Friday, February 28, 2014

Some Upcoming Conferences of Note

Three upcoming conferences that readers might find interesting are as follows.

First, on April 4-5, the University of San Diego Law School will be hosting PatCon 4:  The Annual Patent Conference, billed as "the  largest annual conference for patent scholars in the world."  Among the speakers will be Andrew Byrnes (Chief of Staff, USPTO); U.S. District Judges Benitez, Gallo, and Sabraw; and a host of academics, including Dan Burk, John Duffy, Mark Lemley, Michael Meurer, David Schwartz, and many more.  I'll be speaking on day two during a session on remedies, as also will be Norman Siebrasse.  More information is available here.  

Second,  Law Seminars International is hosting an upcoming conference titled "Litigating Patent Damages: Strategic Issues for Proving and Refuting Damages Claims."  I'm not speaking at this one, but I did speak at one of these Law Seminars International conferences a few years ago and found the content (including but not limited to my own!) to be quite good.  Among the speakers at this upcoming conference with be Alan Cox, Roy Epstein, Christopher Marchese, Gregory Sidak, and U.S. Magistrate Judge Paul Singh Grewel.  The conference will be held in San Francisco on May 29-30.  Here's a link.

Third, the EPLaw Blog recently mentioned an upcoming International Symposium on Patent Litigation in Japan and Germany, to be held in Munich on October 2.  Here is a link.  Among the speakers are (from Japan) Judge Toshiaki Iimura and former Judge Ryoichi Mimura, and (from Germany) Judges Peter Meier-Beck, Klaus Grabinski, and Thomas Kühnen.  The conference will coincide with Oktoberfest.  I'd love to find a way to attend this one.

Wednesday, February 26, 2014

U.S. Supreme Court Hears Oral Argument on Awards of Attorneys' Fees in Patent Litigation

As I have mentioned previously, last fall the U.S. Supreme Court agreed to review two cases--Highmark Inc. v. Allcare Health Mgt. Sys., Docket No. 12-1163, and Octane Fitness, LLC v. Icon Health & Fitness, Inc., Docket No. 12-1184--addressing the topic of attorneys' fees awards in patent cases.  The question presented in Octane Fitness is "Does the Federal Circuit's promulgation of a rigid and exclusive two-part test for determining whether a case is 'exceptional' under 35 U.S.C. § 285 improperly appropriate a district court's discretionary authority to award attorney fees to prevailing accused infringers in contravention of statutory intent and this Court's precedent, thereby raising the standard for accused infringers (but not patentees) to recoup fees and encouraging patent plaintiffs to bring spurious patent cases to cause competitive harm or coerce unwarranted settlements from defendants?"  The question presented in Highmark is "Whether a district court's exceptional-case finding under 35 U.S.C. § 285, based on its judgment that a suit is objectively baseless, is entitled to deference." 

To put the matter in context, unlike many countries the U.S. does not routinely award the prevailing party some or all of its attorneys' fees.  Although there are some exceptions, the general rule (sometimes called the "American Rule") is that each side bears its own attorneys' fees.  In patent law in particular, the governing rule is set forth in section 285 of the Patent Act, which states "The court in exceptional cases may award reasonable attorney fees to the prevailing party."  The moving party must establish "exceptional circumstances" by clear and convincing evidence, and only a limited number of circumstances justify fee awards in patent cases, including  “inequitable conduct before the PTO; litigation misconduct; vexatious, unjustified, and otherwise bad faith litigation; a frivolous suit or willful infringement.”  Wedgetail, Ltd. v. Huddleston Deluxe, Inc., 576 F.3d 1302, 1304 (Fed. Cir. 2009).    Moreover, according to Federal Circuit precedent:
Absent misconduct in litigation or in securing the patent, a case may be found exceptional under § 285 only if (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless. . . .  Subjective bad faith by the offending party can be upheld on review if, despite the lack of an explicit finding by the district court, other findings of fact are compatible with, and only with, that view. . . . There exists a “presumption that the assertion of infringement of a duly granted patent is made in good faith.” . . .  Factual findings regarding subjective bad faith are reviewed for clear error. . . .  
To be objectively baseless, the patentee’s assertions—whether manifested in its infringement allegations or its claim construction positions—“must be such that no reasonable litigant could reasonably expect success on the merits.” . . .   As a question of law, this court reviews a district court’s determination of whether a party’s claim or defense in a patent case is objectively baseless without deference. . . .  
The Octane Fitness case will address what the appropriate standard is for determining that a case is "exceptional" (e.g., "objective baselessness" or something else).  The Highmark case will address whether the district court's determination that a case is exceptional is entitled to deference or is reviewed de novo on appeal.

