Tag: Antitrust

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Antitrust Innovation

Letter to Antitrust Chief Applauds DOJ’s New Evidence-Based Approach to IP Enforcement

hand under a lightbulb drawn on a chalkboardA group of judges, former judges and government officials, law professors and economists with expertise in antitrust law and patent law sent a letter to Assistant Attorney General Makan Delrahim earlier today applauding his recent announcements that the Antitrust Division of the Department of Justice (DOJ) would now take a balanced, evidence-based approach in applying antitrust law to patent licensing, especially to patented innovations that have been contributed to technological standards.

Signatories to the letter include Judge Douglas H. Ginsburg of the D.C. Circuit, former Chief Judge Paul Michel of the Federal Circuit, former FTC Commissioner Joshua D. Wright, and former Director of the U.S. Patent & Trademark Office David Kappos, among others.

A few weeks after his confirmation this past September, AAG Delrahim delivered remarks at a conference held at the USC Gould School of Law in Los Angeles, California. The comments signaled a major shift in intellectual property (IP) policy for the Antitrust Division from the policies pursued by the previous Obama Administration. Indeed, AAG Delrahim pointed out that he is the first head of the Antitrust Division to be a registered patent attorney, and his plans for protecting free market competition in the IP licensing realm reflected a robust understanding of what drives our innovation economy.

AAG Delrahim indicated that antitrust enforcers had “strayed too far” in protecting the interests of implementers of patented technology at the expense of innovators who create the technology in the first place. Such “misapplication of the antitrust laws,” he said, “could undermine the process of dynamic innovation itself.” In particular, AAG Delrahim stated that the recent focus on the “so-called ‘hold-up’ problem,” where innovators threaten to withhold licenses to implementers, fails to recognize the “more serious risk” of the “hold-out problem,” where implementers threaten to use the technology without taking licenses from innovators. AAG Delrahim explained that the “one-sided focus on the hold-up issue” posed a “serious threat to the innovative process.”

Last month, a group of industry representatives sent a letter to AAG Delrahim expressing concerns over the Antitrust Division’s new approach to IP licensing. The letter claimed that “patent hold-up is real, well documented, and harming US industry and consumers,” and it argued that the hold-out problem did not raise similar competition law issues. Remarkably, the industry representatives did not offer one citation to back up their broad claims about the supposed harm from “patent hold-up” or lack of harm from patent hold-out. Given the data connecting stable and effective patent rights and economic growth, the burden should be on the advocates for the “patent hold-up” theory to produce at least some evidence to support their position. Thankfully, AAG Delrahim made clear that he will let the evidence be his guide.

To that end, the letter submitted today by judges, government officials, legal academics, and economists points out the glaring omissions in the letter by the industry representatives: The claims about “patent hold-up” are merely theoretical, and they are “inconsistent with actual market data.” Moreover, today’s letter notes that the implications of the “patent hold-up” theory are testable, and that the empirical studies to date have failed to show that innovators are harming consumers or inhibiting innovation. To bolster its claims, the letter includes an appendix of rigorous empirical studies that directly contradict the “patent hold-up” theory proffered by the industry representatives.

Read the letter below or download it here: Letter to AAG Delrahim

***

February 13, 2018

Assistant Attorney General Makan Delrahim
Department of Justice Antitrust Division
950 Pennsylvania Ave. NW
Washington, DC 20530-0001

Dear Assistant Attorney General Delrahim,

As judges, former judges and government officials, legal academics and economists who are experts in antitrust and intellectual property law, we write to express our support for your recent announcement that the Antitrust Division of the Department of Justice will adopt an evidence-based approach in applying antitrust law equally to both innovators who develop and implementers who use technological standards in the innovation industries.

We disagree with the letter recently submitted to you on January 24, 2018 by other parties who expressed their misgivings with your announcement of your plan to return to this sound antitrust policy. Unfortunately, their January 24 letter perpetuates the long-standing misunderstanding held by some academics, policy activists, and companies, who baldly assert that one-sided “patent holdup” is a real-world problem in the high-tech industries. This claim rests entirely on questionable models that predict that opportunistic behavior in patent licensing transactions will result in higher consumer prices. These predictions are inconsistent with actual market data in any high-tech industry.

