Category: Uncategorized

The Failure of the DMCA Notice and Takedown System

Post author By Joshua Grove
Post date December 5, 2013

Today, CPIP released an important new policy brief, The Failure of the DMCA Notice and Takedown System: A Twentieth Century Solution to a Twenty-First Century Problem, by Professor Bruce Boyden of Marquette University Law School. Professor Boyden argues that the DMCA notice and takedown system is outdated and not up to the task of reducing the availability of infringing copies of creative works. A tool that was originally designed as an emergency stopgap measure, to be used in isolated instances, is now expected to manage infringement on a persistent, ubiquitous, and gargantuan scale. Copyright owners currently send takedown notices at an annualized rate of over 78 million infringing files, and yet every day these same files are still available on the most heavily trafficked websites. In short, the notice and takedown system is long overdue for an update that actually works to prevent today’s wide-scale infringement.

The full document is available here, and we’ve also included the text (and replaced end notes with hyperlinks) below.

The Failure of the DMCA Notice and Takedown System: A Twentieth Century Solution to a Twenty-First Century Problem

Bruce Boyden

Section 512 of the Digital Millennium Copyright Act will be turning 15 years old soon, and it’s showing its age. Its design belongs to a different era. Like a 15-year-old automobile, it no longer runs as well as it used to. It can’t keep up with the newer, faster vehicles on the road. Its users are beginning to look for alternative forms of transportation. Pieces of it have been wearing down over time, and ultimately something is going to break that outweighs the cost of replacement.

That time may be now: the notice-and-takedown provision of Section 512 is straining under the weight of a blizzard of notices, as copyright owners struggle to abate the availability of infringing copies of their most highly valued works. The tool is no longer up to the task. Mainstream copyright owners now send takedown notices for more than 6.5 million infringing files, on over 30,000 sites, each month. Printing out the list of sites for which Google receives takedown requests in just one week runs to 393 pages. And that just counts the notices sent to Google; duplicates of many of those notices are sent to the site hosts and to other search engines. For example, over a six-month period ending in August, the member companies of the Motion Picture Association of America sent takedown notices for 11,996,291 files to search engines, but sent even more notices—for 13,238,860 files—directly to site operators. (See chart below.)

That amount of effort might be worth the trouble if the flurry of paperwork made more than a dent in the availability of infringing files. Despite all the notice, there is precious little “takedown” to show for it. Unless a site employs some sort of content filtering technology, the same content typically re-appears within hours after it is removed. As a result, this is a system that makes no one happy. Copyright owners are unhappy with the amount of expense and effort the system requires for such paltry results. Online services are unhappy with the burden of having to process and respond to all of those notices. Users are unhappy with inconsistent enforcement and occasional, inevitable mistakes.

The problem is that notice-and-takedown has been pressed into service in a role for which it was never intended. Section 512 was originally designed as an emergency stopgap measure, to be used in isolated instances to remove infringing files from the Internet just long enough to allow a copyright owner to get into court. That design reflected the concerns of its time. In 1998, the dawn of widespread public use of the Internet, there was considerable anxiety about how the law would react to the growing problem of online infringement. Online services worried that they might be held directly liable as publishers for infringing copies of works uploaded by users, despite lacking any knowledge of those copies. Section 512 addressed these concerns by giving service providers a safe harbor to protect them from liability for unknowingly hosting or linking to infringing material.

Since Section 512 was a legislative compromise, Congress sought to address the concerns of copyright owners too – at least the ones they had in the late ‘90s. The problem the creative industries confronted in 1998 was one of content escapes—of copyrighted work moving off of physical formats and onto the Internet. Once there, the speed and accessibility of Internet transmission meant that even a single individual could create a website—or in the 1990s, perhaps a file transfer protocol (FTP) site—and distribute such copyrighted work worldwide. That approach suited the times. Since residential transmission speeds were slow, there was a chance that if copyrighted owners acted quickly enough they could prevent uploaded works from reaching a large audience. Even preparing court papers would take a few days, however; to get immediate results, they would need the assistance of the ISPs hosting the infringing site to help them take it down, at least temporarily.

And that’s why the notice-and-takedown system was added. The goal of notice-and-takedown was to get “service providers and copyright owners to cooperate to detect and deal with” infringing sites before the content was distributed too widely (S. Rep. No. 105-190 at 20 (1998)). It was a more immediate, but temporary, substitute for going into court and getting a temporary restraining order. Indeed, it lasts approximately the same amount of time as a TRO, ten business days.

The DMCA’s statutory language confirms the original, extraordinary nature of takedown requests. The notices themselves are cumbersome to draft, with six required pieces of information in a signed writing. Then, after the online service removes or disables access to the material, there is a complicated game of tennis, as the service provider must first forward the takedown notice to the user, who then may reply with a counternotice asking that the material be restored, which in turn must be forwarded back to the content owner. At that point, the copyright owner has “not less than 10, nor more than 14, business days” to stop the copyrighted work from being replaced by filing a lawsuit. (17 U.S.C. § 512(g)(2)(C)).

The notion that content might leak onto the Internet unless somehow stopped now seems almost quaint. Modern infringement is persistent, ubiquitous, and gargantuan in scale. It is a problem that needs to be policed, not prevented, if our current copyright system is to continue to function. Takedown notices, with their detailed requirements and elaborate back-and-forth, are a poor way to achieve the routine policing of sites that receive thousands of new files every hour.

Indeed, the situation has only gotten worse. The DMCA’s unsuitability as a tool to manage chronic, persistent, and pervasive infringement is particularly apparent after recent decisions from the Second Circuit and Ninth Circuit that construed the duty of website owners very narrowly under Section 512. (See Viacom Int’l, Inc. v. YouTube, Inc., 676 F.3d 19 (2d Cir. 2012); UMG Recordings, Inc. v. Shelter Capital Partners LLC, 106 U.S.P.Q.2d 1253 (9th Cir. 2013). In those decisions, the courts largely rejected any arguments that Section 512 requires site owners to do anything more than remove the specific file identified in a takedown notice, even if a flood of takedown notices arrives all identifying the same copyrighted work, and even if the site owner has tools in place to automatically identify copyrighted work by pattern-matching. (Viacom Int’l, 676 F.3d at 30-31, 41).

The result is that Section 512 takedowns have become largely ineffective for most works. Even for the largest media companies with the most resources at their disposal, attempting to purge a site of even a fraction of the highest-value content is like trying to bail out an oil tanker with a thimble. In their effort to make their most highly sought-after works just slightly harder to find, copyright owners are currently sending notices at an annualized rate of over 78 million infringing files. The expense of locating, identifying, and then sending a notice for that many files is so significant that even large companies must limit their efforts to only their most recent releases. And even then, despite intensive efforts targeted at the most popular files, takedown notices achieve not a single day when the content is not available on the most heavily trafficked sites.

That burden is falling on businesses of all sizes in every creative industry. Of the roughly 6.5 million files Google receives notices for each month from mainstream U.S. copyright owners, approximately 2.1 million are the subject of notices sent by the RIAA, and another 2 million are in notices sent by the MPAA member companies. But more than one-third of the notices received by Google are the results of efforts undertaken by other industries, such as publishing, video games, and software creators, and by smaller record labels and film and television producers.

