What Google’s FTC Deal Means for the Patent Wars

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Gary Cameron / REUTERS

The Federal Trade Commission building is seen in Washington on March 4, 2012.

Google‘s landmark deal with the U.S. government, which was announced last week and ends a two-year federal investigation, has gotten a lot of attention, primarily for the Federal Trade Commission’s conclusion that Google has not violated antitrust law. But the second component of the pact, in which Google agreed to grant rivals access to certain basic technology patents, is worth scrutiny as well, because it could have important ramifications in the ongoing intellectual property wars that have roiled the technology industry over the last several years.

During a press conference, FTC chairman Jon Leibowitz asserted that the patent agreement with Google could serve as a “template” for other patent disputes, and could reduce patent litigation — and litigation costs — for companies throughout the tech industry.

That, of course, would be a good thing, because there is general agreement among tech and legal experts that there is something seriously wrong with the current U.S. intellectual property system, at least with respect to technology patents. Several of the largest tech companies in the world — including Apple, Google, and Samsung — are engaged in very costly and time-consuming patent litigation in multiple jurisdictions around the world. And in a remarkable milestone, last year Apple and Google spent more money on intellectual property — both litigation and defensive acquisitions — than on research and development.

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Google’s $12.5 billion acquisition of Motorola Mobility was one such defensive acquisition — Google bought the company in part for its vast stable of some 17,000 tech patents — and that purchase is at the center of the FTC’s deal with the search giant. In the tech world, there is a certain category of patents called “standard-essential patents,” which cover widely used technologies based on industry standards that allow high-tech devices to work together. “These essential patents and others like them are the cornerstone of the system of interoperability standards that ensure that wireless internet devices and mobile phones can talk to each other,” Leibowitz said. For example, Motorola owns standard-essential patents covering technology that allows laptops, tablets and smartphones to connect to WiFi and cellular networks.

Technology industry standards are an important — but under-appreciated — component of the tech economy because they allow tech giants to share inventions in order to improve the consumer experience. The idea behind standard-essential patents is that because they cover technologies that are crucial to device interoperability, tech companies agree to license them to rivals and competitors on fair, reasonable, and non-discriminatory (FRAND) terms. Many years ago, Motorola Mobility had agreed to license its standard-essential patents under FRAND terms, but the company reneged on that pledge, according to Leibowitz, prompting the FTC’s action. After Google bought Motorola Mobility, the search giant continued this practice, and sought a series of injunctions based on these patents, in some cases demanding that rival products that use them be barred from entering the country.

“Google’s unfair conduct threatened to block consumers’ access to critical electronic devices including laptops, tablet computers, smartphones and gaming systems, or it could have increased the cost of these products by requiring manufacturers to pay higher licensing fee which then would have been passed on to consumers,” Leibowitz said. In order to dispel any doubt about what devices he was talking about, Leibowitz brandished Apple’s wildly popular iPad, along with a Microsoft Xbox and a Research in Motion Blackberry, as examples of “products that are under threat if this practice had been allowed to continue and to grow.”

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As part of the FTC deal, Google entered into a legally binding consent decree affirming its intention to allow its competitors access to standard-essential patents on FRAND terms. “We will seek to resolve standard-essential patent disputes through a neutral third-party before seeking injunctions,” Google senior vice president and chief legal officer David Drummond said in a statement. “This agreement establishes clear rules of the road for standard-essential patents going forward.”

FTC chairman Leibowitz said he hopes the agency’s patent enforcement action against Google will become a “template” for resolving other standard-essential patent disputes throughout the industry. “Today’s commission action will also relieve companies of some of the costly and inefficient burden of hoarding patents for purely defensive purposes, savings that we hope can be invested in job-creating research and development,” Leibowitz said.

Google’s agreement with the FTC “helps solidify the move to stop injunctions in standard-essential patent cases, which is great,” Carl Shapiro, a former chief economist in the Justice Department’s antitrust division, told The New York Times. He also pointed out that U.S. federal courts have become more wary about granting injunctions banning certain devices, even in cases that do not involve standard-essential patents. For example, even though California federal judge Lucy Koh awarded Apple a $1 billion patent verdict against Samsung, she denied Apple’s motion for an injunction that would have barred infringing products made by Samsung — the world’s largest mobile phone manufacturer — from being sold in the United States.

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Does the FTC’s deal with Google signal the end of the great tech patent wars? Absolutely not. But the agreement does represent incremental progress with respect to standard-essential patents, particularly if the deal leads to a reduction in intellectual property litigation and legal costs. “The FTC has deflated the power of the injunction and also the incentives to not pay that have existed,” Colleen Chien, a professor specializing in patent law at Santa Clara University School of Law, told Reuters.

Patent law is a highly complex and technical area, and many consumers many not be fully aware that their iPhones, iPads, and Android devices are built using thousands of patented technologies — many of them based upon well-established industry standards. But in America’s highly litigious society, many legal and tech policy experts agree that the patent wars have spun out of control. Even the participants claim to dislike the current state of affairs. Both Apple CEO Tim Cook and Google CEO Larry Page have gone on record expressing their distaste with the patent wars. And there have been glimmers of hope, after Cook and Page opened back-channel talks earlier this year on a range of intellectual property issues.

The FTC’s deal with Google offers another ray of hope for those who would like to see patent de-escalation. Apple’s late co-founder Steve Jobs pledged “thermonuclear war” against Google after he become convinced that Android ripped off the iPhone. It’s time for these tech titans to begin disarmament so they can devote their full attention and resources to building innovative products and competing in the marketplace, rather that battling it out in courtrooms around the world.