Tag: patent licensing

Categories
Antitrust Innovation Patent Licensing

Jonathan Barnett on the “License as Tax” Fallacy and the Real-World Benefits of Licensing

The following post comes from David Ward, a rising 2L at Scalia Law and a Research Assistant at CPIP.

the dictionary entry for the word "innovate"By David Ward

“Casual metaphors can have dangerous consequences.” CPIP Senior Fellow for Innovation Policy Jonathan Barnett’s new paper, The ‘License as Tax’ Fallacy, seeks to undo what he considers to be a dangerous, casual metaphor, namely, that intellectual property is a “state-granted monopoly” and therefore licensing is a “monopolistic tax” on consumers. Instead, Prof. Barnett explains that licensing is a tool that creates value for consumers and producers alike.

Historical Roller Coaster

This “IP = monopoly” metaphor has seen a bit of a jurisprudential roller coaster over the past century. Its origin is tied to monopoly-busting antitrust cases, as one might expect, starting around the end of the New Deal era of the late 1930s. Many of the battles were over the practice of “tying” patented products to other products in bundles. For those unaware, in antitrust, “tying” is essentially an arrangement that requires the buyer of one product to buy something else as well, and this often can be viewed as anticompetitive. These patent-tying cases led to the Supreme Court making a hard-and-fast rule in the 1962 case United States v. Loews. The Loews case effectively outlawed tying arrangements in patent licenses as anticompetitive, without having to prove any actual anticompetitive consequences.

This pivotal case cemented a metaphorical assumption that intellectual property is a state-granted monopoly. Further evolution of this mindset led to an effective halt of many licensing transaction options that were once available to sellers in the IP market. Prof. Barnett points out that this ended up harming consumers rather than protecting them. Sellers wishing to license their intellectual property, but restrict how it was used, would often not sell rather than risk getting hit with an antitrust lawsuit under the not-so-IP-friendly antitrust rules in the courts. And those that did license charged higher prices since they could not enforce value-saving restrictions.

The roller coaster didn’t stop there, though, as the late 1970s Supreme Court moved away from the stifling hard-and-fast rules in two new decisions, U.S. Steel and Sylvania. Instead of assuming that many IP license provisions (such as tying) were anticompetitive on their face, the Court began requiring proof that the provision in question was actually anticompetitive—just as in nearly every other antitrust case. This more license-friendly trend toward requiring proof of anticompetitive IP practices culminated in the 1995 U.S. Department of Justice Antitrust Guidelines for Licensing of Intellectual Property, which concluded that antitrust challenges to licensing transactions have to provide evidence of harm to the market. The bright line licensing rules of the past were effectively gone.

Recent Years: The Lexmark Case

But the coaster did not stop there either, as the mid-2000s and recent years have seen a resurgence of more hard-and-fast IP licensing rules. A great example of the resurgence of these rules is the 2017 case Impression Products v. Lexmark International, which involved the oft-dreaded purchasing of printer ink cartridges. Lexmark sold two types of ink cartridges: expensive ones that users could refill, and cheap ones that users were not allowed to refill. The cheap cartridges included a licensing provision that did not allow users to refill the cartridge in exchange for the lower cost. Impression Products, however, bought the empty, cheap cartridges from third party resellers, refilled them, and sold them for a profit, despite being aware of this license provision that prohibited refilling them.

Impression Products leaned on what is called the “patent exhaustion doctrine” to win the case. This doctrine can end a patent owner’s right to control a product once it has been sold, much in the same way that used bookstores don’t have to get a copyright license to sell a used book. However, the Court overturned a long-standing, fact-specific rule that required examining the market impact of such provisions in patent reseller cases. Instead, it adopted a hard-line rule that does not allow patent owners to enforce their licensing provisions on products that have already been sold, without any analysis on the market impact.

This illustrative example of a return to the hard-and-fast rules of the past is exactly what Prof. Barnett warns against. In the instance of printer ink cartridges, companies now provide fewer options at a higher price since they can’t enforce a provision that allows them to offer a lower-value, lower-cost alternative. But the anticompetitive implications of the Lexmark decision can have far-reaching effects on intellectual property as a whole; hard-line rules that prohibit the enforcement of licensing provisions without any analysis of the impact on the market creates less choice and higher cost for consumers. This, of course, is exactly the opposite of the aim of the antitrust laws.