Oral argument in these two cases was heard this morning (first Octane Fitness, then Highmark), and the transcripts can be downloaded here.  In Octane Fitness much of the argument centered around, as Justice Kennedy put it, "a search for adjectives."  Petitioner's counsel argued that the current standard of "objectively baseless" or "objectively meritless" effectively means that prevailing parties are awarded fees only when the litigation is frivolous--and that litigation is only rarely frivolous.  He suggested as an alternative "without substantial merit, unreasonably weak, or low likelihood of success." He also argued that litigation misconduct should be a relevant factor, and that when misconduct is present a case that might not qualify as "without substantial merit" could qualify as "exceptional."  Viewing this as a proposal for some sort of totality of circumstances test however, Justice Alito asked how (in particular) district court judges who don't hear many patent cases are supposed to know what is "exceptional," and suggested that this might be a reason for deferring to the Federal Circuit's expertise.  Justice Scalia also observed that "you really cannot answer the question of what adjectives should be attached to 'meritless'", because if the test is a totality of the circumstances test meritlessness "is only one factor and it doesn't have to be an absolute degree of meritlessness."  Chief Justice Roberts chimed in by asking whether the petitioner agreed with the Solicitor General's position that the standard should be "necessary to prevent gross injustice," and expressed surprise when counsel stated yes, because (to the Chief) "gross injustice sounds like a very tiny portion of cases, lower than meritless."  Justice Kagan then honed in on what factors in particular the petitioner believes would be relevant:
JUSTICE KAGAN: Mr. Telscher, could I just ask very quickly the factors that you would think a Court should consider. One is the degree to which the case is meritless. Another I presume is bad faith.  Another is litigation misconduct. Is there anything else or are those the three?
MR. TELSCHER: No, there's more. I think it's there's no exhaustive list and, for example, even in this case and in ParkIn Theaters where the Court said other equitable consideration. We believe it is a totality of the circumstances, anything that bears on the gross injustice and the uncommon nature of the case. So, for example, in this case the fact that Icon brought a patent that it, with all of its resources, couldn't commercialize, was indisputably worthless, to this day they've never made a product under this patent, that's a factor that bears on the equities of this case and the uncommon nature and is one that doesn't fall neatly within those categories.
The fact that our client licensed under a different patent that shows its linkage is another factor that shows that what they are asserting isn't reasonable. So I don't think there is a laundry list, but the categories that you identified are the big ones.
Assistant Solicitor General Roman Martinez was up next, and proposed the following framework:
Section 285 grants district courts discretionary authority to look at the totality of the circumstances and award fees when necessary to prevent gross injustice. Such awards can be proper in unusual cases where the losing party has committed bad faith or harassing conduct during the litigation or has advanced objectively unreasonable legal arguments, just as courts had held under the 1946 statute. The Court should restore this understanding of Section 285 and make four additional points that we think will clarify the inquiry for the District Courts:
First and most importantly, the Court should say that baselessness and bad faith do not both have to be present in a case in order to justify a fee award;
Second, the Court should the Court should say that District Courts can grant fees based on a combination of different factors even if no single factor would necessarily support the award on its own;
Third, the Court should say that an objectively unreasonable argument can trigger a fee award even if that argument is not so unreasonable that it's actually considered frivolous;
And fourth, the Court should say that clear and convincing evidence is not required.
Respondent's counsel argued that "objectively baseless" does not mean "zero merit," but rather lacking in probable cause.  He also argued that the decision to sue for patent infringement is not without risk, because it potentially puts the patent's validity in question or in appropriate circumstances might open the plaintiff up to a charge of inequitable conduct (intentionally failing to disclose material information during the course of patent prosecution), which if proven renders the patent unenforceable.  Counsel also argued that the question whether "clear and convincing" is the appropriate burden of proof is not properly subsumed within the question on which the Court granted certiorari.

Reading the tea leaves can be risky, but based on various justices' comments and questions I would guess the Court will reverse and adopt some sort of totality of the circumstances, equitable discretion standard in which the fact that the litigation was "objectively unreasonable" could by itself support an award of fees.  I'm not sure what they'll do, if anything, about the "clear and convincing evidence" issue.

As for Highmark, petitioner's counsel and Assistant Solicitor General Brian Fletcher both argued in support of an abuse of discretion standard of appellate review, citing (among other reasons) the "substantial expenditure of appellate resources" that a de novo standard entails.  They also acknowledged that the Court's resolution of Octane Fitness may go a long way to resolving the standard of appellate review question as well.  Respondent's counsel focused on the value of having a uniform body (the Federal Circuit) deciding questions of law, such as claim construction, that might be entailed in the question of whether the underlying litigation was "objectively baseless" (or whatever the standard turns out to be).  Justice Scalia pushed back on this issue, stating that as he understood the statute it confers discretion, and thus it is not "an area where Congress expected uniformity."

My guess here is that the Court will adopt some sort of abuse of discretion standard that takes into account, among other things, whether the district court correctly applied the law and whether it acted within proper boundaries in deciding whether the arguments a claimant made, though ultimately unsuccessful, where within the realm of reasonableness.

At the end of the day, it might be easier simply to award attorneys' fees to the prevailing party as a matter of course, and thus avoid all or most of these complex issues; but that would require legislative action and a sharp break with tradition, and I don't see that happening in this country any time soon.  Most likely we will have fee awards in a somewhat broader classes of cases, however, and that might have the beneficent effect of deterring some relatively meritless claims.  It also probably will mean that Congress won't need to amend section 285 in the context of its pending patent reform efforts.

Monday, February 24, 2014

AIPPI Q236: Relief in IP Proceedings Other than Injunctions or Damages, Part 1

Many readers will be familiar with AIPPI (the Association Internationale pour la Protection de la Propriété Intellectuelle, or International Association for the Protection of Intellectual Property).  For those who are not, here is a description of the organization's aims and purposes, from its website:
The International Association for the Protection of Intellectual Property, generally known under the abbreviated name AIPPI, is the world's leading International Organization dedicated to the development and improvement of the regimes for the protection of intellectual property.

