(Cross post on DisCo)

What a difference a year makes in Congress.  Last year, Reps. DeFazio (D-OR) and Chaffetz (R-UT) introduced the Saving High-tech Innovators from Egregious Legal Disputes (SHIELD) Act.  The bill generated some attention in the press, but never made it onto the campaign year legislative agenda.

Then we hit a tipping point of sorts.  It has been widely known that troll litigation is unsavory and inefficient, but many ardent defenders of the current patent system argued that patent trolls were a sideshow.  In 2005, trolls accounted for 23% of patent litigation.  Then, in December of last year, Santa Clara Law’s Prof. Colleen Chien released the results of her study showing that trolls accounted for 61% of patent lawsuits in 2012, which marked the first year that trolls accounted for more than half of all patent litigation.  The rhetorical rubicon had been crossed, which helped put the gears of Washington, DC in motion.

In December, the FTC and DOJ held a joint workshop on patent trolls, which marked the first time that our nation’s antitrust regulators took serious steps to examine the competition problem posed by patent assertion entities.  (Last April, I asked the former Assistant Attorney General for Antitrust, Sharis Pozen, about the DOJ’s stance on patent trolls and she said the agency was still internally thinking about how to handle trolls and had no comment beyond that [@ 39:10]).

Then this February the SHIELD Act was amended and reintroduced.  As some commenters have pointed out, the SHIELD Act is a small, but important tweak to get at some of the problems with trolls, but it does not go far enough on its own.  And, at the time of its introduction, it seemed like the SHIELD Act was as far as Congress was willing to go to help update our misfiring patent system, after having failed to agree on comprehensive reform in the America Invents Act.

However, the patent troll problem escalated to the Presidential level, with the President giving a well thought out response to a question on patent trolls in a Google Hangout he held in mid-February where he condemned the practice of trolling and discussed the need for more patent “balance” generally.

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(Cross-posted on DisCo)

Last Friday, CCIA filed its comments to the FTC/DOJ’s Public Workshop on Patent Assertion Entities (PAEs) (aka patent trolls).  Although antitrust authorities cannot fix all of the foundational problems in the patent system — such as the patent quality problem – they can certainly use their competition expertise and authority to help rein in some of the most egregious attempts to game the system to the detriment of both consumers and innovation.  Furthermore, the FTC and DOJ should continue their long tradition of excellent marketplace research that can be used as raw material to update competition law, as the patent system does not function in the stylized way that much of our patent law and antitrust jurisprudence contemplate.

Specifically, we stressed three particular areas that the FTC and DOJ should focus on in the short run.

• FTC 6(b) Study – Much of patent troll activity occurs in the shadows, and it is often covered up by a maze of shell companies and non-disclosure agreements.  In order for antitrust regulators to figure out which business arrangements and relationships violate antitrust law, they need to have a more comprehensive picture of PAE relationships and practices.  Luckily, the FTC is armed with just the tool for this – a 6(b) study.  This allows the agencies to send out subpoena-like questionnaires to PAEs and their associates that they are compelled to respond to.

• Ensure Commitments Travel With Patents – In order to provide marketplace certainty, technology companies make frequent commitments as to how they will or will not enforce their patents.  These commitments include the now infamous FRAND commitments, pledges not to “stack royalties,” pledges not to assert against open-source software, pledges to only use defensively, etc.  Companies make these pledges to induce the marketplace to adopt their technology.  If trolls acquire patents with previous commitments, and then revoke them, it amounts to an unfair method of competition (and antitrust violation if the market is “locked-in” to the technology in question).

• Closely Monitor Patent Privateering – The relatively new phenomenon of patent privateering, where operating companies enlist trolls to attack their rivals for them, raises some potential antitrust questions.  The problems become even more acute when multiple competitors collaborate through a troll to bring lawsuits against mutual competitors.  The FTC and DOJ should closely monitor this activity and update their guidance — including the 1995 IP Licensing guidelines — with this behavior in mind.

For CCIA’s full comments click here and for a look at the entire FTC/DOJ public comments docket click here.