The Need for Evidence

It’s important to note that Prof. Barnett acknowledges that intellectual property can cause anticompetitive practices that harm consumers. But he contends that there needs to be evidence showing that specific intellectual property licenses have anti-consumer implications, as there is in most other antitrust cases. The theoretical fear of intellectual property licensing clogging up markets with exorbitant rates (the “licensing tax”), if it has any merit, should be backed up by evidence.

A great case study for this issue comes from the smartphone market. In the smartphone industry, there are countless “standards” for wireless signals and products, such as 4G, that are required for our many devices to interact in a uniform manner. The inventors of these standards have what are called “standard essential patents,” or SEPs. There is a great fear that these patents, being quite literally essential to smartphone manufacturers, will allow their owners to exploit markets and charge anticompetitive pricing.

The great mystery is that, despite this, there isn’t evidence that this hypothetical scenario exists. Prof. Barnett examines three decades of market performance in this industry and shows that SEP licensing royalties account for a modest three to five percent of global handset revenues. This is in stark contrast to the hypothetical models that anticipated double-digit royalty percentages because of the “IP licensing tax.”

Prof. Barnett attributes this disconnect to several factors, but most importantly he points to the fact that regulators, legislatures, and judges should be focusing on real-world impacts from actual evidence and data when contemplating new rules and regulations.

The Real-World Benefits of Licensing

Although some assume that licensing will create anticompetitive environments, there is ample evidence to show that licensing enables competition and diverse markets. Prof. Barnett uses several real-life models to demonstrate this point.

The first model is the “Hub-and-Spoke” structure, where several smaller intellectual property owners license their IP to large companies with commercial power and reach. The best example of this is in the movie business, where outside production companies license their works to large studios. Each party specializes in something different, and a mutually beneficial relationship occurs. If IP licensing agreements cannot be enforced, such as in Impression Products, then content production would consolidate vertically to larger in-house organizations as firms look to protect their creative property. Essentially, not allowing licensing enforcement in this setting actually consolidates the market, rather than diversifying it.

The second model is the reverse of this, where large, usually research-based, firms license their innovations to many different commercialized entities. A prime example of this is Qualcomm, which licenses its wireless communications technology to many smartphone device manufacturers. Rather than hoard their technologies, these firms want to use licensing mechanisms to reach as many users as possible; more users equal more royalties, so there is an incentive to license to many manufacturers at affordable rates. This creates a positive feedback for more R&D and innovation, rather than an “IP = monopoly” hypothetical scenario where innovators gouge licensees.

The third model involves hybrid pooling and anti-licenses. Patent pools and other aggregate entities like music performing rights organizations create ecosystems of mutual benefit to help navigate dense “thickets” of intellectual property. For instance, rather than needing to get a license for every song played at a music venue, the venue can simply get one “blanket license” from a performing rights organization that licenses thousands of songs from the organization’s musicians at once. And somewhat more surprising is the complete lack of licenses at all. Many IT companies give away licenses for free to build a consumer base of users as an early adoption strategy. Contrary to the license-as-tax view, there is no necessary basis to even assume licenses are always used or even the best option for an owner.

Licenses Aren’t Taxes

The theoretical boogeyman of IP licensing creating monopolistic “taxes” has not held up to the intense scrutiny of the evidence, Prof. Barnett concludes. Any restrictions of IP licensing should be based in evidence and not be a knee-jerk reaction to hypothetical scenarios that have not come to pass, such as in the smartphone industry. There is far more evidence to show that licensing creates value for the market than there is evidence to show it “taxes” the market. And thus, this dangerous, common metaphor of “IP = monopoly” should be put to rest.

Categories
Inventors Patent Law

Qualcomm Founder Dr. Irwin M. Jacobs Delights Attendees at CPIP’s Sixth Annual Fall Conference

2018 Fall Conference flyerBy Kathleen Wills*

On October 11-12, 2018, the Center for the Protection of Intellectual Property (CPIP) hosted its Sixth Annual Fall Conference at Antonin Scalia Law School in Arlington, Virginia. The theme of the conference was IP for the Next Generation of Technology, and it featured a number of panel discussions and presentations on how IP rights and institutions can foster the next great technological advances.

In addition to the many renowned scholars and industry professionals who lent their expertise to the event, the conference’s keynote address was delivered by Dr. Irwin M. Jacobs, founder of Qualcomm Inc. and inventor of the digital transmission technology for cell phones that gave birth to the smartphone revolution. The video of Dr. Jacobs’ keynote address, embedded just below, is also available here, and the transcript is available here.

