Cellular inventions trigger avalanche of activities among companies

Major innovations in cellular technologies arise largely from the substantial Research and Development (R&D) investments and inventions of relatively few companies, followed by widespread collaborations including many more in the process of standard setting.

Inventor inspiration triggers avalanche of activities

The disproportionately large amounts of value created by those with most of the inspiration and perspiration in technology development are not reflected in simplistic and often-inflated metrics that are increasingly being used in patent-licensing rate apportionments, including by the courts in Fair, Reasonable and Non-Discriminatory (FRAND) licensing disputes. These metrics include the numbers of contributions to the standards and the numbers of patents declared-essential or cursorily judged to be essential to the standards. Thousands of negotiated and executed licensing agreements, including cross-licenses, with various terms in addition to royalty rates—all underpinned by billions of dollars paid annually over many years—much better reflect how patent-protected value is generated and exchanged.

Device manufacturers, network operators, over-the-top (OTT) service providers and end users derive enormous value from extensive and easily-available technologies in published standards from Standard-Setting Organizations (SSOs). That is evident from the huge success of cellular including an extensive market entry in supply and widespread adoption.  With significant and increasing division of labor between the few who invent and develop Standard-Essential Patent (SEP) technologies and the many who implement these in manufactures, the formers are increasingly dependent on licensing income—based on their shares of value created and exchanged rather than on simplistic metrics such as numbers of contributions to SSOs or SEP counts—to make adequate financial returns and justify reinvestment in further technology R&D.

Standard-essential technology development lifecycle

New cellular and other standardized-technology innovations proceed in three overlapping and entwined stages:

1. Conception and invention—typically by a small number of luminaries in no more than a handful of companies
2. Technology development—by many experts in a relatively small number of companies
3. Standard setting—with numerous companies participating in technology evaluation and selection, most of whom do little or no standard-essential technology development work themselves outside the SSO.

Creating, developing and then incorporating innovative cellular communications technologies in standards is a massive endeavor that expands significantly as it proceeds. It involves increasing numbers of companies as it progresses from conception through to the adoption of new technologies in Technical Specifications at 3GPP and in the standards with its seven regional partners, most significantly including the European Telecommunications Standards Institute (ETSI). Any assessment of how much value is contributed and by whom to standard-essential technologies, including 3G WCDMA or HSDPA, 4G LTE and 5G cellular, must consider the entire process including Stages 1 and 2, not only what is most visible and measurable in standard-setting activities, such as contributions or meeting attendance, at Stage 3.

The large R&D investments and resulting value generated in the first and second stages of innovation, identified above, are not always apparent because the work there is largely hidden from the public or might only be recognized by specialists. In contrast, the popular but simplistic use of publicly-available SSO activity metrics in Stage 3, such as counting the numbers of technical contributions to 3GPP Working Groups (WGs) as a proxy for a company’s share of innovation in standards, can significantly understate the value provided by inventors and pioneers while inflating that of companies who join the bandwagon of an emerging success later on — for example, in the Study Item (SI) and Work Item (WI) phases of standard setting at 3GPP.

Most of the activities logged in the public records of 3GPP are the mere tip of the iceberg in terms of the total amount of development work undertaken, including that outside this SSO, with even more extensive other activities submerged from public view. Activities including in WGs and other meetings at 3GPP are publicly visible because “TDoc” technical contribution documents, meeting attendance records and other information are all available publicly online. But this represents only a small proportion of total effort and rather less still of technical effort or innovation, which most significantly also includes company R&D outside this SSO. 

SSO work at 3GPP is the tip of the iceberg

Whereas standard setting is nominally a matter of selecting the best from among various contributions, in practice the process is far more subtle, complex and multifaceted. For example, most technical contributions that are ultimately approved, are subject to multiple revisions and resubmissions before standardization is completed. Building the required consensus for technology selection among SSO participants also significantly involves consideration of non-technical issues, such as companies’ business models and reputations, bilateral business agreements and nationality.  Even the approval of purely technical contributions can significantly reflect these other factors in many cases. This distorts the accuracy of contribution counts as a purported indicator of patentable inventive and innovative technology developed and incorporated in the standards by one company versus another.