The enormous investment of effort required under the notice-and-takedown system is a waste of everyone’s resources. Worse, it may create perverse incentives. The impossibility of keeping up with new uploads means that an online service can create a site aimed at and dedicated to hosting infringing copyrighted works, comply with every takedown notice, and still benefit from the safe harbor, as long as its intent remains hidden. If the site has enough users, any popular content removed will be supplanted by new copies almost immediately.

As a result of the increasing futility of takedown notices, some copyright owners and online services have begun seeking ways to avoid the notice-and-takedown system altogether. For example, several large user-generated content sites have adopted technological tools that allow copyright owners to identify their content and specify what should happen when it appears on the service provider’s system, such as blocking or ad placement. Access providers have joined with copyright owners in creating the Copyright Alert System, which is an attempt to police copyright infringement by issuing the equivalent of an escalating series of speeding tickets. These private agreements and coordination efforts (what economists call “private ordering”) may be moves in the right direction, but they also indicate the increasing frustration that copyright owners and online services have with the Sisyphean nature of takedown notices. It’s long past time for a retooling of the notice and takedown regime.

Section 512 Notices Sent by MPAA Companies (Based on information provided by the MPAA)

Uncategorized

Copyright is Still Essential to a Free Market in Creative Works

Post author By Joshua Grove
Post date November 14, 2013

In the modern digital era, strong copyright protection is still an essential component of a flourishing free market in creative works. Viewed properly as a property right in creative works, copyright is fundamental to economic freedom in our creative economy. Criticisms of copyright have flooded the public policy debate in recent years. Proponents of weakening or eliminating copyright protection argue that copyright is outdated in the digital age, and that given the ease with which creative works can be distributed and shared online, creators today no longer need robust copyright protection to incentivize the development of creative works. Arguments against strong copyright protection hinge on the belief that copyright should be treated differently from other property rights, eschewing the traditional “right to exclude” in favor of the public’s right to access or use the creative works of others. But the arguments for weakening copyright overlook copyright’s fundamental role in fostering a vibrant creative economy – a role that is every bit as important today as it was before the digital revolution.

Proponents of scaling back copyright protection claim that a robust, property-based copyright system is undesirable because (1) it is not needed to incentivize the production of creative works, and (2) it harms the public by unduly restricting people’s right to access and use creative works. Putting aside several inherent flaws in this reasoning (including the implicit assumption that having to pay for creative works will unduly restrict access, as well as the general disregard of individuals’ property interest in the fruit of their labor), this argument fails from an economic standpoint because it ignores the fundamental function of copyright in developing and maintaining the market mechanisms that facilitate not just the creation, but also the commercialization and distribution of creative works. The approach also fails because it assumes the continued production of valuable creative works at economically optimal levels without a basis for such an assumption. Furthermore, focusing primarily on the incentive to create, while ignoring copyright’s larger economic role in supporting a free market economy for creative works, overlooks a critical function of copyright protection.

It is particularly surprising when libertarians and conservatives, traditional champions of the free market, echo this flawed analysis and ignore copyright’s broad role in promoting an efficient market for creative works. In general, conservatives and libertarians recognize that strong private property rights form the foundation of a free market economy. Property rights are pre-market – they are essential building blocks of economic freedom, and without strong property protection it is difficult to imagine an efficient capitalist market for any set of goods or services. Yet, when it comes to intellectual property (and copyright in particular) some libertarians and conservatives are willing to join forces with the far left in assuming that a vibrant economy for creative works can occur in the absence of strong property protection.

One common approach focuses on the idea that property-based copyright protection is unnecessary given the efficiencies and new potential business models of the digital age (sometimes bolstered by the argument that it is simply not possible to enforce intellectual property in the internet age). Underlying this thinking is the implicit assumption that, because of their failure to adjust their business models away from reliance on copyright, creators themselves are responsible for today’s rampant digital theft. The Mercatus Center’s recent piracydata.org project is a good example of this mindset. The project does nothing more than lead us to the unsurprising conclusion that people are more likely to steal content that is not easily available by legal means. As Jerry Brito (the project’s chief architect) explained to the Washington Post, Hollywood could change its business model to combat their piracy problem, and if they choose not to do so they have “no business complaining” about technology companies that facilitate digital theft. This kind of reasoning echoes back to arguments from a decade ago that technology could serve as a “partial replacement” for copyright protection. One need only look at the current state of our creative industries to see how well technology has “replaced” copyright in protecting the free market economy for creative works.

Despite repeated calls to weaken or eliminate the property-based copyright system, there are no clear alternative legal models that would maintain a functional economy for the creative industries. Lessons from real-world examples of weakly-enforced copyright regimes, where piracy is rampant and royalty payments and licensing fees are rare, further underscore this point. As Mark Schultz’s and Alec van Gelder’s research on creative development in Africa has revealed, lack of strong, effectively-enforced copyright laws can have a devastating effect on a country’s ability to develop economically functional creative industries. As a result, creative industries remain heavily “underappreciated and underexploited,” with tragically low gross domestic product yields. In some countries, musicians have even resorted to “noisy street protests and personal confrontations with pirates” to address the destruction of their livelihood by piracy and their countries’ failure to effectively support the creative industries. This stands in stark contrast to thriving creative upstart economies supported by strong copyright protection.

Another popular belief among opponents of property-based copyright protection is that alternative business models can effectively replace copyright and support an efficient free market for creative works. For example, some argue that the music industry will evolve to a point where copyright is no longer relevant because recordings will be freely shared and live performance fees will fuel the creation of new music. As Mark Schultz illustrates in his thoughtful study of the role of live performance in the music industry, this belief is sadly mistaken. The live performance business model is not lucrative enough to support significant production of freely-distributed recorded music. Rather, weaker (or non-existent) copyright protection would likely result in a loss “of the variety and vitality of the music market,” and artists who can’t generate enough touring revenue or alternative income would likely simply leave the industry. The argument that changing business models can supplant copyright is even more absurd in the context of the film industry, where creative works are significantly more expensive to produce and often involve the joint effort of hundreds of people.

Inefficiencies are also common in models that tend to overregulate or distort the free market for creative works. Compulsory licensing regimes introduce the inefficiencies of statutory rate-setting, where pre-set compensation can easily distort the free market pricing of creative works. Such systems also notoriously lend themselves to rent-seeking efforts to influence rates. Culturally protectionist state patronage models, such as certain European countries’ models for financing film production, likewise disrupt free market efficiencies in the creative economy. By diminishing the link between creators and audiences (i.e. supply and demand), these models create a vicious cycle of falling revenues, diminished private funding, and low-quality creative works.

Lastly, even granting the assumption that in the absence of strong copyright protection creators would continue to produce an optimal level of valuable creative works, the lack of copyright protection would still disrupt the efficient commercialization of those works. Adam Mossoff’s analysis of copyright in the context of scholarly publishing provides a good example in this regard. Some scholars and scientists conduct research and produce work without incentives from potential copyright royalties. Instead, they may be motivated by academic recognition, career placement, awards, or pure scholarly curiosity. Copyright critics would argue that this is a perfect example of an area where copyright protection is unnecessary to the extent that it does not incentivize the production of these scholarly works. What this analysis fails to consider, however, is copyright’s essential role in supporting the free market distribution of reliable scholarly works.

