Published: May 4, 2017
Publication: American Enterprise Institute
(Tim Muris is a Foundation Professor of Law at George Mason University’s Antonin Scalia Law School, Senior Counsel at Sidley Austin LLP, and was chair of the U.S. Federal Trade Commission from 2001 to 2004. He published a report with the American Enterprise Institute titled “Bipartisan Patent Reform and Competition Policy.” A summary appears here.)
Innovation vs. Stifled Competition
As an academic, a government official, and an industry adviser for several decades, I have marveled at how a vibrant U.S. patent system boosts our economy—and leads the world—with technological creativity, innovation, and growth.
At the same time, I have seen bad actors abuse the patent system in ways that stifle competition in the smartphone industry and extort unearned “royalties.”
The FTC, under my direction, began an analysis of the patent system in 2001. Since then, with the participation and bipartisan support of others in government, the courts, and the private sector, the patent system has improved—but more work remains to be done.
Problems From a ‘Thicket’ of Patents
In a recently completed analysis of patent reform and competition policies, I noted how more than 250,000 patents may be used in the production of a smartphone. Patents, of course, have numerous benefits for patent holders. But while patents are granted for significant innovations— a large number of patents with little inventive value have also been granted.
Proliferation of these weak patents creates three major problems. First, to develop commercially viable products relying on industry standards, manufacturers can become locked in to using weak patents claimed essential for the standard. Evan a valid patent, once locked into a standard, can demand royalties in excess of inventive value.
Second, innovation is taxed improperly as holders of the weak patents exploit the system’s weaknesses to demand royalties that do not reflect inventive value.
And third, as our legal system has been unable to cope adequately with a thicket of patents, many of them weak, companies have resorted to the defensive and expensive accumulation of patent portfolios to defend themselves against infringement suits and countersuits.
It’s an arms race. It’s largely unfair. And it has little to do with innovation.
Patent Reform
In industries in which interoperability or comparability is important—for example, telephony, computers, and other technology products—the ability of competing products from multiple manufacturers to work seamlessly with one another generates substantial benefits.
Patent holdup hinders these benefits. Even a patent with little, incremental inventive value can be used to hold up an entire industry if incorporated into a standard and difficult-to-avoid ex post.
Concern about the adverse effects of patent holdup has led to renewed interest in understanding the system’s benefits and costs. Ideal reform, of course, would strengthen patents when they encourage innovation and make patent enforcement more difficult for weak patents.
Making progress, the courts and Congress now recognize how the system’s benefits and costs differ by industry. U.S. law is also moving to keep patents strong for inventions and industries in which the system works well, while making patents much less plaintiff friendly when the benefits do not outweigh the costs.
Still, more progress is needed.
The Antitrust Argument
It’s not just about patent reform.
In a positive step, antitrust cases have attacked anticompetitive conduct related to patents included in industry standards, violations of standard setting organization (SSO) patent policies, and FRAND commitments.
For industry standards with interoperability, competition between different technological approaches ends once an SSO selects a particular technology to develop a standard. At that point, the industry becomes “locked in” and an owner of the selected technology can demand licensing fees beyond what is reflected in the inventive value of the patent.
This kind of behavior can be anti-competitive, allowing monopolies in technology markets. And the existing case law agrees.
In Broadcom v. Qualcomm, the court found that allegations of misconduct during standard setting presented an antitrust claim. Part of the case involved an allegation that technology owned by Qualcomm would not have been included in the standard setting process had it not been for the FRAND commitments the company had made.
There are multiple cases involving Qualcomm: the Taiwanese government fined Qualcomm more than $700 million on competition grounds. The company has been fined for competition violations in South Korea—and has paid a fine in China. Qualcomm is currently embroiled in a suit filed by the U.S. Federal Trade Commission over its licensing practices.
All of these enforcement actions are based at least in part on how Qualcomm licenses its patents deemed essential to certain smartphone standards.
You may read the full paper here.