Friday, January 22, 2016

Broadbased support for Samsung's Supreme Court petition in Apple's design patents case: cert looms large

Persuading the Supreme Court to review a decision is normally a long shot. Even when many pundits predict certiorari, it often doesn't materialize (case in point: Oracle v. Google). In recent years, however, patent law has relatively frequently received the attention of the top U.S. court, which some attribute to the Federal Circuit's exceedingly patentee-friendly approach. "Recent years" does not include design patents, however: the last time the Supreme Court of the United States handed an opinion on a design patent dispute was more than 120 years ago. Is it going to happen now? I have a gut feeling that the answer is yes.

Of course, no one can know what the court will decide. But it's hard to think of a case about design patents that would be more likely than Apple v. Samsung to be of interest to the Supreme Court:

  1. It's the perfect case for a decision on how to apply § 289 (disgorgement of infringer's profits) to today's multifunctional products. Few products embody more patentable designs and inventions than smartphones (given that even screen designs are frequently patented).

  2. It's the perfect case for addressing the need to limit the scope of a design patent to the ornamental aspects of the design, excluding the functional ones. That's because Apple's iPhone design patents at issue in this case (there's also one on an app menu layout) are in no small part about such elements as rounded corners.

  3. The amici curiae ("friends of the court") who filed briefs in support of Samsung's petition credibly demonstrate that large and small corporations, high-tech and low-tech companies, the legal community and consumers are profoundly concerned.

As I wrote yesterday (in a blog post on the fact that Apple and Samsung are the top utilizers of so-called "patent death squads"), it will really be hard for Apple, which has a deadline on February 16 to respond to Samsung's petition, to persuade the Supreme Court that this here is not an important issue. The amicus briefs underscore that this matter has ramifications that make even Apple's original (2012) billion-dollar jury verdict pale by comparison. I venture to guess that Apple's argument will be more of a "there's no need for a review because the law is soooo clear" than a "nothing to see here, move on" message.

Six amicus briefs were submitted a week ago, and the submitters can be categorized as follows (in no particular order):

  1. Major high-tech companies

  2. A high-tech industry body

  3. A leading maker of mechanical devices

  4. Minority and rural communities advocacy organizations (promoting small business as well as consumer interests)

  5. Other non-governmental organizations

  6. IP law professors

A year and a half ago, amicus curiae briefs relating to design patent damages were also filed in support of Apple's maximalist position, but (with only a minor exception) just by low-tech and no-tech companies. I doubt that anyone will file a brief in support of Apple's opposition to the cert petition next month. That's not only because Apple is pretty much isolated on this question among information and communications (ICT) technology companies but also because even those who are on Apple's side won't want to strengthen the impression that this here matters.

Samsung's supporters at this stage are largely the same ones as in 2014. On balance, Samsung's support is slightly more broadbased now, given that it has the same NGOs on its side, the same tech industry heavyweights, but now even 37 IP law professors (10 more than in 2014) and also a mechanical device maker. There are no signs of Apple having found new allies, but if the Supreme Court grants certiorari, I'm sure there will also be filings by those who share Apple's interests in this context. I'm sure it will still be accurate to say that the ICT industry overwhelmingly, if not exclusively (except for Apple), supports Samsung on this one.

All six amicus briefs discuss the disgorgement-related part of Samsung's petition. Only one of them (the law professors' submission) also speaks out on the claim construction issue of limiting the infringement (and validity) analysis to ornamental (non-functional) aspects. With a view to whether or not the Supreme Court will accept to hear the case, I don't view this as a setback for Samsung's efforts. It's easy to understand that outsized damage awards are a particular magnet for third-party submissions. As this dispute continues, most headlines of media reports will likely also focus on the damages-related question. For now, all that Samsung needs is for the Supreme Court to accept to hear the case.

I will now publish a link to each of the six amicus briefs and provide some particularly interesting quotes (so they can be referenced in future posts on this matter).

Google, Facebook, eBay, Dell, HP, Newegg, Pegasytems, Vizio

amicus curiae brief (PDF)

  • "The Federal Circuit's decision is deeply flawed. If allowed to stand, it will lead to absurd results and have a devastating impact on companies, including amici, that spend billions of dollars annually on research and development for complex technological products and their components."

  • "[The Federal Circuit's decision] ignores the reality of modern, multicomponent technologies. These complex products, which have become the norm throughout the consumer electronics industry, are not purchased primarily based on the design of one or more isolated components."

  • "[The Federal Circuit's decision produces] absurd result[s] [that] cannot be squared with the reality of modern, multicomponent technological products."

  • "Awarding a design patentee the total profit from an infringer's product when the design covers only a relatively minor portion of the product is out of proportion with the significance of the design and out of touch with economic realities."

  • "If allowed to stand, the Federal Circuit's decision will create incentives for more [frivolous] litigation, because any technology that somehow encompasses an infringing design—no matter how complex—will trigger the 'total profit' rule and allow the patentee to obtain disgorgement of all profits from the purported infringer."

  • "If allowed to stand, the Federal Circuit’s decision would encourage the procurement and assertion of more low-quality, marginally innovative design patents, in the hopes that those patents will be infringed by the latest smartphone, laptop, or other device."

  • "In all events, the question presented concerning the scope of design-patent damages is an incredibly important one not only to amici, but to the technology industry as a whole."

Computer & Communications Industry Association

amicus curiae brief (PDF)

  • It's worth noting that CCIA already argued in 2014 (as many others do now) that a simple solution to the "total profits" problem is a more up-to-date interpretation of "article of manufacture."

  • Until Apple can show support from at least one significant CCIA member, I come from the assumption that all CCIA members share the concerns raised--and that is an impressive membership base. There was no indication whatsoever of dissenting members in 2014, and there still isn't any.

  • "The Federal Circuit's decision with respect to design patent damages raises constitutional concerns, is a misreading of the statute, and is dangerous to the technology industry."

