European and U.S. competition authorities may be making a course correction toward a more balanced approach to standard essential patents (“SEPs”) following contemporary enforcement activity that had favored implementers over patent holders.
Specifically, recent remarks by the new administration’s U.S. Department of Justice (“DOJ”) antitrust head explained that patent hold-up by patent owners may not be as big an issue as some had suggested and that patent hold-out by implementers may be a bigger concern. Indeed, he expressed concern about improper collusion among implementers within standard setting organizations (“SSOs”) to enact intellectual property rights (“IPR”) policies that unduly devalue patents and undermine innovation. These remarks from the new administration has caused many to question the viability of the IEEE ‘s 2015 IPR Policy change that was perceived as very implementer oriented, but not challenged by the prior DOJ administration. (See our Feb. 5, 2015 Post about the prior DOJ administration’s business review letter on the IEEE policy change).
Further, the European Commission (“EC”) recently issued non-binding guidance for SEPs that did not suggest bright line rules urged by implementers for negotiating SEP FRAND licenses–e.g., did not suggest component-level licensing and royalty base, rather than end product level—and reflects a balanced approach more consistent with long-standing industry custom and practice in implementing FRAND licensing commitments.
We provide a summary of these statements, but encourage you to read the DOJ remarks and EC guidance directly for yourself (they are not long), which may allow you to detect and avoid interpretive spin from those entrenched on either side of the issues. For example, some have suggested that the EC guidelines support licensing at the component level; but that’s not what the EC guidelines actually say and its been reported that the EC intentionally declined to suggest component-level licensing in these guidelines.
The new Trump administration’s U.S. Department of Justice (“DOJ”) Antitrust Division Assistant Attorney General (“AAG”) Makan Delrahim gave remarks about competition law and SEPs during a conference at the USC Gould School of Law on November 10, 2017. AAG Delrahim is the first registered patent attorney to head DOJ’s Antitrust Division, which may have informed his views on the value of patents in spurring innovation that benefits society in standards and elsewhere. Below is a summary of his remarks.
Recent Competition Authority Actions Against SEP Patent Owner’s Has Created an Imbalance
AAG Delrahim expressed concern that competition authorities have misapplied antitrust law and created an imbalance in the standard-setting process that unduly favors implementers at the risk of undermining innovation:
In particular, I worry that we as 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. The dueling interests of innovators and implementers always are in tension, and the tension is resolved through the free market, typically in the form of freely negotiated licensing agreements for royalties or reciprocal licenses. Despite the benefits SSOs confer, the regulation of the interactions and licensing practices within an SSO through the misapplication of the antitrust laws threatens to disrupt the free-market bargain, which could undermine the process of dynamic innovation itself.
[C]oncerns over possible innovator hold-up should not override the dangerous prospect of implementer hold-out.
AAG Delrahim expressed concern that competition authorities focused too much on patent hold-up by patent owners while ignoring an important concern about patent hold-out by implementers:
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.
More to the point, many of the proposed “solutions” to the hold-up problem are often anathema to the policies underlying the intellectual property system envisioned by our forefathers. These patent policies are constitutionally enshrined in Article 1, Section 8, which gives Congress the power “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive right to their respective Writings and Discoveries.” These “exclusive rights” importantly and necessarily include the power to exclude. The misapplication of the antitrust laws to punish the legitimate exercise of these rights seems to undermine these policies when they require a patent holder to sacrifice these rights.
My priority as Assistant Attorney General is to help foster debate toward a more symmetric balance between the seemingly dueling policy concerns between intellectual property and antitrust law. Unfortunately, in recent years, competition policy has focused too heavily on the so-called unilateral hold-up problem, often ignoring what fuels dynamic innovation and efficiency. New inventions do not appear out of the ether, and excessive use of the antitrust laws rather than other remedies can overlook and undermine the magnitude of investment and risk inventors undertake for the chance at being included in a standard. 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.
Contract and Other Common Law Actions Sufficiently Protect SEP Licensing Commitments Without Imposing Competition Law
AAG Delrahim indicated that standard-setting organizations (“SSOs”) and participants are in the best position to police licensing conduct using, if needed, common law contract or related theories to enforce licensing commitments, rather than competition law.
If a patent holder is alleged to have violated a commitment to a standard setting organization, that action may have some impact on competition. But, I respectfully submit, that does not mean the heavy hand of antitrust necessarily is the appropriate remedy for the would-be licensee–or the enforcement agency. There are perfectly adequate and more appropriate common law and statutory remedies available to the SSO or its members.
