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.

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[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.”

US Antitrust Chief Delrahim Announces Withdrawal from DOJ/USPTO Policy Statement on Remedies for SEPs subject to FRAND

On December 7, the chief of the Antitrust Division at the U.S. Department of Justice (DOJ), Makan Delrahim, announced that the DOJ will be withdrawing from the 2013 USPTO and DOJ joint statement, “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.”  The announcement was part of his speech, titled “Telegraph Road: Incentivizing Innovation at the Intersection of Antitrust and Patent law.”  His speech provides, in part:

. . . In the more recent past, we have seen somewhat of a shift toward the view that patents might confer too much power, particularly if those patents are essential to a technical interoperability standard.  The fundamental right of the patent holder to exclude competitors has been questioned in this context.

In particular, I have criticized the argument that it ought to be a violation of antitrust law for a holder of a standard-essential patent, or SEP, to exclude competitors from using the technology, including by seeking an injunction against the sale of infringing goods—I think that argument is wrong as a matter of antitrust law and bad as a matter of innovation policy. 

. . . When it comes to the test for obtaining injunctive relief against infringement, patent law already strikes a careful balance that optimizes the incentive to innovate, for the benefit of the public.  The test was articulated by the Supreme Court in eBay v. MercExchange.  

. . . A court applying the eBay test is thus allowed to consider effects in the market, including (as Justice Kennedy noted in concurrence) how significant the patented invention is to the use of the product, and whether the patent holder can be properly rewarded for that contribution without the ability to exclude competitors. 

When this test is used to maintain appropriate incentives to innovate, it thus facilitates the goals of antitrust law and patent law alike. 

I fear that we at the Antitrust Division gave some observers the opposite impression, however, with the confusion created by the joint statement issued by the Department of Justice and the U.S. Patent & Trademark Office in early 2013, entitled “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.” 

That Policy Statement purported to offer the agencies’ perspectives on the propriety of a federal court issuing an injunction, or the International Trade Commission’s issuing an exclusion order, “when a patent holder seeking such a remedy asserts standards-essential patents that are encumbered by a RAND or FRAND licensing commitment.”  In particular, the statement discusses what is in the “public interest” because the eBay test and the Tariff Act governing the ITC name the public interest as a relevant factor.

As I have said before, this joint statement should not be read as a limitation on the careful balance that patent law strikes to optimize the incentive to innovate.  There is no special set of rules for exclusion when patents are part of standards.  A FRAND commitment does not and should not create a compulsory licensing scheme.  

In those cases, as in all cases, the question is what result will optimize the incentives to innovate for the benefit of the public.  Since injunctions against infringement frequently do serve the public interest in maintaining a patent system that incentivizes and rewards successful inventors through the process of dynamic competition, enforcement agencies without clear direction otherwise from Congress should not place a thumb on the scale against an injunction in the case of FRAND-encumbered patents. 

Despite my clarification of the Antitrust Division’s position on the propriety of these types of injunctions, the potential for confusion remains high because the joint statement from 2013 indicates that an injunction or exclusion order “may harm competition and consumers,” seeming somehow to suggest an antitrust inquiry that is distinct from the goal of optimizing the incentives for innovation—namely, dynamic competition.  

This potential for confusion has lead me to a conclusion that I would like to announce here today, in the interest of clarity and predictability of the laws, and among the patent law community with whom we share the goal of incentivizing innovation: The Antitrust Division is hereby withdrawing its assent to the 2013 joint “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.”

The 2013 statement has not accurately conveyed our position about when and how patent holders should be able to exclude competitors from practicing their technologies.  We will be engaging with the U.S.P.T.O. to draft a new joint statement that better provides clarity and predictability with respect to the balance of interests at stake when an SEP-holder seeks an injunctive order.

Any discussion regarding injunctive relief should include the recognition that in addition to patent holders being able to engage in patent “hold up,” patent implementers are also able to engage in “hold out” once the innovators have already sunk their investment into developing a valuable technology.  Additionally, a balanced discussion should recognize that some standard-setting organizations may make it too easy for patent implementers to bargain collectively and achieve sub-optimal concessions from patent holders that undermine the incentive to innovate.  That is the topic I want to turn to next.