It is a politically neutral, non-profit organization, domiciled in Switzerland which currently has almost 9000 Members representing more than 100 countries.

The objective of AIPPI is to improve and promote the protection of intellectual property on both an international and national basis. It pursues this objective by working for the development, expansion and improvement of international and regional treaties and agreements and also of national laws relating to intellectual property.

It operates by conducting studies of existing national laws and proposes measures to achieve harmonisation of these laws on an international basis. In this context AIPPI has become increasingly concerned with issues concerning the enforcement of intellectual property rights.
To this end, AIPPI formulates questions to which its national member groups prepare reports, and then drafts and considers resolutions for adoption.

One recent committee was No. Q236, titled "Relief in IP Proceedings Other than Injunctions or Damages."  (Here is a link to the relevant webpage, which includes the resolutions, summary reports, group reports, working guidelines, and an introductory plenary session document)  Its main task was "to prepare a draft resolution to be presented at the AIPPI ExCo Helsinki, Finland," and its working question described as follows:
The availability of relief for infringement is fundamental to the protection of intellectual property rights (IPRs). In Hyderabad last year, AIPPI adopted Resolution Q219 regarding injunctive relief in the case of infringements of IPRs. In Boston in 2008, AIPPI adopted Resolution Q203 dealing with damages in the context of trademark infringement, and notably counterfeiting and piracy of trademarks. Besides injunctive relief and damages, there are other remedies permitting ‘effective action against any act of infringement’ (Article 41 (1) TRIPS) which AIPPI has not studied so far. We propose to explore the availability of relief in IP proceedings other than injunctions or damages.

These other forms of relief include, for example, seizure of infringing goods, delivery up and destruction of infringing goods, rectification, publication of the court’s judgment and declaratory relief. In addition, there may be other forms of monetary relief than damages, e.g. account of profits where the infringer is asked to surrender the profits earned as a result of the IPR infringement. While the Working Guidelines Q203 briefly addressed account of profits, the Working Committee and, hence, the Resolution Q203 did not further consider account of profits as a separate form of monetary relief. Alternatively, the plaintiff may obtain an award of monetary reparation for moral tort or an award of reasonable royalty based on unjust enrichment law. Finally, in addition to these more general forms of relief, there are also other forms of relief which are heavily fact specific, e.g. alteration of infringing goods such as change/removal of packaging, and modifications to technology by way of a workaround.
The list of specific questions posed to the national groups, available here, included the following:

1)            What forms of Additional Relief are available in IP proceedings?

2)            Are those forms of Additional Relief available for all types of IPRs? If not, please indicate what types of Additional Relief are available for what types of IPRs. . . .

3)            Having regard to the types of Additional Relief available addressed by questions 1 and 2, what are the criteria for the grant of that relief? There may be different criteria for the different types of Additional Relief identified. Hence, the Groups are asked to address the individual criteria for each type of Additional Relief that is available in IP proceedings in their country.

4)            Is there any element of judicial discretion in relation to the grant of any form of Additional Relief addressed in questions 1 and 2? If so, how is that discretion applied?

5)            Are any particular forms of Additional Relief invariably ordered in certain circumstances? If so, what types of Additional Relief and in what circumstances? Does that occur pursuant to mandatory statutory regulation, or by reason of the practice of the relevant court (or applicable administrative body)?

6)            Are there any specific considerations relevant to particular IPR holders? If so, what considerations are relevant and in respect of what IPR holders?

7)            Can a court (or applicable administrative body) order any form of Additional Relief directly against a non‑party to an IP proceeding?

8)            If yes to question 7:

a)    in what circumstances;

b)    what forms of Additional Relief may be ordered; and

c)    in respect of what types of IPR infringement?

9)            Is a court (or applicable administrative body), in making an order for Additional Relief against an IPR infringer who is a party to the IP proceeding, obliged to consider the impact of such order on any non‑party? If so, how does the court (or applicable administrative body) fulfil that obligation?

10)         If yes to question 7 or 9, is the court (or applicable administrative body) obliged to give any relevant non‑party an opportunity to be heard? If so, how is that effected? . . .
Groups are invited to put forward proposals for the adoption of harmonised rules in relation to Additional Relief in IP proceedings. More specifically, the Groups are invited to answer the following questions:

11)         What forms of Additional Relief should be available in IP proceedings, and for what types of IPRs?

12)         What should the criteria be for the grant of the types of Additional Relief identified in response to question 11?

13)         Should there be any specific considerations relevant to particular IPR holders? If so, what should those considerations be and in respect of which IPR holders?

14)         Should any particular form of Additional Relief be mandatory in certain circumstances? If so, what types of Additional Relief and in what circumstances?

15)         Should a court (or applicable administrative body) be empowered to order any form of Additional Relief directly against a non-party to an IP proceeding?

16)         If yes, to question 15:

a)   in what circumstances;

b)   what forms of Additional Relief should a court (or applicable administrative body) be empowered to order; and

c)   in respect of what types of IPR infringement?

17)         Should a court (or applicable administrative body), in making an order against an IPR infringer who is a party to the proceeding, be obliged to consider the impact of such order on any non-party? If yes, how should the court (or applicable administrative body) fulfil that obligation?

18)         If yes to question 15 or 17, should the court (or applicable administrative body) be obliged to give any relevant non-party an opportunity to be heard? If so, how should that be effected?

