In my first article, I posed the question whether the “Smart Phone Patent Wars” were giving IP rights – and more specifically, patents – a bad rap? My conclusion was an unfortunate “yes,” with the villains being a handful of companies that willingly contributed patented technologies to various standard setting organizations (SSOs), encouraged their use in a host of consumer electronics, and years later charge the very producers they encouraged to implement these standards with patent infringement. In my second article, I examined the so-called “Fair, Reasonable and Non-Discriminatory” (FRAND) licensing terms that SSOs require of their participants and concluded the phrase has no clear, widely-accepted definition or standards for determining compliance. In my third article, I examined the patent policies of four major SSOs and concluded that none offered any clear guidance on what constitutes a FRAND license leading to unnecessary and counterproductive litigation. In my fourth article, I made a few observations among the flurry of activity as to the market effects of these patent wars. Now, I report on potential congressional action on the horizon and the increasing focus on the U.S. International Trade Commission (ITC).
Pew Research recently reported that 46.0% of Americans now own a smartphone device, making them more commonly owned than regular, basic mobile telephones. This ownership figure rises to 66% for the sought-after consumers population aged between 18-29. Thus, there is no surprise that the smart phone patent wars rage on, and members of Congress have noticed.
Last month, both the U.S. Senate and U.S. House of Representatives held hearings related to patent disputes, the ITC, SSOs and FRAND licensing – no doubt precipitated by the smart phone patent wars. On July 11, 2012, the full Senate Judiciary Committee held a hearing entitled “Oversight of the Impact on Competition of Exclusion Orders to Enforce Standard-Essential Patents.” Witnesses at the Senate hearing included the Acting Assistant Attorney General, Antitrust Division, U.S. Department of Justice, and the Commissioner of the Federal Trade Commission (FTC). A week later, on July 18, 2012, the House Judiciary Committee’s Subcommittee on Intellectual Property, Competition and the Internet held a hearing entitled “The International Trade Commission and Patent Disputes.” Witnesses at the House hearing included Professor Colleen Chien of Santa Clara University School of Law, IP Counsel for Ford, VP of Litigation for Cisco, the General Counsel of Tessera Technologies, and the President of The American Antitrust Institute (AAI).
Amid all the fury about excessive patent infringement litigation, SSOs, and the failure of some entities to engage in FRAND licensing for standard-essential patents, it was surprising that these two hearings focused heavily on the role of the ITC – an agency often referred to as “obscure” and “little known outside Washington.” Also interesting was the fact that no one from the ITC testified at either hearing! So why the focus on the ITC? Well, the ITC has become an increasingly popular battleground for patent infringement litigation (and especially the smart phone patent wars). The agency, despite not being able to award money damages, is becoming a popular battleground because: (1) they can issue exclusion orders enforced by the U.S. Customs Service at the borders which prohibit a competitor from bringing infringing products into the U.S.; and (2) the average turnaround time for a case in 2011 was approximately 14 months, compared to approximately three years in a federal district court. The ITC’s jurisdiction over patent disputes comes from Section 337 of the Tariff Act of 1930 (19 U.S.C. § 1337), which authorizes it to conduct investigations into patent infringement by products imported into the U.S.
Professor Chien, in her House testimony, explained the growing popularity of the ITC as venue for patent disputes in this way:
The impact of an ITC “exclusion order” preventing importation of a product can be dramatic. To comply with such an order, a company must pull its products from the market or redesign them. The Supreme Court has repeatedly said that an injunction is an extraordinary remedy, but the ITC is not bound by the Court’s jurisprudence on patent injunctions. In my opinion, that some litigants are taking advantage of the ITC’s injunction record to hold up respondents is a significant problem, though not the only problem, In today’s patent system. It undoes the progress that eBay represents, and it contributes to the favorable climate for patent trolling and holdup present in today’s patent system. This climate is driving investment towards patent speculation, and away from productive enterprises.
