Tag: competition

Categories
Biotech Patents Pharma

“No Combination Drug Patents Act” Stalls, but Threats to Innovation Remain

superimposed images from a chemistry labBy Kevin Madigan & Sean O’Connor

This week, the Senate Judiciary Committee was to mark up a bill limiting patent eligibility for combination drug patents—new forms, uses, and administrations of FDA approved medicines. While the impetus was to curb so-called “evergreening” of drug patents, the effect would have been to stifle life-saving therapeutic innovations. Though the “No Combination Drug Patents Act”—reportedly to be introduced by Senator Lindsey Graham (R-SC)—was wisely withdrawn at the last minute, it’s likely not the last time that such a misconceived legislative effort will be introduced.

An Exaggerated Response to a Disputed Theory

The bill would have established a presumption of obviousness for drug or biologic patent applications whose invention was a new: dosing regimen, method of delivery, method of treatment, or formulation. While there was a rebuttal provision where the claim covered a new treatment for a new indication or “increase[d] . . . efficacy,” the latter was almost certain to introduce years of uncertainty and litigation. Further, the bill would have covered a broader class than true combination drug patents, in which one active ingredient is combined with another or with a non-drug.

Like many recent legislative efforts, the amendment sought to address a perceived lack of affordability of prescription drugs. After praising the America Invents Act of 2011 and subsequent Supreme Court rulings for strengthening the US patent system, the bill claimed that rising drug prices have outpaced “spending on research and development with respect to those drugs.” In addition to applauding Supreme Court decisions that have injected unquestionable uncertainty into patentable subject matter standards, the amendment went on to blame high drug prices on continually overstated issues related to advanced drug patents.

According to critics, combination drug patents have granted drug makers unearned and extended protection over existing drugs or biological products. But, quite simply, when properly issued by the USPTO under existing patentability standards, these are new patents for new products or processes.

Combination patents have been maligned as anticompetitive, resulting in a “thicket” of patents that impedes innovation through transaction costs and other inefficiencies. Unfortunately, notwithstanding a lack of empirical evidence validating the harm of follow-on innovation patents, patent thicket rhetoric is now being echoed by the media, the academy, courts, and policy makers in a fraught attempt to fix drug pricing.

Reports (see here, here, here, and here) from leading antitrust experts and intellectual property scholars have detailed the value of incremental innovation and challenged the notion that patent thickets are a true threat to competition and innovation. These studies have exposed patent thicket claims—much like the “troll” narrative that for years infected patent law debates—as an empty strawman theory, the repetition of which has led to undue confidence in its accuracy. The reality is that what critics point to as problematic cases of combination patents are in fact infrequent outliers, strategically highlighted to discount evidence of the value of new and innovative drug uses and administrations.

A similar claim by those promoting the patent thicket narrative is that combination patents extend exclusivity on a drug for years beyond an initial patent term, thereby blocking generic entry in the market. But if an underlying drug has gone off patent, no follow-on or combination patent will prevent a generic drug company from producing the underlying formulation—it’s only the new formulation, use, or administration that is protected.

Vague, Yet Oddly Familiar Standards

The language of the Graham amendment asserted that because “numerous” combination patents “contain obvious product developments,” a restructuring of 35 USC 103 is necessary to combat patent thickets and achieve optimal drug pricing. Suggesting that 103 obvious standards for advanced drug development should include a presumption that the covered claimed invention and the prior art to which it relates would have been obvious, the legislation would have undermined a unitary system of patent law in favor of different standards for different fields of technology. It was a bold proposal, and it’s one that ignored the proven value of new drug formulations and methods of treatment.

While the amendment provided for a rebuttal to the presumption of obviousness, the language was ambiguous and likely to render the patent system even more unreliable than it already is. The proposed statute said that an applicant may rebut the presumption of obviousness if the covered claimed invention “results in a statistically significant increase in the efficacy of the drug or biological product that the covered claimed invention contains or uses.” It is unclear what would qualify as “statistically significant,” and proving this vague standard would be nearly impossible.

In order to show a “statistically significant increase in efficacy,” long and costly head-to-head clinical trials would be necessary. To be clear, this is not a standard required by the FDA for new drug approval, let alone patentability.

As if that wasn’t enough reason to reject the Graham amendment, the language was alarmingly similar to that of an Indian patent law statute that has been recognized by the US Trade Representative as a “major obstacle to innovators.” In 2005, in order to comply with the WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, India adopted for the first time patent protection for pharmaceuticals. Despite its recognition of IP rights in pharmaceuticals, India’s Act contains a troubling ambiguity in its Section 3(d), which requires an “enhanced efficacy” for known drugs in addition to the standard novelty, inventive step, and industrial applicability requirements.

India’s Section 3(d) has been invoked to reject patent protection for life-saving drug innovations, including Novartis’ landmark leukemia drug, Gleevec. Drug companies, government agencies, and policy makers have all recognized the threat to innovation that India’s patent law poses. In 2013, not long after the Novartis ruling, a bipartisan group of 40 Senators signed a letter to then Secretary of State John Kerry urging the state department to take action against India’s “deteriorating IP environment,” citing its willingness to “break or revoke patents for nearly a dozen lifesaving medications.”

Despite the widespread condemnation of India’s Section 3(d), the Graham amendment proposed adopting similarly indefinable standards to US patent law. While the language differed slightly—replacing “enhanced efficacy” with “increase in the efficacy”—it was no clearer, and implementation of this type of standard would only cause more confusion.