19)         Please provide any other proposals in respect of harmonisation as to the types of Additional Relief that should be available in IP proceedings and the conditions in which such relief should be ordered.
Some future posts will discuss points I found interesting in some of the national group reports, as well as the resolution that was adopted on September 10, 2013.


Friday, February 21, 2014

TIPLJ Session 7: Litigation Perspectives on FRAND

This final session is the one I'm participating in, so I wouldn't be able to blog about it.  I will be presenting this paper again, and I have previously blogged on earlier versions of the Page and Haw papers.  I also recommend Jorge Contreras's paper "A Brief History of FRAND," which I read on the trip to Austin.  With that, I will close today's live blogging and wish everyone a pleasant weekend.

TIPLJ Session 6: Laurie Fitzgerald (McKool Smith) on "Standardization, Essentiality, and Estimating Patent Strength"

3 topics:  How is an open standard created?  What makes a patent essential?  And how to estimate a patent owner's essential patent strength?

Wireless tech now being adopted beyond the telecom industry--medical devices, automotives, etc.  As standardized technologies spread to other industries, many more lawyers will have to deal with these issues.

Standardization;  a collaborative and competitive process.  Requirements agreed upon at the outset.  Concurrent R&D by participants who make competing technical contributions.  Consensus selection of "approved contributions."  Jointly owned standard.

Making these technical contributions is a risky endeavor.  R&D performed years before adoption.  Why would a company submit a technical contribution?  That's where FRAND comes into play.  You're guaranteed FRAND licensing revenue if your technical contribution is adopted.  And there may be other strategic purposes of participating.  A company that develops a portfolio of SEPs can be in a better position to offset its own licensing costs through cross-licensing.  Or your products may incorporate a standard and you want to help influence the selection of a good standard.

What makes a standard essential?  Look to SSO bylawss.  File declarations that patents are essential, obligated to license on FRAND terms.  No oversight by SSO whether it really is essential.  In re Innovatio IP Ventures case has most comprehensive analysis of essentiality by a U.S. court.  3 key aspects of decision:  who has burden of proof to establish existence of RAND obligation?  Comparable to existence of license, so defendant bears burden of proving this; it's a limitation on damages.  Defendant proving essentiality of patent.  In a sense, defendant is proving the fact of infringement.  [I hadn't thought about that way before; very interesting.]  Does the RAND commitment apply on a patent-by-patent or claim-by-claim basis?  Claim-by-claim, looking to IEEE bylaws.  Finally, what is the meaning of "essential patent claim"?  Two-part test from IEEE bylaws cited by Judge Holderman.  Rejected argument that presence of claim elements not required by standard don't necessarily render claim nonessential.

OneBlue case before Judge Stark in Delaware will address the essentiality issue as well and will reverse bifurcate, as did Judge Holderman.

Estimating an innovator's essential patent strength in a standard.  Why does an innovator's essential patent strength relative to others matter?  Relevant to cross-licensing and to FRAND offers.  Is it possible to determine precisely who owns each patent essential to a standard?  Probably not.  Can't determine exactly how many patents are essential to a standard and who owns them; would need to know all the cross-licensing deals.  

Four possible approaches for estimating an innovator's essential patent strength in a standard.  Declaration counting is one.  Most commonly used database is ETSI's.  Seems reasonable on surface, though time consuming, but declarations are self-policing.  May skew results.  Also, declarations may cover some patent applications that were never granted or were limited in scope.  Another approach is keyword searching.  Flaws:  no guarantee that just because a particular phrase (such as "LTE") are in a patent doesn't mean it's a SEP, or that the word even appears in the claims.  Third, could try limited analysis of declared essential patents.  Depends on the quality of your analysis; requires deep technical understanding and understanding of patent law.  Resource-intensive.  

Fourth, most reliable is to focus on approved contributions.  Assumption that companies seek patent protection on these contributions; application that corresponds to an approved contribution is likely to be essential.   Identify relevant technical contributions to standard during pertinent time period. Then identify the subset of relevant technical contributions that were approved.  Then assign credit to companies that authored the approved contributions.  Less subjective.  

Question from the audience:  when you are the defendant in a case and want the benefit of FRAND, but also want to avoid a finding of infringement, how do you do that?  Response:  may have to pick your poison, argue the other matter in the alternative.  Or make your case through other side's expert.  Or just agree to fight over damages only.

Contreras:  are the studies publicly available?  Response:  Yes.      



TIPLJ Session 5: Economic Perspectives on FRAND (moderated by Professor Abraham Wickelgren of the University of Texas)

First speaker is Thomas Knight, economics Ph.D. candidate at the University of Florida.  Coauthored paper with Roger Blair.  In deciding what constitutes a reasonable rate, can economic analysis determine the ex ante bargaining solution?  Economics can get us part of the way, but in terms of selecting a particular one, it only gets us so far.  What would have happened had the standard not been adopted?  Can consider alternatives, etc., but can't necessarily identify a unique outcome as the correct one.  Bargaining outcomes are determined by the negotiating process.  Nash bargaining is axiomatic but doesn't tell us how the outcome is arrived at.  Often comes to 50/50 split.  Or there could be an ultimatum game; accept or reject, not counteroffers, winner-take-all.  Idea of a single reasonable rate not supported by economic theory.

