Sneaky patent dispute threatens smartphone economy

A seemingly-limited dispute over the patent rights to a graphics processor chip found in your smart phone will be addressed at an International Trade Commission hearing this week. But the outcome could reach far beyond the two parties in the hearing room. It has the potential to blindside the burgeoning mobile broadband market and throw an important aspect of national broadband policy into a cocked hat. And it shows how the enforcement of a patent system designed to promote innovation risks corrupting the process of innovation, investment, and growth.

The Samsung Galaxy S6 Edge smartphone at the Mobile World Congress in Barcelona, March 2, 2015.
Gustau Nacarino | Reuters
The Samsung Galaxy S6 Edge smartphone at the Mobile World Congress in Barcelona, March 2, 2015.

Here's the issue: Chip maker Nvidia claims that Samsung, a global leader in mobile broadband devices, uses chips that infringe Nvidia's patents (the chips are the core of Samsung's phones' Graphics Processor Units). Samsung denies it.

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Maybe they do or don't; I lack the ability — and prerogative — to decide that question. In fact, our system has a way to process that contention. First, the parties can meet in negotiation and see if they can resolve the issue through a royalty payment, purchase agreement, or some other business relationship that make the issue go away. And if they can't agree, they can go to court and let a jury decide after they've heard both sides' presentation of the evidence.

But Nvidia has found a way to end-run this process by taking its complaint to the ITC. It argues that, because Samsung is (allegedly) infringing its patents, the ITC has the responsibility to stop Samsung products from entering the country, period, full stop.

There are so many issues raised by this suit that they're hard to sort out and list. But let's try.

First, who died and made the International Trade Commission, whose predominant responsibility is to identify dumping and subsidies, the arbiter of whether or not engineering devices violate patents? The idea that their mandate to protect the country from unfair competition somehow gives them the ability to understand and adjudicate the design and engineering of a microprocessor is somewhere between scary and absurd. To say it's an overreach is an understatement.

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Second, if the ITC finds, using whatever logic, that Samsung has violated Nvidia's patents, then it has one and only one remedy at its disposal — prohibiting Samsung from selling in the U.S. market. No matter how great or small the infraction, that's the only arrow in is quiver. And, remember, we're not talking about pirating an entire phone, much as you would if you were George Harrison or Sam Smith and decided to appropriate "He's So Fine" or "I Won't Back Down," or if you decided to use a genetically-engineered microorganism that turned carbon dioxide into chocolate-chip cookies but didn't pay the company that developed it. We're talking about one microprocessor in a fairly complex piece of equipment estimated to include as many as 250,000 individual patents per device. In fact, as the digital age unfolds around us, this is becoming an ever more important issue. "Things" are not patented so much as are the things that go into them, or the way those things are put together. But the ITC has only the death sentence to impose, as opposed to a remedy proportionate to the harm alleged.

But perhaps the most egregious aspect of all of this isn't about Samsung or Nvidia, but about our country's policy towards broadband. We have a national commitment to expanding broadband access, and mobile sources are the fastest-growing part of the broadband market. The Federal Communications Commission voted only last week to expand the federal Lifeline Program, which helps low-income families gain broadband access to mobile phones, given their disproportionate role among those households. Low-income workers are far more likely to use mobile devices to access the Internet. They're generally less expensive than computers, and since low-income families are far more likely to rent and subsequently to relocate, they lack the incentive to put the infrastructure that supports landline broadband — fiber, routers, and the like — into their residences.

Samsung is a leader in this very market. It makes one out of six tablets sold in America, a market share equivalent to Ford in the U.S. passenger vehicle market. It sells one out of four smartphones, a share roughly equal to that of General Motors plus Honda. That's an astonishingly large disruption of a vital product market. How can one arm of the government impose such a burden just when another is trying to extend that market to the underserved?

A few points emerge from this episode. First, technical and scientific issues should be resolved directly, not through the back door of trade policy. Second, patent law needs to recognize the difference between a component and a finished product when considering all of the remedies at its disposal.

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And, third, let's recognize the reality of the situation. Nvidia is taking Samsung to the ITC and a possible execution in order to improve their negotiating position for royalty-related disputes . It's nothing more than corporate hardball. Perhaps we can create a system where cases like this go to mediation, or binding arbitration, instead of to the hearing room, particularly when it's the seemingly-wrong hearing room.

Maybe Nvidia is doing what might be best for their stockholders. But, unlike General Motors in the mind of "Engine Charlie" Wilson in the 1950s, what's good for one company isn't necessarily good for the country. The purpose of trade and patent law is not to produce litigation, but to produce resolutions. Going to court shouldn't be an element of business strategy. The ITC should dismiss the Nvidia case and send it to where it belongs – the conference table or the courtroom. Anything else would limit consumer choice and undermine government efforts to expand broadband access.

Commentary by Ev Ehrlich, who served as undersecretary of commerce under President Bill Clinton. He is now president of ESC Company, a Washington, D.C.-based consulting firm, and a fellow at the Progressive Policy Institute. Follow him on Twitter @evehrlich.