Summary

In the context of ongoing negotiations of the Trans Pacific Partnership (TPP) and deliberations over trade promotion authority (TPA), some organizations have been advocating for the inclusion of U.S.style fair use exceptions and limitations to copyright. This brief looks at the evidence for and against mandating the adoption of a U.S.-style fair use exception and, in particular, at the implications of requiring countries to adopt such an exception in free trade agreements. It begins with a brief exploration of the relationship between copyright, creativity and economic development. It then considers the economics of copyright and fair use, applying these to a networked global marketplace. The brief concludes with an assessment of current debates around fair use exceptions in free trade agreements and TPA.

Microsoft and its allies (the Microsoft-funded trade organization FairSearch and the prolific Google critic Ben Edelman) have been highly critical of Google’s use of “secret” contracts to license its proprietary suite of mobile apps, Google Mobile Services, to device manufacturers.

I’ve written about this at length before. As I said previously,

In order to argue that Google has an iron grip on Android, Edelman’s analysis relies heavily on ”secret” Google licensing agreements — “MADAs” (Mobile Application Distribution Agreements) — trotted out with such fanfare one might think it was the first time two companies ever had a written contract (or tried to keep it confidential).

For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.”

Microsoft (via another of its front groups, ICOMP) responded in predictable fashion.

While the hysteria over private, mutually beneficial contracts negotiated between sophisticated corporations was always patently absurd (who ever heard of sensitive commercial contracts that weren’t confidential?), Edelman’s claim that the Google MADAs operate to “suppress competition” with “no plausible pro-consumer benefits” was the subject of my previous post.

I won’t rehash all of those arguments here, but rather point to another indication that such contract terms are not anticompetitive: The recent revelation that they are used by others in the same industry — including, we’ve learned (to no one’s surprise), Microsoft.

Much like the release of Google’s MADAs in an unrelated lawsuit, the ongoing patent licensing contract dispute between Microsoft and Samsung has obliged the companies to release their own agreements. As it happens, they are at least as restrictive as the Google agreements criticized by Edelman — and, in at least one way, even more so.

Some quick background: As I said in my previous post, it is no secret that equipment manufacturers have the option to license a free set of Google apps (Google Mobile Services) and set Google as the default search engine. However, Google allows OEMs to preinstall other competing search engines as they see fit. Indeed, no matter which applications come pre-installed, the user can easily download Yahoo!, Microsoft’s Bing, Yandex, Naver, DuckDuckGo and other search engines for free from the Google Play Store.

But Microsoft has sought to impose even-more stringent constraints on its device partners. One of the agreements disclosed in the Microsoft-Samsung contract litigation, the “Microsoft-Samsung Business Collaboration Agreement,” requires Samsung to set Bing as the search default for all Windows phones and precludes Samsung from pre-installing any other search applications on Windows-based phones. Samsung must configure all of its Windows Phones to use Microsoft Search Services as the

default Web Search  . . . in all instances on such properties where Web Search can be launched or a Query submitted directly by a user (including by voice command) or automatically (including based on location or context).

Interestingly, the agreement also requires Samsung to install Microsoft Search Services as a non-default search option on all of Samsung’s non-Microsoft Android devices (to the extent doing so does not conflict with other contracts).

Of course, the Microsoft-Samsung contract is expressly intended to remain secret: Its terms are declared to be “Confidential Information,” prohibiting Samsung from making “any public statement regarding the specific terms of [the] Agreement” without Microsoft’s consent.

Meanwhile, the accompanying Patent License Agreement provides that

all terms and conditions in this Agreement, including the payment amount [and the] specific terms and conditions in this Agreement (including, without limitation, the amount of any fees and any other amounts payable to Microsoft under this Agreement) are confidential and shall not be disclosed by either Party.

In addition to the confidentiality terms spelled out in these two documents, there is a separate Non-Disclosure Agreement—to further dispel any modicum of doubt on that score. Perhaps this is why Edelman was unaware of the ubiquity of such terms (and their confidentiality) when he issued his indictment of the Google agreements but neglected to mention Microsoft’s own.