It bears emphasizing that no empirical study has demonstrated that a patent-owner’s request for injunctive relief after a finding of a defendant’s infringement of its property rights has ever resulted either in consumer harm or in slowing down the pace of technological innovation. Given the well understood role that innovation plays in facilitating economic growth and well-being, a heavy burden of proof rests on those who insist on the centrality of “patent holdup” to offer some tangible support for that view, which they have ultimately failed to supply in the decade or more since that theory was first propounded. Given the contrary conclusions in economic studies of the past decade, there is no sound empirical basis for claims of a systematic problem of opportunistic “patent holdup” by owners of patents on technological standards.

Several empirical studies demonstrate that the observed pattern in high-tech industries, especially in the smartphone industry, is one of constant lower quality-adjusted prices, increased entry and competition, and higher performance standards. These robust findings all contradict the testable implications of “patent holdup” theory. The best explanation for this disconnect between the flawed “patent holdup” theory and overwhelming weight of the evidence lies in the institutional features that surround industry licensing practices. These practices include bilateral licensing negotiations, and the reputation effects in long-term standards activities. Both support a feed-back mechanism that creates a system of natural checks and balances in the setting of royalty rates. The simplistic models of “patent holdup” ignore all these moderating effects.

Of even greater concern are the likely negative social welfare consequences of prior antitrust policies implemented based upon nothing more than the purely theoretical concern about opportunistic “patent holdup” behavior by owners of patented innovations incorporated into technological standards. For example, those policies have resulted in demands to set royalty rates for technologies incorporated into standards in the smartphone industry according to particular components in a smartphone. This was a change to the longstanding industry practice of licensing at the end-user device level, which recognized that fundamental technologies incorporated into the cellular standards like 2G, 3G, etc., optimize the entire wireless system and network, and not just the specific chip or component of a chip inside a device.

In support, we attach an Appendix of articles identifying the numerous substantive and methodological flaws in the “patent holdup” models. We also point to rigorous empirical studies that all directly contradict the predictions of the “patent holdup” theory.

For these reasons, we welcome your announcement of a much-needed return to evidence-based policy making by antitrust authorities concerning the licensing and enforcement of patented innovations that have been committed to a technological standard. This sound program ensures balanced protection of all innovators, implementers, and consumers. We are confident that consistent application of this program will lead to a vibrant, dynamic smartphone market that depends on a complex web of standard essential patents which will continue to benefit everyone throughout the world.

Sincerely,

Jonathan Barnett
Professor of Law
USC Gould School of Law

Ronald A. Cass
Dean Emeritus,
Boston University School of Law
Former Vice-Chairman and Commissioner,
United States International Trade Commission

Richard A. Epstein
Laurence A. Tisch Professor of Law,
New York University School of Law
James Parker Hall Distinguished Service Professor of Law Emeritus,
University of Chicago Law School

The Honorable Douglas H. Ginsburg
Senior Circuit Judge,
United States Court of Appeals for the District of Columbia Circuit, and
Professor of Law,
Antonin Scalia Law School
George Mason University

Justin (Gus) Hurwitz
Assistant Professor of Law
University of Nebraska College of Law

David J. Kappos
Former Under Secretary of Commerce and Director
United States Patent & Trademark Office

The Honorable Paul Michel
Chief Judge (Ret.),
United States Court of Appeals for the Federal Circuit

Damon C. Matteo
Course Professor,
Graduate School of Economics and Management
Tsinghua University in Beijing
Chief Executive Officer,
Fulcrum Strategy

Adam Mossoff
Professor of Law
Antonin Scalia Law School
George Mason University

Kristen Osenga
Professor of Law
University of Richmond School of Law

David J. Teece
Thomas W. Tusher Professor in Global Business
Haas School of Business
University of California at Berkeley

Joshua D. Wright
University Professor,
Antonin Scalia Law School
George Mason University
Former Commissioner,
Federal Trade Commission

 

Appendix

 

Richard A. Epstein & Kayvan Noroozi, Why Incentives for Patent Hold Out Threaten to Dismantle FRAND and Why It Matters, Berkeley Tech. L. Rev. (forthcoming), https://ssrn.com/abstract=2913105

