DOJ and FTC Hold Workshop on PAEs

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1 THIS WEEK S CONTRIBUTING AUTHOR IS DANIEL P. WEICK EDITED BY KOREN W. WONG-ERVIN DECEMBER 10-14, 2012 PATENTS DOJ and FTC Hold Workshop on PAEs On Monday, December 10, 2012, the DOJ and the FTC held a joint workshop on the antitrust implications of patent assertion entity (PAE) activity. A major theme of the workshop was the need for more reliable data and empirical evidence. The agencies, in particular, asked for data regarding the extent to which PAEs spur innovation (e.g., what percentage of PAE compensation is given back to patentees to invest in innovation, and do PAEs provide higher net sales prices for patents than non-paes?). The agencies and numerous participants also called for greater transparency with respect to the identity of the real party in interest. FTC Chairman Jon Leibowitz gave the opening remarks stating that PAE activity is a growing issue, relying on studies such as the James Bessen and Michael Meurer report, which states that PAE-generated revenue cost defendants and licensees $29 billion in 2011, a 400% increase from According to this report, no more than 25% of this flowed back to innovation, which Chairman Leibowitz described as a 75% deadweight loss. Chairman Leibowitz also relied on a GAO study, which reports that PAE suits are on the rise to the tune of an almost 40% increase in Several presenters, including Professor David Schwartz, stated that they viewed these and other existing studies with skepticism, and called not only for more reliable data, but also pointed out that we need a baseline to compare the costs of PAE litigation and that it cannot be $0 since all litigation has costs. Economist Carl Shapiro delivered a presentation contending that (1) more and better data are needed to determine to what extent PAE activity spurs or hinders innovation, (2) the main problems (to the extent there are any) are with the patent system and the difficulties it has ensuring patent quality, and (3) antitrust cannot fix the broken patent system. I don t see how asserting patents in good faith is ever going to be an antitrust violation, stated Shapiro. Shapiro also pointed out the importance of categorization, stating that how we categorize these entities makes a big difference when analyzing data. For example, of the existing studies, some include individuals and product companies in the PAE category, while others do not. Lastly, Shapiro -1-

2 stated that hybrid PAEs (an operating company that exerts some control over a PAE) are a different creature for antitrust analysis, and may raise antitrust concerns. Some panelists, including Professor Colleen Chien, argued that PAEs give little guys a chance to monetize their patents, noting that PAEs buy and litigate the patents of small companies more than others. However, Chien also stated that the majority of PAE suits are against small companies, reasoning that PAEs are much more likely to collect on a number of smaller suits than on one big suit against Apple or Google. According to Chien, PAEs fundamentally change the economics of litigation because, unlike traditional patent litigation plaintiffs, PAEs do not have to take into account indirect costs such as countersuits and reputation. The workshop included separate panels on the potential benefits of PAEs and the potential harms, respectively. The presenters noted that the evidence is still being accumulated, and that it is difficult to parse out the net impact of PAE activity on competition and innovation. Potential benefits discussed included: (1) patent market efficiencies such as scale, expertise, and efficient risk bearing; and (2) idea market efficiencies such as increased liquidity, monetization, innovation incentives, and division of innovation labor. Potential harms discussed included: (1) systematic overcompensation of PAEs, which could negatively impact R&D, end user prices, and incentives to innovate; (2) resource diversion such as transfer of rewards, increase in the equilibrium number of suits, opportunity costs, burden on the PTO, and defensive responses (e.g., abandoned projects, second best technology solutions, and preemptive acquisitions of unnecessary intellectual property); (3) potential impact on competition due to decreased incentives for PAEs to participate in cross-licensing truces and incentives for patentees to enter into transactions with PAEs that increase product market rival s costs; and (4) ex-post assertion of patents (i.e., PAEs tend to sue after products are already on the market), which can break existing socially efficient contracts. Andy Gavil, the Director of the Office of Policy Planning, pointed out that antitrust law is concerned only with harms to competition. The workshop also included a panel with industry participants such as Cisco, HP, RIM, Nokia, and Mosaid. Cisco advocated transparency in ownership and suggested that the FTC require an HSR-type filing for all PAE acquisitions. HP and RIM noted a substantial increase in PAE litigation, costs, and settlement amounts, both stating that they spend more money defending patent litigation (which includes non-pae patent litigation) than pursuing new patents. Nokia and Mosaid stated that they believed the system is fine and does not need any changes. Nokia, who is both a frequent defendant in PAE litigation and a seller of patents to PAEs such as Mosaid, stated that it expects 60-80% gross revenue on the patents its sells to PAEs, all of which goes directly back into R&D. The Chief Economist of the USPTO, Stuart Graham, delivered an address noting the PTO s efforts to improve patent quality and enhance transparency in patent ownership. Graham stated that the PTO has enacted a new fee schedule ($0/patent to file an electronic report) to encourage patent-ownership reporting and is holding a roundtable on the issue on January 11, 2013, which is open to the public. The final panel of the day focused on whether, and how, antitrust law applies. The panelists discussed a number of hypotheticals and, although there was little consensus as to whether purely unilateral conduct involving a PAE amounts to an antitrust violation, the panelists did seem to agree that coordination between patentees and PAEs, or hybrid-pae activity, raises -2-