  • "If the decision below is allowed to stand, design patent infringement will become a new tool for patent assertion entities to use to gain leverage."

  • "The interpretation of Section 289 used by the Federal Circuit raises constitutional concerns because it grants a design patent an effective monopoly over an entire smartphone based solely on certain ornamental features." (in light of the claim construction issue I mentioned above, one could even argue that a largely functional design could have this effect, making this even worse)

  • "While Congress has broad authority to legislate with respect to patents, it is not allowed to remove knowledge from the public domain or grant a monopoly to an inventor far beyond what the inventor has contributed to the public."

  • "The Federal Circuit's interpretation of Section 289, however, does exactly what Congress is not allowed to do."

  • I particularly like this citation from a Supreme Court decision:

    "[W]here a statute is susceptible of two constructions, by one of which grave and doubtful constitutional questions arise and by the other of which such questions are avoided, our duty is to adopt the latter." Jones v. United States, 529 U.S. 848, 857 (2000) (quoting United States ex rel. Attorney General v. Delaware & Hudson Co., 213 U.S. 366, 408 (1909))

  • "This case is important to the thousands of businesses that are the targets of patent assertion entities, also called patent monetization entities."

Systems Inc. (leading maker of dock levelers, i.e., mechanical devices)

amicus curiae brief (PDF)

  • "The Federal Circuit has adopted an interpretation of Section 289 that appears to contradict over a century of established jurisprudence."

  • "The Federal Circuit's erroneous interpretation has resulted in a foot race to the courthouse with design patent holders seeking exorbitant windfalls in some cases that offend all notions of substantial justice."

  • "The problem presented in Petitioner's case is not isolated or unique."

  • "The Federal Circuit's erroneous interpretation of Section 289 is contrary to a century of established law and is having a rapidly-increasing detrimental impact on patent litigants."

National Black Chamber of Commerce, Hispanic Leadership Fund and the National Grange of the Order of the Patrons of Husbandry (rural communities/farmers)

amicus curiae brief (PDF)

  • "The threat posed by these total-profit disgorgement damages also will hand design-patent-holding companies a weapon so powerful that it threatens to distort markets in a variety of industries and exact tangible harms on the vulnerable communities amici represent."

  • "Minority and rural entrepreneurs will be particularly hard-hit by the anti-competitive harms posed by the Federal Circuit's interpretation of Section 289 because of their vulnerable position in the American marketplace."

  • "The anti-competitive forces set in motion by the Federal Circuit’s decision also threaten to make smartphones far more expensive, rendering it impossible for millions of low-income, minority and rural Americans to connect to the Internet."

  • "[T]he Federal Circuit's interpretation of Section 289 harms entrepreneurs from minority and rural communities by inhibiting the potential success of their developing businesses. It also harms the consumers and citizens of these communities, pricing them out of the only affordable means of obtaining the essential benefits of Internet access."

Electronic Frontier Foundation (EFF) and Public Knowledge

amicus curiae brief (PDF)

  • "It would be entirely unsurprising if the Federal Circuit's damages rule spawned a new generation of abusive patent litigation."

  • "[T]he Court of Appeals opens the door to a new species of abusive patent litigation, namely those over design patents, that will potentially plague future innovators for years to come."

  • "[A]warding 'total profits' on an entire product for a patent only on a small component overcompensates the design patent owner to an absurd degree."

  • "The Federal Circuit's absolute 'total profits' rule, in practice, will serve [...] to promote abusive litigation and licensing practices, and provide yet another mechanism for suppressing competition."

  • "[T]he Federal Circuit's interpretation may raise constitutional doubts, specifically because an absolute 'total profits' rule can result in excessively high and disproportionate damages awards that could violate the Fifth Amendment."

37 (IP) law professors

amicus curiae brief (PDF)

  • Stanford Professor Mark Lemley is counsel of record for his colleagues

  • The professors describe as "counterintuitive" that the "Federal Circuit upheld a finding of design patent infringement based on the very same Apple designs that it found functional under trade dress law."

  • "There is no justification in statutory text, history or policy for interpreting functionality differently for design patents than for trade dress."

  • he Federal Circuit has applied a "draconian" total-profits rule that "dates back more than a century to circumstances that no longer apply."

  • "As applied to a modern, multicomponent product, the entire profit rule drastically overcompensates design patent owners, undervalues technological innovation and manufacturing know-how, and raises troubling questions about how to handle other potential claims to a share of the defendant's profits."

  • "If there is more than one patented design in a product, the assumption that any particular patented design drives the sale of the product falls apart."

  • "Nor does all, or even most, of the value of a product come from patented designs. People do not buy iPhones for their appearance alone; they buy them for their functions."

  • I've saved (a part of) the best for last:

    "It is (barely) possible to argue with a straight face that it is the shape and overall ornamental design of the iPhone, rather than its functionality, that motivates consumers to buy it. It is not even remotely plausible that the shape of the Apple iTunes icon is what motivates people to buy the whole iPhone. And it literally cannot be the case that the phone shape patent and the iTunes icon patent are each the sole driver of a consumer buying the phone. Notably, all of the patents Apple asserted in this litigation cover discrete parts, rather than the entire phone. And while these patents on different aspects of the iPhone's design happen to be owned by the same company, there is no reason to think that the same will always be the case for similarly complex products."

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Thursday, January 21, 2016

Study reveals Apple and Samsung are the leading utilizers of so-called 'patent death squads'

I have a post coming up tomorrow on the tremendous support Samsung has received from industry, the legal community and non-governmental organizations for its cert petition relating to design patent claim construction and damages. For now, suffice it to say that Apple will have a hard time trying to persuade the Supreme Court next month that there's nothing to see (or review) here. I will publish and discuss all those third-party submissions tomorrow, Friday.