(Cross-posted on DisCo)

There has been a recent flurry of policy and regulatory activity related to standard-essential patents (SEPs).  First, Samsung announced it was dropping its requests for injunctions on SEPs in its ongoing patent battles with Apple.  Then, curiously, the European Commission filed a “Statement of Objections” (first round of European antitrust charges) against the Korean company for the very practice it had just ceased.  On the other side of the Atlantic, the U.S. FTC announced that it had reached a settlement with Google (and its subsidiary Motorola Mobility) preventing the company from seeking injunctive relief on SEPs if the potential licensee was willing to undergo binding arbitration to determine “reasonable” licensing terms for Google’s patents.  Then the U.S. Department of Justice and the U.S. Patent and Trademark Office issued their own policy statement counseling against SEP injunctions is many cases.

The crux of the debate centers on how much flexibility SEP holders have to negotiate licensing terms for their patents that are promised to be licensed under “(fair) reasonable and non-discriminatory” terms (FRAND or RAND).  Specifically, the debate focuses on this question:  when is it appropriate to enjoin infringing products from the market if licensing negotiations break down?  Historically, FRAND commitments have been relatively ambiguous, giving those holding SEPs broad (but not unlimited) flexibility to negotiate “reasonable” bilateral deals.  Currently, there is a movement afoot to give SEP holders less negotiating flexibility.  This will have both positive and negative consequences.

Much hay has been made over SEPs and injunctions lately, but there has been little discussion of the historical context, which is truly necessary to understand this complex issue and the role SEPs have played in the larger smartphone wars.

(For a more in depth discussion on SEPs, see CCIA’s filing to the FTC on the Commission’s Consent Decree with Motorola Mobility.)

Although some commenters and regulators have implied that SEP injunctions are the main cause of the current smartphone patent wars, this simply isn’t the case.  Indeed, over the last few decades, there has been an explosion of both innovators declaring patents to standard setting bodies, and implementers investing billions in products that implement these standards.  The fact that both sides of the market flourished during a period of time that there was no legal restraint on the ability to get injunctions on SEPs is dramatic evidence that the standard-setting system was not broken.

That isn’t to say the system is perfect.  Far from it.  Sometimes the incentives to “play nice” break down and hold-up does occur.  Sometimes a company who was living by the spirit of their FRAND commitment goes bankrupt and the SEPs get sold off to patent trolls who seek excessive licensing fees.  These problems should not be downplayed, but they are problems that have been at the margins of the system.

Ambiguous FRAND commitments have also had positive benefits.  Some standards contributors have decided to keep their SEPs for defensive purposes.  Often these firms don’t proactively track down companies for licensing revenue and only assert their SEPs against companies that seek licenses from (or sue) them.  And given the realities of the technology marketplace, where millions of patents apply to technology devices, other firms use their SEPs to gain “freedom to operate” (aka the ability to bring their products to market) by seeking large portfolio cross-licenses.  If companies can force mandatory arbitration on just the SEP components of these licensing proposals, there is less incentive to negotiate these large deals where companies essentially agree not to sue each other.

These types of defensive SEP strategies have two pro-competitive effects.  First, they function to keep the licensing burden of particular standards lower than if everyone sought to charge everyone else for their SEPs.  Second, they prevent lawsuits.  In a world where ‘everyone infringes everyone elses IP’, the preventing lawsuits function is particularly important.

If competition agencies rein in the flexibility of FRAND terms without other action being taken to control the patent flood, this will likely lead to more litigation in the short run, not less, as the rivals of companies with SEP-heavy portfolios are incentivized to push their litigation advantages while their opponents are aggressively rebuilding their defensive portfolios.  Furthermore, given the courtroom success that other litigants have achieved with controversial software and design patents, it is reasonable to assume that these patents will become the core of new defensive strategies.

Although gaining more clarity and providing real teeth to the FRAND licensing pledges that accompany many SEPs is probably a good thing if part of a larger patent reform effort, any competitive gains achieved through discrete action will quickly be lost if the root causes of the patent wars are not adequately dealt with.

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(Cross posted on Project DisCo)

First of all, thank you Newegg!