Although standard-setting organizations can undoubtedly offer enormous benefits to consumers, there are antitrust risks associated with any activity that involves competitors making joint decisions.  When there is evidence that participants in a standard-setting organization have engaged in collusion, which is the “supreme evil” of antitrust law, according to the Supreme Court in Trinko, the Division will be inclined to investigate. 

For instance, there is a potential antitrust problem where a group of product manufacturers within a standard-setting organization come together to dictate licensing terms to a patent holder as a condition for inclusion in a standard because it may be a collective exertion of monopsony power over the patent holder.  . . . 

The Antitrust Division will therefore investigate and bring enforcement actions to end practices that eliminate the independent centers of decision-making and thereby harm competitive processes, including price competition and innovation competition.  Often a single maverick firm may be willing to take a chance on a new and innovative technology or business model that the rest of its competitors would rather see killed off in its incipiency.  Antitrust law recognizes the consumer benefit of those entrepreneurial and innovative tendencies and their vulnerability to collusion.

Although there are certain best practices for guarding the process of standard setting against such abuses, we are concerned that some standard-setting organizations may not even attempt to adopt these safeguards.  

. . . Calling your meetings a standard-setting organization, or even in fact publishing some standards necessary for interoperability, is not a free pass for coordination designed to reduce common competitive threats or forestalling innovative developments in the industry that put a legacy business model at risk.

… Patent policies affect the incentives for innovation.  If an SSO’s policy is too restrictive for one side or the other, it also risks deterring participation in procompetitive standard setting. 

Just as competition in the marketplace results in better outcomes for the consumers of goods and services, competition among standard-setting organizations to adopt better patent policies can result in better outcomes for the consumers of standard-setting activities (that is, for the participants themselves). 

It is for this reason that we will take a dim view of any coordinated effort by competitors to stifle competition among standard-setting organizations, including competition to offer the patent policy that brings the most participants to the table.  For instance, competitors would come under scrutiny if they orchestrated a group boycott of an SSO with a patent policy that is unfavorable to their commercial interests. 

Northwestern Releases Technology Standards and Standard Setting Organizations Databases and Congratulations to Dr. Roya Ghafele!

Northwestern University, Pritzker Law School, has released three databases on technology standards and standard setting organizations.  The announcement states:

The Searle Center on Law, Regulation, and Economic Growth is pleased to announce the release of three important databases on Technology Standards and Standard Setting Organizations (SSOs). The databases are available free of charge for all academic researchers.

The first database, known as the Searle Center Database on Technology Standards and Standard Setting Organizations, created by Justus Baron and Daniel F. Spulber, contains original data on the rules and membership of SSOs, and bibliographic information on published technology standards (including an original database of normative and informative references between standard documents).

The second database, created by Justus Baron and Tim Pohlmann (IPlyitics), contains the currently most comprehensive database of declared standard-essential patents (SEP) and the first detailed mapping of declared SEPs to a systematic dataset of standard documents.

The third database, created by Justus Baron and Kirti Gupta (Qualcomm), includes detailed procedural data on standard development at an important SSO, the 3rd Generation Partnership Project 3GPP.

The three databases are inter-related, and share a common system of identifiers for standards and firms to facilitate research applications combining the various databases.

Under the direction of Daniel F. Spulber, (Kellogg School of Management, Northwestern University, and Research Director of the Searle Center), the Searle Center's Research Project on Innovation Economics addresses a broad range of important issues involving intellectual property (IP), research and development (R&D), the market for inventions, innovation, and technology standards.

For details on the databases and the Searle Center's ongoing Research Project on Innovation Economics Project please visit: http://www.law.northwestern.edu/searlecenter/innovationeconomics
Papers describing the databases can be found at the following links:

- Justus Baron and Daniel Spulber: Technology Standards and Standard Setting Organizations: Introduction to the Searle Center Database, Northwestern Law & Econ Research Paper No. 17-16. Available at SSRN: https://ssrn.com/abstract=3073165 or http://dx.doi.org/10.2139/ssrn.3073165, forthcoming Journal of Economics and Management Strategy, 2018.

- Justus Baron and Kirti Gupta: Unpacking 3GPP Standards. forthcoming Journal of Economics and Management Strategy, 2018.

- Justus Baron and Tim Pohlmann: Mapping Standards to Patents Using Declarations of Standard-Essential Patents, forthcoming Journal of Economics and Management Strategy, 2018.

