Tag: Makan Delrahim

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Antitrust Patent Law Pharma

USPTO-DOJ Workshop on Promoting Innovation in the Life Science Sector: Day Two Recap

The following post comes from Austin Shaffer, a 2L at Scalia Law and a Research Assistant at CPIP. 

night view of Washington, D.C.By Austin Shaffer

This past fall, the Department of Justice (DOJ) and U.S. Patent and Trademark Office (USPTO) hosted day two of their public workshop to discuss the importance of intellectual property rights and pro-competitive collaborations for life sciences companies, research institutions, and American consumers. While day one focused on how patents and copyrights impact collaboration and innovation for business development in life science technologies, day two concentrated on competition, collaboration, and licensing, and how those tools can promote access to therapeutics, diagnostics, and vaccines. Video of day two of the workshop is available here, and our summary of day one is available here.

Welcome Remarks, Fireside Chat, and Program Overview

Makan Delrahim, Assistant Attorney General for the DOJ Antitrust Division, kicked off day two with some opening remarks, emphasizing the significant role that IP and antitrust play to encourage innovation and healthy competition as entities around the globe race to find a COVID vaccine.

Mr. Delrahim was then joined by USPTO Director Andrei Iancu for a fireside chat, moderated by Judge Kathleen O’Malley of the U.S. Court of Appeals for the Federal Circuit. Mr. Iancu spoke to the critical pro-competitive role of patents at this time, as they incentivize innovation and disclosure and create transferrable financial instruments. Indeed, obtaining a patent boosts viability and employment growth, particularly for small companies. Additionally, Mr. Iancu highlighted some of the measures that the USPTO is taking to foster innovation and collaboration in the life science sector. One such measure, the Patents 4 Partnerships program, provides the public with a user-friendly, searchable repository of patents and published applications related to the COVID pandemic that are available for licensing. Additionally, the USPTO has extended deadlines and discounted application fees pursuant to the CARES Act.

Following the fireside chat, David Lawrence, Chief, Competition Policy & Advocacy Section at the DOJ, gave a brief overview of the day’s program. Mr. Lawrence noted that the life science sector relies on both competition and collaboration—the key question throughout the upcoming panels is where to draw the line at the cross-section of those factors to promote efficiency and effectiveness.

Session V: Collaboration and Licensing Strategies

Partnerships can serve as a key tool in the development of therapeutics and vaccines from initial research, through product development and clinical trials, and into the market-ready stage. These partnerships and various licensing strategies are particularly relevant to addressing the current pandemic. This panel focused on public-private partnerships, private partnerships, exclusive versus non-exclusive licensing, ownership rights, and information pooling.

The panel included Laura Coruzzi of Regenxbio, Lauren Foster from MIT, Prof. Sheridan Miyamoto from Penn State University, Mita Mukherjee of Emergent BioSolutions, Mark Rohrbaugh of the NIH, and Dick Wilder of the Coalition for Epidemic Preparedness Innovations, and it was moderated by DOJ Deputy Associate Attorney General Brian Pandya.

Each panelist took a turn discussing the role of collaboration in the development of therapeutics and vaccines. Ms. Coruzzi said that while collaboration is important throughout product development, it is particularly critical in the early research stage. Gene therapy research is precariously risky, and investors tend to stay away from those endeavors. Collaboration between multiple entities leads to a higher success rate, thereby providing a greater incentive for investors to get on board. Ms. Mukherjee explained that while big pharma has the expertise in researching and developing a marketable product, the initial work is often more appropriate for smaller, niche companies.

Ms. Foster explained that at MIT, the mission is to make technology broadly available, and by prudently engaging in a collaborative relationship, they can better ensure advancement. While the NIH approaches licensing in a similar manner to MIT, Mr. Rohrbaugh noted some of the statutory requirements and regulations that govern the NIH’s ability to license, such as the requirement to post on the Federal Register for comment. Mr. Wilder argued that the key to successful collaboration is to manage projects on a collective basis to ensuring that the resulting IP is used properly.

