Category: Remedies

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Copyright Innovation Internet Remedies Uncategorized

Protecting Artists from Streaming Piracy Benefits Creativity and Technology

Here’s a brief excerpt of an op-ed by Devlin Hartline & Matthew Barblan that was published in The Hill:

In his recent op-ed in The Hill, Mike Montgomery argues that “[m]aking streaming copyright infringement a felony is a terrible idea” that will create “further rifts between tech and entertainment at a time when these two sectors are not only reliant upon one another, but melding.” While it’s true that the line between art and technology has become less discernable, it’s simply false that creating felony penalties for criminal streamers will put a wedge between the two. Instead, protecting artists and authors from such criminal enterprises serves to level the playing field so that honest creators and innovators can work together even more closely.

To read the rest of this op-ed, please visit The Hill.

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Administrative Agency Copyright High Tech Industry Innovation International Law Internet Inventors ITC Patent Law Remedies Software Patent Trademarks Uncategorized

Digital Goods and the ITC: The Most Important Case That Nobody is Talking About

circuit boardBy Devlin Hartline & Matthew Barblan

In its ClearCorrect opinion from early 2014, the International Trade Commission (ITC) issued cease and desist orders preventing the importation of infringing digital goods into the United States. The ITC’s 5-1 opinion has since been appealed to the Federal Circuit, with oral argument scheduled for the morning of August 11th, and the case has drawn a number of amicus briefs on both sides. Despite receiving little attention in media or policy circles, the positive consequences of the ITC’s decision are significant.

This case is important because the problem of the importation of infringing digital goods continues to grow. The ITC’s authority over digital goods can be a powerful tool for creators and innovators against a threat that has only gotten worse, and it would permit the ITC to go about doing what it’s always done in the intellectual property space—protecting our borders from the threat of foreign infringing goods. Interestingly, a look at the proceedings in the ITC and the briefs now before the Federal Circuit reveals how some parties now opposing the ITC’s authority over digital goods had argued for the opposite just a few years back.

The ITC Proceedings

This case began in March of 2012, when Align Technology Inc. filed a complaint with the ITC alleging that its only competitor, ClearCorrect Operating LLC, violated Section 337 of the Tariff Act of 1930 by importing digital goods that infringed several of its orthodontic patents. Section 337, codified at 19 U.S.C. § 1337, makes unlawful the “importation . . . of articles” that infringe “valid and enforceable” patents, copyrights, or trademarks, and it declares that the ITC “shall investigate any alleged violation of this section on complaint under oath or upon its initiative.”

There are two statutory remedies available to a complainant in an ITC proceeding. The first is an exclusion order, which dictates that “the articles concerned . . . be excluded from entry into the United States.” Exclusion orders are issued by the ITC and enforced by the U.S. Customs and Border Protection. The second remedy is a cease and desist order, which directs any person violating Section 337 “to cease and desist from engaging in the unfair methods or acts involved.” The ITC enforces its own cease and desist orders through the imposition of civil penalties, recoverable in the federal district courts.

Align’s complaint with the ITC involved its patented Invisalign System, a “proprietary method for treating crooked and misaligned teeth” using modern plastic aligners instead of old-fashioned metal braces. Align alleged that ClearCorrect violated Section 337 by importing “digital models, digital data and treatment plans that . . . infringe or induce infringement of” its patents, and it asked the ITC to “issue permanent cease and desist orders” prohibiting ClearCorrect from importing the digital files. In response, ClearCorrect argued that “no articles” had been imported since the digital data associated with the teeth aligners were not themselves “articles.”

This was the primary bone of contention: The ITC only has statutory authority over the “importation . . . of articles,” and if digital goods are not “articles,” then the ITC has no jurisdiction. After an administrative law judge (ALJ) determined that the digital files at issue were indeed “articles” within the meaning of Section 337, ClearCorrect petitioned the ITC to review that determination. The ITC took the case and solicited comments from the public as to whether electronic transmissions are “articles” under Section 337.

The ITC ultimately sided 5-to-1 with Align. On the threshold issue of whether electronic transmissions constitute “articles” under Section 337, the ITC affirmed the ALJ’s conclusion that they do: “[T]he statutory construction of ‘articles’ that hews most closely to the language of the statute and implements the avowed Congressional purpose for Section 337 encompasses within its scope the electronic transmission of the digital data sets at issue in this investigation.” This was consistent, said the ITC, with the “legislative purpose . . . to prevent every type of unfair act in connection with imported articles . . . and to strengthen protection of intellectual property rights.”

Appeal to the Federal Circuit

Having lost at the ITC, ClearCorrect appealed to the Federal Circuit. There, it focused its arguments on the statutory question of whether digital goods constitute “articles” under Section 337.

Public Knowledge and the Electronic Frontier Foundation (EFF) filed an amicus brief calling the ITC’s decision “sweeping and unprecedented,” and they urged the Federal Circuit to reject the ITC’s “overzealous construction” of the term “articles.” Aside from the statutory issue, the digital rights groups suggested that there were “important reasons” why Section 337 “ought not cover telecommunications.” They stressed the “real and unanswered questions about the enforcement role” ISPs would play, and they noted how ISPs “could be required to actively block transmission of certain content.”

It’s worth noting that no ISPs were involved in the ClearCorrect litigation—only ClearCorrect itself was subject to a cease and desist order. But this ISP question seems to be the reason why the case drew their attention: The real concern wasn’t whether ClearCorrect had infringed Align’s patents; it was whether the ITC had the authority to issue cease and desist orders to ISPs. This sentiment was echoed in an amicus brief by the Internet Association, which includes Google, arguing that the internet “should not be restricted to national borders” because of “the unforeseeable but far-reaching results that would follow.”

The policy arguments made by Public Knowledge, the EFF, Google, and others were essentially circular: The internet should be “open” so we shouldn’t let the ITC “close” it. But that begs the question of what the ideal “open” internet looks like, and what illegal activities should or should not be tolerated in the digital space. We shut our borders to infringing physical goods. What makes infringing digital goods so special? A right is only as good as the remedies available to enforce it, so why should we give short shrift to the property rights of artists, creators, and innovators?

Align’s intervenor brief took the groups to task: “The amici briefs supporting ClearCorrect brim with hyperbole.” Align noted that the ITC “only asserts jurisdiction over the ‘articles” that are electronically transmitted, not over all acts of transmission.” It pointed out that it is the “owner, importer, or consignee” of the “articles” that violates Section 337, not the carrier, and it said that the claim that the ITC could issue cease and desist orders against ISPs for “data transmission activities” is “baseless.”

Supporting the ITC’s understanding of “articles,” an amicus brief filed by the Association of American Publishers explained that the ITC’s “authority over electronically transmitted copyrighted works is critical because . . . there has been rapid growth in digital publications.” It pointed to the rise in digital piracy “at the expense of U.S. creators and innovators.” It urged that affirming the ITC’s decision was “crucial” since it “will help ensure that unfair trade practices abroad do not harm the livelihoods” of those that “rely on copyright protection.”

An amicus brief filed by Nokia supporting the ITC also noted the importance of protecting intellectual property: “Stripping the Commission of its long-exercised authority over electronic transmissions could gravely damage the protection of valid patent rights through Section 337 investigations.” It pointed out that holding otherwise would lead to “absurd results” since the ITC would have jurisdiction over software “imported on a USB stick or CD-ROM” but not software disseminated by “electronic transmission.” Such a result would be “wholly contrary to the remedial purpose of Section 337.” Nokia concluded that the ITC’s “authority should not wax and wane as technology develops new methods of dissemination.”

The MPAA and the RIAA likewise submitted an amicus brief supporting the ITC. The industry groups pointed out that “illegal downloads and illegal streaming” account for most of the infringement losses they suffer, and they argued that “copyright protection is essential to the health” of their industries. They urged the Federal Circuit to affirm the ITC because “Section 337 is a powerful mechanism for stopping illegal electronic imports,” and doing so “would give effect to the intent of Congress that Section 337 protect U.S. industries from all manner of unfair acts in international trade.”

Who has the better argument here? Obviously, both sides argued that the text of Section 337 favored their positions. ClearCorrect and its supporters claimed that “articles” should be interpreted narrowly to include only tangible goods, while the ITC and its supporters wanted a read of the statute that allows the ITC to continue to fulfill its mission even as new technology and methods of trade become more common. What may come as a surprise, however, is that many of the groups now seeking to limit the ITC’s jurisdiction were arguing just the opposite a few years ago.

Remember the OPEN Act?

It may seem like ages ago, but it’s been less than four years since Congress debated the Stop Online Piracy Act (SOPA) and the PROTECT IP Act. Those two bills would have explicitly afforded artists and creators robust tools to use in the federal district courts against foreign rogue sites that aim their infringements at the United States. Many vocal opponents of the bills supported an alternative approach: the OPEN Act. Under the OPEN Act, the ITC would have been given explicit authority to investigate complaints against foreign rogue sites that import infringing digital goods into the United States.

