Category Archives: Commentary

Drinking Facebook’s Milkshake

Towards the end of the film There Will Be Blood, Daniel Day-Lewis, playing a ruthless oil baron we have watched rise from lone prospector, explains slant drilling technology to a rival. By angling his drill horizontally, he can tap the petroleum reserves underneath his rival’s property. He compares it to having a long straw to reach across a table and dip into the other’s beverage. “I drink your milkshake!” he crows triumphantly in the film’s signature line.

Did Cambridge Analytica pull off the digital age equivalent against Facebook? Although the exact details are still being sorted out, in 2015 the U.K.-based data firm, which was briefly hired by the Trump campaign, ended up with personal data from some 50 million Facebook accounts through a personality polling app software application. Although only 270,000 users downloaded the app, Cambridge Analytica designed it to scrape data from the profiles and feeds of all the Facebook friends of those original 270,000, according to Christopher Wylie, the whistleblower in the case. As a result, Cambridge Analytica harvested a motherlode of information proprietary to the social media giant. It drank Facebook’s milkshake.

But while in There Will Be Blood, oil was being hijacked, in this case it was individual personal information–information that Facebook not only was obliged to protect, but had significant business interests in doing so. That’s why the company’s stock is being pounded. Washington and Wall Street are openly wondering what’s going on. Massachusetts Attorney General Maura Healy promises an investigation. The Federal Trade Commission reportedly believes Facebook violated terms of a 2011 consent decree on user privacy and may face a fine of $40,000 per violation.

When it comes to regulation and fines, I always prefer a cautious approach. Investors already are punishing the company, as is appropriate in a market economy. On a basic level, Facebook was extremely careless. Although some are characterizing Cambridge Analytica’s data harvest as a criminal breach, that charge is debatable. Consumer bank accounts, passwords, health and financial records were not exposed. According to the Washington Post, Cambridge Analytica’s harvesting was in line with Facebook’s terms of use at the time. Popular apps such as FarmVille and Tinder used similar wide-scale collection tools. The Obama campaign also used data harvested from social media, including Facebook, to target voters. So perhaps we should turn down the volume of moral outrage and see this for the business issue it is. If there was a breach of contract, civil law should apply. If Cambridge broke the law, it should be held accountable. And Facebook should not have waited two years before disclosing the loss. But we until we understand the scope of any violation, Washington should avoid creating regulations or imposing penalties out of an emotional reaction.

Most of that emotion stems from the case being framed within the controversy over “fake news” and whether to any degree it improperly affected the outcome of the 2016 election. As of now, it’s not clear whether the Cambridge Analytica used the data it collected and if so, if it got any measurable results.

But before we get carried away, let’s recall that audience manipulation is not a crime. On the contrary, it’s the whole point of advertising, politics not excepted. To this day we argue whether images of a nuclear bomb detonation juxtaposed with a little girl picking flowers or an African-American man in a revolving prison door were outside the rules of political engagement. They had an undeniable influence on the elections held those years, but no ad agencies or TV networks were investigated or fined.

But Facebook’s not off the hook. If the company wants a hand in policy direction it first needs to take responsibility for what it’s become. It seems pathologically reluctant to admit that it has become a major media company that brings to market unique algorithms that advertisers can use, with amazing accuracy, to target, profile and manipulate individuals. Consequently, third parties like Cambridge Analytica are becoming more adept at understanding and exploiting the value of Facebook’s own resources than Facebook itself. It doesn’t help that CEO Mark Zuckerberg, who let five days pass before publicly addressing the reports, gives the impression that he’s being pushed along by events, rather than taking direct control of them. If he doesn’t step up with a clearer vision of Facebook’s direction, in the end it won’t be Cambridge Analytica, but the government itself, that will drink Facebook’s milkshake. That will be the detriment to everyone.

This article is an updated version of an op-ed originally published in The Hill March 23, 2018 under the title “Facebook Has a Problem with Transparency, but It’s Not Yet Time for Regulators to Act.”

 

FTC-Qualcomm Patent Dispute: No license, no chips

It’s not every day that the government and the tech industry agree on intellectual property policy, but both interests are united in their opposition to San Diego-based Qualcomm Inc.’s abusive patent-licensing practices.

Hoping to escape impending and much-needed scrutiny, Qualcomm has asked the U.S. District Court for Northern California to dismiss an antitrust suit brought by the U.S. Federal Trade Commission (FTC) that alleges that Qualcomm, which holds patents essential to assuring that wireless devices operate with networks worldwide, leveraged its monopoly on those standards-essential patents (SEP) to harm competition. A hearing on Qualcomm’s dismissal motion is scheduled for June 15.

Judging from the amicus curie briefs filed against Qualcomm’s motion to dismiss, Qualcomm’s years of bullying competitors and abusing the licensing process for its own financial gain have netted it few friends in the wireless industry.