Today I received a really interesting Lex Machina press release. Lex Machina, a LexisNexis company, operates the Legal Analytics platform and claims that companies such as Microsoft, Google, Nike and eBay as well as various top-notch law firms are among its clients. Its new "Patent Trial and Appeal Board 2015 Report" provides lots of insight about last year's trials before the United States Patent and Trademark Office's (USPTO) Patent Trial and Appeal Board, i.e., the USPTO's in-house court system. The following two bullet points are particularly relevant to the topics covered by this blog:

  • "Apple has filed 252 PTAB trials (making it the leading filer of PTAB petitions with 197 IPRs and 55 CBMs) but has never appeared as a patent owner.

  • Samsung Electronics, the second most active petitioner, has filed a total of 155 PTAB trials (141 IPR and 14 CBM), and has appeared as a patent owner in 11 petitions."

IPR means inter-partes review and CBM means covered business methods, i.e., a category of subject matter with respect to which a challenge before the USPTO can be particularly effective when defending against patent infringement lawsuits.

Here are my observations:

  • The report comes at a time when the Supreme Court has just decided to review a key principle underlying many patent invalidation decisions by the PTAB: the broadest reasonable claim construction principle. As Bloomberg notes, PTAB challenges have a very high rate of success, with at least part of a disputed patent getting invalidated in 87% of all PTAB cases. The Bloomberg article I just referred to mentions former Chief Judge Rader's derogatory remark: he called PTAB panels "death squads" for patents. I disagree with Mr. Rader. Most patents, at least in this industry here, are invalid as granted. It's a form of hygiene, or one might call it garbage collection, to shoot those junk patents down. The appropriate conclusion is to downsize the patent system and prioritize quality over quantity.

  • Lex Machina describes communications and semiconductors as the "most litigious sectors." It's widely known that no one gets sued as often over patents as Apple these days, and Samsung is also a defendant in countless patent infringement cases. I consider it unfortunate that the two are still embroiled in a long-running patent infringement dispute instead of teaming up to promote reasonableness in patent enforcement, which as a side effect would benefit app developers.

  • In the U.S. patent reform debate, one of the most controversial questions--though in my view it should not be controversial at all--is a proposed expansion of the Covered Business Method (CBM) review program. It was originally created to help banks fend off lawsuits by patent trolls over financial services-related patents. For the reason stated above--hygiene or garbage collection, or whichever other term you may prefer--this program should be extended. It's very interesting that Apple is a big-time utilizer of CBM proceedings (more than 20% of its PTAB trials, as compared to approximately 10% of Samsung's cases). I just don't understand why Apple doesn't actively promote an expansion of the CBM program. It would certainly be in the interest of Apple's shareholders to do so.

In a nutshell: there's way too many bad patents out there; some of them are unbelievably stupid, as the Electronic Frontier Foundation regularly highlights; the PTAB process enables especially deep-pocketed litigants to strike down such bad patents; and Apple and Samsung, though they are fighting each other in court, are the top two utilizers of that kind of proceeding. It would be great if the Supreme Court could affirm the PTAB's approach to claim construction once and for all. I'm keeping my fingers crossed.

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Tuesday, January 19, 2016

Apple finally obtains U.S. sales ban against certain features in Samsung phones, but it's useless

Last month, the United States Court of Appeals for the Federal Circuit denied Samsung's petition for an injunction rehearing relating to the second Apple v. Samsung case in the Northern District of California. But earlier this month the appeals court indicated that the underlying ruling on the merits had serious issues, with two patents being likely invalid and the relatively most important one of them, the '647 "quick links" patent, not being infringed under the appropriate claim construction. That wasn't just my interpretation: Law.com understood the judges' statements the same way.

On remand, Apple wanted an injunction that would enter into force immediately as opposed to after a 30-day "sunset period," especially since the '647 patent is set to expire on February 1. However, Judge Koh has now (in her order entering a permanent injunction) rejected Apple's attempt to modify the language of the injunction on remand. Therefore, the '647 patent is--apart from the claim construction issue I mentioned before--now practically irrelevant from an injunction point of view.

The '721 slide-to-unlock patent, whose European sibling has already been held invalid by 15 judges, is irrelevant not only because it will likely be held invalid but also because it covers only certain graphical variants of the slide-to-unlock mechanism, but not the slide-to-unlock functionality as a whole. In fact, even Apple did not claim that various Samsung devices at issue in the spring 2014 trial had infringed the patent. The injunction only refers to "the slide-to-unlock feature accused at trial as implemented in Samsung's Admire, Galaxy Nexus, and Stratosphere products," but not to the implementation found in other products at issue in the same litigation, such as the Galaxy Note, Note II, S II and S III products. In other words: the products accused in the 2014 trial were pretty old from today's perspective (where the current Galaxy is the S 6), but even the less old ones of those weren't even accused of infringing the slide-to-unlock patent. So Samsung can still provide the functionality by simply avoiding the implementation it used in its oldest products. If the patent is indeed held invalid, then Samsung can also use the older implementations (but it presumably won't even be interested in that).

The third injunction patent, the '172 autocorrect patent, is the one I have paid the least attention to so far because I felt that the parties didn't view that one as important. Samsung has claimed to have workarounds for all three injunction patents. What I don't know is whether Apple agrees with respect to the '172 patent. If it doesn't, then we may soon see an enforcement dispute. However, that patent is also likely invalid (not only in the preliminary opinion the Federal Circuit judges indicated at this month's appellate hearing but also in the opinion of the USPTO's Central Reexamination Division).

Some of the reasons for which a majority of the Federal Circuit panel had determined that Apple was entitled to an injunction initially appeared so outrageous to me that I hoped Samsung would take this matter to the Supreme Court. But in practical terms, I guess it wouldn't make (or have made) sense for Samsung to ask the top U.S. court to take a look at this matter while Samsung is trying to get the Supreme Court interested in a couple of design patent issues. It's not that the issues aren't important; they definitely are. But in the practical context of the Apple-Samsung patent dispute, this injunction doesn't matter. Samsung or anyone else could still try to take such questions to the Supreme Court in some future case in which there are would be actual business implications.