Anne Layne-Farrar, Why Patent Holdout is Not Just a Fancy Name for Plain Old Patent Infringement, CPI North American Column (Feb. 2016), https://www.competitionpolicyinternational.com/wp-content/uploads/2016/02/North-America-Column-February-Full.pdf

Anne Layne-Farrar, Patent Holdup and Royalty Stacking Theory and Evidence: Where Do We Stand After 15 Years of History?, OECD Intellectual Property and Standard Setting (Nov. 18, 2014), http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/WD%282014%2984&doclanguage=en

Alexander Galetovic & Stephen Haber, The Fallacies of Patent Holdup Theory, 13 J. Comp. L. & Econ., 1 (2017), https://academic.oup.com/jcle/article/13/1/1/3060409

Alexander Galetovic, Stephen Haber, & Lew Zaretzki, An Estimate of the Average Cumulative Royalty Yield in the World Mobile Phone Industry: Theory, Measurement and Results (Feb. 7, 2018), https://hooverip2.org/working-paper/wp18005

Alexander Galetovic, Stephen Haber, & Ross Levine, An Empirical Examination of Patent Hold-Up (Nat’l Bureau of Econ. Research, Working Paper No. 21090, 2015), http://www.nber.org/papers/w21090.pdf

Douglas H. Ginsburg, Koren W. Wong-Ervin, & Joshua Wright, The Troubling Use of Antitrust to Regulate FRAND Licensing, CPI Antitrust Chronicle (Oct. 2015), https://www.competitionpolicyinternational.com/assets/Uploads/GinsburgetalOct-151.pdf

Douglas H. Ginsburg, Taylor M. Ownings, & Joshua D. Wright, Enjoining Injunctions: The Case Against Antitrust Liability for Standard Essential Patent Holders Who Seek Injunctions, The Antitrust Source (Oct. 2014), https://ssrn.com/abstract=2515949

Gerard Llobet & Jorge Padilla, The Optimal Scope of the Royalty Base in Patent Licensing, 59 J. L. & Econ. 45 (2016), https://ssrn.com/abstract=2417216

Keith Mallinson, Theories of Harm with SEP Licensing Do Not Stack Up, IP Fin. Blog (May 24, 2013), http://www.ip.finance/2013/05/theories-of-harm-with-sep-licensing-do.html

Jorge Padilla & Koren W. Wong-Ervin, Portfolio Licensing to Makers of Downstream End-User Devices: Analyzing Refusals to License FRAND-Assured Standard-Essential Patents at the Component Level, 62 The Antitrust Bulletin 494 (2017), https://doi.org/10.1177/0003603X17719762

Jonathan D. Putnam & Tim A. Williams, The Smallest Salable Patent-Practicing Unit (SSPPU): Theory and Evidence (Sept. 2016), https://ssrn.com/abstract=2835617

Gregory Sidak, The Antitrust Division’s Devaluation of Standard-Essential Patents, 104 Geo. L.J. Online 48 (2015), https://georgetownlawjournal.org/articles/161/antitrust-division-s-devaluation-of/pdf

Joanna Tsai & Joshua D. Wright, Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts, 80 Antitrust L.J. 157 (2015), https://ssrn.com/abstract=2467939

Joshua D. Wright, SSOs, FRAND, and Antitrust: Lessons from the Economics of Incomplete Contracts, 21 Geo. Mason L. Rev. 791 (2014), http://www.georgemasonlawreview.org/wp-content/uploads/2014/06/Wright-Website-Version.pdf

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Antitrust Innovation Patents

Foreign Antitrust Regulators Are Threatening American Innovation

By David Lund & Matthew Barblan

U.S. Capitol buildingAmerican businesses are suffering as foreign governments improperly use their antitrust laws to discriminate against American companies. Recently, the United States Chamber of Commerce assembled an International Competition Policy Expert Group to examine this problem. The Group released a report describing particular harmful and inappropriate uses of antitrust law and providing recommendations for U.S. policymakers to address these harms.

Although the report addresses foreign antitrust law abuses broadly, there has been a recent upsurge in the misapplication of these laws in the context of intellectual property. The report itself identifies several unique ways that innovative industries have been harmed by this unfortunate trend, noting that “legitimate IP rights are often not respected for their role in incentivizing investment in innovation that can have an enormously positive long term impact on competition.”

