FRAND licensing: A call for greater transparency

No topic in technology licensing is more vexing than standard-setting organizations (SSO’s), standard essential patent (SEP) owners and FRAND terms. Anders Møller, a recent graduate of Oxford engaged as an independent economist, describes some interesting research that shows how much transparent FRAND licensing negotiations still need to be in order to achieve their expressed goals.

With the IEEE having updated its patent policy in 2015, some standard essential patent (SEP) owners raised concerns about the economic effectiveness of its move. While it is still too early to tell what economic impact their updated patent policy will have, it is worth paying attention to an econometric analysis of the patent policy introduced by VITA (VMEbus International Trade Association ) in 2007, undertaken by the now Chief Economist of the EPO, Professor Yann Ménière, and François Lévêque, Professor at CERNA, MINES ParisTech.

SSOs generally require firms to license their patents for a given piece of technology to users on a Fair, Reasonable and Non-Discriminatory basis, or FRAND. The FRAND principle is adopted to avoid the moral hazard of license holders ex post (after negotiations) using their intellectual property to extract supra-normal rents from licensees, once technologies have become indispensable to a given manufacturing process. This is commonly referred to as patent holdup. As Lévêque and Ménière point out--

“the mainstream view is that the rationale for [F]RAND is to mitigate holdup and that the R in RAND stands for the level of royalty resulting from competition in advance of standard selection (pp. 5-6).”

In turn, this promotes the broader adoption of new standards and, hence, higher royalty earnings for licensors. However, there is no common definition of what constitutes a “reasonable” royalty, which creates vagueness and thus greater uncertainty in licensing negotiations.

Lévêque and Ménière argue that the FRAND principle has worked surprisingly well up until recently, given that both licensors and licensees have an incentive to abide by it (i.e. licensors gain an increase in uptake of their IP while licensees mitigate holdup risk). However, a few cases have been highly publicized involving antitrust litigations over IP holdup. In the words of Lévêque and Ménière, this has “instilled doubts for standard users about [F]RAND as an effective safeguard against holdup (p. 16).”

This creates a social welfare loss because both licensors and licensees are disincentivized to negotiate and license new technology standards. According to the authors--

“the threat of being held up results in allocative and productive inefficiencies that are detrimental to society, especially to consumers for whom standard-compliment products are produced in lower quantities, later and at a higher cost (p. 21).”

So, what can SSOs do about this? Lévêque and Ménière Leveque model two policy approaches. The first is based on the January 2007 updated patent policy of VITA, which states that members “must declare the maximum royalty rate for all patent claims... that may become essential to implement the Draft VSO Specification.” Furthermore, this declaration is “irrevocable,” and subsequent declarations covering the same "may only supersede the prior Declaration if the subsequent Declaration is less restrictive."

This is quite a departure from the practice of simply relying on FRAND in principle and negotiating without disclosures, which Lévêque and Ménière show to be a helpful tactic for SSOs to deal with the with the growing uncertainty associated with what ‘reasonable’ means in the FRAND regime.

Based on a mathematical model, the authors find that licensing commitments before manufacturers sink fixed costs into new product standards “induce lower prices for standard compliant products (p. 41).” This is because the expected costs are always lower when manufacturers are guaranteed a maximum royalty rate than with no assurance at all. Although the licensor accepts a certain amount of risk by committing to charging lower royalties ex ante before demand is realized, this is offset by the promotion of higher technology uptake (as lower risk encourages market entry of more manufacturers). There is therefore a convergence of interests between licensors and consumers as doing otherwise would reduce the consumption of tariff compliant products.

The second policy approach is to make declarations optional, whether of a specific royalty or a ceiling. Lévêque and Ménière’s model shows that – assuming rational action – licensors will always choose either a royalty ceiling or an exact royalty rate, as a high maximum rate is always better than having no assurance in place at all. Moreover, such a flexible policy approach allows licensors to choose the option which maximizes expected profits, thus leading to more innovation which is a significant positive externality.

The authors therefore conclude that “although the VITA IP policy is an attractive one, the policy of IEEE-SA is even preferable”, because it maximises both licensor and consumer benefits. The implications are simple yet profound for policy makers. With the European Commission as well as the Joint Research Council having issued several studies on the topic , and the European Union considering guidelines on SSO policies by early summer of this year, such insights are invaluable.

