Does the government come and tell you, "You have to move out and abandon the house. Sorry for the loss of the value of your house, but that's life. The public interest comes ahead of your individual property rights."

Is that how it works?

Of course not. The government may be able, under certain circumstances, to tell you to move in order to build the highway, but it has to *pay* you reasonable compensation. You don't have to just gulp and swallow such a loss. Why? Because no one, not the government or anyone, has the right to rob you of your property rights. It's your house. You paid money for it, and if they take it away to benefit the larger good, you should at least be paid compensation.

What about taking away certain property rights from FRAND patent holders? Why is that any different than taking away a man's house? Patents, they tell us, are property, and patents come with certain property rights, such as the right to seek injunctive relief against willful infringers and the possibility of treble damages. If you take that away, without compensation, where is the fairness in that?

The FTC is now suggesting that companies that own standards-essential patents and offer them under FRAND terms, like Motorola, should not be allowed to seek injunctions regarding those kinds of patents except in the most extreme of circumstances. But for decades, they had those property rights, the right to seek injunctive relief. How can a government agency just show up and take those traditional rights away by fiat, without reasonable compensation? That's not America, to me. I don't even like software patents, but as long as the patent system exists, you want it to be fair. And this just feels wrong.

These thoughts, and others, came into my mind because I've been reading some comments companies and entities have been filing with the FTC. The FTC asked for comments from interested parties on its proposed Motorola-Google consent agreement (FTC File No. 121 0120), which includes the new ban on seeking injunctive relief for infringement of FRAND patents, except in certain unusual circumstances. You can find the comments submitted here on the FTC's website. Some of the comments are telling the FTC that a one-size-fits-all approach to FRAND patents and injunctions is a terrible idea, one that threatens to make the smartphone wars worse, not better.

Apple and Microsoft filed briefs. They love the idea, I suppose, because they have few FRAND patents, not having been in the mobile market until recently, so why would they mind if companies that sell Android and do own FRAND patents lose defensive protection? Then they can sue the FRAND companies without fear of a fair negotiation or a fair playing field. Motorola and Samsung were there building mobile technology long before Apple and Microsoft showed up, and that's why they have FRAND patents.

Some of the comments are telling the FTC that its proposed agreement isn't going to have the results the FTC hopes for. Research in Motion, now calling itself Blackberry, and the Computer & Communications Industry Association both warn the FTC that forbidding injunctions for all FRAND patent holders will likely destabilize the market and make the smartphone patent wars worse, unless other patent reforms are also taken. It will, RIM says upset the equilibrium in patent negotiations and cause companies to hold back from contributing to standards. Here's a taste:

RIM wishes, however, briefly to set forth its perspective regarding the availability of injunctions for FRAND-committed patents. Although injunctions generally may not be appropriate, a one-size-fits-all rule barring entities from ever seeking injunctions on their FRAND-encumbered SEPs would be economically undesirable. We believe that, in evaluating the facts, an antitrust enforcer should ask whether the SEP holder is seeking opportunistically to evade its FRAND commitment, or, rather, is defensively using its patent to preclude opportunistic hold-up by the other negotiating party.

In other words, if (as RIM believes) the overarching policy goal of FRAND is viewed as the avoidance of hold-up and the promotion of standards-based competition, there are circumstances in which a defensive injunctive threat by an SEP holder is procompetitive (and thus in compliance with a FRAND undertaking) - and the denial of the ability to make such a threat is anticompetitive (and thus at odds with the FRAND undertaking).

We also are concerned that an inflexible "no injunctions" rule would over time reduce the value of SEPs relative to non-SEPs, and cause firms to invest fewer resources in standard setting. The end result would be inferior standards and reduced consumer welfare.

In a letter [PDF] RIM sent the ITC in November, attached to its comment to the FTC, and which it tells the FTC it stands by still, it tells the agency that a one-size-fits-all approach barring entities from seeking injunctions on their FRAND patents could result in gross unfairness. It gives contrasting examples, first where blocking the seeking of an injunction might be useful to promote competition and then another situation where allowing a FRAND patent holding firm to seek an injunction might actually promote competition:

First, consider the holder of FRAND-encumbered SEPs that takes the offensive and seeks excessively high royalties from another producing firm, backed by the threat of an injunction. The patent holder is in effect reneging on its FRAND commitment, and should not be granted an injunction, because, by its very nature, FRAND requires a firm to offer a License on reasonable terms. The threat of an injunction renders the offer coercive and unreasonable. Denying the right to enjoin here incentivizes reasonable licensing offers, resulting in limitations on royalty costs that enhance competition on the merits and benefit consumers.

Second, by contrast, consider a FRAND-encumbered SEP holder that is faced with an unreasonably high royalty demand by a counterparty that holds and is invoking non-FRAND encumbered implementation patents. ¹⁵ Under these circumstances, if it is barred from seeking an injunction defensively, the SEP holder possesses negligible negotiating leverage (given the pricing limitations imposed by FRAND) and will have to pay exorbitantly high royalty costs - or exit the industry entirely. In either case, competition in the product market covered by the patents in questiou will suffer. If, however, the SEP holder is allowed defensively to seek an injunction, it can force the implementatjon patent holder to the bargaining table, with a likely negotiated reduction in the cost burden of licensing between the parties. This reduced cost burden, as in the first hypothetical, constrains royalties and promotes competition and consumer welfare.

