Wednesday, 16 September 2020

Curing contagion and harm from previous changes in IP policy and law for SEP licensing

Following IEEE’s purported “clarification” and “update” of its Patent Policy in 2015, with a non-objecting Business Review Letter from the U.S. Department of Justice at that time, the Department has now “supplement[ed], update[d] and amend[ed]” its 2015 BRL with a new BRL.

The Department complains in its new BRL that its 2015 BRL was “frequently and incorrectly” cited as “an endorsement of the IEEE Policy.” The new BRL emphatically and with mettle renounces Standard Setting Organization patent policy changes that were proposed by the former head of the Department’s Antitrust Division, Assistant Attorney General, Renate Hesse, together with those that were detailed in IEEE’s 2015 Patent Policy.

This Patent Policy change was damaging to IP owners and their incentives to contribute to the standard setting and development process. Misinterpretation of the BRL, including by foreign authorities, has resulted in harmful policy developments and legal overreach in Standard-Essential Patent disputes.

As also requested by the Department most recently, it is about time IEEE re-reconsidered its Patent Policy given adverse developments at this SSO and with changes in US law and policy with respect to SEPs since 2015.

A low watermark for developers and contributors of SEPs

The former AAG, publicly beckoned SSOs to weaken patent owners’ rights with her disregard for considerations of patent “hold out.” In a 2012 speech entitled Six “Small” Proposals for SSOs Before Lunch she suggested that SSOs 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 SSOs to overcome any concerns they might have about antitrust actions against their revised patent policies by “seek[ing] ex ante review through [the Department’s] business review procedures.” This was presumably to reassure any SSOs 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 2015, touting it as “clarification” and an ”update,” but it actually set 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 Reasonable and Non-Discriminatory commitment with the following conditions:
  • SEP holders must waive their rights to seek any injunctions until they have successfully-litigated 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 Patent 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 (e.g. entire end product device, as opposed to chip or module).

The cause’s harmful effects

Following my in-depth empirical analysis on the effects of this patent policy change, published in September 2017—which showed that the standardization process was being jeopardized given the widespread unwillingness of technology developers to pledge their patents to the new Patent Policy—in a review of IP policy developments in December 2017 I also wrote:

“[Assistant Attorney General Makan Delrahim], the new head of the US DoJ antitrust division is reinforcing a trend that shifts the balance between IP rights and antitrust restrictions.[1] 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.”

I, among various others, unwittingly, incorrectly, yet unsurprisingly misinterpreted the extent of what the Department had stated in its 2015 BRL. This BRL purported a patent “hold up” problem that the "Update" to IEEE’s Patent Policy “may further help to mitigate.” And it was a cunning sleight of hand by the former AAG to propose more in her aforementioned speech than could be legally defended as “endorsed” by the Department’s BRL.

The new BRL clarifies and underlines the Department’s position by stating that “[b]ased on our analysis in 2015, we indicated there was no intention at that time to challenge the proposed policy—nothing more. Any representation by IEEE—or other stakeholders, government enforcers, or commentators—that the Department has endorsed the Policy is wrong, causes confusion, and must stop.” (all BRL citations omitted here and elsewhere.) So, while I argued from the outset against such a Patent Policy change—given the adverse effects it would have on patent holders, the standard development process and how it would contaminate policy making and licensing enforcement abroad—with my perceptions prejudiced by separate public statements from the former AAG and from analysis in the 2015 BRL, I also incorrectly inferred at least an implicit “endorsement” of the Patent Policy change by the Department in its issuance of the 2015 BRL:

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 [SSO’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 [SSOs] including IEEE, 3GPP (including regional partners such as ETSI).’

The new BRL also notes that:

“the misinterpretation of the 2015 Letter appears to extend around the world and may have influenced foreign enforcement activity. Over the last several years, some foreign competition authorities have misapplied the 2015 Letter in support of enforcement actions against essential patent holders that have no basis under U.S law, raising the prospect that the business review process could be subject to intentional manipulation abroad. For instance, in 2017 a major economy’s competition agency claimed the Department expressed support for IEEE’s injunctive relief provisions in connection with a liability decision penalizing an essential patent owner. And, more recently, a policy report authored for another jurisdiction incorrectly characterized the 2015 Letter and other Department letters as “soft precedent” to guide SSOs in designing IPR policies. 