Compounding the problem is the mistaken belief that in the modern “digital age” publication and distribution of high-quality creative works is free. In fact, as Adam Mossoff’s research finds, the infrastructure supporting digital distribution of scholarly articles is very expensive. Publishers of digital scholarly works have invested hundreds of millions of dollars ex ante to establish mechanisms to efficiently deliver published research to scholarly consumers (including mobile platforms, websites, and other technology), and strong copyright protection in the underlying works is essential to protecting publishers’ investment in these innovative new distribution mechanisms. Thus, even in rare cases where copyright may not provide an incentive for the initial creation of certain works, copyright is still essential to support the efficient free market for distributing those works.

In conclusion, even in today’s digital age, strong property-based copyright protection remains an essential component of our creative economy. It is the bedrock supporting the free market for creative works, and it is vital to maintaining the market mechanisms that promote the creation, commercialization, and distribution of creative works. Repeated calls to weaken copyright (and accompanying suggestions of alternative legal or business models) routinely ignore copyright’s fundamental economic importance. Conservatives and libertarians that hold free markets in the highest esteem should be particularly sensitive to this. Efficient free markets cannot occur without strong underlying property rights, and weakening copyright would thus undoubtedly hurt our creative economy.

Mercatus’s Unhelpful Business Advice to the Creative Industries

Post author By Joshua Grove
Post date October 18, 2013

Washington, D.C. is full of smart people with great ideas about how other people should run their lives and businesses. The more innocent of first hand knowledge and practice they are, the more generous and enthusiastic they seem to be with their advice.

While free market advocates are particularly fond of criticizing progressives for this sort of “helpfulness,” it is, in truth, a bi-partisan, pan-philosophical affliction.

For example, I have a friend who runs a business managing parking garages for various organizations and corporations in D.C. In one of those only-in-Washington moments, an executive at one of his accounts, a free market policy analyst, summoned him to a meeting to explain to him how to better run the parking garage.

The scholar proceeded to cite and explain various economic models that counseled changes in my friend’s business practices. As I listened to my friend’s story sympathetically, I thought of how I would respond. In truth, I’m cut from the same cloth as this scholar, so I probably would have cited Mises and Hayek back at him, and talked about the importance of distributed, first hand knowledge. We could have had a fine Washington think tank conversation – perhaps we could have perfected it by citing “data” supplied by rival trade associations.

My friend’s answer was simpler. After listening patiently, he asked the scholar a few questions: “Do you know how many cars came into this garage between 7 and 10am yesterday? Do you know how many spaces are in this garage? Do you know how many spaces are in the neighborhood?” “No,” replied the scholar. Of course, my friend knew the answers, and knowledge like that, combined with 20 years of successful experience explained why he ran his business the way he did.

The conversation pretty much ended there, with the free market advocate and the actual market actor staring at each other across the gulf between theory and experience.

I was reminded of this story when I heard about the error-plagued launch of the Mercatus Center’s new piracydata.org project. The free-market organization launched a website that proposes to answer the question: “Do people turn to piracy when the movies they want to watch are not available legally?”

To answer this question, the website takes a weekly top ten list of most-pirated movies from the TorrentFreak website, and then compares it to a list from CanIStream.It, which purports to provide information as to whether movies are available for rental or purchase via stream.

Initially, Mercatus claimed that only 1 of those top ten most-pirated movies was available for rental and 4 were available for purchase. It later issued a correction (buried at the bottom of this Washington Post piece), noting that, actually, 4 were available for rental and 6 for purchase. (In truth, Mercauts only concedes that 3 were available for rental, since the authors offer a qualification with respect to one of the movies).

What to make of all this? Well, putting aside the embarrassing errors (but the authors don’t seem all that embarrassed), first there’s the way Mercatus framed the research question: Do people “turn” to piracy because the movies they want are unavailable legally? Ah, yes, that familiar “turn” of phrase, as in being forced to “turn to a life of crime” by circumstances beyond one’s control.

It sounds to me like Mercatus is blaming the wrong victim here, which is what Jeffery Eisenach said in TechPolicyDaily. We skeptics weren’t the only ones who saw things that way. Many who praised the website saw it the same way. For example, TorrentFreak’s coverage said “Is Hollywood partly to blame for the high piracy rates of some movies? A newly launched website suggests that this may be the case, as it shows that the most pirated movies are not available to stream, buy or rent legally.” The CCIA’s blog similarly headlined its coverage: “Piracydata.Org Confirms Yet Again That Hollywood Should Evolve Business Models To Deter Piracy.”

Look, we all get it, skeptics and fans alike: There are certain questions you ask because you want to make a particular point by answering them. Is it really a surprise that the newest movies are the subject of the most piracy, and, may not be available quite yet, as their owners continue to exploit other markets? It would be more of a surprise to find “The Maltese Falcon,” “Casablanca,” or even “The Little Mermaid” among the most pirated movies. And yet, Mercatus chose to ask the question and gather the data. It seems disingenuous to claim that the authors were just curious and had no point to make about piracy.

Jerry Brito of the Mercatus Center explains that this point of view is wrong. Piracy is bad. Brito says he is not blaming the victim.

In both my post announcing the site and the Washington Post article Eisenach links to, as well as other articles about the site, I make it clear that there is no excuse for piracy. Piracy is illegal and wrong and copyright holders should be able to exercise their exclusive rights as they see fit during the term of copyright. I don’t know how much more explicit I can be.

Okay, sorry. So Jerry Brito is not blaming the victim. Except, of course, when he is blaming the victim on Twitter:

Brito also links piracy to Hollywood’s release windows – the implication seems to be that Hollywood should change its business model. Just as with my friend’s parking garage, the free market analyst wants to tell the market actor how to run his business.

But once again, I allegedly am doing the Mercatus project an injustice. I’m not the first to contend that Brito and his colleagues are, well, Washington know-it-alls, and Brito wants to make clear that he is not a meddler:

In my post announcing the site I wrote that “their business model is their prerogative, and it’s none of my business to tell them how to operate,” and that’s something I repeated in other articles where I was quoted. So to be clear, I don’t think movie studios have any obligation to do anything. And I certainly don’t think that shortening their release windows would “eliminate piracy,” as [one commentator] said.

So, Brito is not telling Hollywood how to run its business. I got a different impression from his friend and frequent collaborator Tim Lee, who quoted Brito in the Washington Post as follows:

Hollywood, [Brito] says, could “change its business model to take their own voluntary measures to deal with piracy,” by making movies more readily available through legal online channels. If it chooses not to do that, he believes, they have no business complaining that tech companies aren’t doing enough to combat the problem.

