Professor Nguyen on Sovereign Patent Funds

Professor Xuan-Thao Nguyen explores government created and funded patent funds in Sovereign Patent Funds recently published in the UC Davis Law Review.  In part, Professor Nguyen reviews and analyzes the sovereign patent funds of numerous countries and investigates their role in patent enforcement.  The following is a part of her introduction of her article:

What are SPFs? How are they created and structured? What purposes do SPFs serve? Are SPFs effective initiatives for foreign governments to encourage innovation and foster competition or are they merely state-sponsored patent trolls? Are they violating international trade law, specifically the World Trade Organization (“WTO”) Agreement on Subsidies and Countervailing Measures?

This Article is the first to address the above questions. The Article proceeds as follows. Part I traces the creation of SPFs in Japan, South Korea, Taiwan, China, and France. Part I also explains when, why, and how each country provides public funding to SPFs. There are many different types of SPFs in different technology and life sciences areas, and with specific goals and mandates, although several share the same goal of aggregating patents. Open innovation and patent licensing are two common themes among the different goals and approaches employed by SPFs. Part II investigates whether SPFs have engaged in patent assertions — attempts to use acquired patents “to generate revenue by asserting them against alleged infringers.” Part II focuses on the simultaneous litigations filed by the French SPF against LG Electronics Corporation and HTC Germany GmbH in Germany and the United States. Likewise, the Asian SPFs have filed lawsuits against multinational companies. The investigation reveals surprises, including that litigation is typically an SPF’s last resort. SPFs are reluctant to embrace litigation. Part II also examines SPFs’ licensing strategies. French and Korean SPFs seem to have success in licensing out. They direct more efforts to selecting quality patents for licensing. In addition, Korean and Japanese SPFs are engaging in licensing for open innovation.

SPFs have been condemned as global patent trolls and state sponsored patent trolls. Part III addresses whether the pejorative label is warranted. Exploring the popular narrative of patent trolls and the evolving landscape of the patent market where former manufacturing companies and research institutions, along with other non-practicing enterprises (“NPEs”), are participants, Part III reveals that the SPF label does not fit SPFs’ characteristics. SPFs are both diverse and complex. Some have collaborated with universities to engage in specific research and development projects. Some share their profits with original inventors. Some facilitate open innovation. Some are doing all of the above. Condemning SPFs as patent trolls amounts to dismissing the true innovations, research, and development that have been the hallmarks of many industries and sectors in Japan, South Korea, China, and France.

SPFs have also been condemned as a trade protectionist measure in violation of international trade law. Part IV examines the heavy charges that SPFs discourage international technology transfers, depress innovation, force foreign companies to accept unfavorable license terms akin to discriminatory tax, support domestic industries at the expense of foreign firms, resurrect ailing national companies, and cause a race to the bottom. Part IV found no evidence to support these condemnations. On the contrary, what SPFs have done since their existence refutes these charges.

If SPFs are illegal subsidies in violation of international trade law, there is an appropriate mechanism to remedy the harm. Part V turns to the WTO solution, analyzing relevant provisions of the WTO Agreement on Subsidies and Countervailing Measures. Part V discusses WTO Tribunal decisions, as they illuminate and interpret legal requirements in subsidy cases. Part V further suggests that the international framework is suited to eliminate SPFs if evidence exists that a particular subsidy is causing injury to a domestic industry. Certainly, using the appropriate channel to address SPFs is preferable to dismissive and pejorative labeling.

Part VI, however, posits that an international trade solution might be unnecessary because SPFs may soon be relics of the past. SPFs can easily alter their structure to remove the government-sponsored characteristic to quiet critics and restless nation litigants in the WTO Tribunal. Moreover, the global innovation and patent market is dynamic and complex; SPFs will not be able to survive and flourish if they are under governmental control. Part VI observes that, in fact, some prominent SPFs are planning to privatize in order to compete and adapt.

