Restoring the America Invents Act: legislative measure to defend post-grant review of U.S. patents welcomed by tech industry, patent experts

About a year ago I described a complaint by Apple, Google, Intel, and Cisco over then-USPTO Director Iancu's PTAB rulemaking as "litigation to the rescue of legislation" because the case was brought in defense of the ideas underlying the Leahy-Smith America Invents Act (AIA). Essentially, Mr. Iancu had gutted the PTAB IPR (inter partes review) part of the AIA by establishing a discretionary-denial regime.

By now there is also hope for the PTAB IPR process because of developments on other fronts. The next USPTO Director may undo some of Mr. Iancu's rulemaking, and now there's a proposal in the United Senate that amounts to "legislation to the rescue of (earlier) legislation": the Leahy-Cornyn Restore AIA bill ("RAIA"). Sen. Patrick Leahy (D-Vt.), one of the sponsors of the original AIA, is now the President pro tempore of the Senate. Sen. John Cornyn (R-Tex.) has also taken an interest in patent policy for some time. Both have a reputation for balanced positions on patent enforcement: neither are they in the "Coons camp" (which favors ever stronger enforcement even of weak patents) nor could they be reasonably accused of seeking to weaken patent protection.

Litigation, executive action, legislation--three ways to reverse Mr. Iancu's PTAB rules, any single one of which could do the job. Executive action would potentially be quickest (as it won't take that much longer until the new USPTO Director has been named). Durability is the most important quality of new legislation: the Restore AIA would not only solve the problem at hand but would also prevent it from reoccurring, unless and until Congress would decide otherwise.

None of these options are mutually exclusive, so in the ideal scenario for the U.S. technology industry the USPTO would alter course (the sooner, the better) and Congress would pass legislation with a view to future administrations. App stores are an entirely unrelated subject (except that Apple and Google, which frequently defend against patent infringement complaints, are involved again, though as reform opponents), but it's another example of parallel efforts on multiple fronts (legislation such as the Open App Markets Act (U.S.) and Digital Markets Act (EU), antitrust enforcement, and private litigation such as Epic Games v. Apple), some of which may even serve to reinforce each other.

A few days ago, Law360 published an opinion piece that makes a very compelling case for the RAIA. The author, Haynes Boone's Joseph Matal, was personally involved with the creation of the original AIA, and served as Acting Director as well as Acting Solicitor of the USPTO. Not only does this background make him an interesting voice to chime in but he makes an argument that policy makers can't brush aside in these times of chip shortage: "[T]he bill would protect American manufacturers against the depredations of hedge funds and other unscrupulous actors that have been exploiting recent opportunities to leverage invalid patents against America's industrial base."

Mr. Matal's op-ed points to estimates according to which "American automobile manufacturers are expected to lose almost $300 billion in revenue because of a lack of access to the semiconductors that control so many of the functions on a modern car." That is an example of the disruptive impact of problems at or near the top of a multi-tiered supply chain. It is in the national economic (and also the national security) interest of the United States to encourage manufacturing companies to invest. And industrial policy also involves IP policy.

The opinion pece points to the record $2.175 billion verdict in VLSI v. Intel. According to Mr. Matal's article, one VLSI patent "claimed simple insights into the voltage needs of integrated circuits" and faced a PTAB challenge by Intel that allegedly "showed that these things had been understood by electrical engineers years before the patent was filed." But irrespectively of the merits of that PTAB petition, the USPTO declined to conduct a post-grant review. It was one of many discretionary denials of its kind.

Mr. Matal notes that the amount of that staggering verdict "is a substantial portion of the cost of building a new microchip fabrication plant" and goes on to ask a (rhetorical) question: "Before we transfer that amount from the nation's premier chip manufacturer to a hedge fund, shouldn't we at least want an accurate and technically reliable assessment of whether the patent is valid?"

Due to that VLSI verdict and the chip shortage crisis, Intel may be the perfect poster child in the U.S. when it comes to being a victim of patent overleveraging.

I wish to clarify that I also take criticism of "patent holdout" and "intelligent infringement" very seriously. Others have argued that the PTAB had too much of a motivation to grant IPR petitions, and I'm philosophically against giving government officials the wrong incentives. If there are issues to be addressed with respect to abuse of the PTAB process by defendants, let's have a debate--and come up with solutions. But the RAIA goes in the right direction, and discretionary denials are not the answer. It should be all about the merits, and that's the way I interpret Mr. Matal's Law360 contribution.

He draws an interesting comparison between two cases in which Huawei asserted U.S. patents. Samsung had some success at the PTAB, but later, when Huawei sued Verizon, the U.S. telecommunications carrier "received a total of six discretionary denials from the USPTO -- the agency refused to consider Verizon's challenges on their merits." The end of the story was that Verizon felt forced to settle with Huawei, and to pay up.

Mr. Matal's opinion piece notes that the country of origin of a patent lawsuit is irrelevant: "Regardless of who is asserting a patent, the public interest demands that we only award infringement damages for valid patents — those that claim a technological advance. Allowing invalid patents to be monetized does not reward innovation — it simply corrupts the system and encourages more investment in this type of litigation." In the alternative, we will see more lawsuits over patents of dubious quality, more damages awards and settlements, and as a result, ever more litigation. A vicious circle.

There are other benefits of the RAIA that Mr. Matal touts, such as that it "would also safeguard patent judges' independence by prohibiting political interference in pending PTAB cases — abuses that are currently the subject of a bipartisan Government Accountability Office investigation."

Here's the most optimistic paragraph from the article:

"Americans are a highly inventive people. There is no shortage of strong patents that are being issued and enforced in the U.S. Providing access to accurate and technically proficient validity review ensures that the patent system's rewards flow to the true innovators rather than to legal opportunists and ultimately preserves the integrity and credibility of the U.S. patent system."

As a litigation watcher with a long-standing interest in patent policy, I couldn't agree more. Reward the innovators, not the mere opportunists--and an assessment of patent quality by the agency that is best-placed to do (and infinitely better placed than a layperson jury) is the way to make that critical distinction.

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Apple's adamant refusal to reinstate Epic's Fortnite developer account is regrettable--but unfortunately rational, at least in the short term

This is a follow-up to my previous post on the Epic Games v. Apple Unfair Competition Law (not antitrust) injunction. In the meantime, iMore quoted me on an announcement of an in-app purchasing (IAP) alternative by a company named Paddle that believes its drop-in replacement for Apple's IAP API will be allowed soon as a result of the Epic injunction.

Now that Apple has filed a motion to stay the injunction (PDF), I'd like to share a few observations and perspectives.

That whole motion-to-stay process could be avoided if both parties acted more constructively. To the extent that any correspondence between them has come to light, neither of the parties is being constructive, and they could not complain should Judge Yvonne Gonzalez Rogers--who has already put so much effort into her handling of this huge and complex case--scold them at next month's motion hearing.