The FTC suit is only the latest scrutiny of Qualcomm for abusing its patent monopoly. It follows sanctions in South Korea, Taiwan, China and the European Union for similar behavior.

Typically, companies that hold patents that international industry bodies deem essential to make part of a global or regional standard — such as the way TVs convert signals into pictures — agree to make those patent licenses available to all manufacturers under fair, reasonable and non-discriminatory (FRAND) terms.

Courts and regulatory bodies in the U.S. and internationally have found that Qualcomm repeatedly flouts its FRAND commitments and agreements. The most persistent complaint within the FTC action is the Qualcomm practice of “no license, no chips.” Qualcomm, the FTC says, has a pattern of withholding patent licenses unless buyers also agree to purchase its chipsets for wireless devices. For example, Qualcomm is accused of demanding a license royalty of 5% of the retail price of a device — $30 for a $600 smartphone — when a typical SEP license amounts to less than 0.5% of retail price.

If left unchecked, Qualcomm’s anticompetitive practices could have profound effects on the entire standards-setting ecosystem. For consumers, that would mean higher prices and a proliferation of incompatible devices. Without the industry’s adoption of the global Wi-Fi standard, TVs, computers, tablets and smart speakers such as Amazon’s Echo might all require separate wireless routers. More likely, few of these innovations would be developed at all.

Though no company is obliged to submit technology for standards consideration, once it does and its technology is deemed essential to a standard, it is obliged to license that technology under FRAND terms. Over the years, standards bodies have proved to be an excellent example of industry self-regulation, but Qualcomm’s persistent flouting of established laws and rules have forced government authorities to step in. That’s why the FTC case is critical. The case will help check Qualcomm’s behaviors, but more importantly it will send a signal that the U.S. government stands behind the FRAND system and the global innovation it upholds.

“The public interest function of FRAND breaks down where a company violates its obligation to license on FRAND terms,” the App Association, a group representing thousands of small businesses, writes in its amicus brief.

The App Association’s brief was one of several to urge the U.S. district court to deny Qualcomm’s request for dismissal. Though motions to dismiss are commonplace, an onslaught of amicus filings at this stage of a trial is extremely rare. The outpouring of concern speaks volumes about the impact of Qualcomm’s tactics.

“For too long, Qualcomm has blocked [wireless device makers] from assessing competing chipsets on their merits,” Intel writes in its amicus brief. “Qualcomm’s web of anticompetitive practices distorts prices in this market, which imposes a financial burden on [device makers], rival chipset manufacturers, and ordinary consumers alike.”

For its part, Qualcomm poses a weak defense and doesn’t dispute the main accusations in the case. Because it has been charging a 5% royalty rate since the early years of wireless, it argues, it can continue to do so. This ignores the reality that today’s wireless devices have evolved way beyond a device dedicated to voice communication on the go.

The FTC claims that competitors such as Broadcom, Marvell, Freescale and NVidia were all illegally forced out of the wireless chip market due to Qualcomm’s tactics. And these higher-profile casualties don’t account for all the would-be competitors that never got off the ground because of Qualcomm’s abusive behavior.

The FTC’s lawsuit is justified, and the case must move forward. The court should deny Qualcomm’s motion for dismissal. It’s time to hold the company accountable.

Originally published on Computerworld.com June 13, 2017

U.S. must continue improving the patent process

For the past several weeks, the ongoing series of lawsuits between Apple and Samsung over smartphone patents has been back in the news. Last week, Samsung announced that it plans on paying up, but expects to be reimbursed should other patents in the dispute be invalidated, which is likely based on U.S. Patent and Trade Office (USPTO) proceedings thus far.

This followed a 2-1 vote by a panel of a federal circuit court of appeals to grant Apple an injunction against Samsung as part of an infringement remedy, overturning a district court’s decision. That ruling to enjoin Samsung was surprising.

Injunctive relief is a drastic remedy casting a huge shadow over upstream markets — for example, the companies that manufacture the touchscreens — and downstream markets, such as the thousands of Android app developers. Typically, injunctions require that the product at issue be taken off the market, even if the infringing patent covers minor product functions, designs or elements.

Because of the severity of the consequences, courts usually look for irreparable harm before awarding an injunction. Indeed, the U.S. Supreme Court, in eBay Inc. v. MercExchange LLC, determined that lower courts were obliged to consider more equitable remedy standards, such as fines, and that injunctive relief should be the last resort, applicable only in cases where the patent holder would be irreparably harmed if an injunction did not issue.

In Apple Inc. v. Samsung Electronics Co. Ltd., the court of the Northern District of California declined to impose the injunction that Apple sought, stating that Apple would not suffer the irreparable harm that would warrant it. That decision was reversed by a three-judge panel of the federal appeals court, though the chief judge issued a strongly worded dissent citing the lower court judge’s finding of fact that Apple would not be irreparably harmed.

