The
new US Department of Justice antitrust leader says antitrust enforcers are too
accommodating to IP implementers when in dispute with standard-essential patent owners. Instead, patent owners should be allowed to decide how
they want to exercise their property rights: “under the antitrust laws, a
unilateral refusal to license a valid patent should be per se legal” – he
also reminds us “the right to exclude is one of the most fundamental
bargaining rights the patent owner possesses.”
New
European Commission guidelines on SEP licensing respect patent owners’ rights
to benefit from “fair and adequate return”
from “value added of patented technology”
contributions and “rewards are needed to
continue to invest in R&D and standardisation activities.” Standardised
technology “should be available to any
potential user of the standard” and “with
smooth and wide dissemination of standardised technologies,” but the
guidelines do not oblige SEP owners to license to anyone who asks for a license.
This
is important news: the new head of the US DoJ antitrust division is reinforcing
a trend that shifts the balance between IP rights and antitrust restrictions.
But significant harm has already also been done internationally with contagion from
prospective or actual policy positions that were previously more hostile or
equivocal on IP owners’ rights. For
example, some Asian antitrust agencies have welcomed, for reasons of industrial
or protectionist policy, previous attempts in the ‘West’ to weaken rights of
SEP owners. Actions have included seeking to reduce royalty returns, imposing chip-based
licensing and reducing the availability of injunctions. Getting the Asian
authorities also to reverse their positions in IP policy, for example, on antitrust
enforcement, is a daunting task.
US U-turns
In a major reversal to the stance of Renate Hesse, the former
head of the DoJ’s Antitrust Division, her successor Assistant Attorney General for
Antitrust Makan Delrahim really hit the nail on the head in his
speech at the USC Gould School of Law's Center for Transnational
Law and Business Conference in Los Angeles on 10th November 2017 by warning
that:
“enforcers have strayed too far in the direction of
accommodating the concerns of technology implementers who participate in
standard setting bodies, and perhaps risk undermining incentives for IP
creators, who are entitled to an appropriate reward for developing
break-through technologies.”
He explained that:
“[t]oo often lost in the debate over the hold-up problem is
recognition of a more serious risk: the hold-out problem. Standard
setting typically occurs against the backdrop of negotiations between
innovators, who develop technologies through private investment and own IP
rights, and implementers, who hope to market and use the technology through a
license and pay the IP holder a royalty. The hold-out problem arises when
implementers threaten to under-invest in the implementation of a standard, or
threaten not to take a license at all, until their royalty demands are met.”
Delrahim went on to opine:
“I view the collective hold-out problem as a more serious
impediment to innovation. Here is why: most importantly, the hold-up and
hold-out problems are not symmetric. What do I mean by that? It is
important to recognize that innovators make an investment before they know
whether that investment will ever pay off. If the implementers hold out,
the innovator has no recourse, even if the innovation is successful. In
contrast, the implementer has some buffer against the risk of hold-up because
at least some of its investments occur after royalty rates for new technology
could have been determined. Because this asymmetry exists,
under-investment by the innovator should be of greater concern than
under-investment by the implementer.”
In conclusion, he said:
“Every incremental shift
in bargaining leverage toward implementers of new technologies acting in
concert can undermine incentives to innovate. I therefore view policy
proposals with a one-sided focus on the hold-up issue with great skepticism
because they can pose a serious threat to the innovative process.”
“Whereas alleged “patent holdup” supposedly results in
excessive royalties, “patent holdout” is undermining licensors attempts even to
achieve FRAND terms or to complete any licensing at all in many cases.
Licensors are therefore losing their ability to make a fair return on their
investments in SEP technologies. This discourages ongoing investments in
standard-essential technologies, participation in SDOs and contribution to the
standards.
Free-riders who are not paying for the IP they use are
gaining an unfair advantage over other implementers who are paying FRAND
royalties as well as stealing property rights from technology developers. There
is significant evidence of some infringers flourishing while avoiding paying
patent licensing fees on their manufactures and product sales for many years.
They can, for example, typically challenge FRAND offers in lengthy litigation
before paying any royalties. In some jurisdictions, even the royalties
ultimately awarded can be derisorily low. In particular, various Asian
OEMs accounting for a substantial proportion of global smartphone sales remain
significantly unlicensed for at least some of the many SEPs they implement in
the devices they manufacture or sell.”
European Commission
also seeks fairer balance in its approach to SEPs
The
EC has been pondering SEP licensing policy issues for at least a few years,
including an extensive consultation process with workshop discussions. I
pitched in a couple of times, myself, here
and here.
