A recent ITC ruling in the global smartphone wars has teed up a hot-button issue in patent law. The White House has till Friday to weigh in. Will it?
FORTUNE — This week we will see if President Barack Obama puts some muscle behind his recent professorial lectures on the need for patent reform.
Unless he acts, an order of the International Trade Commission will take effect on Monday, Aug. 5, that seems to fly in the face of the public interest as that concept has been defined in recent years by the U.S. Department of Justice’s Antitrust Division, the U.S. Federal Trade Commission, the U.S. Patent and Trademark Office, the European Commission, at least three federal judges, and, indeed, the White House itself. Obama is empowered to stop it.
The ITC order would ban the importation and sale of certain models of Apple AAPL iPhone and iPads on the basis of their allegedly having violated a Samsung patent. Now, to be sure, the mere fact that it bans certain product models from the market is neither unusual nor troubling per se. The ITC does that all the time and, in fact, it’s virtually the only thing the ITC can do upon finding patent infringement. Unlike a federal court, it has no power to order payment of money damages.
Nor is the impact of this particular ITC order particularly sweeping or disruptive in its commercial impact. On the contrary, the devices it would ban (the GSM versions of the iPhone 4 and iPad 2 3G) are nearing the ends of their product cycles anyway.
What makes this order noteworthy to tech companies and patent lawyers around the world is, rather, the particular kind of patent the ITC is enforcing here. It’s a so-called standards essential patent, or SEP.
Here’s why that matters. To ensure interoperability among technological devices made by different companies, standards making bodies — like the European Telecommunications Standards Institute, or ETSI, which is the one pertinent to this particular dispute — decide to solve certain technical challenges in certain ways. While they try to use the best engineering solution available, often the competing approaches are equally good, and the final decision is a bit arbitrary.
To have one’s patented solution selected is obviously a great boon to the patent-holder — a windfall, really — since all manufacturers now have no choice but to license that rights-holder’s patent if they want their products to be interoperable within the pertinent technological ecosystem. That much is unavoidable. But once the standard is set, there’s a danger that a greedy rights holder can go on to seek a second windfall, too. Since he now has manufacturers over a barrel, he may be tempted to demand outrageous prices for licensing his SEPs, all out of proportion to what their worth would have been in the absence of their having been incorporated into an industry standard.
To prevent this latter sort of abuse, standards-setting organizations require that the holders of standards essential patents commit in writing to freely license their SEPs at a “fair, reasonable, and non-discriminatory rate” (FRAND). While there will inevitably be disputes over what that the precise FRAND licensing rate should be in any given instance, those disputes can be settled by courts or arbitration tribunals which issue awards for money damages. Retroactive monetary awards (with interest, of course) give the patent holder everything he was entitled to. Accordingly, there should rarely, if ever, be any need for the holder of an SEP to seek an injunction barring the importation or sale of a product — the most devastating weapon in the patent-holder’s arsenal. Injunctions limit competition and consumer choice.
That’s why it was such a big deal when, on June 4, the ITC issued the import ban on those dated Apple devices we listed above. This ban was based on an SEP — the first time the ITC has ever based an exclusion order on one of those. And that’s why President Obama should exercise the White House’s seldom-invoked power to overturn an ITC order. (President Ronald Reagan was the last to do so. In 1987 he lifted a ban on certain products then being made by, yes, Samsung.)
The same day the ITC issued its exclusion order against these Apple devices, the White House coincidentally issued a report on “Patent Assertion and U.S. Innovation.” It denounced patent abuses that were hindering innovation rather than promoting it, and proposed some legislative reforms. While its focus was on curbing abuses by “patent assertion entities” — pejoratively, patent trolls — it also mentioned in passing the problem of major manufacturers seeking to impose import bans on competitors’ products based on SEP infringements. The ITC’s June 4 ban affords Obama a perfect opportunity to put his mandate where his mouth is.
Tellingly, Samsung’s own brief to the U.S. Trade Representative — the White House office that advises the President on how to rule on ITC orders — is quite understated in its defense of the order it won before the ITC. Samsung is, after all, a frequent “respondent” (defendant, basically) before that body, and it is currently defending an attempt by Ericsson to block one of its own products from importation based on an SEP. (It is also a respondent in a different patent investigation, instigated by Apple, which the ITC is expected to rule upon Thursday, Aug. 1, although that case does not involve SEPs.)
In its brief to the USTR, Samsung actually endorses the view that import bans should not ordinarily issue based on SEPs. It argues only that the particular SEP-based injunction it won against Apple should be approved as a rare exception to the rule, due to Apple’s alleged refusal to negotiate in good faith — a claim Apple has denied.
But the nitty-gritty of this he-said-she-said snit between Apple and Samsung seems tailor-made for being hashed out in a federal district court in a suit for money damages, not in a proceeding before the ITC, which, by law, is empowered only to issue injunctive relief — i.e., import bans and cease and desist orders against future sales. Samsung has already filed a parallel patent suit against Apple in U.S. District Court in Delaware over the same patent and same devices, so there is an alternative forum where those facts can be fully aired.
Some observers think the striking philosophical rift over SEP injunctions that we’re seeing today between the ITC, on the one hand, and the Justice Department, PTO, FTC, federal judiciary, and White House on the other, might reduce to, consciously or unconsciously, a bit of a turf battle. Thanks in no small part to the global patent wars precipitated by the rise of smartphones, the ITC’s patent docket ballooned from just 17 cases in calendar year 2000 to a peak of 69 cases in 2011. Last year the docket sank to 40 cases, however, while this year, as of mid-July, 26 cases had been filed. In the context of already ebbing influence, maybe the commission just isn’t eager to cede a large chunk of potential future business.