I have often stated that the lifeblood of any high-tech enterprise is the intellectual property (IP) rights that it controls or potentially controls. This is especially true for my small- and medium-sized enterprise (SME) clients with respect to their short-term salability, long-term profitability, and eventual ability to undertake an IPO or sale exit. It seemed that public sentiment and the popular press were in accord with this view no more so than when President Obama signed the America Invents Act into law on September 16, 2011. The law, which received bi-partisan support by passing the U.S. House of Representatives 304-117, and the U.S. Senate 89-9, was widely-praised as the first major overhaul to the U.S. patent system in almost 60 years. The recent (and mostly negative) headlines concerning the “Smart Phone Patent Wars,” however, has made me wonder if IP rights – and more specifically, patents – are once again getting a bad rap?
The smart phone wars began in 2011 as mobile industry giants either gained or lost profits due to the growth of alternative mobile platforms. As the wars heated up, Google, Inc. acquired Motorola Mobility Holdings, Inc. – and its 17,000 patents – for US$12.5B on August 15, 2011. (After netting out other assets and liabilities, the price per patent was US$510,204.08!) This led to the increased headlines. A nice graphical summary of the wars – whose battlegrounds have been the U.S. International Trade Commission (ITC) in Washington, D.C., the European Commission in Belgium and federal trial courts all over the U.S., Europe and Asia – can be found here.
Why are these patent wars being waged over smart phones? Well, in 2010, people sent more emails per day (294 billion), than the number of letters the U.S. Postal Service processes in a year (approximately 171 billion). U.S. customers also send more text messages (over 4 billion per day in 2011) than letters. And, with more than 30% of U.S. households choosing a wireless device in lieu of a land-line telephone, the number of minutes we spend talking over mobile networks is increasing rapidly. These factors drove U.S. mobile telephone usage to a staggering 2.7 trillion minutes in 2010, with the global mobile phone industry reaching a value of US$1.18T in 2011. (These statistics are even more staggering when you consider that the U.S. Postal Service reported a record loss of US$5.1B in FY2010.) So, that was a long-winded way of just saying “money.”
Given the foregoing, most would have you believe that these wars are really a battle for consumers’ palms between the Android™, BlackBerry®, iOS™, Symbian® and Windows® Phone mobile operating systems. Yet, with different handset manufactures, operating systems and wireless carries, there has to be a set of standards – promulgated by various standard setting organizations (SSOs) – so that consumers can talk, text and email each other, as well as surf the Internet to retrieve information and download music and picture files from virtually any website. After all, as New Yorker staff writer James Surowiecki once famously observed, “without standardization there wouldn’t be a modern economy.” Nearly all SSOs, however, have regulations requiring participants to not only disclose the patents they own that relate to a proposed standard, but to eventually grant licenses to industry participants on “reasonable and nondiscriminatory” (RAND) terms.
So who is the villain in all of these wars responsible for again giving patents a bad rap? Well, the villain in not the ITC, USPTO or any U.S. government agency. Nor it is any country’s protectionist trade regime, or an “irreparably broken” U.S. or global patent system. No, the real villains here may very well be a handful of companies that willingly contributed patented technologies to various SSOs, championing their adoption and encouraging their use in a host of consumer electronics, and now claim (years later) that the very producers they encouraged to implement these standards should be barred from making, using or importing their products into the U.S. market.
Despite all the talk of smart phones, there is more at stake. A wide variety of popular consumer electronics products, including video game consoles, routers, computers, GPS navigation devices and video players, use the same standards that are at issue in the smart phone wars. Given that today’s complex products often incorporate dozens (or even hundreds) of standardized technologies, and that the patent holders in these current cases are demanding significant royalties, some manufacturers could find themselves facing aggregate royalties that exceed the final selling price of their products. If allowed to occur, it may turn some of the most popular consumer electronics into a one-way ticket to bankruptcy for their manufacturers.
So what should be done to prevent this? Well, the answer is at least two-fold. First, patent owners who attempt to renege on their SSO commitments should be held to such commitments made prior to adoption of any applicable standard. As such, a quiver of private lawsuits including patent misuse, estoppel, laches, breach of contract, and fraud claims may follow. Second, regulators in all affected markets should take action to deter future renouncements of this type that have anticompetitive effects. In fact, EU regulators have already signaled their intention to do just that.
In sum, I return to my original query: “Are the smart phone patent wars giving patents a bad rap?” The answer is very likely “yes.” This is unfortunate. Since the days of our founding fathers, the patent laws were seen as a reward system for those who brought innovative products to market in the hopes of improving (and prolonging) our lives. Now is the time for those private market participants who are affected and the relevant government regulators to be vigilant in fighting such patent-based anticompetitive behavior. Otherwise, the bad actions of a few will undoubtedly be used as a justification to erode the patent system for all.
I will further discuss such answers in the future as this is the first in a series of six articles exploring the smart phone wars, RAND patent licensing schemes, standard setting organizations and their affects on not only the consumer electronics marketplace, but the entire IP ecosystem. Please stay tuned!