The response by Hewlett Packard’s associate general counsel Paul Roeder to my essay supporting the International Trade Commission’s exclusion of imports that infringe U.S. patents brings to mind the classic George Orwell novella Animal Farm. In that allegorical tale, Orwell depicts how power quietly corrupts the leaders of a revolution, turning them into a self-satisfied hegemony that creates new rules and privileges for itself at the expense of everyone else.
But before I explain the relevance of Animal Farm to Mr. Roeder’s response, let me first reiterate what’s at stake in the efforts by HP and the other members of the self-described “ITC Working Group” to limit the enforcement powers of the International Trade Commission (ITC).
The ITC has the power under Section 337 of the Tariff Act of 1930 to prevent products that infringe U.S. intellectual property rights from being imported into the United States. Given that some foreign countries have economic ecosystems in which labor is cheap and IP protection is almost non-existent — a situation that many U.S. companies now benefit from, thanks to offshoring — the Section 337 process exists to fight unfair competition from such importers by excluding their goods from the U.S. if these products infringe American patents.
Mr. Roeder’s employer, Hewlett Packard, today ranks 11th on the Fortune 100, with profits last year in excess of $8.7 billion. Like a number of companies in the high-tech importer lobby, HP benefits quite handsomely by manufacturing its products in nations that disdain IP. Many of these companies also make little or no effort to obtain licenses for American patented technology before importing their foreign-manufactured goods.
As much as these companies might like to avoid talking about unfair competition and intellectual property rights, their lobbying activities have now thrust to the forefront a new public policy question: Should the U.S. Congress change existing law to make it easier for companies — whether they be Chinese exporters or U.S. firms that offshore manufacturing — to engage in unfair competition by bringing infringing products into our market?
That’s what’s really at issue here. What’s troubling is that Hewlett Packard itself, the original startup headquartered in a garage, was one of the earliest and most-respected leaders of the 20th Century high-tech revolution that had its epicenter in Silicon Valley. It was William Hewlett who gave a 13-year-old Steve Jobs spare parts for a device Jobs was building — and a summer job as well. And it was Mr. Hewlett and his executive heirs who insisted that HP conscientiously patent its breakthrough innovations and fight against those that infringed those patents. HP today earns hundreds of millions of dollars annually by licensing its patent rights to others — according to IAM magazine, “at any one time, HP has about 150 licensing transactions in process.” And as the court dockets show, it certainly isn’t shy about filing suit against infringers who refuse to take a license.
Yet to judge from Mr. Roeder’s essay, HP is now trying to excuse itself from the bedrock rules of respect for intellectual property that it insists everyone else must follow. These bedrock IP principles include:
- no patent holder is required to manufacture products that practice the patent,
- the value of a patent is determined by the usefulness of the innovation it discloses, not by the identity or business model of its owner,
- patents are freely transferable property, and
- patent infringement is a strict liability tort (i.e., infringement need not be willful).
There is no reason to undo these time-tested fundamental principles. Nor should we change the rules to convenience a handful of former high-tech revolutionaries who now rule the commercial roost. Yet in his response to my essay, Mr. Roeder makes a number of claims and proposals that would do just that. Let me address some of the more striking claims:
Claim: The ITC Caseload is in Crisis.
This is simply not true. Offshoring by U.S. tech giants continues to increase, and as a result, so has the number and variety of high-tech products being imported, marketed, and sold in the U.S. Is it any surprise that as the number of imported products manufactured in cheap labor, IP-disdainful countries increases, so have the number of infringement cases brought to the ITC? The ITC has allocated resources to deal with the increased workload, and ITC officials are continuing to manage the agency’s important work efficiently and effectively. The sky is not falling. The ITC is doing what Congress intended.
Claim: The ITC Waives Its Jurisdictional Requirements for Licensors.
Mr. Roeder claims that the ITC waives its jurisdictional requirements for patent licensors — not true. From my perspective, the ITC takes its jurisdictional requirements with the utmost seriousness.
The essential jurisdictional requirement is that a complainant at the ITC must be a “domestic industry.” To proceed in a patent-based claim in the ITC, a complainant must establish that an industry “related to the articles protected by the patent … exists or is in the process of being established” in the United States. 19 U.S.C. § 1337(a)(2). Importantly, the Tariff Act of 1930 was amended in 1988 to specifically mention licensing as one such domestic industry. 19 U.S.C. § 1337(a)(3) states that such an industry …
“shall be considered to exist if there is in the United States, with respect to the articles protected by the patent . . . concerned-
(A) significant investment in plant and equipment;
(B) significant employment of labor or capital; or
(C) substantial investment in its exploitation, including engineering, research and development, or licensing.”
