As previously remarked in IP Finance, I recently submitted my individual comments, and commented along with other scholars of law, business and economics, among hundreds of consultation submissions in response to the US Department of Justice’s ‘Draft Policy Statement on Licensing Negotiations and Remedies for Standard-Essential Patents Subject to Voluntary F/RAND Licensing Commitments’ (”DoJ Draft Revised Statement”).
 |
| Red herring, courtesy of Wikimedia Commons |
Comments on the DoJ
Draft Revised Statement by academics Christian Helmers and Brian Love misleadingly
imply that many measures taken by a standard-essential patent holder in seeking
to obtain a FRAND license are abusive. They state there that ’we present empirical evidence of “hold-up”—i.e., evidence of
opportunistic behavior by SEP enforcers that is intended to unreasonably
inflate royalties.’ However, elsewhere in
a supposedly supporting research paper they co-authored and cite in their
comments, they admit that their analysis of these behaviors does not constitute
proof of holdup: ’while these behaviors have all been associated with
holdup, we stress at the outset that many are not per se unlawful and
none are, standing alone, conclusive proof of holdup.’ They ’do not claim that the presence of any of these
behaviors constitutes, in itself, empirical proof of holdup.’
Helmers and Love seek
to maximize scope of what is deemed opportunistic to include virtually any
action an SEP holder might pursue in its legitimate attempts to obtain
FRAND licensing.
While the DoJ Draft Revised Statement
entirely avoids using the commonly-used terms “holdup” and “holdout,” it
asserts that ‘opportunistic behavior
by both parties can occur’ and that ‘opportunistic conduct by either SEP
holders or implementers makes the implementation of standards more costly
and deters investment in future standards development, affecting all
users and producers of standardized inputs and products, including small and
large firms, inventors, and consumers
(emphasis added).’
The DoJ Draft Revised
Statement appears
aligned with commonly asserted—but disputed—existence of holdup and interpretations
of the term in the context of prospective patent licensing; but it does nothing to delineate what is
legitimate and possible in the real world from purported bad behaviors
by SEP owners:
‘Opportunistic conduct by SEP holders to obtain, through the threat of
exclusion, higher compensation for SEPs than they would have been able to
negotiate prior to standardization, can deter investment in and delay
introduction of standardized products, raise prices, and ultimately harm
consumers and small businesses.’[1]
For example, it is
impractical for royalty rates to be negotiated ex-ante to standardization, and
it rarely occurs because neither licensors nor licensees seek that in practice,
and it would cause antitrust concerns if it was required in standards
development.
And, the DoJ has provided
no supporting evidence for those alleged harms.
Another misnomer
“Opportunistic behavior”
is the new euphemism for alleged holdup or any other action by patent-owners
that implementers might find unwelcome. This substitute term is so vaguely
defined it only sows further confusion into the already heated debate about
what is and what is not Fair, Reasonable and Non-Discriminatory (FRAND) and
legal when seeking Standard-Essential Patents (SEP) licensing.
No wonder one other
commenter—seemingly unaligned with either the licensor or implementer camps—was
so dumfounded he wrote:
'Having encountered the SEP Policy
proposal today in an ad embedded in an article by the Washington Post, I urge
you to revise your regulations to be intelligible to more Americans. I cannot
fathom the purpose of this mission: is it to prevent Chinese manufacturers from
counterfeiting American premier brands, or is it to enrich patent holders by
preserving their intellectual rights?
Having
graduated from the University of California with Honors in English and having
taught English in public schools for 25 years, I can merely determine that
these proposed regulations address a real concern. Unfortunately, I suspect
that most English speakers would disregard what they cannot possibly
comprehend. The likely result is a creeping cynicism about regulation and a
further contempt for regulatory compliance.