After beginning his career as an electrical engineer and professor at the Massachusetts Institute of Technology (MIT), Dr. Jacobs’ vision for the future of wireless communications drove him to found his first company, Linkabit, in the late 1960s. In the years that followed, Dr. Jacobs led teams that developed the first microprocessor-based satellite modem and scrambling systems for video and TV transmissions. In 1985, Dr. Jacobs founded Qualcomm, which pioneered the development of mobile satellite communications and digital wireless telephony on the national and international stage.

Dr. Jacobs’ keynote address focused on intellectual property’s role in the development of technology throughout his 50-year career. He began his speech by discussing his background in electrical engineering and academia at MIT and at the University of California, San Diego (UCSD). After publishing a textbook on digital communications, Dr. Jacobs explained that he then transitioned into consulting and started Linkabit, where he learned the importance of intellectual property.

Dr. Jacobs recounted how he later sold the company to start Qualcomm with the “mobile situation” of satellite communications on his mind. At Qualcomm, Dr. Jacobs wanted to break from the standard technology in favor of code-division multiple access (CDMA). CDMA had the potential to attract more users with a system that limited the total amount of interference affecting each channel, and it wasn’t long before Qualcomm was assigned the first patent on the new technology.

Qualcomm’s first product was Omnitracs, a small satellite terminal designed for communicating with dishes that led to the creation of a GPS system. Qualcomm’s patented GPS device used antenna technology to calculate locations based on information about the terrain, and it was very valuable to the company.

Using that source of income, Dr. Jacobs revisited CDMA at a time when the industry pursued time-division multiple access (TDMA) for supporting the shift to second-generation digital cellular technology. However, Dr. Jacobs knew that CDMA had the potential to support 10 to 20 times more subscribers in a given frequency band per antenna than TDMA. Within one year, Qualcomm built a demonstration of CDMA. At that time, the size of the mobile phone was large enough to need a van to drive it around!

Dr. Jacobs explained that commercializing the technology required an investment for chips, and it wasn’t long before AT&T, Motorola, and some other companies signed up for a license. Qualcomm decided to license every patent for the next “n” years to avoid future licensing issues and collect a small royalty. The industry eventually set up a meeting comparing TDMA to CDMA, and CDMA’s successful demonstration convinced the Cellular Telephone Industry Association to allow a second standard. A standards-setting process took place and, a year and a half later, the first standard issuance was completed in July of 1993.

Speaking on the push for CDMA, Dr. Jacob’s explained that there were “religious wars” in Europe because governments had agreed to only use an alternate type of technology. Nevertheless, CDMA continued to spread to other countries and rose to the international stage during talks about the third generation of cellular technology involving simultaneous voice and data transmissions. Dr. Jacobs visited the European Commissioner for Competition and eventually arranged an agreement with Ericsson around 1999 based on a strategic decision: instead of manufacturing CDMA phones in San Diego, there would be manufacturers everywhere in the world.

Selling the infrastructure to Ericsson, Qualcomm dove into the technology, funded by the licenses. The strategic decision to embed technology in chips in order to sell the software broadly has been Qualcomm’s business model ever since. Dr. Jacobs explained that since “we felt we had well-protected patents,” and had a steady income from the licenses, the team could do additional R&D. With that support, they were the first to put GPS technology into a chip and into a phone, developed the first application downloadable for the phone, and looked ahead at the next generation of technology.

Dr. Jacobs said that he’s often asked, “Did you anticipate where all of this might go?” To that question he replies, “Every so often.” Qualcomm was able to move the industry forward because of the returns generated through its intellectual property. Dr. Jacobs early realized that the devices people were carrying around everywhere were going to be very powerful computers, and that “it’s probably going to be the only computer most of us need several years from now.”

“Protecting intellectual property, having that available, is very critical for what was then a very small company being able to grow,” Dr. Jacobs said. Because Dr. Jacobs relied on secure intellectual property rights to commercialize and license innovative products, and in turn used income from licensing patents for R&D, Qualcomm was—and continues to be—able to prioritize high performance computing and to keep the cellular technology industry moving forward.

To watch the video of Dr. Jacobs’ keynote address, please click here, and to read the transcript, please click here.