Putting snark aside, perhaps the authors should simply dispense with the pretext. All too often, we see arguments such as this that say ‘I think copyright is important and abhor piracy, BUT . . . ‘ And, after the “but” comes outrage at most any attempt by creators to enforce their rights and protect their investment. Or, as in this case, advice that excuses piracy and counsels surrender to piracy as the only practical way forward. Perhaps it would be less hypocritical for such commentators to admit that they are members of the Copyleft. While I think that it’s a terribly misguided and unfortunate position, it is all too respectable in libertarian circles these days. See the debate in which I participated earlier this year in Cato Unbound.

In any event, however, how about a little more modesty and a little more respect for copyright owners? In truth, the “content” industry leaders I’ve met are, as I’ve told them, way smarter than the Internet says they are. They are certainly smarter about their business than any policy analysts or other Washingtonians I’ve met.

The movie industry knows these numbers very well and knows about the challenges imposed by its release windows. They know their business better than their critics. All sorts of internal, business, and practical constraints may keep them from fixing their problems overnight, but it’s not a lack of will or insight that’s doing it. If you love the free market, then perhaps it’s time to respect the people with the best information about their property and the greatest motivation to engage in mutually beneficial voluntary exchanges.

Or you can just contribute to the mountain of lame excuses for piracy that have piled up over the last decade.

Antitrust Injunctions ITC Patent Law Patent Licensing Patent Theory Remedies Uncategorized

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

Post author By Joshua Grove
Post date August 6, 2013

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.

Commercialization History of Intellectual Property Innovation Patent Law Patent Licensing Patent Litigation Uncategorized

Guest Post by Wayne Sobon: A Line in the Sand on the Calls for New Patent Legislation

Post author By Joshua Grove
Post date June 24, 2013

On June 9-11, the IP Business Congress sponsored by Intellectual Asset Magazine (IAM) hosted a debate on the resolution: “This house believes that the America Invents Act should be a legislative line in the sand and that no more reform of the US patent system is needed.” The debate was moderated by Denise DeFranco, a partner with the Finnegan law firm. Arguing on behalf of the resolution were David Schwartz, Associate Professor of Law at Chicago-Kent College of Law, and Wayne Sobon, Vice President and General Counsel of Inventergy, Inc. Arguing against the resolution were Michael Meurer, Professor of Law at Boston University School of Law and Dan Lang, Vice President, Intellectual Property, Cisco.

With Mr. Sobon’s permission, we are publishing here a slightly modified version of his opening statement at the IP Business Congress debate. Mr. Sobon spoke for himself and not on behalf of his employer or any other institutions.

A Line in the Sand on the Calls for New Patent Legislation

Wayne Sobon
Vice President & General Counsel, Inventergy

With the June 4, 2013 announcement by the Obama Administration of a new set of legislative priorities to change our patent laws yet again, bolstered by a chorus of academics and interested corporations, there are now four separate bills in Congress (with more coming) proposing a wide range of changes to the patent system. Fresh from the seven-year battle that concluded with the America Invents Act of 2011, we once more face a highly emotionally-driven campaign to alter the rules of the field, replete with name-calling (“trolls”).

But just as with our personal conflicts, the best way forward usually comes once we let emotions cool and we dispassionately take a longer view.

We just spent the better part of a decade — following significant research, public hearings, the reports of the National Academies of Science and the FTC, and the testimony of a wide variety of NGOs, corporations, and private inventors and citizens — debating and then approving the most significant changes to our patent system since the 1952 Act. The America Invents Act of 2011was argued in forums like this and on the floor of our Congress as the needed corrective for poor-quality patents, claimed by so-called “trolls” to hold up and oppress innovative companies.

Various companies such as Cisco testified before Congress that the sweeping collection of provisions that make up the AIA were necessary to achieve these policy goals. When it was enacted, it was heralded as “the most significant reform of the U.S. patent system since 1836.” Yet the ink is barely dry, and the voluminous regulations implementing the AIA have barely been set in motion, when the same group of academics and industry players are once again demanding sweeping new changes to the patent laws.

The United States intellectual property system is a precious resource. Indeed, the Founding Fathers saw a unified, national regime of patent laws as so crucial to our democracy that they enshrined it as one of the key powers of Congress. Unanimously and without debate, they passed Article 1, Section 8, Clause 8 of our Constitution. One of the first acts of the first Congress was to pass the Patent Law of 1790. That law has only been significantly amended five times in the last 220 some years. Five times. 1793‎, 1836, 1870, 1952 and 2011.

One genius of our patent system has been an implicit recognition that since its underlying subject matter, innovation, remains by definition in constant flux, the scaffolding of our system and the ability of all stakeholders to make reasonably consistent, prudent and socially efficient choices, should remain as stable as possible. But now these latest moves, demanding yet further significant changes to our patent laws, threaten that stability. And it is in fact systemic instability, from whatever source, that allows the very parasitic behaviors we have termed “troll”-like, to flourish.

It is silly and blindly ahistoric to lump anyone who seeks to license or enforce a patent right, but who does not themselves make a corresponding product, as a “troll.” Many arguments about Non-Practicing Entities (NPE), Patent Assertion Entities (PAE), Patent Licensing Assertion Entities (PLAE) — the various formal names and acronyms for the more commonly known epithet, “patent troll” — include an implicit and often explicit emotional condemnation of any patent holder who either did not invent or does not manufacture the patented products. The President’s statements unfortunately are replete with such derision of people or firms who “don’t actually produce anything themselves.”

Yet, from the very outset, our American patent system distinguished itself from its English predecessor, by establishing the unfettered sale in the marketplace of patent rights, precisely because patents are private property rights (see here, here, and here). In England, patent monopolies were still mostly creatures of the Crown — personal privileges. See B. Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 (Cambridge University Press, 2005), pp. 36-38. The United States patent system, based upon objective criteria for inventiveness and established in freely-alienable property rights, was as significant a revolution in the commercial sphere as the federalist structure was in the political. Id., pp. 49-51, 60-62. And it’s hard to argue against the unprecedented success of the American economy based on the patented innovation protected by these laws.

And indeed, it might come as a surprise, that many of the inventor giants we hold in such high regard today in fact never manufactured the products covered by their patents. Elias Howe did not make sewing machines. Rather, having invented the hugely important lock-stitch technology, but being poor himself, he assembled financing, using then novel securitization of patents, and then licensed his patent to others (and famously, fought the equivalent of our smart phone wars, against Singer). Charles Goodyear never manufactured any rubber; he licensed his vulcanization process to others. Thomas Edison also received third-party financing to operate his famous invention factory in Menlo Park, and he licensed his patented inventions to other companies for manufacture and sale in the marketplace, such as his invention of the first electric pen. And when the unscrupulous refused to pay licenses, each of these inventors of course moved to enforce.

Rather than focus on practicing vs. non-practicing, as manufacturing and licensing are both equal rights in practicing a property right, let’s focus instead on parasitic behaviors. Let’s respect the genius of our Founders, and make few if any changes to the structure of our system. And let’s focus on specific, targeted interventions that can actually cut off the systemic rot upon which parasitic behavior thrives.

