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Patents and the Public Interest

Post Time:2011-12-14 Source: Author: Views:
On Wednesday, in a case closely watched both by analysts and retailers, the International Trade Commission will decide whether the handset maker HTC should be allowed to import its products into the United States. The controversy? A claim by Apple that HTC infringed on two of the estimated 250,000 patents covering smartphone technology. If the commission agrees, it is likely to issue an “exclusion order,” which would in effect say “keep out” (of the United States) to HTC’s Android phones during the Christmas season.

It’s cases like this that have many people concerned that soon judicial decisions, rather than consumers, will decide what products make it onto Santa’s sleigh. While smartphone patent disputes are being waged around the world, with injunctions in play on several continents, the I.T.C. ruling has the potential to be the most significant one to date, given the size of the United States market. As patent law experts who appreciate the efficiency of the I.T.C.’s decision-making, we believe that a small change in how the commission does its job could yield big dividends for competition and consumers by reducing the disruption an exclusion order can wreak.

But first, some background.

The Apple-HTC dispute isn’t the only one at the I.T.C. with a potentially huge impact on consumers. Makers of GPS devices and flat-screens, and most major smartphone makers, are also embroiled in disputes there, all of them hoping that the I.T.C. will not prevent their products from being on the United States market.

How did this once-obscure trade court become one of the most important battlegrounds of consumer technology? The answer lies in part in the speed of the I.T.C., but even more so in the power it has to keep products out of the United States.

In 2006, the BlackBerry manufacturer Research in Motion was almost blocked from making its phones when NTP — a “patent troll” whose sole business is profiting from patents — sought to enforce some patents. Though a jury had awarded just $23 million in damages, R.I.M. agreed to pay NTP what later amounted to $613 million in licensing fees to avoid having its phones shut down by the court.

Later that year the Supreme Court’s eBay decision made it harder to impose such “holdup” fees by doing away with the practice of automatically awarding an injunction. After eBay, a court must consider the harms to the parties and the public that an injunction would present before deciding to grant one. This new case-by-case standard has gone a long way to solving the holdup problem that had beset the patent system.

But in the wake of eBay, both patent trolls and product companies like Apple have flocked to the I.T.C., where a federal ruling held that eBay’s new equitable test does not apply. The commission’s caseload has more than doubled, from 29 cases in 2005 to 64 and counting this year. And while the injunction grant rate in district courts has declined to around 75 percent for companies that make products and much lower than that for trolls, the I.T.C.’s injunction rate has held steady at 100 percent. The result has been to undo much of the desirable effect of eBay.

Although the I.T.C. is supposed to consider an exclusion order’s impact on competition and consumers relating to the effect of any exclusion order, it hasn’t given these so-called “public interest” factors many teeth. But it should. The I.T.C. has the power to tailor the remedy to fit the crime, for example delaying an injunction to allow a defendant to redesign its product, or even refusing to exclude the imports at all.

Tailoring remedies makes sense. When a patent holder doesn’t compete in the market or risk irreparable harm, fast-tracking the case to a district court to assess damages may be the better option. But when the dispute is between competitors, or involves a start-up or university seeking to commercialize its invention, an exclusion order should be the default.

Even in such cases, shutting out imports of an infringing product is not always the right answer. If the patent covers a small part of the product, the defendant could design around it, and if the defendant’s infringement was inadvertent, the I.T.C. could award an exclusion order but delay its start. During the delay period, the infringer could pay remuneration through a bond, allowing the patentee to get paid but not holding up a large product because of a small patent.

A delay would allow companies and consumers to adjust to the ruling. The alternatives — for companies to change their products every time they are sued, no matter how meritlessly, or to shut down production altogether — would drive up costs unnecessarily. (As is often said: companies can manage bad news, it’s the bad surprises that they hate. Just ask Samsung and HTC, which have had to design around patent injunctions in Germany and Australia.)

Congress could require the I.T.C. to consider these options. But it shouldn’t have to. The I.T.C. has proven to be adaptive to changing competitive conditions. The agency has the power to make fair, case-by-case decisions on whether and how to block products from entering the country. It should use that power.

Colleen V. Chien is an assistant professor at Santa Clara University School of Law. Mark A. Lemley is a professor at Stanford Law School and a partner in the law firm of Durie Tangri.
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