It is utterly disappointing to see Apple break a promise. It adds to this picture of Apple stopping at nothing to defend its App Store monopoly. Last year, at the preliminary-injunction stage, Apple wrote that it "wants Epic on iOS" provided that it complies with the rules. The Apple apologists out there, of whom there are quite a few, may argue that some of Epic's public statements since the grant of the injunction justify Apple's current stance. They may say that Apple has a reasonable apprehension of Epic being hell-bent to break the rules again, just like in August 2020. But Epic CEO Tim Sweeney's statements are neither what I believe to be the true motivation for Apple to keep the door closed nor are they sufficient justification for walking back on last year's promise.

There is a motivation that makes it a perfectly rational choice for Apple, at least if Apple takes a short-term perspective. It's that Apple wants to get the injunction stayed, which is a legitimate objective. And in order for the district court or (more likely) the appeals court to grant a stay, Apple must argue that the balance of the hardships tips (clearly) in its favor. That's why Apple is telling the court (and will tell the appeals court) that Epic loses nothing from a stay, as it's not on iOS. It's out of the game because Apple, based on the judgment that even entitles it to breach-of-contract damages from Epic, rightfully terminated Epic's account.

It's obviously also a factor that Apple seeks to discourage similar behavior by other app developers. As far as I am concerned, I just have a different style. I had my disagreement with Apple last year about its COVID app guideline, and I submitted multiple versions of it, but I was always totally transparent about what was in there (and what was not). I told them, and they decided. I disagreed with some of their decisions (and still do), and even brought formal complaints. But I don't think it's a good idea to defraud the app review process. Apple's dogged refusal to reinstate Epic's account may dissuade some others from playing that kind of game.

Even Judge YGR could easily grant Apple's motion to stay the injunction just because Epic--the sole opponent to that motion--stands nothing to gain from the injunction. She wouldn't even have to doubt that her judgment would be upheld on appeal. If there is no Fortnite on the App Store at all, it doesn't matter whether it could link to some website that promotes other purchasing options.

I'm sure this wasn't an easy decision for Apple. The short-term benefits are clear. In the mid term, however, it is hard to predict how the appeals court will view this situation: the fact that Epic is shut out of the App Store does demonstrate Apple's enormous market power. Now, Epic faces an uphill battle on appeal anyway. It won't be able to make up for some of what went wrong, and which among other things led the trial court to conclude that web apps were a pretty viable alternative to native iOS apps (a conclusion that I'm sure a court-appointed technical expert with a minimum level of understanding of market realities would have disagreed with). And the appeals court might not view Epic's aggressive approach more favorably than the court below. But the overall situation does allow Epic to portray itself as a victim.

The bigger risk for Apple is that this may strengthen the resolve of Capitol Hill (and European Union) lawmakers to bring about change.

I credited Epic for conceding defeat after the judgment. I wish Epic also gave up on the idea of trying to stretch the envelope of the consolation prize that is the UCL injunction. Epic itself can't do it anyway. If Epic successfully opposed Apple's motion for a stay, other companies (such as Paddle's prospective customers) would do that job. It won't do any good. It would be more gracious and reasonable to accept that the injunction is next to useless. I agree with the following passage from Apple's motion to stay:

"The Court has stricken one sentence of Guideline 3.1.1, but did not disable Apple from otherwise running its business or protecting consumers."

Apple will have to tolerate links and buttons of certain kinds, but that doesn't mean app developers will effectively be able to circumvent Apple's IAP rule. Unless its Japanese "reader" settlement required it, Apple would still be free to disallow that iOS apps make certain functionality or content (such as game passes) available even though the related purchases occurred outside of Apple's IAP system. And, as Apple notes, it can still demand its cut, even if a transaction occurs on a website. If Apple had to collect its cut by means of intellectual property enforcement, I don't think it would get a lot, if anything. But Apple wouldn't have to sue for patent and/or copyright infringement: it could simply use its gatekeeper power (just like Qualcomm normally doesn't have to enforce its patents because smartphone makers buy its chips, which they won't get unless they previously take an IP license).

Apple's motion to stay also correctly identifies other issues with the injunction. It's true that the court based its judgment on a particular market definition (game transactions), but the injunction doesn't appear to be specific to that market. This is again one of those limitations that affect private antitrust actions brought by companies as opposed to governmental entities. Also, Apple is right that some of what the injunction seeks to accomplish is actually taken care of by settlements (in a different case pending before the same judge, and the Japanese "reader" deal).

It doesn't have to be this way. Instead of fighting over the enforcement of that next-to-useless injunction, the parties should work out a mutually beneficial--or at least mutually unharmful--solution. I completely understand that Apple wants to avoid in the first place that it would have to fight with Epic and potentially various other app developers over the scope of the injunction. My unsolicited advice is that the parties stipulate to a stay (saving the court(s) the trouble of having to decide), and that Apple reinstate Epic's developer account, provided that reasonable assurances are provided to Apple that Epic won't engage in another "sneak assault." The parties could agree on a substantial contractual penalty, on top of which Apple could seek damages.

The exhibits to Apple's motion may give an incomplete picture of the dialog between the parties. Maybe--and hopefully--they are being a lot more constructive than meets the eye.

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These should be the top five priorities for those organizations seeking to promote balanced patent policy

Things haven't recently gone too well for those opposing patentee overcompensation in the information and communications technology sector and trollish litigation tactics. The German patent injunction reform effort is now at a point where even communists demand strong intellectual property protection. To turn that one around, with the end of the term approaching fast, is like trying to win a chess match after losing too many pieces. But there are five other contexts in which the camp that is making itself completely ridiculous in the German reform process could still bring about really positive developments. The following order does not indicate the relative importance of each item, but is related to how soon one would have to take action:

1. Ericsson v. Samsung now involves multiple antisuit injunctions (Samsung obtained an A1SI and A3SI in China, and according to rumors the Chinese court even entered an A4SI for good measure, while Ericsson won an A2SI that is being appealed). Ericsson has announced significant amicus brief activity. This dispute could become the next Microsoft v. Motorola in terms of its importance for U.S. antisuit injunctions in standard-essential patent (SEP) cases. It won't be hard for Ericsson to find many allies who argue that U.S. courts should enjoin, enjoin, and enjoin--just to have as much patent litigation in the U.S. as possible. But that's not going to be constructive because other countries, such as China in this case, could take the same attitude.