Please see the following instructions to receive access to the database:

- The three Searle Center databases are intended only for academic research. Commercial and or for-profit research is strictly prohibited.

- Prior to being granted access to the databases, all academic researchers must first compete a Data License Agreement (DUA).

- The DUA is available for download here: http://bit.ly/searlessodua
- Once requestor has filled out the required fields and signed the DUA, email a scan of the DUA to searlecenter@law.northwestern.edu

- Please note that a PDF electronic signature on the DUA is acceptable.

- All research assistants or research personnel that will have access to the data must also complete DUA's.

- Once we receive your signed DUA, we will verify that your application fits the criteria listed above. If we conclude that it does, we will then send you a link to a Box Folder where all of the files and supporting documents will be permanently hosted. You may have to create a Box account in order to access the databases.
. . .

The databases release is apparently for academics.  My guess is that others can access the databases for a fee. 

Congratulations to Oxfirst’s Dr. Roya Ghafele on joining the EU Commissions’ Group of Experts on Licensing and Valuation of Standard Essential Patents!  According to the press release:

The purpose of the expert group is to ‘deepen the expertise on evolving industry practices related to the licensing of standard essential patents in the context of the digitalisation of the economy, the sound valuation of intellectual property and the determination of fair, reasonable and non-discriminatory ("FRAND") licensing terms.’ The Expert Group’s importance to European and international governance formulation on FRAND is widely recognized. The Expert Group will address a host of complex issues pertaining to patents that read on standards, as already set out in 2017 in the E.C.’s ‘Communication from the Commission to the Institutions on Setting out the EU approach to Standard Essential Patents.’

U.S. Antitrust Division Chief Makan Delrahim: Making Patents Great Again?

Makan Delrahim, the leader of the Antitrust Division of the U.S. Department of Justice of the Trump Administration, has made several interesting comments concerning patents and the antitrust interface.  In a recent post on the Patently Obvious Blog, Professor Dennis Crouch discusses some debate concerning Mr. Delrahim’s positions as to when patent holders may create antitrust issues: “[Delrahim] explained that the DOJ’s historic approach has been a “one-sided focus on the hold-up issue” in ways that create a “serious threat to the innovative process.””  Professor Crouch includes links to documents concerning Delrahim’s positions as well as some responses. 

A few days ago, Mr. Delrahim spoke to the College of Europe in Brussels.  His speech is titled: “Good Times, Bad Times, Trust Will Take Us Far: Competition Enforcement and the Relationship Between Washington and Brussels.”  Most of the speech concerns the successes of cooperation between the DG Competition and the US DOJ Antitrust Division.  However, he does note some divergence in approach concerning intellectual property:

In the intellectual property area, we each have licensing guidelines; DG Competition’s guidelines were revised in 2014; ours just last year.  Both sets of guidelines highlight the benefits of robust IP protection, the importance of innovation incentives, and the risk that certain hardcore conduct poses to competition.

Intellectual property rights and innovation are topics I have cared about for a long time.  Intellectual property rights are enshrined in the U.S. Constitution, and I believe that strong protection of these rights drives innovation incentives, which in turn drive a successful economy.

A deep-seated concern for protecting incentives to innovate underlies many of the changes in U.S. antitrust law over the past several decades, and it is no coincidence that we have enjoyed a period of staggering innovation over that time.  But in an ever-evolving marketplace, success is not a static outcome.  We must continue to think critically about how best to calibrate our enforcement decisions to promote competition and innovation.

As you may know from what I have said publicly, a particular concern of mine is how we use antitrust enforcement in the context of standard setting.  In particular, I worry that we have strayed too far in the direction of accommodating the concerns of technology licensees who participate in standard setting bodies, very likely at the risk of undermining incentives for the creation of new and innovative technologies.  We continue to better our understanding of this important field.

The dueling interests of innovators and implementers always are in tension, but the tension is best resolved through free market competition and bargaining.  And that bargaining process works best when standard setting bodies respect the intellectual property rights of technology innovators, including the very important right to exclude.  To the extent a patent holder violates its commitments to a standard setting organization, remedies under contract law, rather than antitrust remedies, are more appropriate to address licensees’ concerns.