Put another way, and all those who testified at the House hearing seem to agree, the ITC has become a popular venue because the exclusion order remedy – which bars a company from importing its products into the U.S. – has largely been unavailable to patent plaintiffs in the federal district courts ever since 2006, when the Supreme Court decided eBay v. MercExchange. In eBay, the Supreme Court held that injunctive relief may only be awarded to patent holders who satisfy a traditional four-prong test for an injunction by proving, among other things, that their patent claims cannot be adequately satisfied by an award of money damages. As Professor Chien surmised: “In the 6 years since the Supreme Court decided eBay, district courts have given contested injunctions to [patent assertion entities] exactly once by our count, and three-quarters of the time to practicing companies; in contrast, the ITC still routinely awards injunctions to all comers.”
The FTC Commissioner observed in her Senate testimony that current law provides a mechanism by which the ITC can limit the incidence of hold-up generated by an exclusion order by allowing the agency to consider “the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, and United States consumers” in deciding whether to grant the exclusion order. But she went on to note – as Professor Chien in her House testimony suggested – that: “Our research has revealed only three cases in the past 35 years in which the ITC has denied an exclusion order on public interest grounds.”
Even before these two congressional hearings, last month on June 19, 2012, Senators Herb Kohl (D-Wisconsin), Mike Lee (R-Utah), Jon Kyl (R-Arizona), John Cornyn (R-Texas), Jim Risch (R-Idaho), and John Hoeven (R-North Dakota), in reaction to Motorola Mobility’s pursuit of exclusion orders, wrote a letter to the ITC to “express concerns with regard to the availability of the exclusion order as a remedy for cases in which ‘standard-essential patents’ (SEPs) are asserted.” The Senators wrote:
For the standards setting process to function effectively, companies that commit to license their SEPs on RAND terms must seek to resolve disputes over patents through a royalty agreement or judicial determination of a reasonable rate. As these companies have pledged not to exercise exclusivity over such patents, they should not expect the grant of an exclusion order when they are in violation of an obligation to license the patents on RAND terms.
Any precedent that would enable or encourage companies to include their patented technology in a standard, commit to license included patents on RAND terms, and then seek to secure an exclusion order despite a breach of that commitment would thus implicate significant policy concerns. Such an outcome would severely undermine broad participation in the standards-setting process, which would in turn threaten the meaningful benefits these standards provide for both industries and consumers.
So, now that we have detailed the problem, what is the solution (especially in light of the smart phone patent wars)!?
As far back as April of this year, Congressman Devin Nunes (R-CA) circulated draft legislation that would make two significant changes to patent disputes at the ITC by: (1) requiring the ITC, when deciding whether to issue exclusion orders, to utilize the same four-factor test that the U.S. Supreme Court held in eBay applied to permanent injunctions sought by patent owners in the federal district courts; and (2) making it more difficult for non-practicing entities to qualify as proper plaintiffs in ITC actions (i.e., only allowing “carrot licensing” to qualify as a “domestic industry” under Section 337, not “stick licensing”).
During their Senate hearing testimonies, both the Acting Assistant Attorney General for the Antitrust Division, and the FTC Commissioner suggested that ITC exclusion orders should generally be unavailable for SEPs. More specifically, the Acting Assistant Attorney General stated in his testimony that:
The Antitrust Division is also closely monitoring a number of pending International Trade Commission (ITC) matters involving F/RAND-encumbered SEPs. …
In considering this issue, the Department of Justice is concerned about the circumstances in which an exclusion order may be inappropriate, in certain cases where a product implementing a standard has been determined to have infringed a valid F/RAND-encumbered patent that is essential to that standard.
The FTC Commissioner went further and stated:
ITC issuance of an exclusion or cease and desist order in matters involving RAND encumbered SEPs, where infringement is based on implementation of standardized technology, has the potential to cause substantial harm to U.S. competition, consumers and innovation. The FTC expressed concern to the ITC that a patent holder can make a RAND commitment as part of the standard setting process, and then seek an exclusion order for infringement of the RAND encumbered SEP as a way of securing royalties that may be inconsistent with that RAND commitment. …
The FTC believes that the ITC has the authority under its public interest obligations to … deny an exclusion order if the holder of the RAND encumbered SEP has not complied with its RAND obligation. If, instead, the ITC finds that its public interest authority is not flexible enough to allow this analysis, then Congress should consider whether it should amend Section 337 to give the ITC more flexible authority to prevent hold-up.