The study from Professor Lévêque and Professor Ménière clearly shows that there is a need for more transparency in FRAND licensing negotiations and that SSOs need to assume their responsibility so to further clarify what FRAND means. This is needed so to restore confidence in the FRAND regime. A VITA-like policy requiring a specific or maximum royalty rate declared up front is essential to maximize social welfare from standards and the respective patents that read on them.

The challenge for other SSOs, like ETSI or CEN/CENELEC, now lies not only in adopting policies that include flexible disclosure regimes, but also in how to institutionalize the practice by all negotiating parties in order to avoid any one licensor attempting to gain a first-mover advantage. The success of this approach will increase innovation, which is ultimately the goal of a prudent IP framework.

Commercialization Activities as Part of the Tenure Process for Academics

Rachel Abbey McCafferty has published an article in Crain's Cleveland Business titled, State is Pushing Universities to Bring Research to Market, on March 5, 2017.  The article outlines how the proposed Ohio state budget includes provisions concerning making commercialization activities by academics part of the tenure process.  The article notes how the purpose of the proposal is to direct academics to engage in research that may have a potential market.  This, of course, is one of the criticisms of the Bayh-Dole Act--that indeed the Act would push researchers toward directing research efforts to "real world" problems as opposed to "blue sky" research, which could have broad uses.  Some universities have unilaterally made the move to requiring commercialization activities for academics for tenure, but this is one of the first state "top down" directives for research institutions to require it.  Notably, the state is apparently striking a nice balance by stating that commercialization activities are just one route to be considered in the tenure process--it is not the only way to obtain tenure.  This nicely preserves flexibility for each researcher to make their own choices.  There is still the question of whether requiring commercialization efforts for tenure is necessary given the substantial market incentives available to researchers. 

The article also discusses a new institute to be formed in Ohio, which will direct commercialization activities in state institutions.  I am not very familiar with the technology transfer processes in Ohio, but this sounds like a good idea to coordinate commercialization efforts and provide accountability and stewardship for public research funding.  Notably, Governor Kasich, the recent presidential candidate, is reportedly a big fan of technology transfer, and its potential to create jobs and benefit the public.  (Hat tip to Technology Transfer Tactics for the lead to the article.)

President Trump's 2017 Trade Policy Agenda Released

The United States Trade Representative has released the President’s 2017 Trade Policy Agenda document (Agenda) on March 1, 2017.  The Agenda sets forth its purpose as well as its top priorities.  Interestingly, the purpose points to the voters as the impetus for the focus of the Agenda:

In 2016, voters in both major parties [?] called for a fundamental change in direction of U.S. trade policy.  The American people grew frustrated with our prior trade policy not because they have ceased to believe in free trade and open markets, but because they did not all see clear benefits from international trade agreements.  President Trump has called for a new approach, and the Trump Administration will deliver on that promise.

The overarching purpose of our trade policy – the guiding principle behind all of our actions in this key area – will be to expand trade in a way that is freer and fairer for all Americans.  Every action we take with respect to trade will be designed to increase our economic growth, promote job creation in the United States, promote reciprocity with our trading partners, strengthen our manufacturing base and our ability to defend ourselves, and expand our agricultural and services industry exports.  As a general matter, we believe that these goals can be best accomplished by focusing on bilateral negotiations rather than multilateral negotiations – and by renegotiating and revising trade agreements when our goals are not being met.  Finally, we reject the notion that the United States should, for putative geopolitical advantage, turn a blind eye to unfair trade practices that disadvantage American workers, farmers, ranchers, and businesses in global markets.   [emphasis added]

One of the specific key objectives noted by the Agenda includes “Ensuring that U.S. owners of intellectual property (IP) have a full and fair opportunity to use and profit from their IP.”  The Agenda further lays out its top priorities as: “(1) defend U.S. national sovereignty over trade policy; (2) strictly enforce U.S. trade laws; (3) use all possible sources of leverage to encourage other countries to open their markets to U.S. exports of goods and services, and provide adequate and effective protection and enforcement of U.S. intellectual property rights; and (4) negotiate new and better trade deals with countries in key markets around the world.” [emphasis added].