   It's key to help decision-makers at all levels understand that AxSI injunctions are merely a symptomatic escalation ("bring the popcorn"), but the underlying problem is territorial overreach courtesy of the Supreme Court of the UK. Escalation doesn't solve the problem. Deference and restraint are needed. It may take an international treaty to ensure patents will be litigated jurisdiction by jurisdiction, including SEP valuation. I know some patent monetization-focused companies (trolls and others) don't like that, but it's the only way out of this mess. In the Ericsson-Samsung dispute you now have a Swedish company that wants to litigate in Texas and a Korean company that asked a Chinese court for a global FRAND determination. Plus, the Swedes say that they'd be open to arbitration, but that always favors patent holders making unreasonable demands (because its results gravitate toward the middle between the parties' positions, and while you can always go higher, you can't counterbalance an excessive royalty demand by offering a negative royalty).

   It would be desirable for some amici to support Samsung's opening brief (due later this month) and to explain to the Federal Circuit that what Ericsson seeks to accomplish isn't ultimately even going to be good for the U.S. economy.

2. SEPs again: The Dusseldorf Regional Court's referral to the Court of Justice of the EU of certain component-level SEP licensing questions is certain to be affirmed by the regional appeals court. Nokia, Ericsson, Qualcomm, and other net patent licensors who prefer to shake down end-product makers are going to be lobbying all across the EU. The CJEU doesn't accept amicus briefs from companies or industry associations. You must get support for your positions from the European Commission and from the governments of EU member states. Daimler's IP lobbying capabilities are unproven to put it diplomatically for a change. More sophisticated organizations with an interest in component-level licensing should play an active role and talk to EU member state governments (to all of them) and figure out how to steer the Commission's position in the right direction.

3. Another CJEU referral, but not SEP-related: the Munich I Regional Court made a smart move from its perspective by asking the top EU court to lower the standard for preliminary patent injunctions. But every referral creates an opportunity to achieve a different outcome than the one the referrer would like. I'm not suggesting that one could or should "hijack" this referral, but it is perfectly legitimate to raise the issue of proportionality (EU Intellectual Property Rights Enforcement Directive) in this context. Maybe this referral is not only the first but also, due to group pressure on German patent judges, the last opportunity for many years to challenge the German near-automatic patent injunction regime at the EU level. In terms of what it takes, see the previous item.

4. Access to injunctions is also an issue on the other side of the Atlantic. The case law is good, but some politicians would like to overrule eBay v. MercExchange through new legislation. During the last term it turned out that Senator Thom Thillis (R-N.C.) was having second thoughts. Still, don't underestimate the risk here, and do your lobbying job on Capitol Hill before it's too late.

5. Another Congressional challenge: the aforementioned Senator Thillis does still seek to do away with Alice (invalidity of abstract patents). He actually appears to be obsessed with that one--as is equally re-elected pro-patent-troll Senator Chris "Looney" Coons (D-Del.). This is going to be a bigger challenge than preserving the eBay standard!

The above handful of policy issues are likely the most important ones this year and next with respect to patents. Should the Federal Trade Commission file a cert petition in the Qualcomm case, that would make it six (precisely 50% of which would be SEP matters). The deadline is late next month, and I heard from DC circles that this depends on new nominations of FTC commissioners by President Biden. Even if that didn't work out, it's key to at least ensure that the Biden Administration's positions on SEP enforcement will be more like those of the Obama Administration.

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Congressional report on competition in digital markets will have political impact, but judiciary remains independent: Epic Games v. Apple and Epic Games v. Google

Toward the end of my first post today (on the Epic Games v. Apple bench trial having been scheduled to start on May 3, 2021) I linked to and quoted from a Congressional report, Investigation of Competition in Digital Markets. At about the same time, a Twitter user taking great interest in the App Store antitrust matters asked me whether I thought this report might affect the upcoming trial. I thought others might have the same question, so in addition to my Twitter reply I felt I should do a blog post as well.

As an antitrust commentator and app developer, I'm somewhere in the middle between the parties and understand both sides to some degree. At this point it's too early for me to take a firm position on the merits, though I will soon as the case is going to go to trial so very soon. The following thoughts are purely procedural or, where it applies, political in nature.

• The separation of powers is one of the most fundamental principles of Western democracies. It's never a total separation: there are overlaps, some of which are important for checks-and-balances purposes.

  The report by the Democratic majority of the House of Representatives is, therefore, not legal precedent. While many Congresspeople have formal legal training, Congress is simply not a competent (in terms of "being in charge") forum of antitrust jurisdiction.

• Epic will presumably quote from that report in future court filings, trying it to use it as persuasive authority--but persuasive authority is what it will be at best, and conservative judges (like two of the three judges who heard FTC v. Qualcomm this year) may even find it highly dissuasive.

• Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California, who is presiding over the Epic Games v. Apple litigation and presumably close to finalizing her decision on Epic's motion for a preliminary injunction, is a Democrat (according to Wikipedia). But there's every indication she's a very independent thinker. She's going to form her own opinion on such questions as market definition.

• The United States Senate--not the House of Representatives--confirms judicial nominations.

• The Pepper and Cameron class actions against Apple over its App Store terms will be put before juries. There may be a dispute over the admissibility of that report.

• A report like that doesn't amend the Sherman Act (which the House couldn't do without the Senate anyway).

• I have no idea whether the Department of Justice (DoJ) is as much interested in the Apple App Store subject as it is in, for example, Google. If its Antitrust Division wanted to take action against Apple, it might like the idea of being supported by a House majority, but...this is a Republican administration.

• The newly-formed Coalition for App Fairness is already trying to leverage the House Democrats' report:

  Today the House Judiciary Committee took a historic step in protecting consumers and app creators from Apple’s monopolist behavior. We anticipate that their recommendations and our principles will usher in urgently needed App Store reforms. https://t.co/MJfINw7GP1 pic.twitter.com/ID3JrRDZuh

  — Coalition for App Fairness (@appfairness) October 7, 2020

• The European Commission's Directorate-General for Competition (DG COMP) is investigating Spotify's EU antitrust complaint against Apple, and regulators in other jurisdictions are looking into the same topic. It definitely hurts Apple politically that a number of lawmakers in its own country attack its App Store practices--and as I mentioned earlier today, Apple "vehemently disagrees" with the report's findings. Then, just like that report doesn't amend U.S. competition law, it won't change the framework in other jurisdictions. Whatever DG COMP decides will be subject to review by the EU courts in Luxembourg, and decisions by other regulators are reviewable by courts in their countries.

• The report is not just about Apple, but also about Google, Amazon, and Facebook, and says that while there are significant differences, the lawmakers behind the report feel that all four companies are simply too powerful. For a long time, those companies and other Silicon Valley tech companies, with only a few exceptions such as Oracle and maybe Tesla, have been ideologically aligned with the Democratic Party. They must be thoroughly disappointed, but it's not like they could solve their problems by supporting the Republican Party instead.

