Friday, 6 February 2015

IEEE will jeopardise its attractiveness as venue for standards development if proposed new IP policies are adopted

The IEEE board of directors is imminently expected (probably on 9th February 2015) to vote on whether to adopt proposed changes to IP policies which will significantly diminish the future attractiveness of IEEE as a venue for standards development. Proposals are fundamentally flawed and have not been properly reviewed in accordance with IEEE principles and procedures to the point that the European Commission has publicly expressed its concerns.

In response to a question by the regulatory newswire MLex, the EC issued this following statement: “The Commission is closely following the developments at the IEEE. We are very mindful about the need for a careful balance between guaranteeing full access to standards at the same time as ensuring appropriate remuneration for intellectual property. Standards bodies should ensure that their rules comply with competition law so as to ensure that the benefits of standardisation can be achieved without anti-competitive outcomes. We are currently running a public consultation on Standard Essential Patents to gather information and views on the interplay between standardisation and intellectual property rights (IPR). The consultation deadline has been extended to 15 February and it would be premature to draw any conclusions.”

IP policies are pivotal to standard setting organisations. They determine whether or not technology developers have sufficient commercial incentives to contribute their patented technologies and engineering resources in development of interoperability standards such as IEEE’s 802.11 (WiFi).   

Striking a balance between the interests of developers and implementers of standard-essential patented technologies is therefore vital. This has been achieved remarkably well by many SSOs to date including IEEE, ITU and ETSI. WiFi, H.264 video and GSM/WCDMA are prime examples of successful global standards from these three SSOs respectively. The proposed rule changes would likely undermine this success at IEEE.

Unwarranted changes

Standard setting IP rules determine the basis upon which implementers inside and outside SSOs must pay for – in money or in kind – the extensive standard-essential patented technologies embodied within the standards.  

The proposed policy changes include measures which are dysfunctional, unfair, shun universally accepted practices or are highly contentious. These include some measures that undermine IP rights which I have argued against in my previous IP Finance postings:

·         Defining a ‘reasonable’ royalty using controversial and unworkable valuation methodologies—including tying a royalty rate to the ‘smallest saleable component’ of a standard-compliant device—all of which are intended to minimize licensing fees for SEPs.  As I explained in my IP Finance blog posting entitled Stacking the Deck in Analysis of Smartphone Patent Licensing Costs, a chip-based royalty scheme incorrectly and unfairly associates royalties to costs, process economics and competitive outcomes in the silicon chip foundry manufacturing business that have nothing to do with mobile technology development costs and the market value generated from these investments in the broader ecosystem.  Similarly, in Commonwealth Scientific and Industrial Research Organisation versus Cisco Systems, Inc. Judge Leonard Davis ruled that ”It is simply illogical to attempt to value the contributions of the ’069 Patent based on wireless chip prices that were artificially deflated because of pervasive infringement. Basing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product. While such a calculation captures the cost of the physical product, it provides no indication of its actual value.”
·         Severely limiting injunctive relief available to SEP owners, requiring them to engage in costly multiyear litigation against infringers who refuse to license an SEP on reasonable and non-discriminatory terms, and providing them an advantage over their competitors who are licensed. As I explained in my IP Finance blog posting entitled Plunging into a Safe Harbour from SEP Injunctions, reducing the availability of injunction relief for SEPs infringement, under the threat of antitrust sanction, will unfairly shift the balance of negotiating power from patentees to licensees. There is no proof that injunctions unbalance negotiations – especially given that injunctions are very rarely granted and in the U.S. can be counted on the fingers of one hand. This shift could undermine royalties and consequently deter further investment in standard-essential technologies while harm to consumers and licensees is unproven. Some of the latter are already extremely profitable by exploiting SEPs in conjunction with their own IP and other competitive strengths.