Overall, by creating and infusing SPFs with public funding to aggregate patents, a government can seem to have ownership and control of the patents while simultaneously wielding authority in dispute proceedings relating to those very same patents. The government can block or rule against others from challenging the validity of patents. The same government may coerce others into accepting unfavorable patent license terms. The same government also may protect domestic firms at the expense of foreign firms. Such an arrangement seems to create many conflicts. Additionally, SPFs may be illegal subsidies under international trade law. Also, the creation of SPFs suggests a new global chaos in patents. The new chaos raises fear that SPFs would cause a race to the bottom. SPFs become sovereign patent trolls with levers more potent than private patent trolls, depressing innovation for short-term gains. The fear about SPFs, however, is exaggerated. These concerns perhaps emanate from the tendency to group all SPFs from different countries into one and characterize them within the convenient patent troll narrative. Fear not, the present and future development of different SPFs should instead prompt us to rethink patents and the very laws creating them.

The article is available, here. 

"Patent holdup" allegations encourage SEP free-riders

Despite many years of speculation and recently adjusted claims, there is no empirical support for the theory of “patent holdup.” Various eminent experts refute allegations of systemic “patent holdup.” It is likely that “patent holdup” has not occurred in the context of standards and licensing of standards essential patents (SEPs) because of the fair, reasonable and non-discriminatory (FRAND) licensing contracts and available recourse to the courts have ensured that licensees cannot be forced to pay “excessive” licensing fees. 

Free Riders Abound

“Patent holdout,” which is also sometimes referred to as “reverse holdup,“ rather than “patent holdup” may instead be a prevalent problem; although calls for remedies have largely been in response to “patent holdup” allegations. Beguiled courts, antitrust authorities, government policy makers and even a standards development organisation (SDO) are tipping the scales in favour of “patent holdout” by infringing implementers of SEPs. This is destabilising the equilibrium between the interests of the licensors and licensees forged by consensus over decades in the IPR policies of SDOs such as ETSI with Fair, Reasonable and Non-Discriminatory licensing.  As leading academics note, “FRAND Implies Balance” and “FRAND [is not] a one-way street.”  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.[1] 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.

On the other hand, Alcatel-Lucent, Ericsson, Nokia and Qualcomm have exited the mobile phone market over the last 15 years while ramping-up R&D in 3G and 4G technologies. These and other technology-development oriented companies can only sustain these risky R&D investments if they can make direct returns on their patent portfolios through licensing. Former network equipment market leader Ericsson has recently ousted its CEO due to poor growth and weak profits despite cost reductions, including in R&D.

“Patent holdup” is manifestly not a systemic problem. There is no empirical evidence of harm to markets or consumers, and such abundant proof of market success—particularly for innovative smartphones and the extensive 3G and 4G networks to which they are connected—including seven billion cellular connections and modest licensing costs totalling only around five percent of device prices. 

Unmentionable claims

I came upon a paper entitled “Patent Holdup: Myth or Reality?” by Carl Shapiro, dated 6^th October 2015, which was circulated as a hard-copy and presented at an IEEE-SIIT conference at the Intel-sponsored key-note address. In this, the author concedes that there are “few documented instances of actual holdups” and that they are “exceedingly difficult for researchers to detect and reliably quantify.” He has backed off from his previous claims of prevalence of “patent holdup” where he stated “patentees regularly settle with companies in the information technology industries for far more money than their inventions are actually worth. These companies are paying holdup money to avoid the threat of infringement.”  Shapiro has retreated due to lack of empirical support for these original claims which is because portfolio licensing among many licensees on FRAND terms together with the courts ensure that holdup royalties are rarely demanded and are never paid. However, Shapiro takes another position where there is also no supporting evidence. He now claims that the social costs caused by the alleged “patent holdup” problem are in the actions taken to prevent holdup and in the opportunities forgone under the threat of “patent holdup.”

His 2015 paper is labelled a preliminary draft that should not be quoted, yet the verbatim thesis of this most outspoken author is evidently being adopted elsewhere; including in a speech by the US Department of Justice’s Chief Economist, Nancy Rose, at a George Washington University conference on “Patents in Telecoms” in November 2015. In this, she analogises that “patent holdup” is like dark matter in the universe – something that cannot itself be detected but is present. She said that the existence of dark matter can be inferred from effects on visible matter.