  The relationship between the Democratic Party and U.S. tech giants might improve after the election should Kamala Harris, a United States Senator from California who is known to be on friendly terms with Silicon Valley, be elected vice president.

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U.S. patent reform movement lacks strategic leadership, fails to leverage the Internet

Approximately ten years ago I became an anti-software patent activist. I ran a Europe-wide campaign in 17 languages (not the first one in Europe to advocate the abolition of software patents, but it was forceful enough for me to win the European Campaigner of the Year award from the Economist Group that went to Austrian-born Governor Schwarzenegger two years later). Meanwhile I've done my first couple of patent filings and intend to do more, and there's no way I would return to anti-patent campaigning (I was already done with that in 2006). I do, however, believe that some serious reform is needed in the U.S., and in Europe there's a risk of very negative side effects of what would be a good thing per se (a more unified and less expensive European patent system). In this post I want to share my observations on why the U.S. patent reform effort is apparently on the verge of defeat (though these things can sometimes change overnight in politics).

[Update on May 21] Sen. Leahy, whose commitment to reform is questionable, has taken the reform bill off the Senate Judiciary Committee agenda, at least for now. [/Update]

When my brothers in arms and I were fighting the patent establishment in Europe, Twitter didn't exist, nor did anyone outside of Harvard University know Facebook. We used mailing lists and Wikis, and to a lesser degree conventional discussion forums, for communication and coordination. Even with those limited tools, we were able to build serious pressure on EU policy-makers over the Internet. Many websites had anti-software-patent banners, some on an ongoing basis, others just during "web demos" ahead of key decisions.

There was a Europe-wide community of anti-software-patent activists. A few of its members were active on a daily basis, and others just from time to time. There was a grassroots network that was able to mobilize people very quickly and effectively to take action -- and a pretty significant number of them were small business owners, who obviously had less time available for this effort than students but were more important to politicians. I'm not aware of anything like that in the U.S., where there's no shortage of professionally-designed websites by lobby groups (all of which look more or less the same) -- in that regard, we had some shortcomings -- but there is no community of activists. Just a bunch of lobbying entities.

As long as it's using the very same tools as its opponents, the U.S. patent reform movement should not be surprised about the current stalemate. The pro-patent camp also has money to spend on web designers and lobbyists. It may have even more money available because the pro-patent camp has a more centralized structure. So what you get is a bunch of lobby group websites that all look very similar.

Ten years ago, large companies like Google were unwilling to lend any financial support to critics of the patent system. Nowadays, companies like Google, Facebook and Twitter, but even certain hardware makers such as Cisco, pour money into patent reform initiatives. But they won't be able to solve the problem by trying to outspend those who oppose meaningful reform. They won't win unless they realize that the most valuable currency in politics is not money: at the end of the day it's all about voters.

Many victims of patent trolling have indeed contacted U.S. politicians. And this has had an effect, which is noticeable when politicians speak at hearings. But you can get only so far with advocacy. There will be politicians, such as apparently certain Senate Democrats, who are beholden to the patent system and/or large corporations supporting it. There's no way you can convince them because they don't even want to understand what's wrong with the system. They are beholden to trial lawyers and certain corporations.

That's where more of the same won't help. It's where you have to become truly combative and play hardball in order to break the resistance. And to do that, you must fight both smart and hard. Your movement must also be effective as a pressure group to bring about serious change. Once you've figured out a politician will never be on your side, you must make him or her pay a political price for it. You want his party base to be so outraged that he or she will worry about this having a potential effect on the next primary or general election. Obviously, patent policy is not the kind of subject that can decide an election at any level on its own. But it can be one of various factors, and a very vocal group that can mobilize its supporters effectively will appear stronger than it may be in numbers.

The U.S. patent reform effort is too conventional, too predictable, too unimaginative. It's playing the game by rules that favor its opponents instead of changing the rules and bringing to bear its strength, which is that there's a far greater number of people who are unhappy with the state of the patent system than people who would actively support it.

The pressure group that started the European fight against software patents, the Foundation for a Free Information Infrastructure (FFII), sometimes stepped over the line, but overshooting a little bit occasionally is better than running an anemic, stolid campaign like the push for U.S. patent reform. The FFII attacked politicians who were firmly on the other side. It maintained Wiki pages on which it documented the pro-software-patent activities and statements by those politicians. It published and dissected statements, speeches, and letters those politicians sent to voters, just to explain to people what those politicians really said and did. This really had politicians concerned. Many politicians and their staffers kept track of what the FFII wrote about them, and sometimes even called up the FFII to request edits. Those politicians (and their staffers) were concerned that this information could influence the way that their peers, journalists, friends, neighbors, and especially their voters viewed them.

Apparently the U.S. patent reform movement knows very well who the obstructors of reform are. But it's not enough to put the blame on unnamed Senate Democrats. You have to name and shame them. You have to publish and dissect their statements and explain how those politicians harm Main Street businesses and consumers. You have to show how they act against the public interest only because it means more money in the trial lawyers' pockets. You have to expose them as the friends of patent trolls that they are. You won't convince them that way, but they may proceed with greater caution and, ideally, at some point give up their resistance to reform because they realize the price is too high.

In politics, the enemy of your enemy is your friend. In Europe, we had entrepreneurs as well as Attac activists. In the U.S., the patent reform movement should think about who the enemies of their enemies -- the Senate Democrats who oppose reform -- are. For example, many of the people who promote patent reform may be left of the political center, but the small business owners who are affected by patent trolling are usually not. In any event, if certain Senate Democrats oppose the public interest in patent reform, why doesn't the patent reform movement find a way to get, for example, Rush Limbaugh and his relatively new Young Conservatives website to talk about it? Or Glenn Beck? They reach large audiences. It may be possible to get them interested in a story of Senate Democrats acting against Main Street interests, especially if there is some well-researched material available on the Internet that exposes the friends of the trolls.

Obviously, the kinds of conventional lobby groups that are members of the Main Street Patents Coalition, such as the American Hotel & Lodging Association or the National Association of Federal Credit Unions, can't play the name-and-shame game. Even the Electronic Frontier Foundation, though some of its positions on IP are very extreme, wouldn't want to do that. Those kinds of groups need to maintain good relations with politicians all the time. And patent reform, while important, is only one of many things they're interested in, so they can't burn bridges.

That said, those traditional lobby groups could lend logistical and, if structured intelligently, also financial support to activists who are willing to spend time on this, whose exclusive political focus would be on patent reform and who would be willing to break the rules of D.C. lobbying in order to win.

Without financial support from the likes of Google, Cisco and Facebook, we broke pretty much all the rules of Brussels lobbying, and while we didn't achieve the abolition of software patents in Europe (they continue to be granted and enforced on a daily basis), we created a situation in which both camps agreed that it was best to have no new EU-wide law on software patentability. For the first and I believe still the only time in EU history, the European Parliament threw out a bill at a second reading, i.e., without any negotiations with the EU Council (the other legislative body in the EU). Against the rules, we made EU history.