In discussing the first priority and the WTO Dispute Settlement Understanding, the Agenda states: “[E]ven if a WTO dispute settlement panel – or the WTO Appellate Body – rules against the United States, such a ruling does not automatically lead to a change in U.S. law or practice.   Consistent with these important protections and applicable U.S. law, the Trump Administration will aggressively defend American sovereignty over matters of trade policy.”  On strictly enforcing U.S. trade laws, the Agenda states: “We strongly support true market based competition – and we welcome the partnership of any country that agrees with us.  Unfortunately, however, large portions of the global economy do not reflect market forces.  Important sectors of the global economy, and significant markets around the world, have been at times distorted by foreign government subsidies, theft of intellectual property, currency manipulation, unfair competitive behavior by state-owned enterprises, violations of labor laws, use of forced labor, and numerous other unfair practices.”

On using leverage to open markets, the Agenda asserts that: “Other countries have looked to harm U.S. companies by blocking or unreasonably restricting the flow of digital data and services, or through theft of trade secrets.  In still others, foreign countries can use technical barriers – such as unnecessary regulations on particular items – to limit competition, including in the services sector.  Concerns have also been raised over currency practices and their impact on the competitiveness of U.S. goods and services.  These are only a few examples of the tactics that can be used to block or impede the competitiveness of U.S. exporters.”  The Agenda notes that transparency in implementing regulations of WTO rules and trade agreements would be helpful. 

On the section on negotiating new and better trade deals, the Agenda notes the following issues:  

1. In 2000, the U.S. trade deficit in manufactured goods was $317 billion.  Last year, it was $648 billion – an increase of 100 percent.

2. Our trade deficit in goods and services with China soared from $81.9 billion in 2000 to almost $334 billion in 2015 (the last year for which such data are available), an increase of more than 300 percent.

3. Of course, a rising trade deficit may be consistent with a stronger economy.  However, that has not been the experience of the typical American household.  In 2000, U.S. real median household income (in 2015 dollars) was $57,790.  In 2015 (the most recent year for which data are available), it was $56,516.  In fact, despite the recovery since the financial crisis, real median household income in the United States remains lower today than it was 16 years ago.

4. In January 2000, there were 17,284,000 manufacturing jobs in the United States – a figure roughly in line with the total number of U.S. manufacturing jobs going back to the early 1980s.   In January 2017, there were only 12,341,000 manufacturing jobs in the United States – a loss of almost 5 million jobs.

5. In the 16 years before China joined the WTO – from 1984 to 2000 – U.S. industrial production grew by almost 71 percent.  In the period from 2000 to 2016, U.S. industrial production grew by less than 9 percent.

The Agenda also notes that the most important trade deal under the Obama Administration—with South Korea—resulted in a massive trade deficit.  It will be interesting to see how intellectual property policy works out in coming negotiations.  

John Huntsman and the Commission on the Theft of American IP's New Update

In an interesting development, John Huntsman, Jr. is being considered by the Trump Administration for the position of ambassador to Russia.  Mr. Huntsman was the previous U.S. ambassador to China (Obama Administration) and Singapore (G.H. Bush Administration), and was a credible candidate for the U.S. Presidency in 2012.  Importantly, Mr. Huntsman is also the co-chair for the Commission on the Theft of American Intellectual Property.  In 2013, the Commission released its first Report on the Theft of American Intellectual Property.  Recently, on February 27, 2017, the Commission released an Update to the IP Commission Report of 2013.  The new Update states:

Since 2013, at the release of the IP Commission Report, U.S. policy mechanisms have been markedly enhanced but gone largely unused. We estimate that the annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software, and theft of trade secrets and could be as high as $600 billion.1 It is important to note that both the low- and high-end figures do not incorporate the full cost of patent infringement—an area sorely in need of greater research. We have found no evidence that casts doubt on the estimate provided by the Office of the Director of National Intelligence in November 2015 that economic espionage through hacking costs $400 billion per year.2 At this rate, the United States has suffered over $1.2 trillion in economic damage since the publication of the original IP Commission Report more than three years ago.

