Federal Trade Commission

This is the first of a couple posts we intend to make on the FTC v. Qualcomm litigation that recently concluded a bench trial last week and is awaiting decision by Judge Koh in the Northern District of California (San Jose Division) federal court.  This case occurs at a historical point of opportunity and transformation brought by the opening stages of the 5G communication revolution.  The theories and targets of the FTC case have caused many to raise concerns about how the case will cause upheaval in long-established industry licensing practices as well as national security concerns about the United States leading the 5G revolution.

This first post will provide background and set the stage for why you may care about what is going on in this case and U.S. innovation law generally.  The next post in the series will discuss developments in the FTC v. Qualcomm case itself that led up to and molded the parties’ presentation at trial.  This will be followed by a post discussing the bench trial.  And, of course, the final post will discuss Judge Koh’s decision when it issues (guesstimate about four to six weeks from now).

This first post admittedly will mix both objective discussion and opinion that departs from the typical objective case analysis that is our core goal and strength (our last post like this was our May 2, 2013 post “The Patent Forest” during legislative efforts that threatened to harm the U.S. patent system).  As always, we recommend reading for yourself the sources we cite and other sources to determine whether this is something we all should care about or just a tempest in a tea pot.  But perhaps you too will find this is not your typical case and you too may wonder: “Where is Denzel?”

Background on Standard Essential Patents

Following is a summary of technical standard setting, standard essential patents, licensing and other issues that underlie the FTC v. Qualcomm case.

What is a Technical Industry Standard?

In its most simplistic form, a standard is an agreed upon way of doing things among several people to facilitate a smoother interaction between them.  For example, we may set a standard unit for measure for doing transactions or computations – e.g., measure distance in hands, yards, meters, miles, etc.  In some cases, people are choosing between several simple, well-known options with little, if any, innovation involved.  For example, people may agree to drive on the left side of the road or right side of the road.  Either may work equally well, but we agree on a specific side of the road so that cars do not crash if drivers simply drove on whatever side they felt like.

In a technical industry standard, those in related areas of industry may form a voluntary standard setting organization (SSO) to develop technical standards that will increase the compatibility of devices made be different companies in that industry.  For example, an SSO may consider many existing options and agree upon the shape of a wall plug and socket so that blow dryers and televisions made by different companies can plug into wall sockets made by different companies.  This is technical standard setting in its simplest form.

But standard setting also occurs in a higher form where, rather than selecting between equal known options, new technology is created or “developed” (what occurs in what some call a standards development organization or SDO).  In the wireless communication industry, for example, SDOs seek to develop technology that does not currently exist in order to create the next generation of wireless technology—e.g., 1G, 2G, 3G, 4G and now 5G wireless communication.  This has been highly successful in the wireless industry where mobile phones have transitioned from bulky suitcase-sized devices owned by the elite few that could only do phone calls (and not very well) to pocket-sized personal data assistants owned by everyday people that are used more to do amazing data-intensive services than simply make phone calls.

An SDO will have many participants in a related industry that have different roles in developing or setting the standard.  Some companies take huge risks in investing money, time and resources to create innovative technologies to propose for the next generation of wireless systems and technical standards, which is risky because not all technical designs and proposals are adopted.  These are sometimes called the Innovators and patents covering their innovations that are adopted into the standard are called standard essential patents (SEPs).  Other companies do not develop the technology, but are interested in setting a standard with technology that best matches there interest in implementing the standard in a product or service.  These are sometimes called the Implementers.  Many (perhaps most) SDO participants are some mixture of both Innovator and Implementer, but at the end of the day a particular company usually leans more on the Innovator or Implementer side.

Most SEP disputes concern standard development in creating new technologies, because the effort to create the next generation of technology naturally leads to innovations and patents thereon.  In contrast, SEPs typically do not arise from simple standard setting of just choosing between two equal and already existing alternatives.

The most prominent and influential SDO for mobile wireless communications is the European Telecommunications Standards Institute (ETSI), which has overseen development of generations of mobile wireless standards, including 5G.  Hundreds of companies participated in developing the mobile wireless standards, but only a small number of them serve as the R&D arm of the industry to actually develop and make technical contributions to the wireless standards.  That’s not to say that the other companies are not innovators in other areas, its just that they either do not innovate in the wireless area or they have chosen not to submit their innovations to a standards body so that others may use them.  Apple, for example, is no doubt an innovator with hundreds of patents, but not in the foundational wireless technologies of the wireless standards.  Estimates are that Apple made a little over a hundred technical contributions to the 3GPP mobile wireless standards as compared to tens of thousands of contributions made by each of Qualcomm, Nokia, Ericsson and Huawei.  Some say that Apple tends to keep its innovations proprietary to sell at premium prices, rather than invest in developing and contributing technology that others may use (ask anyone who has paid over $20 for a special Apple cord to charge their iPhone that was not compatible with the prevalent and inexpensive USB standard cords used by other mobile phone manufacturers).

What is a FRAND Commitment?

The term FRAND stands for “fair, reasonable and non-discriminatory” and is often used by SDOs to describe terms and conditions that a patent owner may agree to in licensing its standard essential patents (SEPs) under an SDO’s intellectual property rights (IPR) policy.  Under U.S. law, the essence of the patent right is the right to exclude and a patent owner generally can refuse to license its patents (there is no compulsory licensing in the U.S., unlike in some other countries).  The patent owner can decide not to license the patent at all, can limit to whom it is willing to license the patent, and can set whatever terms they want for the license.

Given that fundamental patent right to exclude, SDOs considered how to address concerns that a patent owner may charge unreasonable royalty rates if their patent covers the standard—i.e., concern about what’s often called “patent holdup.”  One way to avoid that concern would be to avoid using patented technology in the standard or only use technology that the patent owner is willing to give away for free.  But how good would such a standard be if it did not have valuable innovations?  SDOs don’t want to simply burn effort to develop a standard they hope will be widely adopted; they want their efforts to produce a standard that is worthy of widespread adoption.  And that requires incentives and rewards to participants to take risks, make investments and develop patented innovations to contribute to the standard.  Sure: We could and would have standards without valuable innovations, but would we want them?  East Germans had cars—the Trabant—but the superior cars that the world wanted to drive were on the other side of the wall developed in a system that rewarded the risk takers and investors in innovation.

Rather than drive a Trabant, SDOs welcome premium innovations and address patent holdup concerns by asking its participants to disclose whether they have patents that may cover the standard and, if so, whether and on what terms they would be willing to license the patent—e.g., FRAND.  A FRAND commitment, therefor, does not raise patent holdup concerns, but addresses it.  If the licensing terms for an SEP with a FRAND commitment are fair, reasonable and non-discriminatory, then there is no holdup; if the licensing terms for that FRAND committed SEP are not fair, reasonable and non-discriminatory, then there may be a remedy for breach of contract such that there still will be no holdup.  In sum, there could be patent holdup for an SEP where the patent owner maintains its full patent rights to exclude because it has no standard-setting commitment.  But the FRAND commitment imposes enforceable contractual limits to resolve the patent holdup concern.

Who to License?

Who to license and under what terms is one of the current hot topics and a subject of the FTC v. Qualcomm litigation—e.g., grant a license based on the “end product”, a “component” in the end product or elsewhere.  Wireless communication standards involve technology that is implemented at many different levels and portions of the wireless system.  Most people are familiar with the mobile phone part of the wireless system.  But that’s just the tip of the iceberg.  The mobile phone will communicate with cell phone towers (or “base stations”) that involves many complex technologies.  If someone is using the mobile phone in a car and driving past the range of one cell phone tower, there are complex processes executed by the mobile phone and cell phone towers for “handing-off” the communication between the phone with that one tower to a closer tower.  And there is prioritization of traffic between a cell phone tower and the many other mobile phones that it is in communication with to maintain balance and optimize communications with all mobile phones as a whole.  Wireless communication to a single phone is relatively easy, but not very beneficial if there were only one phone in the world.  The magic resides in communicating with a massive amount of differing communication needs from the extraordinary number of mobile devices that exist today.