What does this injunction mean for Apple?

  • Cupertino doesn't really get leverage from it with a view to a settlement with Samsung.

  • It is, however, a significant accomplishment for Apple's in-house and outside counsel. They had been fighting for an injunction like this for several years. They had to deal with multiple setbacks. But ultimately they got an injunction (albeit one without business implications) over a set of features allegedly found in highly multifunctional devices. If Apple's lawyers had a Ben Carson approach to their own achievements (which they certainly don't), they could put that injunction on a wall because it really is a major achievement from a "persistent litigation" perspective. Alternatively, one could print a poster for lawyers that shows this injunction and says: "No one is ever beaten unless he gives up the fight."

  • Anyone considering infringing any of Apple's patents in the future now knows that Apple may obtain an injunction even if the patents cover only limited aspects of small features of highly multi-functional products. Whether the Supreme Court would uphold such a decision is another question, but it's hard to even persuade the Supreme Court to hear a case.

So the injunction isn't going to have any direct impact, but at a meta-level it does have some relevance.

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Monday, January 11, 2016

U.S. patent reform activists should prepare for an increasingly possible Donald J. Trump presidency

One can't plan the future, but one can at least prepare for it. Next year, there will be a new president and a new push for patent reform.

U.S. patent reform advocates have been disappointed term after term, presidency after presidency. Washington has a "do nothing" reputation, but a sea change appears to be around the corner and it may also create an environment in which, at long last, the massive and dramatic problems caused by a broken patent system may be addressed more forcefully and courageously than before.

Political correctness has terrible effects because it prevents politicians, the media and the general public from discussing the real issues without mincing words, and when you can't even talk about the real issues, you're very, very unlikely to identify and implement solutions.

Political correctness is the root cause of many problems not only in such contexts as immigration policy or the problem with certain ethnicities' crime rates.

There are many areas in which a dogma has been turned into an axiom. Even though I'm an environmentalist (my house has a groundwater heat pump and uses groundwater temperature for cooling), I'd like there to be a more open discussion of the causes of global warming. Just an example.

Political correctness is also a huge problem in the debate over U.S. patent reform. Organizations and individuals probably feared that they would be "anti-American" if they simply said that the U.S. patent system is broken and fails to serve true innnovators.

In all those congressional hearings on patent reform that I watched, each and every politician repeated the mantra of the U.S. patent system being key to innovation and allegedly being the envy of the world, when the reality is that it's the laughing stock of patent and industry professionals in the rest of the world. Over the years I've talked to so many patent lawyers from Europe and Asia, and even to patent examiners (though not the ones the EPO leadership accuses of having been in contact with me), about the overall situation, and no one believes that U.S. juries are qualified to determine infringement and validity issues, no one has ever disagreed with me that the Federal Circuit is generally too patent-holder-friendly, and no one has ever disagreed with me that the quality of USPTO-granted patents is generally even lower than that of European patents.

Impactful patent reform in the U.S. won't happen until at least a significant percentage of all politicians and stakeholders participating in the debate will start to tell the truth, which is that most information and communications technology patents are invalid as granted, that a high percentage of all claim construction decisions are reversed on appeal, that even those patents that are not invalid and are ultimately deemed infringed generally don't protect anything that justifies a 20-year monopoly, and that there is no point in incentivizing "being first to file" when the combination of copyright, trademarks, trade secrets, and the first-mover advantage in relatively fast-moving fields are more than sufficient to protect investment in innovation. Reform advocates must place more emphasis on the fact that ever more U.S. patents are not granted to U.S. companies, just like most European patents are not held by European companies. It must be said that the correlation between patents and innovation in a country is hardly a causation of patents promoting innovation, that patents increasingly serve as a substitute rather than an incentive for innovation, and that studies linking patents to innovation are often based on circular logic, considering each patent an innovation.

Less is more. How can anyone seriously believe that patent inflation has anything to do with increased innovative activity? Would anyone believe that merely printing more money creates prosperity? Reform advocates should talk about how to gradually bring the number of patents granted per year down to a fraction of the current rate.

With the political culture of recent decades, further U.S. patent reform will either not happen at all or it will be diluted and useless. But there is hope that the way in which such debates are held--in all policy areas--may change. Donald J. Trump is living proof that raising the real issues can work. He says there's no time for political correctness to make America secure again and great again. And I believe there's no time for political correctness and old-fashioned political strategies in connection with patent policy either.

It took Mr. Trump some time to convince others that his campaign was for real. Last month an Obama spokesman said the Trump 2016 campaign belonged into the dustbin of history, when the reality is that Donald J. Trump's candidacy may finally deliver on Obama's undoubtedly-unkept promise of "change" (of how political processes work). Time and time again, the media--and not just left-leaning commentaqtors--thought Mr. Trump had gone too far and was going to lose support. Instead, he kept rising in the polls. And now the media has started to talk about how he may win.

Bill O'Reilly's thoughts on whether Mr. Trump can really win and on the hurdles he faces make sense to me, but Fox News is obviously not trusted by everyone. Even the Wall Street Journal, which noted that many, many Democrats and independents agree with Mr. Trump on such issues as Muslim immigration, would be more likely to agree with a conservative than the average newspaper. I found it really impressive when the Washington Post published an article on "why Trump may be winning the war on 'political correctness'." By far and away the biggest breakthrough is the latest TIME magazine, which has Mr. Trump on its cover and says: "HOW TRUMP WON (Now he just needs the votes)" (this post continues below the image):

No real vote has been cast yet, and the GOP establishment may make a last-ditch attempt to get the candidate that career politicians and Republican donors want. A lot of things may still happen until Election Day. Where things stand today, I believe Mr. Trump has chances of well over 50% of becoming the 45th POTUS.

