The following post comes from Wade Cribbs, a 2L at Scalia Law and a Research Assistant at CPIP.
By Wade Cribbs
Last week, Arlington Economic Development’s BizLaunch network co-hosted an online legal clinic event entitled “Mason Law Clinic @BizLaunch: Which Entity is Right for Your Startup?” with Antonin Scalia Law School’s Innovation Law Clinic, which is led by CPIP Executive Director Sean O’Connor. The virtual clinic addressed entrepreneurship and which business entities might best fit a business’s needs and attract investment. The panelists were Kenneth Silverberg, Senior Counsel at Nixon Peabody, and third-year Scalia Law students Mitch Gibson and Rebecka Haynes.
Mr. Gibson opened the discussion by describing the kinds of non-corporate pass-through business entities: sole proprietorships, partnerships, and limited liability companies (LLC). Sole proprietorships are operated by only one person, while partnerships can have as many participants as desired. Neither form of business entity requires registration with the State Corporation Commission; nevertheless, registering a business’s name or obtaining an employer identification number may be necessary. Similarly, partnership agreements are borderline necessary before beginning a partnership so that all parties agree on profit splits, decision making, and how much say each partner has in the venture.
An entrepreneur must register an LLC with the State Corporation Commission. An LLC is made of members and managers. A member of an LLC is anyone who owns a stake in the company—analogous to a shareholder—while a manager can be either a member or an outside person who handles the business decisions. Either members or a manager can run an LLC. To create an LLC, form LLC-1011 must be filed with the State Corporation Commission. If the business is for professional occupations—such as for doctors, lawyers, or architects—form LLC-1103 is needed.
Pass-through taxation is where the business itself is not taxed for the gains and losses. Pass-through taxation occurs at the ownership level, and its most significant advantage is that there is only a single level of taxation. Gains are taxed as the owners’ income and are taxed only once—instead of being taxed when made as profit by the business and then again when distributed to shareholders. Similarly, another advantage is pass-through losses. If the business loses money, the losses can be used to diminish other tax burdens. Liquidity, however, is a disadvantage of pass-through taxation. Liquidity occurs when the business has made a profit that remains within the business. When this happens, the owners are still taxed on the profits without receiving any of them. Another disadvantage is that there is a limit of $10,000 that can be deducted from state or local taxes per member or partner.
Ms. Haynes continued the discussion of pass-through taxation with how it applies to corporations. A corporation utilizes pass-through taxation by electing to be taxed as an S-Corporation, which is a corporation that chooses to be taxed under Subchapter S of the tax code. An S-Corporation is formed by incorporating in the desired state and submitting form 2553, “Election by a Small Business Corporation,” signed by all shareholders. For a business to be an S-Corporation, it must be a domestic corporation, have no more than 100 shareholders, and have only one class of stock. Furthermore, the kind of shareholder is limited to individuals, certain trusts, and estates. Certain financial institutions, insurance companies, and international sales corporations are ineligible to be S-Corporations. An S-Corporation is different from other tax-through businesses in that it allows for tax-free reorganization, provides stock options, and can easily convert to a C-Corporation.
A C-Corporation, on the other hand, is a corporation that does not elect to be taxed under Subchapter S of the tax code and by default is taxed under Subchapter C of the tax code. C-Corporations are closely or publicly held. A closely held corporation has a limited number of shareholders, whereas a publicly held corporation has a large number of shareholders with shares on the market. Some states allow for closely held C-Corporations to dispense with some of the formalities of operating a corporation. C-Corporations are taxed separately from their owners at a flat 21% tax rate. Any further profits distributed to shareholders are then taxed again, resulting in an effective tax rate of 41% on the distributions. The exception to this is that qualified small business stock that has been held for more than five years after its issuance is eligible for 100% exclusion from gain on disposition, not to exceed $10 million for any one shareholder. For a stock to be a qualified small business stock, there are three requirements: it must be issued by a C-Corporation at original issuance; the corporation must be engaged in active business that is not a service business; and the business’s gross assets cannot exceed $50 million. A C-Corporation’s benefits are that it can issue more than one class of stock and have unlimited deduction of state and local taxes.
