Smart patent reform needs to enable market solutions

While many predict gridlock in the new Congress, hopefully one exception is patent reform, one of the few areas where Congressional Republicans and President Obama agree.  Once again patent trolls will take front and center as the poster child for why patent reform is needed.  This makes sense – patent trolls are a clear example of how the patent system can be abused and become the source of costly litigation and litigation threats that ultimately hamper innovation, dampen competition and cost consumers billions in higher costs.  

But there is more to patent reform than stopping trolls. For example, even if last term’s troll-focused Innovation Act (H.R.3309) had passed into law, we would still have devices covered by hundreds of thousands of patents and many patents with fuzzy boundaries.  Combine that with patent holders who control a scary amount of patents and the high price of patent litigation and you have a system ripe for broad-based abuse, not just by patent trolls. 

{mosads}This perfect storm of circumstances is what makes patent law different in its potential for abuse. Everyone, even trial lawyers, should support patent reforms that fix the issues of fundamental unfairness specific to patent law before they cause significant damage to our faith in the justice system.  But well targeted reforms will not be enough. 

Fortunately, the market is beginning to try to solve this problem.  Defensive patent pools help patent owners organize their rights and provide transparent licensing information – which reduces the threat of disruptive patent litigation.  Freed from this threat, patents can begin to be transacted at a normal market value and not a threat based market value.  Additionally, businesses are free to bring new products to market without fear that their entire investment might be destroyed due to costly and unpredictable patent litigation. 

Unfortunately, these valuable defensive patent pools are coming under attack.  Once again the trolls have turned to misuse of the court system. This time it is the antitrust laws that are being abused.  The antitrust laws which seek to lower costs and promote innovation are being turned on their head to threaten these market based solutions.   

For example, in 2012, the patent troll Cascades filed an antitrust suit against a defensive pool called RPX as well as manufacturers HTC, Samsung and Motorola claiming the defensive pool was an antitrust conspiracy that sought to drive down the price of patent licenses.  Cascades had actually been negotiating to sell patent rights to RPX and only turned to litigation when the talks fell through.   

Antitrust litigation is fabulously time consuming and expensive.  RPX sought to dismiss the case but the court declined.  Even though it recognized that defensive patent pools can potentially improve efficiency, it permitted the case to go forward. The court even refused to dismiss a claim that the agreement was per se illegal.   

Per se claims are severe in antitrust law and don’t even allow defendants to show that their actions had procompetitive justifications and courts have warned about attacking potentially procompetitive conduct under this draconian rule. It seems distressing that a claim that parties were trying to lower costs could be considered as per se illegal.  As Justice Breyer said, “[T]he Congress that enacted the Sherman Act saw it as a way of protecting consumers against prices that were too high, not too low.  [Courts] should be cautious—reluctant to condemn too speedily—an arrangement that on its face appears to bring low price benefits to the consumer.” Now RPX and other defensive collaborations face the threat of endless antitrust litigation with all the uncertainty, risk, and cost that entails.   

Congress should step in and clarify that these kinds of market-based solutions should not face draconian condemnation and costly litigation. The market must be allowed the freedom to discover solutions to the problem of unbalanced negotiating positions and the risk of extortionate litigation.  As part of patent reform, Congress should make clear that these organizations can experiment and test the market as long as this experimentation is conducted in good faith and with proper safeguards.  Without such market-based solutions, we will inexorably see higher prices for patent rights and decreased incentive to produce or consume cutting edge products. 

Congress is experienced in enabling market solutions to problems in high tech industries.  In 1993, Congress passed the National Cooperative Research and Production Act (NCRPA) which provided limited antitrust exemption for joint ventures. This legislation was later extended to standards development organizations in the Standards Development Organization Advancement Act of 2004. Standards development is an activity that, for instance, allows phones from different companies to all connect to the internet through 4G technology. 

The NCRPA changes to antitrust law were carefully structured – it simply made clear that antitrust cases would be analyzed under rule of reason, not the per se doctrine, and that prevailing parties may recover attorney’s fees.  In addition, organizations that notified the government of their activities are only liable for actual damages, not the treble damages usually imposed in antitrust cases. 

This new Congress will hopefully revisit the issue of patent reform.  While doing so, it should create an environment where antitrust law and the threat of litigation do not create a roadblock to market based solutions.  The NCRPA serves as the ideal model on how this can be done. Congress should consider adding NCRPA like protections for defensive patent organizations.

Balto is an antitrust lawyer in Washington, D.C. and  former policy director at the Federal Trade Commission.