The cell phone tower also communicates with other network infrastructure so that calls, video streams or other data communications are exchanged with the person who is being called, website being accessed, etc.  So patented technology for implementing a standard often is not limited to just a single component in a mobile phone or elsewhere, but involves technology that is intertwined and distributed throughout the system.  Innovative patented technology spanning a system may, for example, have a mobile phone transmit/receive data a certain way or at a certain time to the cell phone tower that is executing some of that patented technology to receive/transmit data.  The cell phone tower is communicating with further equipment implementing other parts of the technology to make the entire system as a whole functions efficiently in dealing with innumerable mobile phones.  Looking at a mobile phone in your hand and saying “This is the whole standard” would be like looking at your hand itself and saying “This is the whole person.”  It all operates together as a complete system.

So there typically is not a single component of the entire network one can point to and say “That’s where the invention resides.”  The general norm in licensing patents in the wireless industry is to license the end product (the mobile phone) where benefits from use of the invention typically is realized.  This is consistent with damages awards under the patent statute that are required to be “no less than a reasonable royalty for the use made of the invention.”  How an invention is used often depends on the ultimate end product.  In the context of SEPs, for example, Judge Robart ruled that patented encryption in the WiFi standard had little value to Microsoft’s Xbox even though it implemented the standard.  The WiFi signal was encrypted using the patented technology for transmissions between the Xbox and a nearby WiFi access point.  But the Xbox had its own encryption technology so that the signal was encrypted before WiFi transmission so that it was encrypted all the way to and through the WiFi access point and through the Internet until it reached and was unencrypted by a remote server.  So the patented encryption in the WiFi standard had little, if any, value to the Xbox that used its own encryption.In some instances, a chip (i.e., component) may implement a significant part of the portion of the standard performed by the mobile phone (i.e., the end product).  Consider, for example, patented technology in a wireless standard that reduces the power consumed by the transmitter and receiver of the end product (e.g., perhaps a protocol that allows the transmitter and receiver to be turned-off for longer periods of time).  A chip implementing that patented protocol may be used in either a battery-powered mobile device (e.g., mobile phone) or a line-powered stationary device plugged into a wall (e.g., a desktop computer).  Power savings is crucial for mobile devices, so the patented technology has substantial value to the battery-powered device.  But power savings is not crucial for the desktop device that’s plugged into the wall, so the patented technology has little, if any, value to that device.

Considering the value of the patented technology in a standard to the end product device will be even more acute in our 5G future where the same components and patented technology may be used in different end products.  A wide variety of end product devices will use 5G wireless communication and each will benefit differently from that standard and the patented technology therein.  Consider, for example, patented technology that reduces lag time in transmitting data.  That can be very valuable to devices that stream real-time data, such as video or audio calls, because the human ear cannot tolerate delays of more than 150 ms.  In contrast, a 150 ms delay in receiving an alert from your toaster that your toast is done probably will not be an issue.  So licensing at the end product level will continue to be—if not more so—an efficient way to place a value on the use made of a patented invention in a standard.

Further, the price structure in existing wireless technology eco-systems relies on the value of the patented technology being accounted for at the end product level, not at the component level.  So it may be difficult to properly account for the value of patented technology if required to do so at the component level.  Let’s consider DVD movies as a loose analogy.  A movie distributor may have a manufacturer make the physical DVD.  The DVD manufacturer does not incorporate the cost of the intellectual property (IP) being imprinted on the DVD into its price, but charges the same amount (about 50-cents or so) based on material and other costs regardless of whether it is imprinting the DVD with the “Crimson Tide” movie starring Denzel Washington or “The Best of Barney” starring a purple dinosaur.  The distributor then sells the DVD at a much higher price (e.g., $2 to $30) based on that cost, marketing and other costs including the cost/value of the IP.  Even though the cost of the component is the same (i.e., the physical DVD materials with 1s and 0s stamped into it), the value of the DVD varies drastically based on the IP within it, with movies ranging in price from a few dollars to thirty or more dollars.  Plainly one would not value the IP based on the cost of making the DVD or some percentage of the price that the distributor paid the DVD manufacturer for making the DVD.  You would not likewise value patented technology based on the cost of a component, particularly where that cost does not account for the value of the IP. (see post of July 28, 2014 citing Judge Davis book analogy).

We also can carry that analogy a bit further to understand the problem with “patent counting” that the FTC is accused of doing in its case against Qualcomm to evaluate the value of a large patent portfolio—i.e., where every patent is assumed to have the same value and the value of the portfolio is assumed to be based on counting the number of patents within it.  If I had 10 DVDs of Denzel Washington’s best movies and you had 10 DVDs of Barney the purple dinosaur’s best shows, we probably would not work-out an equal trade even though it would be easier to simply count each DVD the same.  That’s because we know that IP has different value: you can buy some movies on DVD for a couple dollars, but others sell at a premium price.  Similarly, not all patents have the same value and taking a short-cut by simply counting patents to value them is fundamentally flawed and fraught with error.

If a patent is to be licensed at the component level, the value paid for the IP should not change.  The Federal Circuit made this clear in its first decision on determining a FRAND royalty (See post of Dec. 5, 2014 on Ericsson v. D-Link).  In one of the few patent cases to give us a mathematical formula as guidance, the Federal Circuit explained that either the end product or a component theoretically can be used as a royalty base as long as a corresponding royalty rate is used so that the ultimate value attributable to the patented technology does not change—i.e., if you chose a lower value royalty base (B), than you also must chose a higher value royalty rate (R) so that multiplying the base (B) times the rate (R) maintains the same value (V) of the patented invention to the end product:

So a theoretical change of the royalty base in a licensing scheme from licensing at the end product level to the component level would require a corresponding change of the royalty rate (R)—i.e., the royalty rate (R) must be higher so that the ultimate value (V) paid for the patented technology remains the same.

But it is far from practical or even feasible in an established eco-system such as DVD movie sales or wireless products to change the entire industry from paying for the cost of IP at the end of the product chain to somewhere in the middle of the chain.  For example, the IP costs may exceed what can be borne by the current price at which a DVD manufacturer sells a DVD.  A DVD manufacturer who had to pay the cost of the IP would need to raise the costs of the DVD from pennies to several dollars and then pass that cost along to the distributor.

Let’s put that in perspective for mobile devices.  In its case against Samsung, Apple argued and was awarded a “reasonable royalty” of $7.14 for each Samsung mobile phone using three Apple patents on pinch-to-zoom, bounce-back and tap-to-zoom touchscreen features.  If a couple of touchscreen features are worth $7.14, then patented technology probably is worth many times that for enhancing data rates, lag time, etc. in a mobile standard that allow seamless streaming of video, email access, internet browsing, real time location tracking, and countless mobile applications, such as Uber, that such patented features make possible.  But a mobile chip set in a mobile phone has an average cost of about $20-25.  That current mobile chipset price plainly does not and could not account for the value of that patented technology on top of the other costs of the chipset on which the current price was based.

For these and other reasons, the long-established and prevalent practice in licensing patents in the wireless communication industry has been on a mobile device end product basis, not a component basis.  And that prevalent practice existed all along the way of the stunning transformation we have seen so far in wireless communication since we started that journey with 1G.  It works.  To force a sudden change of that settled industry practice at this critical stage of 5G development could be disastrous and, at best, seems imprudent.  There certainly should be sound conviction and consensus before doing so.  But that’s a change that the FTC appears to be forcing now in its case against Qualcomm.