The OPEN Act’s sponsors set up a website at keepthewebopen.com where members of the public could see the text of the bill and suggest changes to it. The website included an FAQ to familiarize supporters with the thinking behind the OPEN Act. As to why online infringement was an issue of international trade, the FAQ pointed out that “there is little difference between downloading a movie from a foreign website and importing a product from a foreign company.”

When advocating for the OPEN Act as a good alternative to SOPA and the PROTECT IP Act, the bill’s sponsors touted the ITC as being a great venue for tackling the problems of foreign rogue sites. Among the claimed virtues were its vast experience, transparency, due process protection, consistency, and independence:

For well over 80 years, the independent International Trade Commission (ITC) has been the venue by which U.S. rightsholders have obtained relief from unfair imports, such as those that violate intellectual property rights. Under Section 337 of the Tariff Act of 1930 – which governs how the ITC investigates rightsholders’ request for relief – the agency already employs a transparent process that gives parties to the investigation, and third party interests, a chance to be heard. The ITC’s process and work is highly regarded as independent and free from political influence and the department already has a well recognized expertise in intellectual property and trade law that could be expanded to the import of digital goods.

The Commission already employs important safeguards to ensure that rightsholders do not abuse their right to request a Commission investigation and the Commission may self-initiate investigations. Keeping them in charge of determining whether unfair imports – like those that violate intellectual property rights – [sic] would ensure consistent enforcement of Intellectual Property rights and trade law.

Some of the groups now arguing that the ITC shouldn’t have jurisdiction over digital goods openly supported the OPEN Act. Back in late 2011, the EFF stated that it was “glad to learn that a bipartisan group of congressional representatives has come together to formulate a real alternative, called the OPEN Act.” The EFF liked the bill because the “ITC’s process . . . is transparent, quick, and effective” and “both parties would have the opportunity to participate and the record would be public.” It emphasized how the “process would include many important due process protections, such as effective notice to the site of the complaint and ensuing investigation.”

Google likewise thought that giving the ITC jurisdiction over digital goods was a great idea. In a letter posted to its blog in early 2012, Google claimed that “there are better ways to address piracy than to ask U.S. companies to censor the Internet,” and it explicitly stated that it “supports alternative approaches like the OPEN Act.” Google also signed onto a letter promoting the virtues of the ITC: “This approach targets foreign rogue sites without inflicting collateral damage on legitimate, law-abiding U.S. Internet companies by bringing well-established International trade remedies to bear on this problem.”

Conclusion

The ITC has been protecting our borders against the importation of infringing goods for nearly a century now. As technology and trade evolves, it makes perfect sense to let the ITC continue to do its job by protecting our borders against the importation of infringing digital goods. This is an important tool for our innovators and creators in combating the ever-growing flood of foreign infringing goods.

The fact that many of those who supported the OPEN Act are now supporting ClearCorrect suggests that for them this appeal isn’t really about whether digital goods are “articles” under Section 337. The ITC is an appropriate venue for all of the reasons the supporters of the OPEN Act publicized just over three years ago: The process is transparent, there’s ample due process protections, the commissioners are experienced and independent, and their decisions are consistent.

As the 5-1 opinion suggests, affirming the ITC’s decision should be an easy choice for the Federal Circuit. Let’s hope the Federal Circuit does the right thing for our artists and innovators.

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Copyright Injunctions Internet Remedies Trademarks Uncategorized

CloudFlare Enjoined From Aiding Infringers: Internet Unbroken

Just how far does a court’s power to enjoin reach into cyberspace? It’s clear enough that those directly posting or hosting infringing content are subject to an injunction. But what about a company such as CloudFlare that provides content delivery network and domain name server services? Does an injunction under Rule 65 against anyone acting in “active concert or participation” with an online infringer apply to an internet infrastructure company such as CloudFlare? CloudFlare recently argued that its service is “passive” and untouchable, but a district court vehemently—and rightly—disagreed.

The controversy started with the shutdown of the Grooveshark music streaming service pursuant to a settlement agreement with the major record label plaintiffs this past April. Back in September of 2014, Grooveshark and its two founders were found directly and indirectly liable for copyright infringement. After the district court held that their infringement was “willful,” thus subjecting them to potential statutory damages exceeding $736 million for the 4,907 works-in-suit, they consented to paying $50 million in damages and shutting down the grooveshark.com site rather than risk it with a jury.

But the demise of Grooveshark was short-lived, and just days after publicly apologizing for failing “to secure licenses from right holders,” two copycat sites popped up at different top-level domains: grooveshark.io and grooveshark.pw. The record label plaintiffs filed a new complaint and obtained ex parte relief, including a temporary restraining order (TRO), against the new sites. Upon receipt of the TRO, Namecheap, the registrar for both sites, disabled the .io and .pw domain names. When another copycat site was established at grooveshark.vc, the domain name was quickly disabled by Dynadot, the registrar, after it received the TRO.

Undeterred, the defendants publicly taunted the plaintiffs and registered yet another copycat site at grooveshark.li. Rather than continuing this global game of domain name Whac-A-Mole, the plaintiffs served the TRO on CloudFlare, the service utilized by the defendants for each of the infringing domains. And this is where things got interesting. Rather than swiftly complying with the TRO, as the domain name registrars had done, CloudFlare lawyered up and contended that it was beyond the court’s reach.

In its briefing to the court, CloudFlare argued that it played merely a passive role for its customers—including the defendants and their copycat site—by resolving their domain names and making their websites faster and more secure. CloudFlare disavowed the ability to control any content on the copycat site, and it denied that it was in active concert or participation with the defendants:

Active concert requires action, and CloudFlare has taken none. Participation means assisting a defendant in evading an injunction. CloudFlare has not so assisted defendants and, in fact, has no ability to stop the alleged infringement. Even if CloudFlare—and every company in the world that provides similar services—took proactive steps to identify and block the Defendants, the website would remain up and running at its current domain name.

CloudFlare did not deny that the defendants utilized its services; it instead argued that the TRO would not remove the infringing site from the internet. Thus, CloudFlare’s position hinged on its own passivity and on the futility of enjoining it from providing services to the defendants.

A moment’s reflection reveals the superficiality of this position. The fact that CloudFlare had no control over the content of the copycat site was not dispositive. The question was whether CloudFlare aided the defendants, and there was no doubt that it did. It was not only the defendants’ authoritative domain name server, it also optimized and secured their copycat site. That the defendants could have used other services did not erase the fact that they were using CloudFlare’s services. And once CloudFlare was served with the TRO and made aware of the copycat site, its continued provision of services to the defendants constituted active concert or participation.

CloudFlare’s policy arguments were similarly unpersuasive. It suggested that the TRO “would transform a dispute between specific parties into a mandate to third parties to enforce” the plaintiffs’ rights “against the world in perpetuity.” Of course, that is not what happened here. The question was not who else in the world the TRO reached; the question was whether the TRO reached CloudFlare because it aided the defendants.

CloudFlare further argued that it could not be enjoined because “Congress explicitly considered and rejected granting such authority to the courts with respect to Internet infrastructure providers and other intermediaries for the purpose of making a website disappear from the Internet.” To enjoin it, CloudFlare proposed, would be to pretend that the Stop Online Piracy Act (SOPA) “had in fact become law.” This argument, however, completely ignored the fact that courts have long been empowered to enjoin those in active concert or participation with infringers.

In reply, the record label plaintiffs rebuffed CloudFlare’s claim that it was not aiding the defendants: “CloudFlare’s steadfast refusal to discontinue providing its services to Defendants – who even CloudFlare acknowledges are openly in contempt of this Court’s TRO – is nothing short of breathtaking.” They pointed to how CloudFlare continued to aid the defendants, even after being on notice of the TRO: “[T]he failure of an Internet service provider to stop connecting users to an enjoined website, once on notice of the injunction, readily can constitute aiding and abetting for purposes of Rule 65.”

In the real world, CloudFlare markets the benefits of its services to its customers. It touts its content delivery network as delivering “the fastest page load times and best performance” through its “34 data centers around the world.” It boasts having “web content optimization features that take performance to the next level.” It offers robust “security protection” and “visitor analytics” to its customers. And its authoritative domain name server proudly serves “43 billion DNS queries per day.” But when it came to the defendants’ copycat site, it claimed to be a “passive conduit” that in no way helped them accomplish their illicit goals. This disingenuousness is, to borrow the plaintiffs’ term, “breathtaking.”

District Judge Alison J. Nathan (S.D.N.Y.) made short work in rejecting CloudFlare’s shallow denials. She noted that there was no factual question that CloudFlare operated the defendants’ authoritative domain name server and optimized the performance and security of their copycat site. The question was whether these acts were passive such that CloudFlare was not in “active concert or participation” with the defendants. Judge Nathan held that the services CloudFlare provided to the defendants were anything but passive:

CloudFlare’s authoritative domain name server translates grooveshark.li as entered in a search browser into the correct IP address associated with that site, thus allowing the user to connect to the site. Connecting internet users to grooveshark.li in this manner benefits Defendants and quite fundamentally assists them in violating the injunction because, without it, users would not be able to connect to Defendants’ site unless they knew the specific IP address for the site. Beyond the authoritative domain name server, CloudFlare also provides additional services that it describes as improving the performance of the grooveshark.li site.