Thus, enforcing valid patent rights–such as “seeking an injunction or refusing to license”–should not violate competition law (though it might be subject to “contractual or other common law liability”).
Under the antitrust laws, I humbly submit that a unilateral refusal to license a valid patent should be per se legal.
Accordingly, a patent owner that seeks injunctive relief in a way that violates its standard-setting commitment may be the subject to contract or other common law action, but that “rarely if ever should be an antitrust violation.”
Illegal Collusion By Implementers In SSOs?
AAG Delrahim also suggested that competition authorities should look out for collusion by implementers in the standard-setting process, such as a risk that they may “engage in a form of buyer’s cartel, what economists call a monopsony effect.”
When implementers act together within a standard-setting organization as the gatekeeper to sales of products including a new technology, they have both the motive and means to impose anticompetitive licensing terms.
AAG Delrahim indicated that DOJ will give close scrutiny and look for improper collusion if an SSO changes its intellectual property rights (“IPR”) policies in a way that shifts the bargaining leverage to implementers or patent holders, even if such changes are made in the guise of “clarify[ing] the meaning” of licensing terms:
The Antitrust Division will therefore be skeptical of rules that SSOs impose that appear designed specifically to shift bargaining leverage from IP creators to implementers, or vice versa. 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.
AAG Delrahim indicated scrutiny would be given to IPR Policy changes that, for example, focus on a single Georgia-Pacific royalty factor “that heavily favors either implementers or innovators” (referring to 15 factors commonly used to determine a reasonable royalty as damages in U.S. patent infringement litigation). This includes giving antitrust scrutiny to an SSO requirement to use the smallest salable component:
While the so-called “smallest salable component” rule may be a useful tool among many in determining patent infringement damages for multi-component products, its use as a requirement by a concerted agreement of implementers as the exclusive determinant of patent royalties may very well warrant antitrust scrutiny.
He also indicated that competition authorities should look “with suspicion” at an SSO rule that deprives the patent owner of its injunctive remedy and implements essentially a compulsory licensing scheme.
In closing, AAG Delrahim indicated that competition authorities should focus more on collusive behavior among several participants within SSOs — of both implementers and patent holders — and not as much on individual actions of patent holders alleged to violate an SSO’s IPR Policy.
On November 29, 2017, the European Commission (“EC”) issued guidelines concerning SEPs entitled “Setting out the EU approach to Standard Essential Patents.” The guidelines are not binding and are “not intended to represent a statement of the law.” The guidelines appear to be spurred, at least in part, by the increased number of every day products that may use wireless or other digital technology not previously found in those products–i.e., 5G and the Internet of Things or “IoT”)–leading such product suppliers into licensing SEPs in a technology space with which they are not familiar. The EC, therefore, sought to “set out key principles that foster a balanced, smooth and predictable framework for SEPs.” The EC set forth two main objectives:
- “[I]ncentivising the development and inclusion of top technologies in standards, by preserving fair and adequate return for these contributions”
- “[W]ide dissemination of standardised technologies based on fair access conditions.
The EC Guidelines then discuss four primary areas:
- Increasing Transparency On SEPs Exposure
- General Principles For FRAND Licensing Terms for SEPs
- A Predictable Enforcement Environment For SEPs
- Open Source And Standards
We review each of those areas below.
1. Increasing Transparency On SEPs Exposure
This portion of the EC Guidelines concerns the availability of information to determine what patents are essential to a standard. For example, a large number of patents may be identified in declarations or letters of assurance (“LOAs”) submitted to SSOs, but many of those may not actually be essential to the standard. Such over-declaration is caused in part by patent owner concerns that they will face liability if they fail to disclose a patent that ends up being essential to the standard. U.S. patent attorneys can relate to this: Many dump box-loads of potential prior art in their patent office filings to avoid inequitable conduct challenges for failing to disclose relevant prior art. The over-declaration can make it difficult for implementers to know what patents actually are SEPs and require a license. The EC found “[t]his is particularly unsatisfactory in the context of IoT where new players with little experience of SEPs licensing are continually entering the market for connectivity.” The EC, therefore, considered measures to improve information about SEPs.