Second speaker is Keith Hylton, Boston University, "A Unified Framework for Competition Policy and Innovation Policy".  Common to view them as policies generated separately.  But they can be viewed as two sides of the same coin.  Simple model of optimal penalty and its implications.  Optimal fine is unambiguously less than the amount that internalizes consumer harm.  A more lenient policy than the Chicago School result.  Optimal "fine" actually may be a reward or subsidy.  Innovation gets greater weight than it typically gets in competition policy.  Slide shows the familiar downward sloping demand curve, deadweight loss (D), consumer surplus (W), transfer from consumers to producer (T).  But there can also be an efficiency gain if marginal cost decreases, designated "E" on the diagram.  Internalizing consumer harm:  static penalty = (T+D)/P + C, where P is probability enforcer will go after monopolizing firm and C is the cost of enforcement. But now assume that innovation can create monopoly power.  This changes the story.  Optimal innovation subsidy = (- W/P) + C.  Give the monopolist a subsidy for investing in lowering marginal cost.  The dynamic penalty is (1 - theta)(static penalty) + theta(innovation subsidy).  What is theta?  It lies between 1 and 0 (but can't be 0).  Bias toward innovation.  Theta "is a function of the ratio of the sensitivity (elasticity) of innovation with respect to penalty to the sensitivity of monopolization with respect to penalty."   Hylton believes the model implies more antitrust deference with respect to, e.g., pharmaceuticals:  need to protect innovation incentives.  [My thought:  yes, we need to protect innovation incentives, but it's always a matter of degree.  Not all drugs are life saving drugs, access is also important, etc.]  Maybe don't inject antitrust law into FRAND disputes; rely on patent and contract law.  [I'm largely in agreement with that, for reasons I will discuss in connection with my paper.]

Third speaker:  Allan Shampine (executive VP at Compass Lexicon).  Holdup is one problem; strategic action is another.  During standard setting process, members could try to rig the system, e.g., agree to charge each other a low rate and a  higher rate to others ex post.  SSOs realize these are potential problems; FRAND intended to address them.  "Reasonable" according to most economists means the ex ante approach.  Figuring out exactly how to do it can be tricky, though.  And setting rates in advance is costly and often would be wasted effort, where standard wasn't successful.  But to say it's hard doesn't just mean it's difficult but also that there is huge uncertainty.  Ex ante approach is correct theoretically, but also we need something that works.  Sometimes ex ante announcements are best.  Arbitration can reduce costs of determining.  Shampine suggests thinking about the nondiscrimination aspect (citing work with Dennis Carlton).  But what is "similarly situated"?  A more precise definition:  firms are similarly situated if they have the same incremental value relative to whatever we are going to use, but suffers from same problem as ex ante approach.  Suggests using a broader version of nondiscrimination.  Smallest compliant element:  everyone pays same rate.  Not a perfect solution, but ensures that people won't be disadvantaged relative to one another.  Can help to reduce holdup.  Does potentially leave money on the table for the patent holder.  But can be very hard to tell is there is holdup or not.  Advantage of simple nondiscrimination rule is simplicity.  Probably rates should not rise over time, because difficult to tell why.  Another issue:  FRAND is not a cure-all.  Plenty of things that come up in patent negotiations that FRAND is not designed to address, such as royalty stacking.  How do  you apportion when many of the players are not at the table?  Though there is a lot of good thinking about this going on; still, FRAND may not be the best way to do it.  FRAND also doesn't help with weak patents.  Perhaps you could increase filing fees to deter frivolous assertions, or prohibit software patents, or whatever.  Or maybe licensees could sue SSO for antitrust violation--creating monopoly power.  To follow up with something that Knight said, the ex ante approach can tell you what the maximum surplus is, but not how to split it up.  Still can be helpful to set upper bounds. 

Moderator opens it up to questions from the audience.

Bill Page asks Keith Hylton:  does you model assume there will be both efficiency gains and losses?  For naked monopolization, the static model works fine.  Hylton:  yes, but for a lot of conduct it isn't naked monopolization.

Haw asks Hylton about the diagram and its relation to the Williamson diagram.  Does the product exist already?  Hylton:  no; if penalty is too large, product won't exist.  Haw:  in period 0, no market.  When does marginal cost go down?  Hylton:  When monopolization creates efficiency and increases monopolization.

Wickelgren:  so there is a period 1 where the firm could enter, produce, and face competition, but it won't if it can't enjoy a monopoly?  Hylton :  yes.  Wickelgren:  could we view this as two separate problems?  You enter the market and create a consumer surplus of W + T + D.  You could get a reward of W + T +  D but then there will be competition.  After optimal reward, penalty for anticompetitive action after the reward?

I asked whether the reduction in marginal cost was the innovation.  Answer: not necessarily.The innovation precedes this, then there is (say) an exclusive dealing arrangement that has both efficiency gains and increases monopolization.

Page:  why not just say that efficiency conduct is legal?  [Sorry, I didn't quite catch the response and discussion.]

I asked Shampine:  Economists often think that price discrimination isn't necessarily a bad thing.  In your model, is the principal concern that nondiscrimination provides an additional safeguard against holdup, or is it a safeguard against coalitions of SSO members engaging in favoritism towards themselves, or what?  Shampine:  both.  But strategic action is the principal rationale.

