TLJ News from August 21-25, 2013

People and Appointments

Steve Ballmer8/23. Microsoft announced in a release that Steve Ballmer (at right) "has decided to retire as CEO within the next 12 months, upon the completion of a process to choose his successor". See also, Ballmer's public email to Microsoft employees.

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8/23. The Department of Justice's (DOJ) Antitrust Division and state plaintiffs filed in the U.S. District Court (SDNY) their Memorandum in Support of Plaintiffs' Revised Proposed Injunction [108 pages in PDF] in USA v. Apple, the e-books antitrust case.

8/23. The Federal Communications Commission (FCC) released a Memorandum Opinion and Order (MOO) that considers several applications for Review that challenge actions taken by the FCC's Media Bureau regarding applications for new low power FM (LPFM) construction permits filed in the 2000 and 2001 LPFM filing windows. This MOO is FCC 13-116.

GAO Reports on Patent Litigation Trends

8/22. The Government Accountability Office (GAO) released its long overdue statutorily mandated report [61 pages in PDF] on patent litigation by non-practicing entities (NPEs), who are derided by some as patent trolls.

While this is a long and informative report, it is not very responsive to the Congressional mandate. Moreover, any proponents of legislation to rein in abusive trolls who had expected this report to contain a thorough condemnation of NPE litigation will be disappointed. Opponents of legislative reform may argue in forthcoming legislative battles that this report backs their cause.

The GAO gave this report the awkward title of "Intellectual Property: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality".

Section 34 of the "Leahy-Smith America Invents Act", or AIA, mandated this report. The AIA act was HR 1249 [LOC | WW] in the 112th Congress. President Obama signed this huge patent reform bill into law on September 16, 2011.

Section 34 required that the GAO examine many topics related to "the consequences of litigation by non-practicing entities, or by patent assertion entities, related to patent claims made under title 35". Section 34 also specified in detail the topics to be examined by the GAO.

Report Fails to Address Key Topics. The report does little to address many of the things listed in Section 34, such as the economic impacts of NPE and PAE litigation. In contrast, it covers many topics not required by the statute, such as data on the number of software patents, and software patent litigation.

There have long been calls for reform of substantive patent law, and patent litigation procedure, to limit harmful litigation by the NPEs or patent trolls. Section 34 does not use the term "trolls". However, it is directed at this issue.

Since the beginning of the 113th Congress in January of this year proponents of legislation to limit meritless litigation by patent trolls have offered a narrative of abuses, backed by their anecdotal allegations. This Section 34 report could have provided bodies of data that would either corroborated or rebutted these allegations. But, it did not.

The GAO report points out that as to many of the topics listed in Section 34 the necessary data simply does not exist.

It is also possible that leaders of the House Judiciary Committee (HJC) and Senate Judiciary Committee (SJC) may have given the GAO post-enactment instructions regarding the scope of the report.

The timing of the report may be significant. The GAO released this report on August 22 when most Representatives, Senators, Congressional staffers, industry representatives, and reporters are out of town and/or on vacation.

Trolls, PAEs, NPEs and PMEs. Proponents of legislative reform often use the term "patent trolls". However, neither the statute nor the just released report use this term.

The statute directed the GAO to examine litigation brought by "non-practicing entities" (NPEs) and "patent assertion entities" (PAEs). The GAO report instead focuses on "patent monetization entities" (PMEs), a term not found in Section 34 of the Act.

The report states that an NPE is a person or entity that holds a patent, but does not practice it. This includes individual inventors, research universities, and R&D labs that invent things, and then license others to practice their patents. The report states that PMEs are a subset of NPEs; they "simply buy patents from others for the purpose of asserting them for profit".

The report only addresses PAEs in a few footnotes.

Volume of Patent Litigation. First, the statute required a study of the volume of NPE and PAE litigation over the 20 year period ending on the date of enactment.

This report first assesses overall litigation. It states that "From 2000 to 2010, the number of patent infringement lawsuits fluctuated slightly, and from 2010 to 2011, the number increased about 31 percent. Our more detailed analysis of a generalizable sample of 500 lawsuits estimates that the overall number of defendants in these cases increased from 2007 to 2011 by about 129 percent over the 5-year period. This analysis also shows that operating companies brought most of these lawsuits and that lawsuits involving software-related patents accounted for about 89 percent of the increase in defendants during this period. Some stakeholders we interviewed said that they experienced a substantial amount of patent assertion without firms ever filing lawsuits against them."

