Understanding the Role of Patents for Small Smartphone Companies

When I think of smartphones and smartphone patents, I think of the big battles and players: Apple v. Samsung, Motorola v. Microsoft, NTP v. RIM, Nokia, Ericsson, Google, Sony, and other mega-companies. But what about small smartphone companies? Do they have patents? And, if so, how do those patents affect important issues like fundraising and litigation?

Joel R. Reidenberg, N. Cameron Russell, Maxim Price & Anand Mohan (Fordham Law School and Fordham CLIP) answer some of these questions in their article, Patents and Small Participants in the Smartphone Industry (18 Stan. Tech. L. Rev. 375 (2015)). Here is the abstract:

For intellectual property law and policy, the impact that patent rights may have on the ability of small companies to compete in the smartphone market is a critically important issue for continued robust innovation. Open and competitive markets provide vitality for the development of smartphone technologies. Nevertheless, the impact of patent rights on the smartphone industry is an unexplored area of empirical research. Thus, this Article seeks to show how patent rights affect the ability of small participants to enter, compete, and exit smartphone markets. The study collected and used comprehensive empirical data on patent grants, venture funding, mergers and acquisitions, initial public offerings, patent litigation, and marketing research data. This Article shows empirically that small participants succeed in the market when they have a low and specific critical mass of patents and that this success exceeds the general norms in the startup world. Surprisingly, the analysis demonstrates that the level of financing and market success do not increase with larger patent portfolios. Lastly, despite the controversies over patent trolls, this Article demonstrates that patent litigation, whether from operating companies or NPEs, does not appear to be a significant concern for small players and does not appear to pose barriers to entry. The Article concludes by arguing that patent rights are providing incentives for innovation among small industry players and that contrary to some expectations, patent rights support competitiveness in the smartphone industry for small market players.

This is an interesting article - my comments after the jump.

How Often are DMCA Takedown Notices Wrong?

A couple weeks ago, I blogged about Lenz v. Universal Music and wondered how often "bad" DMCA notices are actually sent. My theory was one of availability and salience - we talk about the few nutty requests, but largely ignore the millions of real takedown requests. I wrote:

How important is this case in the scheme of things? On the one hand, it seems really important - it's really unfair (pardon the pun) to takedown fair use works. But how often does it happen? Once in a while? A thousand times a month? Ten thousand? It seems like often, because these are the takedowns we tend to hear about; blogs and press releases abound. However, I've never seen an actual number discerned from data (though the data is available).

While there are some older studies on smaller data sets, no one has attempted to tease out the millions of notices that come in each moth now (like 50 million requests per month!). It turns out, though, that someone has attempted a comprehensive study through 2012. Daniel Seng (Assoc. Prof. at NUS/JSD student at Stanford) downloaded Google's transparency data and performed cross-checks with Chilling Effects data to give us 'Who Watches the Watchmen?' An Empirical Analysis of Errors in DMCA Takedown Notices:

Under the Digital Millennium Copyright Act (DMCA) takedown system, to request for the takedown of infringing content, content providers and agents issuing takedown notice are required to identify the infringed work and the infringing material, and attest to the accuracy of such information and their authority to act on behalf of the copyright owner. Online service providers are required to evaluate such notices for their effectiveness and compliance before successfully acting on them. To this end, Google and Twitter as service providers are claiming very different successful takedown rates. There is also anecdotal evidence that many of these successful takedowns are "abusive" as they do not contain legitimate complaints of copyright or erroneously target legitimate content sites. This paper seeks to answer these questions by systematically examining the issue of errors in takedown notices. By parsing each individual notice in the dataset of half a million takedown notices and more than fifty million takedown requests served on Google up to 2012, this paper identifies the various types of errors made by content providers and their agents when issuing takedown notices, and the various notices which were erroneously responded to by Google. The paper finds in that up to 8.4% of all successfully-processed requests in the dataset had "technical" errors, and that additionally, at least 1.4% of all successfully-processed requests had some "substantive" errors. As all these errors are avoidable at little or no cost, this paper proposes changes to the DMCA that would improve the takedown system. By strengthening the attestation requirements of notices, subjecting notice senders to penalties for submitting notices with unambiguously substantive errors and clarifying the responsibilities of service providers in response to non-compliant notices, the takedown system will remain a fast, efficient and nuanced system that balances the diverse interests of content providers, service providers and the Internet community at large.

