Does the International Trade Commission Facilitate Patent Holdup?

Abstract

In April 2016, the Subcommittee on Courts, Intellectual Property, and the Internet of the House Judiciary Committee held a hearing to examine whether the U.S. International Trade Commission (ITC) had adequately addressed the alleged risk of abusive patent litigation since the Committee had last visited the topic in 2012. Professor Fiona Scott Morton of the Yale School of Management and the economic consultancy Charles River Associates opined on the risks of allowing a holder of standard-essential patents (SEPs) that had committed to license its SEPs on fair, reasonable, and nondiscriminatory (FRAND) terms to seek an exclusion order at the ITC. She argued that the availability of exclusion orders against products that infringe FRAND-committed SEPs bestows disproportional bargaining power on the SEP holder and inevitably results in patent holdup—that is, in above-FRAND royalties. She criticized the ITC for allegedly failing to accept the “economic logic” behind the patent-holdup conjecture. She proposed that, to avoid patent holdup, the ITC should (1) apply a test comparable to the eBay standard for injunctions when deciding whether to issue an exclusion order against a product that infringes a FRAND-committed SEP or, alternatively, (2) categorically deny exclusion orders to SEP holders that can obtain a remedy in a district court. In this article, I explain that Professor Scott Morton’s testimony that an SEP holder could use the threat of an exclusion order to engage in patent holdup was inaccurate. It omitted important information about the position that courts, government agencies, and economists have adopted toward the patent-holdup conjecture. It posited erroneous assumptions about the risk and prevalence of abusive litigation at the ITC, particularly involving SEPs, and about the SEP holder’s incentive to use an exclusion order, or even the mere threat of one, to hold up a potential licensee. There is no valid economic justification for assuming, as Professor Scott Morton did in her testimony, that the ITC is rife with patent holdup and abusive patent assertion. In fact, publicly available data indicate that, in 2016, the ITC does not face the issues that she raised in her testimony. Finally, even if patent holdup were a plausible risk at the ITC, Professor Scott Morton’s testimony failed to explain why following the Federal Circuit’s approach (and the USTR’s advice to the ITC), which requires analyzing the evidence of patent holdup on a case-by-case basis, would fail to contain the risk of an SEP holder’s opportunism. Professor Scott Morton presented no evidence to justify her view that a categorical rule that would deny SEP holders the right to obtain an exclusion order would be superior to the existing case-specific analysis.