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Obama Rightly Intervened in Apple’s Patent Dispute

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Aug. 6 (Bloomberg) -- When the White House issues a decree on the Saturday after Congress has departed for its August break and the decision involves major corporations, hefty financial consequences and angry trading partners, you know it’s a big deal.

The Aug. 3 reprieve President Barack Obama granted to Apple Inc. in its long-running patent dispute with Samsung Electronics Co. had an immediate upshot: The U.S. International Trade Commission can’t block certain iPhone 4 and iPad 2 models from entering the country. Brisk sales of such older, cheaper devices will therefore continue. Samsung’s market value dropped by more than $1 billion and the South Korean government protested.

The president’s intervention, the first of its kind since 1987, has wider implications because it diminishes the ITC’s role as a patent arbiter. The move could affect many more pending cases involving such wireless-industry companies as Nokia Corp., ZTE Corp., Huawei Technologies Co. Ltd. and Ericsson AB. It doesn’t mean the patent wars are over. But with one decision, Obama has changed the rules of such conflicts -- and in a good way.

Decreasing the trade commission’s role in patent disputes will encourage companies to cross-license fundamental technologies on reasonable terms, meaning there will be less litigation and more innovation. It upends a tactic popular with many high-tech companies: Take your case to an obscure agency whose only recourse is an import ban.

Essential Patents

At the heart of the ITC case is Samsung’s so-called standard-essential patent for a technology that lets mobile phones, no matter who makes them, communicate with wireless networks and other phones when sending data. Samsung claims Apple is infringing that patent. In return, Apple claims Samsung is violating an industry practice calling on owners of standard-essential patents to license those technologies on reasonable terms.

Part of the problem is the ITC’s narrow remit. It rules on whether imports violate U.S.-granted patents -- a task for which it is ill-equipped, especially in the high-tech realm. Its standard of proof is lower than that of U.S. courts, and its only remedy is an import ban. It can’t, for example, award financial damages. It can’t weigh the commercial, social and economic costs of blocking products that U.S. consumers want. It can’t even consider the benefits of staying its hand when a disputed patent covers an industry standard, as in this case.

That’s why the ITC has become patent litigants’ favorite venue: The mere threat of an import ban often induces settlements. Increasingly, companies are flinging lawsuits against each other instead of innovating. The Samsung-Apple dispute is just one of dozens between the two companies in a war of one-upmanship playing out on four continents.

Therefore, the presidential veto announced by Michael Froman, the newly confirmed U.S. Trade Representative, makes sense, even if it complicates Froman’s job as he takes over negotiations for new trade deals with Europe and Asia. He is seeking stronger protections for U.S. intellectual property. China, India, Russia and other emerging markets, which often fail to protect U.S. property rights, will complain that the U.S. is failing to live up to the demands it makes of them.

Froman should remind them that Samsung can still get relief through the U.S. courts (though it will have to work harder to prevail). He should also use the ITC case as an example of what he hopes to accomplish through the Trans-Pacific Partnership talks between the U.S. and 11 Pacific Rim countries, as well as the parallel free-trade discussions with the European Union: common rules for patent disputes, especially for standard technologies.

Global Solution

These battles aren’t always nationalistic. For example, Google Inc. backs Samsung in believing it should be able to block use of an essential technology if a competitor won’t pay whatever royalties are demanded. This lack of agreement even within countries cries out for a global solution through trade talks.

Obama’s decision points in the right direction. Require low-cost licensing of technologies once they become the industry favorite -- a status that patent-holders often lobby standard-setting bodies to award. Holders of patents that cover more specialized features can be granted more leeway in setting royalties. Finally, avoid blocking the sale of products that infringe patents, except perhaps when a technology user simply refuses to negotiate a license.

The White House veto was a noteworthy strike against the patent warriors, even if Obama unnecessarily chose a slow summer weekend to announce it.

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