Fool’s errand with fallacies in administrative essentiality checking

This is my second article on some topics discussed by my panel on “transparency” and in other sessions at the Patents in Telecoms and the Internet of Things conference in London recently. My first article, also published here, was on how value and royalty costs in standards and SEPs are passed along the supply chain to consumers.

The European Commission’s proposed essentiality checking and patent counting at the EUIPO is troubling. While parties are entitled to present whatever methods and studies they wish to imply Standard Essential Patent (SEP) portfolio strength in licensing negotiations or to the courts in litigation, the proposed registry with mandatory essentiality checking on random samples of patents will give a false sense of security on the applicability, accuracy and reliability of such checks, measures and any royalty charges derived from them. Essentiality determinations and patent counts provide a poor and unproven gauge of patent portfolio strength. Methods fail a key integrity test for any evaluation or measurement system because results are not reproducible. Despite the EUIPO being ordained the official authority on determining patent essentiality, its checking will be as contestable technically as for private evaluators and their studies that already check essentiality, count patents and invariably disagree with each other. Nevertheless, even though determinations are non-binding they will have significant sway with the courts.

A European Parliament press release issued following a January 2024 Legal Affairs Committee vote to adopt “New rules to promote standard-setting innovation in new technologies” states that “in 5G almost 85% of the standard essential patents are in fact non-essential. The new essentiality test will stop the occurrence of over-declaration”.

Some studies do indeed indicate essentiality rates of only 15% (i.e. 100%-85% = 15%) or even less in some cases—which might well be correct—but there is no evidence to support the latter contention that checking will improve the declaration behaviour of patent owners. There is no shame or sanction for over-declaration. Bias in essentiality checking—that is most severe at such low essentiality rates—means that the effects of over-declaration can only be somewhat moderated by checking. Over-declaration can never be anywhere near eliminated. The bias incentivises over-declaration despite checking. Rather than stopping over-declaration, institutionalized checking by the EUIPO will likely motivate patent owners to game the system by declaring even more patents of dubious essentiality.

Essentiality is subjective and only one among various factors affecting patent strength

Patent strength is a function of validity, infringement and technical contribution, as well as essentiality to the standards. While some parts of standards go unimplemented, are rarely used, become obsolete or are peripheral to where standards provide most innovative value, other parts are fundamental to very significant improvements with new technologies such as 5G. For example, various radio access network technology improvements have increased network speeds and capacities one hundred thousand-fold (e.g. from 10 kbps to 1 Gbps) since the introduction of 2G data in the mid-1990s.

Some characteristics can be objectively, reliably and reproducibly checked, others cannot. Patent essentiality and validity are matters of judgment where different assessors will often disagree about what are ostensibly yes-no decisions. As stated by the judges’ decisions in Unwired Planet v Huawei and TCL v Ericsson, respectively:

“Based on my assessment of both experts, I am sure the disagreement represents cases in which reasonable people can differ.” (Paragraph 335.)

“Given the somewhat subjective nature of these determinations, ‘disagreements’ is probably a more accurate label than ‘error.’" (Footnote 16.)

By way of analogy: on the one hand, selections of beauty pageant and international song contest winners are also subjective tasks that can be swayed by judges’ predilections and do not have reproducible results with different assessors; on the other hand, and in marked contrast to all the above, checks such as the UK’s annual car roadworthiness MOT test is highly objective and reproducible. Two different test centres would reliably come up with the same pass-fail result for the same car after verifying that brakes work, turn indicators flash, and measuring that tyre tread depth is sufficient, among other checks.

Determining true essentiality is made more difficult by the fact that patent counters have very different objectives to those agreed by consensus in Standard Setting Organizations. ETSI merely wants to ensure standards such as 5G are not blocked by demanding patent owners declare whether they believe a patent might be or might become essential. ETSI never checks essentiality and does not want to do so. Essentiality declarations such as those in ETSI’s IPR database were never intended to be used for royalty rate determinations in Fair, Reasonable and Non-Discriminatory (FRAND) licensing, as sought by the Commission with the EUIPO’s registry and additional steps of essentiality checking and patent counting.

Only the courts can definitively determine which patents are truly essential, which are not invalid and valuate portfolios. Cases in litigation illustrate how uncertain everything is and how expert opinions differ. The challenges in assessing essentiality were extensively discussed at the conference. Issues include interpretation of patent claims and that the scope of these can be entwined with validity. Prosecution history can be pertinent in making determinations. As patents are amended to cover the standard they can include what has been contributed to the standard by others. With many patents being found invalid by the courts, validity should not be ignored on the path to determining value, as it is in the Commission’s proposed checking. Validity can be the most significant factor affecting SEP value.

In FRAND litigation, highly experienced top minds including judges, experts and those representing the parties spend many months at multi-million dollar costs evaluating and deliberating—with various disagreements on essentiality and validity of litigated patents prior to judgment—even though typically only a few patents are examined.