These two examples illustrate the fact that a one-size-fits-all rule barring entities from seeking injunctions on their FRAND-encumbered SEPs would not always promote competition and consumer welfare. Instead oftreating labels such as FRAND as a substitute for analysis, the ITC (as well as competition agencies and federal courts) should focus on the fact-specific context of the bargaining relationship between the parties. In evaluating the facts, the ITC should ask whether the SEP holder is seeking opportunisticaJiy to evade its FRAND commitment, or, rather, is de{i:msively using its patent to preclude opportunistic bold-up by the other negotiating party. In other words, jf (as RIM believes) the overarcbing poUcy goal of FRAND is viewed as the avoidance of hold-up and the promotion of standards-based competition, there are circumstances m which a defensive injunctive threat by an SEP holder is procompetitive (and thus in compliance with a FRAND undertaking) - and the denial of the ability to make such a threat is anticompetitive (and thus at odds with the FRAND undertaking).

Finally, an inflexible "no injunctions" rule denying FRAND-encumbered SEP-holders any ability to defensively prevent opportunism by implementation patent holders would reduce the value of SEPs relative to non-SEPs. Over time, this would in turn cause finns to invest less in standard setting and to be less inclined to contribute their technology to standards. As a result, the quality of standards would diminish, thereby depriving consumers of the procompetitive innovations and product improvements that arc the fruits of vibrant standard setting. In sum, a "no injunctions" rule subject to no exceptions would undercut the consumer welfare and competition goals ... Conclusion

We request the ITC avoid using this case to make any inflexible rule that would always preclude holders of FRAND-encumbered SEPs from seeking exclusion orders. We urge the ITC to examine the factual negotiating context within which SEPs and non-SEPs are being asserted and whether the behavior under scrutiny is aimed at undermining competition by raising costs, in determining whether an exclusion order is appropriate on public interest grounds. Beyond this, we offer no opinion on whether exclusion orders are or are not in the public interest in this specific matter.

__________
¹⁵ Implementation patents are patents that are needed to bring a commercially viable product to the marketplace, but are not an inherent part of a standard's technical specifications. See July 9 Comments by RIM, supra note 2, at 4.

¹⁶ See 19 U.S.C. §1337(d)(l) .

(1) exacerbate the patent arms race as newly vulnerable firms pursue more problematic defensive patenting strategies;

(2) trigger additional litigation as rivals of those disadvantaged by the FTC’s decision seek to press their advantage over competitors whose defensive positions are dependent on FRAND-encumbered patents; and

(3) prospectively, either (a) diminish incentives to standard setting or (b) encourage standards participants to rewrite policies to approximate their prior understanding of FRAND licensing.

If the Commission seeks the root causes of the current litigation epidemic, it must look to the increased issuance of abstract and low-quality software and design patents, the expanded functionality of smartphones and the changing competitive structure of the mobile device market. These background conditions have contributed far more to the current litigation epidemic than a contractual understanding that has evolved little over the last three decades....

Far too many patents flood the high-tech marketplace. The smartphone alone has an estimated 250,000 patents that read on the technology embedded in it.⁴ Many of these patents are abstract, loosely defined, or invalid. This generates high transaction costs, and increases risk and uncertainty for all companies that develop and build high-tech products.

In response, technology companies have engaged in massive cross-licensing to diminish the potentially crippling level of risk and uncertainty foisted upon them by the ready availability of vague, low-quality patents. This solution – essentially, agreements between competitors to opt out of the patent system – reflects a real-world compromise that has also enabled standard setting to function free of disruption by major stakeholders. FRAND commitments, nonspecific as they are, have simply been folded into the cross-licensing process.

Standard-setting organizations (SSOs) must induce cooperation from a wide range of players, many of whom have divergent interests. The policies and practices of each reflect compromises necessary to allow each one to function. Some choose royalty free licensing. Some mandate more specific ex-ante patent disclosure. The fact that SSOs have developed customized policies by consensus should counsel the FTC to be cautious in altering the interpretations of terms agreed upon by all participants in a particular SSO. To the best we have been able to determine, no SSO has promulgated policies either for or against injunctive relief.... Imposing changes from the outside, particularly without addressing the risks that these consensual policies hedge against, is to upset the equilibrium that has been established....

By altering the framework for negotiated cross-licenses, and for the bilateral negotiating process in general, the FTC changes a much larger set of expectations and practices. In particular, by diminishing the prospect of injunctive relief the Commission’s approach will disadvantage firms that contribute significant IP to standards development efforts vis-à-vis downstream standards implementers. This will likely result in diminished incentives to participate in standards bodies.

_________
⁴ RPX Corp., Registration Statement (Sec. & Exch. Comm’n Form S-1), at 59 (Sept. 2, 2011).

If making a FRAND commitment forecloses injunctive relief against an adversary – even when one is already being enjoined by that same adversary – some industry participants have likened this to “IP suicide.”³³ As a result, major SEP holders will be forced to divert engineering and legal resources to rebuild a commitment-free, defensive patent portfolio. This patenting will likely be less productive than standard-essential patenting activity, where the R&D time is focused on actual technological solutions. Preferred non-SEP defensive patents may not be patents related to one’s own products and services, but patents that read on competitors’ products or anticipate where competitors are heading.³⁴ More specifically, firms will likely seek patents in areas that have proven strategically effective in the courtroom in the recent wave of smartphone litigation, such as broad, ambiguous design and software patents.³⁵ Unfortunately, these are also the areas in which patenting has proved most problematic and controversial in the last decade.