Protecting and Incentivizing Medical Innovation

Like most forms of innovation, the development of medicines and therapeutics is a process by which one builds and improves upon previous discoveries and breakthroughs. Sometimes those improvements are major advancements, but often they are incremental steps forward. In the pharmaceutical field, incremental or follow-on innovation frequently results in new therapeutic uses for existing drugs, which address serious challenges related to adverse effects, delivery systems, and dosing schedules. While they might not sound like medical breakthroughs on par with the discovery of penicillin, these advancements in the administration and use of pharmaceuticals improve public health and save lives.

Additionally, follow-on innovations are—and should remain—subject to the same patentability standards as any other technologies. Patents reward advancements that are novel, useful, and nonobvious, and our patent system has long recognized that patent claims are to be presumed patentable and nonobvious. The Graham amendment would have turned this established standard on its head, creating a separate and ill-defined hurdle for certain advancements in medicine.

The benefits of incremental innovation to public health and patients cannot be overstated. New formulations of malaria drugs, dosing regimens and delivery systems for AIDS patients, more efficient administrations of insulin for the treatment of diabetes, and developments in the treatment of cognitive heart disease have all been possible because of incremental innovation.

Imposing unjustified restrictions on the patentability of advancements like these would be disastrous for drug development, as the incentives that come with patent protection would be all but eliminated. Without the assurance that their innovative labor would be supported by intellectual property protection, pioneering drug developers would shift resources away from improving drug formulations and uses. The development of more effective treatments of some of the most devastating diseases would stall, as innovators would be unable to commercialize their products, recoup losses, or fund future research and development.

As critics continue to target myopically the patent system for a broader issue of drug prices in the American health care system, it’s likely not the last time that language like this will be proposed. In order to avoid the implementation of such ill-conceived standards into our patent laws, understanding what’s at stake is critical. The future of medical innovation depends on it.

Categories
FTC Healthcare

CPIP Scholars Join Comments to FTC on How Antitrust Overreach is Threatening Healthcare Innovation

dictionary entry for the word "innovate"On December 21, 2018, CPIP Senior Scholars Adam Mossoff and Kristen Osenga joined former Federal Circuit Chief Judge Randall Rader and SIU Law’s Mark Schultz in comments submitted to the FTC as part of its ongoing Competition and Consumer Protection in the 21st Century Hearings. Through the hearings, the FTC is examining whether recent economic or technological changes warrant adjustments to competition or consumer protection laws. The comments submitted to the FTC explain how the FTC itself is harming innovation in the health sciences by meddling in patent disputes between branded and generic drug companies.

The introduction is copied below, and the comments can be downloaded here.

***

How Antitrust Overreach is Threatening Healthcare Innovation

Imagine passing a rigorous test with flying colors, only to be told that you need to start over because you weren’t wearing the right clothing or you wrote your answers in the wrong color. Does that sound silly? Unfair? That scenario is happening to the American pharmaceutical industry thanks to regulators at the Federal Trade Commission who aren’t content to let the Food & Drug Administration (the experts in pharmaceutical safety and regulation) and federal courts (which referee disputes between branded and generic drug companies) decide when new drugs are ready to come to market. The consequences of these regulatory actions impact people’s lives.

The development and widespread availability of safe and effective pharmaceutical products has helped people live longer and better lives. The pharmaceutical industry invests billions each year in research and infrastructure and employs millions of Americans. The industry is closely regulated by many agencies, most notably the FDA, which requires extensive testing for safety and effectiveness before new drugs enter the market. Many thoughtful proposals have been advanced to improve and modernize the FDA’s review and approval of new drugs, but there is broad agreement that the FDA’s basic role in drug approval serves valid ends.

In recent years, however, other government agencies have played an increasingly intrusive role in deciding whether and when new drugs can enter the market. One such agency is the Federal Trade Commission, which has recently taken steps to block branded drug companies from settling patent litigation with generic drug makers. The FTC substitutes its own judgment for the business judgment of sophisticated parties, simultaneously weakening the patent rights of branded drug companies that spend billions in drug discovery and development and delaying generic drug companies from bringing consumers low cost alternatives to branded drugs. This example of government agencies picking winners and losers—indeed, deciding there should be no winners and losers—harms consumers in the short run by slowing access to drugs and in the long run by weakening innovation.

This paper describes the role of patents in protecting drugs and the special patent litigation regime Congress enacted in the 1980s to carefully balance the needs of branded drug companies, generic competitors, and consumers. Although these systems are not perfect, the FTC’s overreach in its regulatory powers in this area of the innovation economy results in a net loss for American consumers, as described below.

To read the comments, please click here.

Categories
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 Licensing DOJ Uncategorized

Rejection of DOJ Consent Decree Interpretation is a Win for Songwriters

Cross-posted from the Mister Copyright blog.

sheet musicEarlier this month, a federal judge in the Southern District of New York issued an order rejecting the Department of Justice’s (DOJ) interpretation of a consent decree governing the way the performance rights organization Broadcast Music Inc. (BMI) licenses its songs. The ruling was in response to a DOJ statement that the consent decrees controlling BMI and ASCAP should be interpreted to include a “full-work” licensing agreement that would require any entity that controls part of a composition to offer a license for the whole composition. The implications of the DOJ’s evaluation would be disastrous for both artists and the organizations that represent them, and while the judge’s order is likely not the final say in the debate, it represents a strong endorsement of the rights of publishers and songwriters to control their creative works.