I think this is a really interesting and useful paper, and the literature review is also well worth a read. I think the takeaways, though, depend on your priors. Some thoughts on the paper after the jump.

The Banality of the TPP

I've now skimmed through the leaked IP Chapter of the final TPP agreement, and I've read some commentary on it. I'm not sure what to make of it, but at the moment I'm trying to decide if there's anything to make of it. As I read it, almost all of the provisions are an exportation of US law to the agreeing countries - for good or bad. But as a US scholar, that has me thinking, "meh" - at least as to the content of it. I'm not aware of any consensus that the way these other countries were doing things is so much better than our way. Or so much worse, for that matter. I understand concerns that the TPP represents the U.S. getting other countries to agree to its view of the world in exchange for whatever other benefit those countries think they will be getting, but that's not what this post is about. Instead, this post is about whether the TPP is creating some new law. (Disclaimer: I haven't looked at the pharma/biologics sections in detail. I know that these sections, in particular, might create issues in other countries in a way they don't currently experience).

But the hand-wringing I've read in content reviews seems odd. Many complain that copyright term will increase from life + 50 to life +70. I think that's no big deal - forever + 20 isn't that much  longer than forever. This doesn't mean I agree that the duration is a good thing; I don't. Life + 50 is already too long. I just think that if this is what you have to complain about, then there's not so much to complain about.

Other analysis is similar. The EFF points out the shocking clause that breaking digital locks may be punished even if there is no copyright infringement. The italics are theirs, as if this is some new thing. But it turns out that's been the law in the US since the DMCA was passed more than 15 years ago. Similarly, another website complains that devices used to break digital locks may be forfeited and destroyed. Shocking again! Except that this, too, has long been a potential remedy under the law in the U.S.

Don't get me wrong. People who like US law as is will be pleased with the TPP. People who don't like US law as it is will not be pleased with the TPP. But regardless of which camp one is in, I am not convinced that the world will be a significantly better or worse place because of the IP provisions of the TPP.

So, where does this leave us? The TPP has real problems, but they aren't substantive -- at least not newly substantive:

1. The secret negotiation process was not great. But I'm a cynic and think the outcome would have been the same.

2. The TPP locks in US law as it is, so dreams of orphan works and reduced IP protections are gone. But I'm a cynic and think that we are locked in anyway.

3. The TPP exports US law to other countries, extending its hegemony. I'm not convinced that this will change things one way or the other. But I'm a cynic, so time will tell. In the meantime, I don't think anyone's prediction will be accurate.

4. This is long and dense, and there may be parts that will change U.S. law in some way that isn't being discussed now. And I'm a cynic, so I'm sure there are.

Policy Issues in Lexmark Argument on International Patent Exhaustion

Last Friday, the Federal Circuit heard en banc argument on whether it should adopt a U.S. rule of international patent exhaustion in Lexmark v. Impression Products. This case has important distributive implications for foreign consumers, as Daniel Hemel and I describe in our new essay, Trade and Tradeoffs: The Case of International Patent Exhaustion (forthcoming in the Columbia Law Review Sidebar).

In a Patently-O post last week, we asked whether the Federal Circuit would recognize the U.S.–foreign tradeoff at stake. And the answer appears to be yes. Tony Dutra summed up the argument for Bloomberg (subscription required): Policy Focus in Fed. Cir. Patent Exhaustion Review. Here's an excerpt of his analysis:

Most members of the court appeared prepared to distinguish patent law because there is no Patent Act statutory equivalent to the Copyright Act's provision. However, the discussion turned more to policy questions as the 90-minute argument proceeded. Some judges essentially said that the harm to the copyright holder in Kirtsaeng—books priced more cheaply overseas and imported for less than the U.S. price—was minimal compared to the harm to, for example, AIDS patients in Africa, unless patentees can engage in drug price discrimination.