"Representatives of several operating companies that we interviewed said they are being sued more often since the mid-2000s." Also, the report states that legal commentators "said that such increases are common during periods of rapid technological change -- new industries lead to more patents and the number of patent infringement lawsuits also increases because there are more patents to be enforced. Similarly, one researcher working on these issues told us that, historically, major technological developments -- such as the development of automobiles, airplanes, and radio -- have also led to temporary, dramatic increases in patent infringement lawsuits."

The report then addresses PME litigation. "Operating companies brought most of the patent infringement lawsuits from 2007 to 2011. According to our analysis of data for this period, operating companies and related entities brought an estimated 68 percent of all lawsuits. PMEs and likely PMEs brought 19 percent of the lawsuits. PMEs and likely PMEs brought 17 percent of all lawsuits in 2007 and 24 percent in 2011, although this increase was not statistically significant. In contrast, operating companies and related entities filed 76 percent of the lawsuits in 2007 and 59 percent in 2011, a statistically significant decrease."

However, "Our analysis of the data from 2007 through 2011 shows that PMEs tended to sue more defendants per suit than operating companies. ... Thus, even with bringing about a fifth of all patent infringement lawsuits from 2007 to 2011, PMEs sued close to one-third of the overall defendants, accounting for about half of the overall increase in defendants."

The report then delves into data on software patent litigation, and volumes of cases by district. Both subjects are important. But, neither is mentioned in Section 34.

Meritless NPE and PAE Patent Litigation. The statute also directed the GAO to report on the "volume of cases comprising" NPE and PAE "litigation that are found to be without merit after judicial review".

The report provides no answer. However, it does state that "Lawsuits brought by both operating companies and PMEs settled or likely settled at similar rates".

Costs of NPE and PAE Litigation. The statute also directed the GAO to report on the "estimated costs, including the estimated cost of defense, associated with such litigation for patent holders, patent licensors, patent licensees, and inventors, and for users of alternate or competing innovations."

The report states that "We were not able to determine litigation cost information from our sample data, and we found very little information on the costs of patent infringement lawsuits in court records. Further, as one stakeholder we interviewed noted, all litigation is expensive, not just patent infringement litigation."

Economic Impact of NPE and PAE Litigation. The statute also directed the GAO to report on the "economic impact of such litigation on the economy of the United States, including the impact on inventors, job creation, employers, employees, and consumers."

There is no section in the report that directly addresses this.

Benefits of NPEs and PAEs. The statute also directed the GAO to report on the "benefit to commerce, if any, supplied by non-practicing entities or patent assertion entities that prosecute such litigation".

The report does not directly take on this mandate in one section. However, there are references spread throughout the report that pertain to the benefits of PME litigation.

For example, in a section devoted to addressing why the number of patent lawsuits per year is increasing, the report states that "economic literature suggests that inventors who do not have the resources or skills to enforce patents on their own benefit from partnering with PMEs that specialize in patent monetization ... For example, one inventor we spoke with said that he was able to sell his patents to a PME that specialized in patent litigation when his start-up company failed, which allowed him to fund a new company. Representatives from a university we spoke with also said universities look to outside entities, such as PMEs, to finance patent infringement litigation ..."

Non-litigation conduct. Section 34 only directed the GAO to examine "litigation". The report examines "litigation".

But, much of the criticism of "patent trolls" is now directed at non-litigation conduct. First and foremost, critics assert that the trolls are sending out huge numbers of demand letters, rather than initiating litigation by the filing of a complaint.

The argument is that these trolls are now targeting not only companies alleged to be making products that infringe the trolls' patents, but also end users of these products, which are often small businesses without resources or expertise for disputing patent claims.

Moreover, the argument goes, the trolls are adept at offering to settle for licensing fees that incent many of their targets to pay merely to avoid the nuissance of contesting the claim. In this situation, trolls' meritless claims never end up in litigation.

Section 34 of the AIA did not direct the GAO to study this. And, the GAO report does not examine this.

The report merely states that "patent assertion occurs without firms ever filing lawsuits, but the extent of this practice is unclear because we were not able to find reliable data on patent assertion outside of the court system". There are a few paragraphs on demand letters, but the information is only anecdotal, and does not go to the practice of targeting end users.

