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

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

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

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

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

A low watermark for developers and contributors of SEPs

The former AAG, publicly beckoned SSOs to weaken patent owners’ rights with her disregard for considerations of patent “hold out.” In a 2012 speech entitled Six “Small” Proposals for SSOs Before Lunch she suggested that SSOs include terms in patent policies that make injunctions harder to obtain, restrict cross-licensing and “explore setting guidelines for what constitutes a F/RAND rate.” She also encouraged SSOs to overcome any concerns they might have about antitrust actions against their revised patent policies by “seek[ing] ex ante review through [the Department’s] business review procedures.” This was presumably to reassure any SSOs that might adopt her proposals would not find adverse antitrust actions being formulated against them subsequently.

A couple of years later, IEEE-SA (responsible for the 802.11 WiFi standard among many others) changed its Patent Policy in 2015, touting it as “clarification” and an ”update,” but it actually set out various wholly new terms that are restrictive and harmful to patent owners. In the face of significant resistance by IEEE members who were technology contributors, and via a highly controversial and secretive process, the new patent policy significantly restricted flexibility in the Reasonable and Non-Discriminatory commitment with the following conditions:

• SEP holders must waive their rights to seek any injunctions until they have successfully-litigated claims against unlicensed implementers to conclusion in a court of appeals;
• Reciprocal cross-licensing cannot be required, except for patents reading on the same standard;
• Royalty charges “should” be calculated based on the “smallest saleable” implementation of any portion of the standard and comport with a reasonable aggregate royalty burden of the relevant standard; and
• Only licenses for which SEP holders have relinquished the right to seek, enforce, or even threaten, an injunction can qualify as “comparable licenses” for determining RAND royalties.

The Patent Policy “update” also obliged patent holders to be bound by the IEEE RAND commitment to license their patent to any “Compliant Implementation,” meaning that a patent holder making such a commitment cannot opt to license its patents for using the IEEE standards at only certain levels of production (e.g. entire end product device, as opposed to chip or module).

The cause’s harmful effects

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

“[Assistant Attorney General Makan Delrahim], the new head of the US DoJ antitrust division is reinforcing a trend that shifts the balance between IP rights and antitrust restrictions.[1] But significant harm has already also been done internationally with contagion from prospective or actual policy positions that were previously more hostile or equivocal on IP owners’ rights. For example, some Asian antitrust agencies have welcomed, for reasons of industrial or protectionist policy, previous attempts in the ‘West’ to weaken rights of SEP owners. Actions have included seeking to reduce royalty returns, imposing chip-based licensing and reducing the availability of injunctions. Getting the Asian authorities also to reverse their positions in IP policy, for example, on antitrust enforcement, is a daunting task.”

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

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

‘Curing and reversing the contagion

The detrimental effect of the patent policy change and supporting BRL is possibly even more severe outside of IEEE standards in some jurisdictions. The 2015 IEEE patent policy change, endorsed by a BRL from the previous DoJ antitrust head, is dangerously serving as a template for antitrust enforcers worldwide – not only with respect to IEEE standards, but also for other standards such as 3GPP’s mobile communications standards. This is like pushing at an open door in nations where antitrust enforcement is being used as an instrument of industrial or protectionist policy to support manufacturing-oriented companies who would like to pay less for the IP they are reliant upon that is developed in other nations, significantly including the US and Europe.

Contributing technology to standardisation efforts and making a FRAND commitment is voluntary. If antitrust agencies construe IEEE’s patent policy as only a “clarification,” and therefore impose it on holders of SEPs to various [SSO’s] standards the effects could be severe. They might bind patent holders to new conditions that they were never willing and never agreed to accept— for IEEE standards and for other standards. The latter would include standards such as 3GPP’s where some technology developers’ business models, development of standards and their success are much more dependent on payment of royalties than with IEEE standards. 3GPP standards account for much more in total royalties than IEEE standards. Delrahim rightly states that “[w]e should not transform commitments to license on FRAND terms into a compulsory licensing scheme.”

Antitrust agencies including NDRC (China), KFTC (Korea) and TFTC (Taiwan), as well as many other organisations and individuals have been swayed by or receptive to policy positions of US and European government agencies that were against or ambivalent about upholding patent rights in interoperability technology standards including those of many [SSOs] including IEEE, 3GPP (including regional partners such as ETSI).’

