US And UN Consider New Limits On Patent Wars

The patent wars have produced many casualties around the world. Companies that make and sell smartphones and tablet computers, courts, consumers and the economy – all have suffered, according to many experts.

“I couldn’t come up with a worse system” for handling patent disputes, said Erich Spangenberg, chairman of IP Navigation Group, a consultancy. But significant reforms may be on the way, thanks to the US government and a United Nations agency.

Love of money is the root of all patent litigation. But many plaintiffs in the patent wars are not content to recover damages or reasonable royalties. Their main goal is to prevent rivals from selling competing (and supposedly infringing) products.

Unfortunately, pushing popular products off the market can do far more than simply dent the bottom line of defendants. Such injunctions can produce “catastrophic” effects on competition, consumers and the economy, according to Richard Gilbert, an economics professor at the University of California at Berkeley. Courts thus need to be cautious about granting injunctions for patent infringement, many experts assert.

Limiting the availability of such injunctions would bring another benefit. If injunctive relief were unavailable, patentees would have much less to gain from infringement suits. They would need to think harder about when it is worthwhile to prosecute infringement actions. The result would likely be fewer lawsuits that settle more quickly.

Over the past six years, the US courts have made it significantly tougher for patentees to get injunctions against infringers. These injunctions used to be routinely granted, but that ended in May 2006, when the US Supreme Court handed down its decision in eBay Inc. v. MercExchange LLC. The high court held that in order to obtain an injunction, a patentee must prove that it would suffer “irreparable harm” from a defendant’s continued infringement and that damages would not provide adequate compensation.

Since that ruling, the US courts have interpreted this standard more and more rigorously. Injunctions in patent suits have become far less common.

Patentees have responded by filing a growing number of infringement complaints with the International Trade Commission (ITC). This agency of the US government cannot levy damages against infringers or halt purely domestic infringements. It is an attractive forum for patentees, however, because whenever it finds infringement, the ITC is required by statute to provide injunctive-type relief. The agency must order the seizure of infringing imports and issue exclusion orders, which forbid infringing items from being imported into the US.

There is only one exception. The statute, 37 USC 1337(d)(1), states that the ITC can limit or deny an exclusion order if the order would be too harmful to “the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, [or] United States consumers.”

The ITC has been loath to use this public interest exception. The agency has used this exception only twice in modern times, according to Prof. Colleen Chien of Santa Clara University Law School. In 2007, the ITC found Qualcomm cellphones and PDAs violated a US patent held by Broadcom, but applied an exclusion order [pdf] only against new models of Qualcomm products. In order to avoid harm to the public, the ITC allowed Qualcomm to continue to import and sell in the US existing models of its cell phones and PDAs.

In late 2011, the ITC found that HTC’s Android smartphones violated a US patent owned by Apple, but issued an exclusion order [pdf] that did not go into effect for four months. That delay greatly limited the harm to consumers and to competition in the smartphone market – and it provided HTC time to design around the patent.

Such rulings may become more common, according to many experts. The 2011 HTC ruling “may signal an important shift,” said Kelly Kubasta, a partner in the law firm of Klemchuk Kubasta. “The ITC’s decision to delay implementation of the importation ban may indicate a stronger consideration of public interest factors.”

There are certainly pressures on the ITC to make such a shift. “There’s a rising tide of opinion that the ITC should apply some discretion in their exclusion orders,” Kubasta said.

In addition, there is a growing consensus among US policymakers that injunctive-type remedies should not be used to protect certain types of patents. Standard-essential patents (SEPs) cover technologies that are adopted by an industry standards-setting body in order to enable the interoperability of different products.

In return for having its technology chosen as an industry standard, and thus widely licensed, the owner of an SEP voluntarily gives up its right to make exclusive use of the patented technology. The owner agrees to licence its SEP to all on a reasonable and nondiscriminatory (RAND) basis. (Sometimes the terminology is slightly different, and the SEP owner agrees to licence its patent on a fair, reasonable and nondiscriminatory, or FRAND, basis. But the US government and the vast majority of experts see no significant different between RAND and FRAND.)

In a letter [pdf] dated 6 June, the Federal Trade Commission (FTC) urged the ITC not to grant exclusion orders for SEP patents covered by RAND agreements. The FTC warned that “the issuance of an exclusion order … in matters involving RAND-encumbered SEPs, where infringement is based on implementation of standardized technology, has the potential to cause substantial harm to U.S. competition, consumers and innovation.”

An unimportant patent can become immensely valuable simply because it is part of an industry standard, the FTC noted:

Because it may not be feasible to deviate from the standard unless all or most other participants in the industry agree to do so in compatible ways, and because all of these participants may face substantial switching costs in abandoning initial designs and substituting a different technology, an entire industry may become locked in to a standard, giving a SEP owner the ability to demand and obtain royalty payments based not on the true market value of its patents, but on the costs and delays of switching away from the standardized technology.

This “patent holdup” can put the owner of an SEP in an unusually powerful negotiating position with potential licensees. That’s why the owner of an SEP should not be able to obtain exclusion orders against infringers, the FTC argued.

High switching costs combined with the threat of an exclusion order could allow a patentee to obtain unreasonable licensing terms despite its RAND commitment, not because its invention is valuable, but because implementers are locked in to practicing the standard. …In these ways, the threat of an exclusion order may allow the holder of a RAND-encumbered SEP to realize royalty rates that reflect patent hold-up, rather than the value of the patent relative to alternatives, which could raise prices to consumers while undermining the standard setting process.

The FTC encouraged the ITC to avoid exclusion orders for SEP infringements and to adopt alternative remedies. For instance, the ITC could deny any relief unless the SEP owner made a reasonable royalty offer to the alleged infringer. Or the ITC could require the parties to go into mediation and impose an exclusion order only if the alleged infringer refuses a reasonable royalty offer.

Other parts of the US government have backed the FTC’s stance. The chairman of the Senate Judiciary Committee sent a letter to the ITC in March that expressed serious concerns about the agency’s granting exclusion orders for SEPs. The House Judiciary Committee sent a 7 June letter to the ITC expressing the same concerns. The US Department of Justice echoed this view in its 11 July testimony [psf] to the Senate Judiciary Committee.

On 22 June, one of the USA’s most respected jurists went further. Judge Richard Posner held in Apple, Inc. v. Motorola, Inc. that courts can never issue injunctions to stop infringements of RAND-encumbered SEPs. Judge Posner noted that in order to obtain an injunction for infringement, a plaintiff must show that monetary damages would not be an adequate remedy. However, the owner of a RAND-encumbered SEP has agreed to always licence its patent in return for a reasonable royalty. If someone should use the patent without first obtaining a licence, the patentee would be made whole by receiving a reasonable royalty. Money damages would be an adequate remedy, so the owner of a RAND-encumbered SEP “is not entitled to an injunction,” Judge Posner stated.

There is international concern, too, about using SEPs as a basis for injunctive relief. The Secretary-General of the UN’s International Telecommunication Union (ITU), Hamadoun Touré, said, “We are seeing an unwelcome trend in today’s marketplace to use standards-essential patents to block markets. There needs to be an urgent review of this situation: patents are meant to encourage innovation, not stifle it.”

The ITU will address this issue at a high-level roundtable discussion to be held at ITU headquarters in Geneva, on 10 October. Standards organizations, key industry players and government officials will discuss whether holders of SEPs are entitled to injunctive relief and what constitutes a “reasonable” royalty.

For now, the patent wars continue to rage. Many hope, however, that these wars will soon be made less harmful.