If all that work including analysis of claim charts and patent prosecution histories is actually required to do a proper job on only a few patents, how can we trust the accuracy of the EUIPO’s experts examining orders of magnitude more patents and whose determinations ignore the crucial issue of validity? While the courts tend only to have the resources to do the required assessments on no more than a handful of patents in each case, there are many tens of thousands of patents and patent families declared essential to standards such as 5G. It is unsurprising that the UK courts have tended to reject patent counting as a means of determining FRAND royalties, except in some cases as a cross-check for determinations primarily based on comparable licensing agreements.

Unscalable checking

One proposed way dealing with the insurmountable task of checking all a standard’s declared patents is to check only random samples of them. The hope is that it would be possible to check a manageably small number of them very thoroughly and accurately. Consensus is that accuracy can best be achieved with the preparation and use of claim charts.

However, there are several problems with this approach, as illustrated in my empirical research in 2021 and 2022:

• Even when claim charts are used to assist in determining essentiality, different assessors still disagree widely in their determinations with agreement on only around 83% of them. That’s not as good as it might seem when one considers that different assessors can be expected to agree on precisely 50% of them if one assessor was making determinations randomly based on the flip of a coin. If two assessors disagree in their determinations, at least one of them must be wrong. However, if two different assessors are in agreement, that does not mean the determination is correct.
  
  
• Inaccurate determinations cause a substantial upward systematic bias in essentiality rates derived after checking. My empirical research shows that the proportion of false positive essentiality determinations will greatly outnumber false negatives at essentiality rates of 15% or less.
  
  
• Sample sizes need to be large (e.g. >1,000) if true essentiality rates are at 15% or below and if, for example, accuracy within ± 15% at the 95% confidence level is required. Sampling error as a proportion of true essentiality rate increases at lower and lower levels of true essentiality.
  
  
• Sampled patents cannot be appealed and reassessed without destroying the integrity of the sample. For example, if one in ten patents is sampled the determination has a 10x effect implied in the entire population count. With inevitable selection bias in appealed patents, “corrected” determinations will have a distorted and magnified effect implied in the overall population.
  
  
• However, it would be to deny justice not to allow some kind of appeals procedure on determinations made by a public authority. This issue could weigh heavily in FRAND dispute litigation.
  
  
• It’s very costly. Ericsson testified in TCL v Ericsson that it took 50 man-hours per patent to prepare claim charts.

What the Commission is seeking to concoct at the EUIPO will produce yet more patent counting studies, somewhat like what PA Consulting has been producing regularly for years and that several other firms have published from time to time. PA’s studies are widely used because others use and seemingly take heed of their results—not because they are proven to be accurate and reliable, because it is impossible to prove that. Here’s what Justice Smith had to say in the Optis v. Apple judgment:

“So, as with validity – but for different reasons – making a judgement about levels of essentiality in the stack is unreliable and unsafe.

My conclusion is that – accepting entirely that PA Consulting seeks to do a careful job – for the purposes of a judicial determination of what is fact, the PA Consulting/Optis approach to determining Stack size (or the figure for the denominator) is not to be relied upon.

I accept that were a reliable qualitative assessment to be possible, that might well be preferable. But an unreliable qualitative assessment – especially where even the magnitude of the error is unknown – is not (in my judgement) an acceptable metric to use when seeking to answer the FRAND Question.

I cannot use the PA Consulting data as a metric in answering the FRAND Question.”

Patent counting is simplistic

Even checking both essentiality and validity is woefully insufficient in determining patent value. It’s widely recognized that different patents vary in value enormously—by orders of magnitude from virtually worthless to some real gems. The significance of a patent’s technical contribution to a standard and value in implementation can vary from being seldom used or of marginal worth to being fundamental functionality that might enable major cost savings or increases in customer utility or revenues to be generated. Convenience aside, there is, therefore, no basis for assuming that portfolio value is in proportion to any kind of patent count (i.e. of declared, found essential or found not invalid patents). On the contrary, some patent owners likely have a much larger proportion or number of gems than others. However, even approximately how much more is an unanswered empirical question.

Ministry of Patent Counting and Red Tape

The Commission’s proposals for registering, checking and counting patents, among other demands in the proposed legislation, is also in conflict with the stated objectives of European leaders.

French and German leaders Emmanuel Macron and Olaf Scholz recently co-wrote an op-ed in the Financial Times setting out some laudable objectives:

“With an ambitious industrial policy, we can enable the development and rollout of key technologies of tomorrow, such as AI, quantum technologies, space, 5G/6G, biotechnologies, net zero technologies, mobility and chemicals.

We call for strengthening the EU’s technological capabilities by promoting cutting-edge research and innovation and necessary infrastructures.