What is 5G?

5G stands for “Fifth Generation” wireless communication technology.  But it is more than a simple generation upgrade.  It is a revolutionary new platform for wireless communication that enables technological growth never seen before.  Prior generations (1G, 2G, 3G and 4G) were about connecting communications between people through voice, video, email, texts, etc.  5G advances this much further and concerns connecting not only people, but appliances, cars, city infrastructure, health care equipment, first responder equipment, etc.  Basically, connecting anything that has data to share with other machines, databases, people or who knows what else.  It is fascinating and the world is rightfully excited about this new communication age.

Importantly, 5G is just at its birth stage.  It is not done so that we can just sit back, relax and enjoy it.  There will be a lot of learning, growth, enhancements and revisions of the 5G standard from its current infant stage now.  This is a very unique and historical opportunity.  Whoever leads this design and development in these early stages will have a long term impact on the future of this technology throughout the world.  Indeed, this is so important that countries consider expertise and a strong presence in 5G to be of vital national security interest.  Just last year, President Trump followed the advice of the Committee on Foreign Investment in the United States (CFIUS) and blocked a hostile takeover of Qualcomm by foreign interests because “reduc[ing] Qualcomm’s long-term technological competitiveness and influence in standard setting would significantly impact U.S. national security” given this 5G transformation:

Reduction in Qualcomm’s long-term technological competitiveness and influence in standard setting would significantly impact U.S. national security.  This is in large part because a weakening of Qualcomm’s position would leave an opening for China to expand its influence on the 5G standard-setting process.  Chinese companies, including Huawei, have increased their engagement in 5G standardization working groups as part of their efforts to build out a 5G technology.  For example, Huawei has increased its R&D expenditures and owns about 10 percent of 5G essential patents.  While the United States remains dominant in the standards-setting space currently, China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover.  Given well-known U.S. national security concerns about Huawei and other Chinese telecommunications companies, a shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States.

The FTC lawsuit against Qualcomm

In early 2017, the U.S. Federal Trade Commission (FTC) had only three Commissioners to guide FTC on policy issues, including which enforcement law suits to file (FTC usually has five Commissioners).  Following the 2016 elections, the federal Administration was set to change on January 20, 2017 when Donald Trump would be sworn-in as President, signaling a significant change in U.S. policy.  On January 17, 2017—just three days before that change—the FTC filed its lawsuit against Qualcomm.  The lawsuit was filed despite significant division between the three Commissioners.  Commissioner Ohlhausen provided a “rare” dissent in what she considered “an extraordinary situation” given the lawsuit’s “flawed legal theory” in an action that “will undermine U.S. intellectual property rights in Asia and worldwide,” stating:

I do not depart from that policy [of dissenting only on rare occasions] lightly.  Yet, in the Commission’s 2-1 decision to sue Qualcomm, I face an extraordinary situation: an enforcement action based on a flawed legal theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide.  These extreme circumstances compel me to voice my objections.

And its probably no coincidence that, on January 20, 2017—just three days after the FTC’s filing—Apple sued Qualcomm alleging antitrust violations.  The FTC and Apple are known to have a Common Interest agreement between them that allows them to secretly coordinate their strategy and share information toward a common goal in these litigations.

We will cover the FTC’s theories in more detail in a later post.  At a top-level, among other things, the FTC argued that Qualcomm was overcharging for the price of its patented technology and that Qualcomm’s practice of licensing the end product (e.g., mobile phones) violated alleged standard setting non-discrimination obligations that required licensing makers of chipsets used in those end products.  That argument goes against the long established practice of licensing end products followed by almost everyone—if not everyone—in the wireless industry.  Basically, there was no discrimination because similarly people were treated similarly—e.g., all the end product manufacturers were licensed, and all the component manufacturers were not licensed (they would not need a license if the end product is licensed).  Even if licensing chipset makers were required, that might be the basis for a chipset manufacturer to bring a breach of contract action for violating a contractual FRAND commitment to the SDOs.  But the FTC antitrust mission does not have jurisdiction to enforce a breach of contract action.  So the FTC alleged that this was part of activity that together raised an antitrust violation.

A key part of the FTC’s theory is an alleged “No license, no chips” policy where Qualcomm would not sell its mobile chipsets to mobile phone manufacturers if they did not have a license from Qualcomm to use patented technology in those chips (Qualcomm disputes whether it actually has declined to provide chips to someone who did not have a license).  If true, that’s rather unremarkable in the patent world.  Someone who wants to use patented technology is supposed to obtain authority from the patent owner before selling products using that technology. (see our July 2, 2014 post re Judge Essex stating implementer should obtain a license to an SEP before using that technology).  In contrast, under U.S. patent law, it would be extraordinary to force a patent owner to help someone infringe their patent—e.g., to force the patent owner to sell an unlicensed infringer the components it needs to infringe the patent.

What has happened since the split-decision by an incomplete set of Commissioners to bring the action against Qualcomm is further troubling.  Only a couple weeks after the case was filed, one of the three Commissioners who voted to bring the case left the FTC.  That left one Commissioner who was against the case and one who was for it.  It appears that, because there was a stalemate among the Commissioners, the FTC Staff would continue to pursue the lawsuit without any substantial policy guidance from appointed Commissioners.  About a year and a half later, the FTC finally had all five Commissioner slots filled.  However, one of the Commissioners recused himself from participating in the FTC case against Qualcomm.  This again left an equal split over the case with two Commissioners against the lawsuit and two Commissioners for it.  So, again in the face of a Commissioner stalemate, the FTC Staff apparently continues forward without any substantial policy guidance from appointed Commissioners.

Further, as discussed above, after the case was filed President Trump followed the CFIUS advice and precluded a hostile takeover of Qualcomm by a foreign entity given national security interests that specifically singled out concern that the U.S. could lose its lead in 5G technology to Huawei.  And during the course of this trial Huawei has come under fire for stealing U.S. technology, including charges filed just last week following intellectual property theft investigation by the Federal Bureau of Investigation.  Yet the FTC Staff continues its lawsuit that relies substantially on Huawei as what some call the FTC’s “star witness” to make its case against Qualcomm.  This has not gone unnoticed by mainstream media. (See The U.S.’s Star Witness in the Qualcomm Antitrust Suit: China’s Huawei; Trump allies warn Obama-era FTC suit against US firm giving boost to China; The Chinese government will have eyes and ears on all of us someday if the FTC gets its way; The U.S. government shouldn’t partner with Huawei)

Also within the past week or so, Makan Delrahim, the Assistant Attorney General for the Antitrust Division of the Department of Justice, criticized the theory underlying the FTC’s case against Qualcomm, indicating that disputes over patent-licensing rates should not be subject to antitrust law. (See DOJ’s Delrahim criticizes ‘theory’ underlying FTC’s Qualcomm case).

Of course, there is more to one side to any issue.  There will be excuses and arguments from all points of view.  But, taking a step back and looking at this broadly, it is plainly troubling to see an agency staff unguided by administration policy makers seek such sweeping and disruptive action against long-established industry licensing practices at a very important historical point of wireless communication development with the birth of 5G.  And doing so against a company whose continued vitality in this wireless technology was deemed a national security concern.  And basing that case on a “star witness” that is the specific foreign company identified in the national security concern and that the U.S. government recently indicted for stealing U.S. technology.

Where is Denzel?

