The U.S. digital marketing, advertising and media industry lose $8.2 billion annually, according to a study prepared by EY for the Interactive Advertising Bureau, as a result of ad fraud; stolen video programming, music and editorial content; and malware.
The report observes that each of these categories, i.e., "invalid traffic," "infringed content" and "malvertising," can be interrelated.
An excellent example is a consumer who visits an infringed content site containing malware and infects the consumer's browser with a robot that is later used to drive invalid traffic. If the industry can eliminate the profits earned by serving ads next to infringed content, it can reduce the amount of money available to drive illegal activities in the supply chain.
Thus, for example, content producers lose $2 billion in revenue from infringement, while advertisers and content producers lose $456 million in legitimate advertising opportunities. Malware from infrigement sites helps to produce invalid traffic (e.g., robot-generated ad requests made without the consumer's consent) that costs advertisers a total of $4.4 billion in out of pocket expenses. Ad blocking and site blacklisting that is considered to be primarily for the purpose of combating malware results in the further loss of advertisement opportunities valued at $781 million and $57 million respectively.
The report recommends improvement in business practices, "such as knowing your business partners and investigating new business relationships using address information, tax IDs and backkground checks" to help industry reclaim some of the $8.2 billion in costs.
Advertising--or more specifically, the ability of advertisers to "deliver the right ad at the right time to the right user"--helps fuel the Internet ecosystem. This report suggests that content theft doesn't just impact the balance sheets of publishing dynasties and Hollywood studios and record labels. There are downstream consequences for Internet vendors, ecommerce and consumers.
CNBC talked to CreativeFuture CEO Ruth Vitale about the findings. She points out that illegal downloads heavily impact smaller media companies that focus on independent productions, and that 5.5 million people are employed in the creative field in the U.S.
Attorneys general from forty states and the District of Columbia have asked the United States Court of Appeals for the Fifth Circuit to lift a preliminary injunction preventing a state attorney general from investigating Google's business practices.
In 2011, Google signed a non-prosecution agreement with the U.S. Department of Justice in which it acknowledged that it improperly assisted Canadian online pharmacy advertisers target U.S. consumers. Google agreed to forfeit $500 million and to adopt compliance and reporting measures.
"State Attorneys General have reason to believe that Google's services are still being used for unlawful activities," according to a brief filed on behalf of Mississippi AG James M. Hood, III at the end of June.
Google asserts that it's not liable for displaying information created by third parties. "Congress broadly immunized interactive computer service providers from state regulation for displaying information created by others," according to the company's December 2014 motion for preliminary injunction.
However, three federal appellate courts have ruled that Section 230 of the Communications Decency Act, to which Google refers, does not confer unlimited immunity.
Continue reading "Google probe may be revived" »
The U.S. Copyright Office would be given greater autonomy pursuant to a proposal unveiled by two members of Congress last week, and the agency's Director would be appointed for a ten year term by the President upon the advice of a bipartisan, bicameral commission and with the consent of the Senate.
The Copyright Office was established as a separate department in the Library of Congress in 1897. The head of the Copyright Office, known as the Register of Copyrights, serves at the pleasure of the Librarian of Congress. But the Copyright Office has outgrown the Library of Congress. For example, the Library of Congress hasn't delivered the necessary information technology environment so the Copyright Office can meet or exceed customer expectations in the Digital Age.
An efficient copyright system increases the supply of creative content by incentivizing content creators and rewarding investors who underwrite the cost of bringing the creations to market. The Copyright Office must make extensive use of IT to process copyright registration applications, preserve deposited copies of copyrighted works and maintain records of the transfer of copyright ownership. If the Copyright Office fails, there could be unintended consequences for the copyright system.
Continue reading "Modernize the Copyright Office" »
A bill before Congress would for the first time require radio broadcasters to pay royalty fees to recording artists and record labels pursuant to the Copyright Act. The proposed Fair Play Fair Pay Act (H.R. 1733) would "[make] sure that all radio services play by the same rules, and all artists are fairly compensated," according to Congressman Jerrold Nadler (D-NY).
... AM/FM radio has used whatever music it wants without paying a cent to the musicians, vocalists, and labels that created it. Satellite radio has paid below market royalties for the music it uses ...
The bill would still allow for different fees for AM/FM radio, satellite radio and Internet radio, but it would mandate a "minimum fee" for each type of service for the first time.
A February report from the U.S. Copyright Office cites the promotional value of airtime as the longstanding justification for exempting terrestrial radio broadcasters from paying royalties under the Copyright Act.
In the traditional view of the market, broadcasters and labels representing copyright owners enjoy a mutually beneficial relationship whereby terrestrial radio stations exploit sound recordings to attract the listener pools that generate advertising dollars, and, in return, sound recording owners receive exposure that promotes record and other sales.
The Copyright Office now feels there are "significant questions" whether the traditional view remains credible today. But significant questions are not the same thing as clear evidence.
Continue reading at Technology Liberation Front
According to Google, the Motion Picture Association of America (MPAA) has:
- "conspired to achieve [the Stop Online Piracy Act (SOPA)]'s goals through non-legislative means,"
- "pointed its guns at Google," and
- "did the legal legwork for the Mississippi State Attorney General."
Where to begin?
If MPAA and its members are protecting their rights through "non-legislative means," is that a bad thing? Absolutely not. It simply means they are attempting to protect their rights on the basis of pre-existing law rather than trying to enact new law. Who could object to this? What does one say in response to Google's allegation that motion picture studios have pointed their guns at the search engine? That they have the power to pull the trigger a kill Google? Is this paranoid, delusional, hysterical or all three?
Jim Hood, the Attorney General of Mississippi, is also president of the National Association of Attorneys General. As chairman of NAAG's intellectual property committee, Hood sent a letter to Google in November, 2013 that began as follows:
As you are aware, the overwhelming evidence shows that Google facilitates and profits from numerous illegal online activities ranging from piracy to illegal drug sales and human trafficking. Yet Google has repeatedly refused to take reasonable but important steps that would reduce the ability of criminals to profit from their crimes. Google's inaction is not merely a failure to do the right thing. Rather, it raises serious questions as to whether Google is engaged in unlawful conduct itself.
Continue reading "Secret conspiracy to revive SOPA?" »
The motion picture industry has established a search site to help consumers find non-pirated movies and TV shows available on the Internet--WheretoWatch.com.