We call for an ambitious bureaucracy reduction agenda to deliver on simpler and faster administrative procedures and cutting bureaucratic burdens for businesses of all sizes. We welcome the European Commission’s initiative to reduce reporting obligations for our companies by 25 per cent.” (hyperlink added)

The Commission’s proposed demands for patent registration at the EUIPO, together with preparation and submission of additional information such as patent claim charts will substantially increase administrative burdens for European companies such as Ericsson and Nokia that remain dependent on SEP licensing income. These new burdens will cause friction, delays and diminution in the well established, highly effective and self-sustaining innovation loop in which licensing fees are used to fund further R&D, leading to the creation of yet more valuable new technologies.

Better to have scarce and costly technical experts innovating and prosecuting their own patents, or designing and testing new products, rather than tying up hundreds of them generating additional information for checkers and in doing the checking—at patent owners and at the EUIPO, respectively.

Transparency about what?

There was consensus at the conference that greater transparency could help with FRAND licensing for SEPs. However, rather than burdening licensees with voluminous disclosures on patent claims and with delays while conciliators deliberate about aggregate royalties and technical experts check patents for essentiality, it would be better to have licensors and licensees disclose more about actual licensing. This should include terms in licensing agreements and information on licensed trade including volumes and prices. If parties are unwilling to make such information public, then it could be disclosed to a confidential repository with limited access, information anonymised and other safeguards. Let’s find out more about what’s happening already and rely on that, rather than trying to make things up with top-down rate setting.

In Q&A under the Chatham House Rule, I asked another panel whether a modicum of accuracy and reliability can be achieved in essentiality checking to determine patent portfolio strength. Bad news — no. Good news — it’s probably not necessary because most licences get agreed, regardless.

While I believe it would be best for the Commission to abandon is proposed checking and rate setting, if it does proceed it should consider recommendations about how to do that competently and with recognition of limitations, as explained in my publications cited with hyperlinks in this article.


Keith Mallinson, founder of WiseHarbor, has more than 25 years of experience in the telecommunications industry as a research analyst, consultant and testifying expert witness.

US leadership through promoting what works best for International Standards

The United States Government National Standards Strategy for Critical and Emerging Technology calls for a whole of government approach to reinvigorate its rules-based and private sector-led approach to standards development. The strategy seeks to prioritize efforts for standards development that are essential for US competitiveness and national security including communication and networking technologies, semiconductors and microelectronics, artificial intelligence and machine learning, biotechnologies, clean energy, and quantum information technologies.[1] 

The International Trade Administration (ITA), The National Institute of Standards and Technology (NIST) and The United States Patent and Trademark Office (USPTO) have asked a dozen questions in their request for public comments on the strategy. I responded with my in-depth submission which can be downloaded, here. 

In this, my focus is on technical standards providing interoperability in communications and networking technologies. These have been most significant technically, economically and in improving consumer welfare in the US and globally over several decades. Purely national or geographically limited technical standards might make sense in limited cases for reasons of national security, but there is broad consensus that standardizing globally is most effective and efficient due to economies of scale and the universal interoperability provided. Various “International Standards” have also flourished because, in accordance with World Trade Organisation (WTO) Technical Barriers to Trade (TBT) requirements, these also foster various competing business models. Some industry participants are dependent on generating licensing royalties, others move fast and succeed in downstream product markets by licensing-in standard-essential technologies and incorporating semiconductor chips and other components that already include them. Many other companies have hybrid business models that operate in both ways concurrently.[2]

My responses explain that what is good for International Standard development with Fair, Reasonable and Non-Discriminatory (FRAND) licensing of Standard-Essential Patents (SEPs) is also good for America. The US is the world leader in various advanced technologies — as a technology developer, and as an implementer. For market leaders, more can usually be gained by growing the pie than by simply taking share from others.

The US should promote predictability with legal certainty in institutions and open market processes that have proven successful in the development of International Standards by private sector companies. Intellectual property rights (IPR) policies and legal rulings in foreign jurisdictions are threatening US leadership and development of International Standards overall by eroding and potentially severely undermining the value of patented standard-essential technologies. While these actions might provide some short-term advantage to certain implementers; for example in Asia where the overwhelming majority of consumer electronics products implementing Standard Essential Patents (SEPs) are manufactured, in the medium and long term these policies and rulings impede technical and market developments across the entire ecosystem, and in turn harm consumer welfare.

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[1] United States Government National Standards Strategy for Critical and Emerging Technology, May 4, 2023.

[2] These important distinctions are explicitly recognized by competition authorities; for example, in the EU’s 2023 Horizontal Guidelines, paragraph 440.