Non-linearities in apportioning rates

Neither patent counting nor contribution counting can account for significant differences among patents, and among licensors and licensees. Most declared-essential patents are not actually essential. Even adjusting counts of these with third-party standard-essentiality assessments is problematic because it introduces additional inaccuracies including bias. SEPs are not all of equal value. The same proviso applies to judged-essential patents and to SSO contributions. Bargaining strength is not proportional to any of these counts and depends on other significant factors including R&D pipeline and technology roadmap, position or absence thereof in downstream product markets.

Many patent-licenses established bilaterally with numerous licensees and underpinned by billions of dollars in payments over many years reflect all these complexities and subtleties. Formulae used to diagnose existing licenses and apportion royalty rates elsewhere simplistically misrepresent these dynamics.

Nevertheless, both parties in the TCL v. Ericsson FRAND royalty rate-setting dispute agreed to use a simple algebraic formula with inverse proportionality (i.e. using only +, −, x and ÷) to “unpack” various existing SEP cross-licenses in the derivation of one-way licensing rates (see Decision, page 62). Variables include licensed sales, royalty rates, relative patent strength and balancing payments.

Presiding Judge Selna expressed “some reservations” about top-down royalty-rate apportionment methodology based on patent-counting proportionality in this litigation (see Decision, page 50); but he used it there, regardless, as his primary means of determining FRAND rates in his declaratory judgement.

Outstanding technology value in cellular standards

In a cellular marketplace worth trillions of dollars, with value and growth driven by recent technologies such as LTE Advanced, LTE-LAA and upcoming 5G, is it important to identify where and how much value is generated and exchanged in SEP technologies. Innovators’ rewards should be commensurate with that—as exemplified in numerous executed licenses— not based on simplistic counts of contributions to SSOs or patents.

The example of taking cellular technology into unlicensed spectrum with LTE-LAA is a pertinent case study in how and where value is created in standard development because this major innovation significantly involved various regulatory and commercial issues as well as matters concerning the incorporation of already-standardized and new technologies. This case study and these related issues are discussed in my full article. It can be downloaded, here.

All the above was originally published in cellular industry trade publication RCR Wireless on 29th June 2018.

Making Patents Great Again: U.S. Supreme Court Allows Foreign Lost Profits for Infringement Under 271(f)(2)

The U.S. Supreme Court (Justice Thomas) issued the opinion in WesternGenco v. Ion concerning the availability of foreign profits as part of damages under section 284 of the Patent Act.  The U.S. Supreme Court basically holds that section 284 includes lost foreign profits—at least as a remedy to an infringement under 271(f)(2).  Essentially, WesternGenco owns patents directed “to a system that it developed for surveying the ocean floor” and does not license the patents.  ION “manufactured the components for [a] competing system and then shipped them to companies abroad.”  Western Genco sued for patent infringement under 271(f)(1) and (2).  The jury “awarded WesternGenco damages of $12.5 million in royalties and $93.4 million in lost profits.”  ION asserted that the lost profits are unavailable to WesternGenco because “271(f) does not apply extraterritorially.”  The Federal Circuit reversed and “had previously held that 271(a), the general infringement provision, does not allow patent owners to recover for lost foreign sales.”  The U.S. Supreme Court reverses the Federal Circuit.  

In deciding whether section 284 (in conjunction with 271(f)(2)) applies extraterritorially, the Court examined the focus of the statute(s):

“If the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application” of the statute, “even if other conduct occurred abroad.”  RJR Nabisco, 579 U. S., at ___ (slip op., at 9).  But if the relevant conduct occurred in another country, “then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U. S. territory.” Ibid.

When determining the focus of a statute, we do not analyze the provision at issue in a vacuum. See Morrison, supra, at 267–269.  If the statutory provision at issue works in tandem with other provisions, it must be assessed in concert with those other provisions. Otherwise, it would be impossible to accurately determine whether the application of the statute in the case is a “domestic application.” RJR Nabisco, 579 U. S., at ___ (slip op., at 9). And determining how the statute has actually been applied is the whole point of the focus test.  See ibid.

