The following is a guest blog written by Timothy Muris, a Foundation Professor of Law at George Mason University’s Antonin Scalia Law School and Senior Counsel at Sidley Austin LLP.
The smartphone is a testament to the creative minds and herculean cooperation that transformed our personal and professional lives. Yet more than 250,000 patents may be used in a single smartphone, revealing the thicket of patents companies must navigate to bring new innovations to market in patent-intensive industries. The result has been endless intellectual property (IP) litigation, the “smart phone wars” dubbed by the press.
A well functioning patent system promotes economic growth; indeed, strong patents are essential for economic sectors such as life sciences. They foster innovation, create jobs, and grow our economy. IP litigation is a natural element of any robust patent system, and the US government and industry are rightfully concerned about whether patent rights are protected adequately outside the United States.
But our patent system is hardly perfect. The proliferation of patents that the smartphone illustrates – many of little or of no inventive value – presents a daunting coordination challenge for industries where interoperability or compatibility is critical. To work effectively, the private sector has developed industry standards that let products from different companies interoperate and allow seamless interaction in those products of different features using different standards. Thus, today’s smartphone incorporates numerous features, each manufactured to a separate industry standard. Unfortunately, the desire for interoperability using common industry standards makes technology companies vulnerable to patent “holdup.”
The holdup problem is now well known. Once an industry standard is widely accepted, makers of products that adhere to that standard use the patented technology that the standard-setting organization has declared to be “standard essential.” Given the high cost of switching from a standard once an industry commits to it – and becomes locked in – a firm offering products in this industry will have little choice but to use the standard technology. A weak patent with cheap substitutes becomes an essential patent merely by its inclusion in the standard. One form of patent holdup arises when the owners of standard essential patents (SEPs) exploit their new-found leverage to demand licensing rates that reflect the high switching costs rather than the lower intrinsic value of their patents.
Businesses have not waited patiently for the patent system to fix this holdup problem. Instead, standard-setting organization require holders of SEPs to commit contractually to limit how patents will be enforced. These commitments include fair, reasonable, and nondiscriminatory (FRAND) licenses consistent with competition when the standard was set. These FRAND commitments thus seek to avoid patent holdup after industry standards are “locked” into specific technologies.
Besides these contractual commitments, technology companies could protect themselves by MAD: Mutually Assured Destruction by which firms could secure a broad portfolio of patents to deter excessive patent litigation and holdups with threats of counter-lawsuits. But markets evolve as even legal markets do. In this century, we witnessed a new breed of patent litigators with patents acquired by assertion entities that can monetize and then exploit even weak patents without fear of counterattack. And ownership of SEPs have been divided and subdivided among these assertion entities – in part to evade FRAND commitments.
Yet the bulk of the proliferation of non-practicing entities and surge in actual or threatened patent litigation contribute no innovation to our society. Rather, they exploit the patent system’s weakness to hold up the companies that do in fact innovate in high-technology industries. They extract a toll or tax on companies’ past efforts and future innovation. Higher prices and less innovation result.
What can be done? I published an article with the American Enterprise Institute describing promising bi-partisan steps already taken to address the patent system’s problems. Under my leadership, the Federal Trade Commission held 24 days of hearings, resulting in a detailed report that documented the strengths and weaknesses of the patent system, including the numerous questionable patents in computer hardware and software industries that created a patent thicket that must be overcome to innovate. Our report was followed by National Academy of Sciences reports, criticizing the proliferation of patents, particularly in emerging technology industries. The common theme of these studies was not to attack the patent system, but to seek to improve it.
These dual studies during the Bush Administration laid the foundation for patent reforms that followed, with the Supreme Court and Congress taking strong steps to improve the patent system. Congress properly focused on patent reform, with hearings that culminated in the America Invests Act in 2011, with significant reforms to patent law. The Supreme Court has led efforts to reform the patent laws, with eBay Inc. v. MercExchange LLC, 547 U.S. 388 (2006), one of the most important decisions. Under then-existing law, a finding of infringement meant a patent holder automatically could get an injunction to prevent the infringing party from operation. The Supreme Court ruled instead that a patent owner seeking an injunction must satisfy the normal four-part test, including a showing for why money damages would not be an adequate remedy. This decision was transformative. For industries subject to patent holdup, the right to an automatic injunction escalated the leverage of the patent holder, particularly when the patent was just one of thousands implicated by industry standards.
These reforms did not attack IP rights. Rather, they sought to promote innovation by curtailing the ability of patent holders with even weak patents to engage in various forms of patent holdup, such as abandoning contractual FRAND commitments to exploit market power created, not by the intrinsic value of their patent, but by its inclusion within a broader industry standard. Even market oriented defenders of the patent system can’t ignore the problems from the proliferation of patents and holdup. As the Wall Street Journal editorialized, some “free-market friends are so attached to patents as a vanguard of private property in theory that they ignore that the Patent Office is vulnerable to the usual failings and perverse incentives of any government bureaucracy.”
More needs to be done to protect our technology industries from the anticompetitive effects of patent holdup. Contract remedies or further advances in patent law alone will not control all of the anticompetitive effects from patent holdup in patent-intensive industries.
As my AEI report discusses, our federal antitrust laws serve an important role too, and the Bush and Obama Administrations attacked patent holdup. Those laws can provide an added deterrent to anticompetitive behavior by patent holders who lie silent while their usually low-valued patents (due to competitive alternatives) are incorporated within industry standards, only to leap from the undergrowth with demands for excessive compensation for those patents once the industry is locked into a particular standard. Indeed, the antitrust laws already make it unlawful for a company to deceive a standard-setting body with a FRAND commitment that it will then flout.
The proper evolution in antitrust policy is for the courts to find violations of the antitrust laws based on violations of FRAND commitments that meet the stringent requirements of the antitrust laws, without any required showing of deceptive intent. This is a natural next step for two reasons. First, the harm to competition from FRAND breaches does not depend on deception at the time of standard setting. Modern antitrust law hinges Section 2 liability on competitive effects, not intent. Second, demanding a showing of deceptive intent would simply encourage the patent holder to transfer the patent to another entity who – having no original deceptive intent – could then breach the FRAND commitment with impunity from the antitrust laws.
By focusing on how breaches of FRAND commitments can harm competitive markets, the antitrust laws can assist contract and patent laws in deterring anticompetitive holdups. Using all three bodies of law to hold firms to their FRAND commitments will foster innovation, investments, and growth in technology sectors that are crucial to our modern economy. Further attention to patent holdup in the Trump administration is warranted and would continue the bipartisan focus on this vital issue.
Timothy J. Muris is a Foundation Professor of Law at George Mason University’s Antonin Scalia Law School and Senior Counsel at Sidley Austin LLP. This report implicates three aspects of his professional career, as an academic, a government official, and an adviser to various businesses. In particular, the Federal Trade Commission’s (FTC) 2003 report on the patent system, which helped launch modern efforts to reform that system, was issued when he was Chairman, as were some of the cases discussed herein involving standard setting and patent holdup. Since leaving the FTC, he remained active on these issues both as a scholar and expert, with the latter primarily involving work he has done for Intel.
ACT | The App Association represents more than 5,000 app companies and information technology firms across the mobile economy. The App Association advocates for an environment that inspires and rewards innovation, while providing resources to help app developers and technology companies leverage their intellectual assets to raise capital, create jobs, and continue innovating. Patents and technology standards are critical to driving competition and supporting the success of innovators throughout the software and mobile computing ecosystems. The App Association established the All Things FRAND initiative to underscore the importance of this issue and provide a resource to industry leaders, government officials, and academics who are interested and engaged in this topic.