Several years ago there was a thrilling action movie called “Crimson Tide” starring Gene Hackman as the Captain of the U.S.S. Alabama submarine and Denzel Washington as his new Executive Officer.  A political group took control of a nuclear missile base and threatened to launch them.  As tensions grew, the U.S.S. Alabama received a message ordering them to launch a preemptive strike of nuclear missiles at the facility.  After that initial message, another message was received but it was incomplete.  It might have said don’t launch or it might have said something else.  The Captain said an incomplete message is meaningless and protocol required following the last fully received and authenticated message: Launch the nuclear weapons.  The Executive Officer disagreed and refused to launch the missiles until the submarine surfaced to a level where it could receive confirmation that circumstances had not changed and the launch was still a go.  A lot of things happened, it was very tense and exciting—you have to watch it.  But [SPOILER ALERT] it turned out that, when they finally got back in communication, they were told [AGAIN – SPOILER ALERT] not to launch the missiles.

We all may be best served if a Denzel stood up to take pause and ensure that the FTC staff’s lawsuit filed by a divided and incomplete Commission under a different administration is a prudent course under current circumstances.

Yesterday, the U.S. Federal Trade Commission (“FTC”) released a 269-page Report following its study of patent assertion entities (“PAEs”) — i.e. what the FTC’s press release calls “firms that acquire patents from third parties and then try to make money by licensing or suing accused infringers.” (see our Sep. 27, 2013 post, May 21, 2014 post and Aug. 14, 2014 post for background on this PAE study).  The report is based on a study of public information as well as non-public information that the FTC used its subpeona power to obtain resulting in data covering the 2009 to 2014 period from 22 PAEs, 327 PAE affilidate and over 2100 holding entities (entities that owned but did not assert patents).

The report indicates that not all PAEs are the same and concerns about PAEs should be focused on problematic behavior of a subset of PAEs–i.e., certain Litigation PAEs, but not Porfolio PAEs.  The report also indicates that there is no widespread concern about PAEs sending demand letters or PAEs owning standard essential patents subject to a FRAND or other standard setting licensing commitment.  The report provides some recommendations concerning patent reform, which are directed to patent litigation and the behavior of some Litigation PAEs. Continue Reading FTC Releases Long-Awaited Patent Assertion Entity Study

Yesterday, we reported on the manager’s amendments to the Protecting American Talent and Entrepreneurship Act, or “PATENT Act,” a bi-partisan patent reform bill introduced by Senator Leahy and several other Senators.  After two additional amendments by members of the Senate Judiciary Committee during yesterday’s mark-up session, the committee approved the bill by a vote of sixteen (16) to four (4).  The two amendments are discussed below.

Senators Feinstein and Tillis’ amendment made changes to the Act’s provisions governing pre-suit notification of infringement by patentees to accused infringers.  The amendment prohibits such pre-suit notification from containing, absent “consent of the intended recipient,” a “request for, demand for, or offer to accept a specific monetary amount in exchange for a license, settlement, or similar agreement to resolve allegations of patent infringement” or “a specific monetary amount demanded based on the cost of legal defense in a lawsuit concerning any asserted claim or claims.”

Senator Cornyn’s amendment permits certain “institution[s] of higher education” and employees thereof to qualify for micro entity status when applying for patents and, therefore, pay lower patent application fees.

Senator Coons, who has also introduced proposed patent reform legislation known as the STRONG Act, proposed several amendments to the PATENT Act, but none were approved.  One of his proposed amendments would have required petitioners in inter partes and post-grant reviews to prove that a previously issued patent claim is invalid “by clear and convincing evidence” and a proposed amended claim invalid by a preponderance of the evidence.  This same language is in Senator Coons’ proposed STRONG Act.  Senator Coons’ other proposed amendments would have exempted certain claims and parties from the Act’s provisions.  For example, one proposed amendment would have rendered inapplicable the heightened patent infringement pleading standards in the Act to patent plaintiffs that have “never previously brought a civil action alleging infringement of any patent” and who also allege “infringement of a patent that has never been the subject of litigation in any previous civil action.”

Senator Durbin proposed an amendment that would have exempted inventors, joint inventors, “or in the case of a patent filed by and awarded to an assignee of the original inventor or joint inventor, the original assignee of the patent” from the heightened patent infringement pleading standards in the PATENT Act.  This amendment was also not approved by the committee.

Prior to the PATENT Act going to the full Senate for a vote, it is expected that members of the committee will make revisions to Section 11’s provisions governing the amendment of patent claims in inter partes and post grant review proceedings.

On Tuesday, a proposed Manager’s Amendment was released for the Senate’s pending PATENT Act bill.  Following is a recap of the recent wave of patent legislation proposals this year.

Innovation Act.  Since 2013, the House and the Senate have considered various forms of patent reform legislation that attempt to address perceived patent litigation abuse.  See our Dec. 9, 2013 post.  In February, the House Judiciary Committee Chairman Bob Goodlatte (R-Va.) reintroduced the Innovation Act, which is identical to the bill the House passed in December of 2013 by a vote of 325-91.  A summary of the Innovation Act’s provision is in our Feb. 11, 2015 post.

TROL Act.  In April, the House Subcommittee on Commerce, Manufacturing and Trade — a subcommittee of the House’s Energy and Commerce Committee — voted to send a separate proposed patent legislation bill to the full committee for a vote.  This bill, known as the Targeting Rogue and Opaque Letters Act, or “TROL Act,” would expressly render misleading demand letters sent by patent holders to accused infringers a violation of Section 5 of the Federal Trade Commission Act.  Under the bill’s provisions, a demand letter that states or represents “that the recipients are or may be infringing” would be deemed unfair and deceptive under Section 5 if, among other things, the sender, “in bad faith,” misrepresents that

  • it has the right to enforce the patent (when it does not);
  • a patent infringement action has been filed against the recipient and/or other persons;
  • legal action for infringement will be taken against the recipient; or
  • other persons have purchased a license to the asserted patents.

The bill also prohibits sending a demand letter in bad faith seeking compensation for infringing a patent that has been held, in a final determination, to be invalid or unenforceable due to inequitable conduct.  The FTC and states attorneys general would be granted authority to bring civil actions for penalties and other relief against persons that violate the Act, with the FTC retaining the right to intervene in any civil action brought by a state attorney general.  A previous version of the TROL Act was introduced last year.  After mark up by the House’s Subcommittee on Commerce, Manufacturing and Trade, the bill was forwarded, as amended, to the full Energy and Commerce Committee for consideration, but did not advance further.

STRONG Act.  In May of this year, Senators Coons (D-DE), Durbin (D-IL) and Hirono (D-HI) introduced a proposed bill known as the Support Technology & Research for Our Nation’s Growth Act, or “STRONG Act.”  If enacted into law, this bill would, inter alia:

  • harmonize the claim-construction standard used in post-grant proceedings at the Patent Trial and Appeal Board (PTAB) with the standard used in District Court litigation;
  • clarify that during post-grant proceedings, the patent-holder may propose amended, narrower claims for the patent(s) under consideration;
  • maintain the presumption of validity for patent rights in post-grant proceedings, and clarifies that unpatentability may be proved for existing claims by the “clear and convincing evidence” standard used in District Court litigation;
  • attempt to minimize abuse of post-grant proceedings by ensuring that a petitioner has a business or financial reason to bring a case before the PTAB, to reduce incentives for privateering or extortion of nuisance settlements; and
  • permit evidence in post-grant discovery to determine the petition’s real party in interest.

PATENT Act.  At the end of 2013, Senators Leahy (D-VT) and Lee (R-UT) introduced the Patent Transparency and Improvements Act of 2013 (see our Nov. 19, 2013 post), but the bill was pulled from debate apparently due to lack of bi-partisan support (May 23, 2014 post).  In April of this year, Senator Leahy, along with several other Senators from both sides of the aisle, introduced a separate patent reform bill known as the Protecting American Talent and Entrepreneurship Act, or “PATENT Act.”  Here is an overview of some of that version of the PATENT Act’s provisions.