I urge you
to clarify the language.'[2]
Dictionary definitions
for opportunistic and opportunism all cite bad intent, including:
·
Usually disapproving: using a situation to get power or an advantage.[3]
· Taking advantage of
opportunities as they arise: such as exploiting opportunities with little
regard to principle or consequences.[4]
·
To quickly take advantage of a
situation, usually in a way that’s just plain wrong.[5]
·
The policy or practice, as in
politics, business, or one’s personal affairs, of adapting actions, decisions,
etc., to expediency or effectiveness regardless of the sacrifice of ethical
principles.[6]
Filling the void
Helmers and Love brazenly
exploit this chaos. In absence of identification and explanation about which
“opportunistic behaviors” are illegal or unacceptably bad-faith,[7] commenting
on the DoJ Draft Revised Statement became a free-for-all, including by Christian
Helmers and Brian Love, citing a paper they co-authored with Yassine Lefouili. They take an “everything but the kitchen sink”
approach in circumscribing the wide variety of behaviors they deem unacceptably
opportunistic conduct in patent holders’ attempts to obtain FRAND licensing.
In their consultation
comments, Helmers and Love state that ’we present empirical evidence of “hold-up”—i.e., evidence of
opportunistic behavior by SEP enforcers that is intended to unreasonably
inflate royalties’ and they also assert
that ‘licensees are induced to pay royalties that exceed FRAND levels.’ To the
contrary, their econometric analysis is on alleged behaviors, provides no
evidence of patent holdup actually occurring, and they make no assessment of
what FRAND levels are or whether amounts demanded or paid are FRAND.
Buried in their cited research
paper, but not in the consultation comments, the three co-authors tellingly admit that ’while these behaviors have all been associated with
holdup, we stress at the outset that many are not per se unlawful and
none are, standing alone, conclusive proof of holdup.’ They ’do not claim that the presence of any of these
behaviors constitutes, in itself, empirical proof of holdup.’ This is because, even in combination, these behaviors
say nothing about—let alone evidence of—whether patent holdup is ever occurring.
All they have done, in
their empirical research, is some elaborate and lengthy econometric analysis on
a variety of legal and legitimate actions by the patent holder—most of which
are no more than alleged actions—that are lawful and are only to be expected in
attempts to obtain FRAND licensing.
SEPs do not license
themselves and they are not self-enforcing. Patent owners invariably need to
take some actions if they are ever to get paid. In goods and services markets,
supplies can simply be withdrawn if customers do not pay. Supply of SEP
technologies cannot be withheld.
The research paper by all three authors admits they take ‘a broad view of potential holdup behavior by SEP owner (emphasis added).’ Figure 1 repeats the list and descriptions of opportunistic behaviors alleged by Hellmers, Love and Lefouili, and the table also includes my rebuttals explaining why all of these actions are legitimate and may be necessary in pursuit of FRAND licensing. Helmers, Love and Lefouili “find evidence of opportunistic behavior by the SEP enforcer in approximately 75% of patent-party level SEP assertions.”
Figure 1: Overview of
measures of alleged opportunistic conduct by SEP enforcers
|
Opportunistic
behavior (Table 1 sequence, Table 3 numbering) [8] |
Description[9](emphasis
added) |
Rebuttal[10] |
|
1. Any
opportunistic behavior |
Did the accused
infringer (specifically) allege that the patent enforcer (or its
predecessor) engaged in some kind of opportunistic behavior or something that
might constitute a FRAND violation? |
|
|
3. Untimely
declaration |
Did the accused
infringer argue that the patent enforcer (or its predecessor) did not
disclose the SEP to the SSO until after the standard was adopted? |
Mere allegations, no
matter how frequent, cannot be regarded as any kind of evidence or proof of
opportunism. It is normal and expected that many SEPs are not declared until
standards are set.[11]
SEP owners’ declarations ensure that only FRAND royalties are paid,
regardless of when disclosure is made. Most new declarations are from SEP
owners that have already committed to FRAND licensing for many other patents.
It is unclear which patents are SEPs until the standard is set because patent
claims change in prosecution and technical specifications change until the
standard is completed. |
|
4. Overdeclaration |
Did the accused infringer (specifically) allege that the patent enforcer required licensees of relevant SEPs to additionally pay royalties for rights to patents that were either not essential to the relevant standardized technology generally or not relevant to the accused infringer’s specific products? |
Mere allegations, no
matter how frequent, cannot be regarded as any kind of evidence or proof of
opportunism. SEP licensing offers are invariably for portfolios comprising patents
that are declared by their owners to be or might become standard essential.