PROs and the Consent Decrees

Performance rights organizations (PROs) act as intermediaries between songwriters and parties who wish to perform their copyrighted works publicly. Pooling compositional copyrights and offering “blanket licenses” to users such as bars, stores, gyms, radio and television stations, and Internet music distributors, PROs facilitate access to millions of songs while eliminating the need for individualized negotiations and licensing agreements. PROs also collect royalties from their licensees and distribute them among their member songwriters, composers, and music publishers, providing a workable solution to an otherwise impossibly complex system of individual agreements.

ASCAP and BMI are governed by consent decree agreements that have been in place for over 75 years and were introduced by the Department of Justice to promote competition in the marketplace for musical works. Under the decrees, PROs are encouraged to compete with one another to recruit songwriters and must offer licenses to venues and users on equivalent terms. It’s a system intended to benefit both emerging, unknown songwriters and established artists in order to prevent any one PRO from leveraging undue market influence.

Full v. Fractional Licensing

But even with the support of PROs, complicated licensing issues arise when a musical composition has more than one author or rights owner. In 2014, the Antitrust Division of the DOJ initiated an inquiry into the effectiveness of the consent decrees, soliciting comments from various stakeholders on whether the decrees obligate ASCAP and BMI to offer licenses to an entire work when not all owners of the composition are members of the organization. “Full-work” licenses allow for a song to be licensed provided that one owner consents by way of membership in a PRO, regardless of how much of the composition that party owns or whether the co-owners have conflicting contractual agreements.

Default copyright law treats joint authors of a single work as tenants-in-common, with any co-owner retaining the right to grant a nonexclusive license to the entire work without the consent of other owners, so long as the licensor compensates the other co-owners. As this rule is strictly the default, co-owners are free to agree to alternate arrangements with regard to licensing the underlying work, including one in which an author may only offer a license to the partial interest it holds in the work. This type of agreement, known as “fractional” licensing, requires that a licensee obtain additional licenses from all other rights owners or the PROs representing them.

The comments received by the DOJ as part of its consent decree investigation showed conflicting views on the treatment of multi-owner works. Rightsholders claimed that PROs had never offered full licenses and urged the DOJ to add language to the decree that would confirm this understood feature of the agreement. Music users and licensees, by contrast, argued that full licensing was always part of the deal and also pressed the DOJ to amend the decree to reflect their opinion. These differing opinions were never addressed in past revisions of the decrees because most licensees would obtain blanket licenses from both BMI and ASCAP, which would then charge fees based on their respective market shares, accounting for songs to which they represented only a partial interest.

DOJ Gets it Wrong

With new licensees entering the market in the form of streaming internet services, the DOJ decided it was time to clarify this neglected, but important, part of the decrees. In a statement issued last month, the Department concluded that it would not be in the interest of the public to modify the decrees to permit fractional licensing, insisting that full-licensing was the intent of the decrees and would not upset the rights of co-authors. But despite positioning its statement as an interpretation of the existing decrees, the DOJ statement actually modified a decades-old industry standard while trampling on the rights of creators and rights owners.

Instead of explaining how full-licensing doesn’t violate copyright law, the statement focuses on the “immediate access” to works that would be threatened by fractional licensing. The DOJ repeatedly warns of the consequences of having to secure licenses from multiple owners or authors, claiming it will result in licensees “simply turning off the music.” But the statement seems to confuse the original intent of the decrees with the creation of a system that guarantees immediate access to any song a licensee might want to play. While licensing efficiency is important, respect for the rights of all those responsible for creating a work shouldn’t be discarded for a haphazard licensing mechanism.

The statement goes on to argue that fractional licensing would force licensees and music users to carefully track song ownership and rights information to avoid potential infringement, a process that would be nearly impossible due to the lack of a reliable source of ownership data. But as Register Pallante explains in her response to a request for the Copyright Office’s insight on the licensing of jointly-owned works, full-licensing would impose a much more extreme burden on PROs that would have to ascertain, song-by-song for millions of songs, whether they have the right to grant a full license. These logistical challenges would surely result in higher operational costs that would have to be recouped through higher commissions to PRO members.

In addition to logistical problems, Register Pallante warns of the legal complications that would inevitably result from a full-licensing scheme: “Such an approach would seemingly vitiate important principles of copyright law, interfere with creative collaborations among songwriters, negate private contracts, and impermissibly expand the reach of the consent decrees.”

Songwriters and PROs Strike Back

Not surprisingly, the songwriting community was outraged by the DOJ’s disregard for artists’ rights and criticized the statement for its betrayal of long-accepted and practical licensing mechanisms. Just weeks after the statement was issued, the Songwriters of North America (SONA) – an advocacy group founded by and made up of artists and composers – sued the DOJ, claiming the agency overstepped its authority and that its ruling violated the property rights of songwriters by potentially invalidating private contracts between co-authors and collaborators.

PROs also joined forces to fight the Justice Department’s interpretation of the consent decrees, with ASCAP pursuing legislative reform while BMI took legal action to challenge full-licensing in federal court. In a pre-motion letter to Judge Louis Stanton, BMI warns of the disastrous consequences of the DOJ’s interpretation and urges the court to determine that its consent decree allows for the long-standing industry practice of fractional licensing.

On September 16th, Judge Stanton issued an opinion and declaratory judgment unequivocally rejecting the Justice Department’s interpretation of BMI’s consent decree. The opinion makes clear that “nothing in the consent decree gives support to the Division’s views,” and that because infringements and remedies are not addressed, the decree “neither bars fractional licensing nor requires full-work licensing.”