Everybody go out and buy an extra computer monitor, TV or a bulk pack of styluses from them right now (FYI, styluses are retro cool!).  I’ll wait…

Done?  Good.  Now I will explain why.

As it was widely reported earlier this week, perhaps best by Joe Mullin at Ars Technica, Newegg — the online technology retailer — fought Soverain, a notorious patent troll.  Soverain was holding the industry hostage with some pretty shoddy patents with which they claimed the entire idea of a “shopping cart” in e-commerce.  Newegg’s fighting spirit is commendable and part of its broader “We never negotiate with trolls. Ever.” policy.

[Newegg’s strategy may also be a risky calculated attempt to deter troll lawsuits in the future -- the patent world’s equivalent of “we do not negotiate with terrorists.” However, the first two companies who fought Soverain -- Victoria’s Secret and Avon -- actually lost.  Soverain lost its initial case in the same patent friendly court that rendered the Victoria’s Secret and Avon verdicts, the Eastern District of Texas, before winning on appeal.]

Unfortunately, under our current patent system Newegg’s act was exceptional. The retailer’s stand was the product of a fed up company willing to make a banzai charge on behalf of a besieged industry (or the Howard Beale of the tech world).  If the Department of Commerce gave out medals of valor: Newegg should get one.  It would have been easier (and likely cheaper) for them to settle early, but they stood on principle.

Unfortunately, economics, and actual outcomes, does not give much weight to principled stands.  Incentives dictate market outcomes.  Given the huge expense and uncertainty of patent litigation, patent friendly courts and the legal uncertainty around concerted boycotts of trolls, standing up to patent trolls is difficult.  Usually this leads to companies, particularly small and medium size companies, settling with trolls instead of undertaking a costly legal fight that could put them on the hook for a huge sum of money if they lose.  (Patent attackers often “punish” firms that fight the validity of a patent, offering significantly better deals to the firms that choose to settle early.)

In economic parlance, busting trolls with bad patents is a “public good.”  In other words, the entire industry benefits when an individual company invalidates a bad patent.  Or, as Dan Ravicher of PUBPAT pointed out in an amicus brief in the pay to delay pharmaceutical antitrust case:

Accused infringers who prove a patent invalid perform an important public service by correcting the PTO’s errors on their own nickel.

Economic theory also tells us that public goods are generally underprovided (by the private market at least) because individual market actors do not reap the full benefit of their investments.  In this instance, Soverain had cases pending against over 30 companies, including such household names as eBay, RadioShack, Nordstrom, Bloomingdales and Walgreens.  Newegg’s stubborn refusal to rollover means that those other companies are also saved the significant time and expense of fighting to knock out Soverain’s patents.

This “underprovision” is well-documented in economics literature:

In many cases where each party’s respective incentive is expressed by the difference in its profits between winning and losing, a patentee’s incentive to defend its patent grossly exceeds an alleged infringer’s incentive to challenge it….

Thus, for instance, if there are five infringers of equal size, each gets only a fifth of the gains from a successful challenge because each is paying only a fifth of the patentee’s total royalties.  Therefore, the patentee has five times more incentives to prevail in litigation than any one challenger has.

Going forward, we can’t rely on altruistic companies like Newegg to reliably provide the “public good” for the industry at large.  Academic literature suggests several ways of better aligning private incentives with the public good:

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(Cross posted on Project DisCo)

Yesterday, a sworn statement by former Palm CEO Edward Colligan became part of the public record in a civil antitrust lawsuit brought by 5 employees at major Silicon Valley tech firms.  Colligan alleged, supported by email records, that Steve Jobs contacted him and “proposed” an arrangement in which Apple and Palm would agree not to hire each other’s employees.  If Palm did not agree, Jobs threatened Colligan with patent lawsuits.

Although the antitrust case will focus on the agreements not to hire each other’s employees (collusive agreements in restraint of trade — whether the “trade” is in physical products or the supply of labor — are an antitrust no-no punishable by steep fines and, in some cases, even criminal sanction), I think the patent “stick” used in this case is far more telling — and a far bigger deal — than the alleged do-not-poach-our-employees agreements.  (Note: the DOJ already extracted a settlement agreement from Apple, Adobe, Google, Pixar, Intuit and Intel preventing them from enacting a broad array of “no solicitation agreements” with rivals.)

