Government Fails to Enact Patent Reform

Playwright William Shakespeare famously wrote in Romeo and Juliet that “sudden joys have sudden endings…they burn up in victory like fire and gunpowder.”

For tech experts and novices alike following Congressional patent reform – a once arcane topic that justifiably became mainstream in the past year due to the egregious tales of extortion from American innovators – the recent decision by Senate Judiciary Chairman Patrick Leahy (D-VT) to table patent reform was a shot across the bow to all those hoping for legislative action against “patent trolling.”

After all, the writing was on the wall when the U. S. House of Representatives passed the Innovation Act. Patent reform appeared imminent  and was widely supported by engaged parties, because The Patent Transparency and Improvements Act could have addressed the alarming growth of infringement suits brought by patent assertion entities (PAEs) — companies and organizations that buy up and hoard patents on unrealized products and attempt to extort a fee from any company that develops a similar device.

Due to high legal costs and uncertain trial outcomes, the troll’s target often settles out of court. The troll gets its fee and avoids a judgment on the validity of its claim.

Leahy’s bill, which tracked relatively closely with the slightly stronger but passed Innovation Act, had bipartisan support and President Obama’s backing.

But if one thing is clear from the failed reform effort that even the most dysfunctional Congress ever was poised to pass, it is that big business like 3M or Eli Lilly and trolls such as MPEG LA, a for-profit consortium which controls thousands of patents related to consumer electronics, are strong enough to have considerable lobbying power, especially when allied with trial lawyers.

The pressure the brought was enough to push the bill off the Senate calendar, against the will of innovators from Silicon Valley to Austin, Texas to the East Coast.

The government also sends mixed messages. The White House’s support of patent reform is muddled by the fact that a U.S. government agency endorses patent assertion quite frequently. This may be the only positive of stalling – it provides an opportunity to discuss specifics.

For example, the beleaguered Federal Communications Commission (FCC) requires all digital TVs, cable boxes and other products that receive digital TV signals to include a tuner standardized by the Advanced Television Systems Committee (ATSC), a cross-industry standards body. The ATSC standard is now used in digital TV receivers sold throughout North America. The problem is that the ATSC standard incorporates patented technology. In mandating it, the FCC went against the advice of the Federal Trade Commission (FTC), which in testimony before Leahy’s Judiciary Committee warned standards that rely on patented material have a potential to distort competition.

That’s exactly what happened here.

The aforementioned MPEG LA controls the ATSC patent portfolio. No company can produce ATSC-compliant components without paying a license fee to the Denver-based entity. Since ATSC-compliance is an FCC rule, MPEG LA ostensibly has a government-granted monopoly on critical elements used in every digital TV receiver produced for the North American market.

When government mandates purchase of an item controlled by just one vendor, there’s no incentive to keep the price low. So it’s no surprise that MPEG LA charges $5 per license per unit. By comparison, the royalty for use of components compliant to the digital TV standards used in Europe and Japan are about $1 when adjusted for currency conversion.

In 2009, the Coalition United to Terminate Financial Abuses of the Television Transition, a consumer advocacy group, told the FCC that the royalty fee was excessive. When total cost is added up, the group asserted that U.S. consumers pay about $20 to $30 more per digital set than consumers in other countries because of royalty overcharging.

Standards are important. Without ATSC, TV equipment from different manufacturers would not be interoperable. However, MPEG LA fee-gouging abuses its government-granted position and hurts U.S. consumers and U.S. trade. Japan, by contrast, eliminated the royalty fee on the use of its ISDB-T digital TV standard in Brazil, encouraging greater technology transfer from Japan to that economically emerging South American country.

And MPEG LA through ATSC is not afraid to assert its absolute power over the industry. In June 2013, four patent licensors within the ATSC patent portfolio license filed suit against Craig Electronics, Curtis International and ViewSonic for infringing on patents essential to the ATSC digital broadcast standard.

In choosing a standard that incorporated patented elements, the FCC gave exclusivity to MPEG LA’s ATSC, forcing manufacturers to pay high fees to for-profit entities.

While Leahy’s bill has been shelved, one way the President can incrementally help patent reform is to call for an across-the-board policy that eschews standards that include essential patents. This would prevent further abuse along the line of the ATSC standard.

But until then, it will be great to be the one company who supplies the product that the government forces everyone to buy.

Steven Titch is an independent policy analyst based in Sugar Land, Texas. His work has been published by the Reason Foundation and the R Street Institute. Follow him at @stevetitch.