A study by NetNames estimated that 23.8% of all the bandwidth consumed in North America, Europe and Asia-Pacific in January 2013 was used to access pirated content.
There are more than 100 legal online services offering movie and television content in the U.S., according to Chairman and CEO Senator Chris Dodd of the Motion Picture Association of America, and a study by KPMG found that 94% of the most popular and critically acclaimed films were legally available online in December 2013.
In the opinion of Google, which has taken steps including downranking (in search results) sites that generate a large number of removal notices pursuant to the Digital Millenium Copyright Act,
Piracy often arises when consumer demand goes unmet by legitimate supply. As services ranging from Netflix to Spotify to iTunes have demonstrated, the best way to combat piracy is with better and more convenient legitimate services. The right combination of price, convenience, and inventory will do far more to reduce piracy than enforcement can.
WheretoWatch.com is an important step in that direction, however it's hard to compete with free. Both enforcement and convenient legitimate sources are needed to combat digital piracy.
A report by NetNames for the Digital Citizens Alliance has found that the "overwhelming use of cyberlockers is for content theft." At least 79-84% of sampled files on 30 of the most popular online file sharing destinations infringed copyright, according to the analysis.
The report also estimates that the sites generate profit margins of 88-96% on combined revenue of over $95 million per year. The primary sources of income are premium account subscriptions enabled by payment processors such as VISA and MasterCard, and advertising.
Every cyberlocker that offered paid premium accounts to users provided the ability to pay for those subscriptions by Visa or MasterCard, with only one exception. Only a single cyberlocker accepted PayPal.
Continue reading "Study shows credit card companies collect millions for cyberlockers that infringe copyright laws" »
The House Judiciary Committee examined the "first sale" doctrine at a recent field hearing in New York City as part of the committee's comprehensive review of copyright. The first sale doctrine made perfect sense during the Industrial Age, but in some respects it's problematic for the Digital Age.
Consumers have the right to give away, lend or sell a book that they own, thanks to a 1908 Supreme Court decision that was subsequently codified by Congress at 17 U.S.C. �109(c). There's no dispute that "[p]hysical copies of works in a digital format, such as CDs or DVDs, are [covered] in the same way as physical copies in analog form."
However, consumers with an Internet connection are downloading more and more digital content from remote servers pursuant to license agreements. And the first sale doctrine does not apply to digital files that are transmitted from machine to machine, according to the Copyright Office, because transmission results in two copies (one on each machine).
Continue reading "First Sale in the Digital Age" »
Over 1.3 million notices of alleged copyright infringement were sent to users of peer-to-peer (P2P) networks suspected of illegally sharing copyrighted material over a ten month period beginning in late February 2013, according to the Center for Copyright Information (CCI).
The Copyright Alert System, a voluntary private sector initiative of the CCI that is "based on the premise that most consumers will take corrective action if alleged copyright infringement involving their Internet account is brought to their attention," generated the notices.
P2P networks are monitored on behalf of recording artists and music producers, filmmakers, and creators and distributors of movies and television shows, and notices of alleged copyright infringement are generated through the use of publicly available IP address data. This information is shared with Internet Service Providers (ISPs), who then deliver up to six separate alerts (for repeat violations) to the corresponding account holders without sharing any personally-identifiable information about their customers.
Continue reading "Copyright Alert System successfully launches" »
The Digital Millenium Copyright Act's notice-and-takedown safe harbor is rapidly becoming obsolete. The safe harbor, aka Section 512 of Title 17 of the U.S. Code, is the subject of a hearing tomorrow in the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet.
The safe harbor limits the liability of online service providers for copyright infringement if they remove infringing content upon receiving notice from the copyright owner. Safeguards are built into the law to protect against the possibility of erroneous or fraudulent notifications.
The problem is the safe harbor was designed for the Internet as it existed 15 years ago, before broadband. Most people did not access video over the Internet when Congress enacted the DMCA in 1998. As the Federal Communications Commission concluded at the time,
Due to bandwidth and other limitations, this method of video distribution does not yet produce programming that is comparable in length, quality, or convenience to broadcast video. Before Internet distribution of video becomes competitive in the video distribution marketplace, significant improvement must be made in this form of delivery.
Continue reading "Industry combating online piracy" »
A sampling of 596 web sites that deal primarily in pirated content made an estimated $227 million in annual advertising revenues, according to the Digital Citizens Alliance (See: "Good Money Gone Bad: Digital Thieves and the Hijacking of the Online Ad Business - A Report on the Profitability of Ad-Supported Content Theft"). "The 30 largest sites studied that are supported only by ads average $4.4 million annually, with the largest BitTorrent portal sites topping $6 million. Even small sites can make more than $100,000 a year from advertising."
"It is important to note that the advertising profits garnered by content thieves do not equate with the losses incurred by the owners of the content," notes the report. "These losses are unquestionably greater by many orders of magnitude..."
Fortunately, the advertising industry is not willing to tolerate intellectual property infringement. "The future health of digital media is at stake," according to Bob Liodice, head of the Association of National Advertisers, "and we owe it to ourselves, our industry and its brands to attack the issue head-on."
Continue reading "Advertisers vs. ad-supported pirate sites" »
Retransmission consent came under attack again this month, and two long-awaited bills on the subject have finally been introduced--the Next Generation Television Marketplace Act (H.R. 3720) by Rep. Steve Scalise, and the Video CHOICE (Consumers Have Options in Choosing Entertainment) Act (H.R. 3719) by Rep. Anna G. Eshoo.
The American Cable Association's Matthew M. Polka has reiterated his view that the process whereby cable and satellite TV providers negotiate with broadcasters for the right to retransmit broadcast signals is a "far cry from the free market," and Alan Daley and Steve Pociask with the American Consumer Institute claim that retransmission consent jeopardizes the Broadcast Television Spectrum Incentive Auction.
As Jeff Eisenach pointed out at the Hudson Institute, "Congress created retransmission consent in 1992 to take the place of the property rights that it and the FCC abrogated. Prior to 1992, broadcasters weren't permitted to charge anyone for retransmitting their signals."
Showdowns are likely in the Senate and House of Representatives later this month on legislation combating online piracy. The House Judiciary Committee is expected to vote on the Stop Online Privacy Act, H.R. 3261 (SOPA), and the full Senate on the Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act, S. 968 (Protect IP Act). These measures have generated some overheated rhetoric.