The new BRL also notes that:

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

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

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

‘Except for IEEE, [SSOs] have reaffirmed longstanding IP policies that uphold the rights of patent owners. For example, major European [SSOs] CEN and CENELEC state that [SSOs] should not provide guidance on, or impose compliance with, FRAND pricing, valuation, and rate-setting methodologies, and they “firmly believe that pricing should be determined by patent holders and implementers outside of SSOs in the context of bilateral negotiations.”’

Backspin

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

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

The Department highlights in its new BRL:

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

The heart of the matter

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

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

Making amends

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

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

Tide turns in US and EU agencies’ policies on SEP licensing

The new US Department of Justice antitrust leader says antitrust enforcers are too accommodating to IP implementers when in dispute with standard-essential patent owners. Instead, patent owners should be allowed to decide how they want to exercise their property rights: “under the antitrust laws, a unilateral refusal to license a valid patent should be per se legal” – he also reminds us “the right to exclude is one of the most fundamental bargaining rights the patent owner possesses.”

New European Commission guidelines on SEP licensing respect patent owners’ rights to benefit from “fair and adequate return” from “value added of patented technology” contributions and “rewards are needed to continue to invest in R&D and standardisation activities.” Standardised technology “should be available to any potential user of the standard” and “with smooth and wide dissemination of standardised technologies,” but the guidelines do not oblige SEP owners to license to anyone who asks for a license.

This is important news: the new head of the US DoJ antitrust division is reinforcing a trend that shifts the balance between IP rights and antitrust restrictions.^[1] But significant harm has already also been done internationally with contagion from prospective or actual policy positions that were previously more hostile or equivocal on IP owners’ rights.  For example, some Asian antitrust agencies have welcomed, for reasons of industrial or protectionist policy, previous attempts in the ‘West’ to weaken rights of SEP owners. Actions have included seeking to reduce royalty returns, imposing chip-based licensing and reducing the availability of injunctions. Getting the Asian authorities also to reverse their positions in IP policy, for example, on antitrust enforcement, is a daunting task.

US U-turns

In a major reversal to the stance of Renate Hesse, the former head of the DoJ’s Antitrust Division, her successor Assistant Attorney General for Antitrust Makan Delrahim really hit the nail on the head in his speech at the USC Gould School of Law's Center for Transnational Law and Business Conference in Los Angeles on 10th November 2017 by warning that:

“enforcers have strayed too far in the direction of accommodating the concerns of technology implementers who participate in standard setting bodies, and perhaps risk undermining incentives for IP creators, who are entitled to an appropriate reward for developing break-through technologies.”

He explained that:

“[t]oo often lost in the debate over the hold-up problem is recognition of a more serious risk: the hold-out problem.  Standard setting typically occurs against the backdrop of negotiations between innovators, who develop technologies through private investment and own IP rights, and implementers, who hope to market and use the technology through a license and pay the IP holder a royalty.  The hold-out problem arises when implementers threaten to under-invest in the implementation of a standard, or threaten not to take a license at all, until their royalty demands are met.”

Delrahim went on to opine:

“I view the collective hold-out problem as a more serious impediment to innovation.  Here is why: most importantly, the hold-up and hold-out problems are not symmetric.  What do I mean by that?  It is important to recognize that innovators make an investment before they know whether that investment will ever pay off.  If the implementers hold out, the innovator has no recourse, even if the innovation is successful.  In contrast, the implementer has some buffer against the risk of hold-up because at least some of its investments occur after royalty rates for new technology could have been determined.  Because this asymmetry exists, under-investment by the innovator should be of greater concern than under-investment by the implementer.”

In conclusion, he said:

“Every incremental shift in bargaining leverage toward implementers of new technologies acting in concert can undermine incentives to innovate.  I therefore view policy proposals with a one-sided focus on the hold-up issue with great skepticism because they can pose a serious threat to the innovative process.”

I agree, as I have argued repeatedly. For example, in my August 2016 IP Finance posting entitled "Patent holdup" allegations encourage SEP free-riders, I wrote:

“Whereas alleged “patent holdup” supposedly results in excessive royalties, “patent holdout” is undermining licensors attempts even to achieve FRAND terms or to complete any licensing at all in many cases. Licensors are therefore losing their ability to make a fair return on their investments in SEP technologies. This discourages ongoing investments in standard-essential technologies, participation in SDOs and contribution to the standards.