The Update notes that since the publication of the first Report that several recommendations were adopted by Congress and the Obama Administration including enactment of the Defend Trade Secrets Act, the 2015 National Defense Authorization Act , The National Cybersecurity Protection Act of 2014, The Federal Information Security Modernization Act of 2014, The Cybersecurity Workforce Assessment Act of 2014, and The Cybersecurity Enhancement Act of 2014. The Update continues to focus on China as a source of trade secret theft, but notes that cyberattacks from China have decreased.  The Update does hedge and note that this may be hard to measure.  In discussing China’s efforts to protect intellectual property, the Update also states:

To realize those reforms, China’s State Council issued a new action plan in 2016. Building on a 2015 policy document outlining goals to develop a stricter IPR regime, the action plan, titled “Opinion of the State Council on Accelerating the Construction of Intellectual Property Powers for China as an Intellectual Property Strong Country under the New Situation—Division of Tasks,” duplicates standing policy but also lists several priorities for reform of the IPR regime.50 According to analysis by Mark Cohen, a long-standing expert on China’s IP environment, the document suggests that China is making a greater effort to raise the damages a victim can sue for in Chinese courts.51 The action plan also stresses international cooperation and the placement of more IP officials overseas to protect Chinese companies. It goes on to encourage the study of China’s IP-intensive industries and the use of fiscal policy to promote their development.52 Taken as a whole, the plan appears to be more geared toward fostering stronger IP-intensive industries at home than developing the rule of law.

The Update notes that the recent United States Trade Representative’s 301 Report on China states that there are several areas of concern in China’s protection of intellectual property that require attention according to industry, such as the participation of foreign firms in standard setting in China.  Curiously, the Update then points to some potential fields in which it is alleged that state owned enterprises in China may be engaging in theft.  The Update provides two examples of possible issues; however, they both are not concretely closely tied to theft of trade secrets.  More information would be helpful.  The Update also points to state subsidization of industry and underbidding as two potential problems that help Chinese industry to the detriment of U.S. companies.  The Update concludes with a call to the Trump Administration to tackle the theft of intellectual property early in the Administration, and provides a list of recommendations that have not been adopted by the U.S. government.  For additional discussion of IP enforcement in China, please see here, here and here. 

Lexology Publishes Patent Damages Rules in 16 Jurisdictions

Lexology has recently published an article titled, "The Calculation of Patent Infringement Damages Awards in 15+ Jurisdictions." The article answers two questions for each jurisdiction: "How are damages calculated" and "Are punitive damages available?"  The jurisdictions include: the United Kingdom, Pakistan, China, Denmark, Ecuador, Finland, France, Greece, India, Israel, Italy, Japan, Malaysia, Netherlands, Romania and Turkey.  Notably, the answers for each jurisdiction appear to have been prepared by firms from each respective jurisdiction.  Interestingly, in Greece and Romania, one can obtain "moral damages." And, most jurisdictions do not allow for "punitive damages" for patent infringement.  It would be interesting to learn if there are any criminal penalties for patent infringement in the various jurisdictions--or a movement toward adding criminal penalties. 

A Closer Look at CRISPR Patents and Licensing: A More Nuanced Approach

Professors Jorge Contreras and Jacob Sherkow recently published an article on February 17, 2017, titled, "CRISPR, Surrogate Licensing and Scientific Discovery: Have Research Universities Abandoned Their Public Focus," in Science.  The authors examined the publicly available licenses between the research institutions and "spin-off" companies which include one of the principal researchers (the spin-off companies are called "surrogates" by the authors).  The authors believe that an apparent "bottleneck" exists with respect to some of the exclusive field of use licenses granted to surrogates which may result in underuse of the technology ultimately harming innovation.  This is, in part, because the surrogates may not be best positioned to utilize the technology under some of the broader fields of use that are exclusively licensed.  The authors note that a "platform technology" such as CRISPR should be broadly accessible and provide some suggestions for future licensing.  The authors also point to how the research institutions have attempted to make the technology available as a tool although without the rights to "market and develop products derived from their research."  This paper is three pages long and well-worth a read. 

US Senate Candidate in California Critical of Bayh-Dole Act

Michael Eisen, a geneticist at University of California, Berkeley, has written a blog post concerning the CRISPR dispute, the Bayh-Dole Act and academic science.  Notably, Dr. Eisen is running for the U.S. Senate in California.  Dr. Eisen is essentially critical of the Bayh-Dole Act for skewing incentives toward commercially valuable research, complicating accessing research, slowing the progress of research and creating incentives for researchers to “behave badly.”  Here is an excerpt from his post:

Academic science is, after all, largely funded by the public. By all rights discoveries made on with public funds should belong to the public. And not too long ago they did. But legislation passed in 1980 – the Bayh-Dole Act – gave universities the right to claim patents on inventions made by their researchers on the public dime. Prior to 1980 these patents belonged to the federal government and many languished unused. The logic of Bayh-Dole was that, if they owned patents in their work, universities and other grantees would be incentivized to have their inventions turned into products, thereby benefiting the public.