Although, a section of the report on damage awards notes that "One PME we spoke with said that although it tries to sue technology vendors whenever possible, it sues end users most of the time because these are usually profitable companies, and there is greater potential for larger settlements."

Software Patents. Section 34 did not direct the GAO to examine software patents. Nevertheless, there is much in this report about software patents.

It provides data that shows that the number of software patent granted each year has been growing faster than other patents. It notes though that software and computers are becoming more important components of various activities. It also provides data that shows that in recent years software patents granted have equaled grants of all other patents.

The report also states that "Our analysis of patent infringement lawsuit data from 2007 to 2011 shows that on average about 46 percent of the lawsuits involved software-related patents."

However, notably, the report finds that operating companies and PMEs bring different types of lawsuits. It states that "about 84 percent of PME lawsuits from 2007 to 2011 involved software-related patents, while about 35 percent of operating company lawsuits did".

The report continues that "39 percent of suits involving software-related patents were against firms in nontechnology sectors, according to our analysis of 2007 to 2011 data. One representative from a retail company noted that historically, all of the patent infringement lawsuits brought against the company used to be related to products they sold. However, as of mid-2012, the representative said that half of the lawsuits against the company were related to e-commerce software that the company uses for its shopping website --such as software that allows customers to locate their stores on the website -- and were brought by PMEs."

Patent Quality. The report states that "Several of the stakeholders we spoke with, including representatives from PMEs, operating companies, and legal commentators, said that many recent patent infringement lawsuits are related to the prevalence of low-quality patents".

Reaction. Cathy Sloan of the Computer and Communications Industry Association (CCIA) stated in a release that "While abusive patent litigation is certainly not good news, companies facing the expense of nuisance lawsuits are encouraged that this additional evidence may motivate improvements to specific rules for patent litigation sooner rather than later. This study is yet another reason why Congress should support patent reform measures that have already been introduced."

The CCIA is one of the leading groups advocating for legislative reform.

Matt Levy of the CCIA stated that "We hope that those in Congress who were waiting for this study will see the toll on the economy and will support patent reform legislation like the STOP Act ..., the Patent Quality Improvement Act ..., the Patent Abuse Reduction Act ... and the Patent Litigation and Innovation Act of 2013". See, related item in this issue titled "Pending Patent Reform Bills".

Tim Molino of the Business Software Alliance (BSA) stated in a release that the BSA "applauds GAO's conclusion that improving patent quality is the indispensable and surest way to contain the alarming increase in opportunistic litigation that has targeted BSA member companies and their customers over the past decade".

He added that the "BSA also supports legislative initiatives aimed at directly addressing imbalances in the economic incentives for non-practicing entities and their targets ... Those asymmetries create the conditions for quick, profitable and sometimes unwarranted settlements."

Pending Patent Reform Bills

8/22. There are numerous legislative proposals to reform patent law. The following is incomplete list of patent bills pending in the Senate and House.

S 780 [LOC | WW], the "Promoting Automotive Repair, Trade, and Sales Act of 2013" or "PARTS Act", introduced by Sen. Sheldon Whitehouse (D-RI) on April 23, 2013.

S 866 [LOC | WW], the "Patent Quality Improvement Act", introduced on May 6, 2013 by Sen. Charles Schumer (D-NY).

S 1013 [LOC | WW], the "Patent Abuse Reduction Act of 2013", introduced on May 22, 2013 by Sen. John Cornyn (R-TX).

HR 845 [LOC | WW], the "Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013", or "SHIELD Act", introduced on February 27, 2013 by Rep. Peter DeFazio (D-OR).

HR 1663 [LOC | WW | PDF], the "Promoting Automotive Repair, Trade, and Sales Act of 2013" or "PARTS Act", introduced by Rep. Darrell Issa (R-CA) on April 23, 2013.

HR 2024 [LOC | WW], the "End Anonymous Patents Act", introduced on May 16, 2013 by Rep. Ted Deutch (D-FL).

HR 2236 [LOC | WW], the "Promoting Startup Innovation Act", introduced on June 4, 2013 by Rep. Steve Chabot (R-IN).

HR 2582 [LOC | WW], the "Patents and Trademarks Encourage New Technology Jobs Act" or the "PATENT Jobs Act", introduced on June 28, 2013 by Rep. Mike Honda (D-CA).