Wickelgren:  asks Knight about models with asymmetric information.  Knight:  Nash bargaining says little about strategic interaction.  Wickelgren:  what if we take a normative view that we want complete information, etc., and apply that, instead of a positive view?  Knight:  courts could.  And do.  Shampine:  I don't know why courts are so scared of Nash and game theory.  But if we are dealing with hypothetical information, once you figure out what you're bargaining over, you have to turn over to game theory; why should that be a problem?  Could suggest normative approach, e.g., this would be efficient if they did it this way.

John Golden, University of Texas:  To me, the real problem is how you assign value to these things.  Circularity to the whole process; these are legally generated rights, bargaining in shadow of law.  I'm not sure that worrying about the bargaining process is the key thing.  And juries can't process.  Problem is that parties are often orders of magnitude apart.  Hylton responds:  I'll try to bridge these two.  One issue is determination of royalties; the other is whether FRAND = injunction waiver.  On royalties, agreement to ex post determination of rates by somebody.  I don't see much of an antitrust/innovation conflict there.  The conflict is when the FTC or EC thinks a FRAND commitment means no injunction; introducing something from antitrust law that the parties didn't agree to.  [I don't agree with that.]   Shampine:  true enough that if parties are orders of magnitude off, just picking the upper bound is helpful. Figuring out how you split it is a less important issue.

My question:  if you always pick, say, the mean of the range of possible outcomes, wouldn't you expect to get things right in the aggregate over time?  In other words, how important is it to get the "right" outcome in every case if we are on average right?  Knight:  basic intuition seems correct.  investment decisions made ex post so if on average right, should be good enough.  Though can be complications in figuring the "average." 

David Taylor:  maybe the expectations approach I suggested isn't good for smaller firms.  Bigger impact on them if you get it wrong.  Knight:  yes, could be heterogeneity.                      

David Killough:  Innovation just means something that is different, not necessarily better.  Want to reward people who make better things.  Patents designed to produce innovations.  Market tells you what is better.  is that implied here?

Shampine:  very good point.  There is a spectrum.  Targeting rewards so as to maximize innovation a tricky problem.  Hylton:  I agree.  In my model, the company that made an innovation that had no value would get a penalty, not a subsidy.  W would be 0.

TIPLJ Session 4: David Hoffman on "FTC Regulations and Their Relation to FRAND"

Actually, the title of the presentation is "How Did You Get in Here:  Executive Agency Involvement with IP Issues," by David Hoffman and David Healey of Fish & Richardson.  Notes at the outset that this is not legal advice or the opinion of Fish Richardson, but intended to provoke discussion by practitioners.

1.  The U.S. Supreme Court's decision in FTC v. Actavis (the reverse payment case) last June gave a boost to the FTC's enforcement activities.  FTC thinks a large reverse payment is evidence that the patent owner is trying to pay off the generic to stay out of the market.  FTC's website says it supports legislation to end pay-for-delay settlements. 

2.  Patent pools:  DOJ and cross-licensing.  For the first time, the DOG denied approval to a patent pool in a business review letter.  DOJ also was concerned about MPEG LA pool barring Google from developing a competing standard; matter resolved.  Also mentions Apple eBooks case; most favored nations clauses in licenses between publishers and Apple set prices above those paid by Apple.  Pursued as a rule of reason case, but could have been a per se violation.

3.  Patent assertions entities (PAEs)--the new NPE.  DOJ/FTC workshop in December 2012.  Focused on new trend of large companies forming entities to enforce patents.  PAEs increasingly used by patent owners to enforce patents (e.g., MobilMedia Ideas, Mosaid).  No immunity for two actors jointly exploiting a patent or portfolio.  Notes Commissioner Ramirez's speech about PAEs and privateering. FTC investigations of PAEs are probably coming.  See MPHJ Technology Investments v. FC, fixed 1/13/14 in W.D. Tex., seeking declaration that FTC lacks jurisdiction, etc.  DOJ and FTC also pressing for disclosure of PAEs.

4.   White House Involvement:  USTR Froman's executive veto of ITC decision in Samsung v. Apple.  New executive orders on NPEs (announced yesterday).  Crowdsourcing prior art, improved technical training for patent examiners, new website for resources on patent litigation.  Patent reform mentioned in State of the Union address.

5.  State Attorneys General involvement with regard to MPHJ under state consumer protection laws.  According to EFF, MPHJ sent about 16,465 letters to small businesses asking for license of 5 scanner patents.  Asked for about $1000 per employee.  Received 17 licenses.  First patent suit filed 11/18/2013.  New York AG settlement (press release available online).  Set forth guidelines that AG will use in evaluating licensing requests:  no mass mailing or accusations and requires good faith basis; requires patent owner set forth basis for infringement, material information that reveals patent's likely invalidity; clear explanation of basis for licensing fee; reveal true identity of patent holder.  Nebraska AG issued cease and desist order against plaintiff Activision's counsel; cease and desist order enjoined by court, though.

Question from the audience regarding indemnification.  Response:  indemnifying very large number of customers can be very expensive.  But manufacturers won't want to lose customers either, so they may put themselves in the fray and enter into a settlement that covers customers.