The ruling in favor of the injunction has important implications and should be reconsidered by the full appellate court. Because it dismisses the eBay standard’s framework for drastic remedies like injunctions, the ruling imperils the entire intellectual property system with an increase in abusive patent litigation. Coercive patent litigation, already a problem, can now be armed with the threat of injunctions. That will slow innovation, harming U.S. consumers and the economy. Concerns such as that led organizations such as the Computer & Communications Industry Association, Public Knowledge and the Electronic Frontier Foundation and companies such as Google, Facebook, eBay and even two Samsung competitors, HTC and Lenovo, to voice opposition to the recent decision and urge the appeals court to give the case an en banc, or full-court, hearing.

The principal worry is that if lower courts are going to ignore the Supreme Court’s eBay standard, litigation abusers such as patent trolls will have a new and costly threat to leverage. As it is, patent litigation destroys more than $60 billion in firm wealth each year, according to a March 2015 study. In 2012, Santa Clara University School of Law research found that companies with less than $100 million annual revenue represented 66% of defendants to troll suits.

The courts are not the only problem, of course. There’s also the USPTO. Although the USPTO served commerce well in the Industrial Age, it now struggles to keep up with the rapid pace of digital innovation. Yet even if the USPTO were to be transformed tomorrow, the courts would still have to deal with the many low-quality patents that have already been granted. Low-quality, mistakenly granted patents pose a tremendous problem for small businesses that face the threat of business-crippling injunctions.

Courts should impose injunctive relief judiciously, as per the eBay standard. Courts should not be in a position to order Boeing to stop selling 777 jets after finding that its supplier of seat cushions infringed on a patent, because nobody purchases the aircraft or the airline ticket based on those cushions. Given the thousands of patents that go into a smartphone or similarly complex device, the nexus of harm to imposed remedy is similar.

Given the dissenting position stated by the appellate court’s chief judge, the full court should grant Samsung’s motion for en banc hearing and properly apply the holding of eBay. Injunctions are a drastic remedy only applicable when financial remedies are insufficient to avoid irreparable harm. The court must maintain this important standard.

This article was originally published on ComputerWorld.com Dec. 15, 2015. 

Diluting the eBay Standard Will Embolden Trolls

Patent reform is proving to be an incremental process. Congress took a big step in 2011, when it passed the America Invents Acts. Additional legislation to protect both established businesses and small entrepreneurs from unique and “innovative” forms of lawsuit abuse is pending both on Capitol Hill and in state houses around the country. The U.S. Supreme Court also delivered two decisions in 2014 that will make it easier for defendants to recover legal costs if an infringement suit is deemed frivolous.

But the work is far from over. Indeed, legislation and court rulings are credited with a 27 percent reduction in patent suits in 2014 compared to the year before. The downturn was short-lived, however, as patent suits surged again in the first half of 2015, increasing 11 percent compared to the same period in 2014. One powerful weapon for patent plaintiffs, foreign or domestic, is the injunction. That’s when a court, at its discretion, imposes a moratorium or ban on the sale or import of an alleged infringing product or component.

Patent litigation destroys more than $60 billion in wealth each year, according to a March 2015 study published by the Boston University School of Law. In 2012, Santa Clara University School of Law research found that companies with less than $100 million annual revenue comprised 66 percent of defendants in troll suits. Patent trolls equipped with the threat of injunction are a danger to small business innovators, as are larger companies that wield injunctions and lawsuits rather than trying to maintain healthy marketplace competition and boardroom negotiation.

Patent troll is the pejorative name for a non-practicing entity that doesn’t produce with its patents. Instead, it lies in wait until another company develops something using similar technology, and then it sues claiming infringement. The cost of a defense can be high, especially for a start-up with limited capital, so the defendant is often pressured into entering into a licensing agreement even if there is no real infringement. Abuse of this system turns an innovation protection into a playground for legal arbitrage.

While Congress examines patent troll activities and ways to combat abuse, there is fortunately court guidance on injunctions. In its 2006 decision in eBay Inc. v. MercExchange LLC, the U.S. Supreme Court determined traditional equitable considerations must be applied to infringement. The upshot is that the “eBay standard,” as it has come to be known, calls for a more equitable remedy standard, such as royalty payments or fines. Injunctive relief should be the last resort, not the first action.

In the wake of eBay, a report by law firm K&LNG concluded the decision made it much less certain a troll would be able to win an injunction on the claim it has suffered such an irreparable injury that monetary damages alone would not be sufficient.

Recently, Federal District Court Judge Lucy Koh applied the eBay standard in Apple Inc. v. Samsung Electronics Co. Ltd. Although Apple won the case, Koh did not grant an injunction against Samsung, because Apple did not demonstrate it would suffer irreparable harm without it. Unfortunately, in September the Federal Circuit Court of Appeals reversed Koh’s decision. Samsung has since moved for an en banc review of that decision.

