Patent Bending Ding-a-ling!

This sounds like BIG BUSINESS to me...

The ITC blows up the cell-phone market.

Paging U.S. Trade Representative Susan Schwab: Please call us on your cell phone. And better do it fast because cell phones may soon be harder to come by thanks to one of the dumber rulings ever by the U.S. International Trade Commission.

By a 4-2 vote on Thursday, the ITC decided to ban the import of any new cell phone model produced with certain microchips made by Qualcomm. ITC Chairman David Pearson dissented on grounds that the ban was antithetical to the public good, which is certainly true. But the import ban is effective immediately, and this means that President Bush, through Ms. Schwab, has just 60 days to set the ruling aside before it becomes permanent. There's an overwhelming case for doing so.

The ITC's power to ban foreign-made, patent-infringing products goes back to the infamous Smoot-Hawley Tariff of 1930--which ought to be a hint that this is a bad idea. The fear was that American intellectual property would be stolen by foreign firms, which would use U.S. patents to produce goods overseas without paying royalties and then ship those products to the U.S. The law was never intended to substitute for domestic patent-infringement suits in federal courts between two American companies, which is the story here.

The patent holder in this instance is California-based Broadcom, which has sued Qualcomm for infringement. Broadcom owns several patents relevant to the production of certain cell phones sold by Sprint, Verizon, Alltel, as well as T-Mobile and AT&T. In other words, pretty much every large cell phone operator in the country sells at least some phones that contain the allegedly infringing chips.

The ITC tried to soften the blow of its ruling by grandfathering existing models and applying the ban only to future models. This was presumably a nod to the extraordinary breadth of the ban: Nobody, including Broadcom, actually makes competing chips in the U.S., so an import ban is tantamount to a total ban. However, anyone who's shopped recently for a cell phone knows that the future arrives fast in that industry, with new models coming all the time.

The ITC ban is in effect a bar to innovation by these U.S. companies--a fact recognized both by Chairman Pearson in his dissent, and by the administrative law judge who originally heard the case and refused to issue a broad ban in October 2006. Moreover, Broadcom is already suing Qualcomm in federal court over these very same patents. There is thus no need for the ITC to muscle in, except to expand its own bureaucratic turf in the patent field. The ITC's separate process was created only as a way to deal with patent infringers who were beyond the reach of U.S. courts.

This case is part of a larger legal patent quagmire that now has Congress entering with its own reform proposals. Uh, oh. So far, the proposals are a jumble of good and bad ideas, and that's before the boys on Capitol Hill start mulching in earnest. Everyone from Big Pharma to federal judges and small inventors is up in arms about something in the House and Senate twin bills. The only people not howling seem to be the lawyers, who no doubt assume that any big reform will require years of litigation and millions of billable hours before anyone is sure what in the name of invention it really means.

Our own sense is that the patent system needs two things above all: better patents and less litigation, and the two are related. The U.S. Patent Office needs to raise its standard of patent quality, so that patent-holders and potential licensees both know that any patent is likely to be valid and upheld by the courts. Better patents also mean less costly litigation, because a patent that is both of high quality and clear purpose is much less likely to go to trial than one that is dubious, or too broad, or of uncertain application.

Better patents depend most of all on a Patent Office that gives its examiners the right incentives--which means rewarding them for issuing quality patents rather than disposing of patent cases. The courts can help too, and recently they have been. Last month's Supreme Court decision in KSR v. Teleflex put down a marker on the "obviousness" of inventions that ought to be relevant to patent examiners who are considering whether to grant an application.

If Congress really wants to help, it could start by refusing to let companies like Broadcom use the ITC as a legal backstop at the same time they're suing in federal court. In the meantime, let's hope Ms. Schwab uses her power to overrule the ITC in this case and save American cell phone companies and consumers from needless harm.


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