On November 29, 2017, the European Commission issued a Communication to the
European Parliament “Setting
out the EU approach to Standard Essential Patents.” Thankfully this strikes
a rather better balance, as all the above indicates is required, than some
proposals that more resemble the one-sided “clarifications” endorsed by the DoJ’s
business review of IEEE’s 2015 patent policy “update,” as discussed below. The guidelines
in the EC Communication significantly represent EU policy but they are non-binding.
The
EC Communication addresses four areas: transparency on SEP exposure; principles
for FRAND licensing terms for SEPs; enforcement of SEP rights (e.g. including
injunctions); and open source.
Significantly,
with respect to FRAND licensing, the EC is not seeking to prescribe how or
where in the value chain SEPs should or can be licensed. In other words, licensors
will not be obliged to license at the chip level, whether that might be
regarded as a “smallest salable patent-practising unit” or not. The requirement
is that standardised technology “should
be available to any potential user of the standard” and that there is “smooth and wide dissemination of
standardised technologies,” not that any implementer can insist on being
licensed.
The
guidance that allows “fair and adequate
return” from “value added of patented
technology” contributions is also consistent with standards developing organisation patent policies such
as ETSI’s. It therefore recognises the
need for SEP holders to be incentivised to continue to invest in R&D and
their standardisation efforts.
Unsurprisingly,
the Communication significantly relies on Huawei vs. ZTE jurisprudence, notably
with respect to the fundamental importance of availability for injunctive
relief. The Communication also recognises the problem of patent holdout. For
example:
“With
respect to the security to be provided by the SEP user as protection against an
injunction, the amount should be fixed at a level that discourages patent
hold-out strategies. Similar considerations could apply when assessing the
magnitude of damages.”
Of course, there is an
important distinction between the EC as a policy-maker versus the DoJ as an antitrust
enforcement agency saying antitrust agencies should back off from imposing or guiding SDO
policy. The EC guidance correctly notes that the Communication “does not bind the Commission as regards the
application of EU rules on competition.” Such rules are relevant and their
application is fact-specific. The Communication clearly establishes that
European policy should strive to create fair balance between different
interests (and with industry-led solutions), rather than prescribing action and
imposing SEP policy through EU antitrust enforcement.
Policy guidance passé
In
marked contrast to all the above, by 2012, the previous head of the DoJ’s
Antitrust Division publicly beckoned SDOs to weaken patent owners’ rights with her
disregard for considerations of patent holdout. In a 2012 speech entitled Six “Small” Proposals
for SSOs Before Lunch she suggested that SDOs include terms in patent
policies that make injunctions harder to obtain, restrict cross-licensing and “explore setting guidelines
for what constitutes a F/RAND rate.” She also encouraged SDOs to overcome any
concerns they might have about antitrust actions against their revised patent
policies by “seek[ing] ex ante review through [DoJ’s] business review
procedures.” This was presumably to reassure any SDOs that might adopt her
proposals would not find adverse antitrust actions being formulated against
them subsequently.
A
couple of years later, IEEE-SA (responsible for the 802.11 WiFi standard among
many others) changed its patent policy in line with some of these proposals; which was
duly blessed by DoJ with a Business Review Letter.
The
new patent policy, ratified in 2015, was touted as “clarification” and an ”update,”
but it actually sets out various wholly new terms that are restrictive and
harmful to patent owners. In the face of significant resistance by IEEE members
who were technology contributors, and via a highly controversial and secretive
process, the new patent policy significantly restricted flexibility in the RAND
commitment with the following conditions, the first three of which significantly correspond
with the three among Hesse’s six proposals I identify above:
- SEP
holders must waive their rights to seek any injunctions until they have
successfullylitigated claims
against unlicensed implementers to conclusion in a court of appeals;
- Reciprocal cross-licensing cannot be required, except for patents reading on the same standard;
- Royalty charges “should” be calculated based on the “smallest saleable” implementation of any portion of the standard and comport with a reasonable aggregate royalty burden of the relevant standard; and
- Only
licenses for which SEP holders have relinquished the right to seek, enforce, or
even threaten, an injunction
can qualify as “comparable licenses” for determining RAND royalties.
The policy “update” also obliged patent holders to be
bound by the IEEE RAND commitment to license their patent to any “Compliant
Implementation,” meaning that a patent holder making such a commitment cannot
opt to license its patents for using the IEEE standards at only certain levels
of production.