A recent column in Roll Call by Stephen DeMaura and David Segal, entitled "All Candidates Should Be Concerned About SOPA," for example, suggests that SOPA could be exploited by political opponents to restrict free speech.
Here's a plausible campaign scenario under SOPA. Imagine you are running for Congress in a competitive House district. You give a strong interview to a local morning news show and your campaign posts the clip on your website. When your opponent's campaign sees the video, it decides to play hardball and sends a notice to your Internet service provider alerting them to what it deems "infringing content." It doesn't matter if the content is actually pirated. The ISP has five days to pull down your website and the offending clip or be sued. If you don't take the video down, even if you believe that the content is protected under fair use, your website goes dark.
Another recent column in Politico
by Tim Mak entitled "Bloggers: SOPA's the end of us
" makes a similar claim and implies a tidal wave of opposition is forming (we shall see).
The conservative and liberal blogospheres are unifying behind opposition to Congress's Stop Online Piracy Act, with right-leaning bloggers arguing their very existence could be wiped out if the anti-piracy bill passes.
There is no way these bills would permit an opposing campaign or campaign committee to pull down websites harboring "infringing content," nor would they authorize censorship of lawful speech.
Continue reading "Opponents overreact to online piracy legislation" »
Is the proposed Stop Online Piracy Act, H.R. 3261 (SOPA) a "massive piece of job-killing Internet regulation," as our friends at the Electronic Frontier Foundation claim?
According to the sponsor of the proposal, House Judiciary Chairman Lamar Smith (R-TX), there is an urgent need to protect American innovators from foreign theft via the Internet.
Rogue websites that steal and sell American innovations have operated with impunity. The online thieves who run these foreign websites are out of the reach of U.S. law enforcement agencies and profit from selling pirated goods without any legal consequences. According to estimates, IP theft costs the U.S. economy more than $100 billion annually and results in the loss of thousands of American jobs.
The Stop Online Piracy Act helps stop the flow of revenue to rogue websites and ensures that the profits from American innovations go to American innovators. The bill prevents online thieves from selling counterfeit goods in the U.S., expands international protections for intellectual property, and protects American consumers from dangerous counterfeit products.
American IP industries provide 19 million high-paying jobs to the U.S. economy and account for more than 60% of U.S. exports. It's time to stop online piracy and start protecting American jobs and innovations.
EFF makes some potentially useful points about the drafting of the bill. In lawmaking, as a general matter, the first draft of a bill sometimes uses language that is perhaps overly broad. Sometimes consequences for reckless, negligent or malicious enforcement, litigation or prosecution should be added to ensure fairness. To the extent that these are legitimate issues, they are normally resolved during a properly-functioning legislative process.
Presumably we can all agree that theft is bad, and that we would all like to prevent theft to the extent possible. Opponents such as EFF can provide a valuable service by making specific recommendations; unfortunately, EFF is not playing ball. "This bill cannot be fixed," according to EFF, "it must be killed."
With all due respect to EFF, the numbers cited by Chairman Smith are staggering. Foreigners are robbing American innovators blind. And their losses are ultimately our losses. It is time for us to come together and search for new approaches for combating intellectual property theft.
No one wants to strangle "Twitter, Tumblr, and the next innovative social network, cloud computing, or web hosting service that some smart kid is designing in her garage right now," to use EFF's colorful example. But let's be real, innovation is about creating, not stealing. Pirated content is not primarily responsible for the success of Twitter, Tumblr, Facebook, iTunes or YouTube. Although piracy may provide some limited help for imitators, it is not necessary for creators, and it does not promote innovation.
So, if there is a better approach for combating foreign piracy than SOPA, let's hear it.
Guy Kewney notes in The Register:
The story behind the story is always more interesting, somehow, than the story itself; and the story behind last week's Mobile World congress wasn't just the obvious stuff about backhaul capacity. Instead, people were mumbling furtively about piracy - intellectual piracy, that is. You know, like intellectual property, but acquired by devious means.
I asked Scott McGregor, CEO of Broadcom, what he thought of 2008 in the intellectual piracy arena. He said: "Patent enforcement has gone too far. It's time to see an adjustment in roll-forward royalties, where people have a business model predicated on charging royalties several times on the same component."
The problem is not the patent system but the litigious exploitation of it by trolls shopping their synthetic IP baubles and beads before gullible rotten borough Texas judges high on handouts and Lone Star booze. On target is the quote about sudsy ideas ginned up in the bathtub, defying non-obviousness and reduction to practice (which are crucial to a practical patent). The Broadcom and NBT cases were typical, racing to find a round-heeled court to award extortionate terms minutes before the news reached the boondock bench that the patents were getting thrown out with the trash.
Qualcomm actually has inventions, which were so non-obvious that they were widely depicted as violating physical law and were reduced to practice every which way by Qualcomm in vertically integrated businesses from infrastructure to handsets. But Broadcom's claims are typical of the process of debauching the entire patent system into a circus of grifters with gotchas. There is no reason the Chinese should respect this debauchery and their current maneuvers seem like typical disruptive business to me. We have got to get rid of our rotten borough patent farms.
Qualcomm is meeting the challenge with patented low-cost devices, but it may not be enough in some of these markets. In any case, Qualcomm has always ultimately won through its chip prowess.
It is the chip design prowess and vertical shows of capability that distinguish the Q from other winners of royalty streams. I am not saying that the royalties are unimportant, just that they are dependent on engineering demonstrations and chip designs. If Qualcomm had merely relied on its patents, CDMA would never have happened.
Should Internet service providers block copyrighted material from their networks if "fingerprinting" technology allows them to easily identify it?
Bits, the New York Times' technology blog, has an excellent copyright discussion featuring Columbia Law Professor Tim Wu and the general counsel of NBC Universal, Rick Cotton. One of the questions is whether ISPs should block copyrighted works? Wu makes a good point,
"Technologies designed to examine what kind of content is passing the network are technologies of censorship. Tolerating the routine inspection of all content, in the search for "forbidden" content, is a fast road to a private police state."
But I think Wu is glossing over an important point here, i.e.
, there is a vast difference between a "private police state" and a real police state: Private entities are vassals of the state; the state answers to no one.