3 potential antitrust concerns. The possible legal theories discussed included Section 7 of the Clayton Act and Sections 1 and 2 of the Sherman Act. The issue of Noerr-Pennington immunity was also raised, with presenters stating that it likely protects conduct such as assertion of patent rights and litigation. The DOJ and FTC are requesting written comments from the public. The deadline for submitting public comments is March 10, Patent Assertion Entity Workshop Opening Remarks by FTC Chairman Jon Leibowitz, available at Carl Shapiro Presentation at PAE Workshop, Patent Assertion Entities: Effective Monetizes, Tax on Innovation, or Both, available at Presentation by Colleen Chien, Assistant Professor of Law, Santa Clara University School of Law, Presentation by Timothy Simcoe Patent Assertion Entities: Potential Efficiencies, Presentation by Ron Epstein, CEO, Epicenter IP Group LLC, Presentation by Iain Cockburn, Professor at BU School of Management, Jury Finds Apple Infringes Three Patents in PAE Case Last week, a jury found that Apple Inc. infringed three patents covering camera phones, call handling, and call rejection in a suit brought by MobileMedia Ideas (MMI). MMI is a patentassertion entity that controls over 300 former Nokia and Sony patents used in smartphones, laptops, and other devices. The company is jointly owned by Nokia, Sony, and MPEG LA, a company that licenses pools of patents in consumer electronics and other industries. MMI currently has patent infringement cases pending against two other smartphone makers, RIM and HTC. Jury verdict, (subscription required) Mike Swift, Apple s iphone infringes three patents in PAE case, mlex (Dec. 14, 2012), available at (subscription required) -3-

4 Apple and Google Make Joint Offer for Kodak Patents Last week, Apple and Google joined together to make a $500 million bid for a portfolio of 1100 patents belonging to the bankrupt Eastman Kodak Co. The patents, which cover a variety of inventions and processes related to imaging technology, are among the assets being sold in the Kodak Chapter 11 reorganization process being overseen by the U.S. Bankruptcy Court for the Southern District of New York. The move comes after both companies tried unsuccessfully to gain sole control over the patent portfolio. Richard Vanderford, Apple, Google Joint Bid Tops $500M for Kodak Patents (Dec. 10, 2012), available at (subscription required) Judge Denies Apple s Request to Hold Samsung SEPs Unenforceable Based on Samsung s Violations of Commitments to SSOs Judge Lucy Koh of the U.S. District Court for the Northern District of California denied Apple Inc. s motion for judgment on its equitable defenses alleging that certain patents asserted by Samsung were unenforceable due to violations of commitments to standard setting organizations (SSOs). Earlier this year, a jury found that Apple had not infringed Samsung s patents. While Judge Koh agreed with Apple that the defenses were not moot as a jurisdictional matter, she declined to resolve the defenses under the doctrine of prudential mootness, stating that a decision now would not provide Apple any meaningful relief, because the jury has already found that Apple is not liable to Samsung for infringing these patents. (Order at 3.) The court also found that interpretation of the governing SSO policies would require analysis of French law (which governs the policies) and would require a delicate inquiry into precisely what factual findings must underlie the jury s verdict. (Id.) In short, since the verdict of non-infringement made a decision on Apple s equitable defenses not necessary for the resolution of the currently pending case, the court found that the issue was best left for a case in which the parties have every incentive to brief and argue the issue as thoroughly as possible. (Id.) Order, available at er.pdf Ryan Davis, Judge Punts on Apple s Bid to Bar Samsung SEP Claims (Dec. 3, 2012), available at (subscription required) European Parliament Approves Centralized Patent System Last week, the European Parliament approved a centralized patent system. Under the legislation, the system will begin functioning in 2014 and will enable applicants to obtain a single patent -4-