In light of these revelations, Edelman’s scathing contempt for the “secrecy” of Google’s MADAs seems especially disingenuous:

MADA secrecy advances Google’s strategic objectives. By keeping MADA restrictions confidential and little-known, Google can suppress the competitive response…Relatedly, MADA secrecy helps prevent standard market forces from disciplining Google’s restriction. Suppose consumers understood that Google uses tying and full-line-forcing to prevent manufacturers from offering phones with alternative apps, which could drive down phone prices. Then consumers would be angry and would likely make their complaints known both to regulators and to phone manufacturers. Instead, Google makes the ubiquitous presence of Google apps and the virtual absence of competitors look like a market outcome, falsely suggesting that no one actually wants to have or distribute competing apps.

If, as Edelman claims, Google’s objectionable contract terms “serve both to help Google expand into areas where competition could otherwise occur, and to prevent competitors from gaining traction,” then what are the very same sorts of terms doing in Microsoft’s contracts with Samsung? The revelation that Microsoft employs contracts similar to — and similarly confidential to — Google’s highlights the hypocrisy of claims that such contracts serve anticompetitive aims.

In fact, as I discussed in my previous post, there are several pro-competitive justifications for such agreements, whether undertaken by a market leader or a newer entrant intent on catching up. Most obviously, such contracts help to ensure that consumers receive the user experience they demand on devices manufactured by third parties. But more to the point, the fact that such arrangements permeate the market and are adopted by both large and small competitors is strong indication that such terms are pro-competitive.

At the very least, they absolutely demonstrate that such practices do not constitute prima facie evidence of the abuse of market power.

[Reminder: See the “Disclosures” page above. ICLE has received financial support from Google in the past, and I formerly worked at Microsoft. Of course, the views here are my own, although I encourage everyone to agree with them.]

Filed under: antitrust, contracts, exclusionary conduct, google, licensing, monopolization, technology, tying, tying Tagged: Android, Ben Edelman, google, Google Mobile Services, microsoft

Summary

“The International Center for Law & Economics (“ICLE”) and eleven independent professors and scholars of law and economics file these comments to address general merger review issues and certain specific concerns that were raised in some of the Comments and Petitions to Deny filed in this proceeding…”

“The FCC’s inquiry is limited to the proposed merger’s likely effect on the public interest. But many of the comments in opposition to the merger take issue with various aspects of the marketplace for residential broadband and video as it exists to- day. Indeed, much of the criticism seems leveled at decisions made decades ago with regard to cable franchising. But those criticisms, whether valid or not, do not speak to whether – against the backdrop of the relevant markets as they exist today and are likely to exist in the near future – the merger of Comcast and Time Warner Cable (“TWC”) is in the public interest. Among many other things, for example, the Comments of the American Antitrust Institute urge the FCC to consider the issue of network neutrality in reviewing the merger. But there is nothing merger-specific about net neutrality, and consideration of that issue (other than as a potentially relevant aspect of the market backdrop) is wholly inappropriate for merger review….”

The free market position on telecom reform has become rather confused of late. Erstwhile conservative Senator Thune is now cosponsoring a version of Senator Rockefeller’s previously proposed video reform bill, bundled into satellite legislation (the Satellite Television Access and Viewer Rights Act or “STAVRA”) that would also include a provision dubbed “Local Choice.” Some free marketeers have defended the bill as a step in the right direction.

Although it looks as if the proposal may be losing steam this Congress, the legislation has been described as a “big and bold idea,” and it’s by no means off the menu. But it should be.

It has been said that politics makes for strange bedfellows. Indeed, people who disagree on just about everything can sometimes unite around a common perceived enemy. Take carriage disputes, for instance. Perhaps because, for some people, a day without The Bachelor is simply a day lost, an unlikely alliance of pro-regulation activists like Public Knowledge and industry stalwarts like Dish has emerged to oppose the ability of copyright holders to withhold content as part of carriage negotiations.