B. More Litigation in the Short- and Medium-Term

As SEPs have been asserted almost exclusively defensively (whether infringement counterclaims or counterattacks in other venues or along other product lines) in the current epidemic of smartphone litigation, SEP constraints will strengthen the hand of instigators who clearly have no qualms about aggressively invoking their IP. Besides those two discrete problems that are likely to flow from significantly altering the meaning of FRAND commitments, there is a distinct possibility that the intensity of the smartphone wars could actually increase in the short- and medium-term. As restocking a defensive portfolio free of FRAND encumbrances will take time and considerable capital, there is an incentive for rivals unencumbered by FRAND commitments to push their patent advantage in the near term.

_________
³³ See Federal Trade Commission, Patents Standards Workshop, “Tools to Prevent Patent ‘Hold-up’”, June 21, 2011, transcript at 223:

“But all of that taken into consideration, I’ve heard that making a RAND commitment should not be akin to IP suicide, in that if you have been sued in a defensive posture, if someone’s coming after you with an injunction, that that then kind of takes the handcuffs off the RAND commitment because it’s – your business is getting shut down if you don’t – aren’t able to use every thing that’s in your arsenal. So, I would say in that situation, maybe there is some room, because you’re saying, ‘Look, how is it you can shut me down and I can’t shut you down?’ That seems counter-intuitive, also.”

Statement of Sarah Guichard (Senior Director of Patents and Standards Strategy with Research in Motion).

³⁴ This strategy is common for companies building defensive portfolios. A concise description is available in a Mondaq article from 2012: “Defensive Reasons: Here, Patents are registered purely for defensive purposes. They are the ones that cover something that a competitor may possibly practice or is already practicing. That is, such patents safeguard the business by providing protection from litigation.” Mrinalini Gupta, “India: Defensive Patents... Bombs For Future Business Battle,” Mondaq, November 30, 2012, available at
http://www.mondaq.com/india/x/208990/Patent/Defensive+Patents+Bombs+For +Future+Business+Battle.
For a more detailed description of strategic defensive patenting, see: James Bessen, “Patent Thickets: Strategic Patenting of Complex Technologies,” March 2003, available at
http://ssrn.com/abstract=327760.

³⁵ Charles Duhigg & Steve Lohr, “The Patent, Used as a Sword,” N.Y. Times, October 7, 2012, available at
http://www.nytimes.com/2012/10/08/technology/patent-wars-among-tech- giants-can-stifle- competition.html?pagewanted=all.

Here's the CCIA brief in full, as text:

**********************

Before the
Federal Trade Commission
Washington, DC

Motorola Mobility LLC and Google Inc.;
Analysis of Proposed Consent Order to Aid
Public Comment

________________

File No. 121-0120

COMMENTS OF
COMPUTER & COMMUNICATIONS INDUSTRY ASSOCIATION

These comments applaud the FTC’s objective but raise concerns that the Commission’s response to the SEP hold-up problem – insofar as it is a template for future conduct – threatens to:

(1) exacerbate the patent arms race as newly vulnerable firms pursue more problematic defensive patenting strategies;

(2) trigger additional litigation as rivals of those disadvantaged by the FTC’s decision seek to press their advantage over competitors whose defensive positions are dependent on FRAND- encumbered patents; and

(3) prospectively, either (a) diminish incentives to standard setting; or (b) encourage standards participants to rewrite policies to approximate their prior understanding of FRAND licensing.  

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EXECUTIVE SUMMARY

Specifically, we disagree with the Commission’s assertion that “[i]f accepted by the Commission, the Proposed Order may set a template for the resolution of SEP licensing disputes across many industries, and reduce the costly and inefficient need for companies to amass patents for purely defensive purposes in industries where standard-compliant products are the norm.”²

Despite these contentions, commitments to license SEPs on FRAND terms had nothing to do with the start of the current patent wars. FRAND commitments have been and remain weak and ambiguous. Academic literature, standards bodies’ deliberations and even the record of the numerous public hearings conducted by this agency going back more than a decade make this clear.

If the Commission seeks the root causes of the current litigation epidemic, it must look to the increased issuance of abstract and low-quality software and design patents, the expanded functionality of smartphones and the changing competitive structure of the mobile device market. These background conditions have contributed far more to the current litigation epidemic than a contractual understanding that has evolved little over the last three decades.        

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In response, technology companies have engaged in massive cross-licensing to diminish the potentially crippling level of risk and uncertainty foisted upon them by the ready availability of vague, low-quality patents. This solution – essentially, agreements between competitors to opt out of the patent system – reflects a real-world compromise that has also enabled standard setting to function free of disruption by major stakeholders. FRAND commitments, nonspecific as they are, have simply been folded into the cross-licensing process.

Standard-setting organizations (SSOs) must induce cooperation from a wide range of players, many of whom have divergent interests. The policies and practices of each reflect compromises necessary to allow each one to function. Some choose royalty free licensing. Some mandate more specific ex-ante patent disclosure. The fact that SSOs have developed customized policies by consensus should counsel the FTC to be cautious in altering the interpretations of terms agreed upon by all participants in a particular SSO. To the best we have been able to determine, no SSO has promulgated policies either for or against injunctive relief.