But, still, government can op-opt corporations to conduct surveillance for government.
Cotton is concerned about "wholesale reproduction of entire works (or even major portions)" and claims that: "as much as 50% of the carrying capacity of many, if not most, Internet service providers are being hijacked by a relatively small percentage of users to carry huge volumes of complete, unchanged pirated digital copies of films, games and software."
There are a couple interesting questions here: One is whether common carriers have a right to block traffic? I think the answer is they can't block lawful content, but audio and video files which violate copyright aren't lawful.
Another interesting question is whether they can allow unlawful content if they have the technical means to block it? The Supreme Court has described a contributory infringer as one who "was in a position to control the use of copyrighted works by others and had authorized the use without permission from the copyright owner." A good argument could be made that fingerprinting technology could block traffic which violates copyright. The question is whether the technology would also inadvertently block substantial lawful content?
Cotton believes the answer is no, but others disagree:
"The problem, according to [Electronic Frontier Foundation senior staff attorney Fred] von Lohmann, is not that fingerprinting isn't good at identifying copyrighted content but that it identifies too much, including instances where a copyrighted work is legitimately incorporated into a new creative context as allowed under the doctrine of fair use."
Speaking of the "Fair Use" Doctrine, Wu claims it is too vague and recommends a simpler formulation: "work that adds to the value of the original, as opposed to substituting for the original, is fair use."
Wu's suggestion would mean you could add a song to the video you shoot of your dog jumping into a bathtub, and the song wouldn't be protected by copyright because it is part of your home movie. It's one of those exceptions that swallows the rule... It would be great in terms of protecting Google's YouTube from copyright liability, but are the rights of the secondary artist more important than the rights of the primary artist?
Why couldn't Google, who earns billions of dollars per quarter in advertising, just pay the copyright-holder a reasonable fee when a YouTube video expropriates their song? It would be easy to tally the number of times the video is viewed and base the fee accordingly. Apple iTunes charges only 99 cents to buy
a song, so YouTube wouldn't have to pay much when one of it's users merely listens to a song.
For more information on fingerprinting, see, e.g., "Policing Web Video With 'Fingerprints' - Sharing Sites Say Technology Could Help Them Identify, Remove Unauthorized Clips," from the Wall Street Journal.
I want to comment on Adam Thierer's recent paper, "Unplugging Plug-and-Play Regulation," which makes several excellent points. Adam briefly summarized his thesis (i.e., there is no need for government "assist" in private standard-setting) here a couple days ago and generated a couple comments.
The cable industry and consumer electronics manufacturers are touting competing standards initiatives. The pros and cons of each approach, from a technology perspective, are somewhat bewildering to a non-engineer like myself. But there appears to be one clear difference that matters a lot. Adam points out that under the initiative sponsored by the consumer electronics industry,
the FCC would be empowered to play a more active role in establishing interoperability standards for cable platforms in the future. [It's] a detailed regulatory blueprint that specifies the technical requirements, testing procedures, and licensing policies for next-generation digital cable devices and applications.
Why would ongoing assistance be required from the FCC, which mainly consists of lawyers? It's that same old argument we hear over and over: Cable companies are big, therefore they must be regulated, right? Back before the emergence of DISH Network, DIRECTV, FiOS, U-verse, the iPod and who knows what else may be coming over the Internet, that argument was hard to refute. The world has changed, as can clearly be seen
in how Wall Street is valuing the cable companies versus phone companies who offer comparable programming .
Already Wall Street has gone negative on cable stocks because of concern over FiOS as well as the slowing growth of the high speed Internet business and the rollout of more high definition TV stations by satellite companies. Comcast is now trading in the $23 range, down from its 52-week high of over $30 a share in January. Verizon's stock, on the other hand, is trading in the $45 range, its highest level since early 2002, with some on Wall Street partially crediting FiOS. Shares of Verizon rose 48 cents, or 1.1%, to $44.81 in 4 p.m. in New York Stock Exchange composite trading yesterday.
Cable companies need to be able to respond to the competition -- they need to be able to raise capital, which requires that investors earn a return which meets or exceeds the return available somewhere else -- yet the FCC is on the path of regulating the navigation devices used by cable companies but no one else.
Is this a big deal? Yes. The motion picture association points out that the CE manufacturers' favored approach "fails to adequately address content creators' reasonable concerns regarding content protection, presentation and interactivity." I'm not going to get into a discussion about the level of content protection the motion picture industry is seeking, only comment on the inappropriateness of placing cable operators in the middle of that dispute without a paddle.
MPAA's ominous warning, that "high value programming will be made available for bidirectional navigation devices only if content is adequately protected from unauthorized copying and redistribution," has enormous implications for broadband competition.
The FCC ought to take a step back and completely reassess what it is doing here. In my view, mature consideration leads to the conclusion that government has no business in this space at this time.
Rep. Howard L. Berman
A centerpiece of the Leahy-Hatch/Berman-Smith Patent Reform Act of 2007 (S. 1145 and H.R. 1908) is the establishment of an injudicious post-grant opposition procedure (also known as a "second window"). According to Chairman Howard L. Berman (D-CA) of the House Subcommittee on Courts, the Internet, and Intellectual Property, a new layer of review is needed because:
In an effort to address the questionable quality of patents issued by the USPTO, the bill establishes a check on the quality of a patent immediately after it is granted or in circumstances where a party can establish significant economic harm resulting from assertion of the patent. [emphasis added.]
There are several key problems with the proposed new procedure for post-grant review contained in sec. 6 of the Patent Reform Act of 2007.
First, someone can challenge a patent anytime, throughout the patent's life if they can show they are likely to suffer "significant economic harm" from the patent. This is extraordinary, because prosecutions of all but a few of the most egregious crimes (e.g., war crimes; murder; rape, in some jurisdictions) are governed by statutes of limitation which say that causes of action aren't permitted after a certain period of time. Statutes of limitation are necessary because memories fade and evidence becomes stale, is lost or more easily corrupted as the years pass. Some crimes are so heinous they aren't subject to a statute of limitations. But patent disputes hardly fit in this category.
Aside from the enormous uncertainty that would arise from an open-ended opportunity for post-grant opposition, sec. 6 also strips patent holders of two important protections they have under current law.
Proof and evidentiary standards
''(a) IN GENERAL.--The presumption of validity set forth in section 282 shall not apply in a challenge to any patent claim under this chapter.