This is a critically important issue, and it is becoming increasingly relevant in DC policy circles. For example, later this week the House Judiciary Committee will be holding a hearing on Recent Trends in International Antitrust Enforcement, including testimony from Deborah Garza (Co-Chair of the Chamber’s International Competition Policy Expert Group) and Scalia Law’s Koren Wong-Ervin (Director of the Global Antitrust Institute), among others.

Over the next couple of months, CPIP will be writing a series of essays highlighting issues discussed in the report that are of particular relevance to the intellectual property policy community.

Industrial Policy Masquerading as Antitrust Law

By securing to innovators exclusive property rights to the fruits of their productive labors, intellectual property law incentivizes innovation and forms the foundation of the myriad partnerships and transactions that enable creators and innovators to commercialize their inventions. In theory, antitrust law is supposed to support the IP system by providing a fair marketplace where innovative companies thrive according to their own merit. The main thesis of the Chamber’s report, however, is that several countries are misusing their antitrust laws to pursue domestic industrial policy goals that allow the government to pick particular winners and losers. The report notes:

[Competition law enforcement] may reflect an effort to improperly discriminate against a U.S. competitor to further “industrial policy” goals, such as by favoring domestic commercial interests or state-owned enterprises over foreign competitors. Report, Page 24.

When antitrust law is used for industrial policy goals or simple political favoritism, it undermines the basic premise of the IP system. Often the selected winners are cherry-picked nationals of the countries at issue. This harms the ability of innovative American companies to compete in these markets based on the actual economic value of their products and IP. As the report states:

Commercial success may turn on political cronyism, rather than on the ability of a firm to efficiently provide the goods and services consumers desire at a competitive price (the result the consumer welfare approach to antitrust law is designed to foster). Report, Pages 20-21.

The misuse of antitrust law is particularly damaging in IP-intensive industries. IP incentivizes research and investment based on the property rights it secures to creators. These property rights are only valuable—and thus only function as an incentive—when IP owners deploy them in the marketplace without undue interference. When countries use antitrust laws to devalue the IP rights of foreign companies in order to favor their own local businesses, it undermines the purpose and function of the IP system as a whole.

Inconsistent Notions of “Fairness”

The Chamber’s report discusses several improper uses of antitrust law that undermine IP owners’ ability to freely deploy their property rights in the marketplace. One key problem is the inconsistent application of vague “fairness” considerations. As the report states:

Where competition rules include inherently subjective concepts such as substantive “fairness” (as is the case in many jurisdictions), for example, the legal treatment of business conduct may differ profoundly on a case-by-case basis, often driven by ad hoc political considerations. Report, Page 20.

“Fairness” may be an important value for children to learn, but when it is vaguely applied to a complex body of law it can result in inconsistent and even contradictory outcomes. The report highlights one particular dichotomy to show just how problematic vague conceptions of fairness can be: pricing. Jurisdictions have used antitrust law to scrutinize prices as being “unfair” both for being too high and too low. But high prices often simply reflect higher consumer demand for a better product. Conversely, low prices often reflect more efficient business practices, precisely the kind of improvements antitrust law is supposedly designed to promote.

Importantly, businesses have no way of knowing ahead of time whether a country’s antitrust regulators will find “fairness” violations for their prices. This prevents companies from taking affirmative steps to comply with the law, thereby increasing volatility, increasing costs to set up and maintain a business, and undermining sound business planning and investment.

Because subjective considerations such as “fairness” can easily be applied arbitrarily, the real-world application of these laws often brings in more nefarious purposes. When there is no objective guide or lodestar to the legal system, cronyism runs rampant. It no longer matters who is the most efficient producer or who invented the technology. What matters is who is friends with the antitrust law enforcement agency. As a result, subjective doctrines of “fairness” perversely create an unfair playing field, making it easy for foreign governments to discriminate against American businesses, even when it ultimately works to the detriment of consumers in their country.

IP-intensive industries are particularly subject to being victimized in the name of “fairness.” The business benefits that come from property rights in innovation can include the ability to set prices that far exceed marginal costs. This makes sense from both an economic and a moral standpoint—innovative companies routinely make millions (if not billions) of dollars worth of up-front R&D investments before commercializing their inventions. And the fruits of their labor are justly secured to them as their property in the form of IP. But from a antitrust law enforcement perspective, pricing far above marginal costs makes IP owners particularly vulnerable to claims that their prices are “unfair.”