I am aware that there may be some distance between my position and that of some of my European counterparts.  If that is the case, however, we can look to our long history of effective and productive collaboration for guidance about how to proceed.  I will make every effort to work with our counterparts at DG Competition to narrow any gap between Brussels and Washington in this area.  We must maintain our close dialogue on the cutting-edge issues—innovation, intellectual property rights, and digital markets—that will occupy much of our time in the future. Innovators and consumers in both of our unions deserve nothing less.        

Mr. Delrahim also discussed the purpose of antitrust or competition law, and digital markets:

We also continue to work to narrow the differences between us on policy and substance.  Mr. Kolasky’s speech identified a “sharp divergence” between the EU approach and “the central tenet of US antitrust policy – that the antitrust laws protect competition, not competitors.”  But since those remarks, European Commissioners have again and again affirmed their commitment to the consumer welfare standard.  Starting with then-Commissioner Mario Monti and continuing with Commissioners Neelie Kroes, Joaquin Almunia, and on to Commissioner Margrethe Vestager today, Commissioners have expressed their commitment to the same consumer welfare standard that guides U.S. competition enforcement.  As Commissioner Vestager has stated, “we don’t always do things the same way.  But I think our goals are very similar: We want to protect competition and consumers.”

This is not to say that we have overcome all of the differences between us.  We still do have differences, but we talk about them regularly and respectfully, so that we can understand what motivates them.  

For example, we have not yet closed the gap in the area of unilateral conduct. European competition law still imposes a “special duty” on dominant market players, while we in the U.S. do not believe any such duty exists.

With respect to unilateral conduct, we have particular concerns in digital markets.  We continue to advocate for an evidence-based approach based on existing theories, which are sufficiently flexible to apply to new forms of doing business in the digital economy.  Where there is no demonstrable harm to competition and consumers, we are reluctant to impose special duties on digital platforms, out of our concern that special duties might stifle the very innovation that has created dynamic competition for the benefit of consumers. 

But the benefit of our close relationship with DG Competition is that we can and do talk about these differences, making progress along the way.  For example, in the ICN’s Unilateral Conduct Working Group, we spent significant time working together to develop an Analytical Framework for Unilateral Conduct.  Even though we have different views on how dominant players should be treated, we nevertheless reached agreement on a fairly significant policy document.

Will Mr. Delrahim Make Patents Great Again? 

Oxfirst Free Webinar: The European Telecommunications Standards Institute Patent Policy

Our friend at Oxfirst, Roya Ghafele, has let us know about another timely webinar sponsored by Oxfirst.  Dirk Weiler, Board and IPR Special Committee Chairman of European Telecommunications Standards Institute [ETSI] & Christian Loyau, Legal and Governance Director of ETSI will present: “The ETSI Patent Policy”.  The talk will cover: “[An] explain[ation of] the main elements of ETSI’s IPR policy, the current challenges and the way changes to the policy are agreed [to] via a consensus based process taking into account all affected stakeholder interests.”

Mr. Weiler’s biography states: “Dirk Weiler is Chairman of the ETSI Board and the ETSI IPR Special Committee, and Head of Standards Management & Horizontal in the Networks Business of Nokia. With 30 years of technical and management experience in the telecoms industry he regularly speaks and writes about standardization, patents and the interplay of both. He holds an advanced degree in physics (Diplom-Physiker) from the University of Cologne.” Mr. Loyau’s biography states: “Christian Loyau is also the Legal Director of ETSI. He served for 12 years as Legal Director for International Affairs for the French telecommunications company Matra Communication and was involved in the IPR group of ETSI from 1993 to 1996. He then served as General Counsel and Secretary of the Board of the French IT company ATOS-Bull for 14 years.”

 

This talk follows Oxfirst’s recent webinar on IEEE’s standard setting process.

