The FTC and Innovative Business Models for Patented Innovation

ftc

On April 5, 2013, Google officially submitted a request with the Federal Trade Commission (FTC) that it sanction the activities of “patent trolls” as violations of the antitrust laws. Google was joined by several other high-tech firms, including RIM, a company that proves dynamic innovation is going strong, as its once-dominant Blackberry smart phone is almost a dead product after being superseded by iPhones and Androids, and Earthlink (who would have thought this company was still around?), among a few others.

This was not a shot out of the blue, as Google has long been complaining about “patent trolls,” which are also known in the patent policy debates as either “non-practicing entities” (NPE) or as “patent assertion entities” (PAE). (Given that these terms have negative rhetorical connotations and lack precise definitions, I prefer to identify these companies descriptively by their actual business model, and so I call them “patent licensing companies.”) Google even succeeded in prompting President Obama to complain about patent licensing companies in an exclusive Internet Q&A on Google+ on February 14, 2013.

Moreover, the FTC has shown a strong interest in the past couple years in patents and in the commercialization of patented innovation in the marketplace. The agency hosted a workshop with the DOJ in December 2012 on whether patent licensing companies are violating the antitrust laws, and it has received public comments on whether it should pursue § 5 actions against these companies. Moreover, the FTC recently required Bosch and Google to limit their rights to enforce their patents against infringers when these patents cover standardized technology used in products or services (these patents are called “standard essential patents”).

Google’s lobbying efforts and the FTC’s actions are prompted in part by widespread beliefs today that the “smart phone wars” are killing innovation and that “the patent system is broken.” Patent licensing companies are often identified as primary culprits in causing these ills. In fact, these complaints are now conventional wisdom today.

Others maintain that it is important not to rush to judgment based on emotionally-charged headlines about patent lawsuits or misleading articles and blog postings that get wrong even basic facts about the patent system. They counsel that the prudent approach is to research the issues fully. This is especially important when regulatory agencies like the FTC impact a legal system intended to promote and secure both new inventions and the new business models that convert these inventions into the innovation used by everyone, such as smart phones, tablets, and biotech’s radical advances in medical care in recent years, among others.

For instance, few people realize that “patent wars” have been occurring since the invention and patenting of the sewing machine in early nineteenth century, and occurred again with the invention of the telephone, the automobile, the radio, the airplane, medical stents, and even disposable diapers. Moreover, even fewer people realize today that the patent licensing business model has long been used by innovators who have secured their inventions via the American patent system. The patent licensing model was successfully used in the nineteenth century by Charles Goodyear, Elias Howe and Thomas Edison, to name just a few. In the twentieth century, it has been used successfully by IBM and by every university that makes money from its professors’ patents.

Notably, patent wars and the many new patent licensing models deployed throughout the years have been repeatedly attacked in similar rhetoric that we are now seeing today about the “smart phone wars” and other alleged problems with the patent system. For instance, the nineteenth-century term for “patent troll” was “patent shark.”

One of the most prominent participants at the FTC-DOJ workshop back in December, former DOJ antitrust official and UC-Berkeley economics professor Carl Shapiro, explained in his opening speech that there was still insufficient data on patent licensing companies and their effects on the market. This is true; for instance, a prominent study cited by Google et al. in support of their request to the FTC to investigate patent licensing companies has been described as being fundamentally flawed on both substantive and methodological grounds. Even more important, Professor Shapiro expressed skepticism at the workshop that, even if there was properly acquired, valid data, the FTC lacked the legal authority to sanction patent licensing firms for being allegedly anti-competitive.

Commentators have long noted that courts and agencies have a lousy historical track record when it comes to assessing the merits of new innovation, whether in new products or new business models. They maintain that the FTC should not continue such mistakes by letting its decision-making today be driven by rhetoric or by the widespread animus against certain commercial firms. Restraint and fact-gathering, institutional virtues reflected in a government animated by the rule of law and respect for individual rights, are key to preventing regulatory overreach and harm to future innovation.