Furthermore, Judge Nathan dismissed CloudFlare’s argument that it was not helping the defendants since they could simply use other services: “[J]ust because another third party could aid and abet the Defendants in violating the injunction does not mean that CloudFlare is not doing so.” And to CloudFlare’s concern that the TRO was overly broad, Judge Nathan reasoned that the issue before her was CloudFlare’s own actions, not those of other, possibly more attenuated, third parties: “[T]he Court is addressing the facts before it, which involve a service that is directly engaged in facilitating access to Defendants’ sites with knowledge of the specific infringing names of those sites.”

This TRO wasn’t about the “world at large,” and it wasn’t about turning the companies that provide internet infrastructure into the “trademark and copyright police.” It was about CloudFlare knowingly helping the enjoined defendants to continue violating the plaintiffs’ intellectual property rights. Thankfully, Judge Nathan was able to see past CloudFlare’s empty and hyperbolic position. Protecting intellectual property in the digital age is difficult enough, but it’s even more challenging when services such as CloudFlare shirk their responsibilities. In the end, reason trumped rhetoric, and, best of all, the internet remains unbroken. In fact, it’s now even better than before.

Further reading: Leo Lichtman, Copyright Alliance, Bringing Accountability to the Internet: Web Services Aiding and Abetting Rogue Sites Must Comply With Injunctions

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Antitrust Commercialization DOJ FTC High Tech Industry Injunctions Innovation Intellectual Property Theory International Law Patent Law Patent Licensing Patent Theory Reasonable Royalty Remedies Software Patent Uncategorized

Curbing the Abuses of China’s Anti-Monopoly Law: An Indictment and Reform Agenda

The following is taken from a CPIP policy brief by Professor Richard A. Epstein.  A PDF of the full policy brief is available here.

Curbing the Abuses of China’s Anti-Monopoly Law:
An Indictment and Reform Agenda

Executive Summary

There are increasing complaints in both the European Union and the United States about a systematic bias in China’s enforcement of its Anti-Monopoly Law (AML).  In an extensive report on China’s abuse of its antitrust laws in advancing its own domestic economic policies, for instance, the U.S. Chamber of Commerce noted among many examples a recent action against Microsoft in which Chinese antitrust authorities used a “speculative possibility of licensor hold-up” following Microsoft’s acquisition of Nokia to justify a decree under the AML to “cap license fees for domestic licensees of mobile handset-related software.”

Although the biases in the enforcement of the AML against foreign companies are rooted in systemic problems in China’s political and legal institutions, the abuses are particularly evident in the patent space.  FTC Commissioner Joshua Wright has recognized the “growing concern about some antitrust regimes around the world using antitrust laws to further nationalistic goals at the expense of [intellectual property rights] holders, among others.” He specifically mentioned China as one such antitrust regime that may be finding encouragement or at least rationalization in recent FTC and DOJ actions that presume that “special rules for IP are desirable . . . and that business arrangements involving IP rights may be safely presumed to be anticompetitive without rigorous economic analysis and proof of competitive harm.”

This same theme has been recently echoed by FTC Commissioner Maureen Ohlhausen, who explained that recent American decisions on standard essential patents (SEP), such as the FTC’s use of its merger review power to enforce settlement agreements on SEPs against Bosch and Google, have “created potentially confusing precedent for foreign enforcers.”  This concern was brought home to her when she witnessed Chinese officials invoke these recent FTC actions against Bosch and Google to justify their per se claim under the AML that “an ‘unreasonable’ refusal to grant a license for a standard essential patent to a competitor should constitute monopolization under the essential facilities doctrine.”

Such broad propositions pave the way for Chinese officials to favor domestic, state-run companies who incorporate foreign patented innovation in their own domestic products and services.  These unfettered notions of “unreasonable” conduct become weapons that let Chinese officials force down prices of foreign goods to promote their own nationalist economic policies. Unfortunately, as Commissioner Ohlhausen observed just this past September, recent U.S. antitrust enforcement actions are giving Chinese officials grist for their industrial policy mill.

It is critical that American legal authorities do not give aid and comfort to China’s discriminatory treatment of foreign companies under the AML by the way in which American regulators either speak about or take action on SEPs or other issues relating to patented innovation in this country.  The antitrust laws should not be applied so as to single out patents or any other intellectual property rights for special treatment; all property deployed in the marketplace should be treated equally under the competition laws.

The unfortunate situation in China is one example of a dangerous set of practices which could spread to other countries, motivated either by imitating what China has done or retaliating against its abuses.  The risk is that the disease can spread all too easily.  Until reforms are implemented in both the substance of the AML and the enforcement practices of the Chinese authorities, American policymakers and enforcement authorities should do everything they can to avoid aiding this misuse of antitrust as a domestic economic policy cudgel.

Curbing the Abuses of China’s Anti-Monopoly Law:
An Indictment and Reform Agenda

Richard A. Epstein

I. Introduction

There is a loud chorus of complaints from both the European Union and the United States about a systematic bias in China’s enforcement of its Anti-Monopoly Law (AML).  This bias is evident in a wide range of economic sectors and companies. The Economist reports that China has imposed extra-heavy antitrust penalties on foreign automobile manufacturers, such as Daimler, including a record $200 million penalty on a group of ten Japanese car-parts firms, and the New York Times reports that China has imposed another $109 million penalty on six companies selling infant milk formula.  China has also initiated antitrust enforcement actions against American high-tech companies, such as Microsoft and Qualcomm, and there is an ongoing Chinese probe of Qualcomm (a firm for which I have consulted unrelated issues), which is said to be done with an effort to force a reduction in the prices that it charges for its advanced wireless technology, which China needs to implement a new 4G system for mobile phones.  Similarly, in a wide-ranging report on China’s abuse of the AML to advance domestic industrial policy, the U.S. Chamber of Commerce noted many examples, including a recent action against Microsoft in which Chinese antitrust authorities used its acquisition of Nokia as a basis for a completely “speculative possibility of licensor hold-up” to justify a decree to “cap license fees for domestic licensees of mobile handset-related software.” It is no wonder that many commentators are repeatedly stressing the distinctive foreign focus of China’s recent antitrust activities.

Chinese public officials insist that their stepped-up enforcement of the AML  is even-handed.  “Everyone is equal before the law,” asserted Li Pumin, the head of the National Development and Reform Commission, which takes the lead in investigating foreign firms.  But others in China disagree.  More market-oriented Chinese writers have lamented how China’s commitment to market processes has reversed course since the adoption of the AML law, as China is now using this law as an industrial policy cudgel in promoting its own domestic firms at the expense of foreign ones. Its recent behavior, which provoked expressions of concern from American antitrust officials at both the Federal Trade Commission and the Department of Justice, suggests that this is indeed the case.

II. The Chinese Anti-Monopoly Law

The current situation is an unwelcome reversal of the initial optimism that surrounded the adoption of the AML in 2008, and so a quick overview of the AML’s provisions is necessary.  Hailed at the time as “a tremendous leap forward for China,” the law adopts, at least in the abstract, many of the standard categories of antitrust analysis found in the United States and in the European Union.  In Article 3, it contains the standard prohibitions against horizontal arrangements that raise prices, reduce output, or divide territories, subject to an exemption under Article 15 for agreements that improve technical standards or upgrade consumer products.  The AML also bans “abuse of dominant market positions by business operators,” which under Article 17 includes setting prices in “selling commodities at unfairly high prices or buying commodities at unfairly low prices;” or in selling goods at below costs, refusals to deal, and tie-in arrangements, all “without any justifiable cause.”[i]

In many ways what is most notable about the AML is the extent to which it imitates the major features, both good and bad, of the more developed competition law applied in the United States and the European Union.  But by the same token, it is quite clear that the Chinese law is embedded in a different set of institutional arrangements.  Two elements stand out.

First, the AML reflects the unique Chinese approach to “market socialism” that was first implemented by Deng Xiaoping’s reform policies in the late 1970s as “socialism with Chinese characteristics.”  Article 4 of the AML thus attempts to square the circle: “The State constitutes and carries out competition rules which accord with the socialist market economy, perfects macro-control, and advances a unified, open, competitive and orderly market system.”

Second, the socialist legacy reflected in Article 4 has resulted in an extensive system of state-owned industries in China, and Article 7 of the AML provides special controls, exemptions and protections for this sector of the Chinese economy:

Industries controlled by the State-owned economy and concerning the lifeline of national economy and national security or the industries implementing exclusive operation and sales according to law, the state protects the lawful business operations conducted by the business operators therein. The state also lawfully regulates and controls their business operations and the prices of their commodities and services so as to safeguard the interests of consumers and promote technical progresses.

The scope of Article 7 offers instructive clues toward understanding the current situation.  Its text refers to entire “industries,” not just individual firms, that are given special treatment under the AML. It still speaks in terms of constraining the ability of “industries” to engage in any abusive practices, which at least in principle serve as the basis for competition-focused anti-monopoly law.