Prof. Silverberg addressed how the various tax and business structures apply to someone who wants to start, run, and sell a business. Prof. Silverberg did this by examining the sale of a hypothetical landscaping business. Through this hypothetical example, Prof. Silverberg looked at what motivates a purchaser to buy a business and how this affects the taxation of the transaction. The buyer and seller have to agree on the purchase price and how that price is allocated to different assets. Prof. Silverberg then discussed the amount pocketed by the entrepreneur after selling the business under pass-through taxation; he also discussed the sales structure under the different possible business structures and compared it to taxation under a C-Corporation. Looking at the numbers, Prof. Silverberg highlighted the tension between the seller’s desire to sell the business as stock under a C-Corporation and the buyer’s desire to buy assets under a sole proprietorship or the like.
The event page can be found on AED’s website and on the Eventbrite page. The video of the event is available below:
The following post comes from Wade Cribbs, a 2L at Scalia Law and a Research Assistant at CPIP.
By Wade Cribbs
Everyone in the technology industry knows that 5G is posed to revolutionize the world, but the finer points of 5G’s impact on the U.S. economy are detailed in a new report by Accenture entitled The Impact of 5G on the United States Economy. In the report, Accenture explains how 5G stands to add up to $1.5 trillion to the U.S. GDP and create or transform up to 16 million jobs from 2021 to 2025.
5G’s benefits include enabling the development of new industries, improving current industries, and accommodating the current, rapid growth of interconnected technologies. Autonomous vehicles are only achievable through 5G’s increased broadband, which can handle the large amount of data transferred to and from the sensors on vehicles on the road as they are operating. Furthermore, 5G is necessary to support the expected growth to 29.3 billion devices and 14.7 billion machine-to-machine connections by 2023. To get a better look at the specific impact 5G will have on the coming business and consumer landscape, Accenture focuses on five key business sectors: manufacturing, retail, healthcare, automotive and transportation, and utilities.
As 10,000 baby boomers retire a day, the manufacturing industry is in dire need of some way to meet its labor shortage. Due in part to a lack of interest from the younger generations, manufacturers are increasingly looking to automation. 5G will allow for an unprecedented level of control and synchronization across the warehouse floor. Examples of manufacturing improvements implementable with 5G include: AI assisted asset management utilizing video analytics and attached sensors; connected worker experiences implementing augmented reality to provide workers with a safer work experience and reduced training times; and enhanced quality monitoring through a combination of AI inspection and UHD video streaming monitoring. Accenture estimates that 5G will provide a $349.9 billion increase in sales for manufacturing of the equipment and products necessary to implement 5G in other business sectors.
In the retail sector, 5G can provide the data needed to support frictionless checkout experiences. AI used in combination with UHD video monitoring will allow for customers to be charged when putting items in their basket, eliminating the long lines that 86% of customers say have caused them to leave a store, which in turns leads to $37.7 billion in missed sales annually. Furthermore, this same AI monitoring system can be used to personalize a shopping experience through monitoring customers and alerting sales associates to a customer with a problem without the customer having to find and flag down an associate; the system can also monitor for theft, which costs the retail industry $25 million daily. Overall, Accenture estimates that the retail industry stands to see a $269.5 billion increase in sales due to 5G sales and cost savings.
Healthcare costs are expected to rise from $3.4 trillion to $6 trillion by 2027. As the need for healthcare professionals is expected to outstrip the labor supply, increases to technology and treatment efficiency are essential to address the problems presented by an aging population. The good news is that 5G is suited to address just these issues by eliminating waste, which is estimated to make up as much as 30% of spending. 5G will expand medical professionals’ ability to monitor patients, giving the option for at-home care to a wider range of patients as well as lowering the number of doctors required to monitor intensive care patients. Doctors will also be able to access previously unreachable patients for virtual consultations. No longer will rural Americans have to travel long distances to visit their doctor in the city. 5G will allow online consultants rapid access to vast amounts of data, such as MRI images, CAT scans, ultrasounds, ECGs, and stethoscope data. Accenture estimates that the healthcare industry stands to gain $192.3 billion in economic output and up to 1.7 million jobs.