The talk is scheduled on March 11, 2016 - 14.00 British Standard Time / 15.00 CET/ 09.00 EST.  To register please follow this link: https://attendee.gotowebinar.com/register/141738416756401924  (Please note from Oxfirst that: “We only accept registrations undertaken with professional email addresses (i.e. we can’t accept registrations from yahoo, gmail or similar private accounts)”)

Oxfirst Free Webinar on IEEE Standards Patent Policy by IEEE Experts

Our friend at Oxfirst, Roya Ghafele, has let us know about another timely webinar sponsored by Oxfirst.  Dr. Karachalios, Managing Director of IEEE, and Michael Lindsay, Partner at Dorsey LLP will present “Review of IEEE Standards Association (IEEE-SA) Patent Policy”.  The talk will cover:

IEEE-SA's Attempt to Provide Greater Clarity in its Patent Policy was triggered by how the landscape was evolving (recommendations from regulators; observations by the courts; IEEE's own experiences). This led to IEEE's re-examination of its standards patent policy, and the resultant policy updates aim at providing greater clarity to all stakeholders.

 

Dr. Karachalios’ biography states: “Dr. Karachalios is responsible for providing strategic and operational leadership and direction to IEEE-SA and for ensuring its consistent and positive differentiation as a standards body. Prior to that he served the EPO in various functions.”  Mr. Lindsay’s biography states: “Michael Lindsay is a partner in the Trial practice and Co-Chair of the Antitrust practice of Dorsey LLP. He practices in the area of general civil litigation, with a strong emphasis on antitrust (litigation and counseling), trademark and unfair competition, commercial litigation.” 

The talk is scheduled for February 17, 2016 at 15:00 GMT.  To register please follow this link: https://attendee.gotowebinar.com/register/5055758245458402049.  (Please note from Oxfirst that: “We only accept registrations undertaken with professional email addresses (i.e. we can’t accept registrations from yahoo, gmail or simiar private accounts)”)

IEEE will jeopardise its attractiveness as venue for standards development if proposed new IP policies are adopted

The IEEE board of directors is imminently expected (probably on 9^th February 2015) to vote on whether to adopt proposed changes to IP policies which will significantly diminish the future attractiveness of IEEE as a venue for standards development. Proposals are fundamentally flawed and have not been properly reviewed in accordance with IEEE principles and procedures to the point that the European Commission has publicly expressed its concerns.

In response to a question by the regulatory newswire MLex, the EC issued this following statement: “The Commission is closely following the developments at the IEEE. We are very mindful about the need for a careful balance between guaranteeing full access to standards at the same time as ensuring appropriate remuneration for intellectual property. Standards bodies should ensure that their rules comply with competition law so as to ensure that the benefits of standardisation can be achieved without anti-competitive outcomes. We are currently running a public consultation on Standard Essential Patents to gather information and views on the interplay between standardisation and intellectual property rights (IPR). The consultation deadline has been extended to 15 February and it would be premature to draw any conclusions.”

IP policies are pivotal to standard setting organisations. They determine whether or not technology developers have sufficient commercial incentives to contribute their patented technologies and engineering resources in development of interoperability standards such as IEEE’s 802.11 (WiFi).   

Striking a balance between the interests of developers and implementers of standard-essential patented technologies is therefore vital. This has been achieved remarkably well by many SSOs to date including IEEE, ITU and ETSI. WiFi, H.264 video and GSM/WCDMA are prime examples of successful global standards from these three SSOs respectively. The proposed rule changes would likely undermine this success at IEEE.

Unwarranted changes

Standard setting IP rules determine the basis upon which implementers inside and outside SSOs must pay for – in money or in kind – the extensive standard-essential patented technologies embodied within the standards.  

The proposed policy changes include measures which are dysfunctional, unfair, shun universally accepted practices or are highly contentious. These include some measures that undermine IP rights which I have argued against in my previous IP Finance postings:

·         Defining a ‘reasonable’ royalty using controversial and unworkable valuation methodologies—including tying a royalty rate to the ‘smallest saleable component’ of a standard-compliant device—all of which are intended to minimize licensing fees for SEPs.  As I explained in my IP Finance blog posting entitled Stacking the Deck in Analysis of Smartphone Patent Licensing Costs, a chip-based royalty scheme incorrectly and unfairly associates royalties to costs, process economics and competitive outcomes in the silicon chip foundry manufacturing business that have nothing to do with mobile technology development costs and the market value generated from these investments in the broader ecosystem.  Similarly, in Commonwealth Scientific and Industrial Research Organisation versus Cisco Systems, Inc. Judge Leonard Davis ruled that ”It is simply illogical to attempt to value the contributions of the ’069 Patent based on wireless chip prices that were artificially deflated because of pervasive infringement. Basing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product. While such a calculation captures the cost of the physical product, it provides no indication of its actual value.”