Even though it makes perfect sense for an IP license fee to be high when the IP enables important functionality in a product, antitrust law authorities are adept at minimizing the economic value of the IP while criticizing the price of the license as unfair. This is particularly true in industries where American companies are leaders in researching and developing foundational innovations that foreign companies want to integrate into their products. As a result, IP-intensive American companies are particularly vulnerable to abusive and inconsistent antitrust law scrutiny under supposed considerations of “fairness.”

A Worrisome Lack of Due Process and Regulatory Humility

In another troubling trend for American IP owners, foreign antitrust authorities are increasingly pursuing investigations that go beyond the scope of any reasonable antitrust concerns. Despite being baseless, these investigations have serious negative consequences for the targeted firms, particularly in the case of innovative firms trying to license their IP or get their products to market while their patents are still in force and while their technology is still cutting-edge. As the Chamber’s report notes:

Enforcement activities may reflect local case law that allows an agency to exercise its powers of investigation and its decision-making authority in an expansive and highly discretionary way. Where this occurs, competition authorities can tend to discount the costs and disruption that their enforcement activities impose on legitimate business conduct, give too little weight the costs of wrongfully condemning conduct that is procompetitive, and exaggerate the likelihood and consequences of wrongfully exonerating conduct that might have anticompetitive impact. Report, Page 22.

In parallel with overly expansive investigations, many jurisdictions do not offer the basic procedural due process safeguards necessary for businesses to defend themselves. Once again, this effectively allows authorities to pick winners and losers based on political cronyism or domestic industrial policy goals rather than actually promoting competition. The report states:

[L]eading U.S. companies have complained that in certain jurisdictions they are subject to investigations and enforcement actions in which they are not given adequate notice or time for responses to questions; are not informed of the particular acts or practices which are a subject of concern; are not allowed to obtain from enforcers information about the theory of anticompetitive harm…. Report, Page 29.

The report further notes that IP-intensive industries suffer additional harms from poorly conducted enforcement activities because of their novel, complex, and dynamic nature. Unfortunately, the regulatory pendulum is swinging in the wrong direction. The report notes that some countries are considering creating liability simply for failing to license patents, including for failing to license outside of the country in question. This will create a whole new burden on IP owners that does not exist for any other industry.

How Should the US Respond?

The report provides several potential solutions to the harms it identifies, some of which will be familiar to the IP community. These solutions include actions that can be taken by the United States alone as well as actions that utilize international organizations. We will discuss these in more detail in a future essay, but two general points are worth mentioning here.

First, the report notes that Section 301 of the Trade Act of 1974 has expansive language that could be more widely used to “respond to unjustifiable, unreasonable or discriminatory practices of foreign governments that burden or restrict U.S. commerce.” The “Special 301 Report,” which names countries that are failing to live up to their IP law commitments, is the most widely known use of this section, but as the report notes, the Trade Act provides for much more.

Second, the report notes the possibility that existing mechanisms in the WTO or OECD may provide internationally-recognized means to examine the substantive and procedural aspects of antitrust law that may be in conflict with international agreements. Such recognition would be valuable to promote harmonization of antitrust law not just across jurisdictions, but also with the underlying principles of antitrust law itself.

The report provides an important examination of the harms caused by improper use of antitrust law across the globe. Over the coming weeks, we will provide more commentary on how this is playing out in particular places, for particular industries, and what the United States should do to fix it.

Categories
Copyright Copyright Licensing

SONA and Songwriters Fight DOJ’s Misguided 100% Licensing Rule

Things are heating up in the lawsuit filed by Songwriters of North America and three of its members (SONA) challenging the new gloss of the Department of Justice (DOJ) on the 75-year-old consent decrees that govern the licensing practices of ASCAP and BMI, the two largest performance rights organizations (PROs). SONA sued the DOJ on September 13, 2016, questioning the DOJ’s reinterpretation of the consent decrees to require the PROs to license all of the works in their repertories on a 100% basis. As reported by Billboard yesterday, CPIP Senior Scholar & Director, Copyright Research and Policy Sandra Aistars is assisting SONA’s legal team at Gerard Fox Law PC in the litigation.