*Kathleen Wills is a 2L at Antonin Scalia Law School, and she works as a Research Assistant at CPIP

Categories
Innovation Patent Licensing

IP for the Next Generation of Mobile Technology: How IEEE’s Policy Changes Have Created Uncertainty for Innovators

In advance of our Sixth Annual Fall Conference on IP for the Next Generation of Technology, we are highlighting works on the challenges brought by the revolutionary developments in mobile technology of the past fifteen years.

hand holding a phone with holographs hovering over the screenEarlier this year, CPIP’s Adam Mossoff and Kevin Madigan detailed an in-depth empirical study on the troubling repercussions of policy changes at the Institute of Electrical and Electronics Engineers-Standards Association (IEEE).

In a rigorous study tracking the activity of creators and owners of technologies incorporated into standards by the IEEE, Kirti Gupta and Georgios Effraimidis show how policy shifts at the IEEE have required patent owners to effectively relinquish their legal right to stop the deliberate and unauthorized uses of their property. Unfortunately, as Gupta and Effraimidis explain, the current unbalanced nature of standard setting at the IEEE is resulting in inefficient licensing negotiations and delayed standards development, and it’s threatening the development of new and innovative consumer products at a crucial time for mobile technologies.

The full Gupta & Effraimidis study is available here, and the synopsis by Adam Mossoff and Kevin Madigan can be found here.

Categories
Innovation Patent Licensing

Focusing on IP for the Next Generation of Mobile Technology

hand holding a phone with holographs hovering over the screenIn advance of our Sixth Annual Fall Conference on IP for the Next Generation of Technology, the Center for the Protection of Intellectual Property will be highlighting works on the challenges brought by the revolutionary developments in mobile technology of the past fifteen years. These articles address issues related to patent licensing, standard setting in the mobile technology sector, and developing business models at the dawn of the 5G era. Contrary to the tread-worn claims that new technological developments render IP rights obsolete, these articles show how stable and effective property rights in innovative technologies continue to foster the groundbreaking advancements that benefit societies.

Much debate in the mobile technology sector has centered on recent policy changes in the standard setting organizations responsible for the development of global industry standards. In a recent paper focusing on the Institute of Electrical and Electronics Engineers Standards Association (IEEE), mobile industry expert Keith Mallinson explores the practical impact of policy changes made in 2015 by the IEEE that implemented the “patent holdup” theory by restricting the rights of owners of patents on technology that is contributed to standards.

Providing an empirical analysis of the activity of innovators of new standards technology since the 2015 change in the IEEE’s patent policy, Mallinson finds that innovators are not contributing their patents resulting from their massive investments over many years into risky research and development of cutting-edge technologies. This is evidence that the one-sided and unbalanced restrictions on innovators, and not on implementers, that were imposed by the IEEE in 2015 under the “patent holdup” theory have slowed the adoption and implementation of pioneering technologies. Mallinson explains that a more balanced and clear respect for the rights of owners of patented technologies that are contributed to standards must be restored in order to better facilitate technological advancements.

To read the Mallinson article, which first appeared on the 4iP Council website in September 2017, please click here.

Categories
Innovation Patent Licensing

Study Finds IEEE’s 2015 Patent Policy Sowing Uncertainty and Slowing Innovation

dictionary entry for the word "innovate"By Kevin Madigan & Adam Mossoff

As the world prepares for the game-changing transition to 5G wireless systems, the high-tech industry must continue to efficiently develop and implement technologies and networks that work together across different platforms and devices. Few people are aware of how this happens, because it occurs solely between the companies who develop and implement technological products and services in the marketplace, such as Qualcomm, InterDigital, Microsoft, Apple, and others. These companies participate in private standard setting organizations, which develop technological standards agreed upon by these companies, such as three-prong electrical plugs, USB drives, hard disk storage drives, and even communications technologies such as Wi-Fi and 2G, 3G, and 4G.

In sum, the development of standards is a key part of how new technological innovations are efficiently sold and used by consumers and work for everyone. The reason standard setting organizations came into existence is because the alternative is neither efficient nor good for consumers. A standards “war” between companies in the marketplace leads to years of incompatible devices being sold while consumers wait for one company to establish (private) market dominance with its products and services such that everyone else must use that standard, such as what happened between VHS and Betamax in the 1980s or the market fight between Blu-ray Disc and HD DVD in the 1990s, to name just two examples. Standard setting organizations preempt this unnecessary and wasteful commercial war by bringing together the innovators and implementers of new technology to agree beforehand on a standard so that new standardized products and services can get into the hands of consumers faster.