HR 2639 [LOC | WW], the "Patent Litigation and Innovation Act of 2013", introduced on July 10, 2013 by Rep. Hakeem Jeffries (D-NY).

HR 2766 [LOC | WW], the "Stopping the Offensive Use of Patents Act" or "STOP Act", introduced on July 22, 2013 by Rep. Darrell Issa (R-CA).

S 780 and HR 1663, the "PARTS Act", would amend the Patent Act to provide an exemption from infringement of design patents for certain component parts of motor vehicles -- primarily collision repair parts. These bills are not directed at non-practicing entities (NPEs) or patent trolls. See, story titled "Representatives and Senators Introduce Bills to Limit Duration of Automotive Design Patents" in TLJ Daily E-Mail Alert No. 2,553, April 23, 2013.

HR 845, the "SHIELD Act", would shift the burden of paying the winner's attorneys fees and costs to the loser in some patent cases, and impose a bond posting requirement on some patent litigants. This bill is directed at patent trolls. See, stories titled "Rep. DeFazio and Rep. Chaffetz Introduce SHIELD Act" and "Summary of HR 845, the SHIELD Act" in TLJ Daily E-Mail Alert No. 2,529, March 4, 2013.

S 866, the "Patent Quality Improvement Act", and HR 2766, the "STOP Act", would both make permanent the Section 18 of the America Invents Act, the "Transitional Program for Covered Business Method Patents".

S 1013, the "Patent Abuse Reduction Act", would create heightened pleading requirements for patent infringement complaints, limit discovery in patent actions, provide for discovery costs shifting, and shift the burden of paying the winner's attorneys fees and costs to the loser in patent cases. This bill is directed at NPEs or patent trolls.

HR 2639, the "Patent Litigation and Innovation Act", would also heighten pleading requirements. It would also provide for stays of actions against secondary parties, provide for discovery stays, and provide for sanctions for abusive litigation. It too is directed at NPEs or patent trolls.

HR 2024, the "End Anonymous Patents Act", would impose new requirements regarding disclosure of the ownership of patents. Anonymity is an issue for critics of patent trolls.

HR 2236, the "Promoting Startup Innovation Act", would amend 35 U.S.C. § 123, regarding micro entities.

HR 2582, the "PATENT Jobs Act", would provide the U.S. Patent and Trademark Office (USPTO) an exemption from sequestration. This bill is not directed at NPEs or patent trolls.

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8/22. The National Telecommunications and Information Administration (NTIA) published a notice in the Federal Register (FR) that announces, describes, recites and sets the effective date (August 22, 2013) for its rules change that provides for the incorporation by reference of the NTIA's Manual of Regulations and Procedures for Federal Radio Frequency Management. See, FR, Vol. 78, No. 163, August 22, 2013, at Pages 52097-52098.

8/22. Deborah Cohn, the U.S. Patent and Trademark Office's (USPTO) Commissioner for Trademarks, wrote in a short piece titled "Update on Trademark Performance From our Third Quarter Dashboard" that "Trademark application filings continue to set new record highs".

USITC Releases First Report on Digital Trade

8/21. The U.S. International Trade Commission (USITC) released a report [280 pages in PDF] on August 15, 2013, at the request of the Senate Finance Committee (SFC), titled "Digital Trade in the U.S. and Global Economies, Part 1". See also, USITC release.

Also, on August 21, the USITC published a notice in the Federal Register (FR) that announces dates and deadlines regarding its continuing investigation of this topic.

The just released report states that "Products and services delivered via the Internet make up a growing segment of the U.S. economy. Internet technologies have also transformed how many goods and services in the economy are produced and delivered. Digital sales make up more than half of music industry revenue; the digital shares of sales for games, videos, and books are smaller, but growing quickly. U.S. exports of digitally enabled services (one measure of international digital trade) grew from $282.1 billion in 2007 to $356.1 billion in 2011, with exports exceeding imports every year." (Parentheses in original.)

It continues that "Studies that have quantified the economic contributions of the Internet have generally found that it has made significant contributions to U.S. output, employment, consumer welfare, trade, innovation, productivity, and corporate financial performance. Digital trade can help producers lower their operating costs and work more efficiently. Small and medium-sized enterprises especially benefit from having lower-cost access to a wider range of products, services, and markets. Consumers benefit by gaining greater access to information about products and prices and more convenient ways to shop."

