Consumers Blindsided by Secret Settlements in Hi-Tech Patent Lawsuits

NEW YORK, NY - DECEMBER 10: People walk through the Apple retail store in Grand Central Terminal on December 10, 2012 in New
NEW YORK, NY - DECEMBER 10: People walk through the Apple retail store in Grand Central Terminal on December 10, 2012 in New York City. Apple Inc. stock was down $4.56 per share, or 0.86 percent decline as investors and analysts worry that the U.S market is becoming saturated with apple products. Apple, the world's most valuable publicly traded company, has lost $167 billion in market value in less than three months. (Photo by Spencer Platt/Getty Images)

Apple recently announced that it had reached a global settlement of its patent disputes with HTC, a producer of smartphones using Android, the Google-owned operating system for phones and tablets that compete head-on with Apple's phones and tablets.

Although this settlement, covering some 50 lawsuits, will have a direct impact -- almost certainly painful -- on millions of American consumers, and many more around the world, you can't find out the settlement's terms. Why not?

Because, incredibly, all the relevant terms are secret -- the secret results of a secret settlement process -- known only to Apple and HTC, to a federal judge in a separate patent case involving Apple and Samsung, another Google-licensed maker of Android devices, and to Samsung's lawyers. (A censored version of the settlement given to reporters has been cleansed of all financial terms).

If Congress took up legislation taxing handheld devices and removing some of their features, you would certainly hear about it -- and you'd have a chance to protest loudly against such a (stupid!) law. Yet Apple and HTC have agreed to terms that almost certainly include licensing fees (raising prices to consumers) and patent use restrictions (limiting device functions) on its Android phones, all as part of a negotiated conclusion to lawsuits.

The only difference, in terms of impact on American citizens, is that the latter scenario is TOP SECRET. (Also, the revenues generated, instead of going to the U.S. Treasury, are pocketed by Apple shareholders.)

Much has been written about the excesses of patent battles in the tech sector: how they divert resources from business expansion to paying armies of lawyers; deter innovation and the formation of new start-up companies; and force top executives to spend their time testifying in depositions instead of inventing the next new thing. But regardless of whether Apple, Google, Samsung, HTC and others should be allowed to tie each other in knots by filing dozens of patent lawsuits, the manner in which these companies go about settling their suits -- this raises very serious questions.

That's because the settlement of a patent infringement case between competitors is not like the settlement of run-of-the-mill commercial disputes. Settlement of a patent case invariably involves agreements to engage in anti-competitive practices that in any other setting could land the CEOs of both companies in prison. Agreements between competitors to raise prices or withhold features from their products are the most serious type of antitrust offenses.

Bad enough that competing companies may enter into these anti-competitive settlements at all. But there's no excuse for allowing them to do so behind closed doors and then treat the resulting agreement like a state secret. The settlement agreement between Apple and HTC should be open to the public in its entirety, period.

It also should be subject to review by a court or agency. Settlements in class actions must be approved by a federal judge to protect the interests of class members. While the Apple-HTC suits were not filed as class actions, they nonetheless seek (and, under the settlement agreement, will impose) financial costs and other burdens on consumers on a class-wide basis.

Similarly, the U.S. Justice Department has authority to vet most mergers in order to protect against harm to competition. Agreements in patent feuds between competitors, like the Apple-HTC settlement, pose an even greater threat to competition than mergers. If class actions and mergers require government approval, settlements in patent suits between rivals should be subject to at least the same level of scrutiny.

Apple, Samsung, et al. no doubt would defend the status quo by arguing that secrecy for settlement agreements is necessary to protect their "trade secrets," meaning any information that is confidential and gives them a leg-up against their competitors. But where is the public interest in maintaining the confidentiality of companies' financial information -- which, if disclosed, could intensify price competition, resulting in lower prices?

When corporate interests and consumer interests diverge, courts should not automatically favor the former over the latter. The judicial habit of genuflecting before corporate assertions of confidentiality and trade secrets makes no sense in an era of patent lawsuits that are filed promiscuously to thwart competition in ways that cannot be achieved in the marketplace.

Apple should be forced to release its settlement with HTC now, in uncensored, unredacted form. Full disclosure should be the norm in patent lawsuits between competitors. If transparency means that tech companies, fearful of having to disclose their financial secrets, refrain from initiating new patent litigation, well, so much the better.

America's best tech companies could go back to focusing their resources and energies on product innovation instead of legal strategy. We will all be better off.

Peter Scheer is executive director of the First Amendment Coalition. FAC is participating in the appeal of the Apple v. Samsung patent case, seeking disclosure of "sealed" records filed by both Apple and Samsung. The views expressed in this column are Scheer's alone; they are not necessarily shared by the FAC Board of Directors.