While the appellate process plays out, the U.S. Patent and Trade Office has found several of the contested patents should not have been issued in the first place. With an estimated250,000 patents within the average smartphone, injunctive relief, when granted too hastily, can wreak havoc in a supply chain, with consumers bearing the brunt.

Small businesses need a solid framework of standards to compete against larger rivals. The eBay standard has made a positive impact. A Cornell Law Review article noted district courts granted 95 percent of requests for injunctions before the eBay standard. After eBay, it was down to 75 percent, suggesting injunctions are more thoroughly scrutinized since the framework was established.

Much of the effort in combatting patent abuses is geared toward leveling the playing field, providing innovators with more tools to counter frivolous claims and dissuading frivolous assertions or threats.

The recent Apple decision could undermine the progress created by the eBay standard. This is especially important for small businesses, such as many tech startups, who often face costly infringement proceedings, a well-funded plaintiff, the threat of injunction, and the possibility of being forced into unfair licenses or insolvency. It is imperative to solidify a legal framework for injunctions rather than allow businesses to wield the threat of drastic embargos unpredictably.

An earlier version of this article was orginally published in The American Spectator Nov. 17, 2015.

Trade agreements could promote international patent abuse

The House of Representatives has delayed voting on the Innovation Act, a bill designed to curb patent trolling, until after the August recess. But patent abuse still finds itself part of the legislative discussion, in this case with the Trans-Pacific Partnership (TPP).

The pact itself is a great step toward freer global trade and more open markets for American products. But lawmakers should ensure that intellectual property commitments within the accord do not overlook new weapons of protectionism.

The concern centers on sovereign patent funds (SPFs), government-funded organizations that acquire and leverage patents in pursuit of national economic objectives. Ideally, they should act as one-stop clearinghouses where a person or entity can acquire a bundle of interrelated patent licenses instead of negotiating with every individual patent holder. Given that the average smartphone incorporates as many as 250,000 patents, patent pools provide a function in streamlining access to IP rights.

While they can increase efficiency into the licensing process if the pools are private, as state entities, SPFs frequently operate discriminately on behalf of their host nation’s commercial interests. This harms free trade and promotes an uneven playing field for private companies that conduct business abroad.

In a few notable cases, SPFs, sometimes called Government-Sponsored Patent Trolls (GSPTs), operate similarly to domestic private patent trolls. Despite the pending Innovation Act, 1,656 patent-infringement suits — a record number — were filed in the second quarter of 2015, according to Lex Machina, a legal analysis firm. The patent law firm Unified Patents estimates that 68 percent of these suits are initiated by trolls.

All countries within the TPP, except for the U.S., sponsor SPFs, said Hosuk Lee-Makiyama, director of the European Centre for International Political Economy (ECIPE), in a forum on SPFs hosted by the Cato Institute July 9 in Washington.

Even some prospective TPP members sponsor these entities. Although they are not yet parties to TPP, South Korea and China have expressed interest in joining. They would bring their own large SPFs with them. Intellectual Discovery, the South Korean SPF, owns more than 4,000 patents related to telecommunications and computing, Lee-Makiyama said. Ruichuan IPR, China’s SPF, holds 23,000 high-tech patents, he added.

Free market proponents should be weary of SPFs controlled by our trading partners — questioning why governments, which are tasked with regulating enterprise, are also participating as a player in the same market. A sound TPP agreement must include safeguards that police three specific abuses.

Litigation aimed at erecting barriers to market entry or investment. A common indicator is when a SPF sues a foreign company for alleged infringement in a foreign court selected for reasons other than the jurisdiction of the alleged violation. Generally, it is favorable to recover an award or settlement when patent registration — the simple fact of owning the patent — is considered ahead of the patent’s validity.

Unfortunately, this may be the toughest to fix for the same reason the Innovation Act has brought so much debate. At heart, the current process for evaluating and granting new quality patents, especially in high-tech areas, is flawed. Still, the TPP can allow room for appropriate penalties if an SPF patent suit is found to be baseless or malicious.

Discriminatory licensing. This occurs when an SPF discriminately demands an inflated patent license fee from a foreign company. That frequently arises when foreign market entrants pose a competitive threat to native enterprise. SPF’s often expansive patent catalogs amplify the threats and impact posed by abusive licensing. Unlike trolling, discriminatory licensing is easier to spot and should be addressed in the agreement.

Retaliation. SPFs should not be used as a means for retribution by lawsuit. For example, when one of its domestic companies is confronted with a patent suit, legitimate or not, from a TPP partner, there should be checks that halt an SPF from filing multiple retaliatory claims against companies native to that same TPP partner. Analogous to the “dumping” problems that plagued international trade in the past, retaliatory suits only escalate confrontation and cost economies, businesses and consumers in both countries exorbitant resources.