Unfortunately, the odds of it remaining focused in this constructive way are necessarily reduced because of its dual operation with respect to both state-owned enterprises (SOEs) and foreign corporations.  The SOEs have a built-in preferential position that can manifest itself in two ways.  Either they can get gentle slaps on the wrist for offenses that prompt far harsher sanctions against private companies, especially foreign companies who are either suppliers or competitors with SOEs, or the SOEs could prod Chinese anti-monopoly enforcement authorities to take action against their foreign competitors.  The AML can all too easily function as a new form of protectionism by virtue of its differential application to foreign firms vis-à-vis SOEs doing business in China.

The difficulties here are increased, moreover, by the structural decision to parcel out enforcement of the AML to several agencies. The National Development and Reform Commission has the lead with respect to enforcement over monopoly agreements.  The State Administration of Industry and Commerce deals with abuses of dominant position.  The division of enforcement authority between these agencies makes it much harder to impose uniform standards on the overall operation of the system. This split in enforcement authority increases the risks of differential enforcement and, more worrisome, the misuse or discriminatory use of the AML.

Therefore, it is evident that no evaluation of the operation of the Chinese anti-monopoly system can be made solely on the basis of the statutory terms in the AML itself.  So much depends on the oft-concealed enforcement practices of the relevant public authorities, who are given very broad powers of inspection and investigation under AML Article 39, which empowers the AML enforcers to run investigations “by getting into the business premises of business operators under investigation or by getting into any other relevant place,” or by forcing them to respond to interrogatories “to explain the relevant conditions” to the public authorities.” Chinese officials also have the power to examine or duplicate all business papers and to seize and retain relevant evidence, and to examine bank records and accounts.  The only procedural protection contained in Article 39, if it can be called that, is that a “written report shall be submitted to the chief person(s)-in-charge of the anti-monopoly authority” before the investigation is approved.  What kind of report and how it is to be reviewed are not stated, even though these substantive and procedural issues are subjects of volumes of statutory, regulatory and decisional law on administrative procedure in the United States and Europe.  Even more significant, there is no mention anywhere in the AML of any probable cause or warrant requirement that must be demonstrated before any independent judicial body.

III. Rule of Law

At the root of the many complaints about the Chinese approach to competition law is the constant concern that its antitrust enforcement practices are inconsistent with the rule of law.  Its legal system invites arbitrary and differential enforcement of anti-monopoly standards.  In dealing with these rule of law issues, it is incumbent to note that they address a critical mix of concerns about both substantive standards and administrative enforcement.

As a general rule of thumb, the more precise the particular rules of conduct that receive government enforcement, the better the prospects to avoid both rule of law violations and the general perception of such government violations.  In this regard, it is worth noting that the ordinary rules of property, contract and tort score very well under this general standard.  As I have argued in my book Design For Liberty:  Private Property, Public Administration and the Rule of Law, these common law rules have several key structural features that facilitate rule of law values.

First, the basic norm with respect to private property is that all other persons need only follow the basic norm “keep off” to comply with the system.  The simplicity of this command means that anyone can follow it regardless of the size of the polity in which this rule operates.  The same command works as well in China with 1.4 billion people as it does in New Zealand with a population just under 4.5 million people.

Second, the content of this simple rule is easily known and understood, so that no one need give special notice of what it requires to the many people who are bound by it.  It is no small deal to have a rule that is not promulgated by statute, which is thereafter interpreted by dense pages of administrative text to which the public has only imperfect knowledge, and which both small and large businesses are able to interpret and apply only with the aid of professional intermediaries such as trade associations and law firms.

Third, the simple rule in question works as well in poor countries as in rich ones, so that there is no awkward transition in rules with increasing development over time.  At this point, the property rules are complemented by the contract rules that allow people within broad limits to decide their own agreements for the provision of goods and services, so that in most cases the key function of the state is to enforce the agreement as designed, not to improve upon its terms with flights of legislative or judicial fancy.

The Chinese AML does not, and cannot, exhibit anything like the requisite level of overall clarity.  In order to determine whether a horizontal arrangement violates the antitrust law, for example, it is necessary to have some sense as to the scope of the market, and the nature of the agreement, to see whether it is or is not in restraint of trade.  It is also necessary to gather evidence about practices that can span both continents and years.  The AML’s standards for dealing with abusive practices are even looser; for example, there is no clear metric by which to determine whether prices are unfairly high or unfairly low. Another nagging question is what it means under the AML for goods to be sold at below cost, because it is completely unclear if the metric is average or marginal cost.  No matter which is chosen, the difficulties of estimation further the scope for abuse of administrative discretion.

This nagging uncertainty about the basic operating rules prompted the late Ronald H. Coase to quip to me long ago in a conversation only partly in jest: “If prices move up in any market, it is surely the result of monopolization. If they remain constant, it is surely the result of market stabilization arrangements.  If they go down, it is surely the result of predation” (quoting from memory).  Coase’s quip ruefully reflects the modus operandi of the Chinese AML.  Since any and all price movements could be associated with some violation of the AML, it follows that in principle no party, and no group of firms, is immune from investigation and criminal prosecution, regardless of how it conducts its own business.  And owing to the vastness of the multinational businesses who are targeted, these investigations can exert a large influence on the behavior of firms and on their key employees who bear the brunt of those investigations, where they are subject to the possibility of criminal sanctions in addition to emotional wear and tear.

IV. The Patent Dimension

The dangers of this system are apparent and easily understood. With respect to accusations of secret horizontal arrangements and price gouging arrangements, the risk comes in the form of extensive and exhaustive investigations that are intended to stifle and not promote competition in the marketplace.  In dealing with these issues, it is critical that our American legal authorities do not give aid and comfort to China’s aggressive regulation of foreign businesses enterprise by the way in which American regulators address similar issues in this country.  We live today in an intensely global environment, and any actions in the United States that overstate the role of the antitrust laws can easily be used as reasons to expand antitrust application overseas.

The point applies to all areas of law, but has especial importance in connection with patents, given that technology that is available in one country is instantly available in all. After the Supreme Court handed down eBay v. MercExchange in 2006, injunctive relief is no longer presumptively available for patent infringement in the United States.  As Professor Scott Kieff, now of the International Trade Commission, and I have written, eBay eased the way for Thailand to impose its regime of compulsory licensing for pharmaceutical patents, at far below market rates.

Evidently, decisions like eBay do not go unnoticed by foreign nations, where they set up a climate in which the weak enforcement of patent rights becomes par for the course.  That same development happens most emphatically in the crossover area between patent and antitrust law.  In general, the proper application of the antitrust law does not single out patents for special treatment of the antitrust laws.  A clear articulation of this principle was recently made by FTC Commissioner Joshua D. Wright in his 2014 Milton Handler Lecture:  “Does the FTC Have a New IP Agenda,”  which stressed the importance of the “parity principle” that states a central tenet in the Department of Justice/Federal Trade Commission 1995 Antitrust Guidelines for the Licensing of Intellectual Property:  “Agencies apply the same general antitrust principles to conduct involving intellectual property that they apply to conduct involving any other form of tangible or intangible property.”

The parity principle is critical to successful antitrust enforcement because it places an important fetter on the arbitrary use of government power, which increases greatly if any government, China included, could use a wide catalogue of novel arguments to justify some deviation from the general rule.  Indeed, this parity principle is an extension of what I have termed elsewhere as the “carry over” principle, which means that intellectual property rights in general should be based on the rules that are applicable to other forms of property, subject only to deviations required by the distinctive features of property rights in information, which chiefly relates to their finite duration to allow for the widespread dissemination of information. But once that key adjustment is made, the standard rules for property used elsewhere, including the rules for injunctive relief, should continue to apply.

Yet as Commissioner Wright mentioned, recent FTC and DOJ actions presume that “special rules for IP are desirable . . . and that business arrangements involving IP rights may be safely presumed to be anticompetitive without rigorous economic analysis and proof of competitive harm.” Commissioner Wright has also recognized the “growing concern about some antitrust regimes around the world using antitrust laws to further nationalistic goals at the expense of [intellectual property rights] holders, among others.” He specifically mentioned China as one such antitrust regime that may be finding encouragement or at least rationalization in these recent actions against IP owners by American antitrust agencies.

This same theme has been recently echoed by FTC Commissioner Maureen Ohlhausen, who noted how foreign nations invoke “‘competition fig leaves’ to address other domestic issues or concerns.” More specifically, Commissioner Ohlhausen explained how this tendency has manifested itself in the debate over standard essential patents (SEPS), that is those patents that are incorporated in setting key technical standards that allow for the interoperability of various technical devices.  She also noted how recent American decisions on SEPs have “created potentially confusing precedent for foreign enforcers.”  That concern was brought home when Chinese officials invoked recent FTC enforcement actions against Bosch and Google SEPs to justify a per se claim under the AML that “an ‘unreasonable’ refusal to grant a license for a standard essential patent to a competitor should constitute monopolization under the essential facilities doctrine.” Such broad propositions pave the way for Chinese officials to favor domestic, state-run companies who incorporate foreign patented innovation in their own domestic products and services.  These unfettered notions of “unreasonable” conduct become weapons that let Chinese officials force down prices of foreign goods to promote their own nationalist economic policies. Unfortunately, as Commissioner Ohlhausen observed just this past September, recent U.S. antitrust enforcement actions are giving Chinese officials grist for their industrial policy mill, by insisting that their heavy-handed antitrust action against foreign patent owners “has support in U.S. precedent,” such as the Google and Bosh settlements.