·         Severely limiting injunctive relief available to SEP owners, requiring them to engage in costly multiyear litigation against infringers who refuse to license an SEP on reasonable and non-discriminatory terms, and providing them an advantage over their competitors who are licensed. As I explained in my IP Finance blog posting entitled Plunging into a Safe Harbour from SEP Injunctions, reducing the availability of injunction relief for SEPs infringement, under the threat of antitrust sanction, will unfairly shift the balance of negotiating power from patentees to licensees. There is no proof that injunctions unbalance negotiations – especially given that injunctions are very rarely granted and in the U.S. can be counted on the fingers of one hand. This shift could undermine royalties and consequently deter further investment in standard-essential technologies while harm to consumers and licensees is unproven. Some of the latter are already extremely profitable by exploiting SEPs in conjunction with their own IP and other competitive strengths.

Violating values and procedures

In violation with IEEE principles, the proposed IP policy changes were apparently created by a closed ad-hoc committee that consistently rejected the repeated and detailed objections, alternative suggestions, letters of complaint, and appeals of some thirteen respected technology companies. That is not consistent with openness, due process, collaboration with all stakeholders, and consensus-based decision making that SSOs including IEEE purport to uphold. Nor is it consistent with the WTO criteria that underpin the European standardisation policy. The US Department of Justice inexplicably glossed over such exclusion in its recent business review letter.

In March 2013, the IEEE-SA Patent Committee (“PatCom”) undertook significant substantive changes to the IEEE-SA Patent Policy. The Ad-Hoc Committee expressly disclaimed its obligation to respect consensus, and PatCom made no effort to move the comments and objections toward consensual resolution. Ad Hoc Committee participation was limited to individuals with an established position of diminishing the rights of technology holders and requests to participate from individuals with contrary views were expressly rejected. There has been no attempt to justify why changes to the Patent Policy are needed and how the proposed changes would actually address any purported problems or improve standard-setting. The fact that there exists no legal, regulatory, or economic requirement to make any changes to the Patent Policy, instead relying on vague and unidentified ‘concerns’ of U.S. and European regulatory officials, has been ignored.

Over approximately fifteen months, the Ad Hoc Committee published four versions of a revised Patent Policy for comment, but it has systematically rejected many hundreds of substantive comments and objections to the proposed Patent Policy changes, often with rote, non-substantive explanations. It has expressly disclaimed its obligation to respect consensus, and PatCom made no effort to move the comments and objections toward consensual resolution. Any deliberations on the comments and objections were closed and no substantive amendments to the proposed Policy changes were made from the initial draft.

Prejudicial proceedings

Such is the grave concern that the IEEE board might actually approve the proposed policy changes, the European Commission (i.e. the EC overall, not a specific directorate or two therein) at the last minute (4^th February 2015) has issued a formal “Statement.”  The EC makes it as clear, as this kind of official statement ever does, that it is unhappy with developments within the IEEE by:

·         Stating the EC is ”very mindful” of “the need for a careful balance” between ‘access to standards” and “ensuring appropriate remuneration for intellectual property”– it is concerned the draft IEEE rules will not achieve this.

·         Demanding respect for competition law – with the implication the proposed rules may raise issues of compliance with European competition Articles. This is presumably on the basis of the PatCom’s exclusionary conduct and the substantive policy rules that are reminiscent of a buyer cartel, as well as a forthcoming ruling from Europe’s Supreme Court on the availability of injunctions.

·         Requesting the IEEE should not presuppose or prejudice the outcome of the EC’s own reflection on standardisation and IP (the EC’s public consultation is currently underway with public comments due on 15^th February 2015) that could well go in the opposite direction to the proposed changes at the IEEE.

Be careful what you wish (or vote) for

Periodic policy reviews of SSO rules are desirable and necessary. In the case of ‘open standards’ it is particularly important that these are undertaken by SSOs in a transparent manner in which the full range of interests and views are reflected. Compliance with the law and established SSO principles and operating procedures is also essential. The best place to start is by asking the question: are existing policies satisfactory?  If changes are to be made, they should be on the basis of clear evidence of harm or failure with existing policies and with proof that change will produce better overall outcomes with fair treatment for various parties who may have different interests. If not, the rules will impact negatively on those pro-competitive activities, and will significantly diminish the attractiveness of SSOs, including IEEE, as standardisation forums.