FRAND-licensing offers reflect, probabilistically, that some patents are not
or will not become standard-essential. True essentiality can only be
determined by a court, which is impractical for all patents. |
|
6. Discriminatory
license |
Did the accused infringer make a specific allegation that the patent enforcer adopted discriminatory or exclusionary licensing terms or practices? |
Mere allegations, no
matter how frequent, cannot be regarded as any kind of evidence or proof of illegitimate
discrimination. |
|
2. Injunction |
In the
complaint (or counterclaim) did the patent enforcer expressly request an
injunction? |
Seeking an
injunction is a fundamental patent right. Courts have acknowledged
that case-specific facts might support the issuance of an injunction. Injunctions are not automatic. Only a court can
decide whether and injunction is issued. |
|
8. Parallel
ITC litigation |
Did the
patent enforcer initiate an investigation against the accused infringer at
the ITC in parallel to the district court litigation? |
Seeking an ITC
exclusion order is a fundamental patent right. This right is preserved if a
FRAND offer has been made for licensing SEPs that the infringer will not or
cannot accept. |
|
9. Relevant
litigation abroad |
Did the
patent enforcer seek injunctive relief against the accused infringer in
related litigation filed outside the U.S. (e.g., in Germany)? |
Seeking an injunction
is a fundamental right in any jurisdiction in which there is patent
infringement. This right is preserved if a FRAND offer has been made for
licensing SEPs that the infringer will not or cannot accept. |
|
11. EMVR vs.
SSPPU (Entire Market Value Rule vs. Smallest Salable Patent-Practicing Unit) |
Did the accused
infringer argue that the patent enforcer improperly attempted to base the
royalty owed on the price of the end product (using the EMVR), rather than
the price of a component/module (the SSPPU). |
Mere allegations, no
matter how frequent, cannot be regarded as any kind of evidence or proof of
opportunism. It is not improper to base royalty offers on EMVR. This is the
way FRAND royalties are most commonly derived in commercial negotiations
outside of litigation. Courts have repeatedly emphasized that `[t]here
is nothing inherently wrong with using the market value of the entire product'
as the royalty base for a FRAND royalty (FTC v Qualcomm, 969 F. 3d 974, 999
(9th Cir. 2020) quoting Exmark Mfg.
Co. v. Briggs & Stratton Power Prods. Grp., 879 F.3d 1332, 1349 (Fed.
Cir. 2018)). |
|
5. Exhaustion |
Did the accused
infringer (specifically) allege that the patent was already licensed
(e.g., by an upstream component supplier)? |
Mere allegations, no
matter how frequent, cannot be regarded as any kind of evidence or proof of
opportunism. That the infringer disagrees with the licensor on matters of law
and fact is no proof or evidence of opportunism. |
|
7. Threats
to sue customers |
Did the
patent enforcer bring the accused infringer’s customers into the licensing
dispute, either by contacting them, threatening to sue them, or actually
suing them? |
SEP owners have a
right to exclude that is tempered by its FRAND commitments. If a FRAND offer
has been made, the SEP owner is entitled seek redress for manufacture, sale
and use of any infringing products that are unlicensed. That reasonably
includes contacting various parties that are knowingly or unwittingly dealing
with or using such products. |
|
12. Prior
licenses not comparable |
Did the accused
infringer argue that the patent enforcer improperly attempted to base the
royalty owed on prior licenses that were not reasonably comparable (due to
differences in patents, duration, geographic scope, licensee type, etc). |
Mere allegations, no
matter how frequent, cannot be regarded as any kind of evidence or proof of
opportunism. Where there is a dispute, only a court can decide whether and
which licenses are comparable, including how and which characteristics in
these should be considered. |
|
10. No
disclosure |
Did the accused infringer make a specific allegation that the patent enforcer simply refused to disclose the terms of prior licenses with similarly situated companies? |
Mere allegations, no
matter how frequent, cannot be regarded as any kind of evidence or proof of
opportunism. The obligation of the SEP owner is to make a FRAND offer. Prior
patent licensing terms are typically confidential and are subject to
confidentiality agreements. Under these conditions and in absence of a court
order, SEP owners are not allowed to disclose licensing terms. However, even without
such restrictions, SEP owners are
under no obligation to disclose terms of other licenses, which would likely
be used as starting points for negotiation, with the infringer only being
willing to pay less. |
|
13. Other |
Did the accused
infringer specifically allege that some other action might constitute a
FRAND violation? |
Mere allegations, no
matter how frequent, cannot be regarded as any kind of evidence or proof of
opportunism. Undefined “other” allegations merely adds the kitchen sink to
the rest of the list of behaviors including mere allegations. |
As I indicate in Figure 1, for example, given that the EMVR is legitimate and the norm in most royalty rate determinations that occur outside of litigation, it is also quite in order for parties to use that royalty base in litigation.[12] It is irrelevant whether those licensors with larger than average patent portfolios are more or less inclined to stick to their guns with EMVR-based licensing than the average patent owner.