European Commission is recklessly replacing established and effective FRAND valuation and licensing practices with dubious top-down rate setting

I have already made various public comments on a draft Proposal for Regulation of the European Parliament and of the Council establishing a framework for transparent licensing of standard essential patents, including the associated draft Impact Assessment report that were leaked ahead of their public launch on 27 April 2023. These comments were first published in IAM (paywalled) and then republished in IP Finance. 

Among numerous legal and other issues in these proposals, I am focusing my feedback to the European Commission, in a new consultation running 27th April 2023 to 9th August  2023, on the anticipated methodologies for setting aggregate and individual SEP royalty charges by the new competence centre at an expanded EUIPO.

My analysis is summarised below and my full submission including detailed analysis and support can be downloaded here.

The proposed regulation largely ignores and seemingly abandons comparable license valuation of patent portfolios—that predominates in licensing negotiations and court decisions—and implicitly replaces this with the dubious top-down approach[1] that is antithetical to patent law and is repeatedly rejected by the courts worldwide. Comparable licenses provide fair, reasonable, non-discriminatory and effective royalty benchmarks in bilateral and multilateral SEP valuation and license charging. The standing of these—typically global—benchmarks is underpinned by billions of dollars of licensing income over decades in numerous licenses including many licensors and licensees.

If a prospective licensor can demonstrate that it has infringed and valid patents it is entitled to a license. If these are standard-essential patents it is obliged to offer and is entitled to receive FRAND royalties. Where charges and other terms have been established in existing licenses, some of these can often be comparable benchmarks for licensing other implementers.

The proposed legislation makes only one passing mention of comparable licenses when describing difficulties including transparency and complexity in making FRAND determinations. The impact assessment only includes references to comparable licenses to acknowledge that they are used and to indicate that some are dissatisfied with the extent of disclosure of existing licensing terms and licenses. Neither document finds that the established royalty charges in existing licenses are excessive or inapplicable FRAND licensing benchmarks.

Elsewhere in licensing negotiations and in litigation, comparable licenses are generally considered to provide the very best benchmarks in determining royalty charges.

Regulated royalties are unwarranted

Setting aggregate rates and apportioning them among patent owners, centrally by the EUIPO—even on a non-binding basis—will unnecessarily distort the free market processes in standards development and FRAND patent licensing compensation that has been effective in enabling the world’s fastest growing and largest ever technology ecosystem serving more than five billion people and 16 billion connections with cellular worldwide. Parties in licensing disputes will feel obliged in the proposed mandatory conciliation process to give significant weight to the EUIPO’s determinations, as will the courts. However; there is no basis whatsoever, let alone supporting evidence, to infer there is market failure or harm to be fixed, or that established benchmarks for royalty charges need to be replaced.

Despite the existence of well-established licensing benchmarks, there is significant dispute about how else to value SEP portfolios and determine royalty charges for these. According to the impact assessment, “Although an impressive amount of scholarship has analysed or interpreted the FRAND concept, this scholarship is characterized by persistent differences of opinion on key aspects of the FRAND concept such as royalty evaluation methods and obligations to license certain parts of the relevant industry.”

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[1] The Commission is explicit in its intention to determine aggregate royalties for some technology standards. As the impact assessment indicates from the results of its literature analysis: “An aggregate royalty for a standard is the royalty due for all SEPs on the standard. It is the starting point in a top-down determination of the royalty to be paid for a given portfolio.” The Commission’s desire that the essentiality of all patents in standard, or a representative random sample of them, are checked, rather than only small numbers of them per patent owner, stealthily implies that it wants patent counts to be used as measures of patent strength— as required in the top-down approach—even though this widely contested apportionment method is not explicitly identified or advocated in the proposed legislation. The proposed legislation requires that “The checks will be conducted based on methodology that ensures a fair and statistically valid selection capable of producing sufficiently accurate results about the percentage of truly essential patents among each SEP holder's registered SEPs.” The impact assessment also hopes that “if the register will be perceived by SEP holders as a means of indicating portfolio strength (and e.g. used in negotiations to determine the share of aggregate royalty applicable to them), they may increase the number of registered patents.”

Essentiality checks might foster SEP licensing, but they won’t stop over-declarations from inflating patent counts and making them unreliable measures

 Essentiality checks could help implementers determine with whom they need patent licenses.  However, essentiality checking does a poor job in adjusting for over-declaration in patent counts and will encourage even more spurious declarations.

We await a new policy framework from the European Commission (EC) with its Impact Statement regarding the Fair Reasonable and Non-Discriminatory (FRAND) licensing of Standard Essential Patents (SEPs). The EC is considering instigating checks on patents disclosed—to Standard Setting Organization (SSO) Intellectual Property Rights (IPR) databases as being possibly standard essential— to establish whether they are actually essential to the implementation of standards such as 5G. Objectives for essentiality checking are to:

1.      enable prospective licensees to determine with whom they need to be licensed

2.      correct for over-declaration and only count patents deemed essential; and

3.      use such figures in FRAND royalty determinations.