I can't imagine that it wouldn't be possible to form such an activist community in the U.S., especially with the dynamics of today's social media. There are many people out there who would love to make a contribution to patent reform. There should be an online community that they can join, and which will organize online campaigns as well as local meetings. A place where they can exchange ideas and educate themselves.

The European anti-software patent movement consisted not only but to quite some extent of free and open source software activists. Many of them came across as overly ideological, but there were also academics and small business owners. Discussions were sometimes difficult, but usually fruitful. It should be possible to have similar dynamics in the U.S. as well.

All volunteer organizations face one fundamental problem: there will always be more people who want to offer their views than people who want to do the grunt work. But if a community is large enough, and if it has great leadership, then it can get a lot done.

Run-of-the-mill lobbying and grassroots activism can be a powerful combination. Sometimes grassroots activism is created organically, such as in Europe. But companies with a strategic interest in connection with a key policy issue can also find and (indirectly) support individuals who have the skills and the energy to create and organize such a movement.

If the U.S. patent reform movement had first-rate strategic leadership, then its leaders would have studied in detail how European anti-software patent activists achieved a historic rejection of a legislative proposal. They would also have tried to learn as much as possible from the recent legislative process in New Zealand. Of course, America is different. The topics are also different: in the U.S. the reform movement is too cowardly to speak out against software patents at the level of subject matter (admittedly this is harder to do in the U.S. than elsewhere, but the positions of the U.S. reform movement are way too soft to begin with and then get diluted in the political process, which is why nothing meaningful is achieved in the end). So the U.S. patent reform movement just uses trolls as a pretext for litigation reform, while the political processes in Europe and New Zealand were about patent-eligible subject matter. There's also a fundamental difference between the U.S. two-party system and the multi-party EU landscape. Still, if the masterminds of the U.S. patent reform initiative had been serious about winning, they would have done some thorough research on what worked and what didn't work elsewhere, in order to then determine which of those lessons learned abroad would also help them in their country. It's quite clear that they didn't do that. All they came up with was the very same kind of D.C. lobbying that the supporters of the current state of the patent system can also do (and possibly do even better). Apparently this isn't working.

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Senators are sympathetic to targets of dubious patent assertions but want focused reform

Today the Judiciary Committee of the United States Senate held a hearing on the Leahy-Lee patent reform proposal, "Protecting Small Businesses and Promoting Innovation by Limiting Patent Troll Abuse". After the recent fast-track passage of the Goodlatte bill by the House of Representatives, the key question at this juncture is what position the Senate will take on reform. The National Journal even wondered whether the current push for patent reform could survive the winter.

The purpose of this blog post is just to share my overall impressions of the debate. I will go into more detail on the substance of the Senate and House bills in the early part of next year.

Based on today's hearing, I believe patent reform will remain high on the agenda after this winter, and while there are calls by some politicians, such as Sen. Dianne Feinstein (D-CA), to take more time and hold more hearings, I think the push for reform has enough momentum that something will probably happen in 2014 -- but it won't be broad. There won't be a law unless the Senate and the House reach a consensus, a fact that Sen. Sheldon Whitehouse (D-RI) strongly urged reform advocates to consider. Sen. Whitehouse advised the reform movement to be flexible and not to "vindicate [its] ire at the deplorable conduct of these patent trolls at the expense of getting a bill through the Senate".

Wise words, and I think patent reform advocates have already learned their lesson in the House. In particular, they know that an expansion of the Covered Business Methods (CBM) program is a surefire way to delay and probably derail the process. Sen. Charles ("Chuck") Schumer (D-NY) delivered by far and away the most emotional speech at today's hearing. The witnesses (two panels) were all rather low-key, and so were almost all of the senators, except for Sen. Schumer, who still hopes to garner support for his proposal to expand the CBM program. He argued that patent litigation is a highway with two exits, both of which exact a high toll: settle or pay lawyers to defend yourself. He views an expansion of the CBM program as a "cost-effective off-ramp from the patent litigation highway", though this is debatable because it would still be quite costly to challenge a patent even on that basis. Sen. Schumer openly conceded that he's very emotional about this and called it a "shame that those who believe in valid patents so strongly defend the invalid patents", which he said he finds "appalling". But he recognizes his proposal is controversial. He looks ready to keep pushing for it after the winter. At this stage I think this effort is futile. It will be hard enough to build a consensus even without such a major league dealbreaker.

Just like in the House, there's awareness in the Senate for the importance of the patent system to the innovation economy. Politicians have received numerous letters from victims of dubious patent assertions, and there's definitely a lot of sympathy there and a will to act. Still, a broad majority doesn't want to enact any overreaching measures. Sen. Leahy's introductory remarks are online and reflect that spirit very well. And the co-sponsor of his bill, Sen. Mike Lee (R-UT), was also very clear about the need to proceed with caution.

There was some criticism of fee-shifting (by senators and witnesses), but it still looks like something that will happen. Even the chief IP counsel of Adobe, Dana Rao, who is definitely against overbroad reforms, argued very passionately for fee-shifting, though some politicians (such as Sen. Dick Durbin (D-IL) are profoundly concerned that fee-shifting compromises access to justice for small inventors (this concern is obviously very hard to understand for someone who lives in a jurisdiction in which it's the norm).

Just like patent reform advocates have an opportunity now to make progress with fee-shifting and transparency and possibly in the demand letter context, those who defend the status quo should also think hard about what realistically achievable outcome would constitute a "sweet spot" from their perspective. After today's hearing it's clear that there is an exceptionally high level of awareness among politicians for the problems created by patent trolls. From a short-term perspective some may want to dilute any reform proposals beyond recognition. A complex political process in which two chambers of Congress have to reach an agreement offers various opportunities for dilution. But the desirable outcome for defendants of the status quo would actually be a reform bill that has an easily verifiable effect on the activities of patent trolls and the related statistics. Fee-shifting should make the patent trolling business costlier and riskier. That would be meaningful progress, and it would greatly reduce the likelihood of another series of patent reform hearings after whatever comes out of the current process.

After the passage of the Leahy-Smith America Invents Act, hardly anyone would have thought that patent reform would be on the political agenda again so soon. Sen. Patrick Leahy (D-VT) himself is now in favor of another bill, recognizing that the previous one didn't go far enough. He sees that small businesses in his state continue to suffer from patent assertions. While still a supporter of the patent system, Sen. Leahy now proposes targeted measures in order to combat the patent troll problem. And that appears to be the position of a broad majority of U.S. legislators.