Nor are standards bodies ignorant of the potential problems of their decisions, such as the potential for patent hold-up, that were identified by the FTC. They have been the topic of frequent academic debate, court rulings and internal negotiations within the standards bodies themselves. Like cross-licenses and patent pools, SSO policies and practices have been developed with the realities of patent proliferation and patent practices in mind and are designed to reduce risk and uncertainty. Imposing changes from the outside, particularly without addressing the risks that these consensual policies hedge against, is to upset the equilibrium that has been established.

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Furthermore, given that SSO IPR commitments are free to be adapted (and often are), reinterpreting a contractual term of art in a way that is unwelcome by the participants will simply result in SSOs that do not like the new injunction standards changing the language of their commitment to better approximate the original meaning, or lack thereof, of FRAND. Therefore, any reinterpretation of FRAND commitments will likely have little long-term effect, absent broad patent reform.

To foster competition and promote consumer welfare, the Commission should preserve the current carve-outs for defensive use (Section IV.F) and continue to pursue its pro-competitive examination of the patent system. Positioning this settlement as the blueprint for ending the current patent wars, however, may undercut momentum to undertake reforms that actually mitigate the epidemic of patent-related litigation. The Commission should continue to advance the extensive work it has undertaken over the past decade – through extensive reports and targeted enforcement actions – to highlight the wide range of patent problems that harm competition and innovation.

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Lastly, if the Commission decides to amend the current consent decree, it should ensure that companies could use SEPs in legitimate defensive ways with the end goal of encouraging competitive markets with a wide range of product offerings. From the perspective of equity, it would be unfortunate if the FTC’s decision tips the scales of the current patent wars in the direction of companies asserting broad, ambiguous design and software patents that are essentially de facto standards and harms companies that have worked in good faith to create the actual standards on which all current mobile devices are built.

I. OBSERVATIONS ON HISTORICAL INTERPRETATIONS OF FRAND

A. The State of FRAND Before the Smartphone Patent Wars

The root causes of the escalation in patent litigation in mobile telecommunications markets have little to do with FRAND commitments. FRAND commitments have been ambiguous since their inception and the market players were mindful of this ambiguity. As discussed earlier, the nature of the FRAND commitment has been vigorously debated, the subject of numerous court cases, discussed in prominent SSOs and scrutinized by regulators. Although the potential for problems with patent holdup are quite clear, the record of the FTC’s 2011 hearings reflects that wide scale abuse had not yet been a serious problem.⁶  

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1. Why Did FRAND Work Relatively Well in the Past?

Unlike the threat of widespread FRAND abuse, the “repeat player” discipline is well documented anecdotally (and in aggregate). When Motorola was said to be unwilling to license its GSM patents under FRAND terms in the early 1990s, the company reported a significant loss of business. Motorola classified these assertions as lies, but was so troubled by them that they considered filing libel suits.⁸ The 2011 FTC hearing record is also replete with references to the disciplining power of the repeated game:

• Referencing a study that showed more than 50% of the SEP declarations in ETSI are made after the publication of the standard (not declaring SEPs prior to a standard publication would, in theory, dramatically increase the likelihood of hold-up), economist Anne Layne-Farrar stated that actual holdup was minimal because the participants are “repeat player[s].”⁹

• Naomi Voegtli, the Vice President of the Intellectual Property Strategy and Standards Group at the software firm SAP, stated: “If SAP backs off a FRAND commitment, our reputation is going to be tarnished, and also, it’s a public relations disaster, and SAP is a repeat player in a standard-setting organization. So, we want to maintain our integrity.¹⁰

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• Larry Bassuk, Deputy General Patent Counsel at Texas Instruments, after stating that he believed that it is difficult for him to see how FRAND commitments are actually legally binding contracts stated: “[W]e’ve worked with one another in the past, we are going to work with one another in the future, we have got to honor our commitments, whether there is [legal] consideration there or not.”¹¹

In sum, because the gains of “defecting” and holding up market participants with an SEP do not outweigh the likely costs in the long run, few repeat players willingly burn long-term bridges for short-term gains.

2. When Did FRAND Fail?

These three cases share unique characteristics. Both the Dell and Rambus cases involved intentional deception. Dell was found to have “not inadvertently”¹⁵ failed to disclose a key patent when a clear alternative was available and Rambus left the standard negotiations and modified its patent applications to incorporate technology being discussed in the standard negotiations. In the N-Data case, N-Data acquired the SEP on the secondary market and blatantly revoked an explicit commitment by the prior owner to license its IP for an upfront $1000 fee. All three of these cases involved either deception or outright repudiation of a prior commitment and were properly addressed by the competition agencies.¹⁶

Second, these companies were not subject to the repeated game discipline. Dell, although a major technology company, has principally been an “assembler” and not a major investor in R&D.¹⁷ Therefore, maintaining its credibility in SSOs was not a major concern.

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N-Data, in the FTC’s words, was a company “whose sole activity is to collect royalties in connection with a number of patents.”¹⁹ As a pure PAE with no products or R&D activities, N- Data had no concerns about its future reputation and had no intention of ever participating in SSOs or negotiating with other market players for access to their patent portfolios.

As the three cases above illustrate, when the repeated game discipline was not applicable, competition authorities dealt with the problems discretely.²⁰ Furthermore, SSOs have largely tweaked their IPR policies to make it clear that patent commitments travel with the patents and that intentional nondisclosure of SEPs or patent applications is forbidden.