Senator Rockefeller’s Online Video Bill was the catalyst for the Local Choice amendments to STAVRA. Rockefeller’s bill did, well, a lot of terrible things, from imposing certain net neutrality requirements, to overturning the Supreme Court’s Aereo decision, to adding even more complications to the already Byzantine morass of video programming regulations.

But putting Senator Thune’s lipstick on Rockefeller’s pig can’t save the bill, and some of the worst problems from Senator Rockefeller’s original proposal remain.

Among other things, the new bill is designed to weaken the ability of copyright owners to negotiate with distributors, most notably by taking away their ability to withhold content during carriage disputes and by forcing TV stations to sell content on an a la carte basis.

Video distribution issues are complicated — at least under current law. But at root these are just commercial contracts and, like any contracts, they rely on a couple of fundamental principles.

First is the basic property right. The Supreme Court (at least somewhat) settled this for now (in Aereo), by protecting the right of copyright holders to be compensated for carriage of their content. With this baseline, distributors must engage in negotiations to obtain content, rather than employing technological workarounds and exploiting legal loopholes.

Second is the related ability of contracts to govern the terms of trade. A property right isn’t worth much if its owner can’t control how it is used, governed or exchanged.

Finally, and derived from these, is the issue of bargaining power. Good-faith negotiations require both sides not to act strategically by intentionally causing negotiations to break down. But if negotiations do break down, parties need to be able to protect their rights. When content owners are not able to withhold content in carriage disputes, they are put in an untenable bargaining position. This invites bad faith negotiations by distributors.

The STAVRA/Local Choice proposal would undermine the property rights and freedom of contract that bring The Bachelor to your TV, and the proposed bill does real damage by curtailing the scope of the property right in TV programming and restricting the range of contracts available for networks to license their content.

The bill would require that essentially all broadcast stations that elect retrans make their content available a la carte — thus unbundling some of the proverbial sticks that make up the traditional property right. It would also establish MVPD pass-through of each local affiliate. Subscribers would pay a fee determined by the affiliate, and the station must be offered on an unbundled basis, without any minimum tier required – meaning an MVPD has to offer local stations to its customers with no markup, on an a la carte basis, if the station doesn’t elect must-carry. It would also direct the FCC to open a rulemaking to determine whether broadcasters should be prohibited from withholding their content online during a dispute with an MPVD.

“Free market” supporters of the bill assert something like “if we don’t do this to stop blackouts, we won’t be able to stem the tide of regulation of broadcasters.” Presumably this would end blackouts of broadcast programming: If you’re an MVPD subscriber, and you pay the $1.40 (or whatever) for CBS, you get it, period. The broadcaster sets an annual per-subscriber rate; MVPDs pass it on and retransmit only to subscribers who opt in.

But none of this is good for consumers.

When transaction costs are positive, negotiations sometimes break down. If the original right is placed in the wrong hands, then contracting may not assure the most efficient outcome. I think it was Coase who said that.

But taking away the ability of content owners to restrict access to their content during a bargaining dispute effectively places the right to content in the hands of distributors. Obviously, this change in bargaining position will depress the value of content. Placing the rights in the hands of distributors reduces the incentive to create content in the first place; this is why the law protects copyright to begin with. But it also reduces the ability of content owners and distributors to reach innovative agreements and contractual arrangements (like certain promotional deals) that benefit consumers, distributors and content owners alike.

The mandating of a la carte licensing doesn’t benefit consumers, either. Bundling is generally pro-competitive and actually gives consumers more content than they would otherwise have. The bill’s proposal to force programmers to sell content to consumers a la carte may actually lead to higher overall prices for less content. Not much of a bargain.

