Obama administration stops patent-based iPhone ban. We should go further.

August 4, 2013
(Justin Sullivan/Getty)
(Justin Sullivan/Getty)

The Obama administration has overturned a decision by the International Trade Commission that would have excluded some older iPhone models from the U.S. market. Michael Froman, the United States Trade Representative, overturned the ruling because of its harmful effects on "competitive conditions in the US economy" and on U.S. consumers.

It was a common-sense ruling. There's no reason consumers who want to buy iPhones should be caught in the crossfire of Apple and Samsung's legal dispute. After all, even Samsung doesn't actually want iPhones pulled off the market. Rather, Samsung sought an iPhone ban as a bargaining strategy. Eventually, Apple and Samsung will reach a deal to license each other's patents; the iPhone exclusion order would have given Samsung leverage to gain more favorable licensing terms.

The option to have infringing products banned from the market gives patent holders outsized leverage, allowing the most litigious patent holders to extract royalties that exceed any plausible estimate of the value of the specific technology covered by each patent. A single smartphone may be covered by thousands of patents, so any single patent can account for only a tiny fraction of its value. But once a smartphone has been introduced into the market, redesigning it to avoid infringing a particular patent can be prohibitively expensive, if it's possible at all. That creates a "holdup" problem: patent holders can wait until after a product is released and then use the threat of exclusion from the market to gain a disproportionate share of the product's sale price.

A good example of this problem was the 2006 legal settlement between Research in Motion, makers of the then-popular Blackberry smartphone, and a patent troll called NTP. NTP effectively claimed to own the concept of checking e-mail wirelessly. There was no evidence that RIM had copied its technology from NTP, but it looked like NTP was on the verge of winning a ruling that would have forced RIM to shut down its entire Blackberry network. To avoid that devastating outcome, RIM eventually agreed to pay NTP $612 million.

Two months after the Blackberry settlement was announced, the Supreme Court handed down eBay v. Merc Exchange, a decision that made it harder for patent holders to win injunctions excluding defendants' products from the market. But that ruling didn't apply to the ITC, the trade body that granted Samsung's order excluding iPhones from the market.

Applying the eBay standard to the ITC, which would make it harder to force products off the market, is an obvious step to reform the patent system. And it may make sense to go even further. Rather than giving victorious patent holders the power to force defendants' products off the market, judges could award patent holders royalties based on the estimated contribution of the patent to the value of the infringing product. That would prevent trolls from extracting outsized payments from successful companies. And it would avoid the harm to consumers that occurs when popular products are forced off the market by patent disputes.

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