Here are two important areas that could benefit from targeted interventions: (1) the high costs of litigation for all participants, and (2) the rampant and extended uncertainty of patent disputes. Both of these interventions rest soundly in the discretion of our Federal Courts. We already have the tools to bring down discovery costs (I’d argue we need less discovery than what we spend so much time, money, energy and emotion on to yield valid, fair results). And as noted by now-former Chief Judge Randall Rader in his many public comments, judges already have the legal and procedural tools to cull sham lawsuits from the courts. It just requires exercising judgment, as they ably can and do. That’s why they’re called judges.

We do not need yet more statutory changes, changes that will engender more uncertainty and another decade of resulting litigation, to achieve the particular policy goals here. We simply need our judges and our existing system to do the job they already have.

Tags America Invents Act, Chief Judge Rader, innovation, legislation, non practicing entity, NPE, patent assertion entity, patent licensing, patent litigation, patent reform, patent troll, SHIELD Act

Biotech Gene Patents Patent Law Uncategorized

A Critique of a Recent Article Which Found That Sequence Patents Cover the Entire Human Genome

Post author By Joshua Grove
Post date April 6, 2013
No Comments on A Critique of a Recent Article Which Found That Sequence Patents Cover the Entire Human Genome

By Professor Christopher Holman

[The following is a blog posting by Christopher Holman, a patent law scholar at UMKC School of Law, that he originally posted on April 5, 2013 at his blog, Holman’s Biotech IP Blog, where Professor Holman regularly blogs on important issues in biotech and IP law. Professor Holman kindly gave us permission to repost his blog posting here.]

A Critique of a Recent Article Which Found That Sequence Patents Cover the Entire Human Genome
By Christopher Holman

I recently fielded a phone call from a reporter with a leading international scientific journal, asking for my opinion of an article entitled “Pervasive Sequence Patents Cover the Entire Human Genome,”recently published in a publication called Genome Medicine. I have published several articles debunking the myth that 20% of human genes are patented, and the reporter thought that the article in Genome Medicine, authored by a researcher affiliated with Yale Law School’s The Information Society Project, contradicted the results of my study. I took a look at the “Pervasive Sequence Patents” article and found it to be a fundamentally flawed empirical study that will sadly be used to further support the widespread misperception that access to a large percentage of the human genome is precluded by a thicket of gene patents.

The “Pervasive Sequence Patents” article does cite to my 2012 Nature Biotechnology article Debunking the Myth That Whole Genome Sequencing Infringes Thousands of Gene Patents, but the authors apparently missed the main point I was trying to make. The myth that 20% of human genes are patented was born out of a 2005 article published in Science by Jensen and Murray that found that the sequence of 20% of human genes (or in some cases the protein encoded by human gene) is mentioned in a US patent claim. The problem arose when people assumed that the mention of a gene’s DNA sequence in a patent claim is equivalent to the patenting of the gene, which led to an assumption that any use of or research on any of these genes would result in patent infringement. In my article, I explained that in patent law “the name of the game is the claim “(to quote Judge Rich), and that when one actually reads the patent claims in the patents identified by Jensen and Murray it is clear that few if any of the patents would be infringed by many forms of research or genetic testing, including diagnostic testing and whole genome sequencing.

Unfortunately, the authors of “Pervasive Sequence Patents” have apparently fallen into the same trap, assuming that mention of a gene’s DNA sequence in a patent claim results in the patenting of the gene in a manner that totally blocks access to the gene. Even more problematically, the authors seem to assume that every patent with a claim mentioning a gene sequence also claims every 15mer present in the sequence, i.e., every contiguous 15 nucleotide sequence appearing in the gene. Presumably they made this assumption because the Myriad gene patent litigation includes a patent claim directed to 15mers of the BRCA1 encoding sequence, including Claim 5 from US patent number 5,747,282:

An isolated DNA having at least 15 nucleotides of the DNA of claim 1.

There are two fundamental problems with this empirical approach. One is that it does not necessarily follow that the mention of a gene’s DNA sequence in a claim equates with the patenting of the gene – that was the main point of my Nature Biotechnology article. The other is to assume that all of these patents include claims analogous to Claim 5 of the ‘282 patent.

In my experience, claims of this type are extremely rare. I looked at hundred patents identified as gene patents in the Jensen Murray study and found that most only claim the full-length gene sequence, and if fragments were claimed the fragments are much larger than 15 nucleotides. In fact, I looked through hundreds of gene patents trying to find another 15mer claim analogous to those in the Myriad patents and could not find one. The patent claims at issue in the Myriad case will be expiring within the next few years I believe, and I doubt that this sort of broad 15mer claim has been issued by the patent office in recent years, or if it has it seems to be extremely rare.

In any event, in 2010 Keppler et al. published an article entitled “Metastasizing Patent Claims in BRCA1” which showed that if the BRCA 15mer claims are interpreted so broadly as to cover any DNA sequence comprising any 15mer appearing in a BRCA gene, there appears to be a wealth of prior art that would invalidate the claim regardless of the claims patent eligibility.

The flawed methodology used in the “Pervasive Sequence Patents” article is readily apparent from the results of their empirical study. Here is what they reported as the result of their study:

[W]hen we took existing gene patents and matched their 15mers to known genes, we found that 100% of known genes have at least one 15mer claimed in a known patent. Current gene patents were observed to match each gene many times, with 1,295 matches to other genes on average (standard deviation 1,208). When we examined the amount of total sequence space in human genes that is covered by 15mers in claims from current patents (Additional file 2), we found 58 patents whose claims covered at least 10% of the bases of all human genes. The top patent was US7795422, whose claims’ sequences matched 91.5% of human genes. Interestingly, we also observed a patent for improving bovine traits (US7468248) with explicit claims for 15mers that matched 84% of human genes. This patent was not even aimed at any human sequence, yet covered a majority of human genes once we examined the claim’s matches at the 15mer scale.

First off, let’s look at the “top patent” they found, US7795422, “whose claims sequences matched 91.5% of human genes.” The ‘422 patent has only one independent claim:

1. A chemically modified short interfering nucleic acid (siNA) molecule, wherein: (a) the siNA molecule comprises a sense strand and an antisense strand, each strand having one or more pyrimidine nucleotides and one or more purine nucleotides; (b) each strand is independently 18 to 27 nucleotides in length, and together comprise a duplex having between 17 and 23 base pairs; (c) the antisense strand is complementary to a human Hypoxia Inducible Factor 1 (HIF1) RNA sequence comprising SEQ ID NO:567; (d) a plurality of pyrimidine nucleotides present in the sense strand are 2′-deoxy-2-fluoro pyrimidine nucleotides and a plurality of purine nucleotide present in the sense strand are 2′-deoxy purine nucleotides; and (e) a plurality of pyrimidine nucleotides present in the antisense strand are 2′-deoxy-2′-fluoro pyrimidine nucleotides and a plurality of purine nucleotides present in the antisense strand are 2′-O-methyl-puine nucleotides.