Applying these principles here, we conclude that the conduct relevant to the statutory focus in this case is domestic. We begin with §284.  It provides a general damages remedy for the various types of patent infringement identified in the Patent Act. The portion of §284 at issue here states that “the court shall award the claimant damages adequate to compensate for the infringement.” We conclude that “the infringement” is the focus of this statute. As this Court has explained, the “overriding purpose” of §284 is to “affor[d] patent owners complete compensation” for infringements.  General Motors Corp. v. Devex Corp., 461 U. S. 648, 655 (1983).  “The question” posed by the statute is “‘how much ha[s] the Patent Holder . . . suffered by the infringement.’” Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U. S. 476, 507 (1964). Accordingly, the infringement is plainly the focus of §284. But that observation does not fully resolve this case, as the Patent Act identifies several ways that a patent can be infringed. See §271. To determine the focus of §284 in a given case, we must look to the type of infringement that occurred. We thus turn to §271(f)(2), which was the basis for WesternGeco’s infringement claim and the lost-profits damages that it received. 

Section 271(f)(2) focuses on domestic conduct.  It provides that a company “shall be liable as an infringer” if it “supplies” certain components of a patented invention “in or from the United States” with the intent that they “will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.”  The conduct that §271(f)(2) regulates—i.e., its focus—is the domestic act of “suppl[ying] in or from the United States.” As this Court has acknowledged, §271(f) vindicates domestic interests: It “was a direct response to a gap in our patent law,” Microsoft Corp., 550 U. S., at 457, and “reach[es] components that are manufactured in the United States but assembled overseas,” Life Technologies, 580 U. S., at ___ (slip op., at 11). As the Federal Circuit explained, §271(f)(2) protects against “domestic entities who export components . . . from the United States.”  791 F. 3d, at 1351.

In sum, the focus of §284, in a case involving infringement under §271(f)(2), is on the act of exporting components from the United States. In other words, the domestic infringement is “the objec[t] of the statute’s solicitude” in this context. Morrison, 561 U. S., at 267.  The conduct in this case that is relevant to that focus clearly occurred in the United States, as it was ION’s domestic act of supplying the components that infringed WesternGeco’s patents. Thus, the lost-profits damages that were awarded to WesternGeco were a domestic application of §284. 

Interestingly, the Court notes that it specifically does not address whether other doctrines such as proximate cause may limit damages under its decision.  Justice Gorsuch authored a dissent which was joined by Justice Breyer.  Justice Thomas addresses their dissent by stating:

Two of our colleagues contend that the Patent Act does not permit damages awards for lost foreign profits.  Post, at 1 (GORSUCH, J., joined by BREYER, J., dissenting). Their position wrongly conflates legal injury with the damages arising from that injury. See post, at 2–3.  And it is not the better reading of “the plain text of the Patent Act.” Post, at 9.  Taken together, §271(f)(2) and §284 allow the patent owner to recover for lost foreign profits. Under §284, damages are “adequate” to compensate for infringement when they “plac[e] [the patent owner] in as good a position as he would have been in” if the patent had not been infringed.  General Motors Corp., supra, at 655. Specifically, a patent owner is entitled to recover “‘the difference between [its] pecuniary condition after the infringement, and what [its] condition would have been if the infringement had not occurred.’” Aro Mfg. Co., supra, at 507. This recovery can include lost profits. See Yale Lock Mfg. Co. v. Sargent, 117 U. S. 536, 552–553 (1886). And, as we hold today, it can include lost foreign profits when the patent owner proves infringement under §271(f)(2). 

The opinion is available, here. 

Disincentivizing the Use of IPRs and PGRs Against Pharmaceutical and Biologic Patents

Senator Orrin Hatch has introduced legislation designed to curb the use of IPRs and PGRs against pharmaceutical and biologic patents by essentially denying the benefits to generic/biosimilar companies of the Hatch-Waxman Act and the Biologics Price Competition and Innovation Act.  Allowing the usage of IPRs against pharmaceutical and biologic patents was a serious oversight in enacting the America Invents Act.  Senator Hatch’s Office has released the following information concerning the new Hatch-Waxman Integrity Act of 2018 (which includes a section by section analysis):

In 2012, Congress enacted the America Invents Act to fix a problem unrelated to drug/biologic innovation and drug/biologic affordability; it created the inter partes review (“IPR”) and post-grant review (“PGR”) processes to combat the growing problem of patent trolls.