If clutches of selected patents are independently and reliably checked to establish that prospective licensors each have at least one patent that would likely be found essential by a court, these results might be used by several or many prospective licensees to determine with whom they need to be licensed.[1] But such checks would be of limited and questionable additional use to existent court determinations. Checks have already been made on some patents for all major licensors and many others in numerous SEP litigation cases over many years. Greater legal certainty is provided in court decisions where many patents have been found standard essential, infringed and not invalid.

My full paper on this topic, which can be downloaded here, focuses on the wider use of essentiality checks and sampling in patent counting. With too many patents to check them all properly, it is hoped that thorough checking of random samples of declared patents will—by extrapolation—also enable accurate SEP counts to be derived. However, essentiality checks do not fix and can only moderate exaggerations in patent counts due to over-declaration. For example, false positive essentiality determinations will exceed correct positive essentiality determinations where true essentiality rates are less than 10% unless at least 90% of determinations are correct.[2] Inadequate checking could imbue many with a false sense of security about precision while encouraging even more over-declaration by others which would further misleadingly inflate their measured patent counts and essentiality rates.

My empirical analysis also shows that declared essential patents are too numerous, and bias in checking and random errors in sampling are too great to provide even the modest precision expected and that should be required for patent counts to determine FRAND royalties without very thorough and highly accurate checks on thousands of patents per standard.

Even ignoring residual bias after improved but imperfect checking, sample sizes of thousands of patents would be required to provide even only modest levels of precision in essential patent counts (e.g. a ±15% margin of error on the estimated patent count at the 95% confidence level) on patent portfolios and entire landscapes where essentiality rates are low (e.g. 10%) due to over-declarations.

The dangers in not recognizing the sources and extent of bias and other errors and in not designing studies with sufficient scale and precision (e.g. for a court setting a royalty rate) is that far from increasing transparency, information provided will be imprecise, distorted and unreliable. Ignoring analytical errors, and mistakenly implying or pretending otherwise is even worse.

This new paper, also available on SSRN, is a follow-on to my previous research on essentiality checking and patent counting in 2011, 2017 and 2021.

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[1] This ignores validity and actual infringement in any specific product, which also determine whether licensing is required under patent law and FRAND conditions. These are also important issues.

[2] The essentiality rate is the number of essential patents divided by the number of declared essential patents. An estimated or found essentiality rate will differ from the true essentiality rate due to inaccuracies.

Revenue boost for automotive industry from cellular connectivity outweighs SEP licensing costs

The automotive industry is being revolutionized by continuous cloud connectivity, autonomous driving technologies, drive train electrification and shared mobility. These transformations are being facilitated in part by the standardized cellular technologies now commonly implemented in “connected vehicles” or “CVs”. The proportion of vehicles shipped worldwide with cellular connectivity embedded is forecast to rise from 46% in 2020 to 76% in 2026.1

The commercial ecosystem for CVs has significantly matured since I last wrote about it here nearly two years ago. The benefits, incremental revenues and costs now associated with the adoption of cellular technologies in vehicles are being reflected in major commercial actions by industry players and in financial markets. Incremental product revenues at a vehicle’s point of sale together with ongoing monetization opportunities in value-added services and cost savings will parallel what has been achieved in smartphones, where substantial profits are reaped beyond initial product sales and recurring network operator service fees in the app ecosystem. The value of automotive connectivity is created through improved safety features, enhanced navigation, driver assistance and automation, vehicle and driver monitoring (e.g., to adjust insurance premiums), reduced maintenance costs, in-vehicle entertainment services and over-the-air software updates for various systems.

Although the portion of new car selling prices and aftermarket service fees attributable to cellular connectivity was estimated to be $54 billion in 2020, total patent royalties paid by automotive OEMs to license the cellular standard-essential patents (SEPs) upon which those capabilities depend was and remains considerably less than 1% of that figure. And that low percentage royalty yield will reduce—despite increasing total royalties as more OEMs are licensed—because that CV market value is expected to grow faster to $166 billion or more by 2025.2

SEP licensing fees are modest in comparison to product costs and with thousands of dollars in revenues and cost savings anticipated from connectivity services over a car’s typical lifespan of 14 years.3 Indeed, SEP licensing fees are a small proportion of an estimated average cost of $700 per vehicle for OEMs on telematics and infotainment systems, which are marked-up significantly when sold to consumers as bundled features or optional extras in finished goods car prices.4 Examples of additional ongoing revenues to OEMs include £141 ($176) per year after an initial free period, excluding mobile operator service charges, to subscribe to the Audi Connect Infotainment package in the UK. “Remote Services” cost an additional £37. In the Eurozone, Volkswagen charges €75 ($80) per year to extend its We Connect basic subscription and €145 for its “Plus” service. OEMs can receive $30 or more per year from insurance companies for policy holders that opt-in to provide their driving behavior data.