SPFs that are focused on research and pooling knowledge rather than on lobbing lawsuits can serve to improve access and spurn innovation. They can be an asset for small companies and start-ups, monetize quality patents and guide them through Byzantine aspects of international patent law. But the cocktail of economic nationalism, deep pockets and regulatory clout seems too tempting for many U.S. trading partners to abstain. A comprehensive TPP provides an opportunity to correct the problem, rather than further open the door to government-funded patent war.

Originally published Aug. 10, 2015 in the Washington Examiner.

 

Trade and Patent Reform Build Bridges in Congress

In a welcome show of bipartisanship, the U.S. Senate took a significant step in the direction of freer global trade in April. The Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA), cosponsored by Sens. Orrin G. Hatch (R-UT) and Ron Wyden (D-OR), is designed to fast-track approval of the Trans-Pacific Partnership (TPP), a landmark trade agreement currently under negotiation by the United States and 10 other Pacific Rim countries.

The legislation would allow President Barack Obama to present the trade pact to Congress for a straight up-or-down vote without lawmakers being able to amend terms, but because the bill has faced numerous delays, congressional support on both sides is waning.

TPA would lower regional market barriers Canada, Chile, Mexico, Peru, and the United States face in East and Southeast Asia. Five key Asian nations—Brunei, Japan, Malaysia, Singapore, and Vietnam—currently are parties to the agreement, and China reportedly is following negotiations closely.

TPP is related to another issue before Congress: patent reform. Patent assertion entities (PAE), or patent trolls, deliberately exploit weaknesses in current patent law and procedures, costing the United States economy $29 billion per year, according to research from the Boston University School of Law.

In my recent Heartland Institute Policy Brief“Why Patent Reform Is Needed: Stockpiling, Frivolous Lawsuits Threaten Innovation and Cost Consumers Billions,” I address a new and daunting patent assertion issue. The governments of China, France, Japan, South Korea, and Taiwan have invested in and operate PAEs with the mission of acquiring all the patents they can, regardless of where the patent is filed or who the filer is, in order to extract settlements from alleged private sector infringers outside their borders.

Although the TPP language we have seen claims member nations will be obligated to abide by the World Trade Organization agreement on Trade-Related Aspects of Intellectual Property Rights, foreign governments who finance and control PAEs fall short of doing so.

Article 7 of the agreement says, “The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.”

Government-controlled trolls do not contribute to innovation or aide in the dissemination of technology. These entities dissuade innovation through litigation aimed specifically at foreign economic targets they perceive to be threats.

Article 8.2 of the agreement entreats member states to “prevent the abuse of intellectual property rights by right holders or the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology.”

The offensive litigation brought by foreign government-run trolls abuses these rights and restrains trade through tariffs in the form of hefty litigation costs based on frequently frivolous claims.

For example, the Innovation Network Corporation of Japan (INCJ), a government-funded PAE launched in July 2009, says its goal is to provide support to promote the creation of next-generation businesses through the flow of technology and expertise. In July 2013, INCJ raised trade concerns when, along with Panasonic and Mitsui & Co., it established the IP Bridge patent pool to consolidate Japan’s corporate patents for potential protectionist litigation. Initially, IP Bridge stated its plan was to acquire 5,000 patents from electronics companies. In the long run, it plans to expand its funding to ¥30 billion, or about $250 million.

The Chinese government reportedly backed Ruichuan IPR Funds with $50 billion to acquire patents to use in actions against U.S. companies, among other industrial rivals. In today’s intellectual-property-fueled global economy, instead of slapping tariffs on imported products that compete with homegrown industries, governments are dubiously applying patent law to extract a “tax” on any product that threatens the nation’s commercial interests. The European Centre for International Political Economy, a research group advocating global free-trade policies, characterizes state-sponsored PAEs as “next generation trade defense.”

The bipartisan progress on trade issues and intellectual property issues is encouraging. Rapid congressional approval of TPP, engendered by the fast-track bill now before the congressional Finance Committee, will help bring long-term benefit to our economy.

This article was originally published on The Heartland Institute’s website, www.heartland,org., May 5, 2015. 

‘Transformer’ patent trolls present latest threat to innovation

Baby boomers and millennials alike probably remember a time when the United States maintained healthy competition in the airline market. Until as recently as 2001, consumers could choose between ten major carriers. Through consolidation and major bankruptcy cases, the U.S. is now home to only four.

While the parallel to a cell phone market that once saw Blackberry or Motorola service wide swaths of consumers is not identical, the similarities are stark.

In April, Nokia purchased France-based telecommunications equipment company Alcatel-Lucent for $16.6 billion. The move is just the latest example of consolidation for one-time giants in pre-Internet telecom infrastructure. For Nokia, once the leader in wireless phone sales, consolidating is merely the next step in the company’s transformation of its business from manufacturing to patent stockpiling – a very relevant topic as U.S. policymakers look to combat abusive patent behavior.

Alcatel-Lucent has more than 33,000 active patents, according to the company’s website, plus 15,000 patent applications pending. The deal will more than double Nokia’s existing ownership of 30,000 patents.