There are plenty of other ways this is bad for consumers, even if it narrowly “protects” them from blackouts. For example, the bill would prohibit a network from making a deal with an MVPD that provides a discount on a bundle including carriage of both its owned broadcast stations as well as the network’s affiliated cable programming. This is not a worthwhile — or free market — trade-off; it is an ill-advised and economically indefensible attack on vertical distribution arrangements — exactly the same thing that animates many net neutrality defenders.

Just as net neutrality’s meddling in commercial arrangements between ISPs and edge providers will ensure a host of unintended consequences, so will the Rockefeller/Thune bill foreclose a host of welfare-increasing deals. In the end, in exchange for never having to go three days without CBS content, the bill will make that content more expensive, limit the range of programming offered, and lock video distribution into a prescribed business model.

Former FCC Commissioner Rob McDowell sees the same hypocritical connection between net neutrality and broadcast regulation like the Local Choice bill:

According to comments filed with the FCC by Time Warner Cable and the National Cable and Telecommunications Association, broadcasters should not be allowed to take down or withhold the content they produce and own from online distribution even if subscribers have not paid for it—as a matter of federal law. In other words, edge providers should be forced to stream their online content no matter what. Such an overreach, of course, would lay waste to the economics of the Internet. It would also violate the First Amendment’s prohibition against state-mandated, or forced, speech—the flip side of censorship.

It is possible that the cable companies figure that subjecting powerful broadcasters to anti-free speech rules will shift the political momentum in the FCC and among the public away from net neutrality. But cable’s anti-free speech arguments play right into the hands of the net-neutrality crowd. They want to place the entire Internet ecosystem, physical networks, content and apps, in the hands of federal bureaucrats.

While cable providers have generally opposed net neutrality regulation, there is, apparently, some support among them for regulations that would apply to the edge. The Rockefeller/Thune proposal is just a replay of this constraint — this time by forcing programmers to allow retransmission of broadcast content under terms set by Congress. While “what’s good for the goose is good for the gander” sounds appealing in theory, here it is simply doubling down on a terrible idea.

What it reveals most of all is that true neutrality advocates don’t want government control to be limited to ISPs — rather, progressives like Rockefeller (and apparently some conservatives, like Thune) want to subject the whole apparatus — distribution and content alike — to intrusive government oversight in order to “protect” consumers (a point Fred Campbell deftly expands upon here and here).

You can be sure that, if the GOP supports broadcast a la carte, it will pave the way for Democrats (and moderates like McCain who back a la carte) to expand anti-consumer unbundling requirements to cable next. Nearly every economic analysis has concluded that mandated a la carte pricing of cable programming would be harmful to consumers. There is no reason to think that applying it to broadcast channels would be any different.

What’s more, the logical extension of the bill is to apply unbundling to all MVPD channels and to saddle them with contract restraints, as well — and while we’re at it, why not unbundle House of Cards from Orange is the New Black? The Rockefeller bill may have started in part as an effort to “protect” OVDs, but there’ll be no limiting this camel once its nose is under the tent. Like it or not, channel unbundling is arbitrary — why not unbundle by program, episode, studio, production company, etc.?

There is simply no principled basis for the restraints in this bill, and thus there will be no limit to its reach. Indeed, “free market” defenders of the Rockefeller/Thune approach may well be supporting a bill that ultimately leads to something like compulsory, a la carte licensing of all video programming. As I noted in my testimony last year before the House Commerce Committee on the satellite video bill:

Unless we are prepared to bear the consumer harm from reduced variety, weakened competition and possibly even higher prices (and absolutely higher prices for some content), there is no economic justification for interfering in these business decisions.

So much for property rights — and so much for vibrant video programming.

That there is something wrong with the current system is evident to anyone who looks at it. As Gus Hurwitz noted in recent testimony on Rockefeller’s original bill,

The problems with the existing regulatory regime cannot be understated. It involves multiple statutes implemented by multiple agencies to govern technologies developed in the 60s, 70s, and 80s, according to policy goals from the 50s, 60s, and 70s. We are no longer living in a world where the Rube Goldberg of compulsory licenses, must carry and retransmission consent, financial interest and syndication exclusivity rules, and the panoply of Federal, state, and local regulations makes sense – yet these are the rules that govern the video industry.

