many occasions, but I don't think SEP hold-up is closely related to that other issue (no matter how important it is in its own right). Qualcomm alleged that others conflated SEPs with issues relating more generally to litigation and accurately noted that the vast majority of patents-in-suit in the ongoing smartphone-related patent cases are non-SEPs. That's true if you count the number of patents asserted; it's not true in terms of the damage they can do or could have done. I very much agree with the FTC that even if FRAND works well most of the time and litigation is less prevalent than licensing, we "still need a means to determine what happens in a FRAND dispute". (As for Qualcomm's claim that there isn't that much litigation, Intel made a strong point by noting that the mere threat of SEP-based injunctions often results in settlements and license agreements on supra-FRAND terms.)

Toward the end of the hearing Senator Chuck Schumer (D-N.Y.) wanted to promote his legislative proposal in the patent trolls context, making it difficult for the witness to answer his off-topic question. Sen. Schumer talked about a start-up that has allegedly gone out of business because of patent assertions and about entrepreneurs who are concerned, but I'm not aware of a single case in which a patent troll by any definition (broad or narrow) has asserted a SEP against a start-up (if anyone knows of such a case, please do let me know).

There were very few references to the Samsung-Apple situation and the impending ITC import ban. Today's hearing was more of a high-level discussion of the issue. I don't know whether there's some activity behind the scenes, but given the concern of certain senators about the problem of SEP abuse, it's certainly possible that lawmakers have talked to the White House about the Samsung-Apple case.

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