As vehicles become smarter, safer, and more connected, 5G will enable automobiles to exchange data with other vehicles, the automotive infrastructure, and pedestrians. This will enhance vehicle safety, fleet management, and smart traffic management. The U.S. National Highway Traffic Safety Administration (NHTSA) estimates that the combined impact of vehicle-to-everything communication technology could reduce the severity of 80% of sober multi-vehicle crashes and 70% of crashes involving trucks. 5G video-based telematics will allow for automated vehicle fleets and fleet management capability, such as improved logistics security and goods-condition diagnostics to eliminate the up to 20% of empty cargo space in U.S. trucks. Through smart traffic managing by vehicle-to-vehicle communication and vehicle-to-infrastructure communication, traffic congestion, traffic accidents, and smog due to idling can all be reduced by an expected 15 to 30%. On the whole, Accenture estimates that $217.1 billion in revenue will be generated in the automotive and transportation industry by 5G.
5G will address multiple problems facing the utility industry, including vegetation and asset management, energy supply and resiliency, and next-generation workforces. 5G will allow smart grid technology to be implemented that can track and adapt to real-time disruptions to the power grid. In combination with smart grid technology, smart power plant technology will be able to map out peak power use and wear on equipment to determine optimal times for taking a machine offline for maintenance. Safer work environments can be created for the next generation workforce using augmented and virtual reality to train and eliminate manual methods with digital tools. Accenture estimates that the utility industry stands to grow by $36.9 billion in total sales from the implementation of 5G.
Accenture concludes that 5G is the necessary step towards achieving a new normal through AI, mass machine communications, and digital cloud technology. Every aspect of American life will be affected, and an unprecedented boost will be given to the economy.
The following post comes from Wade Cribbs, a 2L at Scalia Law and a Research Assistant at CPIP.
By Wade Cribbs
Questions about how Chinese patent protection operates in the international patent landscape are relevant to both companies doing business in China and policymakers in the United States. China is becoming an increasingly frequent patent litigation location for major international corporations. With this new forum for patent disputes come questions about how China can handle anti-suit injunctions and parallel proceedings regarding fair, reasonable, and non-discriminatory (FRAND) agreements for standard-essential patents (SEPs).
To discuss these questions, the Hudson Institute hosted a virtual panel presentation last week entitled Patent Litigation in China: Navigating a Changing Environment. The panel, which was moderated by Hudson Institute Senior Fellow Urška Petrovčič, included Mark Cohen (Distinguished Senior Fellow, University of California Berkeley; Director, Berkeley Center for Law & Technology, Asia Intellectual Property Project), Vivienne Bath (Professor of Chinese International and Business Law, University of Sydney), and He Jing (Founder, GEN Law Firm; Executive Director, Beijing Zhongguancun Intellectual Property Strategy Research Institute).
Mr. Cohen sees differences in patent litigation between western countries—such as the United States and the European Union—and China, particularly with injunctions due to China’s quasi-civil law system and the Chinese economy’s size. He does not view the recent emergence of anti-suit injunctions in China as unusual because they were not necessary, given that China readily awards injunctive relief. It is not unusual for the courts to get through litigation and appeal in China before a U.S. court has commenced discovery. Therefore, a litigant could initiate proceedings in China after suing in the United States and receive an injunction from the Chinese court, using it to compel the party to settle any parallel proceedings.
Mr. Cohen sees no real difference between the current practice of anti-suit injunctions and Chinese courts’ prior practice of ignoring any parallel proceeding. He agrees with Prof. Bath that the shift of Chinese courts to anti-suit injunctions is motivated by judicial sovereignty and the desire to exercise power over international FRAND rate disputes in order to protect Chinese business interests. Mr. Cohen is concerned that this desire is expanding to dictate international behavior in technological markets by leveraging SEP holders.