While video regulation is in need of reform, this bill is not an improvement. In the short run it may ameliorate some carriage disputes, but it will do so at the expense of continued programming vibrancy and distribution innovations. The better way to effect change would be to abolish the Byzantine regulations that simultaneously attempt to place thumbs of both sides of the scale, and to rely on free market negotiations with a copyright baseline and antitrust review for actual abuses.

But STAVRA/Local Choice is about as far from that as you can get.

Cross-posted from Truth on the Market

Excerpt

At the beginning of this millennium, two tech giants, Microsoft Inc. and Sun Microsystems, Inc., waged a savage, seven-year war. Their patent infringement lawsuits and countersuits squandered hundreds of millions of dollars, dominated headlines, and consumed the time and attention of leaders at both companies.

It wasn’t until 2004 that the two companies reached a settlement. At the time, that agreement was heralded by chief executives at both companies as a win for consumers; it would finally shift focus from their legal squabbling to the production and delivery of new, more collaborative products.

But by then, some would argue, the damage was done.

Roll film forward to the mobile device industry of today. Key players, currently embroiled in seemingly endless patent litigation, risk putting their legal battles ahead of the ceaseless innovation required to compete in a dynamic global market. Observers, tired of the bloody charade and hungry for novelty, call out for patent reform to weaken patents and end the infighting.

But the real solution is more nuanced.

Continue reading on Bloomberg BNA

[Cross posted at the CPIP Blog.]

By Mark Schultz & Adam Mossoff

A handful of increasingly noisy critics of intellectual property (IP) have emerged within free market organizations. Both the emergence and vehemence of this group has surprised most observers, since free market advocates generally support property rights. It’s true that there has long been a strain of IP skepticism among some libertarian intellectuals. However, the surprised observer would be correct to think that the latest critique is something new. In our experience, most free market advocates see the benefit and importance of protecting the property rights of all who perform productive labor – whether the results are tangible or intangible.

How do the claims of this emerging critique stand up? We have had occasion to examine the arguments of free market IP skeptics before. (For example, see here, here, here.) So far, we have largely found their claims wanting.

We have yet another occasion to examine their arguments, and once again we are underwhelmed and disappointed. We recently posted an essay at AEI’s Tech Policy Daily prompted by an odd report recently released by the Mercatus Center, a free-market think tank. The Mercatus report attacks recent research that supposedly asserts, in the words of the authors of the Mercatus report, that “the existence of intellectual property in an industry creates the jobs in that industry.” They contend that this research “provide[s] no theoretical or empirical evidence to support” its claims of the importance of intellectual property to the U.S. economy.

Our AEI essay responds to these claims by explaining how these IP skeptics both mischaracterize the studies that they are attacking and fail to acknowledge the actual historical and economic evidence on the connections between IP, innovation, and economic prosperity. We recommend that anyone who may be confused by the assertions of any IP skeptics waving the banner of property rights and the free market read our essay at AEI, as well as our previous essays in which we have called out similarly odd statements from Mercatus about IP rights.

The Mercatus report, though, exemplifies many of the concerns we raise about these IP skeptics, and so it deserves to be considered at greater length.

For instance, something we touched on briefly in our AEI essay is the fact that the authors of this Mercatus report offer no empirical evidence of their own within their lengthy critique of several empirical studies, and at best they invoke thin theoretical support for their contentions.

This is odd if only because they are critiquing several empirical studies that develop careful, balanced and rigorous models for testing one of the biggest economic questions in innovation policy: What is the relationship between intellectual property and jobs and economic growth?

Apparently, the authors of the Mercatus report presume that the burden of proof is entirely on the proponents of IP, and that a bit of hand waving using abstract economic concepts and generalized theory is enough to defeat arguments supported by empirical data and plausible methodology.