Turning to recent developments in licensing structures, Mr. Pandya noted the recent increase in invalidation of IP rights and posed the question: How has this negatively impacted licensing? Ms. Coruzzi cited Mayo v. Prometheus, a 2012 Supreme Court case which held that a natural phenomenon must be sufficiently added upon or transformed in order to make an idea, formula, mechanism, or test patentable. That decision, she argued, has squandered tax-funded university research and placed the U.S. at a competitive disadvantage with other countries that protect purified or engineered natural products. She called on the legislature to fix a decision that “knocked the legs out of patents.”

Session VI: How do Regulation and Antitrust Enforcement Impact Competition and Incentives for Innovation?

The extent to which regulation and antitrust enforcement are necessary to maintain competition is a contested issue, and the answer can have a significant impact on the incentives for innovation. The panelists in this session considered the tradeoffs between the two and the resulting consequences, especially within the context of a pandemic.

The panel included Alden Abbott of the FTC, Prof. Ernst Berndt from MIT, David Kappos of Cravath, Swaine & Moore, Prof. William Kovacic from George Washington University Law School, and Dick Wilder of the Coalition for Epidemic Preparedness Innovations, and it was moderated by Deputy Assistant Attorney General Alexander Okuliar.

Mr. Kappos argued that the patent system has been disabled and marginalized in its role of incentivizing innovation and bringing ideas from the university level to the marketplace for a variety of reasons. Mentioning a host of companies that agree, Mr. Kappos deemed the patent system broken, calling on congressional reform of 35 U.S.C. § 101. From his observations, our restricted statutory scheme has caused investment to flee elsewhere, recent Supreme Court decisions have resulted in decreased overall investment, and venture capital funding is decreasing in patent-reliant sectors.

Pertinent to regulation and antitrust enforcement concerns, several of the panelists pointed to the March 2020 FTC-DOJ Joint Statement as a positive step forward. The statement outlined ways that firms, including competitors, can engage in collaboration for the purpose of public health and safety protection without violating the antitrust laws. Mr. Kovacic called on further FTC and DOJ action, explicating that those agencies have the capacity to analyze the effects of previous policymaking on the life science sector that can provide useful guidance moving forward.

Session VII: Competition and Collaboration: Examining Competitive Effects and Antitrust Risks Associated with Collaborations

In this session, the panelists discussed what makes a collaboration or partnership successful and procompetitive, antitrust concerns that can arise, and potential safeguards that can reduce antitrust risk.

The panel included William Diaz of Amgen, Andrew Finch of Paul Weiss, Prof. Luba Greenwood from Harvard University, and Chuck Loughlin of Hogan Lovells, and it was moderated by the DOJ’s Jennifer Dixton, Special Counsel for Policy & Intellectual Property, Antitrust Division.

Mr. Finch started off the penultimate panel by identifying the hallmarks of a successful joint venture: mechanisms that enable participants in the venture to increase output, clear boundaries as to the scope of the venture, and safeguards to make sure the venture stays “on the rails.” He proposed a “red-yellow-green” system that lawyers can articulate to business clients to let them know what can and cannot be shared, and when to seek advice from counsel for further guidance. Mr. Diaz echoed those sentiments, adding that ventures need a clear charter from the onset of the relationship that provides comprehensive plans for what to do in a variety of scenarios. Also, he continued, it is imperative to keep detailed meeting agendas to avoid members straying into discussions that might raise antitrust concerns.

The panelists went on to commend the usefulness of the DOJ’s Business Review Letters, which provide unusually expedited advisory guidance to firms wondering whether their collaborations will pass antitrust muster. Ms. Dixton, fielding those comments as moderator and in her capacity at the DOJ, then posed a final question to the panel: What else could the Department be doing? The panelists called for updates to the FTC-DOJ Antitrust Guidelines for Collaborations Among Competitors. While still useful, the Guidelines have not been updated in twenty years, leaving many gray areas in today’s world.

Keynote Speech

The keynote speech was delivered by Dr. Elias Zerhouni, Emeritus Professor of Radiology and Biomedical Engineering and Senior Advisor at Johns Hopkins Medicine.