Free-riders who are not paying for the IP they use are gaining an unfair advantage over other implementers who are paying FRAND royalties as well as stealing property rights from technology developers. There is significant evidence of some infringers flourishing while avoiding paying patent licensing fees on their manufactures and product sales for many years. They can, for example, typically challenge FRAND offers in lengthy litigation before paying any royalties. In some jurisdictions, even the royalties ultimately awarded can be derisorily low. In particular, various Asian OEMs accounting for a substantial proportion of global smartphone sales remain significantly unlicensed for at least some of the many SEPs they implement in the devices they manufacture or sell.”

European Commission also seeks fairer balance in its approach to SEPs

The EC has been pondering SEP licensing policy issues for at least a few years, including an extensive consultation process with workshop discussions. I pitched in a couple of times, myself, here and here. On November 29, 2017, the European Commission issued a Communication to the European Parliament “Setting out the EU approach to Standard Essential Patents.” Thankfully this strikes a rather better balance, as all the above indicates is required, than some proposals that more resemble the one-sided “clarifications” endorsed by the DoJ’s business review of IEEE’s 2015 patent policy “update,” as discussed below. The guidelines in the EC Communication significantly represent EU policy but they are non-binding.

The EC Communication addresses four areas: transparency on SEP exposure; principles for FRAND licensing terms for SEPs; enforcement of SEP rights (e.g. including injunctions); and open source.

Significantly, with respect to FRAND licensing, the EC is not seeking to prescribe how or where in the value chain SEPs should or can be licensed. In other words, licensors will not be obliged to license at the chip level, whether that might be regarded as a “smallest salable patent-practising unit” or not. The requirement is that standardised technology “should be available to any potential user of the standard” and that there is “smooth and wide dissemination of standardised technologies,” not that any implementer can insist on being licensed.

The guidance that allows “fair and adequate return” from “value added of patented technology” contributions is also consistent with standards developing organisation patent policies such as ETSI’s.  It therefore recognises the need for SEP holders to be incentivised to continue to invest in R&D and their standardisation efforts.

Unsurprisingly, the Communication significantly relies on Huawei vs. ZTE jurisprudence, notably with respect to the fundamental importance of availability for injunctive relief. The Communication also recognises the problem of patent holdout. For example:

“With respect to the security to be provided by the SEP user as protection against an injunction, the amount should be fixed at a level that discourages patent hold-out strategies. Similar considerations could apply when assessing the magnitude of damages.”

Of course, there is an important distinction between the EC as a policy-maker versus the DoJ as an antitrust enforcement agency saying antitrust agencies should back off from imposing or guiding SDO policy. The EC guidance correctly notes that the Communication “does not bind the Commission as regards the application of EU rules on competition.” Such rules are relevant and their application is fact-specific. The Communication clearly establishes that European policy should strive to create fair balance between different interests (and with industry-led solutions), rather than prescribing action and imposing SEP policy through EU antitrust enforcement.    

Policy guidance passé

In marked contrast to all the above, by 2012, the previous head of the DoJ’s Antitrust Division publicly beckoned SDOs to weaken patent owners’ rights with her disregard for considerations of patent holdout. In a 2012 speech entitled Six “Small” Proposals for SSOs Before Lunch she suggested that SDOs include terms in patent policies that make injunctions harder to obtain, restrict cross-licensing and “explore setting guidelines for what constitutes a F/RAND rate.” She also encouraged SDOs to overcome any concerns they might have about antitrust actions against their revised patent policies by “seek[ing] ex ante review through [DoJ’s] business review procedures.” This was presumably to reassure any SDOs that might adopt her proposals would not find adverse antitrust actions being formulated against them subsequently.

A couple of years later, IEEE-SA (responsible for the 802.11 WiFi standard among many others) changed its patent policy in line with some of these proposals; which was duly blessed by DoJ with a Business Review Letter.