''(b) BURDEN OF PROOF.--The party advancing a proposition under this chapter shall have the burden of proving that proposition by a preponderance of the evidence.
Courts now presume that patents must be valid or they wouldn't have been issued by the Patent & Trademark Office. A plaintiff has to provide "clear and convincing" evidence that a particular patent doesn't meet the legal requirements for validity. Sec. 6 eliminates the presumption and sets a lower evidentiary threshold. This sets up a situation where a decision of the PTO has little if any significance because the courts will be considering patent claims anew as if no PTO proceeding ever occurred. If this is what we want, the question arises why are we retaining the PTO? Normally, courts defer to the expertise of administrative agencies unless an abuse of discretion is apparent. This policy tends to reduce litigation by increasing the importance for all parties to fully participate in agency deliberations. The Patent Reform Act of 2007 would eliminate any such incentive.
Professor Adam B. Jaffe justifies this duplication on the grounds that it would be inefficient to subject trivial patents to heightened scrutiny:
Effective reform must start with the recognition that much of the information needed to decide if a given application should be approved is in the hands of competitors of the applicant, rather than the PTO. A review process with multiple potential review levels efficiently balances the need to bring in outside information with the reality that most patents are unimportant. Multilevel review, with the barriers to invoking review and the thoroughness of that review both increasing at higher levels, would naturally focus attention on the most potentially important applications. Most patents would never receive anything other than the most basic examinations. But for those applications that really mattered, parties would have an incentive and opportunities to bring information in their possession before the PTO, and the PTO would have more resources to help it make the right decision.
Professor Jaffe makes a good argument, for an economist. But there is a compelling public policy favoring finality in government decision-making so people can plan for the future. The general rule requires interested parties to make their views known and submit their challenges during the pendency of agency decision-making, not whenever it is convenient. An innovator trying to market his or her idea needs financing and talent, but by subjecting patents to opposition at any time and making the outcome less predictable a Sword of Damocles will hang over the patent holder and innocent collaborators (such as investors and employees) who help market his or her innovation. This will invariably impact capital formation that is vital for innovation.
A new post-grant opposition procedure would also be highly duplicative, since Congress created a re-examination procedure in 1981 which is still with us (also for the purpose of reducing litigation) and the Patent Reform Act of 2007 includes separate provisions for pre-grant opposition in sec. 9.
Finally, it should be noted that even Chairman Berman seems to understand that a post-grant opposition procedure could lead to the abuse of patent holders:
Many have expressed concerns about the possibility of harassment of patent owners who want to assume quiet title over their invention. In an effort to address those concerns, the bill prohibits multiple bites at the apple by restricting the cancellation petitioner to opt for only one window one time. The bill also requires that the Director prescribe regulations for sanctions for abuse of process or harassment.
If history is any guide, this may lead to hundreds or thousands of pages of new regulations, in which case the only thing Chairman Berman may have accomplished is to substitute one problem for another.
According to Senate Judiciary Chairman Patrick Leahy (D-VT), constructive patent reform would "reduce the unnecessary burdens of litigation" in the patent system and "enhance the quality of patents" granted by the Patent and Trademark Office. Better patent quality ought to be the focus of discussion, because only bad patents lead to unnecessary litigation. Most people would agree courts ought to vigorously enforce good patents. The Leahy-Hatch/Berman-Smith Patent Reform Act of 2007 (S. 1145 and H.R. 1908) fails to reflect this basic point. The bills misguidedly treat the goals of improving patent quality and reducing litigation as mutually exclusive goals to some extent. The result will be to reduce protection for all patents, not just the bad ones.
Take, for example, the right of an inventor to obtain damages for infringement. Sec. 5 of the patent reform proposals addresses the familiar situation where an invention which someone claims has been stolen is a mere component of a more complex product or service. Present law gives patent holders the right to prove their invention is the basis for consumer demand of the entire product or service, and it gives infringers the right to prove a portion of the profit is attributable to the manufacturing process, business risks or features or improvements added by the infringer. If the patent holder satisfies the burden of proof, damages will be calculated based on the full value of the product or service. If the infringer meets the burden of proof, the value of their additions will be subtracted. A leading patent attorney, William C. Rooklidge, explains the policy goals:
Apportionment recognizes the reality that consumer demand for an infringing product or process may in part spring from contributions from the infringer, and to reward the inventor for those contributions is inappropriate. On the other hand, the entire market value rule recognizes the reality that even complex assemblies may owe their marketability to a patented feature--a feature that drives consumer demand for the overall assembly. In those cases, it is entirely appropriate to reward the inventor according to the worth of her invention. To do otherwise would only encourage those who trespass and discourage inventors from making their intellectual efforts available to the public.
Sec. 5 would add the following two provisions to current law (35 U.S.C. §284):
(2) RELATIONSHIP OF DAMAGES TO CONTRIBUTIONS OVER PRIOR ART- The court shall conduct an analysis to ensure that a reasonable royalty under paragraph (1) is applied only to that economic value properly attributable to the patent's specific contribution over the prior art. In a reasonable royalty analysis, the court shall identify all factors relevant to the determination of a reasonable royalty under this subsection, and the court or the jury, as the case may be, shall consider only those factors in making the determination. The court shall exclude from the analysis the economic value properly attributable to the prior art, and other features or improvements, whether or not themselves patented, that contribute economic value to the infringing product or process.
(3) ENTIRE MARKET VALUE- Unless the claimant shows that the patent's specific contribution over the prior art is the predominant basis for market demand for an infringing product or process, damages may not be based upon the entire market value of that infringing product or process.
Rooklidge notes that sec. 5 eliminates the infringer's responsibility for proving apportionment is appropriate -- making apportionment the default method -- and that sec. 5 would likely "preclude application of the entire market value rule in all but a few cases."
Rooklidge also observes, among other things, that paragraph (2) would require courts to conduct an apportionment analysis in every case even though apportionment isn't relevant in every case. This won't promote patent quality, and it won't even reduce litigation. Chief Judge Paul R. Michel of the U.S. Court of Appeals for the Federal Circuit further points out,
[T]he present bills require a new kind of macroeconomic analysis that would be extremely costly and time consuming, far more so than the current application of the well-settled apportionment law. Resulting additional court delays would be severe, as would attorney's fees and costs.