5 enforceable in every EU member state except Italy and Spain, which have opted out of the system. The centralized system will not supplant the current options obtaining national patents in specific countries or obtaining a basket of national patents called a European patent but will provide another option for inventors seeking to obtain patents over their inventions. The new patents will be enforceable in new EU patent courts, eliminating the need to enforce patents in particular national courts and allowing for one suit to enforce a patent across participating countries. Also last week, Advocate General Yves Bot issued an opinion endorsing the single EU patent regime. The case was brought by Spain and Italy in the European Court of Justice (ECJ) challenging the authority of the European Union to implement such a system. The Advocate General, whose role is to advise the ECJ judges hearing the case, argued that the Treaty on the Functioning of the European Union empowered the member states, acting through the European Council, to use enhanced cooperation to establish an EU-wide patent system in order to facilitate the attainment and smooth functioning of the internal market. The Advocate General s opinion does not bind the ECJ, but such opinions normally carry great weight when the ECJ judges prepare their ultimate judgment in any given case. Ryan Davis, EU Unitary Patent System Has Major Cos. Wary (Dec. 12, 2012), available at (subscription required) Anita Rita Rego, AG Opinion Endorses Single EU Patent Regime (Dec. 11, 2012), available at (subscription require) MOFCOM Approves Electronic Security Joint Venture with Licensing and Disclosure Requirements Last week, MOFCOM allowed three technology and security companies to move forward with a joint venture to develop an electronic security standard for mobile devices, but required an eight year commitment from the parties to make licenses, programming code, and standards for its technology available to other companies and to refrain from certain IP development paths that may restrict competition. The conditions are similar to those imposed by the EC when it cleared the transaction in November Melissa Lipman, China Oks E-Security Joint Venture, With Conditions (Dec. 11, 2012), available at (subscription required) FTC-Google Settlement Reportedly Allows for Injunctions on SEPs in Certain Circumstances The FTC and Google are reportedly likely to reach a settlement of the FTC s investigation into Google s use of its standard-essential patents (SEPs) that will allow Google to seek injunctions -5-

6 on SEPs in certain circumstances. Reportedly, the settlement would allow Google to seek an injunction in three circumstances (1) where the licensee is an unwilling licensee ; (2) where the licensee refuses to cross-license, and (3) where the licensee is in breach of contract. Leah Nylen, FTC settlement with Google said to allow injunctions in limited circumstances, mlex (Dec. 14, 2012), available at (subscription required) Mike Swift and Leah Nylen, After opposition to first draft, Google, FTC continue settlement talks to resolve patent case (Dec. 13, 2012), available at (subscription required) PHARMACEUTICALS GSK, Flonase Class Reach Settlement Agreement Last week, GlaxoSmithKline (GSK) and a class of direct purchasers of the GSK anti-allergy drug Flonase filed a motion for preliminary approval of a proposed settlement in the U.S. District Court for the District of New Jersey. The terms of the settlement have not been made public, and the settlement papers were filed under seal. If approved, the settlement would resolve claims by the direct purchasers that GSK had lodged sham citizen petitions with the Food & Drug Administration in order to delay entry of generic versions of Flonase. The case was scheduled for trial in January after the court denied GSK s motions for summary judgment. Leah Nylen, GlaxoSmithKline Reaches Agreement With Plaintiffs to Settle Flonase Class Action (Dec. 12, 2012), available at FTC Approves Final Order in Watson Pharmaceuticals Acquisition of Actavis Following a public comment period, the FTC has approved a final order settling charges that Watson Pharmaceuticals, Inc. s proposed acquisition of Actavis Inc. would have been anticompetitive in the markets for 21 current and future generic drugs used to treat a wide range of conditions ranging from hypertension and diabetes to anxiety and attention deficit hyperactivity disorder. The proposed order settling the agency s charges required Watson and Actavis to sell the rights and assets to 18 drugs to Sandoz International GmbH and Par Pharmaceuticals, Inc and to relinquish the manufacturing and marketing rights to three other drugs. The Commission vote approving the final order was 5-0. FTC Press Release, available at -6-

7 Upcoming Programs How Far Can Patent Holders Go? January 15, :00-1:15 Eastern In this second program of a series of joint programs hosted by the Intellectual Property and International Committees, panelists will explore the question of how far patent holders can go in exercising their intellectual property rights, and how those limits change depending on jurisdiction. Panelists from the DOJ and private practice, including former enforcers from the KFTC and MOFCOM, will discuss issues such as refusals to license, field of use and territorial restrictions, extending the patent through post-expiration royalties, and the scope of the patent misuse doctrine under the laws of the United States, Japan, and Korea. Location: Arnold & Porter LLP 555 Twelfth St. N.W. Room 220 Washington, D.C To attend in-person, please RSVP to Deborah.Morman@aporter.com To participate via teleconference, please register at A special thanks to Debbie Bellinger and Ian Horkley for their weekly contributions to tidbits. -7-