When one reads the claim, it is apparent on the face that the claim is limited to “chemically modified” molecules comprising 2′-deoxy-2-fluoro pyrimidine nucleotides and 2′-deoxy purine nucleotides. DNA does not contain 2′-deoxy-2-fluoro pyrimidine nucleotides and 2′-deoxy purine nucleotides, these are synthetic analogues to the nucleotides that appear in DNA. This patent that the authors found to match 91.5% of human genes does not cover any gene or any DNA molecule, only chemically modified synthetic molecules for use in RNA interference.

Next the authors reported that US7468248 contains “explicit claims for 15mers that matched 84% of human genes.” In fact, the ‘248 patent has only two independent claims, both of them method claims:

1. A method for inferring a trait of a bovine subject from a nucleic acid sample of the bovine subject, comprising identifying in the nucleic acid sample, a nucleotide occurrence of a single nucleotide polymorphism (SNP) at position 300 of SEQ ID NO:21645, thereby inferring the trait, wherein the trait is marbling, tenderness, fat thickness, red meat yield, or average daily weight gain.

22. A method for determining a nucleotide occurrence of a polymorphism in a bovine sample, comprising: a) contacting a bovine polynucleotide in the sample with an oligonucleotide that binds to a target region, wherein the target region comprises a position at position 300 of SEQ ID NO:21645 or wherein the target region is within 3000 nucleotides of a nucleotide at position 300 of SEQ ID NO:21645, and b) determining the nucleotide occurrence of a single nucleotide polymorphism (SNP) at position 300 of SEQ ID NO:21645, wherein the determination comprises analyzing binding of the oligonucleotide or detecting an amplification product generated using the oligonucleotide, thereby determining the nucleotide occurrence of the polymorphism.

Both of these claims would only be infringed by someone performing a specific genetic test on a bovine subject (colloquially a cow). The patent does not include any claim covering any DNA sequence, and the authors’ assumption that the patent “explicitly claims 15mers that matched 84% of human genes” implies that they either did not read the claims or do not understand the basics of claim interpretation.

The problems with this article are pretty apparent once one reads the claims of the patents that were identified as “matching” human genes. Unfortunately, it is just the latest installment of a prolific stream of fundamentally flawed academic articles that are being cited in support of the notion that human gene patents are a pervasive problem. I don’t doubt that the authors meant well, but it’s dangerous to conduct empirical patent studies without appreciating and understanding the critical role of the patent claim. And the publication of the article highlights the limitations of peer review (assuming Genome Medicine engages in peer review).

Tags biotech, christopher holman, gene patents, human genome

Commercialization Copyright Copyright Licensing Legislation Supreme Court Uncategorized

Summary of Kirtsaeng v. John Wiley & Sons by Professor Chris Newman

Post author By Joshua Grove
Post date March 21, 2013
No Comments on Summary of Kirtsaeng v. John Wiley & Sons by Professor Chris Newman

Kirtsaeng v. John Wiley & Sons, U.S. Supreme Court, decided March 19, 2013

Chris Newman
Assistant Professor of Law
George Mason University School of Law

This is best described as a decision in which the Court felt compelled to choose between two readings of the Copyright Act, either of which led to unpalatable results. One reading would eviscerate the exclusive importation right that Congress had sought to grant copyright owners. The other would insert a huge loophole into the first-sale doctrine, which denies a copyright owner the right to control how people dispose of copies of protected works once they lawfully acquire ownership of them. The argument was largely couched in the language of statutory interpretation, but at the end of the day the question was which horrible did more of the Justices fear more.

The majority, in an opinion by Justice Breyer, chose to sacrifice the importation right. This means that U.S. copyright owners may not rely on copyright law to aid them in segmenting the world market into domestic and foreign exclusive distribution zones. Which is nice—at least in the short run—for U.S. consumers who want to buy cheap gray market imports. It may turn out to be less nice in the long run for petitioner Kirtsaeng’s fellow citizens in Thailand, to whom U.S. textbook publishers may no longer be willing to sell books at prices that support arbitrage. As Justice Kagan frankly acknowledged in concurrence, this is a suboptimal result that might have been avoided had the court taken a different route in an earlier case.

The three dissenters would have opted to preserve the importation right, and in terms of straightforward textual interpretation, this commenter thinks Justice Ginsburg got the better of the argument. What cost her the day was her inability to read the statute in a way that definitively closed the potential loophole in first sale doctrine, so as to dispel the spectre of permitting copyright owners to move all their manufacturing overseas and thereby gain the right to control all downstream distribution and display of copies even after they had been legally sold. To be sure, this would indeed be an undesirable result, and Justice Ginsburg certainly did not believe it to be a correct or desirable application of copyright law. But the only way she could avoid it while preserving the importation right was to argue that first sale doctrine is not really governed by the language in which it was codified in the statute. Her solution makes sense as a matter of policy, but there was no way for the Court to adopt and make it stick in the context of this case, which would have left the spectre seemingly at large and triumphant.

Tags copyright, copyright licensing, importation right, price discrimination, Supreme Court

Legislation Patent Law Patent Licensing Patent Litigation Uncategorized

Scratching my Head Over the SHIELD Act

Post author By Joshua Grove
Post date March 13, 2013
No Comments on Scratching my Head Over the SHIELD Act

By Michael Risch

[The following is a blog posting by Michael Risch, a patent law scholar at Villanova Law School, that he originally posted on March 10, 2013 at the law professor group blog, Madisonian.net, where Professor Risch regularly blogs. Professor Risch kindly gave us permission to repost his blog posting here.]

Scratching my Head Over the SHIELD Act
By Michael Risch

I get that many people hate patent trolls. I get that many people would like to find a way to limit NPE activities in enforcing patents. But I’m scratching my head over the rhetoric and content SHIELD Act, which was reintroduced last week. For the uninitiated, the proposal would mandate fee shifting for all losing NPEs. Carved out of this group are initial assignees of a patent (that is, individuals and companies who obtained the patents themselves), universities, and companies that spend “substantial” resources making something. Further, NPEs must post a bond for the fees before they can even get into the courthouse.

I should start by saying that I don’t have a strong position on fee shifting. I think that mutual fee shifting might actually do some good to reduce litigation costs and force more reasonable licensing negotiations. I’m also in favor of all sorts of behavior based fee shifting: filing frivolous cases, demanding license fees that far exceed reasonableness, ridiculous claim construction arguments, frivolous discovery requests, unrealistic damages expert reports, etc. I think the threat of fee shifting is a stick that could be used to tame costs. But note that all of these proposals are based on behavior, not identity.

This leads to my concerns with the SHIELD Act, which leave me scratching my head. As a taste of my further thoughts, I’ll note that the EFFs poster child for the act, a podcasting NPE, is actually excluded from the act, and would not have to pay fees on loss.

Rhetoric

Let’s start with the rhetoric. It seems like few people have actually examined the act in detail, and thus support for it sounds like a propagandistic echo chamber. I joined Twitter only recently, and originally attributed this to the 140 character limit. Get rid of trolls! $29 billion in costs! Meritless patents! However, it turns out that longer discussion also repeats the same claims without much analysis, albeit with more words. Indeed, very few of the reports actually link to the text of the act, which is here, but instead link to each other, all saying the same thing.