Nokia formally exited the market last year when it sold its handset manufacturing operations to Microsoft. Nokia retained its patent portfolio, however, a decision analysts view as a strategy to rely more on monetizing its intellectual property holdings. As the deal was closing last April, analysts said Nokia was likely to increase its annual patent income from $690 million to $820 million.

The company of course has the right to seek just compensation in the market for its patents. It’s troubling though that the company appears to be overreaching, and is showing a pattern of making questionable assertions over components, software and processes that its patents do not cover. In this, Nokia is acting like a patent troll, exploiting shortcomings in the legal system that place a higher cost burden on patent defendants and leaving them with a perverse incentive to settle out of court rather than litigate, even if they have a strong case.

Nokia made its first move in 2012 by filing lawsuits in the United States and Germany against handset manufacturer HTC, claiming infringement on dozens of patents. Several of the lawsuits were dismissed, but not enough to discourage trolling. This is why efforts at reforming certain aspects of the patent granting process; including harmonization, increased oversight, and more transparency are timely.

The Alcatel deal will give Nokia a huge portfolio of patents for fifth-generation (5G) wireless technology, the next major upgrade of worldwide systems expected to roll out in the next ten years. Analysts suspected, even before the deal was public, that Nokia’s motivations were securing IP dominance.  Tech industry types have given a name to companies that shift away from large scale manufacturing, employment and economic growth toward patent assertion and litigation—transformer trolls.

Transformer trolls raise consumer prices and distort markets through unnecessary litigation costs.  Often times, productive companies are left to choose between an unreasonable licensing agreement and the threat of litigation. As a result, these companies face greater costs, which translate to higher prices or decreased research and development, thereby harming competition and innovation. It amounts to little more than a hidden “tax” on the price of goods, especially in industries that rely heavily on IP rights in product development, such as consumer electronics.

Nokia is not the first company to take this route. In 2011 Ericsson sold its share of a handset joint venture to its partner, Sony, but retained a large portfolio of wireless patents. “We are not into selling patents,” CEO Hans Vestberg said at the time. “We want to get the recurrent revenue and we want to sit on them.”

Since then, Ericsson has been accused of gouging customers on patent licensing fees. One result has been a series of lawsuits with Apple after negotiations over licensing broke down.

As manufacturers, Nokia and Ericsson participated in mutually beneficial multilateral cross licensing agreements that collected and distributed patent revenues among the many equipment suppliers, all of whom relied on patented innovations developed by individual companies. There’s no such patent peace with transformer trolls. Since they do not manufacturer anything, they do not require any patents owned by others.

The explosion in tech patents and their innate complexity when it comes to asserting validation and infringement in court have unfairly tilted the risk/reward formula of litigation toward trolls. Sound patent reform will rebalance the proposition, still allowing patent owners to profit from their innovations, but it will curtail predatory practices that aim only to exploit weaknesses in the law.

The article was originally published in The Hill, May 5, 2015.

Patent trolls: Congress Gets Down to Business

White Castle might not be the first company that comes to mind when high tech is mentioned, but the restaurant chain found itself in the middle of the patent troll controversy when it started sending menu updates from its headquarters to digital screens in restaurants around the country.

“We received a letter basically demanding payment not for the technology in the board itself but the process of our sending the information out to the menu boards,” Jamie Richardson, the vice president of corporate relations at White Castle, told Legal Newsline. “We don’t have the global resources that some companies do. So it’s really slowed us down. We’re definitely a lot more reluctant to try new technology.”

It was another example of how bold patent trolls, or patent assertion entities (PAE), have become.

The White Castle case illustrates how PAEs, which exist only to stockpile patents and sue anyone who might come close matching the concept, are not just targeting a handful of powerful Silicon Valley corporations. These days any enterprise that employs any new technology — even if it’s as common as digital signage — risks a dreaded cease-and-desist letter.

Research by an MIT economist found that, during the study period, sales of imaging software had declined by one-third relative to other medical imaging products. The study determined it was patent litigation, not a general slowdown in hospital demand, that was behind the drop.

All this is perhaps why, despite the ultra-partisan atmosphere in Washington, lawmakers are building bipartisan consensus to address the issue. In the House, Rep. Bob Goodlatte (R-Va.) introduced the latest round of patent reform legislation last week.

Goodlatte’s bill is expected to have provisions that aim to force patent trolls, if they lose a frivolous lawsuit, to pay defendants’ legal fees; limit the scope of discovery so that targets don’t drown in expensive and time-consuming requests; and require plaintiffs to be more specific in their infringement charges.

Meanwhile, the Senate plans to introduce a similar bill in the first few months, according to Senate Minority Whip John Cornyn (R-Texas). President Barack Obama has also lent his support through a series of executive orders that strengthened the U.S. Patent & Trade Office’s ability to deal with the often arcane language in technology and software patents.