Whether the ITC will follow the suggested solutions put forth by Congressman Nunes, the Dept. of Justice or the FTC remains to be seen. The answer, however, should come soon as the ITC is expected to decide the issue by late August of this year in the first case it has heard involving issuing an exclusion order for SEPs. (The case was originally brought by Motorola against Apple on October 6, 2010, alleging importation from China of certain Apple wireless communication, portable music and computers devices that infringe six Motorola patents.)
Many commentators are hoping that the ITC follows the lead of famed Seventh Circuit Judge Richard Posner, who while sitting by designation at the federal district court for the Northern District of Illinois, issued a 38-page opinion on June 22, 2012, ruling that Motorola was not entitled to injunctive relief for its SEPs. Judge Posner stated:
To begin with Motorola’s injunctive claim, I don’t see how, given FRAND, I would be justified in enjoining Apple from infringing the ‘898 unless Apple refuses to pay a royalty that meets the FRAND requirement. By committing to license its patents on FRAND terms, Motorola committed to license the ‘898 to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation for a license to use that patent. How could it do otherwise? How could it be permitted to enjoin Apple from using an invention that it contends Apple must use if it wants to make a cell phone with [the ITU’s] UMTS telecommunications [standard] capability – without which it would not be a cell phone. [Emphasis in original.]
Given Judge Posner’s “law and economics” reputation and stature, this reasoning may spread and injunctions for infringement of valid and enforceable SEPs – whether in federal court or the ITC – may soon be a thing of the past.
Moving beyond injunctions, the testimony of the President of the AAI addressed excessive patent infringement litigation, SSOs, and the failure of some entities to engage in FRAND licensing for SEPs. Echoing my earlier articles, the AAI correctly observed that “[u]nfortunately, FRAND has no agreed-upon minimal meaning, which leads to expensive, drawn out, and largely unnecessary litigation.” Thus, the AAI testimony included 12 “observations” about competition policy and SSOs. I now highlight what I believe to be the six most salient proposed solutions from the AAI observations in the hopes that SSOs, lawmakers, policy makers, and those that are able to influence them are reading:
- The DOJ and the FTC should issue joint guidelines on SSOs and FRAND with input from the ITC, USPTO and USTR, while working with the European Commission and other major trading nations to maximize international harmonization.
- Federal antitrust law should impose liability on SSOs who fail to implement procedures aimed at preventing abuse of its processes because “too many SSOs have been slow to embrace any such effort or even to consider the continued adequacy of their longstanding patent policies as protections against patent holdup outcomes in their standards.”
- The concept of FRAND should be standardized such that all SSO patent policies would discuss what constitutes “unreasonable price; other unreasonable conditions; assuring that subsequent owners are bound by prior owners’ commitments; arbitration of disputes; and limitations on the use of injunctions.”
- All FRAND determinations should “rest on ex ante incremental value rather than ex post total market value [and] the royalty base should be the smallest affected component rather than the entire device.”
- “FRAND should imply that acquirers of SEPs should be required to fully adhere to prior owners’ public commitments to SSOs or others to license on FRAND terms.”
- “FRAND should imply a commitment to arbitrate disputes on the application of the FRAND commitment.”
If these six solutions were implemented would we see a situation where, just between Apple and Samsung, for example, there are about 50 patent infringement suits pending in 10 countries!? Probably not.
My next (and last) article – as this is the fifth in a six-part series – will explore the status of the global smart phone patent wars, including an update on Microsoft v. Motorola, the Seattle-based U.S. District Court case I discussed in my third article where Judge Robart ordered a mini-trial to decide the FRAND reasonableness of Motorola’s demand for “a reasonable royalty, of 2.25% per unit for each [801.11 and H.264] compliant product, … calculated based on the price of the end product (e.g., each Xbox 360 product, each PC/laptop, each smartphone, etc.) and not on component software (e.g., Xbox 360 system software, Windows 7 software, Windows Phone 7 software, etc.).”