Dr. Zerhouni shared his wealth of life science knowledge and experience in the day’s keynote speech. He made a key point when it comes to the need for collaboration to combat COVID: no single university, single company, or even single country is able to address modern biological issues by themselves—the amount of data generated in the life science sector is simply beyond the capabilities of one player.

Dr. Zerhouni agreed with some of the previous panelists that developments in the patent system have changed the structure of innovation and created a difficult market to negotiate in. He argued for statutory reform that will allow US innovators to pool their IP together to operate more effectively. Although there are many contributing factors to the current state of the patent system, Dr. Zerhouni referred to the Federal Circuit’s 2002 decision in Madey v. Duke University as an inhibitor to pre-competitive innovation. (Madey held that the experimental use defense applied only to acts taken for amusement, to satisfy curiosity, or for strictly philosophical inquiry).

Session VIII: Academics’ and Economists’ Views on Collaboration and Competition

The final panel featured the perspectives of experts from academia and the field of economics, including Prof. Rena Conti from Boston University, Prof. Scott Hemphill from NYU School of Law, Richard Manning of Bates White Economic Consulting, and Prof. Joanna Shepherd from Emory Law School, and it was moderated by Patrick Greenlee, Economist with the DOJ’s Antitrust Division.

Mr. Greenlee asked one question of the final panel: Are the current prices for life sector IP too high? That question fielded diverse opinions and evaluations. Mr. Manning said there is no cause for worry because the profit margins “aren’t that big.” Prof. Shepherd agreed, citing historically low lifetime revenues for new drugs, resulting in decreasing returns on R&D for pharmaceutical companies. Prof. Hemphill took a step back, arguing that our economic knowledge is still too limited to know the optimal level for the collaboration-competition tradeoff. Prof. Conti contended that we may be looking at the system entirely wrong—when evaluating mergers and the value of IP assets, the value of labor and manufacturing assets and access to raw materials is often overlooked.

Conclusion

Overall, the second day of the DOJ-USPTO workshop on promoting innovation in the life science sector left us with a lot to consider in the coming months as COVID vaccinations continue to be developed and distributed. What is the optimal level of antitrust enforcement? How can firms effectively, and legally, take advantage of licensing strategies and collaboration to expedite development? Does our patent system need to be reformed in the wake of the pandemic? These are questions of the upmost importance for our industry leaders and policymakers to consider and solve.

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Patent Licensing

LeadershIP 2020: Injunctive Relief in Standard-Essential Patent Cases

The following post comes from Colin Kreutzer, a 2E at Scalia Law and a Research Assistant at CPIP.

a hand holding a phone with holograms hovering above the screenBy Colin Kreutzer

The LeadershIP conference is dedicated to promoting an open dialogue on global issues surrounding innovation, intellectual property, and antitrust policy. On September 10th, LeadershIP kicked off its 2020 series of virtual events with a panel discussion featuring three government agency leaders: PTO Director Andrei Iancu, NIST Director Walter Copan, and Assistant Attorney General Makan Delrahim of the DOJ’s Antitrust Division.

Moderator David Kappos, a former PTO Director and current partner at Cravath, Swaine & Moore LLP, led a discussion about the role of standard-essential patents (SEPs) in modern industry and the legal effect that an SEP designation has on patent owners. The main topic of discussion was the importance of retaining the right to injunctive relief against infringers. The panelists had released a joint statement on this subject last year, following some unwelcome court decisions and what they viewed as misinterpretations of an earlier statement from 2013. View the video of the panel discussion here.

SEPs and F/RAND

The adoption of industry-wide technical standards helps industries to thrive by promoting efficiency and interoperability among competitors. A group that authors such standards is known as a standards developing organization (SDO), and it can include representatives from governments, private companies, and universities all over the world. For example, mobile communications standards such as 4G broadband technology are developed by the ITU, a group within the United Nations.

Developing a complex technical framework necessarily involves the use of many patented technologies. When the use of a certain patented technology is essential for adhering to the industry standard, it is known as a standard-essential patent.

