The Role of Standards and Patents in the Era of Artificial Intelligence

 

Key Take Away

AI systems label a specific model of innovation that benefits from a wide range of contributors; be they inside or outside the firm. The role of patent law as an organizational principle of this type of ‘networked innovation’ remains yet to be adequately governed. In AI business thrives because of the interconnected framework in which it is embedded in.

 The technological transformations enabled have triggered drastic modifications of the nature of economic exchange; making novel ways of doing business possible; not necessarily by owning devices protected by patents, but by owning access to a multitude of devices and facilitating easy interacting and exchange between them. Hence, the classical value proposition, whereby a single invention is protected through patent law and by consequence its owner has the right to exclude third parties from accessing it may risk to harm the nurturing eco system emerging from the standardization process.[1] In that regard, public policy formulation will need to play a major role, so to provide a governance structure that allows all players, be they large or small, to succeed. In particular it will require to study at greater length the role that patents that read on standards will and can play in this promising ecosystem.

 This new economic context asks for a differentiated governance structure that assures in particular the functioning interplay between patents and standards. Against this background, this proposal suggests that the role of the FRAND (fair, reasonable and non-discriminatory) commitment should be further studied. Within a UK context in particular, it should be discussed to what extent it would not be appropriate to run another ‘Heargraves Review’ that addresses in greater detail the role of standard essential patents in the novel business environment provided by AI.

The Novel Economic Framework Provided by Artificial Intelligence

AI is still at its early stage and the opportunities it can offer have not even been seized yet to its full extent. At present, we do not even know the many different creative ways in which entrepreneurs will take AI forward. Entrepreneurs are experimenting with leveraging the AI in areas as vast as fashion or primary healthcare. Which businesses will ultimately prove viable remains still to be seen. AI is also big business. Investors expect growth rates as high as 20%.

In AI it is not the single device that creates value, but the ability to connect a sheer infinite number of devices with each other. The worth relies in the continuous expansion of the connection. It is the interconnectivity that creates value, not just the simple ownership of a single device.

At present most connected devices or telecom networks are controlled by humans. However, a key feature of the AI is that devices will be controlled by other devices (the controllers).  These again can be classified in various ways, so to reflect the specific features of the controller. In the networked architecture of the AI various devices are at the same time receivers and suppliers of information; making it increasingly difficult to untangle the net of who provides and who receives proprietary technology and who adds value to the technology. 

 As such, Artificial Intelligence is a prototypical technology space, where Small and Medium Sized Enterprises (SMEs), universities and their spin-outs as well as big corporations alike could constitute a fruitful innovation ecosystem. All these players could thrive in the spirit of collaborative exchange, so to collectively re-invent the future of society, provided that adequate foundations are set for the role of patents within the context of AI.

 

The Need for Standards

Standard setting will be instrumental for the success of AI. It is only through a common language, the adoption of an interoperable and connected system that the wide spread use of AI can succeed. The process of standardisation will enhance innovation efficiency because it enhances compatibility and increases the credibility of technological solution. This standardisation process will likely be highly beneficial to the widespread dissemination of AI.

The success of a standard is based on its wide dissemination; its value derives from its vast usage. This stands in sharp contrast to patents, which are negative rights built around exclusivity. Contrary to a standard, the value of a patent derives from its strength to exclude to the best extent possible third parties from using it; unless obviously a third party is willing to pay for its usage.  

This is why the inherent dilemma between patents and standards is hard to overcome. It is a tension between ‘free access and tight control.[2]’ This tensions is well pronounced in the standard essential patents debate. A patent declared essential to a standard is a strange hybrid that combines patent laws’ negative right’s aspect with a standard’s capability to disseminate a technology as wide as possible. As this formula bears the potential to accrue exceptional market power in the hands of patent owners, while at the same time rendering access to proprietary technology potentially very expensive, the (F)RAND (fair, reasonable and non- discriminatory) promise was introduced.

 The (F)RAND rationale at its the core seeks to counter anti-competitive aspects of the licensing of standard essential patents. The (F)RAND commitment obligates SEPs owners to make their patents available on fair, reasonable and non-discriminatory terms. The reason why it does this, is because in the absence of doing so, there is a strong concern that opportunist behaviour can arise and by consequence competition in technology markets can be distorted.

 Due to technical standard setting, there often arise only a handful of patent holders in a particular standard.  This may be due to first mover advantages or because some firms have the necessary innovation capabilities to capture the patent landscape.  It is alleged that these patent holders – having claimed an important position in the patent landscape – can charge abnormally high licensing rates to standard essential patent implementers; a phenomenon known as hold up.