Violating values and procedures

In violation with IEEE principles, the proposed IP policy changes were apparently created by a closed ad-hoc committee that consistently rejected the repeated and detailed objections, alternative suggestions, letters of complaint, and appeals of some thirteen respected technology companies. That is not consistent with openness, due process, collaboration with all stakeholders, and consensus-based decision making that SSOs including IEEE purport to uphold. Nor is it consistent with the WTO criteria that underpin the European standardisation policy. The US Department of Justice inexplicably glossed over such exclusion in its recent business review letter.
In March 2013, the IEEE-SA Patent Committee (“PatCom”) undertook significant substantive changes to the IEEE-SA Patent Policy. The Ad-Hoc Committee expressly disclaimed its obligation to respect consensus, and PatCom made no effort to move the comments and objections toward consensual resolution. Ad Hoc Committee participation was limited to individuals with an established position of diminishing the rights of technology holders and requests to participate from individuals with contrary views were expressly rejected. There has been no attempt to justify why changes to the Patent Policy are needed and how the proposed changes would actually address any purported problems or improve standard-setting. The fact that there exists no legal, regulatory, or economic requirement to make any changes to the Patent Policy, instead relying on vague and unidentified ‘concerns’ of U.S. and European regulatory officials, has been ignored.
Over approximately fifteen months, the Ad Hoc Committee published four versions of a revised Patent Policy for comment, but it has systematically rejected many hundreds of substantive comments and objections to the proposed Patent Policy changes, often with rote, non-substantive explanations. It has expressly disclaimed its obligation to respect consensus, and PatCom made no effort to move the comments and objections toward consensual resolution. Any deliberations on the comments and objections were closed and no substantive amendments to the proposed Policy changes were made from the initial draft.
Prejudicial proceedings

Such is the grave concern that the IEEE board might actually approve the proposed policy changes, the European Commission (i.e. the EC overall, not a specific directorate or two therein) at the last minute (4th February 2015) has issued a formal “Statement.”  The EC makes it as clear, as this kind of official statement ever does, that it is unhappy with developments within the IEEE by:
·         Stating the EC is ”very mindful” of “the need for a careful balance” between ‘access to standards” and “ensuring appropriate remuneration for intellectual property”– it is concerned the draft IEEE rules will not achieve this.
·         Demanding respect for competition law – with the implication the proposed rules may raise issues of compliance with European competition Articles. This is presumably on the basis of the PatCom’s exclusionary conduct and the substantive policy rules that are reminiscent of a buyer cartel, as well as a forthcoming ruling from Europe’s Supreme Court on the availability of injunctions.
·         Requesting the IEEE should not presuppose or prejudice the outcome of the EC’s own reflection on standardisation and IP (the EC’s public consultation is currently underway with public comments due on 15th February 2015) that could well go in the opposite direction to the proposed changes at the IEEE.
Be careful what you wish (or vote) for

Periodic policy reviews of SSO rules are desirable and necessary. In the case of ‘open standards’ it is particularly important that these are undertaken by SSOs in a transparent manner in which the full range of interests and views are reflected. Compliance with the law and established SSO principles and operating procedures is also essential. The best place to start is by asking the question: are existing policies satisfactory?  If changes are to be made, they should be on the basis of clear evidence of harm or failure with existing policies and with proof that change will produce better overall outcomes with fair treatment for various parties who may have different interests. If not, the rules will impact negatively on those pro-competitive activities, and will significantly diminish the attractiveness of SSOs, including IEEE, as standardisation forums.


Rob Harrison said...

Update to this post. The IEEE's Board of Governors has approved the policy as can be seen at the following link:

Anonymous said...

Too bad. The companies that have made an unrighteous and enormous profit from playing the SSO game in order to fill their corporate treasuries with royalties from SEPs are (finally) encountering pushback. I'm glad to see it.

To argue that the SSO/SEP setup should not be changed because it has been so successful is just another case of the ends justifying the means.

Rob Harrison said...

I'm afraid that I don't agree with Anon's comments about unrighteous and enormous profit from playing the SSO game. Many of the participants in the standard setting process invest significant sums in their corporate R&D departments developing technologies, which they then contribute to the standards development process. It's only fair that they see some return on these investments from companies that do not invest in developing the technology.