V. Enforcement Abuses

The suppression of patent licensing rates charged to domestic Chinese firms is just one example of how the AML enforcers have a built-in invitation to run massively intrusive and expensive investigations into any firms. These investigations are unhampered by any clear legal definition of relevance and are undertaken without regard to the high costs incurred by firms seeking to comply with the officials’ edicts, both administrative and reputational.  In some cases, the charge falls within the yawning gap in the AML concerning limits on its enforcement practices.  For example, the European Union Chamber of Commerce has found  that China engages in administrative intimidation, which is intended to short-circuit formal hearings, and forces parties charged to appear before tribunal hearings without the assistance of counsel and without involving their own governments or chambers of commerce in the process.

It is of course impossible for any academic sitting in the United States to make any estimation of the actual level of abuse in any one individual case. But the simple point here is that the Chinese authorities are already low on credibility because of the way in which they conduct themselves in so many other areas.  It takes no great imagination to connect the dots between China’s anti-monopoly investigations of foreign companies doing business in China proper with the Chinese government’s hostile response to the Hong Kong protests against the high-handed way in which Chinese authorities are stifling homegrown democratic activities by insisting on government vetting of all candidates for public office to weed out those who might oppose China’s national agenda.   And it takes no great leap in imagination to realize that the same aggressive attitude that China now takes on territorial issues with Vietnam and Japan can spill over to these investigations. It is also well known that China blocks (censors) service supplied by the mainstays of the internet and social media, including Google, Facebook, Wikipedia, and Twitter, which would provide ample opportunity for information about government (and private) abuses to be widely spread.

It also looks as though the lack of any formal protections in the AML investigative process opens up the entire system to these forms of abuse.  The lack of any reliable reporting on these matters is consistent with wide-scale abuse because of this simple stylized threat: “Be silent and take your punishment and we shall reduce the penalties.  Speak about the matter in public and the penalties will increase.”  These threats are all too credible within a tightly run collectivist society.  The legal system may give little or no relief, and even if the courts were somehow attuned to the civil liberties and procedural issues, the lack of any clear standards for what counts as either a violation or an appropriate penalty reduces the chances that judicial intervention could be used to slow down an official juggernaut.

VI. Reforms

China needs to do more than make bland and predictable protestations that the AML applies on even terms for all players.  The question is how?  At the most basic level, one way to get rid of this problem is to spin off all SOEs into private hands, preferably by bona fide auctions, so that there is less risk of political influence displacing the rule of law.  That path is of course hampered by China’s explicit commitment to socialist principles in the AML and everywhere else.

There is, however, no reason why that has to create an insuperable barrier.  Socialist principles are also inconsistent with private ownership of the means of production, and with the belief that open competition in the marketplace will assure the highest level of social output for any given set of resources. In a sense, the 2007 adoption of the AML itself should be regarded as an implicit rejection of the principles of the socialist economy found in Article 4, because it assumes private companies and a functioning free market.  It should take only a little imagination to push the cycle one step further by privatizing key government industries with auctions or other schemes of devolution, and the Chinese government has already proven resourceful in finding ways to explain how such free market reforms are consistent with its preexisting socialist system.

Even if this approach is not undertaken, it should still be possible to make reforms internal to the AML itself that are not likely to reduce its economic benefits but could do much to control its adverse effects. Within the American system, a strong distinction is taken between the horizontal arrangements that are governed under Section 1 of the 1890 Sherman Act and the variety of vertical arrangements that are covered under the monopolization provisions of Section 2.  The argument in favor of this distinction turns on the anticipated rate of social return from the enforcement of these two provisions.

With the Section 1 prohibition on contracts in restraint of trade, the nature of the societal loss is generally easy to figure out.  The horizontal arrangements that restrict output, raise prices or divide territories do not result only in the transfer of wealth from consumers to producers, but also a reduction in overall social wealth by removing those transactions that could take place for mutual benefit at the competitive price, but which will be foreclosed when the cartel raises its price to the monopoly level. As noted earlier, the Chinese AML tracks that approach, at least on paper.  The enforcement questions here are not easy, but since there is a clear sense of what the wrong is, it should be possible to obtain evidence from examining evidence of cooperation, including from disgruntled employees of the given firms.  And the matter can be helped along immeasurably by rules that waive treble damages to the first cartel member that reports the cartel practices.  These rules apply with great force in the current American enforcement efforts, much of which has been directed toward international cartels.

The dynamics under Section 2 of the Sherman Act are quite different.  In these instances, it is hard to develop a simple explanation as to why various kinds of vertical arrangements are harmful to consumer welfare.  In many cases, the practices that are undertaken by the dominant firm are also undertaken by their smaller rivals that have no element of market power.  The clear implication of this simple point is that the practices that are routinely attacked as restrictive are also practices that have efficiency benefits.  Any effort to ban or punish these factors could both stifle useful innovations and distort the competitive balance between firms of different size.

The situation gets even worse when the only charge leveled under the AML is that prices are “unfairly high” or “unfairly low,” which is just asking for trouble.  At one level the impetus behind this claim is that certain products are sold at higher (or lower) prices in China than in the United States or the European Union. But these simple price comparisons miss so many of the relevant marketplace complications.  Higher prices could stem from higher costs in distribution or in compliance with local laws.  Lower prices could result from the simple fact that the fixed costs of producing these goods are allocated to the home market where demand is higher, such that the foreign sales at a lower price improve the welfare of both the firm (which gets a chance to expand markets and recover an additional fraction of its fixed costs) and its Chinese customers, who get the benefit of low prices that forces local firms to reduce their costs.  It follows therefore that the Chinese antitrust system could do well to narrow the class of offenses that are said to be practiced by dominant firms, avoiding confusing and unclear terms such as “unfair” prices.

Once a sharper definition of monopolization activities is adopted, it reduces the pressure on the enforcement system to engage in overbroad and unfettered investigations or prosecutions, and thus the risks of massive abuse.  Nonetheless, it is a grim fact of life that the investigation of cartel-like behavior is always intrusive, precisely because these arrangements are always carried out in secret, which requires extensive government efforts to ferret them out.  But in this regard, it is imperative that China reform its antitrust system for the benefit of both its own citizens and foreign companies investing in China. It should adopt procedural protections that impose some definitive and clear checks on how investigators can behave in ways that avoid both massive human rights violations on the one hand and routine investigative abuses on the other.

At this point, it is necessary to add into Chinese law the same kinds of safeguards that are commonplace in most countries with respect to other forms of criminal investigation, whether crimes of violence or drug offenses, or simple cases of fraud and nondisclosure in financial circles and elsewhere.  The point here is that the most dangerous sentence in the English language—“trust me I am from the government”—translates perfectly into Chinese.  It is not enough that the abuse stops.  It is absolutely imperative that the appearance of abuse ceases as well.  Those reforms are not beyond the power of the Chinese legal system to implement, but it will take a long overdue switch from the inquisitorial types of system that socialist countries have found all too congenial in the political and economic sphere.

In urging these major antitrust reforms, it is imperative to put the Chinese position into global perspective. The Chinese government is not the only government that uses its anti-monopoly laws as a cudgel to achieve other political or economic objectives.  It has lots of company worldwide.  There are, more specifically, other illustrations of abuse in the United States and the European Union.  The American system is overly exuberant in its discovery processes, especially with respect to international operations under the 1995 guidelines of the United States Department of Justice and the Federal Trade Commission. It offers shameless protection to American export cartels under the Webb-Pomerene Act, passed in 1918 at the end of World War I, when the need for free trade could hardly have been greater. The European Union thrives on broad definitions of “abuse of dominant position” under Article 102 of its 2009 Treaty on the Functioning of the European Union.  The enforcement in many other nations, such as India, with its endless protectionist practices, is also in need of major reform.

In dealing with all these multi-national issues, the fundamental insight is that free trade across international borders offers the best hope for the amelioration of the human condition, especially in developing or underdeveloped countries.  It is widely understood that tariffs and other restrictions impede the flow of goods across international borders, which is why the World Trade Organization maintains global free trade as its primary objective.  The general attack on explicit entry restrictions by foreign firms and goods has borne much fruit in recent years, although there is still work to be done.  But it is precisely because tariffs and other barriers to entry are public and thus verifiable that it is (relatively) easy to control their abuse.