This requirement will be an unnecessary litigation burden, to borrow Chairman Leahy's phrase, in cases where a patent holder can satisfy the burden of proof for the entire market value rule. It will also tend to favor the defendant who appeals the verdict, because a significant disparity in the results that the entire market value and the apportionment analyses yield might make an impression of its own on appellate judges.
Complicated and nuanced proposals, like this one, for stacking the evidentiary deck and for limiting the discretion of courts to fully consider the unique facts present in each case and render a common-sense verdict are a milder, friendlier form of stripping the lower courts of jurisdiction to consider particular disputes at all. Most people wouldn't tolerate the latter. But there isn't a huge difference.
The damage provisions in the proposed Patent Reform Act of 2007 vastly increase the likelihood that someone who infringes a valid patent will derive at least some profit. That incentivizes infringement and is obviously no way to "secur[e] for limited times to authors and inventors the exclusive right to their respective writings and discoveries."
Why would Congress want to limit damage awards for the holders of good patents? That's what sec. 5 is all about. The damage provisions are a blatant example of Congress picking winners and losers and ought to be dropped completely from the bills.
This week in the Tech Policy Weekly podcast
with Jerry Brito, Adam Thierer, Tim Lee and special guest Mike Masnick, I discuss the patent reform proposal introduced last week in the Senate and House, which I've described here
and in previous posts.
The utility, novelty and non-obviousness requirements haven't been consistently applied, particularly in the software and business methods areas, nor the rule against vagueness. These concepts all need to be resurrected. Unfortunately, patent quality usually comes down to a plea for more funding for the PTO, which would allow the PTO merely to subsidize its preexisting weaknesses.
On the positive side, the proposal permits third parties to submit relevant prior art references to the Patent Office and it modifies the definition of willful infringement -- which subjects an infringer to treble damages -- so that treble damages will be available where an infringer intentionally copies a patented invention with knowledge that it was patented. But innovators hopefully won't be discouraged from reviewing issued patents to determine whether a patent exists as now, where mere knowledge of a preexisting patent leads to treble damages.
The media seems to be focusing on the fact that the proposal converts the U.S. from a first-to-invent to a first-to-file system, giving priority to the earlier-filed application. Didn't we have that once? And didn't we get rid of it because the first to file wasn't always the first to invent, and it's the latter who seems to be the more deserving of the two?
Some of the provisions will allow for harassment of patent owners. The PTO will issue regulations to prevent abuse, but we don't know what those will be. As in every proposal to reform some aspect of the legal system, there are limitations on damage awards in this proposal, because some feel litigation isn't producing predictable damage awards. Some predictability is of course necessary but absolute predictability is dangerous: The more predictable a penalty for wrongful conduct is, the easier it can be factored in as a mere cost of doing business.
I also don't like the new and unnecessary layer of post-grant review, which limits incentives for all parties to participate up front. That's necessary to protect innocent third parties who participate in bringing innovations to market -- such as investors, employees and suppliers (including their families and communities).
Fine-tuning patent law (as I have argued here and here) is a task the Supreme Court is best suited to handle, and the Leahy-Hatch / Berman-Smith Patent Reform Act of 2007, introduced yesterday in the Senate and House, thankfully is silent on some of the more contentious patent reform issues. According to Rep. Howard Berman (D-CA),
There are a number of issues which we have chosen not to include in the bill primarily because we hope they will be addressed without the need for legislation. For instance the Supreme Court recently resolved questions regarding injunctive relief. In that category we include amendments to Section 271(f) and the obviousness standard as both issues are currently before the Supreme Court. If either of those issues are not resolved, Congress may need to re-evaluate whether to include them in a patent bill.
Click here for Rep. Berman's web page containing the text of the proposal and a section-by-section analysis. A very quick initial read indicates that a number of the ideas in the Congressional proposal sound okay in theory but could in practice lead to more uncertainty and new forms of abuse.
First of all, the proposal aims to limit obscene damage awards by requiring that when a court seeks to determine what a "reasonable royalty" would be, the analysis must be limited to the economic value "attributable to the patent's specific contribution over the prior art." But this is what the courts try to do already. The law doesn't intentionally compensate someone for the harm done to another. So this is, in effect, a warning shot to judges to be more defendant-friendly and keep damage awards to a minimum. The proposal also says damages can't be based on the "entire market value" of the infringing product or process, unless the patent's specific contribution over the prior art is the "predominant basis for market demand" for that product or process. This is a very high threshold intended to exclude almost everything. I wonder what's wrong with "significant," for example, instead of "predominant"? Also, a "predominant basis for market demand" may not be the same as an essential ingredient. But right now if something is an essential ingredient the courts can take that into account.
Rep. Howard Berman (D-CA), one of the proposal's sponsors, notes that what really grates on infringers is having to pay damage awards for "low quality" patents,
Litigation abuses, especially ones committed by those which thrive on low quality patents, impede the promotion of the progress of science and the useful arts.
On the positive side, the proposal permits third parties to submit relevant prior art references to the Patent Office. But it also creates a new post-grant opposition procedure. That's because,
a party seeking to challenge the validity and enforceability of the patent has two avenues under current law: by reexamination proceeding at the USPTO or by litigation in federal district court. The former is used sparingly and is considered not very effective; the latter, district court litigation, is unwieldy and expensive
Why is reexamination considered not very effective? Well, for one thing, it has to be requested within three months of the issuance of a patent, unless the Director of the Patent Office decides to on his or her own initiative. The Director can trigger a reexamination at any time. This serves as an important safeguard in truly unusual or egregious situations, but one that's tempered by the fact that the Director presumably is a disinterested third party. Post-grant review can be requested by an infringer at any time, throughout the life of the patent, if the patent is likely to cause the infringer "significant economic harm." There is, therefore, little incentive for interested third parties to participate at the front end of the process when patents are issued. The result is unnecessary risk for innocent third parties who participate in the marketing of new products and processes, such as investors, employees and suppliers. Most if not all decisions of government agencies must be appealed within limited timeframes such as 30, 60 or 90 days, because finality is what allows people to get on with their lives and plan for the future. The proposal tries to solve this problem by making post-grant review just like reexamination,
§ 325. -- The Director may not institute a post-grant review proceeding unless the Director determines that the information presented provides sufficient grounds to proceed.