Mr. Jing believes that the most important SEP disputes in China are focused on the issuance by Chinese courts of anti-suit injunctions, which he notes are relatively recent for these courts. Chinese courts award these injunctions in such circumstances as preventing Huawei from enforcing a German court’s holding of a FRAND rate that was significantly higher than the rate issued by the Chinese courts. Similarly, Chinese courts have issued preliminary anti-suit injunctions against Sharp Corporation, preventing Sharp from initiating litigation in Germany after it began litigation in China.
Mr. Jing admits the logic is straightforward in the case of cell phone manufacturing, since most of the global manufacturing occurs in China. Therefore, he posits that China should have a say in cell phone SEP FRAND rates. However, he is unsure whether there is proper jurisdiction for such cases. To claim jurisdiction in some cases, Chinese courts docket FRAND disputes as contract cases. Mr. Jing’s problem with FRAND as a contract is that there is no concluded contract, and he is not convinced that such disputes meet the specific legal standard required by Chinese law to hear foreign and international contract disputes. Mr. Jing is concerned that Chinese courts are stretching beyond their bounds for jurisdiction and service to hear cases.
Prof. Bath observes that since the Chinese court systems are now fully equipped to handle IP cases, they are incredibly litigious. In this setting, the Chinese Communist Party is trying to tighten its control over the courts’ behavior as the courts streamline the process and improve injunctive enforcement. Prof. Bath sees these two forces resulting in the Chinese court system seeking to use Chinese law in an international setting through attracting dispute resolution to China. The China International Commercial Court and the one-stop diversified dispute resolution, which combine mediation and litigation in the court system, are examples of how the Chinese government is trying to attract foreign arbitration to China.
However, when it comes to international agreements, Prof. Bath notes, China has tended to agree to international instruments only where it is exempt from intellectual property judgments. Prof. Bath warns that, while China is taking steps to make its courts more available for international litigation, it is necessary to remember that the court does not always decide adjudication. Senior judges who did not sit for the case may make the final adjudicative decision, and this risks politicizing any crucial adjudication rulings.
Professor Bath sees the Chinese courts’ problem with parallel proceedings in the form of anti-suit injunctions stemming from its focus on judicial sovereignty. This focus results in China not having many tools to handle parallel proceedings. The Chinese courts will hear almost any suit brought before the court and will not refuse the case because it is already being heard elsewhere, unless a foreign judgment has already been issued and enforced in China. These practices result in foreign judgments being rarely enforced in China as a result of a Chinese court’s having already begun proceedings.
The following post comes from Wade Cribbs, a 2L at Scalia Law and a Research Assistant at CPIP.
By Wade Cribbs
In patent law, equitable defenses can play an essential role in multi-million-dollar patent infringement cases. Unclean hands, misuse, or estoppel can render a potential verdict unenforceable. CPIP Edison Fellow and Assistant Professor of Law at Cleveland-Marshall College of Law Christa J. Laser dives into the unique and unsettled role of equity in her Edison Fellowship paper, Equitable Defenses in Patent Law, which is forthcoming in the University of Miami Law Review.
Professor Laser compares two theories to determine how courts might interpret undefined language governing equitable defenses in patent statutes, given that the Supreme Court has repeatedly dodged the issue. One interpretive method is a traditional point of view, the faithful agent approach, that advocates for courts to only interpret the statutes’ scope from the legislature’s intent when crafting them. The alternative approach, referred to as dynamic statutory interpretation, suggests that courts should determine what the law ought to be given the vague nature of patent statutes. The unique relationship between patent law and equity and the historically broad language of patent statutes frame the discussion about how courts should interpret equitable patent defenses.
Professor Laser sets the stage by discussing the historical distinction between law and equity before merging in 1938. The distinction in patent law is that most patent claims had been brought in equity since 1870. In the Patent Act of 1870, Congress granted equity courts the ability to award actual damages in addition to equitable remedies, effectively giving equity courts the power of law and equity regarding patents.