The success of the WTO in controlling these practices does not put to rest the protectionist impulses that have generated too many obstacles to free trade.  The differential enforcement of the anti-monopoly laws poses major dangers in this regard, for the same laws that protect against anticompetitive practices are all too often used to achieve the very abuse that they are intended to guard against.  Commissioner Ohlhausen bluntly puts the point: “Critics claim that China is using its antitrust law to promote industrial policy.” The unfortunate situation in China is but one example of that dangerous set of practices, which unchecked could spread to other countries, motivated either by imitating what China has done or retaliating against its abuses.  The risk is that the disease can spread all too easily.  Other nations can protest against these practices. But ultimately it is for China itself to throw aside the shackles that disadvantage foreign firms and the Chinese people alike.

 

Endnotes:

[i] The AML also contains a prohibition against mergers that lead to “concentration of business operators that eliminates or restricts competition or might be eliminating or restricting competition,” but this is not addressed in this brief essay.  These prohibitions cover only a few large transactions, none of which involve ordinary commercial practices that are the subject of the anti-monopoly and abuse of practice provisions at issue in the current applications of the AML.

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Conferences Copyright Copyright Theory History of Intellectual Property Injunctions Innovation Intellectual Property Theory Internet Inventors Patent Law Patent Theory Remedies Uncategorized

IP Promotes Progress by Securing the Individual Liberty of Inventors and Creators

This is the third in a series of posts summarizing CPIP’s 2014 Fall Conference, “Common Ground: How Intellectual Property Unites Creators and Innovators.” The Conference was held at George Mason University School of Law on October 9-10, 2014. Videos of the conference panels and keynote will be available soon.

The second panel of CPIP’s 2014 Fall Conference analyzed the common moral case for copyrights and patents. The panel was moderated by Professor Chris Newman (George Mason University School of Law). Two of the panelists, Professor Mark Schultz (CPIP, and Southern Illinois University School of Law) and Professor Eric Claeys (George Mason University School of Law) explained the theoretical and normative principles underlying the moral case for intellectual property. The other two panelists, Dr. Ken Anderson (Thermaquatica) and David Lowery (musician, producer, and lecturer at the University of Georgia), then showed how those principles play out in practice.

Professor Schultz noted that the moral case for intellectual property is often overshadowed by (or outright ignored in favor of) the economic case. But in addition to being economically valuable, intellectual property serves important moral functions by enabling artists and inventors to live free and flourishing lives. Intellectual property fosters economic independence, enables the creation of a private sector, and supports political freedom. Patents and copyrights give an important set of choices to creators and inventors, enabling them not only to survive, but also to thrive. As such, intellectual property is a moral right that facilitates individual liberty. While the economic justifications for copyrights and patents remain important, it is equally important not to lose sight of their strong moral underpinnings.

Professor Claeys discussed the moral case for injunctive relief against IP infringement. Starting from a traditional property law perspective, he explained that remedies (such as injunctive relief) are essential in reinforcing and vindicating property rights. Just as with traditional property, copyrights and patents confer exclusive control to their owners to secure to them the value of their productive labors. By protecting copyright and patent owners’ discretion over the deployment of their property, injunctions protect their moral rights in the fruits of their labors. Claeys further noted that this labor-based understanding of intellectual property could inform the balance of equities discussed in eBay v. MercExchange, filing significant gaps in the Supreme Court’s reasoning and likely leading to a different conclusion regarding licensing companies’ ability to obtain injunctions.

Anderson and Lowery addressed the role of IP in their respective fields. Dr. Anderson discussed how patents were crucial to his ability to obtain investors for his green tech company. He invented a new, environmentally-friendly technology to convert “coal, biomass and other organic solids into low molecular weight products.” Being able to protect the value of his work through patent protection (he filed multiple rounds of patents all over the world) has been essential to his company’s success and his ability to commercialize his invention.

Lowery discussed how the lack of copyright enforcement in the digital era has affected the music industry, leading to an environment where internet platforms thrive, but the artists and creators who fuel the value of those platforms struggle mightily to make ends meet. In many ways, musicians are worse off now than they were in the 1950s (an era that s well-known for the exploitation of musicians). Nonetheless, he expressed hope that the third decade of the Internet could embrace legal and technological innovations that make it a better place for artists.

In sum, the panelists illustrated the fundamental moral importance of intellectual property, which applies equally to inventors’ patent rights as it does to artists’ copyrights. Intellectual property isn’t just about economic incentives. IP also promotes progress by securing the individual liberty of inventors and creators.

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Commercialization Conferences Copyright Copyright Licensing Copyright Theory Economic Study High Tech Industry History of Intellectual Property Injunctions Innovation Intellectual Property Theory Internet Inventors Law and Economics Patent Law Patent Licensing Patent Litigation Patent Theory Remedies Software Patent Uncategorized

Intellectual Property Unites Creators and Innovators

This is the first in a series of posts summarizing CPIP’s 2014 Fall Conference, “Common Ground: How Intellectual Property Unites Creators and Innovators.” The Conference was held at George Mason University School of Law on October 9-10, 2014. Videos of the conference panels and remarks, as well as panel summaries, will be available soon.

Introduction by Professors Adam Mossoff and Mark Schultz

Common Ground: How Intellectual Property Unites Creators and Innovators

The creative industries and innovation industries have much in common, but too often this is overlooked. Both industries engage in brilliant intellectual work to bring new products and services into the world, both take great risks to commercialize this work, and both depend on intellectual property – copyrights (for the creative industries) and patents (for the innovation industries). Unfortunately, most accounts of these two industries emphasize their differences and frequently portray them in conflict.

This conference will explore the common ground shared by these two dynamic industries, focusing on the similar values secured by their patents and copyrights and thus their common policy goals and commercial developments.

It should be unsurprising that these two industries share much in common. The work of inventors and artists is much the same. We see hints of this in their respective aspirations. Engineers, for example, often talk of seeking “elegant” or “beautiful” solutions to the technological problems they face. Artists also strive to innovate technically in how they create their works, as demonstrated with much panache in the recent documentary, Tim’s Vermeer. Many creators apply their prodigious talents to both art and invention.

One may think of a Steve Jobs today as exemplifying this truth, but history is replete with examples. Leonardo da Vinci also comes to mind, the quintessential Renaissance Man. In the 19th century, Samuel Morse invented the telegraph, but he was also a successful artist and in fact he developed the telegraph while working as a well-known Professor of Art at New York University.

In modern America, Walt Disney has defined much of our culture not just with his artistic creations, but also with his innovative technological creations in movies, theme parks and products. More recently, filmmakers George Lucas and James Cameron have cast large shadows in popular culture, but their contributions to filmmaking technology may prove even more enduring and pervasive.

These and many other examples are unsurprising when one considers that art and technology both result from the same source: productive intellectual labor.

As the work of artists and inventors is at heart the same, so is the moral and economic case for securing property rights to them. Artists and inventors deserve to own the fruits of their productive labors. In protecting these labors, intellectual property rights secure to them their liberty and their careers. These rights thus fuel the vast economic activity that drives the innovation economy – bringing to market the products and services that ensure full and flourishing lives for them and for the rest of us as well.

Too often, though, the creative and innovation industries are portrayed as being at odds. One popular narrative today – in both scholarly and popular accounts – is that technology disrupts the creative industries, forcing copyright owners to adapt. This is a myopic account of their relationship that ultimately creates a false picture. In truth, creativity and innovation – secured by copyrights and patents – constantly spur each other to greater heights.

The true story of creativity and innovation is more properly viewed as a virtuous circle.

Recording and broadcast technology, for instance, gave musicians and other performers their first worldwide audiences, whose demand for ever-more entertainment and information spurred further improvement and expansion of technology. The invention of the electric guitar, spurred by a series of patented improvements, enabled blues and rock ‘n’ roll, which in turn pushed further developments in music and recording technology.

The Internet certainly created much disruption, but it also has been a fountainhead of creativity. To take just one example, streaming of original, creative content enables television viewers to enjoy storytelling as never before, bringing about what some are now calling a Second Golden Age of Television.

Our technological devices, such as smartphones and iPads, would not be so well loved and so ubiquitous without the games, music, and video content they deliver to hundreds of millions of people the world over.

The common ground and shared aspirations of creators and innovators is clear, but rarely appreciated in the din of today’s policy debates.

Thus, our Annual Conference this year considers afresh the common goals, challenges and needs of the creative and innovation industries. Many distinguished speakers with extensive knowledge and experience in both fields will address how intellectual property rights represent the bedrock of this common ground. We hope that you will enjoy what promises to be enlightening discussion.

**Panel summaries coming soon**

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Administrative Agency Antitrust Commercialization Damages DOJ Economic Study FTC Injunctions Innovation Law and Economics Patent Law Patent Licensing Patent Litigation Reasonable Royalty Remedies Uncategorized

Patent Policy Debates Characterized by "Intolerably High Ratio of Theory to Evidence"

In an interview with Law360 last week, FTC Commissioner Joshua Wright spoke about the FTC’s upcoming study on PAEs and the state of today’s patent policy debates. The interview is well-worth reading in it’s entirety, and we’ve also highlighted a couple key quotes below.