This move raises a foundational question that frames all debates about IP rights today: On whom should the burden rest? On those who claim that IP has beneficial economic effects? Or on those who claim otherwise, such as the authors of the Mercatus report?

The burden of proof here is an important issue. Too often, recent debates about IP rights have started from an assumption that the entire burden of proof rests on those investigating or defending IP rights. Quite often, IP skeptics appear to believe that their criticism of IP rights needs little empirical or theoretical validation, beyond talismanic invocations of “monopoly” and anachronistic assertions that the Framers of the US Constitution were utilitarians.

As we detail in our AEI essay, though, the problem with arguments like those made in the Mercatus report is that they contradict history and empirics. For the evidence that supports this claim, including citations to the many studies that are ignored by the IP skeptics at Mercatus and elsewhere, check out the essay.

Despite these historical and economic facts, one may still believe that the US would enjoy even greater prosperity without IP. But IP skeptics who believe in this counterfactual world face a challenge. As a preliminary matter, they ought to acknowledge that they are the ones swimming against the tide of history and prevailing belief. More important, the burden of proof is on them – the IP skeptics – to explain why the U.S. has long prospered under an IP system they find so odious and destructive of property rights and economic progress, while countries that largely eschew IP have languished. This obligation is especially heavy for one who seeks to undermine empirical work such as the USPTO Report and other studies.

In sum, you can’t beat something with nothing. For IP skeptics to contest this evidence, they should offer more than polemical and theoretical broadsides. They ought to stop making faux originalist arguments that misstate basic legal facts about property and IP, and instead offer their own empirical evidence. The Mercatus report, however, is content to confine its empirics to critiques of others’ methodology – including claims their targets did not make.

For example, in addition to the several strawman attacks identified in our AEI essay, the Mercatus report constructs another strawman in its discussion of studies of copyright piracy done by Stephen Siwek for the Institute for Policy Innovation (IPI). Mercatus inaccurately and unfairly implies that Siwek’s studies on the impact of piracy in film and music assumed that every copy pirated was a sale lost – this is known as “the substitution rate problem.” In fact, Siwek’s methodology tackled that exact problem.

IPI and Siwek never seem to get credit for this, but Siwek was careful to avoid the one-to-one substitution rate estimate that Mercatus and others foist on him and then critique as empirically unsound. If one actually reads his report, it is clear that Siwek assumes that bootleg physical copies resulted in a 65.7% substitution rate, while illegal downloads resulted in a 20% substitution rate. Siwek’s methodology anticipates and renders moot the critique that Mercatus makes anyway.

After mischaracterizing these studies and their claims, the Mercatus report goes further in attacking them as supporting advocacy on behalf of IP rights. Yes, the empirical results have been used by think tanks, trade associations and others to support advocacy on behalf of IP rights. But does that advocacy make the questions asked and resulting research invalid? IP skeptics would have trumpeted results showing that IP-intensive industries had a minimal economic impact, just as Mercatus policy analysts have done with alleged empirical claims about IP in other contexts. In fact, IP skeptics at free-market institutions repeatedly invoke studies in policy advocacy that allegedly show harm from patent litigation, despite these studies suffering from far worse problems than anything alleged in their critiques of the USPTO and other studies.

Finally, we noted in our AEI essay how it was odd to hear a well-known libertarian think tank like Mercatus advocate for more government-funded programs, such as direct grants or prizes, as viable alternatives to individual property rights secured to inventors and creators. There is even more economic work being done beyond the empirical studies we cited in our AEI essay on the critical role that property rights in innovation serve in a flourishing free market, as well as work on the economic benefits of IP rights over other governmental programs like prizes.

Today, we are in the midst of a full-blown moral panic about the alleged evils of IP. It’s alarming that libertarians – the very people who should be defending all property rights – have jumped on this populist bandwagon. Imagine if free market advocates at the turn of the Twentieth Century had asserted that there was no evidence that property rights had contributed to the Industrial Revolution. Imagine them joining in common cause with the populist Progressives to suppress the enforcement of private rights and the enjoyment of economic liberty. It’s a bizarre image, but we are seeing its modern-day equivalent, as these libertarians join the chorus of voices arguing against property and private ordering in markets for innovation and creativity.