Even though Congress did not intend to upset its drug/biologic-specific Hatch-Waxman and BPCIA procedures with the enactment of the IPR and PGR processes, generic drug and biosimilars manufacturers have increasingly used the IPR process to circumvent the Hatch-Waxman Act and BPCIA patent challenge processes while nonetheless taking advantage of their abbreviated processes for drug entry.1  Moreover, hedge funds with no interest in manufacturing or marketing drugs have filed IPR challenges against drug patents with the goal of profiting from stock market declines triggered by the IPR filings—a type of market manipulation.

The Hatch-Waxman Integrity Act of 2018 would close the loophole unintentionally created by the America Invents Act. To restore the careful balance of the Hatch-Waxman Act and the BPCIA, and to prevent the IPR or PGR processes from undercutting them, the FD&C Act and the PHS Act would be amended to prevent using IPR (or PGR) challenges to circumvent the specific patent challenge processes for drugs and biologics painstakingly created by Congress. In addition, the federal securities rules would be clarified to indicate that filing IPR patent challenges and profiting from resulting stock price changes is a form of prohibited market manipulation.

The Press Release is available, here.  The text of the proposed legislation is available, here.  [Hat Tip to Professor Dennis Crouch’s Patently Obvious Blog]

Judges Lourie and Newman of the Federal Circuit Critique Alice/Mayo and Myriad

The U.S. Court of Appeals for the Federal Circuit, in AatrixSoftware, Inc. v. Green Shades Software, Inc., recently denied a rehearing en banc concerning two cases that may make it more difficult to dismiss a claim challenged for lack of patent eligible subject matter under the Alice/Mayo test because of factual issues.  This leaves intact the ability of counsel to raise factual issues which may avoid early resolution of a patent infringement action on patent eligible subject matter grounds.  Notably, Judges Lourie and Newman, both of whom have graduate degrees in technical fields and are very experienced members of the Federal Circuit, requested in a concurring opinion that the U.S. Congress revisit patent eligible subject matter, particularly in light of the Alice/Mayo test and the U.S. Supreme Court “abstract idea gloss.”  Judge Lourie states:

The case before us involves the abstract idea exception to the statute.  Abstract ideas indeed should not be subject to patent.  They are products of the mind, mental steps, not capable of being controlled by others, regardless what a statute or patent claim might say.  Gottschalk v. Benson, 409 U.S. 63, 67 (1972) (“[M]ental processes, and abstract intellectual concepts are not patentable, as they are the basic tools of scientific and technological work.”).  No one should be inhibited from thinking by a patent.  See Letter from Thomas Jefferson to Isaac McPherson (Aug. 13, 1813) (“[I]f nature has made any one thing less susceptible, than all others, of exclusive property, it is the action of the thinking power called an Idea.”).  Thus, many brilliant and unconventional ideas must be beyond patenting simply because they are “only” ideas, which cannot be monopolized.  Moreover such a patent would be unenforceable.  Who knows what people are thinking?  

But why should there be a step two in an abstract idea analysis at all?  If a method is entirely abstract, is it no less abstract because it contains an inventive step?  And, if a claim recites “something more,” an “inventive” physical or technological step, it is not an abstract idea, and can be examined under established patentability provisions such as §§ 102 and 103.  Step two’s prohibition on identifying the something more from “computer functions [that] are ‘well-understood, routine, conventional activit[ies]’ previously known to the industry,” Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347, 2359 (2014) (alteration in original) (quoting Mayo, 566 U.S. at 73), is essentially a §§ 102 and 103 inquiry.  Section 101 does not need a two-step analysis to determine whether an idea is abstract.   I therefore believe that § 101 requires further authoritative treatment.  Thinking further concerning § 101, but beyond these cases, steps that utilize natural processes, as all mechanical, chemical, and biological steps do, should be patent-eligible, provided they meet the other tests of the statute, including novelty, nonobviousness, and written description.  A claim to a natural process itself should not be patentable, not least because it lacks novelty, but also because natural processes should be available to all.  But claims to using such processes should not be barred at the threshold of a patentability analysis by being considered natural laws, as a method that utilizes a natural law is not itself a natural law.