The decision was celebrated by songwriters and PROs as a sensible and informed response to the DOJ’s misguided understanding of the decrees. But while Judge Stanton’s order is now the controlling interpretation of the BMI decree, the Justice Department may appeal the decision, and it’s likely that music licensees will push back with their own lawsuits and legislative efforts. Regardless of future developments, the unprecedented unified effort of PROs, mobilization of artist organizations such as SONA, and clear message by an informed federal court bode well for the protection of creators’ rights and the preservation of sound copyright law.

Categories
Administrative Agency Copyright Infringement Innovation Internet Uncategorized

IP Scholars to FCC: It’s Not About "The Box"

Washington, D.C. at nightThis past April, we joined other IP scholars in explaining how the FCC’s proposed set-top box rules would undermine the property rights of creators and copyright owners. In reply comments filed last month, the EFF and a group of IP academics argued that the proposed rules would not implicate any copyright owners’ exclusive rights. Yesterday, we filed an ex parte letter with the Commissioners pointing out why this is wrong. The full letter is copied below.

Dear Chairman Wheeler and Commissioners Clyburn, Rosenworcel, Pai and O’Rielly:

On April 22, 2016, the undersigned intellectual property law scholars submitted comments to the FCC in response to the notice of proposed rulemaking in the matter of “Expanding Consumers’ Video Navigation Choices; Commercial Availability of Navigation Devices.” Our comments expressed concerns with the proposed rules’ harmful impact on the property rights of creators and copyright owners. Specifically, we warned that the Commission’s proposed rules would undermine the exclusive property rights guaranteed to copyright owners under the Copyright Act by severely limiting their ability to determine whom to license their property rights to and on what terms. In so doing, the proposed rules risk fundamentally disrupting the vibrant creative ecosystem that those property rights support.

Together with the Electronic Frontier Foundation (EFF), another group of intellectual property law academics submitted reply comments framed as a rebuttal to the many comments that dutifully explained how the Commission’s proposed rules would violate copyright law and imperil the property rights of creators and copyright owners. The EFF/professors offer “observations” on copyright law and conclude that “the proposed rules are consistent with copyright in both letter and spirit.” To reach this conclusion, the EFF/professors broadly defend navigational devices, arguing that “products and services that touch copyrighted works do not infringe copyright, and do not require a license,” and that the “devices and services under the proposed rules” would be non-infringing just like televisions and VCRs.

Surprisingly, despite claiming that the proposed rules are consistent with copyright law, the EFF/professors fail to address the primary copyright concern raised by us and by many other commenters. By focusing on the navigational devices themselves, rather than on how creative works are delivered to those devices, the EFF/professors perform a sleight of hand that masks the real problem. The issue is not what consumers do with the creative works they receive in the privacy of their own homes—the issue is how those creative works are delivered to consumers’ homes in the first place.

The creative works that pay-TV consumers watch on their televisions come from multiple sources, including satellite, cable, and telephony-based transmissions. These transmissions are public performances or public distributions, and as a result, they must be licensed. Ignoring this simple principle of copyright law, the Commission would require pay-TV providers to send copyrighted works to third parties even if doing so exceeds the scope of pay-TV providers’ licenses with copyright owners. By forcing pay-TV providers to exceed the scope of their licenses, the proposed rules would undermine the property rights of creators and copyright owners, effectively creating a zero-rate compulsory license to the benefit of third parties that have no contractual relationship with either copyright owners or pay-TV providers that copyright owners license their works to. Furthermore, the Commission seeks to create this zero-rate compulsory license despite lacking any authority to do so; the Communications Act certainly does not give the Commission authority to amend the Copyright Act and create a new compulsory license for copyrighted works.

The reply comments of the EFF/professors do not address this concern at all. Committing the bulk of their reply to a broad discussion articulating their principles for copyright law, the EFF/professors fail to respond to the distinct copyright issues that inevitably result from this newly-created compulsory license. It is unclear why the EFF/professors do not address this issue, as it was echoed again and again in the comments to which they purport to respond. Because the proposed rules would brazenly undercut copyright owners’ property rights, we believe it is important to call attention to the inability of the EFF/professors to even mention this fundamental problem in their response.

Put simply, the proposed rules would take away the ability of creators and copyright owners to license their works on their own terms. It would give third parties all of the benefits afforded to pay-TV providers by their agreements with copyright owners without the burdens of paying a license or agreeing to the underlying contract terms. This isn’t about “the box,” and it isn’t about what consumers do with the creative works they receive in their homes. The issue is what goes into “the box,” and more importantly, how it gets there. That the EFF/professors ignore this primary issue speaks volumes. The fact that third parties currently need a license from copyright owners to do the very things the proposed rules would countenance demonstrates that the rules would undermine the property rights of creators and copyright owners.

The EFF/professors properly note that the “ultimate goal” of copyright is to benefit the public good. What they fail to understand is that by securing to artists and creators property rights in the fruits of their labors, copyright serves the interests of creators and the public alike, fulfilling its constitutional purpose and forming the bedrock of our creative economy. We urge the Commission to consider and address—as the EFF/professors do not—how the proposed rules inappropriately interfere with the property rights of creators and copyright owners and the damage they stand to cause to our diverse and vibrant creative marketplace.

To download our letter to the FCC, please click here.

Categories
Administrative Agency Copyright Innovation Internet Legislation Uncategorized

FCC’s Extreme Proposal Threatens the Livelihood of Creators

By Matthew Barblan & Kevin Madigan

circuit board

Earlier this year, the FCC proposed a new regulatory scheme ostensibly designed to improve the market for pay-TV set-top boxes. Chairman Wheeler claimed that the proposed rules would “tear down the barriers that currently prevent innovators from developing new ways for consumers to access and enjoy their favorite shows and movies on their terms.” But set-top boxes are already on their way out as more and more consumers turn to streaming apps to watch their favorite movies and shows. So what is the FCC up to here? A close look at the proposed rules reveals that this isn’t about set-top boxes at all. Instead, the rules are designed to benefit a handful of companies that want to disseminate pay-TV programs without negotiating with or paying a license to the owners of those programs, undermining the property rights of creators and copyright owners. The creative community is understandably up in arms.