3. Root Causes of the Current Smartphone Patent War

The root causes of the smartphone patent wars are the increasing flood of technology patents – particularly low quality software and design patents, the increased functionality of mobile devices and the changing wireless device market structure (specifically the asymmetry in profit margins and market shares).  

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• The increasing patent intensity in high-tech markets, particularly software, is a major contributing factor to the rise in patent litigation in the smartphone ecosystem. Although it is beyond the scope of these comments to fully document the software patent problem, this crisis has been exhaustively documented in both academic literature and business publications. Whereas most of the major legacy software industry came to life when software patenting was rare (and therefore didn’t have to worry about patent litigation or portfolio building), over the last two decades the once frowned-upon (and still controversial) practice of software patenting has exploded. As early as 2009, almost 40,000 new software patents were being issued each year, and the rate at which they are being issued is steadily increasing.²¹ This flood is paralyzing the patent system and increasing the frequency of strategic patenting and opportunistic, rent-seeking behavior, including litigation. Furthermore, by their very nature, software patents are more likely to be broadly defined with poorly delineated borders. Therefore it is not surprising to find that software patents are much more likely to be involved in litigation than other patents.²²

• The increased functionality of smartphones and the incorporation of once distinct technologies, such as wireless Internet connectivity and a full-suite of software offerings, mean that wireless devices now potentially infringe a wide array of new patent fields and legacy patent portfolios. In fact, many of the current patent lawsuits in the smartphone space were initiated by legacy software companies who have entered the wireless market and are strategically using their legacy patent portfolios to their advantage.

• The rapidly changing wireless device market structure over the last 20 years is also a major contributing factor to the recent rise of smartphone patent litigation. During the 1990s and early 2000s as the mobile phone market took off, it was highly competitive. Market shares were in constant flux and the major manufacturers were also major contributors to the standards bodies, so patent portfolios tended to be relatively symmetric and SEP heavy. When Apple entered the mobile phone market with the

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iPhone, Apple became the untouched market leader for smartphones. Until very recently Apple commanded the majority of the market share and virtually all the profit. In the process it was well compensated for its contributions, which were largely integration, software and design advances.²³ However, when an open source operating system which could be implemented by many hardware manufacturers (but had relatively little patent protection) proved to be an effective competitor, incentives changed. Faced with the commoditization of the smart device (a market trajectory that is common and healthy in most tech markets) that threatened to cut into its huge profit margins, Apple pressed its patent advantage. As a result, vertically integrated hardware manufacturers, such as Samsung and Motorola, were forced to use their SEP-heavy portfolios defensively— portfolios full of patents and technology that had helped build the underlying communications protocols that Apple utilizes in its devices.

B. Positive Aspects of FRAND Ambiguity

The chaotic nature of the patent system, particularly as it interfaces with technology and software markets, has also been well documented. Massive patent thickets exist around the core technologies that comprise the modern smartphone. Patent aggregator RPX estimates that 250,000 patents may read on the semiconductors, storage technology, protocols, transmission methods, displays and software that comprise a modern smartphone.²⁴

The sheer number of patents, coupled with uncertainty as to the validity of the patents and questions regarding the underlying essentiality of declared SEPs, mean that simplistic economic assumptions of patent jurisdiction break down. If licenses were negotiated    

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In the face of the uncertainty resulting from these pervasive problems, technology companies have developed a host of strategies – including patent pools and cross-licensing. And standard-setting bodies have developed rules, norms and understandings that allow them to function reasonably well.

In standards-dependent industries such as telecommunications and hardware, innovative companies – particularly vertically integrated companies that have significant R&D operations but receive most of their revenue from product sales – are faced with two competing imperatives. The first is to be active participants in industry standards, not only to get their IP incorporated into the standard for the purpose of royalty generation, but also to be on the cutting edge of industry technology and as far along the learning curve as possible.

However, in a world where ‘everyone infringes everyone else,’²⁵ vertically integrated firms that also produce products have a second imperative. They must assemble large defensive portfolios in order to protect themselves from opportunistic patent attacks by their rivals.

Standards participants developed several core strategies for dealing with these competing goals. Upstream innovators, whose primary output was R&D and patents, participated in SSOs and had robust licensing programs that sought to fully monetize their SEPs. Vertically integrated firms that both produced significant levels of R&D but still received a majority of their revenue from selling actual products often adopted one of two strategies that were commonly regarded by the industry as being within the confines of a FRAND agreement.²⁶

• The first strategy, which has been referred to as the “let sleeping dogs lie” strategy, involves firms contributing their R&D to standards, acquiring SEPs and then sitting on them.²⁷ Companies that engaged in this strategy were content to let others use their SEPs,

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often without charge, as long as they themselves were not subjected to any demands. If approached with a license demand, or threatened with infringement lawsuits, they would use their SEPs (as well as other non-SEPs when appropriate) to negotiate broad cross- licensing agreements with the primary intention of maintaining their “freedom to operate” in the product market.²⁸ This discouraged lawsuits and reduced the actual royalty burden of the standard, as many, if not most, of these companies never actually charged others for the SEP royalties they were entitled to.
• A second but similar strategy practiced by vertically integrated firms involves active pursuit of cross-licensing involving bundles of SEPs and non-SEPs designed to achieve product market freedom.²⁹ As individual products often encompass hundreds of

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If competition agencies or courts significantly rein in the bilateral negotiating flexibility currently embedded in FRAND commitments, the delicate equilibrium struck over the last several decades that allowed firms to actively participate in SSOs while maintaining a path to defend themselves from a poorly functioning patent system will be disturbed. And there is no guarantee, particularly given the unchecked tide of broad, overlapping, and questionable patents, that the new equilibrium will be better for either consumers or innovation.