  • Pleading Requirements for Patent Infringement Complaint.  The PATENT Act would expressly direct the Supreme Court to eliminate Form 18, “Complaint for Patent Infringement,” in the Appendix to the Federal Rules of Civil Procedure (as we previously reported, the Judicial Conference has already recommended the elimination of Form 18, and this rule change is expected to take effect later this year).  Similar to the re-introduced Innovation Act by the House, the PATENT Act contains provisions that would increase the specificity and information required to plead patent infringement, requiring a patentee to identify the patents, the asserted patent claims, the accused infringing products or services, and an element-by-element description of how each accused product or service infringes the asserted patent claims.  District courts would be directed to dismiss any complaint that does not include such factual information unless the plaintiff alleges that such information is inaccessible, the reason(s) why the information is inaccessible, and also generally pleads the factual information that is available.
  • Patent Ownership and Financial Interest.  The PATENT Act would require a patent plaintiff to disclose at the outset of an infringement case certain patent ownership and financial interest information to the court, other parties and the Patent Office, including the identity of the patent assignee, the assignee’s parent entity, any entity with a right to sublicense or enforce the patent, and any entity with a financial interest in the patent.
  • Other Complaints Involving the Asserted Patents.  The PATENT Act would also require a patent plaintiff to disclose at the outset of an infringement case all other complaints involving the asserted patents filed by the patentee or any of its affiliates within the preceding three (3) years.
  • Standard Setting Obligations.  The proposed PATENT Act would also require a patent plaintiff to disclose at the outset of an infringement case whether any of the asserted patents are subject to an assurance made “to a standards development organization to license others under such patent” if “the assurance specifically identifies such patent[s] or claims therein” and “the allegation of infringement relates to such standard.”
  • Customer Stay.  The PATENT Act also includes a customer stay provision, under which a District Court would be obligated to stay an infringement action against a “covered customer” (defined as a retailer or end user accused of infringement as a result of the sale, offer for sale or use of a patented product or process) where the manufacturer of the accused product or process is also a party to the action against the customer or a separate infringement action involving the same patent or patents, the covered customer agrees to be bound by the patent determinations that are made in the case against the manufacturer, and the motion to stay is filed no later than 120 days after service of the first pleading against the covered customer or the date on which the first scheduling order is entered.  If the covered customer impleads the manufacturer of the accused product or process into the case, then a stay may only be granted if the covered customer and manufacturer agree in writing to a stay.  If the manufacturer obtains or consents to entry of a consent judgment or fails to prosecute the patent issues to a final decision, the District Court may, upon motion, determine that the consent judgment or unappealed final decision is not binding on the customer if the customer shows that “such an outcome would unreasonably prejudice or be manifestly unjust to the covered customer in light of the circumstances of the case.”
  • Stay of Discovery Pending Decision on Certain Initial Motions.  The proposed PATENT Act would stay discovery in patent infringement actions during the pendency of a motion to dismiss, a motion to transfer venue and a motion to sever accused infringers if the motion or motions were filed prior to the first responsive pleading.  The District Court would retain discretion to allow limited discovery that is “necessary to resolve” such motions.
  • Discovery limitations.  The Act would also require the Judicial Conference to develop rules that address the extent to which each party in an infringement action is “entitled to receive core documentary evidence and should be responsible for the costs of producing core documentary evidence within the possession or control of each such party, and to what extent each party to the action may seek noncore documentary evidence.”
  • Fee Shifting.  Under the proposed PATENT Act, a District Court would be required to award reasonable attorney fees to a prevailing party if the court determines that “the position of the non-prevailing party was not objectively reasonable in law or fact or that the conduct of the non-prevailing party was not objectively reasonable” unless “special circumstances would make an award unjust.”
  • Pre-suit written notice.  In an action alleging infringement “in which the plaintiff has provided written notice of the accusation of infringement to the party accused of infringement prior to filing the action,” the PATENT Act would require the “initial written notice” to: (1) identify each patent believed to be infringed and at least one claim of each patent that is believed to be infringed, (2) contain a “clear and detailed description of the reasons why the plaintiff believes each patent identified . . . is infringed,” (3) notify the recipient that they may have the right to a customer-suit stay, (4) identify any person that has the right to enforce the patent, and (5) if compensation is proposed, “a short and plain statement as to how the proposed compensation was determined.”  If the initial written notice does not contain such information, the defendant’s time to respond to a complaint alleging patent infringement is extended by thirty (30) days.  Additionally, a patent plaintiff seeking to establish willful infringement may not rely on evidence of pre-suit notification unless the notification includes such information.
  • Regulation of “Abusive” Demand Letters.  Similar to the proposed TROL Act, the PATENT Act would render the “widespread” sending of unfair and deceptive demand letters a violation of Section 5 of the FTC Act and expressly grant the FTC the authority to bring enforcement actions against alleged violators.  A demand letter would be deemed to be unlawful if, among other things:
    • it falsely represents that administrative or judicial relief has been sought against the recipient or others or threatens litigation if compensation is not paid, the infringement issue is not otherwise resolved, or the communication is not responded to and there is a pattern of false statements regarding administrative or judicial relief against the recipients or others having been made without litigation or other relief then having been pursued;
    • the assertions contained in the communications lack a reasonable basis in fact or law (e.g., the sender does not have the right to enforce the patent, the sender seeks compensation for acts occurring after the patent has expired, the patent has been finally held to be invalid or unenforceable); or
    • the content of the written communication is likely to materially mislead a reasonable recipient because the content fails to include facts reasonably necessary to inform the recipient (1) of the identity of the person asserting a right to license the patent to, or enforce the patent against, the intended recipient or any affiliated person, (2) of the patent allegedly infringed by the recipient, and (3) if infringement or the need to pay compensation for a license is alleged, of an identification of at least one product, service, or other activity of the recipient that is alleged to infringe the identified patent or patents and, unless the information is not readily accessible, an explanation of the basis for such allegation.

On Tuesday, the co-sponsors released the Committee Manager’s proposed amendments to the PATENT Act.  Among other things, the amendments would add language that changes the procedures for inter partes review (IPR) and post grant review (PGR) at the Patent Office.  Specifically, the amendments would:

  • require IPR and PGR proceedings to apply the same claim construction standard used in District Court and consider District Court claim constructions;
  • estop parties from eschewing in later court or Patent Office proceedings arguments made on claim construction to the Patent Office;
  • presume that patents are valid in IPR and PGR proceedings, though retaining the current preponderance of the evidence burden to invalidate a patent in such proceedings;
  • clarify that the Patent Office Director has discretion not to institute an IPR or PGR if doing so would not serve the interests of justice considering factors such as whether the same prior art or arguments were decided in a prior proceeding or the patent is the subject of a current Patent Office proceeding;
  • allow patent owners to submit evidence in response to a petition to institute an IPR or PGR, and permit petitioners to file a reply to respond to new issues;
  • direct the Patent Office to modify the IPR and PGR process so that institution and merits decisions are not made by the same panels;
  • direct the Patent Office to hold a rulemaking on instituting a Fed. R. Civ. P. 11-type obligation in IPR and PGR proceedings;
  • require PTAB decisions to be publicly available and searchable on the web; and
  • remove the ability to join additional claims to a timely-filed IPR after the time for filing has elapsed, except for claims that are newly-served against the petitioner in an amended complaint (which get 1 year from amendment).

The Judiciary Committee is scheduled to mark-up the PATENT Act today.