The new patent policy, ratified in 2015, was touted as “clarification” and an ”update,” but it actually sets out various wholly new terms that are restrictive and harmful to patent owners. In the face of significant resistance by IEEE members who were technology contributors, and via a highly controversial and secretive process, the new patent policy significantly restricted flexibility in the RAND commitment with the following conditions, the first three of which significantly correspond with the three among Hesse’s six proposals I identify above:

• SEP holders must waive their rights to seek any injunctions until they have successfullylitigated claims against unlicensed implementers to conclusion in a court of appeals;
• Reciprocal cross-licensing cannot be required, except for patents reading on the same standard;
• Royalty charges “should” be calculated based on the “smallest saleable” implementation of any portion of the standard and comport with a reasonable aggregate royalty burden of the relevant standard; and
•  Only licenses for which SEP holders have relinquished the right to seek, enforce, or even threaten, an injunction can qualify as “comparable licenses” for determining RAND royalties.

The policy “update” also obliged patent holders to be bound by the IEEE RAND commitment to license their patent to any “Compliant Implementation,” meaning that a patent holder making such a commitment cannot opt to license its patents for using the IEEE standards at only certain levels of production.

As indicated by the title of my September 2017 report on the effects of IEEE’s new patent policy, [d]evelopment of innovative new standards [is] jeopardised by [the] IEEE patent policy. Instead of creating greater clarity or transparency of licensing terms (as ‘predicted’ in the IEEE BRL), the patent policy change has actually caused confusion and uncertainty to implementers about licensing terms because nearly half of the major contributors to IEEE standards have been unwilling to pledge their IP under this new and one-sided IEEE patent policy that guts technology value. Up to nearly three quarters of ‘Letters of Assurance’ (LOA) submitted to IEEE by all companies contributing essential technology (i.e. for the 802.11 WiFi standard), are now negative LOAs, which means that the patents identified on those forms are not subject to RAND terms as defined under any patent policy. The unhappy experience of IEEE patent policy change cautions antitrust agencies to be wary of getting involved in IP policies.

Despite the DoJ being an antitrust agency, endorsing the collusive agreement among predominantly licensees to prescribe how and where SEPs are licensed always appeared to me like approving price fixing by a buyers’ cartel. This blow to patent owners’ pricing is exacerbated by the previous total disregard for the plight of licensors subject to patent holdout. Renate Hesse once told me that nobody had alleged collusive price fixing, and that holdout is not an antitrust issue. However, her successor points out that a two-sided approach is required on the issue of patent holdup versus patent holdout, and this is what he had to say about “clarifying” how rates are determined:

“SSO rules purporting to clarify the meaning of “reasonable and non-discriminatory” that skew the bargain in the direction of implementers warrant a close look to determine whether they are the product of collusive behavior within the SSO.”

This two-sided approach is supported by the Europe Court in Huawei v ZTE which established obligations on both parties, non-conformity to which could result in either the possibility of an injunction being granted or the raising of an antitrust defence to defeat a request for an injunction.

Curing and reversing the contagion

The detrimental effect of the patent policy change and supporting BRL is possibly even more severe outside of IEEE standards in some jurisdictions. The 2015 IEEE patent policy change, endorsed by a BRL from the previous DoJ antitrust head, is dangerously serving as a template for antitrust enforcers worldwide – not only with respect to IEEE standards, but also for other standards such as 3GPP’s mobile communications standards. This is like pushing at an open door in nations where antitrust enforcement is being used as an instrument of industrial or protectionist policy to support manufacturing-oriented companies who would like to pay less for the IP they are reliant upon that is developed in other nations, significantly including the US and Europe.

Contributing technology to standardisation efforts and making a FRAND commitment is voluntary. If antitrust agencies construe IEEE’s patent policy as only a “clarification,” and therefore impose it on holders of SEPs to various SDO’s standards the effects could be severe. They might bind patent holders to new conditions that they were never willing and never agreed to accept— for IEEE standards and for other standards. The latter would include standards such as 3GPP’s where some technology developers’ business models, development of standards and their success are much more dependent on payment of royalties than with IEEE standards. 3GPP standards account for much more in total royalties than IEEE standards. Delrahim rightly states that “[w]e should not transform commitments to license on FRAND terms into a compulsory licensing scheme.”

Antitrust agencies including NDRC (China), KFTC (Korea) and TFTC (Taiwan), as well as many other organisations and individuals have been swayed by or receptive to policy positions of US and European government agencies that were against or ambivalent about upholding patent rights in interoperability technology standards including those of many SDOs including IEEE, 3GPP (including regional partners such as ETSI).