As indicated by the title of my September 2017 report on the effects
of IEEE’s new patent policy, [d]evelopment
of innovative new standards [is] jeopardised by [the] IEEE patent policy. Instead
of creating greater clarity or transparency of licensing terms (as ‘predicted’
in the IEEE BRL), the patent policy change has actually caused confusion and
uncertainty to implementers about licensing terms because nearly half of the major
contributors to IEEE standards have been unwilling to pledge their IP under this
new and one-sided IEEE patent policy that guts technology value. Up to nearly three
quarters of ‘Letters of Assurance’ (LOA) submitted to IEEE by all companies
contributing essential technology (i.e. for the 802.11 WiFi standard), are now
negative LOAs, which means that the patents identified on those forms are not
subject to RAND terms as defined under any patent policy. The unhappy
experience of IEEE patent policy change cautions antitrust agencies to be wary of
getting involved in IP policies.
Despite the DoJ being an antitrust agency, endorsing the collusive agreement among predominantly licensees to prescribe how and
where SEPs are licensed always appeared to me like approving price fixing by a buyers’
cartel. This blow to patent owners’ pricing is exacerbated by the previous total disregard
for the plight of licensors subject to patent holdout. Renate Hesse once told
me that nobody had alleged collusive price fixing, and that holdout is not an
antitrust issue. However, her successor points out that a two-sided approach is
required on the issue of patent holdup versus patent holdout, and this is what
he had to say about “clarifying” how rates are determined:
“SSO rules purporting to
clarify the meaning of “reasonable and non-discriminatory” that skew the
bargain in the direction of implementers warrant a close look to determine
whether they are the product of collusive behavior within the SSO.”
This two-sided approach is supported by the Europe Court in
Huawei v ZTE which established obligations on both parties, non-conformity to
which could result in either the possibility of an injunction being granted or
the raising of an antitrust defence to defeat a request for an injunction.
Curing and reversing
the contagion
The
detrimental effect of the patent policy change and supporting BRL is possibly
even more severe outside of IEEE standards in some jurisdictions. The 2015 IEEE
patent policy change, endorsed by a BRL from the previous DoJ antitrust head, is
dangerously serving as a template for antitrust enforcers worldwide – not only with
respect to IEEE standards, but also for other standards such as 3GPP’s mobile
communications standards. This is like pushing at an open door in nations where
antitrust enforcement is being used as an instrument of industrial or
protectionist policy to support manufacturing-oriented companies who would like
to pay less for the IP they are reliant upon that is developed in other nations,
significantly including the US and Europe.
Contributing technology to standardisation efforts and making
a FRAND commitment is voluntary. If antitrust agencies construe IEEE’s patent
policy as only a “clarification,” and therefore impose it on holders of SEPs to
various SDO’s standards the effects could be severe. They might bind patent
holders to new conditions that they were never willing and never agreed to
accept— for IEEE standards and for other standards. The latter would include
standards such as 3GPP’s where some technology developers’ business models,
development of standards and their success are much more dependent on payment
of royalties than with IEEE standards. 3GPP standards account for much more in
total royalties than IEEE standards. Delrahim rightly states that “[w]e should
not transform commitments to license on FRAND terms into a compulsory licensing
scheme.”
Antitrust
agencies including NDRC (China), KFTC (Korea) and TFTC (Taiwan), as well as
many other organisations and individuals have been swayed by or receptive to policy
positions of US and European government agencies that were against or
ambivalent about upholding patent rights in interoperability technology
standards including those of many SDOs including IEEE, 3GPP (including regional
partners such as ETSI).
Except
for IEEE, SDOs have reaffirmed longstanding IP policies that uphold the rights
of patent owners. For example, major European
SDOs CEN and CENELEC state that SDOs should not provide guidance on, or impose compliance
with, FRAND pricing, valuation, and rate-setting methodologies, and they
“firmly believe that pricing should be determined by patent holders and
implementers outside of SSOs in the context of bilateral negotiations.”
Notwithstanding strong signs of a reversal of policy at US
DoJ antitrust from its leadership, the moderate and balanced position recently
announced in the EU supported by strong statements by the European Court, and
the overwhelmingly consistent pro-IP position of the SDOs themselves, it
remains to be seen if other antitrust authorities can also be persuaded not to pursue
policies that undermine the fundamental rights of patent holders and the
incentives they have to invest in innovative new technologies that, through contributions
to SDOs, can be readily accessed and exploited by all.
As China and some emerging nations are increasingly
becoming SEP innovators as well as implementers, perhaps self-interest might
ultimately make these nations recognise that upholding IP rights is in their
interests, even in the short term, as licensors themselves, as well as it being
in everybody’s long-term interests to maximise development and dissemination of
innovative new technologies.
Finally the Guidelines suggest that an independent expert assessment be obtained about the centrality and essentiality to the standard of the relevant IPR portfolio. This is the author's knowledge, the most common way of assessing 