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Support, competent pushback for Goodlatte patent reform proposal at Congressional hearing

Yesterday I tweeted and retweeted numerous times during the three-hour hearing on the proposed "Innovation Act" (H.R. 3309: Improving the Patent System to Promote American Innovation and Competitiveness) held by the Judiciary Committee of the House of Representatives. Committee Chairman Bob Goodlatte (R-Va.) opened the hearing; last week he led a bipartisan group of Congressmen who jointly made this legislative proposal.

It was an interesting discussion with witnesses from EMC, Yahoo, a former head of the USPTO who is now a partner at IBM's primary law firm (Cravath), and a former general counsel of pharmaceutical giant Eli Lilly.

To me it became clear pretty quickly that the movement pushing for far-reaching reform faces a steep challenge. There are items on which it won't be too hard to build consensus, but apart from some low-hanging fruit, there are also some more ambitious plans that would affect patent litigation even more fundamentally but have drawn a lot of blowback from Members of Congress as well as industry players and intellectual property professionals.

Last month I reported on a letter that more than 100 innovators wrote to express their opposition to an expansion of the Covered Business Method Patents review program (often just referred to as the "CBM program"), and based on how yesterday's hearing went, this is the part of the Goodlatte proposal that is least likely to come to fruition anytime soon. The CBM part of the Goodlatte proposal may be in for an even rougher ride in the Senate, but it's hard to see how it could receive majority support in the House as a first step, so the Senate may not even have to look at it.

Two of the witnesses (from EMC and Yahoo) favor the Goodlatte proposal, and they did a great job advocating reform. EMC is the more credible innovator of the two companies. Web companies like Yahoo typically don't develop hardcore technology. The Web business is more about doing the right thing at the right time and building network effects and brand recognition. EMC is a hardcore innovator, but there aren't many companies like EMC who would support weakening patent enforcement.

Former USPTO chief David Kappos was undoubtedly the most competent witness and explained his views very well, and it's clear that his insights bear considerable weight with Members of Congress (even some of those advocating major reform).

Mr. Kappos also highlighted something that many of the participants in the hearing and the public debate may not have understood yet. The "customer-suit exception" in its drafted form may not be too helpful anyway because lawsuits between patent holders and manufacturers typically raise different issues from lawsuits against end users. (Apart from the fact that Mr. Kappos is right on this one, I generally think that technology makers must protect their customers, though there are probably some lawsuits targeting end users, such as patent royalty demands or infringement actions over WiFi or the use of scanners, in connection with which it's difficult to identify a particular vendor who should step in.)

Many Members of Congress asked questions. On balance, the ones cautioning against overcorrection of certain issues made a more competent impression. One of the politicians promoting major reform -- out of politeness I won't say which one -- asked questions that reflected his own confusion and lack of understanding of how patent law works. By contrast, IP-specialized politicians such as Representatives Conyers and Watt demonstrated their knowledge. Interestingly, the more time politicians spend on IP matters, the less they are in panic mode concerning patent trolls and other pretexts.

There was relatively little discussion of another important topic that I consider important and on which it may not be too hard to build a consensus: transparency. Congressman Deutch focused on it, and I hope he'll continue to push for more transparency in patent ownership.

A really good article on the U.S. patent reform debate was published ahead of the hearing, and one of the experts quoted in it says something that's absolutely correct: the reform proposals on the table don't really have much to do with trolls per se.

The one proposal that I think is most likely to have an impact on trolls is, however, also most likely to get broadbased support: fee-shifting. This appears to be a consensus item. There will never be a 100% consensus on a question like this, but it's apparently as close to 100% as it realistically gets in politics. The only Member of Congress who strongly spoke out against fee-shifting yesterday was someone from Texas whose electoral district includes parts of the Eastern District of Texas. He's not going to be able to stop fee-shifting from happening. And those who argue that the Supreme Court is in the process of dealing with this also won't be able to discourage lawmakers from doing what their job is: to pass good policy into law. In all fields, including patents, the Supreme Court has repeatedly indicated that certain decisions must be made by the legislature, not by judges.

I'll continue to follow the patent reform process. I guess the Goodlatte proposal in its complete, current form is not going to become law in the near term. Congress will ultimately agree on a common denominator, and it could end up being the lowest common denominator, which is basically fee-shifting and (hopefully) some transparency initiative, but not an expanded CBM program. Staged discovery could also work, depending on whether it's really focused on preventing abuse or hijacked by those who just seek to slow down and weaken IP enforcement.

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Lawmakers, regulators, standardization bodies address abuse of standard-essential patents

In June 2012, European Commission Vice President Joaquín Almunia said that, in addition to regulatory efforts to counter the abuse of FRAND-pledged standard-essential patents (SEPs), courts and standard-setting organizations (SSOs) also need to contribute to solutions. More than a year later, there is indeed momentum on multiple fronts behind efforts to hold companies to their FRAND promises and to ensure that industry can rely on FRAND pledges. This post is an update on positive developments in politics, antitrust enforcement and standardization.

Chairman Goodlatte's draft patent bill contains SEP-specific pleading requirement

Earlier this week the Chairman of the Judiciary Committee of the United States House of Representatives, Bob Goodlate (R-Va.), released his second patent reform discussion draft. Unsurprsingly, there are lobby groups for whose purposes the bill doesn't go far enough.

Patently-O published the proposal. On page 5 of that document, starting on line 9, there's a proposal for an additional pleading requirement (the Goodlatte draft proposes a number of new requirements) concerning SEPs:

"(10) [Identify] [f]or each patent[-in-suit], whether such patent is subject to any licensing term or pricing commitments through any agency or standard-setting body."

While this requirement per se doesn't prevent abuse and is, at first sight, nonjudgmental, I still consider it helpful. If this was ultimately adopted, it would presumably be the first time that the patent law of any country in the world recognizes the fact that SEPs raise specific issues in enforcement. It doesn't say what those issues are; it doesn't say how to deal with them. But the existence of a pleading requirement would, in and of itself, support the position that SEPs are a special category of patents from an enforcement point of view.

At the recent Federal Circuit hearing in the "Posner appeal", Apple's lead counsel, Orrick's Joshua Rosenkranz, told the appeals court that pple and Motorola "occupy completely opposite ends": on the one hand, there are the "distinctive" patented features with which Apple "revolutionized" wireless devices and Apple's "exclusivity"-centric approach of not licensing those patents "in general" to anyone, much less competitors, and on the other hand, Motorola's patents-in-suit, which relate to standards and which it promised to "license universally to everyone". While this distinction is accurate and appropriate, it's based on contract law, antitrust rules, business logic and principles of innovation policy, but statutory patent law does not make or recognize this distinction at present. If Chairman Goodlatte's proposal was adopted, then there would also be at least a strong indication in statutory patent law that SEPs must be treated differently from non-SEPs.