As we explain in comments filed with the FCC, the proposed rules would require pay-TV providers to make copyrighted video content available to third-party companies that have no contractual relationship with either the pay-TV providers or the creators of the video programming. The Commission essentially aims to create a zero-rate compulsory license for these companies. But this zero-rate compulsory license would fundamentally disrupt copyright owners’ ability to pursue the wide variety of business models and licensing arrangements that enable our creative ecosystem to thrive.

A key component of copyright owners’ property interest is the ability to choose to whom they license their works and on what terms. Because their livelihoods depend on the success of their works, copyright owners are particularly well-positioned and incentivized to determine the best way to commercialize them. By conveying copyrighted works to third parties without the consent of copyright owners, the proposed rules trample on the property rights of copyright owners and risk severely damaging our vibrant creative economy.

Adding insult to injury, the proposed rules wouldn’t even require the recipients of this zero-rate compulsory license to abide by the underlying contractual terms between copyright owners and pay-TV providers. Licensing contracts between copyright owners and pay-TV providers often include specific terms detailing the obligations of the provider in distributing the creative works. These terms can include things like channel “neighborhood” assignments, branding requirements, advertising limits, platform restrictions, and the list goes on. While the Commission states that “our goal is to preserve the contractual arrangements” between copyright owners and pay-TV providers, the proposed rules would transfer some, but not all, of the underlying contractual obligations to the third-party recipients of the copyrighted works.

For example, under the Commission’s proposal, third-party recipients of the copyrighted works would not be required to abide by contractual terms about channel placement designed to protect viewer experience and brand value. Similarly, the Commission’s proposal would not require third-party recipients of copyrighted works to abide by contractual terms concerning advertising in the delivery of those works. By allowing third parties to sidestep these terms, the Commission risks reducing the advertising revenue that pay-TV providers can earn from disseminating copyrighted works, thereby reducing the value of the license agreements that copyright owners negotiate with pay-TV providers.

In another thumb-in-the-eye to creators and copyright owners, the Commission’s proposal fails to account for copyright owners who may want to protect their copyrighted works by disseminating them exclusively through proprietary (and not widely licensable) content protection mechanisms. Instead, the Commission proposes to require pay-TV providers “to support at least one content protection system to protect its multichannel video programming that is licensable on reasonable and nondiscriminatory terms by an organization that is not affiliated with [the pay-TV provider].” Thus, the Commission would force copyright owners to risk exposing their property to security threats that may be associated with using widely-licensable content protection mechanisms.

Furthermore, nothing in the Commission’s proposal would prevent third parties from delivering the copyrighted works side-by-side with stolen versions of those same works. It is easy to imagine a search function that aggregates copies of creative works from a variety of platforms and displays the search results side-by-side. In fact, anyone who has run an internet search for a movie or TV show has likely seen results that mix links to both legitimate and stolen works.

Copyright owners’ ability to protect their creative works is essential both to preserve the value of their property and to give them the confidence to enter into arrangements with intermediaries (like pay-TV providers) to disseminate their works to a wide variety of audiences. This is especially true in light of the unique security challenges involved in portable, online, and short-term access to copyrighted works. Any reasonable proposal in this space would help copyright owners move forward in the ongoing battle to prevent the rampant theft and illegal dissemination of their works that has accompanied the rise of the internet. Unfortunately, the Commission’s proposal does just the opposite, limiting copyright owners’ ability to protect their property and pushing them backwards in the ongoing struggle against piracy.

Furthermore, it is entirely unclear where the Commission would draw the legal authority to change the nature of copyright owners’ property rights. The proposed rules simply claim that Section 629 of the Communications Act grants the Commission authority to implement the regulations in order to ensure competition and consumer choice in the navigation device market. In its justification of authority, the Commission repeatedly states that it will broadly interpret ambiguous terms in the Communications Act and that “a broad interpretation is necessary.” But nowhere in its analysis does the Commission cite to language granting it the authority to rewrite copyright law. Even under the broadest of interpretations, it is clear that the Communications Act does not give the Commission the authority to amend the Copyright Act and create a zero-royalty compulsory license out of thin air.

By granting artists and creators property rights in the fruits of their labors, copyright supports a diverse and multifaceted ecosystem that enables the development, distribution, and enjoyment of creative works, and that provides significant economic and cultural benefits to our society. But this ecosystem only works if copyright owners are able to safely and freely deploy their property in the marketplace. Unfortunately, the Commission’s proposal fails to respect the property rights of creators and copyright owners, risking severe disruption to the very same creative marketplace the Commission claims to promote.

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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.

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Administrative Agency Economic Study FTC Innovation Inventors Law and Economics Legislation Uncategorized

Acknowledging the Limitations of the FTC’s PAE Study

dictionary entry for the word "innovate"The FTC’s long-awaited case study of patent assertion entities (PAEs) is expected to be released this spring. Using its subpoena power under Section 6(b) to gather information from a handful of firms, the study promises us a glimpse at their inner workings. But while the results may be interesting, they’ll also be too narrow to support any informed policy changes. And you don’t have to take my word for it—the FTC admits as much. In one submission to the Office of Management and Budget (OMB), which ultimately decided whether the study should move forward, the FTC acknowledges that its findings “will not be generalizable to the universe of all PAE activity.” In another submission to the OMB, the FTC recognizes that “the case study should be viewed as descriptive and probative for future studies seeking to explore the relationships between organizational form and assertion behavior.”