Following an investigation of alleged deceptive patent-assertion practices, the FTC has reached settlement with non-practicing entity MPHJ (the so-called “scanner troll”) and its counsel, Farney Daniels PC. The resolution has resulted in an agreement and consent order that would bar MPHJ and the Farney Daniels firm from making misrepresentations — including deceptive claims concerning the results of licensing, sales, settlement, or litigation regarding particular patents, claims that a particular patent has been licensed to a substantial number of licensees, or claims that a particular patent has been licensed at particular prices or within particular price ranges — when asserting patent rights in the future. Under the proposed settlement, MPHJ and Farney Daniels are commissioned with certain recordkeeping practices and requirements that the parties fully document and substantiate any future patent assertion efforts and keep records demonstrating their compliance with the order for a period of twenty years. The FTC has invited interested parties to submit comments on the issues set forth in the proposed consent agreement via the FTC’s website through December 8, 2014.

As discussed in prior posts, MPHJ and its counsel drew nationwide attention after undertaking an extensive letter campaign in attempt to accumulate license fees on its scanner patents by threatening small end-users with litigation that MPHJ allegedly did not actually intend to pursue. MPHJ’s demand letters prompted legal action from the Attorneys General of several states, including Nebraska and Vermont. MPHJ also filed a complaint against the FTC in W.D. Tex. in January 2014, preemptively seeking to prevent an FTC-enforcement-action premised on the non-practicing entity’s demand practices. Judge Walter Smith dismissed MPHJ’s suit in September, writing, “There has been no FTC action beyond the investigative stage, other than FTC’s attempted settlement. There is, therefore, no imminent threat of prosecution.” The settlement also comes in the midst of the FTC initiating its “Patent Assertion Entity Study”, which was approved by OMB this August.

The Office of Management and Budget Action has approved the FTC’s request to conduct its proposed “Patent Assertion Entity Study” directed to analyzing ongoing PAE activity (see our May 21, 2014 and Sep. 27, 2013 posts for more information on the study and questions related to SSOs and SEPs). According to the Federal Register notice published in May 2014, the study is designed to “collect information about Patent Assertion Entity (“PAE”) organization, structure, economic relationships, and activity, including acquisition, assertion, litigation, and licensing practices” in order to analyze any competitive effects of PAE activity in the market:

PAEs are firms with a business model based primarily on purchasing patents and then attempting to generate revenue by litigating against, or licensing to, persons who are already practicing the patented technology. Currently, the public record of PAE activity focuses on publicly-available litigation data. Litigation, however, is only part of the picture. PAE activity encompasses a wide range of non-public behavior related to acquisition and licensing practices, together with structural issues related to organization and economic relationships. Data analyzing this behavior is not available through the public record and it is not available from a single private source.

It has been reported that the FTC expects to begin sending queries to both PAEs and manufacturing companies very soon and that the PAE study is expected to be completed next year, though OMB has approved the study through August 31, 2017.

 

 

Yesterday, the Second Circuit in Lotus v. Hon Hai Precision affirmed the district court’s dismissal of antitrust and breach of contract claims arising from foreign activity based on the patent owner not licensing, but asserting in litigation in China, patents subject to FRAND-Z (i.e., royalty free) standard setting obligations.  Consistent with the U.S. Federal Trade Commision’s amicus brief (see our Jan. 13, 2014 post), the Second Circuit ruled that dismissal was proper because any effect on U.S. domestic or import commerce from the foreign activity did not “give[] rise to” the asserted antitrust claims as required under the Foreign Trade Antitrust Improvements Act (“FTAIA”).

We refer you to our prior post (Jan. 13, 2014 post, May 17, 2013 post and Feb. 13, 2013 post) for the background discussion of this case that involves plaintiff Lotes suing Hon Hai and related entities (such as Foxconn) for reneging on licensing commitments made to the USB Implementers Forum (USB-IF) by not licensing USB 3.0-related patents on FRAND-Z terms and violating U.S. antitrust laws by instituting foreign patent-enforcement proceedings on those patents against Lotes in China.  Below is a summary of the Second Circuit’s ruling.

FTAIA Requirements Are Substantive, Not Juridictional.  First, in overruling a prior decision, the Second Circuit ruled that the FTAIA restrictions on antitrust claims based on foreign conduct are substantive, not jurisdictional, requirements–i.e., “they go to the merits of the claim rather than the adjudicative power of the court.”  Among other things, this means the restrictions are potentially waivable (though the Second Circuit reserved ruling on whether they actually are waiveable, noting that “[A] ‘right conferred on a private party, but affecting the public interest, may not be waived or released if such waiver or release contravenese the statutory policy.”).

Patentee’s SSO Obligation Did Not Waive FTAIA Defenses.  Second, the Second Circuit ruled that the patentee did not contractually waive the FTAIA restrictions through its standard setting commitments.  As an initial mattter, the Second Circuit stated that the plaintiff failed to first raise the issue in the district court and “an appellate court will not consider an issue raised for the first time on appeal.”  Further, even assuming arguendo that the FTAIA restrictions were waivable, “nothing in the cited [USB-IF standard setting] contractual provisions suggests that the defendants waived those [FTAIA] requirements here.”  Specifically, the plaintiff Lotes pointed to five provisions of the USB-IF’s Contributors Agreement:

  1. Paragraph 2 that recites the contributors’ understanding “that it is imperative that they and their representatives act in a manner which does not violate any state, federal or international antitrust laws and regulations.”  The Second Circuit did not find waiver here, because this “merely recites the parties’ understanding that they are subject to various antitrust laws and regulations and affirms the parties’ commitment to abide by their existing legal obligations.”  Thus, “[at] most”, this provision “can be read to recognize and incorporate into the Contribution Agreement the signatories’ preexisting obligations under U.S. antitrust law,” but “do not waive any statutory requirements or otherwise alter the scope of the signatories’ legal obligations.”  Thus the signatories “remain free to argue that, under the FTAIA, the Sherman Act does not apply to or regulate the conduct at issue in this case.”
  2. Paragraph 2 statement that “prohibits any communications regarding … exclusion of competitors or any other topic that may be construed as a violation of antitrust laws.”  The Second Circuit did not find waiver here, because this simply “prohibits the parties from engaging in anticompetitive ‘communications.'”
  3. Paragraph 6.6 statement that the Agreement is to be “construed and controlled” by New York law.  The Second Circuit found no waiver here, because this was simply a “standard choice-of-law” clause.
  4. Pargraph 6.7 statement that “all disputes arising in any way out of this Agreement shall be heard in, and all parties irrevocably consent to jurisdiction and venue in, the state and Federal courts of New York, New York.”  The Second Circuit found no waiver here, because this was simply a “standard … choice-of-forum” clause.
  5. Paragraph 6.12 statement that “the obligations of the parties hereto shall be subject to all laws, present and future, of any government having jurisdiction over the parties hereto.”  The Second Circuit found no waiver here, because this “merely reiterates the parties’ existing obligation to comply with all applicable laws” as in Paragraph 2 above.

Thus, the Second Circuit held that the patentee did not waive its FTAIA defenses by signing the USB-IF Contributor Agreement.

Foreign Conduct’s U.S. Domestic Effect.  Third, following Seventh Circuit precedent, the Second Circuit held that foreign anticompetitve conduct can have the FTAIA-required “direct, substantial, and reasonably forseeable effect”on U.S. domestic or import commerce ” even if the effect does not follow as an immediate consequence of the defendant’s conduct, so long as there is a reasonably proximate causal nexus between the conduct and the effect.”  The Second Circuit thus rejected the Ninth Circuit’s “direct … effect” standard applied by the district court below.  The Second Circuit, however, declined to decide “the rather difficult question” whether that requirement was met in this case because the case could be resolved based on the “give rise to” requirement discussed below.