It sounds like we're back where we started, except that we now have three layers of review instead of two. But there's more. Post-grant review will be an agreeable forum for an infringer:
§ 328.-- The presumption of patent validity does not apply in post-grant review; burden of proof is preponderance of the evidence.
That's not all. Berman acknowledges there's a possibility of abuse, so new and unspecified regulations are going to be required,
Many have expressed concerns about the possibility of harassment of patent owners who want to assume quiet title over their invention. In an effort to address those concerns, the bill prohibits multiple bites at the apple by restricting the cancellation petitioner to opt for only one window one time. The bill also requires that the Director prescribe regulations for sanctions for abuse of process or harassment.
For those who have struggled to deal with the patent thickets in the newly patentable areas of software and business methods, there will appear to be some good stuff in the Leahy-Hatch / Berman-Smith Patent Reform Act of 2007. For many other holders of traditional patents, who are more or less satisfied with the current system, this isn't a great starting point.
European Union regulators think Apple should charge the same price across Europe for users to download content from iTunes. As it now stands, consumers in countries like Great Britain and Denmark pay a few cents more than their neighbors to download songs. Apple has been served with a Statement of Objections (basically an indictment). According to an EU press release,
The Statement of Objections alleges that distribution agreements between Apple and major record companies contain territorial sales restrictions which violate Article 81 of the EC Treaty. iTunes verifies consumers' country of residence through their credit card details. For example, in order to buy a music download from the iTunes' Belgian on-line store a consumer must use a credit card issued by a bank with an address in Belgium.
The EU's best efforts to the contrary, taxation and regulation are not completely uniform throughout the EU -- so the cost of doing business may actually differ from one country to another. For example, there are still differences in copyright protection notwithstanding recent efforts to harmonize
each country's copyright law.
The EU says it is not alleging that Apple is in a "dominant market position," nor is it examining Apple's use of Digital Rights Management (DRM) to control usage of the songs it sells. My guess is someone in the EU senses political risk. The EU came down hard on Microsoft at the behest of rival software developers (some of whom are European); European cellphone makers are hoping the EU will help reduce the royalty payments they currently pay to Qualcomm; and European semiconductor manufacturers need help, too (click here). Though the complaint against Intel was brought by an American rival, European rivals would also benefit from sanctions against Intel. How many successful American companies can the EU afford to target at once?
The EU may think it can have it both ways. Apple now has separate iTunes stores throughout Europe. When the French Senate and the National Assembly approved a copyright law in June that could force Apple to make its iTunes compatible with rival music players and reducing the fine for illegal downloading of music to "little more than a parking fine," some noted Apple could just stop doing business in France (see, e.g., this and this. If the EU can pressure Apple to create a single EU-wide store, it would be harder for the company to retaliate against a single country who wants to pursue what Apple called, in the case of the French legislation, "state-sponsored piracy." The impetus for interoperability in France appears to be driven by consumer advocates, not any notion that interoperable music files will deliver what Europe needs most -- jobs and economic growth.
This week in the Tech Policy Weekly podcast
, Jerry Brito, Drew Clark, Tim Lee and I discuss patent reform, FreeConference's antitrust suit against AT&T and e-voting.
On patent reform, I observed that the momentum for fundamental reform reminds me in some ways of the eagerness for telecom reform in the mid 1990s. The Telecommunications Act of 1996 created many problems, demonstrating the inevitability of unintended consequences. Meanwhile, the Supreme Court has stepped up to the plate and has a chance to recalibrate the patent system without major reform. I'd like to see what the Supreme Court does, and hope Congress takes it's time. A long time.
I'm not sure what to make of FreeConference v. AT&T. As Tim Lee points out, in effect, FreeConference appears to have been thwarted in an arbitrage scheme. I wonder why FreeConference hasn't filed a formal complaint with the FCC alleging a violation of the commission's rules or policies (the commission has a net neutrality policy, though you might never know it from the left-wing hype promoting net neutrality regulation). Last time the FCC considered a similar complaint it acted expeditiously against a midsize phone company named Madison River Communications. Why didn't FreeConference file an FCC complaint? Instead it has brought an antitrust claim in federal district court. That may take longer to resolve, and leads me to wonder what is FreeConference seeking here? Is it primarily interested in a cease-and-desist order -- which the FCC could issue -- or perhaps in a broader settlement agreement, or, possibly, some kind of ongoing publicity value. I don't know.
The podcast is here.
Irwin Mark Jacobs
The patent system "has overall worked very well in encouraging innovation and, particularly in our case, in allowing us to grow to a significant company," remarked Qualcomm co-founder Irwin Mark Jacobs at the Heritage Foundation last week. To many, the patent system works too well. Our present system awarded a patent for a garbage bag that looks like a pumpkin, for example. Someone else patented a method for swinging on a swing. Jacobs acknowledges patent quality is critical and wants Congress to allow the Patent & Trademark Office to retain all of its user fees, but warns that other reforms could have unintended consequences.
Besides ending the diversion of some $90 million in PTO fees to fund other government programs, the chairman of the House subcommittee responsible for intellectual property, Rep. Howard L. Berman (D-CA), also wants to "improve patent quality, deter abusive practices by unscrupulous patent holders, and provide meaningful, low-cost alternatives to litigation for challenging patent validity."
As noted by Professors Adam B. Jaffe and Josh Lerner in Innovation and Its Discontents (2004), our current problems stem from Congress' last attempt to create a perfect patent system.
Beginning in 1982, the U.S. Congress made two adjustments to how the patent system operates ... the process for judicial appeal of patent cases in the federal courts was changed, so that such appeals are now all heard by a single, specialized appeals court ... [and] Congress changed the structure of fees and financing of the U.S. Patent and Trademark Office (PTO) itself, trying to turn it into a kind of service agency whose costs of operation are covered by fees paid by its clients (the patent applicants).
It is now apparent that these seemingly mundane procedural changes, taken together, have resulted in the most profound changes in U.S. patent policy and practice since 1836.
This explanation is largely compelling. But, as noted
by Professor Mark D. Janis (2001), another part of the problem has been a Supreme Court preoccupied -- until very recently -- with other matters.
The Supreme Court has rendered itself well nigh invisible in modern substantive patent law. The Court of Appeals for the Federal Circuit, created in 1982, has become the de facto supreme court of patents. In those rare patent cases when the real Supreme Court has materialized, the Court has left behind a largely uninspiring jurisprudence.