However, this doesn’t mean that no one will use the study to advocate for drastic changes to the patent system. Even before the study’s release, many people—including some FTC Commissioners themselves—have already jumped to conclusions when it comes to PAEs, arguing that they are a drag on innovation and competition. Yet these same people say that we need this study because there’s no good empirical data analyzing the systemic costs and benefits of PAEs. They can’t have it both ways. The uproar about PAEs is emblematic of the broader movement that advocates for the next big change to the patent system before we’ve even seen how the last one panned out. In this environment, it’s unlikely that the FTC and other critics will responsibly acknowledge that the study simply cannot give us an accurate assessment of the bigger picture.

Limitations of the FTC Study

Many scholars have written about the study’s fundamental limitations. As statistician Fritz Scheuren points out, there are two kinds of studies: exploratory and confirmatory. An exploratory study is a starting point that asks general questions in order to generate testable hypotheses, while a confirmatory study is then used to test the validity of those hypotheses. The FTC study, with its open-ended questions to a handful of firms, is a classic exploratory study. At best, the study will generate answers that could help researchers begin to form theories and design another round of questions for further research. Scheuren notes that while the “FTC study may well be useful at generating exploratory data with respect to PAE activity,” it “is not designed to confirm supportable subject matter conclusions.”

One significant constraint with the FTC study is that the sample size is small—only twenty-five PAEs—and the control group is even smaller—a mixture of fifteen manufacturers and non-practicing entities (NPEs) in the wireless chipset industry. Scheuren reasons that there “is also the risk of non-representative sampling and potential selection bias due to the fact that the universe of PAEs is largely unknown and likely quite diverse.” And the fact that the control group comes from one narrow industry further prevents any generalization of the results. Scheuren concludes that the FTC study “may result in potentially valuable information worthy of further study,” but that it is “not designed in a way as to support public policy decisions.”

Professor Michael Risch questions the FTC’s entire approach: “If the FTC is going to the trouble of doing a study, why not get it done right the first time and a) sample a larger number of manufacturers, in b) a more diverse area of manufacturing, and c) get identical information?” He points out that the FTC won’t be well-positioned to draw conclusions because the control group is not even being asked the same questions as the PAEs. Risch concludes that “any report risks looking like so many others: a static look at an industry with no benchmark to compare it to.” Professor Kristen Osenga echoes these same sentiments and notes that “the study has been shaped in a way that will simply add fuel to the anti–‘patent troll’ fire without providing any data that would explain the best way to fix the real problems in the patent field today.”

Osenga further argues that the study is flawed since the FTC’s definition of PAEs perpetuates the myth that patent licensing firms are all the same. The reality is that many different types of businesses fall under the “PAE” umbrella, and it makes no sense to impute the actions of a small subset to the entire group when making policy recommendations. Moreover, Osenga questions the FTC’s “shortsighted viewpoint” of the potential benefits of PAEs, and she doubts how the “impact on innovation and competition” will be ascertainable given the questions being asked. Anne Layne-Farrar expresses similar doubts about the conclusions that can be drawn from the FTC study since only licensors are being surveyed. She posits that it “cannot generate a full dataset for understanding the conduct of the parties in patent license negotiation or the reasons for the failure of negotiations.”

Layne-Farrar concludes that the FTC study “can point us in fruitful directions for further inquiry and may offer context for interpreting quantitative studies of PAE litigation, but should not be used to justify any policy changes.” Consistent with the FTC’s own admissions of the study’s limitations, this is the real bottom line of what we should expect. The study will have no predictive power because it only looks at how a small sample of firms affect a few other players within the patent ecosystem. It does not quantify how that activity ultimately affects innovation and competition—the very information needed to support policy recommendations. The FTC study is not intended to produce the sort of compelling statistical data that can be extrapolated to the larger universe of firms.

FTC Commissioners Put Cart Before Horse

The FTC has a history of bias against PAEs, as demonstrated in its 2011 report that skeptically questioned the “uncertain benefits” of PAEs while assuming their “detrimental effects” in undermining innovation. That report recommended special remedy rules for PAEs, even as the FTC acknowledged the lack of objective evidence of systemic failure and the difficulty of distinguishing “patent transactions that harm innovation from those that promote it.” With its new study, the FTC concedes to the OMB that much is still not known about PAEs and that the findings will be preliminary and non-generalizable. However, this hasn’t prevented some Commissioners from putting the cart before the horse with PAEs.

In fact, the very call for the FTC to institute the PAE study started with its conclusion. In her 2013 speech suggesting the study, FTC Chairwoman Edith Ramirez recognized that “we still have only snapshots of the costs and benefits of PAE activity” and that “we will need to learn a lot more” in order “to see the full competitive picture.” While acknowledging the vast potential benefits of PAEs in rewarding invention, benefiting competition and consumers, reducing enforcement hurdles, increasing liquidity, encouraging venture capital investment, and funding R&D, she nevertheless concluded that “PAEs exploit underlying problems in the patent system to the detriment of innovation and consumers.” And despite the admitted lack of data, Ramirez stressed “the critical importance of continuing the effort on patent reform to limit the costs associated with some types of PAE activity.”