Unfortunately, some standard setting organizations are changing their rules for the companies that invest hundreds of millions of dollars in long-term R&D to create groundbreaking technologies like those used in our smartphones. These new rules create uncertainty for these innovators. As a result, this uncertainty is threatening investments in new high-tech products and the ongoing growth in the U.S. innovation economy.

Detailing this troubling trend is a recently released, in-depth, and rigorous study by Kirti Gupta and Georgios Effraimidis, which tracks the changes in the rules for the creators and owners of the technologies incorporated into technological standards by one of the largest and more influential organizations—the Institute of Electrical and Electronics Engineers-Standards Association (IEEE). In 2015, the IEEE adopted a new policy governing how owners of patents on technologies incorporated into its technological standards can protect and secure their investments via their legal rights to their patents. This shift in policy required patent owners effectively to relinquish their legal right to stop deliberate and unauthorized uses of their property and thus made it harder for them to license reasonable royalties for the use of their technology equally among all industry stakeholders.

As Gupta and Effraimidis show through detailed analyses, the IEEE’s new policy has distorted the longstanding market processes and licensing negotiations that have led to billions of smartphones being sold to consumers at relatively low cost around the world over the past decade. This is a vitally important study, because it brings key data to the policy discussions about technological standards, patents, and the incredible products and services made possible by them and on which everyone relies on today.

A Quick Summary of Standard Setting Organizations and Patented Technologies

A traditional requirement of the IEEE and several other standard setting organizations is that innovators commit to license equally their patented technologies that are incorporated into an agreed-upon standard for all companies implementing this standard in products and services. The law already provides that a patent owner will receive a “reasonable royalty” as damages for any past unauthorized uses of a patented technology, and thus standard setting organizations added the contractual requirement that this reasonable royalty also be non-discriminatory. To create a pleasant-sounding acronym, the phrase used is that licensing rates for patented technologies incorporated into market standards must be fair, reasonable, and non-discriminatory (FRAND). The goal of FRAND is to ensure that all companies creating products and services that are sold to consumers in the marketplace pay the same rates for incorporating the necessary standardized technologies into these products and services, such as the standardized 4G transmission technology used by everyone’s smartphones.

About a decade ago, some professors and lawyers posited a theory based on an abstract, economic model that owners of patents on technologies incorporated into these standards could exploit their ability to seek injunctions for violations of their patents and thus impose unduly higher costs on the companies implementing these standards in things like smartphones, laptop computers, tablets, and other devices and services. It was a simple story about property owners “holding up” people who wished to use their technologies, cashing in on the ubiquitous knowledge that any property owner can post a sign that says “no trespassing.” Based on this “patent holdup” theory, which deduced from an abstract model that patent owners would demand inordinately high royalties from the companies that need to incorporate agreed-upon technological standards into their products and services, these academics argued for “reforms” in the law to stop “patent holdup.”

But the “patent holdup” theory is just that—a theory. More than a decade of rigorous empirical studies have not only failed to confirm the “patent holdup” hypothesis of systemic market failures in the patent-intensive high-tech industry, and instead have found market conditions that directly contradict the core claim of “patent holdup” theory (see here for a letter to Assistant Attorney General Makan Delrahim summarizing this research and listing many of the studies). One study has shown that the average royalty rate for key technologies used in smartphones is only 3.4%, which is contrary to the 67% royalty rate predicted by “patent holdup” theory. Another study, among others, found significant quality-adjusted drops in consumer prices of smartphones and increasing entry of new manufacturers of smartphones, as well as other market conditions in the smartphone industry, that directly contradict the predictions of “patent hold” theory.

Unfortunately, in response to lobbying and the successful pushing of the “broken patent system” narrative in Washington, D.C., antitrust regulators forged ahead at the DOJ to push for policy changes at standard setting organizations on the basis of this unproven “patent holdup” theory. (Thankfully, recent antitrust regulators have returned back to evidence-based, balanced policy-making.) Several years after the first article propounding the “patent holdup” theory was published in 2007, implementers began pushing this theory at the IEEE to effect changes in its internal patent policy, which ultimately responded to this effort by revising its patent policy in 2015.

IEEE Policy Changes for Owners of Patents on Technological Standards

As Gupta and Effraimidis explain, the IEEE’s new patent policy has been highly controversial and generated much discussion among academics and industry practitioners. Separate from what they disclose in their article, there have been allegations that the internal process at the IEEE in changing its patent policy was initially cloaked in secrecy and was not open to all IEEE members as to when meetings were held and as to what the substantive decision-making processes were at these meetings. One commentator referred to it politely as an “opaque decision-making process” by the IEEE. If true, this is very troubling given that this violates the exemption accorded to the IEEE under the antitrust laws for operating as a standards setting organization.