IEEE’s advocacy may have informed the broad misinterpretation of the 2015 Letter and led to mistaken reliance on it as guidance for foreign enforcement activity. The potential negative impact to global enforcement policy from such a misunderstanding is extensive, commensurate with the wide proliferation of antitrust agencies around the world and the scope of remedies sometimes sought by jurisdictions.”

However, I also noted in 2017 that IEEE remained alone in unfairly manipulating its patent policy to the detriment of patent owners, with other [SSOs] resisting such harmful change:

‘Except for IEEE, [SSOs] have reaffirmed longstanding IP policies that uphold the rights of patent owners. For example, major European [SSOs] CEN and CENELEC state that [SSOs] 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.”’


Recent developments in policy and law indicate that the undermining of fundamental patent rights and fixed, formulaic prescriptions for determining royalties outside and inside of court are out of favour

In its attempts to limit damage and effect reversal in the direction of policy change, the new BRL states that “[t]he Department urges IEEE to ensure that neither it nor its members characterize the 2015 Letter as an endorsement of IEEE’s Policy.” And it indicates “the Department’s concern about mischaracterization of the Letter is also animated in large part by recent changes to US law and policy that render aspects of the 2015 Letter inaccurate.” Therefore, “[t]he Policy limits the basket of rights available to an essential patent owner such that it may undercut current US law and policy.”

The Department highlights in its new BRL:
  • “serious harm to innovation that could arise from limiting injunctive relief.” This is because “injunctive relief is a critical enforcement mechanism and bargaining tool—subject to traditional principles of equity —that may allow a patent holder (including an essential patent holder) to obtain the appropriate value for its invention when a licensee is unwilling to negotiate reasonable terms.”
  • “key risk in relying solely on the smallest saleable unit method, to the exclusion of others, is that real-world licenses often set royalties based on end-product revenue. Parties should not be discouraged from relying on these licenses—particularly since this sort of market-based evidence is often “the most effective method of estimating [an] asserted patent’s value.”

The heart of the matter

A major policy contention over many years is the extent to which efficient FRAND licensing can be disrupted, unfairly distorted or prevented by patent “hold up” by patent owners seeking excessive royalties or by patent “hold out" by implementers seeking sub-FRAND royalties, or to delay payment or avoid it altogether. According to the new BRL, ‘The 2015 Letter focused on the risk of so-called “hold up” by patent-holders without considering the possibility of “hold out” by patent implementers or the Policy’s effect on patent holders’ innovation incentives.’ It also states that ‘The 2015 Letter has proven incorrect, however, in anticipating that “hold-up” would be a competitive problem. Rather, concerns over hold-up as a real-world competition problem have largely dissipated.’ The Department notes that “studies and analyses conducted in the intervening years about hold out have confirmed that these are serious concerns, as well.” In my analysis and opinion, while purported concerns about patent “hold up” have never been factually substantiated, patent “hold out” is a pervasive problem. Accordingly, ‘The Department since has recognized that “[c]ondemning [hold up], in isolation, as an antitrust violation, while ignoring equal incentives of implementers to ‘hold out,’ risks creating ‘false positive’ errors of over-enforcement that would discourage valuable innovation.”’

The Department now urges SSOs “to promote balanced representation in decisional bodies so that diverse interests are represented and [SSO] decisions do not shift bargaining leverage in favor of one set of economic interests, including the interests of either implementers or patent holders.”

Making amends

The new BRL seeks to limit the damage caused at home and abroad by remarks made by the previous AAG, by what was described in the 2015 BRL and by what was incorrectly inferred to be Department policy at that time. While absence of evidence in support of patent “hold up” theory would have made it indefensible for the Department to “endorse” IEEE’s 2015 patent policy with advocacy in the 2015 BRL, non-objection to that patent policy in that BRL and these other statements have had adverse effects at home and abroad. While the new BRL will help arrest and reverse harmful change beyond IEEE in the US and elsewhere, I will watch with interest to what effect this and other recent developments in law and policy might have on patent policy at IEEE.

[1] The new trend was already being set by other actions including: (i) dissenting statements of US FTC Commissioner Maureen Ohlhausen in the matters of (a) Robert Bosch, (b) Motorola Mobility and Google and (c) Qualcomm; (ii) the CJEU’s judgement in Huawei v ZTE establishing obligations applying to both sides of an SEP-licensing agreement. The European court also stated that the FRAND commitment “cannot negate the substance of the rights guaranteed to the proprietors by Art. 17(2) of the European Charter of Fundamental Rights.”

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