I have a problem with this rhetoric for two reasons. First, the facts are way, way more complicated than that (see Kesan & Schwartz, for example, for a critique of the $29 billion estimate, and see the PWC study on patent judgments since 1995 for discussion about how often and how much NPEs and practicing entities win).

Furthermore, there are many types of NPEs out there, from pre-adoption technology houses to the most abusive frivolous claim filers. The SHIELD Act and its proponents consider none of this nuance.

This leads to my real problem with the rhetoric: it is driven by large companies and presented as if it will benefit small companies. If we were so worried about small companies, why wouldn’t we make the act apply to all patent plaintiffs? After all, large companies routinely assert their patents against smaller, disruptive entities in order to stake out market position or even put them out of business. Just compare the Barnes & Noble submission to the FTC about Patent Assertion Entities with the Barnes & Noble complaints about Microsoft’s licensing practices. The complaint is the same, so it is unclear why the solution should not be the same.

I am bothered by any rhetoric purportedly intended to “protect innovation” that does not, well, protect innovation by its own terms. The EFF campaign focus on a patent that would not actually be subject to the act is just one example. And the fact that no one pushing the SHIELD Act—many of whom I respect even though I disagree—is asking these questions makes my knees jerk to oppose it.

Content

My general point of view is that we should address the behavior, not the owner. Yes, it’s bad that an NPE has asserted what many think is a meritless podcasting claim against Adam Corolla. (I won’t address the merits here, but I will note that the initial patent application was filed in 1996, not last year).

But would we really feel better if it were a product company making the same claim? A meritless claim hinders innovation no matter who makes it. That’s about all I will say about the core question of whether NPEs should be required to post a bond just to get into the courthouse. I think they should not—nor should anyone,—even if fee shifting were mutual. But defending that statement is more than I can do in this blog post. I’ve written at least two articles that address the topic and there are a multitude of other studies that address the role of NPEs in licensing as well as the parallels between NPE and product making patentee behavior.

Thus, my questions about the Act relate to the particulars and their unintended consequences. Note that the text of the act has been carefully written to carve out everyone who might object to it, except NPEs. This is the root of the problem, because “patent troll” means different things to different people.

Some points:

1. The act mandates a fee award to any party victorious on noninfringement or invalidity. This means that a company can sue for declaratory relief and force fee shifting, even though the patentee never filed suit. I realize that many people would say, “Great! No more demand letters!” But consider two things. First, there are many, many transactions – millions, if not billions of dollars worth – that are undertaken between technology licensing companies and product companies without the imprimatur of “trollishness.” This provision could disrupt that ecosphere in an effort to fix a different one. Second, this provision could have a perverse effect of multiplying the number of litigations. I don’t believe that patent holders should overclaim in order to seek higher licenses, but I also don’t believe that potential infringers should underclaim in order to force litigation.

2. The act excludes parties that have a “substantial investment” in the exploitation of a patent via production or sale. This is fraught with difficulty. First, what does “substantial” mean? Presumably it is intended to ensnare NPEs that decide to make things, but not make enough (or good enough) things. But why should a court get to decide what is enough? And what do we do about start-ups who have patents but have not yet commercialized their invention? Are they trolls, too?

And what is to stop NPEs from becoming distributors? They could buy competing products wholesale (perhaps products where they have secured licenses) and sell them. This only makes sense; by being resellers, they can claim that the competition of the infringing product is harming their sales business. This points to the general complexity of licensing in the first place: companies might license patents when their opponents do not in order to gain a competitive advantage, even if the patent is old.

3. This exploitation prong leads to other questions. What if a claim construction goes against the patentee, and the patent isn’t quite as broad as the owner thought. This happens all the time, to patentees of all types. Does this mean that the product selling patent holder is no longer exploiting the patent? The language seems to say so, and even the biggest producer would be ensnared.

4. The potential for producers to be liable doesn’t stop there. Consider Palm, which developed WebOS, and made stuff. Consider HP, which has spent billions of dollars in research and development. HP bought Palm, and made WebOS tablets. For various reasons, maybe in part due to patent claims from other tablet makers like Apple, HP decides to stop selling WebOS tablets. HP then decides to enforce Palm’s patents. Mind you, HP didn’t just buy the patents, it bought the company. And then it made stuff, it researched, it developed, and it has even licensed WebOS out to LG try to resurrect it for televisions. Is HP a troll now? It falls under the text of this act. I think that just cannot be right, and yet there it is, in black and white. By the way, HP sold some patents to HTC, who then asserted them against Apple. Soon after, HTC and Apple settled a long running, very costly litigation. Would the SHIELD Act change the dynamic of this dispute? I hope not, my family bought HTC phones.

5. Universities and technology transfer organizations are excluded. This offers a potential way for NPEs to avoid the law. They can become technology transfer organizations for small colleges that cannot afford them, or perhaps coordinate with each other to offer 1 year programs that satisfy the higher education requirements. This latter likelihood is a longshot, I think, but when money is at stake, you never know. This exception also ignores the role of universities in the patent ecosystem; do universities really never assert meritless claims? What happens when they start bringing more lawsuits? Maybe NPEs should team with tech transfer organizations and the tech transfer folks can bring suit instead; it would only take a few large university related intermediaries to make the entire bill fall apart.

6. Excluded are “original assignees,” which are assignees prior to patent issuance that appear on the face of the patent. This leads to two issues. First, what if the assignment is done late, even at a product company? It happens. I suppose they would rely on the “investment” prong, but the company might not be making the patented product.

Second, many NPE patents are assigned to the NPE as the initial assignee. NPEs often buy patents while they are in process and assign continuation applications to themselves; those continuations are often the broadest claims (and thus the least likely to be meritorious as a matter of logic). In other words, the patents we worry about most are the patents that are least likely to fall under the rule. Some of the most highly-litigated, most-litigated patents were originally assigned to the NPE enforcing them now. This brings us to the point I made above, Personal Audio, with its podcasting patent, is initially assigned to….Personal Audio. Sorry folks, this is not the SHIELD you are looking for.

Furthermore, to avoid this issue, NPEs can simply buy shell companies that continue to hold the patents, while the original owner, if still active, can spin off any business to a new entity. I think Acacia does a fair amount of this already, and will surely do more. The more I think about it, the more I think that this rule, intended to protect “real” inventors, will instead render the much of the act toothless.

7. Finally, the original inventor can always sue. This leaves me scratching my head on both ends of the spectrum. On the large company end, I cannot comprehend why fee shifting is a bad thing if BigCo enforces patents, but a good thing if BigCo creates BigCoIPSubsidiary to enforce its patents. Are these two worlds really that different? Perhaps it is to those BigCo supporters of the bill that enforce their own patents. I should add that I’m told, but have not verified, that the tax code rewards companies that spin out their patents. The law gives with one hand and takes away with the other. Perhaps a better solution would be to get rid of the tax benefits, but I won’t hold my breath.

On the small side, I see the SHIELD Act as changing the way NPEs enforce patents. Original inventors aren’t covered, so perhaps the original inventor should be a nominal plaintiff and just get funded by the NPE. That’s a great incentive at a time when people are clamoring for more transparency in the system.