The value that SEPs confer on a CV has been a topic of much discussion, but consensus on how much the automotive industry should pay to license the 4G, 3G and 2G SEPs that underpin connectivity-based solutions has recently emerged. A substantial majority of these SEPs are licensed by the Avanci patent platform for a one-time payment of $15 per 4G CV (or, from 1 September 2022, $20 per 4G CV). With more than 40 automotive brands under license including BMW, Ford, General Motors, Mercedes-Benz and Volkswagen, Avanci licenses around 45% of CV shipments. This is unsurprising given that the platform is providing the “one-stop shop” with transparent and predictable pricing that many implementers and government authorities have demanded.

Automotive is now the most significant segment in IoT SEP licensing, with licensing revenues in the low hundreds of millions of dollars—paid to SEP owners mostly multilaterally through Avanci, but also bilaterally to companies including Nokia and Qualcomm. 

Cellular technology development is a huge, risky and costly endeavor including large numbers of R&D staff and many companies. For example, Ericsson, Nokia and Qualcomm each invest around $5bn apiece annually on R&D which is mostly in cellular. Other companies collectively invest billions more. Smartphones generate virtually all of the return on this R&D investment, which totals around $15 billion in SEP licensing revenues annually. 

While CVs valuably exploit various cellular technologies, including prime 4G LTE capabilities such as eMBB for streaming video, cellular technologies developed specifically for vehicles are also a major focus for standards setting organization 3GPP and the many companies that contribute patented technologies to its standards. Cellular Vehicle-to-Everything (C-V2X) technologies include many features that can improve safety on the road and help enable or enhance Advanced Driver-Assistance Systems (ADAS) and Automated Driving Systems (ADS). WiseHarbor analysis of 3GPP Radio Access Network Working Group contributions reveals that a significant 5% of these are for C-V2X among many innovations.

Consumers often pay more than $1,000 for a new smartphone, plus more per month in network operator service fees, because of the value they obtain from the many free and other services these devices also enable them to obtain including search, navigation, and social media. CV pricing likewise reflects value downstream—regardless of whether all that value is captured by the OEM itself. Yet CVs generate less than one fiftieth of the cellular SEP licensing fees from mobile phones. This is despite OEMs already collecting substantially more than half of their total annual revenues of $2.7 trillion in 2021 from CV sales. In comparison, total mobile phone sales revenues are around $500 million annually. Even if every CV produced over the next five years is licensed—including those expected to include 5G— the proportion of licensing revenues from cars is still unlikely to exceed one tenth that from smartphones.  

With increasing adoption and value of connectivity in vehicles, there is consensus with acceptance now that the modest SEP royalty charges being widely paid are fair and reasonable. Manufacturers and users of CVs are deriving enormous value from cellular technologies including those developed specifically for automotive use.

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1 WiseHarbor estimates based on various industry sources.

2 Markets and Markets estimated the global connected car services market to be worth $54 billion in 2020 with growth to reach $166 billion by 2025. Other industry analyst firms forecast a larger market (e.g. see endnote 3). “Less than 1%” is based on WiseHarbor’s estimate for cellular SEP licensing revenues on CV sales. Total annual car sales revenues were forecast by Statista to be in the range of $2.7-3.0 trillion.

3 Other CV market value estimates also include ongoing services revenues and operational cost savings. Allied Market Research valued the global connected car market —”offering comfort, convenience, performance, safety, and security along with powerful network technology”—at $63.03 billion in 2019, and projected it to grow at a CAGR of 17.1% to reach $225.16 billion by 2027.  McKinsey & Company estimates connectivity could deliver up to $310 in revenue and $180 in cost savings per car per year, on average, in 2030. There are around 1.4 billion cars on the road worldwide.

4 WiseHarbor estimates this figure using various sources focusing on component and manufacturing costs with car sales volumes rising from 73 million in 2020 to 95 million in 2026 and with the proportion of vehicles connected expected to rise from 46% to 76% in that period.

USPTO and WIPO on ADR for SEP Disputes

The USPTO has announced a partnership with WIPO concerning utilizing alternative dispute resolution for SEP disputes.  The Press Release states:

The United States Patent and Trademark Office (USPTO) and the World Intellectual Property Organization (WIPO) today agreed to undertake joint efforts to facilitate the resolution of disputes related to standard essential patents.

Standard essential patents, or SEPs, are patents that have been declared essential to a given technical standard. As part of the standards-setting process, patent owners may agree to license SEPs on fair, reasonable, and nondiscriminatory (FRAND) terms. Standards touch all aspects of modern life and include video compression, wireless communication technologies, computer connection standards, automotive technology, and more.