With the passing of ten months since Shapiro presented his paper at the IEEE event and with the DoJ’s name endorsing this latest development in “patent holdup” theory, I believe it is high time to shine some light on the flaws in arguments made by Shapiro and Rose by making their writings available and by rebutting them here. I do not see why they should enjoy the privilege of being heard and given the opportunity to persuade, while also indefinitely being able to shield their postulations from scrutiny or criticism.

My full analysis on Shapiro's paper and Rose's presentation can be found in a pdf here.

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[1] For example, a Chinese court awarded InterDigital in patent litigation against Huawei a mobile SEP royalty rate of only 0.019 percent of device sales. This is extremely low given that InterDigital’s overall royalty yield (i.e. its total royalty income divided by total device market sales revenues) including licensed and unlicensed sales globally is five times higher at around 0.10 percent.

Academic-Industry Patent Licensing

The US-based Biotechnology Industry Organisation has just released a fascinating study on the impact that academic technology transfer makes to the US economy. The study is limited to US universities, but is probably equally indicative of the impact that technology transfer makes in other countries. The study (available here) estimated that in the 18 years from 1996 to 2013 academic licensing boosted industry output by USD 1.18 trillion and US GDP by USD 518 billion, creating 3,824,000 US jobs.

The study concludes that the Bayh-Dole Act passed in 1980 which allowed universities to maintain the rights to US government sponsored research has contributed to this success. Prior to the passage of the act, no drugs had apparently been commercialised based on the results of the government R&D spending. Subsequently over 183 drugs have been developed, as was report by the New England Journal of Medicine in 2011 in this article. Unsurprisingly a number of countries have adopted similar laws.

The survey submits that absence the incentives of patent ownership and exclusive licences, companies and investors could not justify the effort in bringing these drugs to market. The results seem to be in contradiction to the study by Robin Feldman and Mark Lemley available here, which argued that licensing did not contribute to innovation. Gene Quinn of IP Watchdog argued very succinctly that that study was seriously flawed since it relied on a subjective survey of practitioners.

The argument about whether research funded by governments should be patented and licenced by private companies for their own benefit is one that has been running ever since this author carried out his own Ph.D. research. The latest study seems to demonstrate the value of allowing universities to patent and licence their own IP, even if the public has paid for the research through their tax dollars/euros. It’s probably a question of finding the balance - there may be some research that really should not be patented.

Theories of harm with SEP licensing do not stack up

In this guest posting authored by regular IP Finance contributor Keith Mallinson (WiseHarbor), Keith debunks economic theories of effects and harm due to alleged royalty stacking with numerous patents essential to cellular standards. He does this by assessing the development of these technologies, products and services, market entry, competition and prices over the last six years or so. Keith shows that the sector is thriving and fast-growing. Evidence reveals that aggregate patent royalties paid are nothing like as high as is commonly alleged and are not detrimental. By comparing technologies and their performance over several years, identifying increasing product choice and new market entrants, and tracking key metrics with reducing price indices, decreasing Herfindahl-Hirschman market concentration indices and stellar market growth figures, Keith shows that the dire predictions of academics including Mark A. Lemley and Carl Shapiro in their 2006 and 2013 papers are incorrect, unfounded and based on inapplicable theories.

Exponential global growth in cellular data with mobile broadband

Source: Ericsson Mobility Report, November 2012

Cellular prices flat or falling versus the rising CPI

Source: U.S. BLS indices

Herfindahl-Hirschman Index tracking declining manufacturer market share concentration

Sources: WiseHarbor analysis on figures from Gartner,
Strategy Analytics and WiseHarbor using company disclosures

Keith observes that these inapplicable theories and assertions are also troublingly being adopted by judges and government agencies in their smartphone patent war rulings, despite the weight of so much evidence to the contrary.

For ease of reading, Keith's contribution (which is rather longer than usual) can be accessed here as a PDF document.