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As the smartphone wars reheat, the threat of chilling innovation looms

TechCrunch TechCrunch 18/06/2016 G. Nagesh Rao

Bill Gates recently penned an open letter to the 2016 presidential candidates, imploring them to support something he hopes “every candidate will agree on in November: America’s unparalleled capacity for innovation.”

Politics aside, it’s hard to argue with his call to action. From prolific inventors like George Washington Carver and Grace Hopper to today’s vibrant high-tech startup scene in Silicon Valley, Austin, Boston and the many other booming tech sectors from coast to coast, Americans have a profound disruptive entrepreneurial spirit hardwired into our DNA. Even our founding fathers demonstrated that spirit when they challenged the status quo of the British monarchy to “start up” our great country.

For many decades, the U.S. patent system has carried a reputation as a global benchmark of prestige and technological success. Our intellectual property protections provide economic security by safeguarding investments from the proof of concept phase forward, sometimes leading to ground-breaking innovation. Our system protects the smallest big-thinking visionary in their developmental infancy and the multinational corporation alike — not to suggest the playing field is always even.

But now our patent policies are being tested by increasingly complex products and technologies that evolve at the rapid pace of today and sometimes tomorrow. Many aspects of the intellectual property policy employed to govern and protect innovations were developed yesterday, the day before and sometimes more than 100 years ago.

The U.S. Patent and Trademark Office (PTO) has been working hard to ensure our intellectual property (IP) system operates toward a 21st century agile model, following and leading into the enactment of the American Invents Act (AIA). However, the PTO is not omnipotent, they are bound by legislation and more so by precedent established through federal court decisions.

A timely example of the court’s influence in the system is the high-profile Apple versus Samsung design patent case, which represents an opportunity for critical clarity. In April, the U.S. Supreme Court agreed to review the case and a ruling that raises questions regarding how to protect investment in product development, as well as the appropriate remedies when infringement is found.

The case’s ultimate outcome could impact any company (small or large) that brings a product to market, and it provides a crucial opportunity for modernization in certain areas of the system. What makes the case interesting, other than the household names on both sides, are the implications it may have for companies ranging from Mom and Pop shops to general consumer goods and services that don’t own patents or that operate outside the technology industry.

If we don’t take measures to protect American manufacturers and innovators from evolving threats like patent abuses, we will stunt our own growth.

On June 2, Samsung submitted its opening brief in the Supreme Court case, stating that the ruling under review was “grossly overrewarding design patents.” Outside parties then submitted amicus briefs, which are designed to shed light on the outside impact of the ruling under review, so pretty much anyone other than the two companies. The Electronic Frontier Foundation also submitted a brief about the ruling under review, which states that, “the patent system is supposed to offer fair reward for inventors, not excessive, unfair compensation that threatens our access to technology.”

Most notably, perhaps, the U.S. Department of Justice weighed in on the case by submitting an amicus brief that recommended the Supreme Court send the case back to the lower court for a potential retrial. Though that brief wasn’t officially supporting Samsung or Apple’s side, Samsung reportedly “welcomed” the support and Apple declined to comment.

At the center of the Apple versus Samsung case are design patents. Unlike utility patents, which cover “function,” design patents protect “ornamental appearance” (akin to a trade dress style of protection), a term not easily defined. And therein lies the problem. When design patent protections were first devised, more than 100 years ago, they were typically issued to protect entire objects or products from copying, wherein copyright law was not applicable, as utilitarian functionality is a premise for protection.

Thus, a “total profit” remedy seemed equitable and logical and provided patentees with a vehicle for the lost profit restitution if they fell victim to unlawful copying of their products, often with decorative characteristics that set them apart from the other carpet, teapot or saddle.

Today, design patents are typically applied for and issued covering singular features of a product’s design. In the Apple case, those designs are the rounded rectangle casing of the phone, a grid of icons on the screen and a bezel. Under a previous court ruling, Samsung was ordered to pay Apple the total profits it received from the smartphones that infringed these patents.

Though it is unlikely consumers were confused or duped into buying (or even motivated to buy) a Samsung phone based on these designs, the design infringement remedy remains unchanged. This massive award for such minor design features runs counter to logic and how the system was viewed prior to the award to Apple.

Simply put, most design patent assertions are to combat counterfeiting, but this decision can open up a wave of litigation based on infringement of minor patents in which the IP owner seeks total profit disgorgement.