This early delegation of patent law to equity courts fits with Congress’s lack of specific rules for patents. Equity has historically been more flexible than law. A common argument is that Congress’s lack of specific rules for patents is to enable a common law approach to patents. Congress establishes the rough outlines of the law while leaving the finer contours for the courts, and flexibility is a necessary trait in establishing these contours. However, even if that was once the case, equity has been constrained to standards that resemble the law. In 1952, Congress amended the Patent Act in an attempt to stabilize the common law approach by codifying it.
The question now is, did Congress codify preexisting decisional law or expand it? Also, what methods should courts take to determine the answer? The confusion and its specific relation to equity arose out of the 1952 amendment removing the specifically delineated equitable defenses established under the 1870 Act and replacing them with a defense of unenforceability. Further confusion arose because Congress eliminated the statement that the listed “defenses may be pleaded in any suit in equity for relief against alleged infringement” and left it to state only that “the following shall be a defense in any action.” While committee notes clarified that unenforceability covered the previously recognized equitable defenses, there was no comment on what “defenses in any action” meant. Previously, all equitable defenses were not understood to bar all claims under both law and equity. For example, estoppel barred claims in law and equity, but laches was limited to actions at law.
Professor Laser proposes three possible interpretations of the “defenses in any action” language. The phrase could mean that the defenses would apply equally in law and equity, that the equitable defenses would only bar claims in equity, or that courts should adopt a case-by-case approach, drawing guidance from prior case law. Professor Laser tosses out the first two alternatives as too stark a change from established law, given the lack of legislative comment. The case-by-case approach is unproblematic when it comes to laches and estoppel because their applications to law and equity claims is well delineated. However, for unclean hands, inequitable conduct, and patent misuse, the case law is much less clear, and the disagreement over statutory interpretation is necessary.
As a case-by-case approach is necessary, Professor Laser outlines the case law before 1952 and the impact the amendment had on unclean hands, inequitable conduct, and patent misuse defenses.
For prior case law on unclean hands, Professor Laser looks at Keystone, Hazel-Atlas, and Precision Instruments. Keystone highlights that unclean hands can serve as a bar to equitable relief when plaintiffs commit acts such as bribery or suppression of evidence. Hazel-Atlas allowed unclean hands to bar a judgment at law in an infringement suit because the plaintiff based both the patent itself and the infringement case upon bribery and fraud. In Precision Instruments, the court dismissed the case because blackmail by the plaintiff was an act related to the cause of action that transgressed equitable principles. The case law before 1952 illustrates that equitable claims are barred when a party commits an unconscionable act related to the cause of action, and legal claims are barred if fraud leads to a legal judgment.
After the 1952 amendment, the Federal Circuit has expanded unclean hands to bar both legal and equitable relief without the related cause of action requirement. In Gilead v. Merck, the Federal Circuit held that unclean hands constituted grounds for summary judgment on both legal and equitable claims where an attorney had given false testimony in support of unethically obtained patent strategy information. Pre-1952 case law did not bar legal relief when the conduct was not inequitable, but in Gilead, the court held that conduct that was unclean hands—but that was not inequitable—still barred legal relief.
Some courts believe that inequitable conduct arose out of the unclean hands doctrine. However, inequitable conduct was a defense against patent claims in the first Patent Act passed in 1790. Inequitable conduct and invalidity overlap heavily. Inequitable conduct requires a deceptive intent with misleading information to render a patent invalid. Invalidity requires no such intent. Previously, the reasoning for pleading inequitable conduct instead of invalidity was that inequitable conduct had infectious invalidity. If a claim was invalid, only that claim was invalid and did not affect any other claim in the patent. However, inequitable conduct in a claim would infect the entire patent making it invalid. Congress removed this distinction in 2011 when it passed the America Invents Act and removed the infectious invalidity result from inequitable conduct. The doctrines is now no longer distinguishable from invalidity.