It’s also disconcerting that Mercatus appears to abandon its exceptionally high standards for scholarly work-product when it comes to IP rights. Its economic analyses and policy briefs on such subjects as telecommunications regulation, financial and healthcare markets, and the regulatory state have rightly made Mercatus a respected free-market institution. It’s unfortunate that it has lent this justly earned prestige and legitimacy to stale and derivative arguments against property and private ordering in the innovation and creative industries. It’s time to embrace the sound evidence and back off the rhetoric.

Filed under: copyright, intellectual property, law and economics, patent Tagged: Chamber of Commerce, copyright, creativity, Dan Spulber, economic prosperity, economics, Eli Dourado, empirical study, ian robinson, innovation, Institute for Policy Innovation, Intellectual property, jobs, Mercatus Center, Patent, prizes, Stephen Siwek, trademark, USPTO

An important new paper was recently posted to SSRN by Commissioner Joshua Wright and Joanna Tsai.  It addresses a very hot topic in the innovation industries: the role of patented innovation in standard setting organizations (SSO), what are known as standard essential patents (SEP), and whether the nature of the contractual commitment that adheres to a SEP — specifically, a licensing commitment known by another acronym, FRAND (Fair, Reasonable and Non-Discriminatory) — represents a breakdown in private ordering in the efficient commercialization of new technology.  This is an important contribution to the growing literature on patented innovation and SSOs, if only due to the heightened interest in these issues by the FTC and the Antitrust Division at the DOJ.

http://ssrn.com/abstract=2467939.

“Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts”

Filed under: antitrust, contracts, doj, federal trade commission, intellectual property, licensing, markets, patent, SSRN, technology Tagged: ETSI, FRAND, high tech, IEEE, Joanna Tsai, joshua wright, licensing, Patent, patent holdup, SEP, SSO, standards

[First posted to the CPIP Blog on June 17, 2014]

Last Thursday, Elon Musk, the founder and CEO of Tesla Motors, issued an announcement on the company’s blog with a catchy title: “All Our Patent Are Belong to You.” Commentary in social media and on blogs, as well as in traditional newspapers, jumped to the conclusion that Tesla is abandoning its patents and making them “freely” available to the public for whomever wants to use them. As with all things involving patented innovation these days, the reality of Tesla’s new patent policy does not match the PR spin or the buzz on the Internet.

The reality is that Tesla is not disclaiming its patent rights, despite Musk’s title to his announcement or his invocation in his announcement of the tread-worn cliché today that patents impede innovation. In fact, Tesla’s new policy is an example of Musk exercising patent rights, not abandoning them.

If you’re not puzzled by Tesla’s announcement, you should be. This is because patents are a type of property right that secures the exclusive rights to make, use, or sell an invention for a limited period of time. These rights do not come cheap — inventions cost time, effort, and money to create and companies like Tesla then exploit these property rights in spending even more time, effort and money in converting inventions into viable commercial products and services sold in the marketplace. Thus, if Tesla’s intention is to make its ideas available for public use, why, one may wonder, did it bother to expend the tremendous resources in acquiring the patents in the first place?

The key to understanding this important question lies in a single phrase in Musk’s announcement that almost everyone has failed to notice: “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.” (emphasis added)

What does “in good faith” mean in this context? Fortunately, one intrepid reporter at the L.A. Times asked this question, and the answer from Musk makes clear that this new policy is not an abandonment of patent rights in favor of some fuzzy notion of the public domain, but rather it’s an exercise of his company’s patent rights: “Tesla will allow other manufacturers to use its patents in “good faith” – essentially barring those users from filing patent-infringement lawsuits against [Tesla] or trying to produce knockoffs of Tesla’s cars.” In the legalese known to patent lawyers and inventors the world over, this is not an abandonment of Tesla’s patents, this is what is known as a cross license.