II. SECOND-ORDER PROBLEMS THAT CAN RESULT FROM ALTERING
FRAND FLEXIBILITY

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A. Increase in Problematic Defensive Patenting Strategies

If making a FRAND commitment forecloses injunctive relief against an adversary – even when one is already being enjoined by that same adversary – some industry participants have likened this to “IP suicide.”³³ As a result, major SEP holders will be forced to divert engineering and legal resources to rebuild a commitment-free, defensive patent portfolio. This patenting will likely be less productive than standard-essential patenting activity, where the R&D time is focused on actual technological solutions. Preferred non-SEP defensive patents may not be patents related to one’s own products and services, but patents that read on competitors’ products or anticipate where competitors are heading.³⁴ More specifically, firms will likely seek patents in  

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B. More Litigation in the Short- and Medium-Term

C. Standards Participants Will Adapt to New FRAND Injunction Limitations

1. Standard Bodies Are Free to Change IPR Commitments

Given that SSOs are voluntary consensus undertakings, the ambiguous FRAND commitments have proven to be useful in maintaining inclusive SSOs. This is particularly true in the mobile telecommunications world where the marketplace is complex, as it involves innovators, vertically integrated innovators with consumer products, and pure implementers.  

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While the SEP hold-up problem should not be ignored, this discrete action to mitigate it will exacerbate other problems if it is not accompanied by a broad package of reforms aimed at remedying the broader problems in the patent system. Undercutting defensive strategies firms developed to cope with the underlying patent crisis will simply force firms into even more speculative and problematic patenting strategies. This will likely increase, rather than decrease, distortions and dysfunction in the patent system. Already, major technology firms spend more on patent litigation and defensive patent purchases than they spend on R&D.⁴⁰ This settlement, especially if it is used as a template for interpreting FRAND industry-wide, will only increase the need for firms to develop larger defensive portfolios and divert resources away from investments in R&D and innovation in real products and services.

To best promote consumers’ interests and foster competition, the FTC should maintain its current carve-outs for defensive use found in section Section IV.F of the consent decree. To the extent that the Commission amends the decree or takes broader action to place confines on FRAND generally, it should carefully consider the second-order problems described in the above comments.

The FTC should continue its detailed examination of PAEs, which both exploit and feed the current problems in the patent system identified above, and use its policy staff and broad investigatory powers to highlight the root causes of the competitive problems created by general patent system dysfunction.

Respectfully submitted,

Daniel O’Connor
Matthew Schruers
Ali Sternburg
Computer & Communications Industry Association
[address, phone]

February 22, 2013                                                

__________________
¹ CCIA is an international nonprofit membership organization representing companies in the computer, Internet, information technology, and telecommunications industries. Together, CCIA’s members employ nearly half a million workers and generate approximately a quarter of a trillion dollars in annual revenue. CCIA promotes open markets, open systems, open networks, and full, fair, and open competition in the computer, telecommunications, and Internet industries. A complete list of CCIA members, which includes Google, Inc., is available at http://www.ccianet.org/members.

² Statement of the Federal Trade Commission, In the Matter of Google Inc., FTC File No. 121-0120, January 3, 2013, available at
http://www.ftc.gov/os/caselist/1210120/130103googlemotorolastmtofcomm.pdf.

³ Federal Trade Commission, “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy,” October 2003, available at http://www.ftc.gov/os/2003/10/innovationrpt.pdf.

⁴ RPX Corp., Registration Statement (Sec. & Exch. Comm’n Form S-1), at 59 (Sept. 2, 2011).

⁵ “To Promote Innovation,” supra note 3.

⁶ As Intel made clear in its 2011 FTC filing (prior to the outbreak of the current wave of smartphone patent litigation), “[o]nly a small number of disputes over the licensing of SEPs have arisen. Only a subset of those have been litigated, and even that handful of cases has highlighted the complexity and idiosyncrasy of each licensing situation” (Intel Corporation’s Response to the Commission’s Request for Comments in Connection with Its Patent Standards Workshop, Project No. Pll-1204 (August 5, 2011), at 4-5, available at http://www.ftc.gov/os/comments/patentstandardsworkshop/00042-80174.pdf). Other commenters, including Alliance for Telecommunications Industry Solutions (ATIS), TIA, ANSI, Qualcomm, Microsoft, and industry analyst Keith Mallinson are a few of the commenters who also observed little or no problems related to FRAND abuse or holdup.

⁷ Richard Epstein, Scott Kieff, & Daniel Spulber, “The FTC’s Proposal for Regulating IP through SSOs Would Replace Private Coordination with Government Hold-up,” FTC Issues Agenda for Workshop to Explore the Role of Patented Technology in Collaborative Industry Standards, FTC Project No. P111204, Public Comments, at 23-24, available at
http://www.ftc.gov/os/comments/patentstandardsworkshop/00041-80171.pdf.

