Thursday, 22 September 2016

Self-interested bias of committee members amending IEEE’s patent policy devalues SEPs

According to research published by J. Gregory Sidak of Criterion Economics, the process by which the Institute of Electrical and Electronics Engineers (IEEE) amended its patent policy was significantly biased in favour of implementers and against standard-essential patent (SEP) owners.
He finds that large SEP holders that are net patent licensors and were opposed or neutral to the proposed changes had their comments on policy drafts rejected at a substantially higher rate than companies that are predominantly implementers and net payers of licensing fees. The bias favoured patent policy revisions designed to devalue SEPs. IEEE is the standards development organisation (SDO) responsible for developing the 802.11 WiFi standard, among many others.

Sidak provides a succinct description of the patent policy amendments and finds that these limit the ability of SEP owners to generate patent licensing royalties.

“In 2015, the IEEE ratified amendments to its patent policy to mandate that a reasonable and nondiscriminatory (RAND) royalty for a standard-essential patent (SEP)—more precisely, an Essential Patent Claim for an IEEE standard—exclude any value attributable to the standard, and to deny an SEP holder the right to seek an injunction against an unlicensed implementer until appellate review is exhausted. The amendments further say that the determination of a RAND royalty “should,” without limitation, (1) be derived from the value of the smallest salable compliant implementation of an IEEE standard that practices an SEP; (2) comport with a reasonable aggregate royalty burden of the relevant standard; and (3) disregard comparable license agreements obtained under the implicit or explicit threat of an injunction. Because the revisions place strict limitations on an SEP holder’s ability to enforce its patent rights against infringers, they truncate the upper range of the distribution of bilaterally negotiated RAND royalties and thus unambiguously reduce the compensation that the SEP holder may obtain for its technological contributions to the IEEE standards. The IEEE’s patent-policy revisions became effective in March 2015.

The IEEE’s 2015 bylaw amendments are highly significant because each unambiguously reduces the compensation that an SEP holder can obtain for its technological contributions to the IEEE’s standards. Throughout the development of those bylaw amendments, sixteen companies submitted 680 comments on four drafts of the proposed amendments and two drafts of a supporting informational document that an ad hoc drafting committee of the IEEE released for public comment. The ad hoc committee responded to the suggested revisions in each comment, either accepting them and implementing them into the next draft, accepting them in principle, or rejecting them. I find a strong negative correlation between the comment submitter’s status as a firm initially opposed to the revisions (a group primarily consisting of net SEP licensors) and the ad hoc committee’s incorporation of the submitter’s proposed revision in the subsequently revised draft. The treatment of the comments by the ad hoc committee exhibits a statistically significant bias against the firms that opposed the bylaw amendments—primarily large SEP holders—and in favor of revisions designed to devalue SEPs.”

He finds disregard for important principles and safeguards that IEEE upholds in standard setting. He notes that various members complained that the process by which the IEEE amended its patent policy did not comply with the principles of openness, consensus, balance, due process, and right to appeal that are consistent with the IEEE’s standard-setting process, and that the ad hoc drafting committee responsible for the patent policy revisions did not conciliate this dissent. 

“The IEEE patent policy, contained within the IEEE Standards Board bylaws, specifies the conditions under which an SEP holder voluntarily commits to license its SEPs on RAND terms. The bylaws serve as the Standards Board’s constitution and establish the consensus-driven process of developing and promulgating technical standards, including the popular 802.11 Wi-Fi standard. Embedded in the bylaws, as well as in other IEEE governance documents, are comprehensive safeguards that discourage opportunistic, anticompetitive conduct within the IEEE.”

Also according to Sidak:

“[t]he 2015 bylaw amendments deviated from the safe­guards that the IEEE had guaranteed its members in both the foundational documents of the IEEE and its history of consensus-driven policymaking.”

Although amending an SDO’s patent policy is a different process to selecting a technology to incorporate in a standard, it defies logic or probity that an SDO espousing these principles in standard setting should abandon them in amending patent policy – something that is so fundamental to an SDO’s standing and workings.

Sidak identifies self-interest as the reason the ad hoc committee did this. “To those large implementers, it is now expedient to renege on the bargain of interpret­ing the RAND commitment in a manner that is neutral to both net licensors and net licensees.”  The bias he found in the committee’s decision making aligns with the company affiliations and employment of committee voting members and the objectives of those companies:

“the bias suggests that decision making at the IEEE was controlled by parties that seek to devalue SEPs. The process for amending the IEEE’s bylaws did not protect the interests of SEP holders that were disproportionately responsible for the technologies that the IEEE had incorporated into its standards.”

I wrote, here, prior to its adoption, that the amended IEEE patent policy was bad policy. I opined it would undermine the free and fair market for licensing of SEPs and that imposed licensing terms would make IEEE an unattractive venue for patent owners. Most recently, I have also written, here, about how interested parties are also unjustifiably and harmfully trying to foist similar changes on patent licensing practices more widely.

Sidak’s paper can be accessed via the Criterion Economics web site here.

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