Except for IEEE, SDOs have reaffirmed longstanding IP policies that uphold the rights of patent owners. For example, major European SDOs CEN and CENELEC state that SDOs should not provide guidance on, or impose compliance with, FRAND pricing, valuation, and rate-setting methodologies, and they “firmly believe that pricing should be determined by patent holders and implementers outside of SSOs in the context of bilateral negotiations.” 

Notwithstanding strong signs of a reversal of policy at US DoJ antitrust from its leadership, the moderate and balanced position recently announced in the EU supported by strong statements by the European Court, and the overwhelmingly consistent pro-IP position of the SDOs themselves, it remains to be seen if other antitrust authorities can also be persuaded not to pursue policies that undermine the fundamental rights of patent holders and the incentives they have to invest in innovative new technologies that, through contributions to SDOs, can be readily accessed and exploited by all.  

As China and some emerging nations are increasingly becoming SEP innovators as well as implementers, perhaps self-interest might ultimately make these nations recognise that upholding IP rights is in their interests, even in the short term, as licensors themselves, as well as it being in everybody’s long-term interests to maximise development and dissemination of innovative new technologies.

---

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

Development of innovative new standards jeopardised by IEEE patent policy

I recently wrote a paper for 4iP Council about the effect of the Institute of Electrical and Electronics Engineers' (IEEE) 2015 patent patent policy change on submissions of Letters of Assurance (LOAs) indicating whether patents are pledged to the new policy. In this, I have reviewed some third-party analysis on adoption of the new patent policy and LOAs. And, I have also included my own analysis of LOA data available from IEEE. The summary of my paper is reproduced below with some updated figures from one third-party analyst and with the addition of an IEEE logo:

Development of innovative new standards jeopardised by IEEE patent policy

In March 2015, IEEE significantly amended its patent policy in what was couched as an “update” but that seeks to significantly revise commitments from parties holding patent claims essential to IEEE standards to license those rights on reasonable and non-discriminatory (RAND) terms. Changes disallow patent holders from receiving any value attributable to the standards, require licensing at the smallest saleable patent practicing unit level, and deny these rights holders entitlement to seek an injunction against an unlicensed implementer until appellate review is exhausted.  IEEE’s stated objective was to protect implementers from patent holdup, which was alleged without any substantiation.[1]  IEEE is promoting, by reducing technology licensing costs, the short-term interests of certain implementers while undermining standard-essential patent values and the ability of SEP owners to receive adequate compensation, they are entitled to, from licensing their SEPs.

As I predicted in the IP Finance blog prior to the adoption of this controversial new patent policy,[2] and as indicated by others including senior government officials,[3]  the purported “clarification” is significantly jeopardising the IEEE Standards Association as a venue for development of open technology standards that include significant patented intellectual property. Large proportions of contributors to IEEE standards are now unwilling to provide “positive” Letters of Assurance (“LOAs”) under IEEE’s new patent policy.

In this paper, I have reviewed available data on LOAs and some third-party analysis of this. My conclusions are striking: almost three quarters (i.e. 73 percent) of LOAs for the IEEE flagship 802.11 WiFi standard, accepted by IEEE and posted on its website in the 18-month period to June 2017, are “negative” LOAs, indicating the submitter’s legitimate ex ante refusal to pledge RAND licensing under the new patent policy. Nearly half (i.e. 47 percent) of all accepted LOAs posted on the IEEE website over the same period are negative LOAs. More than one third (i.e. 42 percent) of companies portrayed as leaders with LOAs to IEEE standards are unwilling to pledge their SEPs under the new patent policy or have not provided LOAs when asked to do so.

The new patent policy has created a perverse situation among patent owners and implementers.  In the absence of positive LOAs, implementers are left uncertain about which patent policy applies, if any, and about future ability to implement the standard. Therefore, implementers may be unclear whether many SEPs are subject to new licensing terms, the old licensing terms or are not subject to RAND licensing terms under any patent policy at all. This is unacceptable. Proponents of the new patent policy are also lamenting this lack of clarity, while trying to use this as a pretext to breach binding contractual agreements between IEEE and patent owners in previously-accepted LOAs.[4]

Chart 1: More than one third (10/24=42%) of companies IPlytics portrays as leaders with LOAs to IEEE standards are unwilling to pledge their SEPs under the new patent policy or have not provided LOAs when asked to do so

Source: IPlytics empirical study report on patenting and standardisation activities at IEEE[5] (black and green); WiseHarbor added Chart titles in bold black, identifiers and annotations in other colours.