⁸ Eric J. Iversen, “Standardization and Intellectual Property Rights: ETSI’s Controversial Search for New IPR-Procedures,” proceeding of the 1999 SIIT conference, at 7.

⁹ Federal Trade Commission, Patents Standards Workshop, “Tools to Prevent Patent ‘Hold-up,’” June 21, 2011, transcript at 42, available at
http://www.ftc.gov/opp/workshops/standards/transcript.pdf.

¹⁰ Id. at 167-68.

¹¹ Id. at 156.

¹² In re Dell Computer Corp., 121 F.T.C. 616 (1996).

¹³ Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008).

¹⁴ In the Matter of Negotiated Data Solutions LLC, File No. 051-0094 (2008).

¹⁵ Jorge Contreras, “An Empirical Study of the Effects of Ex Ante Licensing Disclosure Policies on the Development of Voluntary Technical Standards,” Nat’l Inst. of Standards and Tech. (2011), available at
http://gsi.nist.gov/global/docs/pubs/NISTGCR_11_934.pdf.

¹⁶ Although the original decision against Rambus by the FTC was overturned on appeal, the European Commission filed a complaint against Rambus and eventually reached a settlement with the company.

See: http://www.rambus.com/us/news/press_releases/2009/091209.html.

¹⁷ Joan Lappin, “What Exactly Does Michael Dell Have to Sell?,” Forbes, January 16, 2013, available at
http://www.forbes.com/sites/joanlappin/2013/01/16/what-exactly-does- michael-dell-have-to-sell.

¹⁸ Kraken, “Rambus: A Dying Company With Dying Patents,” Seeking Alpha, Feb. 7, 2012, available at http://seekingalpha.com/article/346701-rambus-a-dying-company-with-dying -patents.

¹⁹ Federal Trade Commission, Negotiated Data Solutions LLC; Analysis of Proposed Consent Order to Aid Public Comment, 73 Fed. Reg. 5846, 5847 (Jan. 31, 2008), available at
http://www.gpo.gov/fdsys/pkg/FR-2008-01-31/html/E8-1801.htm.

²⁰ Although ambiguous FRAND pledges are far from perfect, they have provided some assurances and courts have usually recognized them as preventing the worst types of patent abuse. As a result, patent assertion entities have largely acquired other patents, particularly non-SEP software patents, to use in their litigation campaigns. According to one author, “With the exception of IPCom, which attempted to disclaim FRAND commitments previously made by Bosch, no instance has been identified of a PAE asserting an essential patent against a standards-compliant product” (Roger G. Brooks, “Patent ‘Hold-Up’ and the FTC’s Campaign Against Innovators,” 39 AIPLA Q.J. 451 (2011)).

²¹ Christina Mulligan & Timothy B. Lee, “Scaling the Patent System,” N.Y.U. Ann. Surv. Am. L. (forthcoming), at 15, available at
http://ssrn.com/abstract=2016968.

²² See James Bessen, “A Generation of Software Patents,” Boston Univ. School of Law, Law and Econ. Research Paper No. 11-31, June 21, 2011, available at
http://ssrn.com/abstract=1868979.

²³ “I have predicted a marked trend of increasing value with the intangibles in mobile devices—including embedded and aftermarket software predominating over hardware—since Apple‘s 2008 3G iPhone launch. The success of the iPhone including its Apps store proves my point. The iPhone leads the smartphone market and has a manufacturing cost around just one third of its $600 average wholesale pricing (before operator subsidies to consumers). Gross profit margins approaching 60% provide a significant return on investments in software, brand and distribution, while Apple largely relies on the essential IP developed and contributed to mobile standards by others.” Keith Mallinson, “A Compendium of Industry and Market Analysis Articles on Intellectual Property in Mobile Communications Standards,” Response to FTC Request for Comments on the Practical and Legal Issues Arising for Incorporation of Patented Technologies in Collaborative Standards, Patent Standards Workshop, Project No. P11-1204, June 12, 2011, at 19-20, available at
http://www.ftc.gov/os/comments/patentstandardsworkshop/00007-60459.pdf.

²⁴ RPX Corp., Registration Statement, supra note 4.

²⁵ See Federal Trade Commission, “To Promote Innovation,” supra note 3, at ch. 3, at 34-37, 51-54.

²⁶ See infra notes 28-29 (citing testimony from FTC June 21, 2011 Patents Standards Workshop, “Tools to Prevent Patent ‘Hold-up’”).

²⁷ See Jorge Contreras, “Rethinking RAND: SDO-Based Approaches to Patent Licensing Commitments,” ITU Patent Roundtable, Geneva, at 9 (Oct. 10, 2012), available at
http://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=1030& context=fac_works_papers
(“...many patent holders engaged in standards development do not actively seek to license or enforce their SEPs. These companies have been termed ‘sleeping dogs’, and are generally believed to hold SEPs primarily for ‘defensive’ purposes (i.e., to use in counterclaims should they be sued for patent infringement, or as bargaining chips in licensing negotiations with other patent holders). Vendors are loathe to approach sleeping dogs for licenses, as doing so could ‘wake’ these companies and result in royalty obligations that otherwise would not have materialized. Thus, it is a common strategy to let these sleeping dogs lie.”)