SEP-specific questions raised by FTC inquiry into patent troll industry

Three months ago I already expressed skepticism concerning the FTC's Section 6(b) investigation of patent assertion entities (PAEs). So far there's no indication, much less evidence, that there are actually antitrust issues in that area. Not all bad stuff that happens in business is a violation of antitrust laws.

This week the FTC formally launched its inquiry and published a request for public comment on proposed information requests to PAEs. For the reason I gave in the previous section, I like the fact that special attention is given to SEP assertions. On page 4 of the document, the term "Standard-Setting Organization" (or "SSO") is defined as "any organization, group, joint venture or consortia that develops standards for the design, performance or other characteristics of products or technologies". On page 5, subsection o specifies SEP-specific information on PAE patents that the FTC plans to request:

o. whether the Patent (or any claims therein) is subject to a licensing commitment made to a Standard-Setting Organization and specify:

(1) all Standard-Setting Organizations to which a licensing commitment has been made;

(2) all standards to which such a licensing commitment applies;

(3) the Person(s) who made the licensing commitment;

(4) the date(s) on which the licensing commitment was made;

(5) all encumbrances, including, but not limited to, all commitments to license the Patent or any of its claims on reasonable and non-discriminatory (RAND), fair, reasonable, and non-discriminatory (FRAND), or royalty-free (RF) terms[.]

I don't like at all what certain non-practicing entities are doing with FRAND-pledged SEPs. For example, I'm a long-standing critic of certain aspects of InterDigital's demands and enforcement strategies.

But SEP-wielding NPEs ultimately just want to get paid. Some of them demand way too much money, and they seek unfair leverage to force others to accede to their demands. Still, they are sincere in their desire to conclude a license deal. That's more than operating companies that act as SEP trolls can say. Those make purely prohibitive demands for a SEP license because their real objective is a comprehensive cross-licensing involving non-SEPs. In my view, that should be a higher antitrust enforcement priority than SEP-owning NPEs.

The European Commission is focused on abusive conduct by large players, though I wouldn't be surprised to see EU investigations of certain SEP-holding NPEs at some point as well. An antitrust hearing in the EU investigation of Google's (Motorola Mobility's) SEP assertions against Apple in Germany will, according to what I was told on Twitter, be held on Monday, September 30. I did a fair amount of work in Brussels over many years and have some good contacts there. I'll try to find out more about this.

On Friday Vice President Almunia gave a speech at Fordham's Competition Law Institute Annual Conference in New York and mentioned that "Samsung has sent [the Commission] a set of commitments seeking to address [its] concerns" and announced a market test: "We will formally market test these proposed commitments with other market participants in the coming weeks." (That's what the Commission has to do unless it settles cases without formal remedies.)

Proposed IEEE Standards Board Bylaws would provide far greater clarity than previous SSO FRAND policies and pledges

The IEEE (Institute of Electrical and Electronics Engineers) told the Federal Circuit last year that courts should not rely on standards bodies to "take a direct role in enforcing patent commitments". But SSOs can play a role in preventing abuse relating to future standards, and the IEEE appears to be making a very serious effort in that regard.

This webpage contains to links to an August 2013 IEEE-SA Standards Board Bylaws draft and to comments from key companies involved with the process (two different documents; the difference is just in the sorting order, not in the content). Under the U.S. eBay standard, it would be extremely difficult to obtain injunctions if the following sentence (lines 126-128 of the draft bylaws) was adopted:

"A Submitter of an Accepted [Letter of Assurance] who has committed to license Essential Patent Claims on reasonable terms and conditions that are demonstrably free of any unfair discrimination has implicitly acknowledged that a royalty is sufficient compensation for a license to use those Essential Patent Claims."

This is a rather clear way of putting the debate over "(in)adequacy of monetary relief" to rest with respect to future IEEE standards. I discussed this less than two weeks ago in connection with Commissioner Wright's antitrust-minimalist position on SEP-related matters. In my view, the adequacy of monetary relief can be determined the way Judge Posner did even without FRAND pledges containing an explicit admission to that effect. But the clearer, the better (obviously, it could be stated even more clearly than the IEEE draft proposes).

For a round-up post like this there's far too much in the draft bylaws and in the comments for me to cover comprehensively right here and now. The draft bylaws would limit the pursuit of injunctive relief to only certain circumstances (which could be defined more narrowly, but at least there isn't the vague notion of an "(un)willing licensee").

The document containing comments from industry players (with many of the usual suspects being particularly active) is worth reading. Maybe I'll do a separate post on the IEEE debate at some point.

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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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In lobbying and litigation, Google blurs distinction between standard-essential and other patents

Since Friday evening there has been a lot of discussion on the Internet about an AllThingsD article entitled "Google Says Some Apple Inventions Are So Great They Ought to Be Shared". The article and the two letters (one from Google to the United States Senate Judiciary Committee, and a rebuttal letter from Apple) it refers to are definitely worth reading.

Google is well aware of widespread concern over the import bans and other injunctions that Google subsidiary Motorola Mobility, Samsung and other players are seeking based on standard-essential patents (SEPs). For the concerns that have been expressed, let me refer you to four recent blog posts:

• Members of Congress write to ITC to express concern about potential Xbox ban

• Six senators oppose exclusion orders over standard-essential patents

• At Senate hearing, FTC and DoJ argue that import bans over FRAND patents must be an exception

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

In an effort to excuse its own conduct, Google's letter argues that some or all of the issues raised in connection with SEPs also apply to what Google calls "commercially essential" patents. While Google's letter doesn't say specifically that a patent like Apple's "overscroll bounce" and other multi-touch patents would be included, the term "commercially essential" is broad and vague enough to potentially include such technologies. Google talks about "interoperability" in this context, but "interoperability" is also a term "à géometrie variable": different stakeholders use it for different purposes. A very broad definition of interoperability would include user interface concepts.

The key point Google tried to stress in its letter to the Senate can be paraphrased like this: "look, standard-essentiality is not a binary question, there are many different shades of gray."

But the distinction between SEPs and non-SEPs is binary when the question is whether or not injunctive relief should be available for a category of patents. While I agree that non-SEPs vary greatly in strength, ranging from patents that can be worked around with a negligible investment to patents that are essential to interoperability with market-leading products, it still makes sense to categorically oppose injunctive relief over SEPs (since those who made a promise to license their patents on FRAND terms must honor it, as Judge Posner also decided) and to look at "essentiality" issues of other patents only on a case-by-case basis. Very few non-SEPs raise antitrust issues -- but all SEPs do, since the standard-setting process itself is exclusionary in an anticompetitive sense (let's not forget that standard-setting consortia are typically cartels of major industry players) unless FRAND commitments are made and honored.