Also in FTC v.
Qualcomm, the US Court of Appeals for the 9th Circuit noted that 'the
Federal Circuit rejected the premise of the district court’s determination:
that the SSPPU concept is required when calculating patent damages’ and that ‘[no] court has held that the SSPPU concept is a per se rule for
“reasonable royalty” calculations; instead, the concept is used as a tool in
jury cases to minimize potential jury confusion when the jury is weighing
complex expert testimony about patent damages.’
Similarly, it is also quite
usual and a the legal entitlement of any patent owner—including one subject to
FRAND commitments—to pursue parallel litigation in the ITC or a foreign
jurisdiction for patents granted there. There is nothing incorrect or
opportunistic about that.
Helmers and Love also
misunderstand standard setting, IPR policy and how FRAND rate negotiations and agreements
must be pursued. For example, ETSI IPR policy requires that standards are set
purely on the basis of technical criteria, and not on the basis of expected
royalty costs or ex-ante negotiated royalties. The FRAND commitment was introduced
to ensure balance in these circumstances. Rather than making the licensing
market fairer, ex-ante licensing is impractical and would foster monopsonic and
even buyers’ cartel behavior with implementers colluding to drive down royalty
rates below FRAND levels (e.g., selecting the cheapest technology in a reverse
auction). It is perverse for Helmers and Love to assert that absence of ex-ante
licensing rate negotiations is opportunistic, since that generally does not
occur, is unwelcome be either party to licensing and is disfavored by antitrust
authorities.
Devious analysis
The analysis is a big red herring. It does nothing to establish whether there actually is any patent holdup or abuse. Rather than seeking to prove the existence of actual holdup (e.g. payment of supra-FRAND royalties or suffering from lock-in and incurring switching costs to avoid paying these) or any behavior that is in fact illegal or bad faith, Helmers, Love and Lefouili cunningly duck that question.
While the three co-authors’ regression results including statistical significance figures from their ‘linear probability model, ’and their econometric jargon will leave most readers cold, their results also beg the question: So what?
Patent holdup is neither proven nor
disproven by how various legitimate behaviors—most of which are no more than
allegations—correlate with characteristics that the three co-authors also
choose to identify about the parties,[13]
cases[14]
and patents in litigation,[15]
and with case outcomes in law.[16]
No court found that any patent holdup occurred in any of the cases considered
by the co-authors.
Cherry picking characteristics
In econometrics, if
one gets to select and reject which among numerous possible characteristics one
“considers,” one can most easily support whatever point one wishes to make.
Consultation comments by Helmers and Love on the DoJ Draft Revised Statement also cite a research paper they co-authored that purports to empirically test holdout theory with evidence from litigation of SEPs. However, in this paper dated five months later than the cited paper on patent holdup, they select a different set of characteristics to the above:
'We derive empirically testable predictions
from the literature supporting hold-out theory[17]—namely
that hold-out should be positively associated with the size and international
breadth of licensors’ SEP portfolios, but negatively associated with the
“quality” of licensors’ SEPs—and we test those predictions using measures of
pre- and in-litigation hold-out constructed from information disclosed in U.S.