Political correctness is much less of a left-vs.-right question than some tend to portray it. There are times when idiocies and fallacies by conservatives right cause most problems. At this stage, however, the idiocies and fallacies of the left threaten average people's security and overall economic prosperity in America and Europe. When Silicon Valley leaders like Vinod Khosla know very well that 50% of jobs will go away due to technological progress in AI and robotics and, unlike in previous eras, won't just simply be replaced with new jobs, immigration must be extremely selective to have a positive bottom-line effect. This is an aspect of immigration policy in the U.S. and Europe that you don't hear anyone talk about because politicians usually have no grasp of innovation and its impact until it's too late.

It takes voters time to realize when certain approaches don't work, but a silent majority may finally be ready to elect someone who is bold rather than politically correct.

Pre-election polls likely favor a candidate like Mrs. Clinton because no one has a problem with saying so, but when people secretly vote, many who wouldn't openly admit that they support Mr. Trump will ultimately vote for him. That may include enough Democrats and independents for him to become president.

Pushing for patent reform in 2017 after a Trump victory

In my opinion, patent reform advocates should openly support the GOP in 2016, given that many Democrats, except for some really great ones like Senator McCaskill, are aligned with those who benefit from a broken and inflationary patent system. But that probably won't happen, especially since many of those who push for reform are traditionally aligned with the Democratic Party. Especially in California.

Assuming that Mr. Trump does become president and Republicans continue to have a majority in both houses of Congress, this is what I believe patent reform advocates should do:

  • Be bolder and louder. You must cut through the noise. Patent reform is not and will not be a political priority for Mr. Trump himself, but at least you can try to raise the profile of the issue. Challenge the axiom that patents protect innovators even in this industry. Don't just use patent trolls as a bogeyman when the primary issue is not their business model but the quality problems that enable them. Don't make it sound like some minor fixes would be enough but ask for a fundamental change of direction in patent policy.

  • Talk about what's in the national interest. Mr. Trump wants to Make America Great Again. Those who oppose meaningful reform will say that patents are needed to make America great. You must explain why the opposite is the case. How do patents serve that purpose when the greatest American company in many (though not all) ways, Apple, is a net payer of patent royalties to China and to Europe? Talk about the issues that Western companies face when fighting Chinese rivals with patents. Talk about the fact that a U.S. patent is not a patent for a U.S. company, but a patent in the U.S. market, more likely than ever to actually belong to a non-U.S. company.

  • Tell the whole Main Street vs. special interests story. Mr. Trump stands for the real economy rather than special interests that should serve industry but actually seek to siphon money off. I have so many friends now among lawyers, and I've personally benefited over a period of about 10 years from doing work closely related to legal and political processes. But let's be realistic: at the end of the day, someone needs to build real products. If someone is really talented as a lawyer, and maybe also understands technology well enough to be a great patent litigator or prosecutor, that's great, but the goal must always be that lawyers serve businesses and not the other way round.

    Many patent trolls are lawyers. Lawyers make also money on patent applications and patent litigation. What Main Street businesses need now is that politicians (even though many of them, and most of their advisers, are lawyers) redress the balance between the real economy and the legal profession. It doesn't make sense to let the tail wag the dog.

  • Do differentiate between fields of technology. The one-system-fits-all approach is clearly not working. There's a fundamental difference in economic terms between an industry like pharmaceutics and the ICT industry in terms of what level of investment goes into a single patent, and in terms of how many patents a single product may be alleged to infringe. It isn't radical to say that the patent system causes more problems than it solves in a field of incremental innovation. Mr. Trump mentioned that he had Muslim friends who are great people, nevertheless he wants to put a complete halt to Muslim immigration because of what he believes the impact would be on balance. Similarly, there are ICT companies who benefit from patents, but what's really in the public interest when you look at most of those patnets? How good is the average patent granted out there, if even most of the patents large companies pick from their portfolios for litigation purposes are, on average, very questionable? Over all these years I haven't seen even one ICT patent that I thought justified a 20-year monopoly. The one I liked best in some ways, Apple's rubber-banding patent, is more psychological than technological.

  • Meritocracy. Stress the injustice that legitimate innovators suffer. They write their programs independently and then get sued over patents they have no way of even researching (because of patent inflation). Needless to say, the patents they get sued over are often invalid, and even to the extent they're valid, they're either not infringed or the infringement is usually insignificant in technical terms. The biggest problem when discussing economic policy with conservative politicians is often that they confuse conservatism for the law of the financially strong. Rush Limbaugh has repeatedly explained that companies seek to form an alliance with the government instead of outcompeting their rivals in the marketplace, but only a market-oriented approach is true conservatism--the former has more to do with cronyism. Mr. Limbaugh has said it very clearly: it's not conservative to just let big corporations buy the government. Traditional Republican politicians often failed to understand that. Companies shouldn't be able to tax smaller competitors with large patent portfolios that wouldn't actually hold water in court if asserted against large rivals. These issues must be raised, loud and clear. Mr. Trump is not going to be beholden to any large company, and if he wins, that will also make it harder for other politicians to advance any corporate agenda against the public interest.

The next president won't be inaugurated for about a year. But patent reform advocates should already now think about their message, not only with a view to who may or may not win but also because the tone of political debates is indeed changing now. The transformational impact of Mr. Trump's campaign is already a reality. An approach that flies in the face of conventional "political correctness" wisdom has made him the front runner, and every time the media said he had gone too far, he emerged even stronger. Fortune favors the brave, and U.S. patent reform advocates have by far not been bold and brave enough so far. Their push for "too little, too late" has been pathetic. They should try something new. Something Trump-style.

Political incorrectness isn't racism or anything

This is now the final and shortest section. I want to point out very clearly that I despise political correctness and I want real solutions to pressing problems facing Western civilization, but I view every person individually. On my app development team I have people from three continents, and I count people from different parts of the world and of different religions among my personal friends.

It's a great idea to be more tolerant here than certain other countries, but one can disagree on how much more tolerant we should be vis-à-vis intolerance of the dangerous kind.

I do consider it crazy if fear of political incorrectness through "racial profiling" prevents the police or airport security staff from taking a closer look at those who are really likely to be a threat, but I'd like the need for racial profiling to go away.

