On August 6 2007 the Bush administration decided to hold firm with the decision of the International Trade Commission in the long-standing Broadcom v Qualcomm dispute. As most IP aficionados know, the dispute arose when the ITC held that Broadcom was entitled to an injunction that would keep all infringing Qualcomm 3G phones out of the US. That decision highlights one of the central disputes of modern intellectual property law: should the field routinely borrow models of property law used for dealing with tangible objects, or should it be treated as a distinctive subject that should rely on a homegrown paradigm that is not parasitic on traditional property rights options.
The decision of the ITC puts it on a collision course with the recent developments in domestic US patent law since the US Supreme Court’s enigmatic 2006 decision in Ebay v MercExchange, which cast grave doubt on whether injunctive relief should be granted routinely granted as a matter of course. The traditional view of patents held that it should follow the usual rule in real property cases, including those that allow a landowner to order an innocent builder to rip down an entire structure because of a modest incursion into his space: don’t like the result, buy out the injunction, was the attitude. After Ebay, that get tough attitude seems to have fallen out of favour, as courts have been chary about awarding injunctions: some form of compulsory licensing game has become the dominant game in town.
Too bad, for this new domestic trend represents a trendy mistake, which maybe the ITC decision will help reverse. Think back to the parallel between land and IP. The key intellectual error of Ebay for patents has thus far been avoided in encroachment cases where one person builds something that sits in part on the land of another. The efficiency of legal rule is evaluated in part by looking at the bargaining difficulties that arise once the injunction is granted. On this score the injunction rule has fared poorly in the eyes of its critics because of the immense hold out problems that arise. But the experience in the field has indicated that the pressures to reach closure in this area are strong. The holdout scenario hurts both sides. The patentee gets no revenue for a period of time on a wasting asset. The potential user suffers the risk of massive disruption of services. Even if the potential range of prices and fees are large, it behoves both sides to settle fast. Just that happened when Research-in-Motion, which makes the Blackberry device, avoided the abyss by making its settlement with the plaitiff NTP.And this time round Verizon, which had been a Qualcomm customer entered into a deal with Broadcom that was announced shortly after the ITC decision was announced.
On a second key component the injunctive rule fares well. The prospect of injunctive relief has desirable effects on the prior conduct of both the property rights holder and the potential trespasser or infringer. Thus, in the encroachment case, strong knowledge of the iron clad rule will have the desirable effect of reducing the number of workouts that take place ex post, by having neighbours make more accurate surveys. In the intellectual property world, boundaries are never as clear, but the same directional effects will be seen. Knowing that the axe will fall will lead people to steer safely clear of the boundary lines, or procure in advance - when the holdout power is negligible - the licenses needed to obviate the problem to begin with.
One advantage of a strong property rights regime is that it avoids high stakes strategic behaviour. That is of course evident in the Broadcom ITC proceeding which moves in parallel with the huge donnybrook now taking place in the federal court. But the effects of the Ebay rule are not confined to big shot transactions. They also corrupt the licensing system for all sorts of midlevel transactions. The traditional law - which did not worry much about patent trolls - essentially held that the injunctive relief came as of right when the defendant practised the invention, licensed the invention to others, or warehoused the invention in order to make better use of some other patented invention within its portfolio.
In the aftermath of Ebay we face this situation: should the injunction be denied to an owner against an infringer solely because the patent owner has yet to license the invention out to someone else? This happened in a case now on appeal to the Federal Circuit when the District Court Judge refused to grant Finisar an injunction against DirectTV after finding that DirectTV had infringed some key communication patents.
Now note how the uncertainty over the injunction corrupts the primary license market. Why license anything for a price when an immediate infringement could deny the owner the right to exclude? The pressure on the patent holder to make a quick license is really great, for once an infringement takes place, it will be hard to put the genie back into the bottle. Exclusive licenses, now a common occurrence, could become an endangered species. Quite simply, a discretionary rule weakens market structures, and places far greater strains on the damage/compulsory licensing process than need be the case. There is nothing in an ITC decision that changes the posture in the domestic market. But the decision is a welcome reminder that the Bush administration seems to be aware, after painstaking investigation, of the long-term dislocation that comes from a system of weak property rights.
Richard Epstein is a law professor at the University of Chicago and a senior fellow at the Hoover Institution.
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