SEP cases filed 2010-2019.'
So, the only common characteristic between their regression results and findings on holdup versus holdout is actual or claimed portfolio size. Given that the SEP enforcer behaviors in Table 1 are based on the allegations of accused infringers, it is unremarkable that SEP enforcers were found more likely to be accused of overdeclaration in both studies.
Again, the authors’
analysis merely tests the extent to which behavior (in the case of holdout)
correlates with these different characteristics. This does not test or control
for other closely related characteristics—such as the size of the firm—that
would likely be strongly correlated with size and international breadth of patent
portfolios.
Helmers and Love
speculate that if holdout theory is correct, there should be more holdout with
larger SEP portfolios due to overdeclaration. That does not follow: even with
overdeclaration, there will on average be more valid, essential and infringed
patents in large portfolios than in small portfolios. And, there are other characteristics that may
align with large portfolios, including more established licensing, and a track
record of being willing to fight costly litigation that make infringers less
inclined to holdout.
Inconclusive evidence
Helmers and Love claim
to provide evidence of patent holdout, but they merely regurgitate many
speculative allegations about the existence of holdup, “lock-in,” royalty
stacking and its effects and including harms, that have been asserted by others
but have never been properly supported with applicable evidence, let alone
proven in court. To the contrary, these assertions have been repeatedly debunked.
Helmers and Love
conduct analysis to correlate various characteristics in SEP ownership with many
different SEP owner behaviors they describe as opportunistic. But these alleged
behaviors are generally legal and legitimate, and so results of their analysis provides
no evidence that holdup or any resulting harm is actually occurring.
It is for the courts
to decide which behaviors are legitimate and which are illegal, as they have
done many times. Actions such as requests for injunctions or use of EMVR
licensing are not per se illegal. Empirical
assessment of these behaviors, let alone on behaviors that at are mere
allegations, provides no proof or evidence of patent holdup or opportunism.
[1] While this soups-up a legal dictionary definition with the DoJ Draft Revised
Statement’s references to the threat of exclusion and hypothetical ex-ante
royalty rate negotiations, it omits the explicit requirement for deception
or ambush that is included in economists’ traditional definitions of holdout. ‘Oliver Williamson famously
described opportunism as ‘self-interest seeking with guile.’… [Standards
hold-up involves] deceiving buyers or keeping them in the dark about the terms
on which a technology will be available [which] subverts the competitive
process.’
[2] Comment by John Dodd, January 20, 2022. https://www.regulations.gov/comment/ATR-2021-0001-004
[3] Cambridge Dictionary: https://dictionary.cambridge.org/dictionary/english/opportunistic
[4]
Merriam-Webster: https://www.merriam-webster.com/dictionary/opportunistic
[5] Vocabluary.com https://www.vocabulary.com/dictionary/opportunistic
[6]
Dictionary.com (opportunism) https://www.dictionary.com/browse/opportunism
[7] As
set out in patent law and as determined in court precedents, not merely on the
basis of politically-driven policy statements.
[8] As defined and alleged by Helmers,
Lefouili and Love.
[9] As described by Helmers, Lefouili
and Love.
[10] By Keith Mallinson, WiseHarbor.
[11] The legal position on “late disclosures” taken by multiple implementers in litigation is shown to be at odds with industry expectation and against industry practice. On the Timing of ETSI Disclosures, by Gustav Brismark, January 2021. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3988411
[12]
Licensees as well as licensors have agreed to EMVR in litigation (e.g., Unwired
Planet v. Huawei, and TCL v. Ericsson), where the dispute was about the royalty
rate, not the royalty base.
[13]
For example, whether plaintiff is a non-practicing entity, and plaintiff’s
portfolio size.
[14]
For example, declaratory action or motion to dismiss.
[15]
For example, SEP in pool or patent reassigned.
[16]
For example, plaintiff win or settlement.
[17] In
absence of a citation, it is
unclear which literature they are referring to for the three predictions.
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