“International standards, and the role of patents that are essential to them, play an important role in promoting a strong national and global economy,” said Under Secretary of Commerce for Intellectual Property and USPTO Director Kathi Vidal. “The USPTO is grateful that Director General Tang recognized the USPTO’s leadership role in advancing discussions on standard essential patent policies. Our work with WIPO underscores the USPTO’s view that SEP policy is an international issue of international importance. This agreement will leverage existing resources at both the USPTO and WIPO, supporting options to enhance the efficiency of licensing of standard essential patents, and promote resolution of disputes related to those standards.”

The signing of the memorandum of understanding occurred during a meeting this week between Director Vidal and WIPO Director General Daren Tang on the sidelines of WIPO’s General Assembly in Geneva, Switzerland.

Under the terms of the agreement, the USPTO and WIPO will:

• Cooperate on activities that will lend efficiency and effectiveness to the resolution of disputed standard essential patent matters by leveraging existing WIPO Arbitration and Mediation Center and USPTO resources, and
• Engage in stakeholder outreach to raise awareness of the services provided by the WIPO Arbitration and Mediation Center through joint USPTO-WIPO programs.

The agreement will continue in operation for five years from the date of signing.

“We appreciate all the work Director General Tang and WIPO have done in this critical area. We look forward to a successful collaboration and engaging stakeholders to ensure we shape dispute resolution that will facilitate participation and implementation of standards by all innovators including small to medium-sized enterprises,” remarked Director Vidal.

“Alternative Dispute Resolution (ADR) has time and again demonstrated its value in the efficient and timely resolution of commercial disputes. In the last few years, the WIPO Arbitration and Mediation Center has been facilitating the resolution of SEP-related disputes and the new collaboration with the USPTO is an exciting development which will contribute to improving the efficiency of standard implementation,” noted Director General Tang.     

Retraction of 2019 Statement on Remedies and SEPs

The USPTO, DOJ and NIST have issued a statement retracting the 2019 policy statement on remedies for SEPs.  The Press Release states:

WASHINGTON—The Department of Justice, U.S. Patent and Trademark Office (USPTO) and the National Institute of Standards and Technology (NIST) (the Agencies) announced today the withdrawal of the 2019 Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments (2019 Statement). After considering public input on the 2019 Statement and possible revisions, the Agencies have concluded that withdrawal of the 2019 Statement is the best course of action for promoting both competition and innovation in the standards ecosystem.

On Jan. 8, 2013, the Antitrust Division of the Department of Justice and the USPTO issued a Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments (2013 Statement). On Dec. 19, 2019 the Agencies withdrew the 2013 Statement and issued the 2019 Statement, which offered the views of the Agencies and expressly recognized that it had “no force or effect of law.” 

In July 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy noting that, “[a] fair, open, and competitive marketplace has long been a cornerstone of the American economy.” He encouraged the Agencies to review the 2019 Statement to ensure that it adequately promoted competition.

In response to the Executive Order, on Dec. 6, 2021, the Agencies issued a Draft Policy Statement on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments and a request for public comments through a Dec. 6, 2021 news release, extending the deadline for comments in a Dec. 13, 2021 news release. The Agencies thank the wide range of individuals, organizations and other stakeholders who submitted comments, all of which have been considered.

After a review of those comments and a collaborative deliberation on how best to proceed, the Agencies are announcing the withdrawal of the 2019 Statement. As noted in the Withdrawal of the 2019 Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments, “[a]fter considering potential revisions to that statement, the Agencies have concluded that withdrawal best serves the interests of innovation and competition.” 

“The U.S. Patent and Trademark Office is focused on creating incentives to generate more innovation, especially in underserved communities and in key technology areas, and maximizing that innovation’s widespread impact,” said Under Secretary of Commerce for Intellectual Property and USPTO Director Kathi Vidal. “Forging our global leadership in new industries cannot happen without greater investment in research and development in technologies that may become international standards. We also need greater U.S. engagement in global standards-setting organizations from our large multinational companies, as well as from small- to medium-sized businesses and start-ups. I stand behind any measure that will enable innovation that will drive sustainable, long-term growth in the U.S. economy.”

“The withdrawal of the 2019 Statement will strengthen the ability of U.S. companies to engage and influence international standards that are essential to our nation’s technology leadership and that will enable the global technology markets of today and tomorrow,” said Under Secretary of Commerce for Standards and Technology and NIST Director Laurie E. Locascio. “A common thread in so many of the thoughtful stakeholder comments we received is a commitment to America’s industry-led, voluntary, consensus-based approach to standards development. This approach consistently delivers the best technical solutions, and I wholeheartedly support it.”