“One of the most fascinating things about the the policy debates in and around patents and by extension the intersection of patent law and antitrust law, is that most of the debate is chock full of theory and supposition but completely devoid of empirical evidence…It is very difficult to move forward sensibly in debates with those characteristics”

“Wright said that without evidence of ‘pervasive market failure’ in the standard setting space, the FTC and the U.S. Department of Justice should avoid the temptation to serve as ‘management consultant’ to standard setting groups and their members.”

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An Insightful Analysis of “Fair and Reasonable” in the Determination of FRAND Terms

By Steven Tjoe

In his forthcoming George Mason University Law Review article entitled “The Meaning of ‘Fair and Reasonable’ in the Context of Third-Party Determination of FRAND Terms,” Professor Damien Geradin explores the delicate balance of interests protected by the current system of arm’s length negotiations in the standard-setting process, and the detrimental effect disrupting this balance would have on standards-related technologies and our innovation economy.

Fair, reasonable, and non-discriminatory (“FRAND”) commitments are the subject of frequent criticism in both legal and economic literature.  Many policymakers, practitioners, and academics have argued that the inherent ambiguity in establishing “fair and reasonable” terms creates inefficiencies and perverse incentives for standard-essential patent (“SEP”) holders to exercise ex post opportunism.  Based on this belief, some now argue that the standard-setting organization (“SSO”) contracting process is broken and requires additional legal and regulatory mechanisms to afford standard implementers greater protection.

Professor Geradin’s article brings some much-needed balance to this debate.  By highlighting the economic principles and the carefully negotiated terms underlying current SSO contracting processes, Geradin exposes the pitfalls of many of the reforms suggested.  Geradin’s analysis elucidates the SSO contracting process itself through dissection of the intensive discussions and negotiations giving rise to the prominent ETSI Intellectual Property Rights (“IPR”) policy, a policy that played a fundamental standardization role in the wireless communication field.  The ETSI IPR policy shows that its members understood the notions of “fairness and reasonable” to define a fair balance between the interests of SEP holders and standard implementers – securing the availability of the standards while simultaneously ensuring that SEP holders are “adequately and fairly rewarded for the use of their [intellectual property rights].”

Professor Geradin addresses two potential forms of ex post opportunism – “hold-up” and “royalty stacking” – and observes that though both could occur in theory, there is little evidence to suggest that they occur in real-world patent licensing.  Regarding the hold-up conjecture, Geradin observes that the relative absence of hold-up is consistent with the economics of contracting: parties who repeatedly deal with each other will limit opportunism to protect their reputation.  Similarly, royalty stacking is a rare occurrence in high-technology, where cross-licensing is common and greatly diminishes the risk of royalty-stacking.  Given the absence of empirical evidence demonstrating opportunistic behavior by SEP holders, Geradin cautions against implementing reforms that systematically weaken the bargaining power of SEP holders, as proposed reforms may themselves trigger reciprocal opportunistic behavior – such as “reverse hold-up” – by standard implementers.

In the context of FRAND licensing, Geradin observes that for rewards to be adequate and fair, they must not only compensate SEP holders for their risky R&D investments (including investments in prior failed projects), they must also give SEP holders sufficient incentive to keep investing in the development of standardized technologies.  The negative consequences of systematically offering below-FRAND terms to SEP holders are two-fold.  First, as Geradin eloquently observes, “[i]t is a basic law of finance that capital flows where the best opportunities arise,” and developers of technologies in standardized sectors unduly constrained by low returns may seek opportunities outside the standardized sectors.  Second, without adequate returns, major technological contributors may decide to no longer participate in SSOs in order to avoid being bound by FRAND commitments.  As a result, standards would likely fail to incorporate the best technology available.

Accordingly, Geradin is skeptical of many of the policy measures suggested to provide additional protections to potential licensees and consumers of standardized technologies.  One such measure is the “ex ante incremental value method,” where the rate that would have resulted from ex ante competition between the technology in question and alternative technological solutions serves as a benchmark to whether a royalty is fair and reasonable.  As Geradin observes:

While the pricing of SEPs at incremental value may facilitate the dissemination of the standard in the short-term, the licensing fee resulting from the incremental value of the SEP holder’s technology would certainly not be enough to properly compensate the investment costs and risks [a] company incurred in developing its superior technology, as well as to incentivize it to make investment in new technologies.

With respect to this method, Geradin concludes that the “ex ante incremental rule is thus not so much an instrument to prevent the theoretical risks of hold-up, but a tool to lower royalty rates to the benefit of standard implementers.”  As such, the ex ante incremental value rule could potentially have a devastating impact on innovation incentives and standards.

Geradin next explores the multi-factor test contained in Georgia-Pacific Corp. v. United States Plywood Corp. (“Georgia-Pacific”).  In Georgia-Pacific, a federal district court established a framework by which fifteen factors offering a variety of benchmarks are used to compute reasonable royalty damages by contemplating a “hypothetical negotiation” between a “willing licensor” and “willing licensee” at the time the infringement began.  Geradin observes:

A key strength of the Georgia-Pacific framework is that it is sufficiently flexible to establish a balance between the dual objective of SSO’s IPR policies … which are both to ensure standard dissemination and adequate remuneration of the SEP holder.  In other words, unlike abstract mathematical methods, which … can be easily tipped in favor of the prospective licensee (or the prospective licensor), the multi-factor test at the core of the Georgia-Pacific framework reduces the risk of bias if it is properly carried out.

As such, the Georgia-Pacific framework can better reflect the reality of contract negotiations, where the parties look to a variety of factors, and not some magic formula, to come to mutually acceptable licensing terms.

In the context of FRAND litigation, however, Geradin cautions against potential pitfalls of applying the Georgia-Pacific framework.  At the outset, Geradin notes that licensing agreements are often “highly relationship-specific and thus agreements will be hard to compare.”  Geradin discusses the practice of comparing the rate offered ex post standardization by SEP holders with the rate offered for the same patents ex ante standardization.  Though many are inclined to treat the ex ante rate as a “safe harbor” against any claim of opportunism, Geradin finds that there is little reason why licensors should be prohibited from charging higher rates ex post than ex ante.  Not only may ex post contracts be more efficient in the way they incorporate a clearer understanding of the technology and the market, but also forcing SEP holders to charge similar ex ante and ex post rates deprives SEP holders of giving preferential terms to early adopters of their technology.

Professor Geradin then explores whether patent pools offer a useful benchmark to determine FRAND license terms.  Due to the difficulties of forming pools and the different business models of the relevant patent holders, many standardized sectors simply do not have sizeable patent pools covering their standards.  Even where sizeable patent pools exist, Geradin observes that the pools often will not serve as the right benchmark for FRAND rate determination.  In many standardized sectors, such as in wireless communications, patent pools tend to be used by SEP holders to avoid transactions costs, rather than to obtain FRAND compensation.  Moreover, many patent pools base their method of remuneration on the number of a firm’s patents compared to the size of the pool rather than the relative strength of the patents themselves.  Where numerical proportionality serves as the metric of FRAND compensation, such as in the recent In re Innovatio IP Ventures LLC case, SEP holders have the incentive to inflate the number of patents they contribute to the pool.  Thus, using patent pools as a benchmark runs the risk of setting rates that are well below FRAND.

The potential welfare-reducing consequences of limiting the flexibility of the SSO negotiation process has been well documented in recent legal and economic literature.  As Professor Geradin observes, solutions to perceived FRAND inadequacies that aim to weaken the bargaining position of SEP holders often overreach, in effect triggering the “wholesale devaluation of patents.”  Instead, FRAND determinations should consider the “dynamic nature of standardization” and should be determined by balancing the need to (1) make standards available and, (2) fairly compensate SEP holders.  This delicate balance of interests is necessary to protect the future of standardization.

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Guest Post by Richard Epstein: The Dangerous Adventurism of the United States Trade Representative – Lifting the Ban against Apple Products Unnecessarily Opens a Can of Worms in Patent Law

The Dangerous Adventurism of the United States Trade Representative:
Lifting the Ban against Apple Products Unnecessarily Opens a Can of Worms in Patent Law

 Richard A. Epstein

In ordinary times, the business of the International Trade Commission does not appear as the lead story in the Wall Street Journal, predicting massive changes in the high-stakes patent battles. But these are not ordinary times, given the ongoing multi-front war between Apple and Samsung, in which each side has accused the other of serious acts of patent infringement. So when the International Trade Commission issued its order excluding Apple’s still popular iPhone 4 and older versions of the iPad, the smart money predicted that the Obama Administration, acting through the United States Trade Representative, would for the first time in 25 years decide to overrule a decision of the ITC, which it pointedly did in a three page letter of August 3, 2012, signed by Ambassador Michael B. G. Froman and addressed to Irving A. Williamson, Chairman of the ITC, whose wings have definitely been clipped.

Injunctions, Damages, or Something in Between

Properly understood, that letter should be regarded as a patent bombshell whose significance goes far beyond the individual case. The choice of remedy in patent disputes has been, at least since the much-cited 2006 Supreme Court decision in eBay v. MercExchange, one of the central issues in patent law. In the academic literature there has been an extensive debate as to whether various forms of injunctive relief should be allowed as a matter of course, or whether the court should place great weight on so-called public interest factors that many modern patent lawyers claim should displace a remedy which under prior legal practice had been awarded largely “as a matter of course.”