These actions can go far toward curtailing traditional patent trolling, but as policymakers in D.C. move forward, they should also consider the many faces of patent trolling, some of which you may already know. Here are two that I address in my new Heartland Institute white paper, “Why Patent Reforms Are Needed: Intellectual Property Abuses Threaten Innovation and Cost Consumers Billions”: 

Transformer trolls: Well-known brands that shift their business models to focus on extracting revenues from their war chests of patents. One example is Nokia, once the most successful mobile technology manufacturer. Although it sold its handset manufacturing operations to Microsoft in 2014, it retained most of its patent portfolio. Its CEO made no secret of the company’s patent assertion and aggressive licensing demands, as the core of its business model evolved away from producing anything. Though the word “troll” may conjure a more iniquitous image, the reality is that patent assertion is a lucrative practice that offers new revenues to companies of diminished manufacturing relevancy.

Foreign government-sponsored patent trolls: Think a small company’s cease-and-desist letter will have a chilling effect on innovation? Wait until you get one from the People’s Republic of China. Beijing has backed China’s Ruichuan IPR Funds with $50 billion to acquire patents that will be used in actions against U.S. companies. It’s not just China; South Korea, Taiwan, Japan and France have all formed state-sponsored PAEs as well. It’s the latest form of government subsidies to their native private companies by providing them a boost in the global market. As negotiations continue on the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP), two major international trade agreements that stand to set new rules for global trade between the U.S. and Europe and the U.S. and Asia for years to come, stakeholders should consider including binding oversight on the issue.

In addressing these varied threats, patent reform will require a bipartisan, multilateral effort across several federal agencies, including the USPTO and the U.S. Commerce Department. It’s heartening to see that the White House and congressional leadership have signed on. Goodlatte’s bill is a good place to start.

Originally published Feb. 11, 2015 at Computerworld.com

Patent Trolling Damages the Entire Economy

They called it “the mother of all patent battles.” When the U.S. Court of Appeals for the Federal Circuit invalidated Soverain Software’s claim on the patent for the “shopping cart” feature on almost all e-commerce sites, many thought it was a turning point in the battle against “patent trolls.”

Although Soverain Software outwardly appeared to be a functioning enterprise complete with an impressive product suite, this image was in fact a carefully crafted façade.

Until the fateful court decision, Soverain Software was among the most feared patent assertion entities (PAEs) in the technology industry. By pressing its claim to the shopping cart patent in court, the company won a $40 million settlement from retailing giant Amazon.com, followed by decisions against Avon and Victoria’s Secret that netted $17.9 million. In 2012, Soverain launched a blitzkrieg of patent suits against Home Depot, Macy’s, Best Buy, Radio Shack, Walgreens and a relative unknown online retailer called Newegg.

However Newegg stood up to Soverain, even after it lost the initial case in a lower court. During its appeal, Newegg successfully illustrated that “prior art” existed for the shopping cart function, resulting in the dismissal of Soverain’s case against Newegg and all the other retailers.

But Soverain Software’s strong arm tactics shouldn’t have cost any company that much in time and resources to defeat a questionable patent claim. As I address in my new Heartland Institute white paper, “Why Patent Reforms Are Needed: Intellectual Property Abuses Threaten Innovation and Cost Consumers Billions,” patent trolls pervert the intentions of patent law, which is to assure inventors have the opportunity to profit from their innovations.

Patent trolls manufacture nothing, and unlike colleges and universities, which use patent royalties to advance further research, most non-practicing entities (NPEs) are shakedown artists. They often stockpile otherwise largely worthless patents purchased at fire sale prices, then attempt to claim rights to any innovator whose work seems similar enough to make infringement threats and claims.

The median damages awarded to trolls in 2013 was $4.3 million, a study by PricewaterhouseCoopers found, and the number of annual patent suits filed grew by 25 percent in 2013 to almost 6,500 cases. NPEs accounted for 67 percent of them, up from 28 percent five years ago.

Thankfully, defendants such as Newegg are winning at the appellate level, prompting more companies to defend themselves. The U.S. Supreme Court struck back at patent trolling in two rulings last year that will require complaints to be much more specific about the nature of the infringement. This will help filter out frivolous, vaguely worded filings yet still allow legitimate grievances to have their day in court.

Moreover, discussions regarding NPEs have broadened considerably; now including less traditional trolling such as foreign state-sponsored patent assertion entities that, similar to domestic trolls, bog down the global technology industry in legal battles over questionable infringement claims. Unlike domestic patent trolls, whose objective is a settlement, award, or license fee, state-sponsored PAEs are a new form of protectionism and government subsidization of private enterprise. These foreign entities orchestrate legal intellectual property battles in courts around the world and crown their native businesses as champions. Their targeting of foreign competition is essentially using litigation to subsidize their domestic interests.