First, the EC suggests that SSOs provide to interested parties (patent holders, implementers and third-parties) more user-friendly, quality data bases on patents declared as potentially essential to a standard. This would include links to up-to-date patent office databases.
Second, the EC suggests that patent owner submitted declarations should include information that is useful in licensing negotiations. This may include some substantiation that a patent is essential to the standard, though such substantiation should be limited so that it does not create “excessive burdens.” But some sort of substantiation of essentiality and infringement should be provided since that is what patent holders do in concrete licensing negotiations.
Third, the EC gave some suggestions on how to implement transparency:
- Declarations submitted prior to standard adoption (when the standard is in flux) should be reviewed when the standard is adopted; declarations involving patent applications whose claims were in flux should be reviewed when the patent issues.
- SDO’s should provide incentives for reporting SEP cases and their outcomes.
- Have independent party scrutiny of the essentiality of patents in a cost effective way (e.g., scrutiny at request using single patent in a family or sampling).
- Keep burdens on patent holders proportionate to whats at issue and introduce the burdens gradually to new and key standards (e.g., 5G).
- Certify that a patent holder met transparency criteria, which certification the patent holder can use in licensing negotiations and litigation.
- Use patent office expertise or other body for essentiality checks.
Finally, the EC concluded its discussion of transparency with the following statement that was specially set-out in a grey box:
– calls on SDOs to urgently ensure that their databases comply with the main quality features described above and will co-operate with SDOs to facilitate this process;
– calls on SDOs to transform the current declaration system into a tool providing more up-to-date and precise information on SEPs and will co-operate with SDOs in order to facilitate that process;
– considers that declared SEPs should be subject to reliable scrutiny of their essentiality for a standard, and will launch a pilot project for SEPs in selected technologies with a view to facilitating the introduction of an appropriate scrutiny mechanism.
2. General Principles For FRAND Licensing Terms For SEPs
The EC stated that good faith negotiations by the parties is the best way to arrive at FRAND terms, but some set of “key signposts on the FRAND concept” would provide a better negotiation environment given divergent views on what is FRAND. The EC presented a few concepts to consider.
First, both parties must negotiate in good faith since they “are in the best position to determine the FRAND terms most appropriate to their specific situation.” The EC emphasized that “there is no one-size-fit-all solution” since what is fair and reasonable “differs from sector to sector and over time.” The EC, therefore, encouraged establishing some common license practices on a sector basis. The EC suggested some valuation principles to assist in developing those license practices:
- Licensing terms should be related to the economic value of the patented technology and not the value of inclusion in the standard (caveat: if technology developed for and has little use outside the standard, then consider relative value to the standard).
- Take into account the present value added of the patented technology in order to account for a license spanning several years in a fast moving business environment.
- Valuation “should ensure continued incentives for SEP holders to contribute their best available technology to standards.”
- To avoid royalty stacking, do not consider a single SEP in isolation, but “take into account a reasonable aggregate rate for the standard, assessing the overall added value of the technology.”
Second, the non-discrimination aspect of FRAND indicates patent holders “cannot discriminate between implementers that are ‘similarly situated.'” This can vary from sector to sector. Efficiency is important to keep the transaction costs of license negotiations “to the minimum necessary.” Thus, for example, global licensing of an SEP portfolio for products with global circulation may be more efficient than a country-by-country approach.
Third, the EC suggests that patent pools or other licensing platforms may be encouraged since they may offer “better scrutiny on essentiality, more clarity on aggregate licensing fees and one-stop-shop solutions.”
Fourth, the EC suggests that “[t]here is a need to increase accessibility of experience, expertise and know-how around FRAND determination.”
The EC concludes this section with the following statement it highlights in a grey box:
In view of current developments, the Commission considers that SEP licensing should be based on the basis of the following principles:
– There is no one-size-fit-all solution on what FRAND is: what can be considered fair and reasonable can differ from sector to sector and over time. Efficiency considerations, reasonable license fee expectations on both sides, the facilitation of the uptake by implementers to promote wide diffusion of the standard should be taken into account.
– Determining a FRAND value should require taking into account the present value added of the patented technology. That value should be irrespective of the market success of the product which is unrelated to the value of the patented technology.
– In defining a FRAND value, parties need to take account of a reasonable aggregate rate for the standard.
– The non-discrimination element of FRAND indicates that rightholders cannot discriminate between implementers that are ‘similarly situated’.
– For products with a global circulation, SEP licenses granted on a worldwide basis may contribute to a more efficient approach and therefore can be compatible with FRAND.