Since owning an SEP can give the patent owner leverage over an entire industry, SDOs often require an agreement from patent owners before electing to use their technology in the standard. To be included, owners must commit to licensing their invention to all interested parties on terms that are fair, reasonable, and non-discriminatory (FRAND). Some forms of this agreement omit the word “fair,” leaving only “RAND.” They can be collectively referred to as F/RAND commitments.

Holdup and Holdout

The combination of public standards and private property rights can create perverse incentives for both patent owners and technology implementers alike. Once a company is bound to an industry standard, a patent owner may refuse to honor its F/RAND commitment and demand licensing fees that are grossly disproportionate to the patent’s actual value. A practice like this is known as “holdup.” But the presence of F/RAND agreements can encourage the licensee to practice “holdout” as well. In that case, a company will simply use the technology without paying any fees, ostensibly because the owner would not agree to fair and reasonable terms. Holdup and holdout can both weaken standard-setting efforts by breeding distrust and discouraging participation.

The panelists talked about the chain of events that they feel resulted in too much emphasis on preventing holdup at the expense of giving holdout a green light.

The 2013 and 2019 Letters

In 2013, the PTO and DOJ released a joint policy statement on the issue of appropriate legal remedies for SEP owners. The statement said it may not always be proper seek an injunction in a district court or to ban importation of products using an exclusion order at the International Trade Commission. Citing “an effort to reduce . . . opportunistic conduct” and the need to “provide assurances to implementers of the standard that the patented technologies will be available,” the letter suggested that a voluntary F/RAND commitment may imply that “money damages, rather than injunctive or exclusionary relief, is the appropriate remedy for infringement in certain circumstances.” The letter indicated that, at least under certain circumstances, no remedies should be available that would halt the actual flow of products or impede the implementation of a technical standard. Instead, the SEP owners could expect only monetary judgments that would be decided after the fact.

In the years following this statement, several court decisions were handed down denying injunctive relief in SEP infringement cases. In Apple v. Motorola for example, the N.D. Illinois court reasoned that when an SEP owner commits to licensing its patent to everyone, the dispute narrows to one of price: “[b]y committing to license its patents on FRAND terms, Motorola committed to license the [patent] to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation.” On appeal, the Federal Circuit objected to this rationale as a per se rule, but it upheld the denial of injunctive relief all the same.

The agencies became concerned that an entirely different legal standard was being applied when the patent in question was encumbered by a F/RAND commitment. So in 2019 the USPTO and DOJ, now joined by the NIST, released a new statement. In this one, they sought to clarify that, while F/RAND commitments should be considered as a factor, they “need not act as a bar” to injunctive or exclusionary orders. The three agency heads were unified on the importance of keeping these remedies available.

Andrei Iancu, Director, USPTO

Director Iancu talked about the critical role that innovation plays in the United States economy and the need to be vigilant in our protection of IP. Inventors must be certain that their protections are reliable, whether regarding infringement, remedies, march-in rights, or any other current issue. He discussed the various measures the Office is taking to improve our IP system. This includes COVID-response actions, such as fee deferral for small entities and the switch to an all-electronic filing system.

For an IP system to be robust, it must be founded on sound policy considerations. In this vein, Director Iancu discussed various PTO policies. Recent changes at the PTAB are designed to ensure a balance between patent owners and petitioners. The Office has issued new guidance on § 101 issues to provide greater clarity on what constitutes patentable subject matter. The PTO’s chief economist reported that “uncertainty” has decreased by 44% following this new guidance. And, of course, the joint policy statement is a step toward restoring all available remedies.

On the main topic, Director Iancu kept it simple: SEPs are patents. He emphasized that injunctive relief truly goes to the heart of the property rights conferred by a patent, as the right to exclude is explicitly provided in our Constitution. He rejected the notion that a special set of rules should apply when a F/RAND commitment is involved, and he warned about what would happen if there were: “One of the fundamental principles here is that if you have categorical rules, whether in fact or as perceived, then you create a system that leads to perverse incentives and bad outcomes.” There will be far less incentive to negotiate a license agreement up front when infringers “know categorically that they will not be enjoined.”