This position is duplicitous: If the costs and benefits of PAEs are still unknown, what justifies Ramirez’s rushed call for immediate action? While benefits have to be weighed against costs, it’s clear that she’s already jumped to the conclusion that the costs outweigh the benefits. In another speech a few months later, Ramirez noted that the “troubling stories” about PAEs “don’t tell us much about the competitive costs and benefits of PAE activity.” Despite this admission, Ramirez called for “a much broader response to flaws in the patent system that fuel inefficient behavior by PAEs.” And while Ramirez said that understanding “the PAE business model will inform the policy dialogue,” she stated that “it will not change the pressing need for additional progress on patent reform.”

Likewise, in an early 2014 speech, Commissioner Julie Brill ignored the study’s inherent limitations and exploratory nature. She predicted that the study “will provide a fuller and more accurate picture of PAE activity” that “will be put to good use by Congress and others who examine closely the activities of PAEs.” Remarkably, Brill stated that “the FTC and other law enforcement agencies” should not “wait on the results of the 6(b) study before undertaking enforcement actions against PAE activity that crosses the line.” Even without the study’s results, she thought that “reforms to the patent system are clearly warranted.” In Brill’s view, the study would only be useful for determining whether “additional reforms are warranted” to curb the activities of PAEs.

It appears that these Commissioners have already decided—in the absence of any reliable data on the systemic effects of PAE activity—that drastic changes to the patent system are necessary. Given their clear bias in this area, there is little hope that they will acknowledge the deep limitations of the study once it is released.

Commentators Jump the Gun

Unsurprisingly, many supporters of the study have filed comments with the FTC arguing that the study is needed to fill the huge void in empirical data on the costs and benefits associated with PAEs. Some even simultaneously argue that the costs of PAEs far outweigh the benefits, suggesting that they have already jumped to their conclusion and just want the data to back it up. Despite the study’s serious limitations, these commentators appear primed to use it to justify their foregone policy recommendations.

For example, the Consumer Electronics Association applauded “the FTC’s efforts to assess the anticompetitive harms that PAEs cause on our economy as a whole,” and it argued that the study “will illuminate the many dimensions of PAEs’ conduct in a way that no other entity is capable.” At the same time, it stated that “completion of this FTC study should not stay or halt other actions by the administrative, legislative or judicial branches to address this serious issue.” The Internet Commerce Coalition stressed the importance of the study of “PAE activity in order to shed light on its effects on competition and innovation,” and it admitted that without the information, “the debate in this area cannot be empirically based.” Nonetheless, it presupposed that the study will uncover “hidden conduct of and abuses by PAEs” and that “it will still be important to reform the law in this area.”

Engine Advocacy admitted that “there is very little broad empirical data about the structure and conduct of patent assertion entities, and their effect on the economy.” It then argued that PAE activity “harms innovators, consumers, startups and the broader economy.” The Coalition for Patent Fairness called on the study “to contribute to the understanding of policymakers and the public” concerning PAEs, which it claimed “impose enormous costs on U.S. innovators, manufacturers, service providers, and, increasingly, consumers and end-users.” And to those suggesting “the potentially beneficial role of PAEs in the patent market,” it stressed that “reform be guided by the principle that the patent system is intended to incentivize and reward innovation,” not “rent-seeking” PAEs that are “exploiting problems.”

The joint comments of Public Knowledge, Electronic Frontier Foundation, & Engine Advocacy emphasized the fact that information about PAEs “currently remains limited” and that what is “publicly known largely consists of lawsuits filed in court and anecdotal information.” Despite admitting that “broad empirical data often remains lacking,” the groups also suggested that the study “does not mean that legislative efforts should be stalled” since “the harms of PAE activity are well known and already amenable to legislative reform.” In fact, they contended not only that “a problem exists,” but that there’s even “reason to believe the scope is even larger than what has already been reported.”

Given this pervasive and unfounded bias against PAEs, there’s little hope that these and other critics will acknowledge the study’s serious limitations. Instead, it’s far more likely that they will point to the study as concrete evidence that even more sweeping changes to the patent system are in order.

Conclusion

While the FTC study may generate interesting information about a handful of firms, it won’t tell us much about how PAEs affect competition and innovation in general. The study is simply not designed to do this. It instead is a fact-finding mission, the results of which could guide future missions. Such empirical research can be valuable, but it’s very important to recognize the limited utility of the information being collected. And it’s crucial not to draw policy conclusions from it. Unfortunately, if the comments of some of the Commissioners and supporters of the study are any indication, many critics have already made up their minds about the net effects of PAEs, and they will likely use the study to perpetuate the biased anti-patent fervor that has captured so much attention in recent years.

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Administrative Agency Antitrust Commercialization Economic Study FTC Innovation Inventors Legislation Patent Law Patent Licensing Patent Litigation Uncategorized

How Rhetorical Epithets Have Led the FTC Astray in its Study of Patent Licensing Firms

We’ve all heard the narrative about patent licensing firms, often referred to pejoratively as “patent trolls.” These patent owners, who choose to license their innovations rather than build them, are the supposed poster-children of a “broken” patent system. It’s as if commercializing one’s property, just like a landlord leases his land for another to use, is suddenly a bad thing. Nevertheless, the power of this “troll” rhetoric cannot be denied. Many provisions in 2011’s Leahy-Smith America Invents Act were aimed at starving out these “trolls,” and no less than five bills currently under consideration in the House and Senate seek to further deflate their sails.

Another example of the powerful appeal of the “patent troll” rhetoric is that the agencies charged with enforcing antitrust law have also been convinced that there is something amiss with the commercial licensing of patented innovation in the marketplace. This has been a key feature of the deployment of patented inventions in America’s innovation economy since the early nineteenth century, as scholars have shown. Last year, the Federal Trade Commission (FTC) instigated its own investigative study of what it calls “patent assertion entities” (PAEs), which is merely a more formal and neutral-sounding synonym for the popularized “patent troll” epithet.