After completing a two-year review of the ASCAP and BMI consent decrees, the DOJ issued a statement on August 4, 2016, concluding that the decrees require the two PROs to offer only “full-work licenses.” On this view, the PROs would not be able to continue licensing the fractional interests in the musical compositions owned by the songwriters they represent. As the U.S. Copyright Office noted in early-2016, such fractional licensing is a “longstanding practice of the music industry.” Nevertheless, the DOJ claimed that the change “should not meaningfully disrupt the status quo in the licensing of public performance rights.”

This assertion was immediately challenged by the PROs. ASCAP President Paul Williams issued a statement that same day vowing to work with BMI “to overturn the DOJ’s decision” in both Congress and the courts. BMI filed a letter with District Judge Louis L. Stanton, who oversees BMI’s consent decree, announcing its intention to seek a declaration that the decree “does not require 100% licensing.” Six weeks later, Judge Stanton issued an opinion declaring that BMI’s consent decree “neither bars fractional licensing nor requires full-work licensing.” The victory was celebrated as a win for songwriters, and both ASCAP and BMI issued statements praising the decision. The DOJ has since appealed the issue to the Second Circuit.

In its complaint filed in the District of Columbia, SONA argues that the DOJ’s 100% licensing rule violates songwriters’ due process rights, both substantive and procedural, under the Fifth Amendment as well as the Administrative Procedures Act. Calling the DOJ’s rule “a dramatic departure from the status quo,” SONA points out that it will “limit and undermine the creative and economic activities” of songwriters by forcing them to “undertake the burdensome and potentially costly process of revisiting and amending their core business practices, private contracts, and collaborative relationships” in order to comply.

Arguing that the case should be dismissed, the DOJ challenges the standing of SONA to even invoke the court’s jurisdiction. The DOJ claims that any harm caused by the consent decrees is too speculative and remote to create an actual case or controversy, and it suggests that no songwriters have been deprived of any protected liberty or property interest under the Due Process Clause. In its opposition brief filed this past Tuesday, SONA strongly opposes that contention:

[P]laintiffs have alleged and will prove at trial that [the DOJ’s] new rule has caused immediate injuries and will cause imminent injuries to each plaintiff, thus establishing standing. Plaintiffs have also pleaded facts sufficient to show that the government’s action is interfering with their freedom to contract, freedom of association, and freedom of speech, and that the government has taken their valuable intellectual-property rights without compensation, thus violating plaintiffs’ substantive and procedural due-process rights.

Admonishing the DOJ’s “casual disregard for the welfare and livelihoods of America’s songwriters,” SONA points out that, under the DOJ’s new rule, songwriters will:

  • Be deprived of the ability to choose the PRO that will license their shares of coauthored works;
  • Be required to withdraw works from representation by ASCAP or BMI;
  • Have songs that they must license outside of the PRO system;
  • Need to cede administrative control over their copyrights, including the right to collect royalties, to unaffiliated third parties;
  • Be compelled to renegotiate existing contractual relationships on a song-by-song basis;
  • Be forced to consider whether they should decline to collaborate with creators who are not members of the same PRO; and
  • Have reason to consider withdrawing from ASCAP or BMI altogether.

    • Now that President Trump is in office, there is new leadership at the DOJ. Jeff Sessions was sworn in as the U.S. Attorney General earlier today, and Brent Snyder took over as acting director of the DOJ’s Antitrust Division less than three weeks ago. Just last week, the DOJ asked the Second Circuit for an extra 90 days to file its opening brief in its appeal of Judge Stanton’s ruling that the BMI consent decree does not require 100% licensing. According to the DOJ, the “requested extension is necessary to allow new leadership in the Department of Justice adequate time to familiarize themselves with the issues.” Perhaps there is hope that the DOJ will discontinue its misguided push for a 100% licensing rule that will inevitably threaten the livelihoods of songwriters.

    Categories
    Antitrust Copyright International Law Internet Uncategorized

    Google Image Search and the Misappropriation of Copyrighted Images

    Cross-posted from the Mister Copyright blog.