TIPLJ Session 3: In House Perspectives on FRAND (moderated by Professor David Taylor, SMU)

First speaker is David Killough of Microsoft, on "One Litigator's FRAND Lessons Learned."  One misconception:  standard setting isn't necessarily about picking the "best" technology. It's more a question of "just pick one."  Think about plugs and sockets in different countries; one is not necessarily better than another.  Having a standard is valuable; consensus.  Second misconception:  it's not about picking patents.  That's not what the SSO engineers do.  And most technology in standards is not patented.  FRAND allows SSO participants to ignore patents.  They only worry about patents if they find out there's a patent that won't be covered by FRAND, then you try to design the standard around it.  But  there are a few bad apples that try to game the system

FRAND:  What's reasonable?  An SEP owner is not entitled to a royalty on the value conferred by standardization (lock-in or holdup value).  Ask:  what is the additional profit made from implementing the patented technology instead of the next best alternative technology?  A reasonable royalty is a fair share of that additional profit.  Usually a small number.

Be skeptical of comparable licenses.  Is the comparable a holdup situation?  Different standards, technologies, patents, not comparable.  Be careful about "friendly" cross-licenses, which may not be comparable.

FRAND:  what's next?  Nondiscriminatory?  Recent decisions in Japan and India:  concern that SEP owner didn't show other licenses to implementer.

Second speaker is Scott Gilfillan (Standards Counsel at Intel) on "FRAND, Standards and Patents".  How many standards in an iPhone?  iPhone 3--slide shows standardized technologies in red circles.  They are ubiquitous.  How does Intel perceive FRAND?  Four principles. First, injunctive relief is inappropriate except in limited cases where implemented not willing to license on FRAND terms.  Second, must be available to everyone.  Some SEP owners won't license; won't sue, but want to license customer only.  Third, royalty rates should reflect:  based on smallest compliant unit that infringes; value of alternative technologies considered during standard setting; avoid stacking.  Fourth, transferees must assume responsibility for FRAND commitments made to SSOs.  Part of the bargain for getting patent into standard.

Third speaker:  Rosanna Lipscomb (Competition Counsel at Google).  Focus on challenges for antitrust authorities in thinking about FRAND problems.  First, balancing two priorities:  holdup (by potential licensor) and holdout (by potential licensee).  Equally important to consider.  On the holdup side, problem is by now well understood.  FRAND commitment induces lock-in, then patent holder reneges on promise.  Has occurred, but more deterrence today as a result of enforcement efforts.  Holdout:  potential licensees refusing license even if on FRAND terms.  What constitutes a willing licensee?  If potential licensee is unwilling, shouldn't be allowed to expropriate IP just because it's part of a standard.  FTC in Motorola consent decree addressed what a willing/unwilling licensee is.  Set of circumstances in which Google/Motorola can seek injunctive relief.  First, offer written and binding six months before seek injunctive relief.  60 days prior, must submit reasonableness of rate to binding arbitration.  Balances holdup and holdout.  

Problem two is defining a relevant market; do SEPs have market power?  Breach of FRAND is unilteral act.  Under Sherman Act section 2, must define market.  Tempting to assume SEP = market power, but it's more complicated.  Patents don't equal market power.  Not all SEPs have market power.  Sometimes you have two standards competing for adoption by implementer.  Also, patents declared essential aren't always essential.  Antitrust authorities take it on a case-by-case basis.

Where is enforcement headed?  In academic literature and among practicioners and economists, FRAND commitment is FRAND commitment regardless of context.  Lipscomb and coauthor published article in 2009 titled "Best FRANDs Forever":  common thread:  FRAND commitment made, induced lock-in, breached.  Those were the essential components for enforcement actions.  Doesn't have to be an SSO.  See Unocal case (FRAND promise made outside SSO context).  FTC:  holdup can occur outside of SSO context.  We may start to see agencies take a closer look at these commitments whether from SSO context or otherwise.

Fourth speaker:  Luke McLeroy (Senior Counsel at Ericsson):  40% of world's mobile traffic passes through our equipment.  Depend on standards.  Different perspective on FRAND.  Look at FRAND in larger context as business enabler.  Advocate cautious approach to a FRAND system that has served well so far.  Hundreds of license agreements.

Lars Magnus Ericsson, founder of company, over a hundred years ago wrote to his wife about the U.S. patent system.  Bell controlled the telephone system at the time.  Anticompetitive.  This is how the telecom industry could operate without FRAND commitments.  More recent example:  in 1980s, no FRAND framework for 1G.  Many standards.  No tech sharing.  

How does FRAND enable standard setting?  SSOs don't standardize existing technology.  Cellular standards are blueprints.  SSO defines requirements for standard:  what we want to do.  Companies then model, test; come back with proposals for SSO.  Competition on technical merits.  End result:  state of the art with very best technical soluutions.  

Ericsson engineers working on 5G; expensive, risky, no guarantee will be adopted or that standard will be successful in 5 years.  Incentive is ability to license on FRAND terms.  

New entrants:  in 2006-07, Apple introduced iPhone.  Had never touched cellular tech.  Now a dominant player.  Were able to build product on tech that came before.  FRAND enables this.  R&D sharing.  FRAND has been a great success.   Must balance incentives to invest with availability to implementers.

Moderator David Taylor:  asks Scott Gilfillan what the sticking points are in deciding whether to join SSO.  Gilfillan:  Consider the technology, and what is Intel trying to do with this technology?  What is the burden on my IP portfolio?  Some SSOs have royalty-free or no-patent policies.  Things that take away patent value make it difficult to participate unless there is a very good business justification.  But Intel believes in the fairness principles he spoke about earlier.