It finds that "Among the most notable barriers and impediments to digital trade reported were localization barriers, data privacy and protection measures, intellectual property-related issues, online censorship, as well as impediments to digitally enabled trade."

It explains that localization measures "compel companies to conduct certain digital trade-related activities within a country’s borders. They include policies that require data servers to be located in-country; policies requiring local content; and government procurement preferences and technology standards that favor local digital companies. These policies limit market access and may result in higher costs and sub-optimal processes for U.S. firms."

This report states that different industry sectors have different perspectives on intellectual property issues. "Representatives of the content industries -- including software, music, movies, books and journals, and video games -- identified Internet piracy as the single most important barrier to digital trade for their industries. By contrast, representatives of intermediaries were concerned about being held liable for the intellectual property-infringing or illegal conduct of users of their systems."

However, the report states the content providers and intermediaries are in accord on foreign censorship. Both "reported that online censorship of digital content and platforms is pervasive and growing. Digital content representatives noted that onerous content review systems in China and Vietnam, for example, shorten the window period for the legitimate distribution of digital products and cede the market to pirated content. Internet intermediaries compared the blocking and filtering of online platforms and content to customs officials stopping all goods from a particular company at the border; the negative economic effects can be substantial."

The report also states that "Divergent approaches to data privacy and protection, particularly as regards the United States and the European Union (EU), reportedly impose substantial costs and uncertainty on firms, especially small and medium-sized enterprises (SMEs). Industry representatives across digital industries highlighted the need to find common ground and interoperability in regulatory approaches to data privacy and protection."

The USITC will hold a hearing at 9:30 AM on September 25 at the NASA Ames Research Center in Moffett Field, California. The deadline to file requests to appear is September 12. The deadline for filing pre-hearing briefs and statements is September 18. The deadline to file post-hearing briefs and statements is October 3. The deadline for all other written submissions is March 21, 2014. The deadline for the USITC to submit its report to the SFC is July 14, 2014.

The USITC's FR notice states that the purpose of this investigation is to "estimate the value of U.S. digital trade and the potential growth of this trade (with the potential growth estimates to highlight any key trends and discuss their implications for U.S. businesses and employment); provide insight into the broader linkages and contributions of digital trade to the U.S. economy (such linkages and contributions may include effects on consumer welfare, output, productivity, innovation, business practices, and job creation); present case studies that examine the importance of digital trade to selected U.S. industries that use or produce such goods and services, with some of the case studies to highlight, if possible, the impact of digital trade on small and medium-sized enterprises; and examine the effect of notable barriers and impediments to digital trade on selected industries and the broader U.S. economy." (Parentheses in original.)

See, FR, Vol. 78, No. 162, August 21, 2013, at Pages 51744-51746, and USITC release.

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8/21. Federal Trade Commission (FTC) issued a release on August 15, 2013, and published a notice in the Federal Register (FR) on August 21, that request public comments regarding the proposed parental consent method [85 pages in PDF, redacted] submitted by AssertID on June 18, 2013 under the Voluntary Commission Approval Processes provision of the Children's Online Privacy Protection Rule. See, FR, Vol. 78, No. 162, August 21, 2013, at Pages 51677-51678.

8/21. The Department of Justice's (DOJ) Antitrust Division released a Modified Final Judgment [33 pages in PDF] in USA v. Comcast, the action filed in January of 2011 regarding the Comcast NBCU transaction. This case is U.S.A., et al. v. Comcast, et al., U.S. District Court for the District of Columbia, D.C. No. 1:11-cv-00106-RJL.

8/21. The Department of Homeland Security's (DHS) Customs and Border Patrol (CBP) announced and published in the Federal Register (FR) its final determination regarding the country of origin of hard disk drives (HDDs) and self-encrypting drives (SEDs). The DHS/CBP concluded, in response to a request from Seagate, that "the programming operations performed in the United States, using U.S.-origin firmware, substantially transform non-TAA country HDDs. Therefore, the country of origin of the HDDs and SEDs is the United States for purposes of U.S. Government procurement". See, notice in the FR, Vol. 78, No. 162,  August 21, 2013, at Pages 51737-51740.