    Last week, American visual communications and stock photography agency Getty Images filed a formal complaint in support of the European Union’s investigation into Google’s anti-competitive business practices. The Getty complaint accuses Google of using its image search function to appropriate or “scrape” third-party copyrighted works, thereby drawing users away from the original source of the creative works and preserving its search engine dominance.

    Specifically, Getty’s complaint focuses on changes made to Google’s image search functionality in 2013 that led to the appealing image galleries we’re familiar with today. Before the change, users were presented with low-resolution thumbnail versions of images and would be rerouted to the original source website to view a larger, more defined version and to find out how they might legally license or get permission to use the work. But with the current Google Image presentation, users are instantly delivered a large, desirable image and have no need to access the legitimate source. As Getty says in its complaint, “[b]ecause image consumption is immediate, once an image is displayed in high-resolution, large format, there is little impetus to view the image on the original source site.”

    According to a study by Define Media Group, in the first year after the changes to Google Image search, image search referrals to original source websites were reduced by up to 80%. The report also provides before and after screenshots of a Google Image search and points out that before 2013, when a thumbnail was clicked, the source site appeared in the background. Not only does the source site not appear in the new version, but an extra click is required to get to the site, adding to the overall disconnect with the original content. Despite Google’s claims to the contrary, the authors of the study conclude that the new image search service is designed to keep users on the Google website.

    It’s difficult not to consider Google’s image UI [user interface] change a shameless content grab – one which blatantly hijacks material that has been legitimately licensed by publishers so that Google Image users remain on their site, and are de-incentivized from visiting others.

    While Getty’s complaint against Google is based on anticompetitive concerns, it involves the underlying contention that Google Image search enables misappropriation of copyrighted images on a massive scale. Anyone who has run a Google Image search knows that with the click of a mouse, a user is presented with hundreds of images related to their query, and with another simple right click, that user can then copy and paste these images as they please. But Google Image search often returns an abundance of copyright protected images, enabling anyone to copy, display and disseminate images without considering the underlying copyright and existing licenses. And while using the service may be free, make no mistake that Google is monetizing it through advertisements and the mining of users’ personal data.

    When users are able to access and copy these full-screen, high resolution images from Google Image search, not only do third-party image providers lose traffic to their website, but the photographers and creators behind the images lose potential income, attribution and exposure that would come with users accessing the original source. As General Counsel Yoko Miyashita explains, “Getty Images represents over 200,000 photojournalists, content creators and artists around the world who rely on us to protect their ability to be compensated for their work.” When Google Image search obviates the need for a user to access the original creative content, these artists and creators are being denied a fair marketplace for their images, and their ability and motivation to create future works is jeopardized.

    Shortly after Google changed to the new image search, individual photo publishers and image creators took to a Google Forum to voice their concerns over the effects the service was having on their images and personal web pages. A recurring complaint was that the service made it more difficult to find out information about images and that users now had to go through more steps to reach the original source website. One commenter, identifying herself as a “small time photo publisher,” described Google’s new practice of hotlinking to high-resolution images as a “skim engine” rather than a “search engine.” She lamented that not only was Google giving people access to her content without visiting her site, but her bandwidth usage (i.e. expense) went up due to the hotlinking of her high resolution images.

    Google Image supporters argue that creators and image providers should simply use hotlink protection to block Google from displaying their content, but Google’s search engine dominance is so absolute, this would further curtail traffic to the original source of the content. Others suggest image providers stamp their images with watermarks to protect from infringement, but Getty VP Jonathan Lockwood explains that doing so would result in punishment from Google.

    They penalise people who try to protect their content. There is then a ‘mismatch penalty’ for the site: you have to show the same one to Google Images that you own. If you don’t, you disappear.

    The internet has made sharing creative works and gaining exposure as an artist easier than anyone could have imagined before the digital age, but it has also brought challenges in the form of protecting and controlling creative content. These challenges are particularly burdensome for image creators and providers, whose creative works are subject to unauthorized use the moment they are put online. Over the last few years, Google Image search has contributed to this problem by transforming from a service that provided direction to creative works to a complete substitute for original, licensed content.

    With fewer opportunities for image providers and creators to realize a return–whether it be in the form of payment, attribution, or exposure–from their works, creativity and investment in creators will be stifled. Artists and rightsholders deserve fair compensation and credit for their works, and technology needs to work with image providers rather than against them to ensure that great content continues to be created.