Under Chief Justice John Roberts, the Supreme Court has agreed to consider several patent cases. In eBay v. MercExchange
(2006), the Court addressed the problem of "automatic" injunctions. Automatic injunctions are a recent problem, created by the Court of Appeals for the Federal Circuit. The Supreme Court ruled that the traditional four-factor test used by the courts when considering virtually any petition for injunctive relief (irreparable injury, inadequate legal remedies, balance of hardships and the public interest) should likewise apply to patent disputes. The availability of "automatic" injunctions made it particularly appealing for some patent holders or their assigns (so-called patent trolls
) to lie in wait for an opportunity to hold up other innovators in the final stages of commercializing their innovations. The "new" rule will restore some sanity.
Now the Supreme Court is considering the problem of patent quality in KSR v. Teleflex. During the oral arguments,the current "teaching-suggestion-motivation" test received amusing and especially harsh criticism from Chief Justice Roberts, Justice Scalia and Justice Breyer. The test is widely criticized for making it easy to obtain a patent, even if the invention is trivial. The oral arguments before the Supreme Court suggest the party may be ending.
Jacobs predicts that better patents will reduce extensive litigation, which makes sense. It's often said that no one likes to be overturned on appeal; and assuming the Supreme Court issues a clear decision in the near future, the incentives for patent office examiners and the judges who review their decisions will change with or without an additional $90 million in funding. That, in turn, will affect patent applications. As Jaffe noted last month in testimony before Berman's subcommittee,
While the increase in the rate of patent applications over the last two decades is driven by many factors, one important factor is the simple fact that it has gotten so much easier to get a patent, so applications that would never have been submitted before now look like they are worth a try. Conversely, if the PTO pretty consistently rejected applications for bad patents, people would understand that bad patent applications are a waste of money.
The proposal to end the diversion of patent office fees won't, in itself, solve anything. Without better oversight than that which Congress is usually capable of, it would allow the PTO to subsidize its inefficiencies and then go back to its "clients" (the patent applicants) demanding higher fees in the future. In part, additional funding would facilitate additional layers of procedure at the patent office to improve patent quality via more review and opportunities for third-party challenges. But procedural improvements are often overrated and frequently lead to cancerous inefficiencies, as noted
in this context by James DeLong:
Multiplying procedures based on erroneous or fuzzy standards does not improve decisions. If standards are clear and incentives appropriate, then one procedure plus an appeal is enough. If they are not, additional procedures add expense and quirkiness to the system without improving quality.
All of which raises the following question: Should Congress be wading into an ambitious patent reform effort at all?
The essence of the opposing views on patent reform is well-summarized as follows by James DeLong in an excellent paper on the subject available at the Progress & Freedom Foundation:
Reading one side, one learns that inventors are mostly sneaking trolls hiding under bridges to ambush honest enterprises as soon as they commit to producing a product. Read the other, and you are convinced that all corporate hierarchs are uncreative hacks lying in wait to steal the fruits of the honest inventors' toil.
Some of the proposals for patent reform are too radical, according to DeLong:
- [n]o distinction between the rights of integrated firms and those of invention shops is viable ... factors  such as whether the patentee lay in wait until a firm committed capital or the availability of information about the existing patent, are relevant to the equity of an injunction.
- If standards are clear and incentives appropriate, then one procedure plus an appeal is enough.
Others are not radical enough. DeLong notes that only 3 days of examiner time are needed for First Office Action, so the total turnaround time should be about a week instead of 14 months on average. "If such standards cannot be met, then the system should be privatized."
See: "Patent Reform & Industrial Structure," by James DeLong (Nov. 7, 2006)
More good sense (sub. req.) on intellectual property from Profs. Adam Jaffe and Josh Lerner. They offer more examples of frivilous patents...
"such absurdities as patents on wristwatches (paw-watches?) for dogs, a method of swinging on a swing ("invented" by a five-year-old), peanut butter and jelly sandwiches...[and]...broad ideas related to mobile email -- virtually devoid of any details of implementation -- that have imposed a $612 million tax on the maker and users of BlackBerries."
...Then Jaffe and Lerner offer simple, structural solutions to correct most of the system's worse offenses:
"(1) changing the USPTO review process so that the determination of whether a patent application is really new is made with as much information as practical about what related technology is already out there; and (2) leveling the playing field between litigants so frivolous patent holders cannot intimidate true innovators into paying protection money."
Must read hilarity from novelist-turned-policy-wonk Michael Crichton on our increasingly absurd patent laws. Highlighting an upcoming Supreme Court case which questions a company's ability to patent a basic scientific fact -- in this case, that "[e]levated homocysteine is linked to B-12 deficiency" -- Crichton launches a broadside against the increasing patentability of universal facts of nature, entirely obvious techniques or concepts, and abstract "strategies" used throughout the business world.
"Companies have patented their method of hiring, and real estate agents have patented the way they sell houses. Lawyers now advise athletes to patent their sports moves, and screenwriters to patent their movie plots. (My screenplay for "Jurassic Park" was cited as a good candidate.)"
Real software and high-technology innovators and innovations are increasingly savaged by companies whose only function is to dream up and file patents, to stop others from actually doing useful things, and to collect rents. These companies are filled mostly with lawyers, not engineers, scientists, and business managers. The strategy entirely ignores the crucial process of designing, manufacturing, and selling actual products in the field, which is where most real innovation occurs.
Intellectual property is extremely important, but it must be reinforced by real innovation and real products conceived and consummated by real innovators and real companies. When we arrive at a place where everything is considered intellectual property, then of course nothing is real property, and we enter a litigious, anti-innovation free-for-all. Crichton concludes:
"I wanted to end this essay by telling a story about how current rulings hurt us, but the patent for "ending an essay with an anecdote" is owned. So I thought to end with a quotation from a famous person, but that strategy is patented, too. I then decided to end abruptly, but "abrupt ending for dramatic effect" is also patented. Finally, I decided to pay the "end with summary" patent fee, since it was the least expensive."
Patent applicants have contributed over $750 million to government programs that have nothing to do with processing patent applications. "It's a tax on innovation," observes Rep. Zoe Lofgren (D-CA). She's right.
Continue reading "Bill to end "Innovation Tax" advances" »