Orange is the successor to France Telecom.
“Not applicable:” Positive blanket LOA accepted prior to March 2015 under previous patent policy.

Approvals for “standard-amendments” 802.11ah and 802.11ah deferred with policy impasse

There is deadlock between the two sides of this argument – largely, patent owners who seek adequate compensation from licensing their SEPs versus some implementers[6] who would like to minimise their costs. Despite attempts by advocates of the new patent policy text to portray IEEE standardization work as continuing to proceed well, to the contrary, this is an illusion with unreconciled differences regarding applicable patent policy and LOAs. Previous attempts to significantly undermine rights of patent owners in other standard development organizations (SDOs) have failed: for example; with an intellectual property rights (IPR) policy change at ETSI in the 1990s that was abandoned before taking effect.

Unwillingness of SEP holders to pledge to the new patent policy are delaying standardization approval decisions. IEEE seeks to approve standards for which all known SEPs are pledged under the new patent policy with accepted IEEE LOA forms. But it is failing in this objective with an unprecedented high number of negative LOAs submitted and because LOAs requested from others are not forthcoming and should therefore be regarded as “missing.” Negative LOAs that have been accepted by IEEE are, for example, with standard-amendments 802.11ai and 802.11ah. However, numerous other prospective negative LOAs have been rejected by IEEE because patent owners have sought to indicate – and IEEE has refused to allow – willingness to license on a basis other than the new patent policy, such as on the basis of the previous IEEE patent policy. With numerous known SEPs for which there are no licensing commitments, the above amendments to the 802.11 standard have only been “conditionally approve[d]” by the IEEE-SA’s Standards Board.[7] 

Conditional approvals are merely deferral tactics because there can be no reasonable expectation that the LOA conditions preventing full approval with the new patent policy will ever be met. Patent holders who have submitted negative LOAs are not going to change their minds and replace them with positive LOAs in the prevailing circumstances. Similarly, it seems very unlikely that those who acknowledge receipt of a request for an LOA but refuse to submit a positive LOA are likely to change their minds about doing so and submit a positive LOA.  Deferring full approval until these two amendments are rolled up into the next version of the entire standard (i.e. 802.11/D10) amounts to “kicking the can down the road.” [8]

This impasse has occurred because many contributors to IEEE standards are, independently of each other, unwilling to pledge assurances under the new patent policy, which was established without consensus[9] among a closed group of interested parties. The new patent policy text is purported to be a “clarification” of existing patent policy and not a new patent policy — begging the question why many of the new positive LOAs submitted merely restate previous LOAs already-submitted pursuant to the previous patent policy needed to be submitted at all. It is, instead, increasingly creating ambiguities and concerns that courts might interpret new conditions as mandatory. Many patent owners are unwilling to agree to the new patent policy because being bound by it could undermine their licensing businesses — including pre-existing agreements.

Adjusted LOA counts have reduced dramatically since introduction of new patent policy

The counts of submitted LOAs have been misleadingly presented to suggest that the new patent policy is having no overall adverse effect on licensing commitments. The numbers of accepted LOAs since the patent policy change have been inflated by a large proportion of “duplicate” LOAs (resubmissions of LOAs for standards for which there are already existing LOAs) that are not required by IEEE bylaws. Instead, after some well-justified adjustments to LOA counts for these and for negative LOAs and “missing” LOAs (in cases where IEEE sought from a disclosed essential patent holder, but did not receive, an accepted LOA), figures indicate that LOAs are dramatically and statistically significantly lower since the patent policy change. This indicates major adverse effects.

Chart 2: Rejection of IEEE’s new patent policy is indicated by dramatic fall in positive LOAs[10]

Continuing activity in technical working groups, for now, is no assurance this will persist

Technical working group activity is continuing while participating companies wait to see if conflicts will be resolved so that new standards, as well as improvements and amendments to existing standards, will be approved. However, any suggestions that the continuing rate of Project Authorization Requests (PARs) — to commit IEEE-SA resources to new standard-development work — indicate that all is well in IEEE standardisation are phoney. Many IEEE projects do not include many, or even any, patented technologies: so, these might be unaffected by difficulties with the new patent policy. The standards that provide significant innovative value beyond compatibility are rich in patented technologies. LOAs identify these patents, their ownership, and the basis upon which they can be licensed. For those standardisation projects that include significant patented technologies, it is what is occurring with LOAs, rather that PARs, that spells trouble.