Walter Copan, Director, NIST

Director Copan discussed the various roles that NIST play in our economy and in promoting innovation, including: advanced 5G communications, standards leadership and cooperation with the private sector, cybersecurity, biotech innovation and protection, and manufacturing and supply chain security.

His most important objective at NIST is strengthening America’s competitiveness in the world. A strong IP system is the “bedrock” of this position and SEPs figure in prominently. The U.S. share of worldwide IP is on the decline while that of China is growing. One avenue that China is using to assert itself on the world stage is through China Standards 2035, a 15-year plan to become the leader in standards development for next generation technology. Copan and others made a case for the desired SEP remedies as part of an effort to maintain or improve the United States’ global standing on issues of IP and standards development. He said that our international partners are starting to see “the value and power of injunctive relief” to discourage infringement at will.

He also emphasized the same core ideas as the other panelists: SEPs are patents, and they are entitled to the same remedies as any other patent. Rather than favoring one of holdup or holdout over the other, we should focus on encouraging good-faith negotiation.

As a patent owner himself, he has been through a number of injunctive processes and knows first-hand that this form of relief is a “key part in the suite of remedies” available. He expressed excitement about the new policy statement and the international momentum that accompanies it, but he cautioned that this effort “is a journey” and there is a long way to go.

Makan Delrahim, Assistant Attorney General, USDOJ Antitrust Division

Assistant Attorney General Delrahim described the issues in the context of his New Madison approach to IP and antitrust policy, and the four core principles that form the basis of the New Madison approach.

First, patent holdup is not an antitrust issue. The DOJ has long recognized that SDOs are procompetitive institutions, and that the interoperability they provide is a major benefit to consumers. However, that does not mean that SEP holdup is an inherently anticompetitive practice, or that antitrust law is the appropriate forum in which to settle such disputes. He described as “radical” the idea that a patent owner could be accused of an antitrust violation simply for reneging on F/RAND obligations, and that contract law would be far more appropriate.

Second, SDOs shouldn’t be used as “vehicles” by which either implementers or patent owners gain advantages over each other. Instead SDO policies should strive for a balance which maximizes the incentives for innovators to innovate and for implementers to implement. “Negotiating in the shadow of dubious antitrust liability is not only unnecessary, it dramatically shifts the bargaining power between patent holders and implementers in a way that distorts the incentives for real competition on the merits.”

Third, as discussed above, the fundamental right conferred by a patent is the right to exclude. Courts should be very hesitant to take that right away. Doing so can effectively create a compulsory licensing regime, which has been largely disfavored in the U.S. for decades.

Finally, at least from an antitrust perspective, the refusal to license a patent should not be considered per se legal. This will allow F/RAND negotiations to take place “in the shadows of contract law” without the threat of treble damages under the Sherman Act, and thus without “skewing the negotiations in favor of an implementer.”

Conclusion

In closing, the panelists were unified in their views as laid out in the joint policy statement. They were optimistic about the direction in which the law is headed, both in the U.S. as well as with international partners such as Germany and the U.K. And they looked forward to continuing the full restoration of a critical remedy for owners of standard-essential patents.

Categories
FTC Innovation

Unverified Theory Continues to Inform FTC’s Policies Toward Patent Owners

dictionary entry for the word "innovate"The Federal Trade Commission’s unfair competition case against Qualcomm, Inc., has now concluded. The parties gave their closing arguments on Tuesday, January 29, and all that remains is Judge Lucy Koh’s ruling. To prevail, the FTC needed to demonstrate actual, quantifiable harm. It completely failed to do so.

The FTC’s complaint charged Qualcomm with using anticompetitive tactics to maintain its alleged monopoly position as a supplier of certain baseband processors (chips that manage cellular communications in mobile products). Specifically, the FTC alleged that Qualcomm engaged in “exclusionary conduct” through a “no license, no chips” policy in which it supplied CDMA[1] and Premium LTE chips[2] only on the condition that cell phone manufacturers agreed to Qualcomm’s license terms. The FTC claimed that Qualcomm’s conduct reduced competitors’ ability and incentive to innovate and raised prices paid by consumers for cellular devices.