Essentially, the IEEE patent policy was changed in 2015 in two key ways that impacted innovators. First, the new policy prohibits a patent owner seeking an injunction until all efforts at obtaining a license fee have been exhausted, including suing and litigating to a final judicial decision awarding a reasonable royalty. This of course incentives purported licensors to drag out licensing negotiations while they are infringing the patent, imposing large costs on patent owners in having to file lawsuits and pursue their legal remedies in court for many years and who have no choice but to allow the unauthorized use of their property during this time.

Extending these negotiations then allows licensors to take advantage of the second major rule change by the IEEE in its patent policy: the policy shifts licensing rates from the longstanding, market-based licensing of the technology given the value of the consumer device to the component level of the value of the chip itself. Of course, a smartphone without 4G or Wi-Fi is a beautiful 1995 cell phone with a very pretty, colorful screen and nothing more, which is why the free market settled on the value added to the entire smartphone for the basis of the licensing rate for this standardized technology. Moreover, calculating royalty rates based on the very cheap computer chips that contain the valuable technology fails to account for the hundreds of millions of dollars in R&D investments in developing the technology in the first place. Again, this is why the arrangement first reached in the free market between innovators and implementers was a balanced approach in device-level licensing rates that accounted for the costs of R&D and the costs of manufacturing the smartphones that contained the technology derived from this R&D. As a recent empirical study has shown, this is approximately 3.4% per smartphone, which is anything but an example of a massive payment to patent owners on 4G or Wi-Fi, especially for these core technologies that make a cell phone a “smartphone.”

Why then did IEEE change its patent policy? Consistent with the concerns about the “opaque decision-making process” at the IEEE, economist Greg Sidak has identified how the new rules were drafted by an ad hoc committee at the IEEE dominated almost entirely by implementers who license the patented technologies from the innovators who develop and contribute these technologies to the standard-setting process. In effect, the licensees strategically dominated the process and used their clout to push through a policy change that devalued the patented technologies, because they were seeking to lower their own manufacturing costs in implementing this technology in the consumer products and services they manufacture and sell in the marketplace. As evidence, Sidak shows that comments submitted in opposition to the new rules were rejected at nearly double the rate of those in support, reflecting a process that betrayed the IEEE’s core principles of openness, consensus, and the right to appeal. Instead of alleviating any alleged problems caused by patent owners, the IEEE’s rule changes actually facilitated collusion among implementers and resulted in “buyer-side price-fixing” of the patented technologies.

Negative Impact on Contributions of New Technology to Standards at the IEEE

The heart of the Gupta and Effraimidis article is not the theoretical and empirical background to the “patent holdup” dispute, but a detailed empirical study of the impact the new IEEE patent policy has had on the standard development process. Focusing on IP-intensive standards related to the development of Wi-Fi and Ethernet networks, the study first looks into the number of Letters of Assurances (LoAs) submitted to the IEEE in the years before and after the patent policy change took effect.

(LoAs are documents submitted by inventing companies who contribute new technological innovation in the standard-setting process. These technology contributors have patents on these innovations, and in these LoAs, they identify what patents may be essential to the standard that is being developed and they identify the terms under which they’re willing to license this technology if it ends up being incorporated into the standard that is ultimately set by the standard setting organization. An LoA is labeled “positive” if the contributor agrees to license its technology under the patent policy set by the standard setting organization or “negative” if the contributor declines to commit to these terms.)

The Gupta and Effraimidis study found that the number of positive LoA submissions has dropped a whopping 91% since IEEE changed its patent policy in 2015 and the number of negative LoAs rose to an all-time high in 2016. Gupta and Effraimidis explain:

The results suggest that many [patent] owners are reluctant to license their patent portfolio on the new FRAND terms. More importantly, the uncertainty on implementers’ side has increased, as new standards . . . have been approved despite the presence of negative and/or missing LoAs . . . .

Their article also tracks changes in the duration of the comments period that takes place before a new standard is approved—this is the period of time during which IEEE members discuss, debate, and resolve any concerns about a standardized technology before it is ultimately adopted as an official standard by the IEEE. Before the IEEE’s new patent policy went into effect in 2015, the average duration of the first two rounds of comments was 233 days. After the new patent policy took effect, Gupta & Effraimidis found a 42.5% increase in the comment period duration, resulting in an average resolution time of 332 days. This increase by almost half in the standard-setting process, especially in an industry marked by rapid development of new smartphones, laptops, and other high-tech consumer products and services, is concerning, to say the least. These delays are wasting private as well as public resources and impeding the commercial development of important IP-intensive technologies.