²⁸ See Federal Trade Commission, Patents Standards Workshop, “Tools to Prevent Patent ‘Hold-up’”, June 21, 2011, transcript at 154:

“...the way that vertically integrated companies that both contribute technology to standards and also implement disorders [sic], monetize if you will, their contributions to standards, is often through getting defensive positions that can create design freedom for them, and the classic way people do a lot of defensive patenting in the tech industry, and when people talk about, you know, patentees versus innovators – or, sorry, innovators versus implementers, I think that distinction is often overlooked, what what’re you’re getting out of participation in standards development is often design freedom.”

“Now, there may be issues in, you know, how far defensive suspension should apply. And I think those thing need to be dealt with on a case-by-case basis. I think there is a reasonable possibility here. I know when we’ve kind of faced this in the past, we’ve asked ourselves the question of, you know, well, yeah, if you want to litigate against me, then that has a different value to me than if you’re willing to sign a non-assert. So, you know, the way this plays out could be very different, and it shouldn’t be something that is blanketly dismissed.”

²⁹ Id.; see also id. at 50:

“...the decision is going to be more than just about essential patent claims, vis-à-vis, a single standard. It’s going to be about your product, look at the different patent holders? Do I already have a licensing agreement with them? Do we have a longstanding détente, you know, what is their business model? Are they the type of patent holder that makes RAND commitments at standards bodies but don’t proactively seek licenses, they sort of use their patents defensively, so when someone sues them with some intellectually property they’ll go and pull out the stuff that they, you know, where they made a licensing commitment at a standards body? I mean, there’s all these different business models.”

³⁰ Brad Biddle et al., “How Many Standards in a Laptop? (And Other Empirical Questions),” available at http://standardslaw.org/How_Many_Standards.pdf.

³¹ Insofar as SEPs may prospectively provide less design freedom and flexibility to operate, SEP-heavy market participants may be incentivized to institute more aggressive licensing programs. This will ultimately raise prices for consumers.  

  ³² See testimony discussed, supra notes 28-29. Furthermore, ambiguous interpretations of FRAND have given that large technology companies the ability to participate in thousands of standard setting exercises each year. Dispatching legal personnel to each effort would be onerous and inefficient as the majority of these standards never attain commercial significance. Ambiguous FRAND commitments allow companies to punt more complex licensing decisions further down the road while allowing the engineers to focus on crafting the best standard possible from a technological perspective. Although the downside of this is a higher theoretical risk of holdup, reputational concerns and the promise of future interactions largely discipline repeat standards players to negotiate in good faith. If FRAND declarations are intepreted as preventing bilateral negotiating discretion surrounding patents declared as essential, companies will need to do more thorough ex-ante examination of those declarations, which could slow that standard setting process down and limit the number of SSOs or working groups that individual companies could participate in.

³³ See Federal Trade Commission, Patents Standards Workshop, “Tools to Prevent Patent ‘Hold-up’”, June 21, 2011, transcript at 223:

“But all of that taken into consideration, I’ve heard that making a RAND commitment should not be akin to IP suicide, in that if you have been sued in a defensive posture, if someone’s coming after you with an injunction, that that then kind of takes the handcuffs off the RAND commitment because it’s – your business is getting shut down if you don’t – aren’t able to use every thing that’s in your arsenal. So, I would say in that situation, maybe there is some room, because you’re saying, ‘Look, how is it you can shut me down and I can’t shut you down?’ That seems counter-intuitive, also.”

³⁴ This strategy is common for companies building defensive portfolios. A concise description is available in a Mondaq article from 2012: “Defensive Reasons: Here, Patents are registered purely for defensive purposes. They are the ones that cover something that a competitor may possibly practice or is already practicing. That is, such patents safeguard the business by providing protection from litigation.” Mrinalini Gupta, “India: Defensive Patents... Bombs For Future Business Battle,” Mondaq, November 30, 2012, available at
http://www.mondaq.com/india/x/208990/Patent/Defensive+Patents+Bombs+For +Future+Business+Battle.
For a more detailed description of strategic defensive patenting, see: James Bessen, “Patent Thickets: Strategic Patenting of Complex Technologies,” March 2003, available at
http://ssrn.com/abstract=327760.

³⁵ Charles Duhigg & Steve Lohr, “The Patent, Used as a Sword,” N.Y. Times, October 7, 2012, available at
http://www.nytimes.com/2012/10/08/technology/patent-wars-among-tech- giants-can-stifle- competition.html?pagewanted=all.

³⁶ The record of the FTC’s November 6, 2002 hearings on “Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy” was littered with references to the ambiguous nature of the FRAND commitment. Carl Shapiro, the former DOJ Deputy Assistant Attorney General for Economics, summed up the consensus of the hearing when he said, “It just seems there’s a lot of running room between different interpretations of fair, reasonable and non-discriminatory when we’ve got complex terms and conditions that are integral to the whole process.”

³⁷ See generally Iversen, “Standardization and Intellectual Property Rights,” supra note 8.

³⁸ Intel Corporation’s Response to the Commission’s Request for Comments in Connection with Patent Standards Workshop, supra note 6.

³⁹ Jorge Contreras, “An Empirical Study of the Effects of Ex Ante Licensing Disclosure Policies on the Development of Voluntary Technical Standards,” Nat’l Inst. of Standards and Tech. (2011), available at
http://gsi.nist.gov/global/docs/pubs/NISTGCR_11_934.pdf.

  40 Duhigg & Lohr, “The Patent, Used as a Sword,” supra note 35.

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