Does Effect “give rise to” Antitrust Claims.  Finally, the Second Circuit ruled that the alleged anticompetive conduct did not “give[] rise to” the plaintiff’s antitrust claim because, “in the causal chain the plaintiff alleges, the plaintiff’s exclusion from the relevant market actually precedes the alleged domestic effect” [emphasis in original].  The Second Circuit described the domestic effect allegations as follows:

Lotes alleges that the defendants’ foreign conduct had the effect of driving up the prices of consumer electronics devices incorporating USB 3.0 connectors in the United States.  But those higher prices did not cause Lotes’ injury of being excluded from the market for USB 3.0 connectors–that injury flowed directly from the defendant’s exclusionary foreign conduct.  Lotes’s complaint thus seeks redress for precisely the type of “independently caused foreign injury” that … falls outside of Congress’s intent [in enacting FTAIA].

Indeed, to the extent there is any causal connection between Lotes’s injury and an effect on U.S. commerce, the direction of causation runs the wrong way.  Lotes alleges that the defendants’ patent hold-up has excluded Lotes from the market, which reduces competition and raises prices, which are then passed on to U.S. consumers.  Lotes’s injury thus precedes any domestic effect in the causual chain.  And “[a]n effect never precedes its cause.” [emphasis in original]

The Second Circuit also rejected Lotes’s “creative arguments” that “the defendants have also failed to license the necessary claims of certain U.S. patents, which has had the effect of foreclosing competition in the United States.”  Problems with the argument include no allegation that Lotes conducts business in the United States, allegation that Lotes already has rights under the U.S. patents based on the USB-IF Contributors Agreement, and fact that Lotus would still be excluded from the USB 3.0 market because of the foreign enforcement activity against Lotes’s sole-foreign-based manufacturing:

As an initial matter, we are skeptical that the defendants’ refusal to license their U.S. patents has resulted in any domestic foreclosure of competition.  Lotes has not alleged that it manufactures products in the United States, imports products into this country, or otherwise does business here.  It is thus unclear why Lotes believes it even needs a U.S. license from the defendants in order to operate.  And even to the extent a license is in fact necessary, Lotes alleges that, by virtue of the Contributors Agreement, it “either already has .. .or has in irrevocable right to a RAND-Zero license” for all patent claims and other intellectual property necessary to practice the USB 3.0 standard.  The alternative domestic effect Lotes relies upon is thus illusory.

In any event, any domestic effect resulting from the defendants’ failure to license their U.S. patents did not proximately cause Lotes’ injury.  Indeed, any such effect is not even a factual, “but for” cause of Lotes’s injury.  Even if the defendants had granted Lotes a U.S. license, Lotes would still be excluded from the USB 3.0 market by virtue of the defendants’ independent infringement suits in China.  But for the failure to license, Lotes would have suffered the same harm. [emphasis in original]

The Second Circuit thus affirmed dismissal on this alternative ground.  Further, the Second Circuit affirmed the district court’s denying Lotes a second opportunity to amend the complaint because, “[i]n light of our conclusion that any domestic effect did not ‘give[] rise to’ Lotes’s claim, amendment would be futile.”

The U.S. Federal Trade Commission (“FTC”) recently published a Federal Register notice seeking additional public comments on the FTC’s proposed collection of information about Patent Assertion Entities (“PAEs”) (see our Sep. 27, 2013 post about the FTC’s first notice about the PAE study).  Public comments are due by June 18, 2014.

Generally.  In this notice, the FTC defines “PAEs” as “firms with a business model based primarily on purchasing patents and then attempting to generate revenue by litigating against, or licensing to, persons who are already practicing the patented technology.”  The FTC has been studying PAEs for years and is looking for an emperical record of PAE activity to better frame the debate about them.  The proposed study seeks to go beyond the limited publicly available information (e.g., litigation data that the GAO patent litigation study primarily relied upon) to delve into non-public behavior such as those related to acquiring patents, licensing patents, organizational structure and economic relationships.  The information sought is intended to answer the following questions:

  • How do PAEs organize their corporate legal structure, including parents, subsidiaries, and affiliates?
  • What types of patents do PAEs hold and how do they organize their holdings?
  • How do PAEs acquire patents; who are the prior patent owners; and how do they compensate prior patent owners?
  • How do PAEs engage in assertion activity (i.e., how do they behave with respect to demands, litigation, and licensing)?
  • What does assertion activity cost PAEs?
  • What do PAEs earn through assertion activity?
  • How does PAE patent assertion behavior compare to that of other entities that assert patents?

The study will have two parts: (1) a general study of about twenty-five different PAEs and (2) a comparative study of patent assertion activity in the wireless communication sector from about fifteen PAEs, manufacturers and non-practicing entities.

Standard Essential Patents.  With respect to standard essential patents, the FTC explains that it has modified its proposed requests for information to account for standard-setting declarations that may not identify particular patents (e.g., blanket letters of assurance) and, thus, may prove burdensome in identifying specific patents subject to the declaration, stating:

The original requests [in the Sep. 2013 FTC proposal] also required subjects to identify patents subject to commitments such as licensing and standard-setting declarations.  Commenters suggested that these requests may be unduly burdensome when the firm has made commitments on a field of use or subject matter basis–without identifying specific patent numbers.  Commenters also suggested that the original requests may require respondents to conduct legal research to determine whether specific patents are subject to broad commitments.  To address these comments, the FTC will ask respondents to describe the commitments as they have been declared to standard-setting organizations and third parties.

Accordingly, the FTC proposes that PAEs and other entities subject to the study respond to the following questions from Section D (found within the PAE questions) and Section M (found within the other Wireless Industry questions where the Patents are limited to Wireless Patents), where the differences between the Section D and Section M questions are noted below within [bold brackets]:

D.  [M.] Standard Setting Commitments

1.  If any Person has committed to a Standard Setting Organization that it will License any [Wireless] Patent(s) Held by the Firm since January 1, 2009, for each commitment

a.  State the date the commitment was made.

b.  Identify the Person who made the commitment.

c.  Identify the Standard Setting Organization.

d.  Identify the standard(s) to which the commitment applies.

e.  Provide a narrative response identifying any Wireless Patents held by the Firm that are subject to the commitment. [NOTE: This question is not within the Wireless Industry questions]

f.  [e.] State whether the commitment is to License the [Wireless] Patent(s) or any Patent claim(s) on reasonable and non-discriminatory (RAND); fair, reasonable, and non-discriminatory (FRAND); royalty-free (RF); or other terms.

(1) if the commitment is to License on terms other than RAND, FRAND, or RF, provide a narrative response describing the terms.

g.  [f.] Is the commitment subject to a field of use restriction? (Y/N)
If yes:

(1) State the specific field of use restriction(s); and

(2) identify, from the following list, inwhich sector(s) is the field of use restriction: Chemical, Computers & Communications, Druges & Medical, Semiconductors, Other Eletrical & Electronic, Mechanical, or Other.

h.  [g.] Proivde a narrative response listing all Patent(s) that any Person has declared, or otherwise identifed to any Person, as subject to the commitment.

i.  [h. ] Produce, and provide a narrative response identifying by Reference Number, all agreements embodying the commitment.

For purposes of the questions, the FTC defines “Standard Setting Organization” or “SSO” to mean “any organization, group, joint venture, or consortium that develop standards for the design, performance, or other characteristics of products or technologies.”  The definition of “Wireless Patent” depends on a few other defined firms, including the term “Assert” that appears to be limited to patents raised against another entity (not all patents) as well as the term “Patent” that is limited to U.S. patents and applications, the relevant defintions being as follows:

“Wireless Patent” means any Patent Asserted against a Wireless Communication Device.