 Alongside those undesired consequences, royalty stacking can be another means to prevent downstream innovation. Royalty stacking can be defined as ‘situations in which a single product potentially infringes on many patents, and thus may bear multiple royalty burdens. The term 'royalty stacking' reflects the fact that, from the perspective of the firm making the product in question, all of the different claims for royalties must be added or 'stacked' together to determine the total royalty burden borne by the product if the firm is to sell that product free of patent litigation.’[3]

 Research Questions

Nonetheless the (F)RAND commitment translates into an insufficiently complete contract between licensors and licensees. This is because of a built-in ambiguity over what “fair, reasonable and non-discriminatory” means; an ambiguity that is not addressed by means of the policies themselves but is expected to be resolved by “others”. This has led commentators such as Swanson & Baumol to argue that the (F)RAND commitment is of limited value in the absence of objective benchmarks that make clear the concrete terms or range of terms that are deemed to be reasonable and non- discriminatory.[4] This vagueness can lead to abuse and antitrust issues.[5]  The situation is furthermore complicated by clandestine licensing markets and the absence of publicly available royalty rates that could be used as benchmarks to determine the value of a royalty rate of a SEPs.

 

Further issues pertain to a lack of clarity on ownership and distribution of patents that read on standards. Equally, there is lack of consistency as it pertains to the valuation of standard essential patents. Lack of clarity can also lead to a host of other unresolved challenges, such as negotiations taking potentially place in the shadow of the law and potential asymmetrical bargaining power between SEPs owners and downstream innovators.

Against this background, it is suggested to study the following issues further:

 1)      Valuation of standard essential patents

2)      Clarity on ownership and numbers of standard essential patents

3)      Exploring ways to enhance transparency in markets for standards essential patents by making the licensing rates and licensing contracts publicly available

 

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[1] European Patent Office. (2007). Scenarios for the future: how might IP regimes evolve by 2025? What global legitimacy might such regimes have? Europäisches Patentamt. See “Blue Skies” scenario

[2] Miller, J. S. (2006). Standard setting, patents, and access lock-in: RAND licensing and the theory of the firm. Indiana Law Review, 40, 2007-6., at P.6

[3] Lemley, M. A., & Shapiro, C. (2006). Patent holdup and royalty stacking. Tex. L. Rev., 85, 2163.

[4] Swanson, D. G., & Baumol, W. J. (2005). Reasonable and non-discriminatory (RAND) royalties, standards selection, and control of market power. Antitrust Law Journal, 73(1), 1-58. At p.5

[5] Lemley, M. A. (2002). Intellectual property rights and standard-setting organizations. California Law Review, 1889-1980; Miller, J. S. (2006). Standard setting, patents, and access lock-in: RAND licensing and the theory of the firm. Indiana Law Review, 40, 2007-6., at P.11. In ‘Rambus Inc. v. Infineone Technologies. 318 F.3d 1081 (Federal Circuit 203) cert. denied 540 US 874 (2003)’ the inherent uncertainty of the (F)RAND agreement played also a major role. Cited according to Miller (2006)

U.S. National Security Commission on Artificial Intelligence Report: Patent Eligible Subject Matter Reform on the Horizon

The U.S. National Security Commission, chaired by Eric Schmidt, has released its final report, over 750 pages, titled, National Security Commission on Artificial Intelligence.  The Report outlines how the United States may be falling behind on certain artificial intelligence research, particularly compared to China.  The opening letter from the Chair states:

The AI competition is also a values competition. China’s domestic use of AI is a chilling precedent for anyone around the world who cherishes individual liberty. Its employment of AI as a tool of repression and surveillance—at home and, increasingly, abroad—is a powerful counterpoint to how we believe AI should be used. The AI future can be democratic, but we have learned enough about the power of technology to strengthen authoritarianism abroad and fuel extremism at home to know that we must not take for granted that future technology trends will reinforce rather than erode democracy. We must work with fellow democracies and the private sector to build privacy-protecting standards into AI technologies and advance democratic norms to guide AI uses so that democracies can responsibly use AI tools for national security purposes.

The Chair’s letter further provides numerous proposals for the United States, including White House level leadership, talent pipelines and chip manufacturing in the United States.  Surprisingly to me ,the Report only calls for a $40 billion investment initially in Artificial Intelligence research.  I wonder why the number is so low.  The Chair’s letter does note that they envision hundreds of billions of dollars of investment in the future.  Notably, the Executive Summary points to a significant issue with United States policy:

Implement comprehensive intellectual property (IP) policies and regimes. The United States must recognize IP policy as a national security priority critical for preserving America’s leadership in AI and emerging technologies. This is especially important in light of China’s efforts to leverage and exploit IP policies. The United States lacks the comprehensive IP policies it needs for the AI era and is hindered by legal uncertainties in current U.S. patent eligibility and patentability doctrine. The U.S. government needs a plan to reform IP policies and regimes in ways that are designed to further national security priorities.

Chapter 12 is dedicated to intellectual property policy.  Some hot button issues for reform include: patent eligible subject matter, IP protection for data and the standard essential patent process.  Trade secrets may not do the job--especially with weak cybersecurity.  The Report also notes: “Lastly, as further evidence that China views IP as essential in its domestic economic development, China continues to pervasively steal American IP-protected technological advances through varied means like cyber hacking of businesses and research institutes, technological espionage, blackmail, and illicit technology transfer.”  The report also points to the need for cybersecurity improvements.  