One more point: Individuals are a primary source of NPE patents. Small businesses have always held their own as patent plaintiffs in the system and continue to do so. But the number of patents represented by individual inventors is double with NPE participation. It’s easy to see why: it costs a lot to enforce a patent, or even to license it, and NPEs have skill and finances that individuals lack.

And so when we discuss the SHIELD Act, we should be crystal clear about what we are talking about: a system that favors big companies over individuals. I’m not making a value statement; there may be good reasons why we want fewer patents by individuals enforced. For example, individuals invent a lot of software, and a lot of software patents are really bad. But are individual software patents worse than everyone else’s? I’ve read thousands of software patents, and my belief is that big companies can write crappy patents just like everyone else. My point is that we should be truthful about what is at stake, what the impacts will be, and whether those are the results we want. Then, given that truth, we should look at some evidence to decide what to do.

Update A comment below notes that the podcasting patent might indeed fall under SHIELD because it was assigned by a family trust of one of the inventors instead of the inventor. This highlights another problem with the bill that I hadn’t even thought about. I noted issues with purchases of companies above.

But if we also say that a wholly owned and controlled intermediary cannot assign the patent on behalf of the original inventor, then SHIELD has the potential to throw a wrench into the works of corporate financing and restructuring. Every day of the week, companies reform through mergers or financing, often creating “NewCo” shell companies that will serve as intermediate owners of assets or will take on new names post financing. I have known lawyers who have such companies already formed so they can use them on a moments notice.

If we say that the intermediary trust excludes the next assignee from being the “original inventor,” then many restructured startup, merged, and financed companies may be in for a rude surprise when the attempt to enforce their patent portfolios. Now, if you dislike patents generally, this realization would lead to rejoicing. I doubt that’s how this act was intended, though.

Tags legislation, NPE, patent licensing, patent litigation, patents, SHIELD Act

Commercialization Copyright Copyright Theory Uncategorized

Where Are the Creators? Consider Creators in Copyright Reform

Post author By Joshua Grove
Post date February 1, 2013

Note: This post was cross-posted at the CATO Unbound on 2/1/2013. The January 2013 issue of CATO Unbound feature a debate on copyright reform, Opportunities for Copyright Reform This post responds to the discussion in that issue, but it also stands alone as a critique of copyright reform proposals that favor to consider the importance of creators.

One of my biggest questions after reviewing the other responses as well as the lead essay is this: “Where are the creators?” The copyright policy debate is often rather vague on certain key points. Amid the discussion of weighing and balancing interests, “corporate welfare,” and tragic obstacles to remix culture, there is a notable silence.

Too often, the modern copyright debate overlooks the fact that copyright concerns creative works made by real people, and that the creation and commercialization of these works requires entrepreneurial risk taking. A debate that overlooks these facts is factually, morally, and economically deficient. Any reform that arises from such a context is likely to be both unjust and economically harmful.

I am genuinely puzzled when copyright discussions treat creative works as if they were a pre-existing resource that the government arbitrarily allocates. They are not. They aren’t an imaginary regulatory entitlement, such as pollution credits. They aren’t leases or mineral rights on public land handed out to political cronies. Creative works are, instead, the productive intellectual labor of private parties. Real people make this stuff.

At this point in the discussion, a common rhetorical move is to reject what some scholars describe as the romantic myth of authorship. Copyright skeptics point out that authors build on the work of others and that many creative works are the work of corporations, not individuals. This argument was provoked by many decades—a couple centuries, really—of rhetoric that put the individual author on a pedestal. Even if one concedes that authors have, perhaps, been idealized, taking them for granted goes too far.

Commercialization Copyright Copyright Licensing Copyright Theory Uncategorized

Copyright Reform Through Private Ordering

Post author By Joshua Grove
Post date January 14, 2013

Note: This post was cross-posted at the CATO Unbound on 1/14/2013. The January 2013 issue of CATO Unbound feature a debate on copyright reform, Opportunities for Copyright Reform This post responds to the discussion in that issue, but it also stands alone as a critique of copyright reform proposals that fail to understand how copyright’s nature as a property right allows for tremendous flexibility via private ordering

Derek Khanna’s lead essay, as well as his memo for the Republican Study Committee, urge libertarians and conservatives to rally around copyright reform as both good policy and good politics. While copyright law has its problems—like any statutory scheme, it is far from perfect—pursuing the “way forward” suggested by the lead essay is unlikely to yield policy or politics that are helpful or appealing to advocates of the free market.

If we embark on the path to copyright reform, where we end up very much depends on where we start. Given how the lead essay frames the discussion, it points us to a bad end. I addressed some of my general philosophical and policy disagreements with the RSC memo elsewhere. In this short response essay, I focus on the problems with the lead essay’s portrayal of copyright as “regulation.”

The lead essay describes copyright as a “government-imposed system of regulation.” I fear that this characterization confuses private ordering with government intervention. It proposes to put copyright on a path that likely would lead to more intervention.

In a superficial way, intellectual property rights may indeed seem to resemble the sort of economic regulations that provoke skepticism among free market advocates. For example, it appears that copyright prohibits the remix DJs discussed in the lead essay from freely employing their labor and selling the products of that labor.

The problem with the “regulation” label is that copyright law, in its broad strokes, does not tell anyone what he must and must not do.[1] Copyright only acts as a prohibition if a copyright owner chooses to use it that way. However, there is a vast diversity in how copyright owners actually choose to exercise their rights—they may sell copies at a fixed price, negotiate terms on a case-by-case basis, forgo payment entirely via a Creative Commons license, or simply choose to ignore or tolerate unlicensed uses. Or an owner may simply choose not to license at all. Fair use might override many of these choices, and, in any event, an unhappy potential buyer or user can always attempt to negotiate further.

Like other forms of property, copyright thus represents an invitation to a transaction and an opportunity to bargain. This opportunity for parties to transact and bargain is one of the key differences between property and regulation. A regulator has a duty to enforce the law—and if a regulator chooses not to enforce, then a court may order him to do so. Copyright owners need not enforce their rights, of course. Moreover, it is perfectly legitimate to offer a property owner money to forgo their right to enforce their copyrights; such commercial transactions are really the whole point of copyright. Make the same offer to a regulator, and you go to jail.

The distinction here between property and regulation ought to matter to conservatives and libertarians. We are rightly concerned that regulation impedes freedom. We typically embrace the exercise of property rights as furthering freedom. How we classify a copyright owner’s actions—regulation or property—makes a difference, particularly when they are stubbornly refusing to allow others to use their works in the way that others deem most prudent and efficient.

The rhetorical application of the “regulation” label tends to undermine support for the exercise of property rights. Advocates of free markets generally supported the rights of Susette Kelo and her neighbors when they resisted the city of New London taking of their property to give to another private party in the Kelo v. City of New London case. Nobody vilified Kelo and her neighbors as “regulators” for exercising their property rights, first by refusing to sell and then by fighting the city’s taking of their property. While Kelo’s opponents won anyway, their path certainly would have been even smoother if the city could have pulled the neat rhetorical trick of casting Kelo and her fellow plaintiffs as the bullying “regulators.”

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