Finally, the Gupta and Effraimidis study analyzes the change in the number documents submitted at the IEEE that trigger the development of a new standard technology, which is a proxy for the development of new standards by the IEEE. Here, Gupta and Effraimidis’ findings contradict another recent study that alleged a high number of submissions in 2016 reflected a positive impact of the IEEE’s new patent policy. Gupta and Effraimidis reveal that hundreds of the submissions counted in the prior study either came from standards for which no patented inventions were contributed or were for standards of little or no value. Focusing properly on submissions for technologies that have significant value and produce an overwhelming majority of IEEE standards, they find submissions of new standards documents have in fact declined by 16% since 2015.

In sum, the changes in the internal standard-setting process at the IEEE since it adopted its new patent policy in 2015 represent a concerning shift following a strategic and collusive effort by implementers to devalue the patented technology created by innovators and contributed to standard setting organizations like the IEEE. The evidence is slowly building, showing that the IEEE’s new patent policy has devalued the innovative activity of technological innovators based on a purely theoretical and unproven claim that there is a systemic problem with so-called “patent holdup” in the smartphone and other high-tech industries. Unfortunately, in leaping into action on the basis of unproven theories, the IEEE has contributed to pervasive uncertainty and weakened incentives in the development and commercial implementation of innovative technologies, as is increasingly being documented and discussed by legal scholars and economists.

Moving Forward

The Gupta and Effraimidis study analyzes for the first time empirical data in fully detailing the effects of the IEEE’s new patent policy on the standard setting process. Their study shows that innovators are unwilling to continue to contribute the technologies they develop to the standard setting process under onerous terms requiring them effectively to give up their legal rights to their patents, and that these policies are having a perverse effect in creating inefficient licensing negotiations and delayed standards development. Their findings may sound intuitive to patent lawyers and innovators, but it is imperative to bring data into the public policy debates after ten years of concerted efforts to implement unproven theories, such as “patent holdup” theory, in both law and in the policies of private organizations like IEEE.

Gupta and Effraimidis conclude that a proper patent policy for a standard setting organization like the IEEE “should enhance incentives of technology contributors to innovate, while ensuring unlimited access to the new technology standards.” In considering its key role as a long-time professional association for the high-tech industry reaching back to Nikola Tesla and Thomas Edison, as well as its key role as standard setting organization in the innovation economy, the IEEE hopefully will reconsider its patent policy in light of actual economic and legal evidence. It should return back to the balanced patent policy that successfully promoted the computer and mobile revolutions of the past four decades. The future of new and innovative consumer products is at stake, such as the 5G technology that was first being developed many years ago and will start to be introduced into consumer products in the coming year.

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

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

Busting Smartphone Patent Licensing Myths

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

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

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

Busting Smartphone Patent Licensing Myths

By Keith Mallinson

Executive Summary

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

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

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

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

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

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

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

Categories
Uncategorized

Patent Licensing and Secondary Markets in the Nineteenth Century

The following post comes from CPIP Programs and Research Associate Terrica Carrington, a rising 3L at George Mason University School of Law, and Devlin Hartline, Assistant Director at CPIP. They review a paper from CPIP’s 2014 Fall Conference, Common Ground: How Intellectual Property Unites Creators and Innovators, that was recently published in the George Mason Law Review.

By Terrica Carrington & Devlin Hartline

In his paper, Patent Licensing and Secondary Markets in the Nineteenth Century, CPIP Senior Scholar Adam Mossoff gives important historical context to the ongoing debate over patent licensing firms. He explains that some of the biggest misconceptions about such firms are that the patent licensing business model and the secondary market for patents are relatively new phenomena. On the contrary, Mossoff shows that “famous nineteenth-century American inventors,” such as Charles Goodyear, Elias Howe, and Thomas Edison, “wholeheartedly embraced patent licensing to commercialize their inventions.” Moreover, he demonstrates that there was “a vibrant secondary market” where patents were bought and sold with regularity.