In a new paper published in the George Mason Law Review, Sticks and Stones: How the FTC’s Name-Calling Misses the Complexity of Licensing-Based Business Models, CPIP Senior Scholar Kristen Osenga takes a closer look at the FTC’s ongoing study of PAEs and finds that it is destined to fail for two simple, yet inescapably obvious, reasons.

The first is the basic definitional problem of the FTC’s characterization of PAEs, which puts all patent licensing firms in the same boat. Failing to take a more nuanced approach, Osenga warns, “fires up the rhetoric but obscures thoughtful discussion and debate about the issue.” Building upon her previous work, she explains:

[T]he real problem is that patent licensing firms are treated as a homogenous category, with no attention paid to the wide range of business models that exist under the patent licensing firm umbrella. The categorical determination of patent licensing firms as “problems” imputes to a large, diverse group of firms the negative actions and qualities of a small number of bad actors.

Since not all “trolls” are alike, Osenga cautions, it’s “naïve and inaccurate” to lump them all together. And when the FTC makes this mistake, it leads to a situation “where words actually can hurt, much more so than sticks and stones.” The FTC’s study is explicitly “premised on a one-size-fits-all conception of patent licensing firms.” Rather than shedding much-needed light on the complex innovation ecosystem, the study promises to squander the opportunity by failing to recognize that not all “trolls” are the same.

Osenga notes that the FTC is uniquely situated to obtain nonpublic information about how these patent licensing firms operate using its investigative power under Section 6(b) of the FTC Act. Unfortunately, however, the study is premised on the faulty notion that the only upside of patenting licensing firms is to “compensate inventors.” But this focus on patents-as-incentives misses the forest for the trees, Osenga urges, as it fails to account for the larger patent-commercialization network:

[T]here are many steps between invention and the introduction of an actual product to the market and consumers. These steps include transforming an idea in to a marketable embodiment, developing facilities to produce the marketable embodiment, creating distribution channels to bring the embodiment to the consumer, and making the consumer aware of the new product. Each of these steps requires its own additional resources in the form of both capital and labor.

The FTC study, like many patent skeptics, fails to consider the benefits of the division of labor that patent licensing firms represent. Not every inventor is willing or able to bring an invention to the marketplace. Osenga’s point is that patent licensing does more than simply compensate inventors for their troubles; it creates liquid markets and solves problems of asymmetrical actors and information. These exchanges increase innovation and competition by playing the role of match-maker and market-maker, and they place valuable patents into the hands of those who are better positioned to exploit their worth.

Osenga points out that there are indeed possible negative effects with patent licensing firms. For example, they sometimes engage in ex post licensing, waiting to offer licenses until after the would-be licensee has already adopted the technology. These firms can be better positioned litigation-wise since their potential exposure is typically less than that of the infringers they sue. Finally, patent aggregators tend to have greater market power, and it can be difficult to judge the quality of any given patent that’s asserted when they offer to license their entire portfolio.

As with all things, Osenga stresses, there’s both good and bad. The problem is figuring out which is greater. The FTC could conduct a study that reveals a “detailed understanding of the complex world of patent licensing firms,” she laments, but that’s not what the FTC is doing:

[T]he configuration of the study is slanted in such a way that only part of the story will be uncovered. Worse still, the study has been shaped in a way that will simply add fuel to the anti-“patent troll” fire without providing any data that would explain the best way to fix the real problems in the patent field today.

This leads to the second problem with the FTC study, which follows as a necessary, logical consequence from the first definitional problem: There are serious methodological problems with the study that will undermine any possible empirical conclusions that the FTC may wish to draw.

Osenga says that the FTC’s study is simply not asking the right questions. Painting a complete picture of complex licensing schemes requires more than just counting the number of patents a firm has and adding up the attempts to negotiate license deals. To really get to the bottom of things, she contends, the FTC should be asking why patentees sell their patents to licensing firms and why licensing firms buy them from patentees. Better still, ask them why they decided to become patent licensing firms in the first place.

This insight is powerful stuff. It’s not enough to simply ask these firms what they’re doing; to really understand them, the FTC must ask them why they’re doing it. And the results are likely to be varied:

Some, of course, begin with this business model in mind. Others invent new technology but are unable to successfully commercialize it themselves, despite making efforts to do so. Still others exist as practicing entities for years or decades before something changes—supply change issues, rampant infringement by competitors, and regulatory initiatives—and they are no longer able to exist as a viable practicing entity.

Similarly, the FTC could ask them what kind of firms they are, and these answers are also likely to be diverse. Osenga’s point is that the FTC’s questions aren’t designed to showcase the vast differences between the various types of patent licensing firms. If the FTC wants to get to the bottom of how these firms affect innovation and competition, the first step should be to realize that they’re not all the same. The FTC’s study is as clumsy as those who refer to all such firms as “patent trolls,” and the lack of nuance going in will unfortunately produce a study that lacks nuance coming out.

In the end, Osenga agrees that deterring abusive behavior is a good thing, and she worries about innovation and competition. However, unlike many in patent policy debates, she is also concerned that the rhetoric is having an undue influence on policymakers. Throwing all patent licensing firms under the “patent troll” bus will not get us the narrowly-tailored reforms that we need. Sadly, the FTC’s approach with its ongoing study appears to have swallowed this rhetoric wholesale, and it seems unlikely that the results will be anything but more fuel for the “patent troll” pyre.