“The Antitrust Division will carefully scrutinize opportunistic conduct by any market player that threatens to stifle competition in violation of the law, with a particular focus on abusive practices that disproportionately affect small and medium sized businesses or highly concentrated markets,” said Assistant Attorney General Jonathan Kanter. “I am hopeful our case-by-case approach will encourage good-faith efforts to reach F/RAND licenses and create consistency for antitrust enforcement policy so that competition may flourish in this important sector of the U.S. economy.”

In exercising its law enforcement role, the Justice Department will review conduct by standards essential patent (SEP) holders or standards implementers on a case-by-case basis to determine if either party is engaging in practices that result in the anticompetitive use of market power or other abusive processes that harm competition. In addition, in accord with President Biden’s Executive Order, the Agencies plan to continue to cooperate as appropriate on matters that affect the intersection of competition, standards development, and intellectual property rights. 

Standards-developing organizations (SDOs) and the widespread and efficient licensing of SEPs on reasonable and non-discriminatory (RAND) or fair, reasonable and non-discriminatory (FRAND) terms (collectively F/RAND) help to promote technological innovation, further consumer choice, and enable industry competitiveness, including in emerging technologies and by new and small- to medium-sized market entrants. 

SDOs may require parties participating in the standards development process to voluntarily commit to making patents essential to the standard available on F/RAND terms. The specific F/RAND commitments are contractual obligations that vary by SDO. United States laws and regulations govern the interpretation of those contractual obligations and otherwise govern the conduct of parties participating in SDOs.

How Europe can build on strengths in SEPs to reclaim leadership in cellular with 5G and 6G

 The EU is in grave danger of “throwing out the baby with the bathwater” in its prospective attempts to reform SEP licensing with interventions for the purported benefit of European Small and Medium-Sized Enterprises (SMEs) in IoT. 

Europe was once preeminent in cellular communications with 2G GSM—including standard-essential technology innovation, product developments and sales, network deployments, and operator services adoption by consumers. Since its heyday in the in the late 1990s, Europe has declined through a succession of falls from various leading positions in cellular.

Revenue growth captured in cellular by newcomers from outside Europe

Source: Companies’ yearend reports and average annual exchange rate figures

The European Commission’s initiatives to regulate standard essential patents (SEPs)—most significantly in cellular technologies and ostensibly for the benefit of SMEs and other technology implementers—are oblivious to this bigger picture. It is vital for all Europeans that the region’s remaining major players in the cellular ecosystem can flourish profitably and are able to continue investing in R&D for innovation, new products, network deployments and services growth. That means ensuring standard-essential technology developers including the European Union’s Ericsson and Nokia can make fair and adequate returns on their SEP investments. The SEP licensing system needs to be reinforced, not weakened with prospective interventions that are inconsistent, contradictory or that have weak factual justification and would jeopardise Europe’s competitiveness.

Re-establishing European strength in cellular also requires reregulation of operator and other services markets so that European mobile network operators can become profitable leaders in the mobile ecosystem once again. Hopefully the EU’s new Digital Markets Act (DMA) that seeks to reign-in the dominant and abusive behaviour of Big Tech companies such as Apple, Alphabet and Meta will help European mobile operators and others improve their competitive positions and abilities to become leaders rather than remain followers with new technologies and services. Anticipated measures against these Big Tech “gatekeepers” include restrictions on bundling and self-preferencing between complementary services (e.g. search versus shopping), and mandating interoperability among different messaging platforms. 

The European Commission, with its call for evidence for an Impact Assessment regarding a new framework for standard-essential patents closing May 9, 2022, follows the US Department of Justice and the UK’s Intellectual Property Office with public consultations on the topic of SEP licensing. These focus on various issues including improved “transparency” with the counting of essentiality-checked patents in setting royalty rates, prospective new collective licensing arrangements and purported problems such as opportunistic behaviour by patent owners and implementers.

While the European Commission threatens to meddle with SEP licensing, a paper I have written for 4iP Council considers the broader strategic issues on Europe’s competitiveness in cellular. This longer read shows that virtually all the $14 billion in SEP royalties to Europe’s world-leading innovators Ericsson and Nokia over the last 5 years— that were vital to fund their R&D at a total cost of around $10 billion in 2021—were export revenues generated on smartphone sales by Apple and Asian OEMs. Royalties generated from SEPs in Europe are tiny in comparison: most IoT modules are produced by a top five manufacturers that are Chinese, and there is no requirement for software application developers to take SEP licenses. 

Licensing costs pale in comparison to total revenues and profits derived as the cellular ecosystem expands to be worth many trillions of dollars in products, services and applications including IoT.

This summary article was originally Published in RCR Wireless on 4th May 2022.

Confusing allegations of various “behaviors” are a red herring—not evidence of anything illegal, bad-faith or discriminatory—while SEP owners earnestly attempt to obtain FRAND licensing

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?	Mere allegations, no matter how frequent, cannot be regarded as any kind of evidence or proof of opportunism.
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 9^th 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.