|Free Riders Abound|
Tuesday 16 August 2016
"Patent holdup" allegations encourage SEP free-riders
Despite many years of speculation and recently adjusted claims, there is no empirical support for the theory of “patent holdup.” Various eminent experts refute allegations of systemic “patent holdup.” It is likely that “patent holdup” has not occurred in the context of standards and licensing of standards essential patents (SEPs) because of the fair, reasonable and non-discriminatory (FRAND) licensing contracts and available recourse to the courts have ensured that licensees cannot be forced to pay “excessive” licensing fees.
“Patent holdout,” which is also sometimes referred to as “reverse holdup,“ rather than “patent holdup” may instead be a prevalent problem; although calls for remedies have largely been in response to “patent holdup” allegations. Beguiled courts, antitrust authorities, government policy makers and even a standards development organisation (SDO) are tipping the scales in favour of “patent holdout” by infringing implementers of SEPs. This is destabilising the equilibrium between the interests of the licensors and licensees forged by consensus over decades in the IPR policies of SDOs such as ETSI with Fair, Reasonable and Non-Discriminatory licensing. As leading academics note, “FRAND Implies Balance” and “FRAND [is not] a one-way street.” 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.
On the other hand, Alcatel-Lucent, Ericsson, Nokia and Qualcomm have exited the mobile phone market over the last 15 years while ramping-up R&D in 3G and 4G technologies. These and other technology-development oriented companies can only sustain these risky R&D investments if they can make direct returns on their patent portfolios through licensing. Former network equipment market leader Ericsson has recently ousted its CEO due to poor growth and weak profits despite cost reductions, including in R&D.
“Patent holdup” is manifestly not a systemic problem. There is no empirical evidence of harm to markets or consumers, and such abundant proof of market success—particularly for innovative smartphones and the extensive 3G and 4G networks to which they are connected—including seven billion cellular connections and modest licensing costs totalling only around five percent of device prices.
I came upon a paper entitled “Patent Holdup: Myth or Reality?” by Carl Shapiro, dated 6th October 2015, which was circulated as a hard-copy and presented at an IEEE-SIIT conference at the Intel-sponsored key-note address. In this, the author concedes that there are “few documented instances of actual holdups” and that they are “exceedingly difficult for researchers to detect and reliably quantify.” He has backed off from his previous claims of prevalence of “patent holdup” where he stated “patentees regularly settle with companies in the information technology industries for far more money than their inventions are actually worth. These companies are paying holdup money to avoid the threat of infringement.” Shapiro has retreated due to lack of empirical support for these original claims which is because portfolio licensing among many licensees on FRAND terms together with the courts ensure that holdup royalties are rarely demanded and are never paid. However, Shapiro takes another position where there is also no supporting evidence. He now claims that the social costs caused by the alleged “patent holdup” problem are in the actions taken to prevent holdup and in the opportunities forgone under the threat of “patent holdup.”
His 2015 paper is labelled a preliminary draft that should not be quoted, yet the verbatim thesis of this most outspoken author is evidently being adopted elsewhere; including in a speech by the US Department of Justice’s Chief Economist, Nancy Rose, at a George Washington University conference on “Patents in Telecoms” in November 2015. In this, she analogises that “patent holdup” is like dark matter in the universe – something that cannot itself be detected but is present. She said that the existence of dark matter can be inferred from effects on visible matter.
With the passing of ten months since Shapiro presented his paper at the IEEE event and with the DoJ’s name endorsing this latest development in “patent holdup” theory, I believe it is high time to shine some light on the flaws in arguments made by Shapiro and Rose by making their writings available and by rebutting them here. I do not see why they should enjoy the privilege of being heard and given the opportunity to persuade, while also indefinitely being able to shield their postulations from scrutiny or criticism.
My full analysis on Shapiro's paper and Rose's presentation can be found in a pdf here.
 For example, a Chinese court awarded InterDigital in patent litigation against Huawei a mobile SEP royalty rate of only 0.019 percent of device sales. This is extremely low given that InterDigital’s overall royalty yield (i.e. its total royalty income divided by total device market sales revenues) including licensed and unlicensed sales globally is five times higher at around 0.10 percent.