The ITC has not waived or abandoned this requirement. The ITC has repeatedly reaffirmed that complainants must first establish that there is a nexus between the relied-upon investment activities and the asserted patents; that the investment relates to licensing; and that the investment occurred in the United States. The complainant must additionally show that the qualifying investments are “substantial.” See, for example, Certain Liquid Crystal Display Devices, Including Monitors, Televisions, and Modules, and Components Thereof, Inv. No. 337-TA-749, Initial Determination at 410 (February 27, 2012).
Claim: Congress Meant to Include Only One Special Type of “Licensing.”
Mr. Roeder claims that Congress intended that only patent licensing activities meant to bring a non-existent new product to market qualify for ITC jurisdiction under the Tariff Act. Any licensing activities directed towards existing products, he insists, do not.
But Mr. Roeder does not acknowledge, as he should, that after extensive review (including consideration of briefs filed by Cisco, Google, Hewlett Packard and others), the ITC explicitly rejected his very argument two years ago in Certain Coaxial Cable Connectors and Components Thereof and Products Containing Same, Inv. No. 337-TA-650, Commission Opinion at 49-50 (April 14, 2010). In that ruling, the ITC said that “licensing” meant “licensing” — i.e., for purposes of establishing the “domestic industry” requirement, “the plain language of the statute does not limit the types of licensing activities that the Commission can consider.”
But just in case anyone was unclear on its meaning, the ITC went on to specifically and pointedly reject the argument now put forward by Mr. Roeder. It wrote:
“Congress simply provided that an industry exists if there is ‘substantial investment in … exploitation [of the patent], including … licensing.’ The dictionary definition of the term ‘exploit’ is (1) ‘to put to productive use’ and (2) ‘to take advantage of.’ Thus, in ordinary usage, the term ‘exploitation’ would cover licensing activities that ‘put [the patent] to productive use’, i.e., bring a patented technology to market, as well as licensing activities that ‘take advantage of’ the patent, i.e., solely derive revenue.”
Claim: Patent Infringement Must be Willful to be Actionable.
Mr. Roeder also complains that in some ITC actions, patent holders “assert patents they claim read on products independently created and commercialized by others [who had] no knowledge of these patents or so-called ‘inventors.’” If taken seriously, this complaint is a direct attack on the essential legal nature of a patent, the infringement of which, it has long been settled, is a strict liability tort. Patent infringement may occur willfully or not. It need not involve deliberate copying or similarly-willful behavior.
But since the question of whether infringement is willful or not is on the table, let’s explore what that term actually means in the real-world of corporate practice. As any number of product managers, engineers, and patent attorneys can attest¸ a standard operating procedure at many high-tech giants is to avoid doing any serious prior art searching or product clearance work before bringing a product to market. This is precisely so that they won’t uncover existing patented technology whose use would require a license.
Why? Because the risk that a patent holder would (a) even find out about the infringement, and then (b) have the millions of dollars needed to enforce the patent in court is far outweighed by the benefits of racing the product to market without any cumbersome licenses.
That’s why industry insiders call this practice “efficient infringement” — it’s simply more efficient and cost-effective to infringe than to take a license, given the low risk that they’ll ever get caught and have to pay.
Claim: Patents are Holding Up Entire Industries.
Mr. Roeder claims that “Ford, GM, and every other auto maker” are being held up by patent holders. Please! The last I looked, autos were freely available everywhere, and the Big 3 were announcing strong earnings again.
As Forbes magazine noted on February 17, 2012, “GM has rewarded America’s generosity with a record financial report for 2011. Its net income of $7.6 billion was 62 percent above its 2010 result. And that profit — along with solid margins at GM’s peers — forms the basis for an increase in the auto industry workforce after a huge plunge.”
Claim: It is Wrong to Patent Features or File Continuation Applications.
Mr. Roeder complains bitterly about the “avalanche” of cases that exist “because the PTO issues hundreds, if not thousands of patents that can be asserted against every minute feature and functionality of tech products and services.” He also bemoans the frequency of continuation applications. Yet it’s hard to take his complaints seriously given HP’s own prolific patenting practices, which include patenting features and functionalities, as well the filing of continuation applications. Is it his view that that non-manufacturers should be condemned for following the very same patenting practices that HP pursues? Are we to take seriously the notion that HP is being victimized?
When the animals rose up in revolution in Animal Farm, they adopted the democratic law that “all animals are equal.” But before long the revolution’s leaders had become incumbents who dearly liked their power and privileges. So they changed the law to say, “All animals are equal, but some animals are more equal than others.”
It would not surprise Orwell that HP and its allies — startup revolutionaries not so long ago — now want to change ITC law to say in effect that, “All patent holders are equal, but some patent holders” — i.e., those who manufacture — “are more equal than others.”