Patent misuse is improperly using a patent outside of the scope of the patent grant. The Supreme Court, in Continental Paper Bag, held that an unused patent was not a misused patent. On the other hand, in Morton Salt and B.B. Chemical, the Supreme Court found that product tying did qualify as patent misuse, and selling a patented machine cannot be tied to the sale of an unpatented dependent product. Before 1952, patent misuse was only an equitable defense to prevent infringing injunctions. There has not been a patent misuse Supreme Court case since 1952, so how the amendment affected the doctrine has yet to be seen.
The policy arguments supporting a dynamic statutory interpretation are that courts more readily see the impact of policy decisions and therefore are better suited to craft policy. Also, Congress acts too slowly to handle the rapid advancement of the latest technology.
The counterpoint, Professor Laser explains, is that slow and deliberate policymaking is advantageous in patent law. Much of a patent’s value comes from the predictability of patents. A single case changing the landscape of an industry or invalidating hundreds or thousands of patents would ruin faith in the patent industry. Congress is slow because it takes time to gather information in ways that courts cannot. This ability to obtain the necessary knowledge to craft patent legislation is essential in the highly technical application of broad policy. Finally, courts are not policymakers, and judges who are not practiced in crafting policy may prove hesitant or rash in their decisions. While rash decisions have apparent consequences, even inaction will lead to unintentional policy. Judges are accustomed to making decisions based on precedent, not broad policy implications.
Professor Laser closes by suggesting a third strategy. Congress could delegate its authority to an agency to handle the ever-changing patent landscape. This would have the positives of superior access to knowledge and practiced policymakers without Congress’s gridlock and combative lobbying forces. The fact is, until the Supreme Court or Congress provides guidance on how to handle the vague nature of patent statutes, lower courts are left on their own to consider an ever-growing list of factors when determining equity’s impact on patent litigation.
The following post comes from Wade Cribbs, a 2L at Scalia Law and a Research Assistant at CPIP. This is the second of two posts (see day one recap) summarizing our two-day 5G at the Nexus of IP, Antitrust, and Technology Leadership conference that was held online from George Mason University Antonin Scalia Law School on October 7-8, 2020.
By Wade Cribbs
On October 7-8, 2020, CPIP hosted its Eighth Annual Fall Conference, 5G at the Nexus of IP, Antitrust, and Technology Leadership, online from George Mason University Antonin Scalia Law School in Arlington, Virginia. The conference featured a keynote address by the Honorable Andrei Iancu, and it was co-hosted by Scalia Law’s National Security Institute (NSI).
This conference addressed fast-emerging intellectual property (IP), antitrust, and technology leadership issues in the 5G and “Internet of Things” innovation ecosystem. Coverage included standard-essential patents (SEPs) along with established and emerging markets on a regional and global basis. Speakers were drawn from the academic, industry, and policymaking communities, with an emphasis on using objective fact-based analysis to explore points of convergence among legal, economic, and geopolitical perspectives on the IP and regulatory infrastructures that underlie these critical industries.
SESSION 3: MARKETS WORK: PRIVATE ORDERING MECHANISMS IN PATENT-INTENSIVE MARKETS
The first panel of the day consisted of academics and industry experts discussing the path moving forward for intellectual property licensing and how it relates to 5G technology. CPIP Executive Director Sean O’Conner moderated the panel, directing a conversation on the mechanisms for controlling intellectual property licensing and the conflict between antitrust policy and private-ordering initiatives. Panelists included Prof. Jonathan Barnett of the University of Southern California, Dr. Bowman Heiden of the University of California, Berkeley, David Kappos of Cravath, Swain & Moore, and Luke McLeroy of Avanci.
Prof. Barnett opened the panel with a discussion of the difference between the theoretical models of IP licensing and the actual standard-essential patent market. According to the models, the burden of many standard-essential patents involved in developing a smartphone should cripple the smartphone market. Smartphones should cost thousands of dollars due only to the cost of royalties necessary for production. However, as Prof. Barnett pointed out, smartphones are more available than ever and at every price point. The empirical evidence confirms the theoretical models’ fears are inaccurate as the aggregate royalty burden is in the single digits.