No, I'm not Charlie. I never supported the #jesuischarlie movement. As a blogger, I value the freedom of speech (which is why I hate political correctness), but there must be respect. Charlie Hebdo blatantly and unnecessarily did things and continues to do things that hurt the religious feelings of millions, if not billions, of people. That doesn't justify an attack, but they provoked it. The French policeman of Arab descent and Muslim faith who was shot outside the Charlie Hebdo building is the victim whose fate really made me sad because he wasn't there by his choice.

Politics is a pendulum. It swings in one direction, then in another. Terrible mistakes of recent years and decades must now be corrected, and that's better than doing too little, too late. There are high-profile issues, such as the ones Mr. Trump focuses on, and there are others, such as the broken U.S. patent system. Come November, many things may change.

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Friday, January 8, 2016

Disclosure: I'm now long AAPL though I view patents as a net negative for Apple

For many years I used to state in my author's profile (the one in the right column) that, in order to avoid conflicts of interest, I didn't hold or initiate transactions involving technology stocks. This morning I've updated that profile after the following purchase of AAPL shares (this post continues below the screenshot):

Knowing that I have many readers in the smartphone industry as well as the analyst community, I'd like to explain why I believe this was the right time to buy Apple stock.

As I'll explain further below, patents are not the reason. To the contrary, in a hypothetical parallel universe in which the patent system would be abolished, Apple would do even better. Trademarks and copyrights are important forms of intellectual property protection for Apple; patents, however, are a net negative. Patents will always cost Apple more, financially and strategically, than it generates. So what I wrote a couple of days ago about how even the #1 Apple fanboy among U.S. judges (not Judge Koh; she's just the worst pro-weak-patent activist out there, definitely worse than her frequently-criticized colleagues in the Eastern District of Texas) has lost his faith in some of Apple's patents-in-suit against Samsung is not really relevant to what I think of Apple's overall outlook.

My disagreement with Apple on its choice of a license for Swift also wasn't a key consideration. In five years or so Apple may regret that decision (Apple is just being too generous with respect to Swift), but I doubt that the impact will be dramatic even in that scenario.

I believe that Apple's stock has now, for some time, been going in just the opposite direction as its business. I am aware of rumors about a slow-down of iPhone production due to weaker demand, but in this case I decided to actually buy on a negative rumor--and I won't sell on the news, whatever the news will be, because I've decided not to sell a single one of those Apple shares until I see how the Apple car performs in a few years. In the meantime, nothing is going to make me nervous.

Not too long ago I honestly did believe that history would, at a higher level, repeat itself, with Android doing to the iPhone what Windows did to the original Mac. I don't doubt that Android will continue to be the #1 operating system--not just the #1 mobile operating system--but Apple will continue to be the most profitable device maker.

There are some other exciting companies out there. Among the major players, there are some other large and fast-growing ones: Alphabet (GOOG), Amazon (AMZN), and Facebook (FB). But all three are very expensive in terms of PE ratio while AAPL, at the current ratio and all things considered, appears a steal to me. When I say PE here, I mean PE with respect to enterprise value (market cap minus cash reserves), of course.

Of the three alternatives I just mentioned, I actually think Facebook is at the greatest risk of losing its market leadership at some point. Just like Facebook sucked other social networks (like MySpace) dry, it could happen to Facebook at some point (imagine what could have happened if Google had done a better strategic job, and maybe been more willing to take antitrust risks, with Google+, or if someone like Google had acquired WhatsApp, or if Microsoft had had more of a vision for Skype). Amazon is a very interesting company, and my app development company will use AWS for the heavy-duty part of our cloud (user data, scoring/ranking data). But the PE ratio is extreme. Alphabet would definitely be my choice if I had to give X amount of $ to a company and should choose the one that is most likely to use it in a way that benefits mankind. Alphabet is really trying to improve people's lives, to save lives, possibly even to extend life, and that's because it has fantastic founders who are still practically in control. If Tim Cook wanted to spend billions of dollars on, say, medical technologies, his shareholders simply wouldn't allow him to do that. Also, if someone asked me which of those companies has the greatest potential upside, I would bet on GOOG. But... the current PE ratio just makes it very expensive. I don't mean to say it's worth less, but at its current price it's just not a steal, unlike AAPL.

I'm not in denial regarding the substantial risks there, and I wouldn't bet my entire retirement funds on AAPL because a lot may happen over the course of the next couple of decades, but these are some reasons for which I'm optimistic for Apple with a view to the next several years:

  • The problem Apple had in the 1990s was that at some point independent software vendors (ISVs) lost interest in the Mac because the volume business was all on Windows. I remember how the president of the Software Publishers Association Europe told us board members not to leave the room when Apple, one of our conference sponsors, would give its (ISV-oriented) keynote. But that's different now. In the 1990s, you could perhaps charge 10% more for a Mac program than for its Windows counterpart, but in today's "freemium" world, the difference in terms of per-user revenue potential is huge. That's why one of the two apps I'm working on (yes, taking time, but this is definitely the year of the launch) will be released on iOS first, though we're now (again) doing some Android coding as well. All in all the revenue opportunity on iOS will continue to be huge, so there won't be a lack of ISV commitment to iOS anytime soon.

  • I'm a big believer in 3d touch. At least one Android device maker delivered it prior to Apple, and others will deliver it soon. But fragmentation is a huge problem for Android, and iOS developers are particularly fast adopters of exciting new technologies, so over the next couple of years the user experience gap between iOS and Android devices, which is limited right now, could widen. Few people would consciously buy a device because of 3d touch, but if many apps put it to use in smart ways, customer satisfaction will benefit and that will ultimately drive sales.