In support of this position, the FTC offered Carl Shapiro, an Economics Professor from Berkeley, as an expert witness. Shapiro argued that Qualcomm’s “no license, no chips” policy gave it the market power to demand “supra-FRAND”[3] royalties. He claimed these royalties harmed competition by raising rivals’ costs, weakening them as competitors, and deterring them from doing R&D. Shapiro asserted that Qualcomm had monopoly power over CDMA and Premium LTE markets through 2016.

There are (at least) two glaring errors regarding the FTC’s and Shapiro’s arguments. First, the relevant market definitions for “CDMA” and “Premium LTE” chips are fatally flawed. Regarding CDMA, the FTC defined the relevant market solely as CDMA chips, yet the market includes both CDMA and WCDMA[4] chips, with WCDMA selling 5x more chips than CDMA. Regarding Premium LTE, there is no “premium” chip market separate from other mobile chips. What the FTC and Shapiro define as “premium” actually represents the end-result of a normal product evolution where newer, more innovative chips are incorporated first into higher-end devices. And even if one considers only Premium LTE chips, Qualcomm had a first-mover advantage because it invented the technology. A first-mover advantage is not an antitrust violation. The result of both flawed market definitions is an economic theoretical shell-game to divert attention from the fact that there is simply no evidence of harm to the properly defined actual market.[5]

And this leads to the second and even more critical point: the FTC presented no real-world evidence of harm to competitors or consumers from Qualcomm’s alleged exclusionary conduct. If R&D had been deterred by Qualcomm’s licensing practices, as Shapiro argued, he should have been able to identify at least one actual example.[6] Under his theory, the lack of ongoing R&D and harm to competitors should have resulted in an increasing number of inferior cell phones provided by a decreasing number of companies. To the contrary, more and more competitors have been entering the chip market with more and more innovations as cellular technology has advanced from 3G to 4G. Cell phone quality has dramatically increased over time, without concomitant quality-adjusted price increases.[7]

Notwithstanding the flawed market definition and lack of harm, the FTC has misconstrued the underlying basis for Qualcomm’s “no license, no chips” licensing policy, teeing it up as objectively anticompetitive and onerous. Yet, Qualcomm’s policy simply seeks to prevent “patent holdout” as a legitimate business strategy. Without this policy, device manufacturers could build phones using Qualcomm’s chips, then simply refuse to pay Qualcomm for its telecommunications patents. Qualcomm’s only recourse would be to sue for patent infringement, while the device manufacturers continue to profit from use of the chips. The “no-license, no chips” policy ensures that device manufacturers negotiate necessary patent licenses before receiving chips to build phones.

Assistant Attorney General for the Department of Justice, Makan Delrahim, has stated that condemning this kind of licensing practice, in isolation, as an antitrust violation, while ignoring equal incentives for patent holdout, “risks creating ‘false positive’ errors of over-enforcement that would discourage valuable innovation.” (Delrahim also recently criticized the FTC’s entire case saying that disputes about patent licensing should not be decided by antitrust law.)

The FTC, its experts, and its industry witnesses, however, are basically advocating for patent holdout as a legally legitimate, even preferable, strategy for dealing with patent owners like Qualcomm. Professor Shapiro’s model, in particular, advanced patent holdout in lieu of up-front patent licensing. Shapiro would require a patent owner to wait and then sue for infringement as a prerequisite to any license negotiations. But forcing the patent owner to pursue judicial recourse through a time-consuming and costly patent infringement suit leverages the cost of litigation to artificially decrease the ultimate reward to the patentee.

At the close of this case, one is left wondering why. Why did the FTC pursue a “midnight” filing at the tail end of the Obama Administration, just days before President Trump took office? Why did the FTC pursue the case over Commissioner Ohlhausen’s strong dissent in which she argued that the case was based on a flawed legal theory “that lacks economic and evidentiary support” and that “by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide”? And finally, why is the FTC attempting to cripple Qualcomm in the developing 5G technological space in favor of China’s Huawei[8], which will result in actual, quantifiable harm to the U.S.’s competitive advantage over China?

[1] CDMA, which stands for “code-division multiple access,” permits several transmitters to send information over a single communication channel and is a second generation (2G) network used in mobile device.