The Commission calls on SDOs and SEP holders to develop effective solutions to facilitate the licensing of a large number of implementers in the IoT environment (especially SMEs), via patent pools or other licensing platforms, while offering sufficient transparency and predictability.
The Commission will monitor licencing practices, in particular in the IoT sector. It will also set up an expert group with the view to deepening expertise on industry licensing practices, sound IP valuation and FRAND determination.
3. A Predictable Enforcement Environment For SEPs
The EC observes that “[a] balanced and predictable enforcement environment has particularly positive effects on parties’ behaviour during negotiations.” The high amount of SEP litigations shows “the need for a clear dispute framework in this area.” The EC provides several suggestions on enforcing SEPs.
First, the EC referred to the Huawei v. ZTE decision that setforth criteria for seeking an injunction on an SEP without raising competition law concerns. (see our July 16, 2015 Post on that decision). An SEP holder “may not seek injunctions against users willing to enter into a license on FRAND terms.” The EC suggest some factors to consider to assess if one is a willing licensee:
- In order for the prospective licensee to assess a FRAND offer and make a counter-offer, the patent holder should explain (i) the essentiality to the standard; (ii) the allegedly infringing products; (iii) the proposed royalty calculation; and (iv) non-discrimination.
- A prospective licensee’s counter-offer should be “concrete and specific” (i.e., not merely “contesting the SEP holder’s offer and a general reference to third-party determination of a royalty”) and explain “the exact use of the standard in the specific product.”
- The timeliness of the prospective licensee’s counter-offer is case-specific and can vary depending on the number of patents and the level of information provided.
- The prospective licensee should post security “at a level that discourages patent hold-out strategies.”
Second, the EC suggests that courts considering injunctive relief for SEPs on a case-by-case basis that is “effective, proportionate and dissuasive.” Considerations include “the relative relevance of the disputed technology for the application in question and the potential spill-over effects of an injunction on third parties.”
Third, the EC suggests that SEP licensing should be on a portfolio basis for all the SEPs that the prospective licensee needs. The offer could include non-SEPs, but cannot force licensing them. The EC suggests that “[t]he general non-willingness or non-acceptance to offer or accept all SEPs that a licensee needs may be an indication of bad faith.” Thus, “to be FRAND, the counteroffer needs to be related to all SEPs that a licensee needs and cannot be based on individual patent(s) only.” Further, the patent portfolio should include complementary technologies, but not competing technologies.
Fourth, the EC suggests that mediation and arbitration can offer cheaper and quicker resolution of SEP licensing disputes. But parties are not obligated to use such alternative dispute resolution (“ADR”) mechanisms. The EC suggests that the EU’s Unified Patent Court provide a dedicated ADR center with a pool of specialized judges. The EC also suggests that the outcome of ADR proceedings be included in SDO databases.
Fifth, the EC observes that patent assertion entities (“PAEs”) are becoming more involved in SEP licensing. But the EC observes that there are or soon will be safeguards to curb concerns of PAE abuse — e.g., the Unified Patent Court to be established “has sufficient safeguards”; PAEs should be subject to the same rules as any other SEP holder, including the transfer of SEPs; courts apply the proportionality principle.
Finally, the EC suggests “proactively rais[ing] awareness of the FRAND licensing process and its implications.”
The EC concludes this section with the following statement it highlighted in a grey box:
The Commission considers that the FRAND process requires both parties to negotiate in good faith, including responding in a timely manner. Injunctive relief can, however, be sought against parties acting in bad faith (i.e. parties unwilling to take up a licence on FRAND terms), but it must be used proportionally.
The Commision will:
– work with stakeholders to develop and use methodologies, such as sampling, which allow for efficient and effective SEP litigation, in compliance with the industry practice of portfolio licensing;
– further facilitate the roll-out of mediation and alternative dispute resolution tools; and
– monitor the impact of PAEs in Europe.
4. Open Source And Standards
The EC suggests that the increased integration of standards and open source software (“OSS”) is “a win-win situation” because it can speed-up standard development and implementation as well as allow interoperability between different OSS projects. So the EC will help “promote an effective relationship between standardisation and open source.”
The EC concluded this section with the following statement highlighted in a grey box:
The Commission will work with stakeholders, open source communities and SDOs for successful interaction between open source and standardisation, by means of studies and analyses.