  • The automotive industry has not been sufficiently innovative. Tesla is showing the way, but Apple may be able to do this in a far more profitable way. Someone said that even if Apple built a business as valuable as Daimler (Mercedes) and BMW combined, it would be worth less than the iPhone business, but that's just based on the assumption of old-fashioned business models. Apple has previously changed the business model of entire industries (music, for example), and that may happen again. Google is also working on some interesting technology in that area but Apple appears best positioned to turn self-driving, electric cars into great and lucrative products, and to leverage unbelievable synergies--more than anyone would imagine now--with its other products.

    Self-driving cars will also get Apple involved with the wider field of robotics. That is an area in which Apple will hopefully invest aggressively, but it still has time and untold amounts of money to do so.

  • BYOD (Bring Your Own Device) is a major factor in enterprise IT, and (also through its partnership with IBM) Apple may actually be able to take market share away from Microsoft in that market. I'm very disappointed at the quality of Windows 10, to the extent that even I may switch to a Mac desktop in the near term. I find it interesting that most of the developers on my team actually run Windows on a Macbook (using Parallels). Apple is just so much better than Microsoft (even Nadella's Microsoft, let alone Ballmer's) at understanding what users want that I see quite some potential there.

  • It may appear hard to imagine that Steve Jobs could be overrated, but he can be, and he actually is as far as judgment is concerned. There's no doubt that he was a genius, but there are credible claims that he was originally opposed to creating a third-party App Store, and if others hadn't convinced him to do so, Android might really have killed the iPhone shortly after its launch. There's also this story from credible sources that he refused to undergo surgery for a long time after his cancer had been diagnosed because in his New Age thinking surgery would harm, not heal, his body. He wasn't always right, he wasn't always rational, and from what I hear, he was also a very difficult person to work with. If Tim Cook and his team continue to execute well, such as on the Apple Car, then it could very well be that in a few years' time the stock market will conclude Apple's leadership team is, in terms of making the right decisions, stronger than ever.

So why don't I believe in Apple having a net benefit from patents? I just believe the patent system isn't working for a lot of companies in this industry. It's certainly great for trolls and for lawyers, and for the top brass of the world's various patent offices (and I don't want to be a hypocrite so I'll admit it also used to be great for me for a few years), but in a field of granular incremental innovation like information and communications technologies, the system simply doesn't work.

When most patent claims are invalidated once they face a serious challenge (here's a very interesting study that I'd like to recommend), it's more of a lottery than anything else. Companies need to assert dozens of patents in hopes of maybe prevailing on a few, and then the remedies they get over the few they prevail on are usually not impactful. Basically, when you license patents, you don't even know whether you get any serious value; the value is just in eliminating that off-chance of someone maybe getting you into serious trouble after years of litigation (where most claims would fail, but maybe one or two would have impact) and in saving the cost of protracted litigation. It's just a perversion of the concept of intellectual property.

Some error rate is, of course, acceptable in every kind of legal system. But the error rate relating to information and communications technology patents is not just 1% or 5% or 10%. It's more like a search for a needle in a haystack to find a valid and valuable patent. In all of the lawsuits I've watched so far, I haven't seen even one patent that impressed me. Not one. But I've seen countless junk patents from many companies, including several of the largest and most well-respected companies in this industry, including Apple.

No "patent quality" initiative will ever be able to serve the problem for this industry. There's so much prior art out there, much of which is not even found in patent databases, that the examination cost of a patent would have to reach hundreds of thousands, if not millions of dollars, and the rejection rate would have to exceed 99.9%, in order to ensure that every patent that is granted in this field of technology would be valid and valuable (and justify a 20-year monopoly).

Apple is innovative in ways that the patent system doesn't reward. There's a fundamental disconnect between what is protected by patents (i.e., playing a legal game well and having a certain discipline in place) and what customers care about. When I'm unhappy as a Windows 10 user because of stability and usability issues, it doesn't help me that Microsoft has over the years filed for many thousands of patents on the thing. The program code that I want to work well is protected by copyright.

Patents on software and software-controlled technologies overreward ideas, of which there is actually no shortage, and penalize those who execute well. Apple's strength is in both ideas and execution. And it's not in being first, but in being first to do it right. This whole notion that the patent system stimulates innovation because it incentivizes efforts to be first to come up with something is plain wrong: as long as there is sufficient competition, companies will innovate anyway.

Apple's bottom line with patents is, and will forever reamin, negative. Apple settled with Ericsson a short while ago and is presumably going to pay billions of dollars for its extended license. Apple will continue to be a net payer vis-à-vis Nokia. It's a net payer vis-à-vis Chinese device makers, and it doesn't even dare to sue any of them, though the strategic threat to Apple's business from those companies can't be ignored. Whatever little will ultimately come out of Apple v. Samsung, it won't offset what Apple has to pay to other large companies, and may not even the cost of patent filings and of having to defend against countless trolls (including privateers and trollified, failed businesses) all the time.

Trademark and copyright are intellectual property rights that, unlike information and communications technology patents, really deserve to be called intellectual property. Those rights, combined with trade secrets, protect innovators well, and they serve Apple well.

Before there were software patents, companies like Microsoft, Oracle and SAP--and Apple--came out of nothing and became huge. So there's empirical evidence that "patent protection" is not needed to succeed in this industry.

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Wednesday, January 6, 2016

Apple's patent litigation against Samsung has reached the point where even fanboys disagree

With only three months to go until the fifth anniversary of Apple's first patent lawsuit against Samsung, I believe Apple should think hard about an exit strategy from that litigation. Some people in Cupertino should listen to the official recording (MP3) of yesterday's Federal Circuit hearing on the cross-appeal relating to the second California Apple v. Samsung case one more time and ask themselves the following question:

If even Circuit Judge Reyna, a glowing admirer of Apple's impact on the smartphone market (see the passage quoted at the end this post) and a long-standing champion of Apple's patent enforcement cause among Federal Circuit judges, appears to have concluded that some of Apple's patents-in-suit have major shortcomings, isn't it time to just drop those lawsuits before more and more friends, fans and fanboys will be disappointed and disenfranchised?