[2] LTE, which stands for “long term evolution,” is a fourth generation (4G) standard for high-speed wireless communication used in mobile devices.

[3] FRAND stands for “fair, reasonable, and non-discriminatory.”

[4] WCDMA stands for “wide band code division multiple access.” It is a third generation (3G) network used in mobile devices.

[5] This is the same game the FTC played in the 1990s with Microsoft where the FTC defined the relevant market as operating systems for IBM compatible PCs, but that argument only worked if one excluded Apple, Linux, and other operating systems. These type of games about defining the relevant market are common in the high-tech context, and the FTC is repeating it here.

[7] “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.” See: https://cip2.gmu.edu/wp-content/uploads/sites/31/2018/02/Letter-to-DOJ-Supporting-Evidence-Based-Approach-to-Antitrust-Enforcement-of-IP.pdf.

[8] One also wonders why the FTC relied so heavily on Huawei’s testimony in this case given the Trump Administration’s repeated concerns about this company culminating in the Department of Justice’s recent 10-count indictment against Huawei for theft of trade secrets, wire fraud, and obstruction of justice.

Categories
Antitrust Patent Licensing

Department of Justice Recognizes Importance of Reliable Patent Rights in Innovation Economy

dictionary entry for the word "innovate"It is undeniable that the patent system has been under stress for the past decade, as courts, regulators, and even the Patent Office itself (as the newly confirmed Director Andrei Iancu has acknowledged) have sowed legal uncertainty, weakened patent rights, and even outright eliminated patent rights. This is why a series of recent speeches by Assistant Attorney General Makan Delrahim—head of the Antitrust Division at the Department of Justice—have signaled an important and welcome policy change from the past decade. It’s just one step, but it’s an important first step to restoring reliability and predictability to property rights in patents, which, as Director Iancu has also been saying in recent speeches, drives innovation and economic growth by promoting investments by inventors, venture capitalists, and companies in the new inventions that make modern life a veritable miracle today.

Delrahim’s speeches are important because one significant point of stress for the patent system and the innovation economy over the past decade has occurred at the intersection of antitrust law and the licensing of patents in standard setting organizations (SSOs). Many people are unaware of this particular issue, and it’s understandable why it flies under the radar screen. The technical standards set by SSOs are the things that make everything work, such as electrical plugs, toasters, and pencils, among millions of other products and services, but they are not obvious to everyday consumers who use these products. Also, antitrust law is a complex domain of lawyers, policy-makers and economists. Still, the patented innovation that comprises technical standards, such as 4G, WiFi, USB, memory storage chips, and other key features of our smart phones and computers, have been essential drivers of innovation in the telecommunications revolution of the past several decades.

In a series of recent speeches, Delrahim has signaled an important and welcome change from his predecessors in how antitrust law will be applied to patented technology that is contributed to the standards that drive innovation in the high-tech industry. Delrahim’s predecessors at the DOJ gave many speeches criticizing (and instigating investigations of) alleged “anti-competitive behavior” by patent owners on technical standards. The DOJ’s approach was one-sided, unbalanced, and lacked evidence confirming the allegations of anti-competitive behavior. Instead, Delrahim is emphasizing the key importance of promoting and properly securing to innovators the technology they create through their long-term, risky, and multi-billion-dollar R&D investments (as succinctly described in two paragraphs here about Qualcomm’s R&D in 5G by an official at the Department of Treasury).

Delrahim has announced that he will return to an evidence-based, balanced antitrust policy at the DOJ. He will not take action against innovators unless there is real-world evidence of consumer harm or proven harm to the development of innovation. The absence of such evidence is well known among scholars and policy-makers. In February 2018, for instance, a group of scholars, former government officials, and judges wrote 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.” It’s significant that Delrahim has announced that the DOJ will constrain its enforcement actions with basic procedural and substantive safeguards long provided to citizens in courts, such as requiring actual evidence to prove assertions of harm. This guards against unfettered and arbitrary regulatory overreach against innocent owners of private property rights. This self-restraint is even more important when overreach negatively impacts innovation, which portends badly for economic growth and the flourishing lives we have all come to expect with our high-tech products and services.