“Assert” and “Assertion” mean: (i) Any Demand; (ii) any civil action threatened or commenced (by the Firm or other Person) relating to any Patent; or (iii) any investigation pursuant to 190 U.S.C.  1337 [ITC] threatened or initiated (by the Firm or other Person) relating to any Patent.  For Manufacturing Firms, “Assert” and “Asserted” do not include sales of products manufactured by the Firm, or on behalf of the Firm, that practice the claimed invention.

“Demand” means any effort since January 1, 2009 to License any Patent, in whole or in part, and any other attempt to generate revenue by authorizing a Person outside the Firm to practice an invention claimed in a Patent.  Demand does not include complaints or pleadings filed with a United States District Court or the United States International Trade Commission.

“Patent” means a United States patent or United States patent application as defined by 35 U.S.C. 101, et seq.

“Wireless Communication Device” means any device, including wireless chipsets, which implements wireless communication, including, but not limited to, softrware, user equipment, base stations, and network infrastructure.

“Wireless Chipset” means any baseband processor, radio frequency transceiver, integrated circuit, chip, or chipset, or any combination thereof, and any related software, used to implement wireless communication.

PAEs and SEPs generally are separate issues that should not be conflated.  Perhaps the FTC has specific questions on SEPs here given the context of this particular study.  The proposed study concerns entities whose business model primarily is to purchase patents to assert against those already practicing the invention (e.g., they are not innovators contributing to a new standard).  Purchasing a patent directed to an existing, widely adopted standard may readily target a large number of companies already practicing an invention.  Its not clear, however, whether the proposed questions capture all these instances–e.g., what if (1) the patent is not subject to a specific standard-setting declaration or (2) the patent owner claims that the patent is not subject to a standard-setting obligation, such as, disputing whether a blanket commitment attached to the specific patent or whether an obligation survived transfer of the patent (see, e.g., our April 23, 2014 post where the court rejected a patent owner’s express attempt to affirmatively receive “hold-up” value for an alleged standard essential patent not subject to an SSO commitment).  But perhaps the study already does or will consider whether a PAE has asserted to anyone (e.g., a prospective licensee or a litigant) that a patent covers an industry standard regardless whether the patent is subject to an SSO declaration or commitment.

Hopefully the current patent reform effort to address perceived patent litigation abuse problems will result in carefully targeted tweaks to–without harming–our otherwise thriving U.S. patent system, the greatest system for innovation that the world has ever known (see our Patent Forest post).  The Senate is currently considering this balance.  The Senate Judiciary Committee was scheduled to mark-up and vote on a proposed bill designed to curb perceived litigation abuses by non-practicing entities (what some refer to as patent “trolls”) last Thursday but the vote was postponed to give Committee members and their staff time to continue working on language that strikes a balance between protecting the rights of patent holders to pursue good faith claims of infringement and reducing the alleged bad faith tactics of non-practicing entities.  According to Senator Leahy (D-Vt.), the bill’s sponsor, a proposed provision aimed at reducing the ability of non-practicing entities to hide behind shell corporations in order to be judgment proof had proven to be “complicated.”  However, the Senator noted that the bill had bipartisan support.

The Committee pushed the vote to Tuesday, April 8, however it was again postponed.  According to published reports, Democrats circulated revisions of the bill to the Committee but have yet to receive feedback from Republican members.  The Committee will attempt to mark-up the bill on April 10.

As we discussed in a prior post, the proposed bill would require patent-plaintiffs to disclose ownership information for asserted patents at the outset of infringement litigation.  The bill would also require courts to stay infringement suits against customers of infringing products or processes if the manufacturer and customer consent, the manufacturer is a party to an action involving the same patents or product(s), the customer agrees to be bound by the result of the manufacturer’s litigation, and the motion for stay is filed within a specified time early in the case.

The bill would also expressly grant the Federal Trade Commission authority to investigate and bring enforcement actions against patent holders that engage in unfair and deceptive acts and practices in connection with demand letters to accused infringers.

Late last year, the House of Representatives passed a competing bill that would impose heightened pleading standards for patent infringement complaints and also require a patent-plaintiff to plead       “[w]hether a standard-setting body has specifically declared such patent to be essential, potentially essential, or having potential to become essential to that standard-setting body.”  As we have discussed before, SSOs generally do not declare patents essential or potentially essential to their standards.  Rather, declarations of essentiality are usually made by the patent owners themselves in letters of assurances or similar disclosures. However, these disclosures frequently do not declare whether the patent covers the standard, but assert that it might cover the standard and set forth the obligations the patent owner agrees to if the patent actually is essential to the standard.

As we discussed in a prior post, the U.S. Senate is currently debating a patent reform bill (“the Innovation Act”) passed by the House of Representatives late last year directed to perceived patent litigation abuse by certain patent assertion entities (what some characterize as “patent trolls”).  The Senate is also debating a competing bill (“the Patent Transparency and Improvements Act of 2013”) introduced by Senator Patrick Leahy (D-Vt.), Chairman of the Senate Judiciary Committee.

The bill passed by the House would impose heightened pleading standards for patent infringement complaints, requiring patent-plaintiffs to identify — in their complaint — the patents, the patent claims specifically asserted, the instrumentalities accused of infringement, and an element-by-element description of how each accused instrumentality practices the asserted patent claims.  These standards would, if enacted into law, provide patent-defendants the opportunity to seek early dismissal of complaints that fail to plead the requisite factual information.

The House bill would also require a patent-plaintiff to plead “[w]hether a standard-setting body has specifically declared such patent to be essential, potentially essential, or having potential to become essential to that standard-setting body.”  As we noted previously, SSOs generally do not declare patents essential or potentially essential to their standards.  Instead, declarations of essentiality are usually made by the patent owners themselves in letters of assurances or similar disclosures.  These disclosures frequently do not declare whether the patent covers the standard, but assert that it might cover the standard and set forth the obligations the patent owner agrees to if the patent actually is essential to the standard.

The Senate bill would require patent-plaintiffs to be transparent with ownership information for asserted patents.  Specifically, at the outset of infringement litigaiton, patent-plaintiffs would be required to disclose to the Court and all adverse parties any persons, associations of persons, firms, partnerships, corporations (including parent corporations), or other entities other than the patentee itself known by the patentee to have “a financial interest (of any kind) in the subject matter in controversy or in a party to the proceeding; or (2) any other kind of interest that could be substantially affected by the outcome of the proceeding.”

The Senate bill would also require courts to stay infringement suits against customers of infringing products or processes if:

(1) the manufacturer and the customer consent in writing to the stay;

(2) the manufacturer is a party to the action or a separate action involving the same patent or patents relating to the same covered product or process;

(3) the customer agrees to be bound under the principles of collateral estoppel by any issues finally decided as to the manufacturer that the customer has in common with the manufacturer; and

(4) the motion for stay is filed after the first pleading in the action but not later than the later of—(a) 120 days after service of the first pleading in the action that specifically identifies the product or process as a basis for the alleged infringement of the patent by the customer, and specifically identifies how the product or process is alleged to infringe the patent; or (b) the date on which the first scheduling order in the case is entered.

The Senate bill would also expressly grant the Federal Trade Commission authority to investigate and bring enforcement actions against patent holders that engage in unfair and deceptive acts and practices in connection with demand letters to accused infringers.

Recently, Senator Leahy announced that he would be listing “bipartisan legislation for consideration on” the Senate’s next agenda.  As a result, the bipartisan bill will be discussed during the upcoming Executive Business Meeting of the Senate Judiciary Committee on March 27, 2014.  We will monitor the meeting and provide an update on the status of this legislation.