It could be several years before it is evident how much IEEE standardisation has been harmed. For example, clarity (to implementers, in particular) could be rapidly restored by allowing patent owners optionally to indicate their willingness to license based on the old patent policy. Meanwhile, IEEE standardisation work including supporting R&D and product implementation will suffer as participants consider switching to other SDOs. By then it could be too late to fix things.

The whole story

My entire paper can be accessed from 4iP Council's web site, here. Since its publication this month, Ron Katznelson has updated his analysis to 20th September 2017, here, as also reflected in my summary for IP Finance, above.

---

[1] IEEE-SA request for business review letter, November 7, 2014; http://www.gtwassociates.com/answers/DOJ%20PDF/IEEEBRL2015/PatentHoldUpasRationaleIEEE_Bus_Review_Document_02_11072014.pdf

[2] Keith Mallinson: IEEE will jeopardise its attractiveness as venue for standards development if proposed new IP policies are adopted, February 6, 2015; http://www.ip.finance/2015/02/ieee-will-jeopardise-its-attractiveness.html

[3] See e.g. Former Rep. Terry Lee, Don’t turn off Wi-FI (January 8, 2015), available at http://thehill.com/blogs/congress-blog/technology/228817-dont-turn-off-wi-fi; Adam Mossoff, Reality Check: Weakening Wireless Technology Patents Hurts Everyone (RCR Wireless News, January 28, 2015) available at http://www.rcrwireless.com/20150128/opinion/reality-check-weakening-wireless-technology-patents-hurts-everyone-tag10; Leah Nylen and Lewis Crofts, EU Warns of Impact of IEEE’s Patent Policy Change (MLex, January 27, 2015); U.S. Senator Christopher Coons letter to U.S. Department of Justice (14 January 2015) available at http://www.advancingengineering.org/christopher-coons.    

[4] See March 2017 slides by Gil Ohana on behalf of Cisco at http://grouper.ieee.org/groups/pp-dialog/email/pdf6eBTMFaO8V.pdf,  http://grouper.ieee.org/groups/pp-dialog/email/msg00437.html and comments in response at http://grouper.ieee.org/groups/pp-dialog/email/msg00418.html.

[5]https://asoft20107.accrisoft.com/atfrand/clientuploads/news/IPlytics_2017_Patenting%20and%20standardization%20activities%20at%20IEEE.pdf

[6] This paper’s author recognises that a large proportion of implementers are also patent owners.

[7] http://standards.ieee.org/about/sasb/1216sasbmin.pdf#page=22

[8] “Put off confronting a difficult issue or making an important decision, typically on a continuing basis.” Oxford Living Dictionaries.

[9] To mask it, in the fall of 2014, the IEEE-SA removed the most-prominent indication of its previously long-standing principles of consensus, due process and openness from its website.  See comparative website snapshots http://web.archive.org/web/20140723051820/http://standards.ieee.org/about/strategy.html versus new page:  http://standards.ieee.org/about/strategy.html.

[10] Standard Essential Patents – the empirical record since adoption. Symposium on Antitrust, Standard Essential Patents, and the Fallacy of the Anticommons Tragedy, Berkeley, CA. October 29, 2016. [Updated March, 2017 in my full report and, again, to September 2017 in this summary for IP Finance] Ron D. Katznelson, Ph.D.* http://bit.ly/IEEE-LOAs

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

According to research published by J. Gregory Sidak of Criterion Economics, the process by which the Institute of Electrical and Electronics Engineers (IEEE) amended its patent policy was significantly biased in favour of implementers and against standard-essential patent (SEP) owners.

He finds that large SEP holders that are net patent licensors and were opposed or neutral to the proposed changes had their comments on policy drafts rejected at a substantially higher rate than companies that are predominantly implementers and net payers of licensing fees. The bias favoured patent policy revisions designed to devalue SEPs. IEEE is the standards development organisation (SDO) responsible for developing the 802.11 WiFi standard, among many others.

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

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

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

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

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

Also according to Sidak:

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

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

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

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

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

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