Government-sponsored PAEs lock-up patents for any technology or device that might conceivably compete with its key domestic industries. Instead of slapping tariffs on imported products that compete with homegrown industries as they once did, governments are dubiously applying patent law to extract a “tax” on any product that threatens native commercial interests.

President Barack Obama – through executive orders to bolster the U.S. Patent and Trade Office – and Congress – through proposed legislation – are tackling patent abuse head on. While legislation stalled in 2014, the Republican leadership in both the Senate and House is moving forward with new legislation likely to win support from leading Democrats such as Sens. Patrick Leahy (D-VT) and Charles Schumer (D-NY).

Any new legislation should recognize that intellectual property protections were written into the Constitution. But NPEs have so twisted the process that they subvert the very innovation patent law is intended to nurture. These abuses of the process harm the broader economy and should be stopped.

Originally published Feb, 10, 2015 on Breitbart.com

Foreign Government Patent Trolling: A New Form of Trade Protectionism

It can be disconcerting – especially if you are on foreign soil – when a phalanx of armed police march into an exhibition hall and head directly to your booth.

Just ask U.S. company SanDisk and the 50 others that had this experience at the 2006 CeBIT exhibition in Hannover, Germany, an annual international showcase for the latest in consumer and commercial computer and information technology. German police were enforcing a court order issued on behalf of Sisvel, the Italian government-sponsored patent assertion entity (PAE), which claimed SanDisk’s MP3 players infringed on a patent it held. Although SanDisk disputed the allegation, police forced booth personnel to remove all MP3 players it had on display.

Sisvel’s action was among the first volleys in what has grown into a full-fledged war within international trade circles over patent licensing and alleged assertion of acquired rights over production of products.

Just as in the U.S., where both PAEs and non-practicing entities – companies that manufacture nothing and exist only to assert often-expansive libraries of patents – plague technology-reliant businesses and developers, government-sponsored patent trolls bog down the global technology industry in legal battles over frequently questionable infringement claims.

In recent years, the governments of South Korea, Taiwan, Japan, France and China have formed state-sponsored PAEs bent on acquiring all the patents they can, regardless of where the patent is filed or who the filer is, in order to attack international economic competitors by alleging infringement. For example, Intellectual Discovery, the Korean government PAE, has bought more than 200 patents, including one for retinal eye scan technology from Singaporean chipmaker Avago Technologies Ltd., according to U.S. government records. The Chinese government reportedly has backed China’s Ruichuan IPR Funds with a whopping $50 billion to acquire patents that will be used in actions against U.S. companies among others.

Patent trolling in general can be a drag on innovators and entrepreneurs who ultimately spend their limited resources on legal defenses instead of research and development. In 2008, American Intellectual Property Law Association put the median cost of defending a patent claim at $600,000 – just in cases when less than $1 million was at risk. The median cost was $5 million in larger figure infringement claims. Litigation costs U.S. businesses $80 billion a year, according to a 2014 report from Lex Machina, a consulting firm that tracks patent litigation.

Now that foreign governments have become involved in blatantly anti-competitive practices, patent defense can become even more of a jurisdictional and financial nightmare. As I address in a new white paper released today by the Heartland Institute – “Why Patent Reforms Are Needed: Intellectual Property Abuses Threaten Innovation and Cost Consumers Billions” – trolls’ most notable innovations may be the variety of forms they take while they seek to extract revenue from their targets.

Unlike domestic patent trolls, whose objective is a settlement or license fee, state-sponsored PAEs are a newer form of protectionism and government subsidization of private enterprise. Often, government-sponsored PAEs aim to lock-up patents for any technology or device that might conceivably compete with its key domestic industries. Instead of slapping tariffs on imported products which compete with homegrown industries as they once did, governments are dubiously applying patent law to extract a “tax” on any product that threatens native commercial interests.

The European Centre for International Political Economy (ECIPE) characterizes state-sponsored PAEs as the “next generation trade defense,” citing the French government’s troll as an example of the entity’s own admission to their aggressive mission: “Some, like France Brevets, even admit to being retaliatory or discriminatory instruments against foreign actors regardless of whether the original claim is legitimate or not.”

Questionable use of intellectual property internationally is usually more of a trade issue than a legal concern. In the past, most disputes centered on state-owned enterprises appropriating intellectual property from private sectors in other countries, and seeking to avoid payment of patent license fees. Now it is the foreign government claiming intellectual property ownership and pressing foreign companies for payment.

While legislative efforts to address domestic patent trolling may be welcome progress, issues created by government-sponsored PAEs might only be addressable within trade negotiations and agreements. One idea is to include binding oversight within the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership (TTIP),  two major international trade agreements currently being negotiated that stand to set new rules for global trade between the U.S. and Europe and the U.S. and Asia for years to come.

An increasingly global economy needs controls, which would support the open markets and free trade that are vital to global economic growth and allow U.S. companies to field questions about their technology from interested customers, not local police.

Originally published Feb. 10, 2015 by CNS News.