By pointing to the fact that not all non-SEPs are free from competition issues (actually, there could also be antitrust issues in connection with Google's search engine patents such as the one on PageRank), Google cannot explain away the fact that all SEPs pose a major threat if companies obtain injunctions based on them. The two categories of patents must not be lumped together.

The letter Google sent to the Senate Judiciary Committee's leadership is not the only recent document in which it sought to blur the distinction between SEPs and non-SEPs. Last Friday, a Google filing with the ITC became discoverable. It's Google's response to the questions the ITC asked in connection with its review of a preliminary finding that Apple infringes a 3G-essential patent held by wholly-owned Google subsidiary Motorola Mobility.

One of the ITC's questions relates to switching costs:

"Question 4: With regard to the '697 and '223 patents, are there substantial costs and delays associated with switching away from the standardized technology in question?"

Here's the first paragraph of Google's reply:

"While there may exist costs or delays associated with switching away from Motorola's standardized technology, the same is true of switching away from any patented technology. Indeed, many patents are de facto standards where a patent owner, often a market leader at the time, encourages industry-wide adoption of its technology in contexts raising interoperability concerns. The economic analysis is the same to that described by the FTC with regard to patents made essential by a formal standards setting process. This is why the facts of each case should be analyzed."

That paragraph contains two major factual inaccuracies and one wrong conclusion:

1. It's not just that "costs or delays" could be associated with switching away from standards like 3G or IEEE 802.11 (WiFi, or WLAN) -- it's simply a total non-option for a single company like Apple. A lot of existing network infrastructure would have to be replaced. The costs are absolutely prohibitive, and it would take many years.

2. It's not true that "many" patents relate to de facto standards created by a single major player. There are some such patents, but they are few and far between.

3. The final sentence demands that "the facts of each case should be analyzed". But with SEPs -- and especially with a FRAND promise in place -- some of the analysis that Google proposes isn't necessary. It's clear that monetary compensation is all that a FRAND patent holder can expect. Only because injunctions may be inappropriate in some non-SEP cases, they aren't necessarily appropriate in some SEP cases where the implementer is identifiable, can be sued in federal court, and doesn't refuse to pay a court-determined royalty rate. The problem in this case is only that Motorola has been making excessive demands for years.

Other passages of Google's (Motorola's) filing with the ITC also compare cases involving non-SEPs to cases involving SEPs as if no bright-line distinction could be made. Here's one example:

"Indeed, in Investigation No. 710, also directed to smartphones, the Commission rejected arguments -- including those made by Google Inc, now Motorola's parent company -- concerning the public interest for these products, and the Commission issued an exclusion order against HTC. The Commission should be consistent in this regard, and find that Apple's products do not represent the sort of overriding public interest that avoids the statutory remedy. Indeed, unlike the products at issue in Investigation 710, Apple's products are not based on open source operating system that anyone can access, and so the public impact is lesser in Apple's case."

The import ban against HTC is based on Apple's non-standard-essential "data tapping" patent. In the headline of my blog post on that decision, I said that it was a "ruling of narrow technical scope". HTC's CEO said a day or two later that the patent covered a little-used feature that HTC could remove. The ITC is now investigating an enforcement complaint that Apple brought because it believed that HTC's new products still infringe that patent. The ITC denied emergency action (i.e., an immediate import ban against HTC's new devices) because there's a genuine dispute over whether or not HTC still infringes. All of this shows that Apple's patent does not have the power to shut HTC out of the U.S. market -- but Motorola's 3G-essential patent that an ITC judge held infringed would affect all of the accused products (which do not include the iPhone 4S and iPad 4G because Motorola, for purely tactical reasons, wanted to steer clear of patent exhaustion issues relating to a license agreement it has with Qualcomm).

Google's attempts to conflate the issues even include design patents. In its ITC filing, Google also says this:

"Apple itself routinely seeks injunctions against its competitors, such as Samsung recently. See Apple, Inc. v. Samsung Electronics Co., Case No. 5:11-cv-01846, Order of June 26, 2012, D.I. 1135 ('Although Samsung has a right to compete, it does not have a right to compete unfairly, by flooding the market with infringing products. As explained by the Federal Circuit, '[a]lthough the public interest inquiry is not necessarily or always bound to the likelihood of success o[n] the merits . . . absent any other relevant concerns . . . the public is best served by enforcing patents that are likely valid and infringed.' Abbot Labs. v. Andrx Pharm., Inc., 452 F.3d 1331, 1348 (Fed. Cir. 2006). . . . As a patent holder, Apple has a valid right to exclude others from practicing Apple's invention. In order to protect that right, and promote 'the encouragement of investment-based risk,' the public interest weighs in favor of Apple.'); Apple, Inc. v. Samsung Electronics Co., Case No. 5:12-cv-00630, Order of June 29, 2012, D.I. 221 at 99 (same). Apple's arguments in those cases – that remedies for patent infringement are necessary to protect the patent system – hold true when applied to Apple."

By adopting (in the final sentence) Apple's arguments for its own purposes against Apple, Google basically throws Samsung under the bus. But the fundamental problem with the quote from the Apple-Samsung case is that it's a quote from the order of a preliminary injunction against the Galaxy Tab 10.1 because of Samsung's identified infringement of a design patent. With non-standard-essential technical patents, Google can argue that some of them (though its use of "many" blows things out of proportion) raise competition issues. With design patents, that's never the case, by definition: elements that are dictated by functional requirements cannot be claimed by design patents.

Comparing Motorola's enforcement of wireless-essential patents against Apple to Apple's own enforcement of a narrow "data tapping" patent against HTC didn't make sense, but comparing the enforcement of wireless-essential patents to an injunction over a design patent is completely absurd. In fact, Motorola's own Xoom tablet, which a German court just cleared of violation of one of Apple's design-related rights, proves that it's definitely possible to design tablet computers without infringing on Apple's design-related rights. Samsung wanted its products to look very much like Apple's, and courts in different jurisdictions made different decisions on whether this constituted an infringement of Apple's rights. To the extent that injunctions came down, Samsung has no one to blame but itself. Apple's assertion of design-related rights is not by any stretch of the imagination comparable to Motorola's pursuit of injunctions based on wireless-essential patents.

If Google wanted to make an intellectually-honest case against Apple's or anyone else's enforcement of non-SEPs, the first step would have to be that it immediately ceases its pursuit and enforcement of injunctions in the United States, Germany and possibly other jurisdictions over FRAND-pledged SEPs. In a second step, Google could then credibly raise competition issues involving non-SEPs to the extent that there are real issues (and not just imaginary or hypothetical ones). But Google doesn't want to solve these problems step by step. Google apparently thinks that the bigger the problem is (because of its own lawsuits) or the bigger it makes the problem appear to decision-makers (through its letters and filings), the more likely it will be to get a resolution that favors its Android-related business interests.

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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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