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Sorting Out the High-Tech Patent Mess

Thursday, September 5, 2013

Recent action by the U.S. trade representative highlights the need for reform in America’s high-tech patent sector.

You have to be intrepid and thick-skinned to venture into the patent thicket these days — but here goes. The high-tech patent pot most recently boiled over on August 3, when U.S. Trade Representative (USTR) Michael Froman, in a rare though not entirely unprecedented action, overturned a decision by the quasi-judicial U.S. International Trade Commission (ITC). Froman was acting under delegated authority from President Obama. The ITC decision would have barred certain Apple iPhones and iPads from entering the United States because they allegedly infringed on patents held by Samsung, Apple’s major competitor in the global smartphone market.

Froman’s action set off a firestorm of — very divided — reaction and commentary. The editors of the Financial Times, Bloomberg News, and the Wall Street Journal generally applauded the decision (with the WSJ also calling for the abolition of the ITC as an obsolete, protectionist holdover from the New Deal era). Conversely, most (though not all) high-tech business representatives decried the intervention. Bill Reinsch of the National Foreign Trade Council warned that the decision will be used as “an excuse” by countries that don’t like strong intellectual property (IP) protection to disregard U.S. rules in this area. Reinsch’s remarks were echoed and supported by Microsoft’s chief patent attorney, Horatio Gutierrez. Google, which is allied with Samsung in the smartphone competition (Samsung phones operate on Google’s Android system), supports Samsung in opposing Froman’s override.

Dissecting Froman’s Action

These battles over smartphones must be viewed in the context of the decade-long increase in the use of patents as offensive and defensive competitive weapons in high-tech telecommunications and information technology sectors. Competition in the courts now equals competition in the labs for much of the advanced electronics sector.

In sorting out the complexities of this and other recent judicial and administrative high-tech patent actions, it is best to start with the details of the ITC case in which the president intervened. The issue involved a special type of patent, a so-called standard-essential patent, which in this case allows mobile phones to communicate with other wireless networks and phones no matter their make or model. Patent and competition agency officials have strongly encouraged companies holding such standard-essential patents to license them widely. In this case, the nitty-gritty details revolved around whether either Samsung (the patent holder) or Apple had failed to negotiate in good faith, or in the industry jargon, “fair, reasonable, and nondiscriminatory (FRAND) terms.”

Despite much speculation on the potential broader implications of this case, a careful reading of Froman’s explanatory letter to the ITC shows that the administration tailored its veto largely on narrow grounds. A key element in the administration’s decision was its unhappiness with the ITC’s failure to properly develop and publish a factual basis for siding with Samsung. Froman made clear that this dearth of factual support in the ITC decision made it impossible to determine whether either of the contestants had failed to bargain in good faith. He admonished the ITC in the future to “proactively have the parties develop a comprehensive factual record,” including evidence of a “patent hold-up or reverse hold-up” by the patent holder or the patent contestant. And finally, the “Commission should make explicit findings on these issues to the maximum extent possible.”

While basing his decision on the ITC’s failure to provide adequate factual backing for its finding, Froman’s own analysis refers back to a broader policy statement on standard-essential patents issued by the Department of Justice and the U.S. Patent and Trademark Office early in 2013. In referring to it, Froman stated that in future cases where the ITC considers injunctive relief, it should “examine thoroughly and carefully on its own initiative the public interest issues” that are presented in each individual instance — most particularly the impact on U.S. consumers and U.S. competitive conditions.


Can rules be crafted that encompass both the high-tech electronics sector, where thousands of patents go into a final product such as an iPhone, and the biotech/pharmaceutical industries, where a single or very few patents determine the worth of the product in the marketplace?

Beyond the specifics of this case, a further political difficulty stems from the danger that the president’s action could be seen as crass favoritism for a U.S. company over a Korean company — a worry voiced by both Korean and U.S. commentators, and by the Financial Times editorial cited above. This interpretation was underscored by another ITC decision on August 9 that upheld Apple’s contention that Samsung had infringed several of its iPhone patents. Though the agency denied infringement claims for central design elements, it did uphold Apple’s claim for two lesser patents relating to headphones and the mechanics of touch-screen technology. Though these decisions involved very different patents than the standard-essential patents in the earlier case, there were immediate calls for the president to be evenhanded and intervene if the ITC followed up with an order banning import of Samsung phones that utilized these particular technologies.