Like many inventors, Mossoff explains, it was curiosity—rather than market success—that drove Charles Goodyear to create. Despite having invented the process for vulcanized rubber, Goodyear “never manufactured or sold rubber products.” While he enjoyed finding new uses for the material, commercialization was not his niche. Instead, Goodyear “transferred his rights in his patented innovation to other individuals and firms” so that they could capitalize on his inventions. “As the archetypal obsessive inventor,” notes Mossoff, “Goodyear was not interested in manufacturing or selling his patented innovations.” In fact, his assignees and licensees “filed hundreds of lawsuits in the nineteenth century,” demonstrating that “patent licensing companies are nothing new in America’s innovation economy.”

Mossoff next looks at Elias Howe, best known for his invention of the sewing machine lockstitch in 1843, who “licensed his patented innovation for most of his life.” Howe was also famous for “suing commercial firms and individuals for patent infringement” and then entering into royalty agreements with them. It was Howe’s troubles with “noncompliant infringers” that “precipitated the first ‘patent war’ in the American patent system—called, at the time, the Sewing Machine War.” Howe engaged in “practices that are alleged to be relatively novel today,” such as “third-party litigation financing,” and he even joined “the first patent pool formed in American history,” known as “the Sewing Machine Combination of 1856.”

Finally, Mossoff discusses Thomas Edison, whom many consider to be “an early exemplar of the patent licensing business model.” Edison sold and licensed his patents, especially early on, so that he could fund his research and development. However, Edison is a “mixed historical example” since “he manufactured and sold some of his patented innovation to consumers, such as the electric light bulb and the phonograph.” Moreover, despite his “path-breaking inventions,” the marketplace was often dominated by his competitors. Mossoff notes that Edison was a better inventor than businessman: “At the end of the day, Edison should have stuck to the patent licensing business model that brought him his justly earned fame as a young innovator at Menlo Park.”

While some might call these inventors anomalies, Mossoff reveals that they were in good company with others who utilized the patent licensing business model to serve “one of the key policy functions of the patent system by commercializing patented innovation in the United States.” These include “William Woodworth (planing machine), Thomas Blanchard (lathe), and Obed Hussey and Cyrus McCormick (mechanical reaper)” and many others who “sold or licensed their patent rights in addition to engaging in manufacturing and other commercial activities.” This licensing business model continues to be used today by innovative firms such as Bell Labs, IBM, Apple, and Nokia.

Mossoff next rebuts the “oft-repeated claim” made by many law professors that “large-scale selling and licensing of patents in a secondary market is a recent phenomenon.” This claim is as “profoundly mistaken as the related assertion that the patent licensing business model is novel.” Mossoff notes that during the Sewing Machine War of the Antebellum Era, “the various patents obtained by different inventors on different components of the sewing machine were purchased or exchanged between a variety of individuals and firms.” As early as the 1840s, individuals acquired patents in the secondary market and used them to sue infringers.

In fact, Mossoff points out that it was not uncommon to see newspaper ads offering patents for sale in the nineteenth century:

The classified ads in Scientific American provide a window into this vibrant and widespread secondary market. In an 1869 issue of Scientific American, among ads touting the value to purchasers of “Woodbury’s Patent Planing and Matching and Moulding Machines” and ads declaring “AGENTS WANTED—To sell H.V. Van Etten’s Patent Device for Catching and Holding Domestic Animals,” one finds ads offering patents and rights in patents for sale:

Such ads were ubiquitous in the nineteenth century, says Mossoff, and they “belie any assertions about the absence of such historical secondary markets by commentators today.” Similarly, Mossoff points to research showing the “fundamental and significant role” performed by intermediaries known as “patent agents,” the “predecessors of today’s patent aggregators.” These patent agents invested in a wide range of products and industries—a remarkable feat given the “constraints of primitive, nineteenth-century corporate law and the limited financial capabilities of market actors at that time.”

In his brief yet insightful account of the history of patent licensing firms, Mossoff refutes the modern misconception that “the patent licensing business model and secondary markets in patents are novel practices today.” It’s important to set the record straight, especially as many in modern patent policy debates rely on erroneous historical accounts to make negative inferences. The evidence from the nineteenth century isn’t that surprising since it reflects “the basic economic principle of the division of labor that Adam Smith famously recognized as essential to a successful free market and flourishing economy.” Casting “aspersions on this basic economic principle,” Mossoff concludes, “strikes at the very core of what it means to secure property rights in innovation through the patent system.”

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

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

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

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

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

Wayne Sobon
Vice President & General Counsel, Inventergy

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

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

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

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

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

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

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

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

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

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

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

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