A Very Large Patent Infringement Verdict: Over US $2.1 billion

In news that has raced across general as well as patent specific news, a Texas jury has awarded VLSI Technology over US $2.1 billion for patent infringement (two patents)--the defendant is Intel.  Of course, this will be subject to post trial motions as well as appeals. We'll have to wait and see if it sticks.  However, I am sure it has other patent holders licking their lips with the prospect of big payouts from Texas juries (this will make a nice addition to that PowerPoint presentation).  

New Book: Cybersecurity Law: An Evolving Field

In December of 2020, my coauthor, Jack Hobaugh, and I published teaching materials in a casebook concerning Cybersecurity Law with West Academic Publishing [available, here].  I will likely include additional cybersecurity and privacy material as part of the content of the IP Finance blog because of the growing importance of that area of law as demonstrated, in part, by the recent U.S. Government Accounting Office Report discussed below.  Here is a short description of the book:

Cybersecurity Law: An Evolving Field is a casebook that covers the duties of a cybersecurity professional, state and federal regulation, risk assessment and the NIST Risk Assessment Frameworks, common law and statutory causes of action concerning data breach, laws related to anti-hacking, problems concerning the Internet of Things and selected international issues. This text is for law students and counsel who want to understand the connections between cybersecurity laws and cybersecurity requirements, and advise clients concerning cybersecurity related issues. In part, it seeks to bridge the communication gap between the legal department and the cybersecurity team.

In addition, here are some reviews of the book:

“Jack Hobaugh and Michael Mireles have created a masterful work addressing the laws on cybersecurity and data privacy litigation. The casebook is an incredibly comprehensive treatment of these subjects and is an essential resource for students, cyber professionals and lawyers who practice in this area or who seek a basic understanding of the law and issues in these emerging areas. The book is well written and addresses with clarity the hot topics of today and for years to come. I keep the book within arm’s reach as it has become essential in my legal practice as a privacy advocate.”
—John A. Yanchunis, Head of Class Action Department, Morgan & Morgan

“Cybersecurity Law: An Evolving Field is a terrific casebook that provides a comprehensive understanding of cybersecurity law. Cybersecurity law is a diverse and fragmented body of law, but the casebook pulls everything together in a clear and well-organized way. The casebook includes background about cybersecurity frameworks, and its focus and approach is practical and wide-ranging. This book also serves as a highly-useful resource on the topic, as it includes a large array of materials with extensive background sections and insightful notes.”
—Daniel J. Solove, John Marshall Harlan Research Professor of Law, George Washington University Law School

The Government Accounting Office of the United States has released its High Risk Series Report on March 2, 2021, which reviews areas of and subjects concerning the U.S. Government needing leadership to address series problems.  The Report points to cybersecurity as a serious concern and notes that there has been a “regression” in cybersecurity in the U.S. Government since 2019.  The Report states: “This regression is due to missing (1) important characteristics of a national strategy in the White House’s September 2018 National Cyber Strategy and the National Security Council’s accompanying June 2019 Implementation Plan and (2) an officially appointed central leader for coordinating the execution of the White House’s approach to managing the nation’s cybersecurity.”  Moreover, the Report identifies several other issues concerning cybersecurity:

Based on our prior work, we have identified four major cybersecurity challenges:

• establishing and implementing a comprehensive cybersecurity strategy and performing effective oversight,
• securing federal systems and information,
• protecting cyber critical infrastructure, and
• protecting privacy and sensitive data.

 

EIPO and EPO Study on Financial Impact of Patents, Design Rights and Trademarks

The European Intellectual Property Office and the European Patent Office conducted a joint study analyzing the impact of patents, design rights and trademarks on firms.  Interestingly, the study finds that firms with patents, design rights and trademarks pay more to employees and generate more revenue per employee than those firms without those rights.  Notably, firms with patents outperform firms with only design rights or trademarks in both areas: employee pay and employee generated revenue.  Interestingly, firms with combined trademarks and design rights, or combined patents and trademarks, or combined patents, trademarks and design rights, outperform firms only with patents in revenue generated per employee. 

The Executive Summary notes:

The positive association between IPR ownership and economic performance is particularly strong for SMEs. At the same time, less than 9% of SMEs in the sample own one of the three IP rights included in the study. The reasons for the low uptake are explored in the EUIPO survey of European SMEs (EUIPO, 2019). This study (as well its earlier edition from 2015) indicated that barriers faced by SMEs include lack of knowledge about IPRs, a perception that registration procedures are complex and costly, and the high cost of enforcement of those rights, a particular burden for SMEs (EUIPO, 2017). Given this, and the importance of SMEs in the European economy, the EPO and the EUIPO are taking steps as IP offices to address those concerns so as to enable European SMEs to take full advantage of their innovation and intellectual property, in the context of the EPO’s Strategic Plan 2023, the EUIPO Strategic Plan 2025 and the European Commission’s SME strategy formulated in early 2020 (EC, 2020).

The study may be found, here.