Absurd (F)RAND licensing-rate determinations for SEPs

I have submitted many articles to IP Finance over the last couple of years as a "guest" contributor. I would like to thank Jeremy Phillips for inviting me to do so, and posting my articles for me with all the editing and production work entailed. This is my first IP Finance posting as a "resident" contributor.

Absurd (F)RAND licensing-rate determinations for SEPs

Judge James L. Robart's findings in the case between Microsoft and Motorola, which issued in April 2013, represent the first U.S. judicial attempt to determine reasonable and non-discriminatory licensing fees. Most recently, Judge James F. Holderman has also had a go in his royalty rate opinion in the Innovatio case. The judges’ rate setting applies only to standard-essential patent technologies in H.264 video and 802.11 WiFi. In my opinion, the rates set in both cases are defectively based and unreasonably low.



Rate-setting in SEP licensing

The judges’ decisions are both based on the faulty dictum that patentees are entitled only to a small proportion of standard-essential patent value. Valuation methods selected unsurprisingly reflect that predisposition. The judgements significantly rely on the defective notion that SEP-owners’ rewards should only reflect “intrinsic value” of technologies, and that they should be deprived a proportion of the value that comes through standardisation including “network effects.” Core technology developers deserve to share in the economic benefits of standardisation because of the significant costs and risks in developing, proposing and integrating their technologies. That has been the basis for investment and market success so far.

Patent pools and chipset profits used by Judges Robart and Holderman respectively provide biased and misleading benchmarks for (F)RAND royalties. The judges identify some major limitations in using patent pools while seeming oblivious to other pitfalls. Judge Robart ill-advisedly uses pools because participants are mainly implementers who tend to be most interested in keeping their royalty costs low. Those with the most valuable patents tend to steer clear. Judge Holderman latches onto an alternative approach, based on silicon chip component manufacturer profits, that is also deeply flawed, while taking comfort from choosing a reasonable royalty rate that falls within the range established for the same standard by Judge Robart. Licensing rates on ICT products commonly apply across the entire product because value is delivered and enjoyed on that basis. They have little to do with and should not be limited to profits on chips.

My full analysis is a rather lengthier 24 pages. Those with the interest and stomach for it can find it in full here as a PDF document.

Incentives to Collaborate: WIPO Article and the US DOJ/USPTO Guidance Letter

In the December 2012 WIPO Magazine there is an excellent brief article concerning patent pools and standards titled, “Collaboration in Intellectual Property: An Overview,” by distinguished Harvard Business School Professor Josh Lerner and doctoral student Eric Lin.  The article describes the increase in patent pools in the last 15 to 20 years after a period of regulatory distrust of such collaborations since the 1940s.  The article notes that many questions remain for research relating to collaborations and makes suggestions for future research, but also states that some lessons can be learned from the existing literature, such as “requiring patent pools to engage in independent licensing.”  The article also argues that regulatory agencies should “actively encourage socially beneficial collaborations” instead of focusing on the potential anticompetitive consequences of such collaborations.  Specifically, the authors note that France, Germany and the United Kingdom provide benefits to participants in certain collaborations.  Moreover, the authors caution that US regulators may be too zealous in prohibiting discussions of price by standard setting organizations and this may waste time.  The authors suggest a “temporary safe-harbor status to firms that wish to explore the feasibility of collaborating.” 

The United States appears to be taking some steps towards ensuring that the International Trade Commission does not act in a way that creates a disincentive to participate in or create collaborations.  In a January 8, Joint Statement by the United States Department of Justice, Antitrust Division (DOJ) and the United States Patent and Trademark Office, Office of the General Counsel (USPTO), the DOJ and USPTO provide guidance to the International Trade Commission concerning whether exclusion orders should issue in all cases if standards essential patents offered on F/RAND terms are infringed.  The DOJ and USPTO clearly explain the benefits of patents as well as the benefits of voluntary licensing such as F/RAND licensing, and ultimately caution that exclusion orders in particular cases could result in providing disincentives to participate in F/RAND licensing.  The Intellectual Property Watch provides a description of the report here and a copy of the report is available here.   A good first step?