Judge Lourie also criticized the U.S. Supreme Court’s decision in Myriad Genetics:

[F]inding, isolating, and purifying such products are genuine acts of inventiveness, which should be incentivized and rewarded by patents.  We are all aware of the need for new antibiotics because bacteria have become resistant to our existing products.  Nature, including soil and plants, is a fertile possible source of new antibiotics, but there will be much scientific work to be done to find or discover, isolate, and purify any such products before they can be useful to us.  Industry should not be deprived of the incentive to develop such products that a patent creates.  But, while they are part of the same patent-eligibility problems we face, these specific issues are not in the cases before us.   Accordingly, I concur in the decision of the court not to rehear this § 101 case en banc.  Even if it was decided wrongly, which I doubt, it would not work us out of the current § 101 dilemma.  In fact, it digs the hole deeper by further complicating the § 101 analysis.  Resolution of patent-eligibility issues requires higher intervention, hopefully with ideas reflective of the best thinking that can be brought to bear on the subject.

There are numerous proposals for changing patent eligible subject matter before the U.S. Congress, for example, see the AIPLA proposal, here. 

Independent judiciary requires reliability and factual credibility in economic analysis

In a major ruling that underscores judicial independence, federal judge Richard J. Leon has just unconditionally approved the merger between AT&T and Time Warner, rebuffing the US government’s effort to stop the $85.4 billion deal.

Judge Leon made headlines during the trial when he questioned whether a key Justice Department theory, backed by a well-known testifying-expert economist, was a Rube Goldberg contraption: “a machine intentionally designed to perform a simple task in an indirect and over-complicated fashion.” The UK equivalent of this is a Heath Robinson contraption: “any unnecessarily complex and implausible contrivance.” The Dane Robert Strom Peterson was similarly creative with “comic drawings of machines that perform very simple tasks through an unnecessarily complex and usually humorous series of actions.”

The judge was also quite damning in his written Decision:

Page 149: “After hearing Professor Shapiro’s bargaining model described in open Court I wondered on the record whether its complexity made it seem like a Rube Goldberg contraption. Professor Carlton agreed at the trial that that was a fair description. But in fairness to Mr. Goldberg, at least his contraptions would normally move a pea from one side of a room to another. By contrast, the evidence at trial showed that Professor Shapiro’s model lacks both ‘reliability and factual credibility,’ and thus fails to generate probative predictions of future harm associated with the Government’s increased-leverage theory. Accordingly, neither Professor Shapiro’s model, nor his testimony based upon it, provides me with an adequate basis to conclude that the challenged merger will lead to any raised costs on the part of distributors or consumers — much less consumer harms that outweigh the conceded $350 million in annual cost savings to AT&T customers.” (citation omitted, emphasis already included)

Professor Shapiro’s work on alleged patent holdup has similar failings, as I discussed, here (including my full analysis in a 12-page download), in August 2016, and as follows:

I came upon a paper entitled “Patent Holdup: Myth or Reality?” by Carl Shapiro, dated 6^th October 2015, which was circulated as a hard-copy and presented at an IEEE-SIIT conference at the Intel-sponsored key-note address. In this, the author concedes that there are “few documented instances of actual holdups” and that they are “exceedingly difficult for researchers to detect and reliably quantify.” He has backed off from his previous claims of prevalence of “patent holdup” where he stated “patentees regularly settle with companies in the information technology industries for far more money than their inventions are actually worth. These companies are paying holdup money to avoid the threat of infringement.” Shapiro has retreated due to lack of empirical support for these original claims which is because portfolio licensing among many licensees on FRAND terms together with the courts ensure that holdup royalties are rarely demanded and are never paid. However, Shapiro takes another position where there is also no supporting evidence. He now claims that the social costs caused by the alleged “patent holdup” problem are in the actions taken to prevent holdup and in the opportunities forgone under the threat of “patent holdup.” (emphasis added)

It is reassuring that even well-known and widely-cited economists are expected support their opinions with facts when testifying in court. Royalty-stacking theory peddlers should also beware because they are likewise devoid of supporting evidence while there is copious evidence and solid economic analysis to the contrary.