I put quotation marks around the word “proposed,” as the offer was extended in much the same manner that a mob boss proposes a protection deal.  “Accept my proposal or I cannot promise that something bad will not happen to you.”

In this case, Jobs’ enforcers were not thugs with baseball bats (or swords), but Apple’s own patent lawyers.  As Colligan recalls:

Mr. Jobs also suggested that if Palm did not agree to such an arrangement, Palm could face lawsuits alleging infringement of Apple’s many patents.

However, that was not the end of their interaction [email excerpts below].  Colligan’s affidavit had an appendix that laid out the subsequent email exchange between him and Jobs.  Not only does Colligan inform Jobs that the proposal is likely illegal and immoral, but that he wasn’t threatened by Apple’s patent coercion because Palm had a robust patent portfolio of its own.  However, Colligan then extended an olive branch by saying that patent warfare was not a good way to proceed and that the only winners would be the lawyers.  Jobs’ response to Colligan’s email was the most important — and alarming — part of the Apple boss’s threat.

While not addressing the potential illegality or immorality of the do-not-hire agreement (which was the main point of Colligan’s email), Jobs decided to ratchet up his patent threats.  Almost mockingly, Jobs notes “I’m sure you realize the asymmetry in the financial resources of our respective companies when you say: ‘We will both just end up paying a lot of lawyers a lot of money.’”

I want to parse that statement.  Translation: “We are a huge company that does not have a problem paying a ton of money to patent lawyers to punish you, regardless of whether our request is illegal or not.”

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(Cross-posted on Disruptive Competition Project (DisCo))

As I have discussed before, patent trolls pose a unique threat to technology startup companies.  The limited resources and small launch windows that constrain life as a startup company make them vulnerable to patent trolls.  Trolls leverage the sheer cost of fighting a patent challenge — even if the odds of winning are high — against the precarious situation of most startups and seek settlements.  Unlike established companies who can afford to take a long-term view and usually fight trolls at all costs to deter future troll lawsuits (aka “we do not negotiate with terrorists”), small startups do not have this luxury.  As Brad Burnham of the prominent VC firm Union Square Ventures has written, trolls seek to hit startup companies at the most vulnerable times, either right after they receive a major cash infusion — like Etsy and Hipmunk – or right after that startup announces that it is being acquired:

“By pouncing after the merger is announced, but before it closes, [patent trolls] hope to extort a quick cash settlement.”

There is a unique and discrete market failure at work here.  Since the majority of patent trolls lose when the case goes to court, companies should — and the big companies usually do — fight the baseless charges.  However, since startups are uniquely vulnerable — and bear the high costs of litigation even if they win — there is little incentive for them to fight these bogus suits and parasitic market actors (which, I may add, would have significant positive externalities as these trolls target many companies).  As a result, they often end up settling.  This is an unfortunate example of game theory where individual incentives don’t align with the public good.  Paulgb (who appears to be web developer Paul Butler) in a forum at Ycombinator summed up the situation nicely:

The patent trolls know that the rational (in the game-theory sense of the word) decision for the victim company is to settle, because the cost of taking it to court (in both legal fees and lost time) exceed the cost of the settlement.

It’s like an asymmetric game of chicken.  Both players know that the troll has the advantage of having less to lose in a “collision” (a lawsuit), so the troll can count on the victim to “swerve” (settle). If the victim was able to eliminate the cost of a collision, and the troll knew that the cost of a collision to the victim company was eliminated, it would make more sense for the troll to swerve (drop the claim).

Since the America Invents Act (the “AIA”) recently passed Congress after an excruciating multiyear journey — and in the end failed to address most of the systemic problems that plague the current patent system — there is little short-term hope or Congressional appetite for another major patent reform fight.  However, until the political capital refills, there are smaller, more discrete fixes that eliminate some of the worst abuses of the current patent system.

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