That last phrase is not intended to indicate that blanket injunctions should be awarded in any and all cases. Instead, by analogy to traditional equitable principles as applied in various other contexts, including ordinary nuisance cases, the basic principle is subject to some important qualifications that do not undermine the force of the basic rule. First, any patentee may forfeit in whole or in part the right to an injunction by improper conduct on his own part: taking undue delay with respect to enforcement could lead to a loss in some cases of injunctive relief. But the application of this doctrine is within the control of the patentee, who can preserve his rights by promptly asserting them, which means that this issue almost never comes into play with valuable patents that are consistently asserted. Second, traditional doctrine allows a court to delay the enforcement of an injunction to allow the infringer to fix his device, and perhaps even deny the injunction in those cases where a complex device contains many patented components, of which only one is in violation.

The Magic of Section 337 in FRAND Cases

The decision of the Trade Representative did not point to any such complications in the case justifying a departure from the usual remedy of an injunction. Indeed the ITC order was not lightly entered into, for it was agreed by all commissioners that Apple had indeed infringed the Samsung patents in ways that would have resulted in extensive damage awards if the case had been tried in a federal court. The ITC does not have statutory powers to award damages, so the Commission thought, perhaps mistakenly, that it was bound to make an all-or-nothing choice: allow or exclude the importation of the infringing device. Under the applicable statutory provisions of Section 337 of the Tariff Act of 1930, the ITC is supposed to take into account a number of “public interest factors” that address “the effect of such [exclusion or order] upon 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 . . .”

The language in this section is quite broad on its face, and if it were applied in a literal fashion, the history of proceedings before the ITC should be replete with decisions that let infringing products into the United   States. The words “public health and welfare” are in modern American English broad enough to allow foreign pharmaceuticals into the United States even if they infringe key pharmaceutical patents. Any mysterious reference to competitive principles would again seem to invite a wide-ranging inquiry that could easily turn this provision of the Tariff Act into an open sesame for infringing products. The 25-year gap between decisions allowing importation of infringing products makes it quite clear that this provision has never been read to invite the broad type of “facts and circumstances inquiry” that the Trade Representative invoked to decide whether to grant or deny injunctive relief.

Against this background, it is critical to note that the dispute in this case boiled down to the question of the scope of Samsung to license its key patent on fair, reasonable and nondiscriminatory, or FRAND terms, to all comers including Apple. In ordinary cases, no owner of property is required to license or sell its property to a competitor. But for hundreds of years, common carriers have by virtue of their monopoly power been under an obligation to take all passengers on fair and reasonable terms. The thumbnail sketch for this position runs as follows. The obligation to do business on these terms is an offset to the dangers of monopoly power. The prohibition against discrimination is intended to make sure that the common carrier does not duck its obligation by offering its products only at prices so high that it is confident that no passenger will pay them. The concern with nondiscrimination is intended to make sure that the firm does not play favorites among potential customers to whom it can supply the essential service at roughly identical cost.

The carryover of FRAND obligations to the patent space arises only in connection with what are termed “standard-essential patents,” which are those patents that cover an invention that is incorporated in an industry standard that all parties must use in order to market and deploy their own products. The FRAND obligation requires parties to enter into negotiations to make sure that all market participants have a fair shot, so that the owner of the essential patent cannot hold out against a potential user.

In dealing with this issue, the Trade Representative took the position that a White House Report from January 2013 dealing with standard-essential patents revealed the manifest risk of holdout that could take place in these contexts, and recommended a fact-specific inquiry be made into each dispute to determine whether the action of the patent holder was unreasonable under the circumstances. The Trade Representative then extended his discretion further into this situation by insisting that “reverse holdouts” (i.e. those by a potential licensee) should be subject to a similar analysis.

How the Trade Representative Overreaches

It would be foolish to respond to the position of the Trade Representative by saying that there is no holdout risk at stake whenever a party has monopoly power. But there is a vast disagreement over the proper institutional arrangements to deal with these FRAND obligations. The implicit subtext of the Trade Representative’s Report is that holdout is a major risk in these settings that requires some heavy lifting to combat, not only before the ITC, but also in ordinary patent disputes. Just that position was taken by Commissioner Dean Pinkert in dissent below, who relied on some recent work by the well-known Professors Mark Lemley of Stanford and Carl Shapiro of Berkeley, who have proposed major intervention in a form of “final offer baseball arbitration,” whereby the arbitrator chooses between the royalty rates proposed by the two parties.

The obvious point is that this baseball form of arbitration seems ill-suited to determine the complex set of terms that are normally found in any complex licensing agreement. Why propose something that no one has ever used in the voluntary market? But put that point aside, and address the prior question of whether any compulsory remedy is needed to deal with the asserted holdout problem at all. The issue is one to which I have some exposure because I have worked on this question as a legal consultant with Qualcomm. On the strength of that work, and other work of my own on the biomedical anticommons, coauthored with Bruce Kuhlik (now general counsel at Merck), I have concluded that the frequency and severity of this problem is in fact far less than asserted by the overwrought statements of those who advance this theory. In work that I did with Scott Kieff and Dan Spulber, we reported that Qualcomm was a member of some 84 standard organizations and reported few if any problems in working through the details with any of them. Indeed, apart from the citation of a few cases that dealt with tangential issues, there is nothing in the Lemley and Shapiro paper that indicates that this problem has serious dimensions.

The question then arises why this might be so, and the answer is a collection of factors, none of which is decisive but all of which are to some degree relevant. The process of standard-setting does not take place in a vacuum, but involves repeat play by individual firms, all of whom know that coordination is key to their mutual success. The common pattern of standard-setting involves having technical people coming up with a sound technical solution before worrying about who holds what patent position. Standard-setting organizations then require their participants to disclose patents that read onto the standard. These organizations typically revisit standards as circumstances and technology change, which creates a subtle threat for patentees that the standard may migrate away from their patented technology if the patentee’s license terms become too risky. The threat of retaliation is real as well, and all parties know that if they hold up a standard they not only hurt their competitors but also themselves. The process may not look pretty, but in the hands of experienced professionals, the evidence is that it works well.

The choice in question here thus boils down to whether the low rate of voluntary failure justifies the introduction of an expensive and error-filled judicial process that gives all parties the incentive to posture before a public agency that has more business than it can possibly handle. It is on this matter critical to remember that all standards issues are not the same as this particularly nasty, high-stake dispute between two behemoths whose vital interests make this a highly atypical standard-setting dispute. Yet at no point in the Trade Representative’s report is there any mention of how this mega-dispute might be an outlier. Indeed, without so much as a single reference to its own limited institutional role, the decision uses a short three-page document to set out a dogmatic position on issues on which there is, as I have argued elsewhere, good reason to be suspicious of the overwrought claims of the White House on a point that is, to say the least, fraught with political intrigue

Ironically, there was, moreover a way to write this opinion that could have narrowed the dispute and exposed for public deliberation a point that does require serious consideration. The thoughtful dissenting opinion of Commissioner Pinkert pointed the way. Commissioner Pinkert contended that the key factor weighing against granting Samsung an exclusion order is that Samsung in its FRAND negotiations demanded from Apple rights to use certain non standard-essential patents as part of the overall deal. In this view, the introduction of nonprice terms on nonstandard patterns represents an abuse of the FRAND standard. Assume for the moment that this contention is indeed correct, and the magnitude of the problem is cut a hundred or a thousand fold. This particular objection is easy to police and companies will know that they cannot introduce collateral matters into their negotiations over standards, at which point the massive and pointless overkill of the Trade Representative’s order is largely eliminated. No longer do we have to treat as gospel truth the highly dubious assertions about the behavior of key parties to standard-setting disputes.

But is Pinkert correct? On the one side, it is possible to invoke a monopoly leverage theory similar to that used in some tie-in cases to block this extension. But those theories are themselves tricky to apply, and the counter argument could well be that the addition of new terms expands the bargaining space and thus increases the likelihood of an agreement. To answer that question to my mind requires some close attention to the actual and customary dynamics of these negotiations, which could easily vary across different standards. I would want to reserve judgment on a question this complex, and I think that the Trade Representative would have done everyone a great service if he had addressed the hard question. But what we have instead is a grand political overgeneralization that reflects a simple-minded and erroneous view of current practices.

The enormous technical advances in all these fields are not consistent with the claim that holdout problems have brought an industry to a standstill. The brave new world of discretionary remedies could easily backfire and undermine cooperative behavior by rewarding those who refuse to cooperate. If the critics of the current system focused on that one background fact, they might well be more diffident about pushing vast industries into uncharted territories on their regrettable overconfidence in their own untested judgments.

Richard A. Epstein is the Laurence A. Tisch Professor of Law at New York University School of Law, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, and the James Parker Hall Distinguished Service Professor of Law Emeritus and Senior Lecturer at the University of Chicago Law School. He is currently consulting with QUALCOMM on the issues at stake in this case.