You can listen to the oral argument yourself here. (Bill Vobach also maintains a helpful key to judge voices.) The most extensive discussion of the issue of AIDS drugs starts at 1:16:02. Barbara Fiacco, arguing for BIO as amicus, discusses the importance of a no-exhaustion rule for allowing regional pricing and preventing arbitrage at 1:05:21.

How Does the Economy Affect Patent Litigation?

When I was in practice, the conventional wisdom was that litigation (of all kinds) grew during recessions, because people were less optimistic and willing to let slights go, and instead fought over every dollar. Alan Marco (Chief Economist, PTO), Shawn Miller (Stanford Law Fellow), and Ted Sichelman (San Diego) have attempted to tackle this question with respect to patent litigation. They examine litigation rates from 1970-2009 in conjunction with a variety of macroeconomic factors.

Their paper is coming out in the Journal of Empirical Legal Studies, but a draft is on SSRN. The abstract follows:

Recent studies estimate that the economic impact of U.S. patent litigation may be as large as $80 billion per year and that the overall rate of U.S. patent litigation has been growing rapidly over the past twenty years. And yet, the relationship of the macroeconomy to patent litigation rates has never been studied in any rigorous fashion. This lacuna is notable given that there are two opposing theories among lawyers regarding the effect of economic downturns on patent litigation. One camp argues for a substitution theory, holding that patent litigation should increase in a downturn because potential plaintiffs have a greater incentive to exploit patent assets relative to other investments. The other camp posits a capital constraint theory that holds that the decrease in cash flow and available capital disincentivizes litigation. Analyzing quarterly patent infringement suit filing data from 1971-2009 using a time-series vector autoregression (VAR) model, we show that economic downturns have significantly affected patent litigation rates. (To aid other researchers in testing and extending our analyses, we have made our entire dataset available online.) Importantly, we find that these effects have changed over time. In particular, patent litigation has become more dependent on credit availability in a downturn. We hypothesize that such changes resulted from an increase in use of contingent-fee attorneys by patent plaintiffs and the rise of non-practicing entities (NPEs), which unlike most operating companies, generally fund their lawsuits directly from outside capital sources. Over roughly the last twenty years, we find that macroeconomic conditions have affected patent litigation in contrasting ways. Decreases in GDP (particularly economy-wide investment) are correlated with significant increases in patent litigation and countercyclical economic trends. On the other hand, increases in T-bill and real interest rates as well as increases in economy-wide financial risk are generally correlated with significant decreases in patent suits, leading to procyclical trends. Thus, the specific nature of a downturn predicts whether patent litigation rates will tend to rise or fall.

The authors also have a guest post at Patently-O discussing their findings.

I don't have too much to add to their analysis; the notion that a credit crunch will reduce litigation makes a lot of sense.

My two primary additional comments are as follows:

1. There is a lot more to the findings and the authors' analysis than presented in the Patently-O post. For example, there was a shift as litigation changed from competitor to licensor-based claims. The full paper is worth a read.

2. I am not fully convinced what this tells us about the period from 2010-2014. The authors hint that economic growth during that time correlates with a drop in litigation, but the drop in litigation was only in latter 2014 (and reversed itself in early 2015, as they note). This is further complicated by the change in how we count litigation after the America Invents Act requirement that each defendant be joined in a separate case. I think a lot more work (and creative thought) needs to be done to meld the pre- and post-AIA data into a coherent data set.

[UPDATE: I've been corrected - patent litigation by defendant count apparently decreased more than I let on (see, e.g. here) if you exclude false marking claims. This tempers some of my skepticism, though I would still like to see the post AIA data combined with pre-AIA data]