Over time we have transformed from consumers of teapots to consumers of sophisticated Wi-Fi-enabled pocket computers, capable of streaming content from programs like “Antiques Roadshow” on PBS, which can foster an appreciation for decorative teapots.

The smartphone in our pockets is comprised of thousands of components and hundreds of thousands of individual patents owned by a wide array of patent holders. However, in cases of design patent infringement, like the smartphone case, all other contributions are essentially voided and the rounded rectangle and gridded screen of icons reign supreme.

If the ruling stands, Samsung won’t be the only company footing the bill. The outcome of the case carries especially high stakes for America’s high-tech startups. Until recently, patent trolls have predominantly wielded utility patents, making infringement demands tied, albeit loosely, to the value of the technology or functional contribution to the product. Not anymore. Design patents offer a far more lucrative weapon for patent trolls, as they can threaten and potentially recover awards and settlements that account for more than just the value of their patents.

And, of course, it comes as no surprise that even Apple isn’t safe from patent trolls, or at least patent asserters who don’t manufacture products. Late last year, Apple’s iPhone was found to be infringing on utility patents owned by the University of Wisconsin (which is funny, because this is not Apple’s first bout on being called out for infringement… hint, hint… Creative Zen and iPod product disputes). Apple now faces potential damage awards that could approach $1 billion.

We must not uphold an outdated policy that stymies innovation and creates an uncertain environment for those with the ingenuity and courage to innovate.

Even Apple’s Siri isn’t safe, or perhaps isn’t Apple’s at all if you ask my alma mater Rensselaer Polytechnic Institute (RPI) in upstate New York. RPI licensed its utility patent for “user interfaces that recognize natural language” to a company called Dynamic Advances, which some consider to be a troll. That company sued Apple when it released Siri in 2011. A few years later, RPI joined the suit. Apple settled for around $25 million. No word yet if our appropriately named RPI Engineers hockey team (Go Red!) should pack up its lockers for their new home at the “Siri Arena,” but let’s not hold our breath.

Without the Supreme Court reversing the ruling and establishing modernizing precedent in which the remedy is more closely tied to patented design, this smartphone war/design patent ruling will enhance the performance of patent abusers, creating trolls on steroids. Despite Apple’s claim to several common shapes, they likely didn’t patent all of them, so the next time around Cupertino might have to fork over a lot more ransom funds for the safe return of Siri.

Total profit awards could also be devastating for smaller companies. Patent trolls are a nuisance for big enterprises, but total profit-seeking trolls can be the grim reaper for small businesses and startups. And remember that any company that makes and sells anything is at risk of being accused of infringement, not just the tech companies. We are talking about common shapes — and the majority of products are a shape or contain a shape. Artisanal upstart pretzel slingers had to learn this the hard way, but hopefully others will avoid straying from the standard knot shape, assuming Apple doesn’t own that one.

But the threat of total profits and lack of clarity extend beyond the threat of potential trolls. The ambiguity for design patent infringement remedies can also impact innovators’ ability to secure funding for research and development that’s often necessary to potentially offer the next big thing or become the next American success story, like Facebook, Uber or Donald J. Trump Collection clothing — all of which contribute to the economy and provide thousands of jobs to Americans, or the Chinese in the Trump example.

According to a 2014 study authored by Catherine Tucker of the Massachusetts Institute of Technology (MIT), patent trolls have cost U.S. startup entrepreneurs about $21.7 billion in venture capital funds in the five years preceding the report. A 2013 paper from Robin Feldman of the University of California, Hastings College of the Law revealed that 70 percent of the venture capitalists surveyed had portfolio companies that received patent demand letters, and roughly one in three startup companies reported receiving patent demands — the majority of which came from patent trolls.

Mr. Gates calls American innovation our “secret weapon.” If we don’t take measures to protect American manufacturers and innovators from evolving threats like patent abuses, we will stunt our own growth.

We must not uphold an outdated policy that stymies innovation and creates an uncertain environment for those with the ingenuity and courage to innovate. The U.S. Supreme Court should set a precedent for future cases that demonstrates to entrepreneurs, as well as would-be abusers, that America will protect its innovations from threats, whether they come from hackers and identity thieves, patent trolls or outdated patent policies that have been tarnished by time and innovative successes like the modern smartphone.

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