Congress’s Patent Reform Efforts Don’t Go Far Enough

Steve Pociask | President, American Consumer Institute

Wireless technology, services and applications are revolutionizing how consumers communicate, shop, work and get information. In the last year, mobile traffic grew by 81 percent, downloading speeds doubled to 1.4 megabits per second and mobile apps grew by 115 percent – 92 percent of which was downloaded at no cost to consumers.

In the U.S., the number of wireless telephone subscriptions currently exceeds the population, and 40 percent of households rely only on wireless services for telephony. Despite the rosy picture, however, the success of wireless broadband and apps is being slowed by abusive litigation practices employed by patent trolls that never intend to deliver a single product to consumers. These actions are extortionist-like attempts to garner excess royalties and payments, and potentially remove entire product lines from the shelves.

Trolling is profitable because it presents potential defendants, such as wireless device manufacturers, with two choices – settle up and pay or withstand a long and expensive legal battle. For consumers, this adds real dollars to the wireless products that they demand.

Some patent trolls are obvious. In less than 10 years, the number of defendants sued by trolls has increased 4-fold at an annual cost approaching $100 billion, and estimates are that one-third of startups have been threatened by trolls. While Congress is working on much needed patent reforms that it hopes will prevent this abuse, their actions may not go quite far enough.

Some patent abuse occurs when expired patents remain “active” because they are bundled into patent pools. This trick, in effect, makes consumers pay several dollars more for every television, DVD player, computer and smart phone – even though the majority of patents in the pool have expired. Congress is not looking at this form of abuse.

Other patent abuses are less obvious, but are nonetheless costly to consumers. For example, InterDigital has, according to many, pursued patent troll-like activities with its International Trade Commission lawsuit against Nokia, Samsung, and ZTE. InterDigital acts much like non-practicing entities (NPE), which develop technologies but do not make anything with them. It often claims its patents are Standard Essential Patents (SEPs), which means the patent is commonly accepted as the industry standard and is essential to the functionality of a wireless device. Once a technology is deemed an SEP, licensing fees must be negotiated under fair, reasonable and non-discriminatory (FRAND) terms to every licensee. However, the only way to dispute SEPs is in court, where patent trolls are taking their licensing disputes rather than negotiating fairly with licensees outside the legal system.

InterDigital, as some have observed, opts to subject manufacturers to costly litigation in an effort to force an unfair settlement rather than negotiate with licensees in good faith. In some cases, it pursues general exclusion orders in the ITC in order to prevent an alleged infringing company from selling consumers the products they want. This type of exclusions can be detrimental to both the defending company as well as the competitive marketplace, and ultimately consumers pay the price.

An example of a firm’s willingness to sue rather than negotiate is ITC case 337-TA-868, where InterDigital’s it sued Huawei, Nokia, Samsung and ZTE just two days after their licensing agreement expired on expired December 31, 2012. The dispute is over wireless 3G and 4G technology that InterDigital claims is needed for any device accessing these networks. However, if this technology is an SEP, it should have been negotiated under FRAND terms before reaching the point of legal action. Unfortunately, this is not the modus operandi of firms behaving like trolls.

While some of these troll-like companies continue to lose, the lawsuits drag on, thereby keeping products out of consumer hands or requiring manufacturers to charge consumers more for the privilege. If Congress is going to reform patents, let’s not forget to consider FRAND and SEP abusers.

In the U.S., the wireless service, device and apps market has been a boon to economic output, growth, productivity and jobs. Worldwide, over a half a billion wireless devices were added to the market last year. That volume alone makes the sue and settle cabal of trolling too profitable, and the cost continues to add needless expense for American consumers.

Congress is doing the right thing by considering patent reforms, but more needs to be done to take the profit out of trolling and put those funds back into the pockets of consumers. For consumers, patent abuse is costly and it ultimately makes them the victims.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research institute.  For more information, visit www.theamericanconsumer.org.

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