Prof. Barnett went on to illustrate how this empirical evidence is shaping the DOJ Antitrust Division’s view of IP licensing. The fear has shifted from patent holdup, large patent royalties preventing innovation and competition, to a fear of patent holdout. Prof. Barnett explained that patent holdout is becoming common place in the market where a company’s most efficient method of obtaining an IP license is through litigation as opposed to negotiating a competitive licensing fee. Prof. Barnett concluded by suggesting that patent holdout occurs where property rights are not strong and clear. Where injunctive relief is awarded readily and aggressively to license owners, in the United Kingdom and Europe, patent holdout is not a prevalent issue.
Dr. Bowman framed the issue as an interplay between the public and private spheres. For the private sphere to produce, protection of its investment in the form of patents is necessary. The conflict is the public’s access to the private sector’s production is easily frustrated by a large number of standard-essential patents in an industry. Because access to the product is in the interest of the private sphere, the private sphere has solved its own problem. Industries require an agreement from a patent owner to license its patents on terms that are fair, reasonable, and non-discriminatory (FRAND). Without a FRAND agreement, a patent cannot be a standard-essential patent.
Dr. Bowman then examined the implementation of FRANDs in the wireless communication ecosystem. He argued that the inherent vagueness of FRANDs are a necessary feature as it allows for varied and customized solutions. Additionally, the public sphere, or other members of the private sphere, can obtain an advantage through antitrust authorities. However, innovation on the private side is always preferable to antitrust regulations.
Mr. Kappos began by emphasizing the need for balance between innovators and implementers. Current innovation-based standards create enormous consumer surplus, totaling nearly four trillion dollars in the wireless communication industry. He went on to say that innovation-based standards are far superior to previous proprietary, winner-take-all standards that produced limited consumer surplus.
Mr. Kappos further developed Prof. Barnett’s point about the need for injunctive relief to protect innovators. He highlighted that preliminary injunctive relief is available in other IP hubs, such as China and Germany, but that the United States has all but given up on awarding injunctive relief to innovators. In many cases, even when injunctive remedies are available, more is needed to compensate innovators for the lost opportunity, income, and effort. He then added that there needs to be a new recognition in license negotiations. Those who delay or try to avoid paying for licenses should be forced to pay a premium once they finally comply.
Mr. McLeroy discussed the nature of his licensing company Avanci. The company streamlines licensing of cellular standard-essential patents for internet connectivity in commercial products such as cars. It simplifies licensing by compacting all standard-essential licenses, from multiple patent owners, necessary for a product and offering them to companies in the industry at a flat rate. Avanci lowers the transaction costs by removing the time needed to identify the patents necessary and evaluate what the proper fee should be. This reduction in transaction costs allows the innovator to spend money that would have been spent on searching and negotiation back into research and development.
In response to a question, Mr. McLeroy discussed the way that 5G licensing will be administered. One potential method is based on usage. He compared a water meter intermittently transmitting data with autonomous cars constantly interacting with other vehicles and intersection equipment. The licensing fee for the water meter would be much lower than for the autonomous car due to the significantly lower scale of data transfer necessary to operate it.
All panelists agreed that strong and clear property rights in innovation are necessary for a productive global licensing market. Injunctive relief is also a necessary tool that must be made available to those developing innovative standard-essential patents.
SESSION 4: TECHNOLOGY LEADERSHIP IN 5G/IOT MARKETS
The second panel of the day focused on what steps should be taken to protect American leadership in the innovative technology sectors such as 5G networks. Moderator Jamil Jaffer, Founder & Executive Director of the National Security Institute (NSI), led the discussion on how the federal government can best handle the global development of 5G standards and protect American innovation from the competitive threat of China. Panelists included Megan Brown of Wiley Rain, Dr. Jonathan Putnam of Competition Dynamics, the Hon. Randall Rader of the Federal Circuit, and Andy Keiser of Navigators Global.
Dr. Putnam opened the discussion by addressing China’s patent program. Dr. Putnam described a model he created using research and development, gross national product, population, and other national indicators of inventive behavior. He noted that China subsidizes patent applications, resulting in the largest number of patents worldwide. Dr. Putnam addressed whether China has become the world leader in innovative technology. The model shows that while Chinese patent application numbers are dramatically increasing, the quality of those patents are notably lower than the rest of the world.