Government agencies pursuing policy objectives must be more diligent in their deliberations. Academics and other experts should also be more principled when publishing academic articles and giving speeches. As I recently wrote in another publication on the question of “Economists: Do They Have a Place?” following a conference panel speech on the topic:

Economists need to take responsibility for what their own economic analysis relies upon. We need economists to publish, and as expert witnesses, but we need to flush out inapplicable theories, biases, and nonsense with more empirical testing, public debate including academic peer review, and rebuttal in litigation according to the applicable rules of evidence.

ESPN+ and the streaming of sports events--will it complement or cannibalize?

Already in the 19th century, the book industry had begun to experiment with publishing paperback versions. The question early on was whether paperbacks expanded the market, by reaching readers who would not otherwise have purchased the more expensive hardback, or whether it tended to cannibalize sales. The advent of paper books was perhaps the first example of the tension between complementing and cannibalizing a copyright-driven market.

A version of this arose in the recent announcement by Disney of ESPN+, which is meant to be a sports-streaming service that will be available for a (modest?) monthly subscription fee. Still, even die-hard sports fans who cannot get enough of televised sports may have missed the launch of the service on April 12th. Usually, when Disney does a launch, one can expect bells, whistles, and a lot more, the better to draw attention to the new offering. Add to that is the fact that ESPN is the most consistently lucrative part of the Disney empire. Still, all in all, the launch of ESPN+ was a modest affair. It is interesting to consider the reasons this was so, and why Disney is gingerly taking steps as it enters the sports streaming business.

According to The Economist ("ESPN starts a streaming service", April 19th), Disney’s ultimate goal (bad sports pun, this ….) for ESPN+ is to create “a sort of mini [njw-at least for the moment] -Netflix for sports”, namely a commercial streaming service, as opposed to pay-tv packages that offer all the coveted major (at least US) sports. While a cable company may offer hundreds of channels, it is primarily the live sports programming (together with perhaps news) that principally draw subscribers to its services. This is why ESPN is such a valuable channel, with a reported 86 million subscribers, for which ESPN receives $8.14 in fees per subscriber per month, the highest of any network.

Enter the streaming challenge, embodied by Netflix. For a fraction of the cost, viewers can in principle cut the cable cord and still enjoy a wide array [although how "wide" can still be debated] of contents for viewing. So what is Disney to do? ESPN is ever so lucrative as a cable channel, but streaming could disrupt and thereby threaten that industry, if the right business model can be found. For the moment, therefore, the solution is apparently for Disney/ESPN to take baby steps.

This means no streaming of mainline sports events. Instead, ESPN+ will focus on streaming "secondary sports", described by Wikipedia as such events as—

“… combat sports, college sports, cricket, rugby union, soccer (including out-of-market Major League Soccer matches), and tennis”.

The aim in showing such sporting events is to reach what ESPN, according to The Economist, calls the “hard-core sports fanatic” or the “underserved sports fan.” On this basis, ESPN+ would appear to pose no current threat of materially cannibalizing its own cable offerings. As noted by Wikipedia—

“The service is not intended to cannibalize ESPN's core linear networks, so it will not carry ESPN's core professional sports rights or offer access to ESPN's linear programming. ESPN+ will instead serve as a complement to them as part of the ongoing market trend of cord cutting and over-the-top pay television….”

However, it is difficult to believe that ESPN+ will continue to limit itself to streaming only these kinds of live sporting events to the tails of the viewing population. Presumably, at some point, Disney will want to make real money from this. When crunch time comes, Disney will have to answer the question—how will it manage the clash between cable and internet streaming?

Hardback and softback books continue to co-exist (now joined by e-books as a third form of book product) on the basis that they are more complementary than cannibalizing of the book industry, taken as a whole. Whether that model will characterize the relationship between streaming and cable remains an open question. Will ESPN+ will be limited to being a niche form of live sports streaming, "a sort of mini-Netflix for sports". Or will it be something more; if so, how much more? Stay tuned.

Photo on lower left by Roger Cornfoot and is licensed under the Creative Commons Attribution-ShareAlike 2.0 license

By Neil Wilkof