Meanwhile, also on August 9, the U.S. Court of Appeals for the Federal Circuit (a special court of appeals for IP cases) heard oral arguments on a separate Apple appeal of a district court decision that rejected an import ban after Samsung was found to have infringed other Apple design and interface patents. This case had started with a jury trial in which a California jury held that some 26 Samsung products contained parts that violated six Apple patents. The jury awarded Apple $1 billion in damages. On appeal, the district court reduced the damages to $450 million, but the judge ruled against Apple’s move for an import ban on the relevant Samsung products.

The Basics

If this sudden jumble of events and decisions seems hopelessly confusing and duplicative, that’s the point. And while this essay will scrupulously avoid judging the validity of claims made by Apple and Samsung, the following comments on the system and process are relevant.

• The cases and rulings recounted above are but an element of a worldwide patent litigation contest between Apple and Samsung in their quest to achieve dominance in the smartphone market. In turn, these battles over smartphones must be viewed in the context of the decade-long increase in the use of patents as offensive and defensive competitive weapons in high-tech telecommunications and information technology sectors. Competition in the courts now equals competition in the labs for much of the advanced electronics sector.

• In the United States, these patent contests are played out in two competing arenas — almost separate universes. On one side, there is the traditional judicial ladder, starting either with a jury decision or a federal district court ruling, with appeals on up the ladder to the federal circuit or to a federal appeals court. These venues can utilize a variety of solutions, including mediations, fines, and damages, and ultimately injunctions and import bans in response to the gravest economic offenses. Regarding injunctions, in a 2006 decision (eBay Inv. v. MercExchange, L.L.C.), the U.S. Supreme Court reined in what it considered the too-liberal granting of injunctions by lower federal courts. It did not ban such injunctions but it did set out a more vigorous test for deciding on these actions, including whether “irreparable damage” could occur, other remedies are not adequate, and finally, whether a permanent injunction would “disserve” the public interest.

• The quasi-independent ITC represents another avenue for contesting patent violations, though its main responsibility is to administer so-called trade remedy laws (anti-dumping and countervailing duty investigations). In recent years, it has been pulled further into the patent wars through a previously unexploited provision of its basic law, Section 337, that grants the agency authority to issue injunctions banning import of goods deemed to have infringed patents by U.S. domestic companies (this can include foreign companies operating in the United States).

ITC administrative law judges, who have no specialized knowledge of patent law, nevertheless are called upon to judge infringement cases. In recent years, this venue has become widely popular with the business community — according to ITC analysis, the number of Section 337 cases increased by more than 500 percent from 2001-2011.

The reasons are twofold: the agency process is much quicker than court proceedings, including appeals; and the ITC can exercise only one (draconian) remedy in these cases: import bans on products deemed to have infringed an existing patent.

No definitive conclusions or policy prescriptions will be advanced here, but the following questions flow from the developing substantive and institutional dilemmas described above:

• While there is no likelihood that the Wall Street Journal’s call to abolish the ITC will happen (it is far too popular with protectionist elements in the U.S. business community), should consideration be given to curb its use of the import injunctive power? Would it be possible to remove the agency from the patent infringement process, as recommended by the Financial Times, or to allow it to issue injunctions only pursuant to a court decision?

• Given the Supreme Court’s clear warning regarding overuse of injunctions in patent infringement cases, should there be an attempt, either through regulation or statute, to follow up with more precise rules for determining the basis for import bans in patent infringement cases?

• More broadly, have we reached a point where consideration should be given to a review of the “one size fits all” patent system? The debate over the fairest and most economically defensible penalties for patent infringement highlights this larger debate. Specifically, can rules be crafted that encompass both the high-tech electronics sector, where thousands of patents go into a final product such as an iPhone, and the biotech/pharmaceutical industries, where a single or very few patents determine the worth of the product in the marketplace? What may call for injunctive relief/import bans in one sector may not provide a sensible and competition-enhancing solution in another sector.

These are difficult issues, but they need to be tackled before the U.S. innovation process suffers lasting damage. Meanwhile, no doubt lawyers for both Apple and Samsung are busily devising tools to defend their latest technological toys in the relevant courts and agencies.

Claude Barfield is a resident scholar at the American Enterprise Institute.

FURTHER READING: Barfield also writes “The G8’s Exercise in Nostalgia,” “Not So Fast: Conflicting Deadlines for the TPP and US-EU FTA,” and “A Realist's View of the Global Trading System.” Thomas A. Hemphill discusses “The Paradox of Patent Assertion Entities” and contributes “Patents Defended.” James Pethokoukis asks "Should Human Genes be Patented? Should Anything?" and explains "Why One-Size-Fits-All Patent Law Is a Bad Idea."

Image by Dianna Ingram / Bergman Group

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