Dr. Putnam proposed three methods for the United States government to protect domestic interests without following the Chinese model of subsidizing innovators. First, the U.S. should unify its fractured view of antitrust on the global market. Presenting a common understanding of antitrust principles would remove a substantive fracture in U.S. foreign policy that works to China’s advantage. Second, the U.S. should take a more aggressive stance in enforcing fair trade on the world stage. There is systemic theft of foreign patent technology that must be curtailed. Third, in the pharmaceutical industry, private companies can take advantage of basic research conducted by the National Institute for Health. Applying this model to other technological sectors would be beneficial for American innovation as basic research is the foundation for most innovation.
Judge Rader agreed with Dr. Putnam that a large quantity of inferior patents is produced by China. However, Judge Rader distinguished the average patent seeker from the Chinese mega-corporations such as Huawei that produce innovation technology. Chinese mega-corporations are like American innovation leaders such as Qualcomm. Judge Rader explained that China built its platform out of subsidies in the past, but currently individual companies like Huawei devote large percentages of their gross budget to research and development that makes China a competitive innovator. China cannot be dismissed as a competitor built on unfair advantage. Instead, he urged, China must be confronted as an innovative equal that is willing to spend and supply the technology of the future.
Mr. Keiser identified China’s unique control over its market through tariffs, credit, and market manipulation. Unlike any other economy of similar size, its unique control positions China perfectly to advance its interests in innovation. Given that China is the United States’ biggest geopolitical competitor, China poses a serious threat to national security. Mr. Keiser pushed back against Judge Rader’s equal competitor view of China. He cited cases from both the United States and Poland where Huawei was found to have committed espionage and theft of competitors’ patents. Regardless of how China arrived at its current state, he said that Chinese 5G networks are not trustworthy due to consistent exploitation of foreign patents.
Ms. Brown voiced her concerns regarding the impulse to respond to China’s action by nationalizing 5G. She suggested optimizing regulation by removing the fragmented regime currently impeding innovation. The hands-off approach of Congress has facilitated longstanding U.S. leadership in innovation, and unprecedented congressional involvement would only harm American innovators. Ms. Brown framed Mr. Keiser’s point about the trustworthiness of Chinese 5G equipment and networks as a question of government intervention. Assuming these networks cannot be trusted, she asked how much the government should intervene to address the problem. In response to Dr. Putnam’s proposal of government-subsidized basic research, Ms. Brown argued that the focus should be real-world research and development with telecommunication carriers.
Ms. Brown warned that, specifically relating to 5G standard setting, the government must be careful to expend influence in its natural spheres. The 3rd Generation Partnership Project (3GPP) is a private sector, global body that leads the development of standards in 5G technology. As a global private sector organization, the federal government, in the form of the Department of Defense, has no business influencing 3GPP policy. If any government activity is warranted, she continued, it should incentivize more private American businesses to participate in and influence private organizations like 3GPP.
All the panelists agreed that the focus should be on American policy promoting domestic innovation as opposed to overreacting to the imposing threat of China. Foremost on policy makers minds must be preserving and promoting innovation from garage inventors to Qualcomm. However, Mr. Keiser stated that the scale of theft of intellectual property by China is too large to be ignored. Congressional protection in the form of laws such as the CHIPS Act, a bill to incentivize and subsidize research into semiconductors, is necessary.
CLOSING REMARKS
CPIP Executive Director Sean O’Connor and CPIP Deputy Director Joshua Kresh closed out the two-day conference by thanking all of the moderators, panelists, and attendees for making the conference such a huge success. They also thanked CPIP staff members, including Kristina Pietro, Devlin Hartline, and Mary Clare Durel, for working behind the scenes and the generous sponsors of the conference whose financial support made it possible.
By Wade Cribbs
By Wade Cribbs
By Wade Cribbs
By Wade Cribbs
By Wade Cribbs