In plain English, here’s the deal that Tesla is offering to manufacturers and users of its electrical car technology: in exchange for using Tesla’s patents, the users of Tesla’s patents cannot file patent infringement lawsuits against Tesla if Tesla uses their other patents. In other words, this is a classic deal made between businesses all of the time — you can use my property and I can use your property, and we cannot sue each other. It’s a similar deal to that made between two neighbors who agree to permit each other to cross each other’s backyard. In the context of patented innovation, this agreement is more complicated, but it is in principle the same thing: if automobile manufacturer X decides to use Tesla’s patents, and Tesla begins infringing X’s patents on other technology, then X has agreed through its prior use of Tesla’s patents that it cannot sue Tesla. Thus, each party has licensed the other to make, use and sell their respective patented technologies; in patent law parlance, it’s a “cross license.”

The only thing unique about this cross licensing offer is that Tesla publicly announced it as an open offer for anyone willing to accept it. This is not a patent “free for all,” and it certainly is not tantamount to Tesla “taking down the patent wall.” These are catchy sound bites, but they in fact obfuscate the clear business-minded nature of this commercial decision.

For anyone perhaps still doubting what is happening here, the same L.A Times story further confirms that Tesla is not abandoning the patent system. As stated to the reporter: “Tesla will continue to seek patents for its new technology to prevent others from poaching its advancements.” So much for the much ballyhooed pronouncements last week of how Tesla’s new patent (licensing) policy “reminds us of the urgent need for patent reform”! Musk clearly believes that the patent system is working just great for the new technological innovation his engineers are creating at Tesla right now.

For those working in the innovation industries, Tesla’s decision to cross license its old patents makes sense. Tesla Motors has already extracted much of the value from these old patents: Musk was able to secure venture capital funding for his startup company and he was able to secure for Tesla a dominant position in the electrical car market through his exclusive use of this patented innovation. (Venture capitalists consistently rely on patents in making investment decisions, and for anyone who doubts this need to watch only a few episodes of Shark Tank.) Now that everyone associates radical, cutting-edge innovation with Tesla, Musk can shift in his strategic use of his company’s assets, including his intellectual property rights, such as relying more heavily on the goodwill associated with the Tesla trademark. This is clear, for instance, from the statement to the LA Times that companies or individuals agreeing to the “good faith” terms of Tesla’s license agree not to make “knockoffs of Tesla’s cars.”

There are other equally important commercial reasons for Tesla adopting its new cross-licensing policy, but the point has been made. Tesla’s new cross-licensing policy for its old patents is not Musk embracing “the open source philosophy” (as he asserts in his announcement). This may make good PR given the overheated rhetoric today about the so-called “broken patent system,” but it’s time people recognize the difference between PR and a reasonable business decision that reflects a company that has used (old) patents to acquire a dominant market position and is now changing its business model given these successful developments.

At a minimum, people should recognize that Tesla is not declaring that it will not bring patent infringement lawsuits, but only that it will not sue people with whom it has licensed its patented innovation. This is not, contrary to one law professor’s statement, a company “refrain[ing] from exercising their patent rights to the fullest extent of the law.” In licensing its patented technology, Tesla is in fact exercising its patent rights to the fullest extent of the law, and that is exactly what the patent system promotes in the myriad business models and innovative

Filed under: intellectual property, licensing, litigation, patent Tagged: Elon Musk, innovation, open source, Patent, patent enforcement, Patent infringement, patent licensing, patent reform, Patents, property rights, Tesla

Republic 3.0’s Capitol Hill briefing on design patents featuring David Gerk, USPTO; Rebecca Tushnet, Georgetown University School of Law; Julie Hopkins, Tydings & Rosenberg LLP; Geoffrey Manne, International Center for Law and Economics; and Anne Kim and Rob Keast, Republic 3.0.

https://www.youtube.com/watch?v=9_kmBHtE-7A