For example, Delrahim has rightly recognized that “patent holdup” theory is just that—a theory about systemic market failure that remains unproven by extensive empirical studies. Even more concerning, “patent holdup” theory—the theory that patent owners will exploit their ability to seek injunctions to protect their property rights and thus “holdup” commercial implementers by demanding exorbitantly high royalties for the use of their technology—is directly contradicted by the economic evidence of the smart phone industry itself. The smart phone industry is one of the most patent-intensive industries in the U.S. innovation economy; thus, “patent holdup” theory hypothesizes that there will be higher prices, slower technological development, and less and less new development of products and services. Instead, as everyone knows, smart phones—such as the Apple iPhone and the Samsung Galaxy, among many others—are defined by rapidly dropping quality-controlled prices, explosive growth in products and services, and incredibly fast technological innovation. The 5G revolution is right around the corner, which will finally make real the promise of the Internet of Things.

In sum, Delrahim has repeatedly stated that antitrust officials must respect the equal rights of all stakeholders in the innovation industries—the inventors creating fundamental technological innovation, the rights of the companies who implement this innovation, and the consumers who purchase these products and services. This requires restraining investigations and enforcement actions to evidence, and not acting solely on the basis of unproven theories, colorful anecdotes, or rhetorical narratives developed inside D.C. by lobbyists and activists (such as “patent trolls”). This is good governance, which is what fosters ongoing investments in the R&D that makes possible the inventions that drives new technological innovation in smart phones and in the innovation economy more generally.

We will delve more deeply into the substantive issues and implications of Delrahim’s recent speeches in follow-on essays. Since his speeches have been delivered over the course of the past six months, we have aggregated them here in one source. Read them and come back for further analyses of these important speeches (and more speeches that will likely come, which we will keep adding to the list below):

  • November 10, 2017. In a speech at the University of Southern California, Gould School of Law, Assistant Attorney General Delrahim discussed why patent holdout is a bigger problem than patent hold-up. “[T]he hold-up and hold-out problems are not symmetric. What do I mean by that? It is important to recognize that innovators make an investment before they know whether that investment will ever pay off. If the implementers hold out, the innovator has no recourse, even if the innovation is successful.” He further noted that antitrust law has a role to play in preventing the concerted anticompetitive actions that occur during holdout.
  • February 1, 2018. In a speech at the U.S. Embassy in Beijing, Delrahim noted that the proper antitrust focus should be on protecting the innovative process, not “short-term pricing” considerations. With this focus, using antitrust remedies should be approached with “caution.”
  • February 21, 2018. In a speech at the College of Europe, in Brussels Belgium, Delrahim observed that antitrust enforcers have aggressively tried to police patent license terms deemed excessive, and “have strayed too far in the direction of accommodating the concerns of technology licensees who participate in standard setting bodies, very likely at the risk of undermining incentives for the creation of new and innovative technologies.” The real problem and solution he noted is that the “dueling interests of innovators and implementers always are in tension, but the tension is best resolved through free market competition and bargaining.”
  • March 16, 2018. In a speech at the University of Pennsylvania Law School, Delrahim expanded on his detailed remarks from his talk at USC by adding some historical context from the founding fathers. He also made the core point that “patent hold-up is not an antitrust problem,” noting that FRAND commitments from patent owners are part of the normal competitive process and are therefore appropriately policed by contract and common law remedies. He further describes the necessary impacts of having a right to exclude in the patent right, including that the “unilateral and unconditional refusal to license a patent should be considered per se”
  • April 10, 2018. In a keynote address at the LeadershIP Conference on IP, Antitrust, and Innovation Policy in Washington, D.C., Delrahim emphasized the harm that can occur when “advocacy positions lead to unsupportable or even detrimental legal theories when taken out of context.” He specifically noted that some advocacy about patent hold-up could undermine standard setting as “putative licensees have been emboldened to stretch antitrust theories beyond their rightful application, and that courts have indulged these theories at the risk of undermining patent holders’ incentives to participate in standard setting at all.”
Categories
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