Moderator:  asks Killough what fair and reasonable means.  Killough:says you're trying to identify what is the extra profit the patent allows.  Implementer gets some of the profit.  There is a sharing.  In deciding what is reasonable, try to ascertain what that extra profit is.  Often a very small number.  Applies equally in FRAND context as in patent damages context.  Tremendous value to patent once adopted, need to extract that out.  One good check on that is to consider royalty stacking.

Turns to Luke McLeroy.  A lot of what David said we agree with.  Reasonable aggregate rate is important.  But we disagree about incremental value approach.  Practical reasons.  First, when you try to identify what that margin is, you ignore the fact that the next best alternative is probably covered by someone else's patent.  And you're trying to reconstruct the world from a previous time; that alternative may have been abandoned.  Add in portfolio cross-licenses and it gets very complicated; impractical.  Intellectually appealing but tough to do in practice.  

Lipscomb:  Discusses Sidak paper on FRAND [which Norman Siebrasse and I blogged about in December].      

Bill Page:  Does incremental value standard imply that FRAND royalty is zero, if there is competition?  Killough:  No.  But if there isn't an economic advantage of one over the other, you need to look at that.  If could be really small or zero.  Gilfillan:  before a standard is set, you have two competing patented technologies before standard is set.  Absent standard, will compete.  Will reflect value of technologies; one may be better than the other.  But you need to take into account the value of the competing technology as well, so the "delta" doesn't go to zero.  (Killough agrees.)  In standards context, two competing technologies, one is chosen.  Now that patent holder has a huge monopoly.  Royalty base is an important part of the conversation too.  McLeroy:  you can't calculate a royalty based on marginal cost on making the next copy (e.g., of a DVD).  Need to account for costs of invention.  Using smallest saleable unit would be a change from the way FRAND licensing is done now.  [I don't think that's right; choice of base doesn't relate to marginal cost, as I see it.]

Moderator:  asks about FRAND mitigating competition concerns.  Lipscomb:  nondiscriminatory aspect of FRAND alleviates risk of collusion.  Complying with competition rules in different jurisdictions can be a challenge, but take jurisdiction by jurisdiction approach, learn other countries' rules.

Moderator:  what is a typical FRAND licensing negoitation like?  McLeroy:  begin with claim charts from both sides; business discussions re terms.  Need subject matter experts (engineers), sometimes economists, always the business people.  Best practices:  fair and reasonable extends to conduct in negotiations, not just rates.

Moderator:  asks Killough whether courts should be setting FRAND rates, or what about baseball-style arbitration?  Killough:  Courts should do so if there is a legal obligation.  Note that sometimes the implementer is not a party to the SSO.  But courts except in Germany believe there are subject to the FRAND benefit.  But not necessarily compelled to arbitrate.  Note too that implementer may believe patent is not essential or invalid; must have opportunity to challenge in court.  That doesn't make you a holdout or subject to an injunction;  FRAND means money is enough.  Lipscomb responds:  FTC order does take this into account.  Thinks baseball-style arbitration would force people to be reasonable in advance.  McLeroy:  a FRAND commitment sometimes may be a commitment not to seek an injunction depending on SSO policy, but not for most SSOs such as ETSI.  They've discussed this and not adopted it.  Gilfillan:  A negative about arbitration is that outcome is confidential.  Need to consider other licenses to determine FRAND.  As for McLeroy's point, SSOs are being pulled in the direction of adopting a no-injunction policy.  A matter of time.

Moderator:  What is the current role of government agencies re FRAND?  Lipscomb:  antitrust agencies don't want to be in the business of setting rates.  Want a framework that enables bilateral negotiations.  Of course, agencies around the world have different perspectives.  In China, must consider effect on Chinese businesses, for example.  McLeroy:  tends to agree.  Antitrust regulators haven't pushed for a no-injunction rule but rather a safe harbor.  If licensee wants to take a license and not be subject to an injunction, participate in a FRAND determination, as in FTC consent order.  Killough:  SSOs, regulators each have their own constituencies.  Courts can look at things a little more black-or-white.  Patent = right to exclude,  but FRAND commits you to license and impairs your right to exclude; money is enough.                 

My question:  What about ex ante contingent incremental value, as Siebrasse and I have blogged about here and here?  Gilfillan:  including the fact that the patent has been embodied into a standard shouldn't come into play.  And yes, it is difficult to quantify ex ante value, but that's not a reason not to do it.  Lots of things are difficult but not impossible.  McLeroy:  sounds like something I'd like to study.  But we do need practical solutions.

Haw:  asks Scott Gilfillan that the best way to evaluate is to use smallest salable unit.  My understanding is that the reason we don't do that is that it's often not available.  Empirically?  Gilfillan:  look at smallest salable unit that infringes.  Could be a component or a chip; a sellable unit.  Can be difficult, but it's not as simple as saying it's part of a phone so we should use the phone as the base.  Killough:  I agree there's value in coming up with the right theoretical construct, and then come up with applications that are consistent with it.  Don't charge based on a component if it doesn't incorporate the patent.  Lipscomb:  Maybe too utopian, but what we've seen as a result of litigation and regulatory scrutiny is that patent holders are not contributing their technology to SSOs as much as they used to.  You would need to take that into account, ideally.  McLeroy:  royalty should have a connection based on the R&D and on the value to the end user, regardless of what the base is.