Or, to put it differently, isn't it simply unworthy of such a great company to engage in behavior that increasingly resembles the conduct of patent trolls who seek to extract undue leverage from weak and dubious patents?

This blog, which used to be rather sympathetic to Apple's patent enforcement efforts because the "rip-off" story appeared credible for some time, has been highlighting the weaknesses of such patents as the '647 "quick links" patent or the slide-to-unlock patent family for a couple of years. Even though things that judges say at a hearing are not the same as an actual decision, the mere fact that the Federal Circuit has expressed massive doubts about those patents already validates my skepticism.

A little less than two years ago, the trial in the second California Apple v. Samsung case was held. Just before jury deliberations began, the Federal Circuit issued an opinion in an Apple v. Motorola case, based on which I immediately suggested that "the court should drop Apple's '647 'quick links' patent from the verdict form." That didn't happen, but based on what you can hear in the recording of yesterday's hearing, it indeed would have been the appropriate consequence of the Federal Circuit's affirmance of Judge Posner's claim construction.

What's really amazing is that even Apple's lead counsel, Bill Lee, conceded at yesterday's hearing that the Federal Circuit's claim construction was narrower than the one Judge Koh's court applied. I really can't think of a judge who likes weak patents more than Judge Koh does. I've previously dubbed her the World Wildlife Fund for Apple patents, and that's pretty much the way it is.

Apple's lawyers tried hard, but as far as one can tell based on the recording, failed to persuade the Federal Circuit panel that there was an infringement case here even under the appeals court's claim construction.

However, instead of just cutting things short and saving everyone time and costs by withdrawing that patent, Apple's outside lawyers are doing just the opposite. A few hours after that hearing, they wrote a letter to Judge Koh, informing her of the fact that the Federal Circuit, after having denied an injunction rehearing in that case, also denied a motion to stay the mandate, and Apple now asks for an immediate injunction over three patents, including the '647 "quick links" patent:

"Because the '647 patent is set to expire on February 1, 2016, Apple respectfully urges the Court to issue the injunction as promptly as possible."

If this was a case where a patent was a few weeks away from expiration but the patent holder had a very legitimate infringement case, I would understand. But Apple is asking for an immediate injunction over a patent (that will expire in three-and-a-half weeks) just hours after the appeals court made clear that the Calfornia court should not have found an infringement.

Give me a break.

Wasn't it already very questionable that Apple demanded approximately 20 times the per-unit damages it previously sought from Motorola (over essentially the same software, i.e., Android)? A reasonable litigant should at least await the Federal Circuit ruling now, given that yesterday's hearing was a strong indication that Apple's case will be defeated on the merits as far as the '647 patent is concerned.

Apple's $180 million Christmas wish was based in part on patents that are not valid based on the USPTO's final (though appealed) decision on one patent and an unusually well-considered first Office action on another patent. And now Apple wants an injunction over a patent that is not even infringed under the (traditionally rather patentee-friendly) appeals court's claim construction.

Oh, and lest I forget: the Federal Circuit also appeared rather skeptical of the slide-to-unlock patent, a "sibling" of which has been held invalid by 15 (fifteen!) European judges, most of whom are even more focused on patent law than the Federal Circuit is. That patent is unimportant with a view to damages (just a couple of million dollars) and with a view to an injunction (there were all sorts of Apple devices at issue in that case and Apple only accused the oldest ones of infringement). It's still somewhat significant because it's the only patent with respect to which Apple could try to make a willfulness argument. And it's also significant in the sense that the U.S. patent litigation system as a whole would appear a bit ridiculous if its standards were so low that a claimed "invention" would be deemed patentable in the U.S. while none of the 15 European judges who ruled on its (in)validity thought this was a patentable invention (relative to the prior art).

I doubt that Judge Koh will do Apple the favor of quickly entering an injunction under the circumstances. The easiest thing for her to do is to simply (pointing to how busy the court is, and to the need for due process) take enough time to think about the injunction that the '647 patent will be history by then. This way, an injunction would just be symbolic. There would be no enforcement dispute afterwards, but if the '647 patent was involved, a dispute would be foreseeable.

Ideally, the California court should wait until the Federal Circuit has decided on the merits. That might also take care of the slide-to-unlock thing.

Meanwhile, the deadline for amicus curiae briefs in support of Samsung's Supreme Court petition regarding design patents is approaching. I predict that there will be a broadbased coalition (industry, NGOs, academics) siding with Samsung and very little support for Apple's positions in that context.

This is really a sad story. I thought Apple had very good reasons to start its Android lawsuits; it had very good reasons to sue Samsung not only over Android but also over its product designs. But over time it became clear Apple would only be able to "win" if the courts turned a blind eye to the serious validity issues of some patents, blew the scope of other patents (such as "quick links") completely out of proportion, and if Apple was furthermore awarded remedies that are not reasonable relative to the strength of those patents. Apple's lawsuits against HTC and Motorola went nowhere (against Motorola, Apple fortunately did a great defensive job with respect to standard-essential patents). Its Samsung lawsuits have yielded some results, but nothing really earth-shattering, and whatever has come out of the Apple-Samsung dispute so far is simply based on patents that are either invalid or have a rather narrow scope, on an anachronistic interpretation of design patent damages law, and a recent appellate decision that would lower the standard for injunctive relief (the Chief Judge of the Federal Circuit even wrote in her dissent that this was not even a close case but one in which Apple's injunction request should certainly have been denied).

Truth is sometimes stranger than fiction. Seriously, if someone produced a movie about patent litigation and highlighted this unbelievable discrepancy between the merits of the patents Apple is asserting against Samsung and the remedies it's seeking, people would feel that it's totally exaggerated and unrealistic. It appears farcical, but unfortunately it's true, and it will remain true until Apple puts an end to this. Apple has settled with everyone, even Ericsson, a case in which I think Apple could have made some great defensive headway that would have had a major positive impact on the situation surrounding standard-essential patents. Apple should also get out of this thing here now.

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