    Categories
    Antitrust Commercialization DOJ High Tech Industry Innovation Inventors Patent Law Patent Licensing Uncategorized

    Busting Smartphone Patent Licensing Myths

    closeup of a circuit boardCPIP has released a new policy brief, Busting Smartphone Patent Licensing Myths, by Keith Mallinson, Founder of WiseHarbor. Mr. Mallinson is an expert with 25 years of experience in the wired and wireless telecommunications, media, and entertainment markets.

    Mr. Mallinson discusses several common myths concerning smartphone patent licensing and argues that antitrust interventions and SSO policy changes based on these myths may have the unintended consequence of pushing patent owners away from open and collaborative patent licensing. He concludes that depriving patentees of licensing income based on these myths will remove incentives to invest and take risks in developing new technologies.

    We’ve included the Executive Summary below. To read the full policy brief, please click here.

    Busting Smartphone Patent Licensing Myths

    By Keith Mallinson

    Executive Summary

    Smartphones are an outstanding success for hundreds of handset manufacturers and mobile operators, with rapid and broad adoption by billions of consumers worldwide. Major innovations for these—including standard-essential technologies developed at great expense and risk primarily by a small number of companies—have been shared openly and extensively through standard-setting organizations and commitments to license essential patents on “fair, reasonable, and non-discriminatory terms.”

    Despite this success, manufacturers seeking to severely reduce what they must pay for the technologies that make their products possible have widely promoted several falsehoods about licensing in the cellular industry. Unsubstantiated by facts, these myths are being used to justify interventions in intellectual property (IP) markets by antitrust authorities, as well as changes to patent policies in standard-setting organizations. This paper identifies and dispels some of the most egregious and widespread myths about smartphone patent licensing:

    Myth 1: Licensing royalties should be based on the smallest saleable patent practicing unit (SSPPU) implementing the patented technology, and not on the handset. The SSPPU concept is completely inapplicable in the real world of licensing negotiations involving portfolios that may have thousands of patents reading on various components, combinations of components, entire devices, and networks. In the cellular industry, negotiated license agreements almost invariably calculate royalties as a percentage of handset sales prices. The SSPPU concept is inapplicable because it would not only be impractical given the size and scope of those portfolios, but it would not reflect properly the utility and value that high-speed cellular connectivity brings to bear on all features in cellular handsets.

    Myth 2: Licensing fees are an unfair tax on the wireless industry. License fees relate to the creation—not arbitrary subtraction—of value in the cellular industry. They are payments for use of essential patented technologies, developed at significant cost by others, when an implementer chooses to produce products made possible by those technologies. The revenue generated by those license fees encourages innovation, and is directly related to the use of the patented technologies.

    Myth 3: Licensing fees and cross-licensing diminish licensee profits and impede them from investing in their own research and development (R&D). Profits among manufacturers are determined by competition among them, including differences in pricing power and costs. Core-technology royalty fees, which are charged on a non-discriminatory basis and are payable by all implementers, are not the cause of low profitability by some manufacturers while others are very profitable. Cross-licensing is widespread: It provides in-kind consideration, which reduces patent-licensing costs and incentivizes R&D.

    Myth 4: Fixed royalty rates ignore the decreasing value of portfolio licenses as patents expire. Portfolio licensing is the norm because it is convenient and cost efficient for licensor and licensee alike. All parties know the composition of the portfolio will change as some patents expire and new patents are added. Indeed, this myth is particularly fanciful given that the number of new patents issued greatly exceeds the number that expires for the major patentees. In fact, each succeeding generation of cellular technology has represented and will continue to represent a far greater investment in the development of IP than the prior generation.

    Myth 5: Royalty charges should be capped so they do not exceed figures such as 10% of the handset price or even well under $1 per device. There is no basis for arbitrary royalty caps. It is not unusual for the value of IP to predominate as a proportion of total selling prices, in books, CDs, DVDs, or computer programs. Market forces—not arbitrary benchmarks wished for or demanded by vested interests and which do not reflect costs, business risks, or values involved—should also be left to determine how costs and financial rewards are allocated in the cellular industry with smartphones.