But this is not how things worked out. Encouraged by a small number of patents that made huge sums, universities developed massive infrastructure to profit from their researchers. Not only do they spend millions on patents, they’ve turned every interaction scientists have with each other into an intellectual property transaction. Everything I get from or send to a colleague at another academic institution involves a complex legal agreement whose purpose is not to promote science but to protect the university’s ability to profit from hypothetical inventions that might arise from scientists doing what we’re supposed to do – share our work with each other.

And the idea that this system promotes the transformation of inventions made with public funding into products is laughable. CRISPR is a perfect case in point. The patent battle between UC and The Broad is likely to last for years. Meanwhile companies interested in actually developing CRISPR into new products are stymied by a combination of a lack of clarity about with whom to negotiate, and universities being difficult negotiating partners.

It would be so much easier if the US government simply placed all work arising from federal dollars into the public domain. We have a robust science and technology industry ready to exploit new ideas, and entrepreneurs and venture capitalists eager to fill in where existing companies are uninterested. Taxpayers would benefit by allowing the market, and not university licensing offices, to decide whose ideas and products make the best use of publicly funded inventions.

And most importantly we all would benefit returning academic science to its roots in basic discovery oriented research. We see with CRISPR the toxic effects of turning academic institutions into money hungry hawkers of intellectual property. Pursuit of patent riches has transformed The Broad Institute, which houses some of the most talented scientists working today, into a prominent purveyor of calumny.

Public Universities Bringing More Patent Suits and May Be Immune to IPRs

A recent Technology Transfer Tactics article by Jesse Schwartz published on February 22, 2017 states that universities are bringing more intellectual property suits, particularly patent infringement actions, against large companies.  Notably, the article points to the University of Minnesota infringement suit against Gilead Life Sciences and states:

Litigation like the UM lawsuit indicates that universities are warming up to the idea that fighting for their patent rights is worth the effort and expense, says Joshua H. Haffner, JD, an attorney with Haffner Law in Los Angeles. The UM case continues a trend of schools stepping up and demanding payment for use of their patents, he notes. Carnegie Mellon University settled a patent infringement case with Marvell Technology Group for $750 million in 2016, and later that year a jury ordered Apple to pay the University of Wisconsin more than $234 million for using its microchip technology in iPhones and iPads without permission. In 2015, a jury awarded Boston University more than $13 million from three companies that infringed on its patent for blue light emitting diodes (LEDs).

“This trend is continuing because they’re making money off the cases,” Haffner says. “Patent infringement cases can be very profitable, and with every win by a university others are looking at that and saying maybe they could reap the same rewards. There are other principles at play, like protecting the inventors and the principle of ownership, but really if the invention is not making money those principles tend to fall by the wayside.”

Interestingly, the Patent Trial and Appeal Board (PTAB) recently decided the Covidien v. University of Florida Research Foundation (UFRF) matter.  In that matter, the PTAB analogized inter partes review proceedings (IPRs) to litigation and decided that public (state) universities have 11^th Amendment immunity against IPRs.  Basically, this means that parties cannot bring IPRs against public universities to challenge their patents.  Notably, this immunity may be waived by the public university.  Interestingly, UFRF brought an action in state court for breach of a license agreement.  Covidien counterclaimed for a declaratory judgment of noninfringement and then filed IPRs at the United States Patent and Trademark Office challenging UFRF’s patents.  Covidien then removed the action to federal court; however, the federal district court sent the action back to state court because of UFRF’s 11^th Amendment immunity.  That decision is pending resolution at the U.S. Court of Appeals for the Federal Circuit (Federal Circuit). 

Interestingly, the PTAB states:

Petitioner additionally argues that “immunizing patents owned by alleged state entities from IPR proceedings would have harmful and far-reaching consequences.” Opp. 15–17. Here, Petitioner’s arguments are three-fold. One, invalid patents would stand simply because they are assigned to a state entity. Two, a patent owned by a monetization foundation affiliated with a state university would be insulated from the inter partes review process. Three, determining whether an entity is entitled to sovereign immunity is a fact-intensive inquiry that the Patent Office is not designed to adjudicate.

With respect to the first two arguments, we are cognizant of the fact that applying an Eleventh Amendment immunity to inter partes review, absent waiver by the state entity4, precludes the institution of inter partes review against a state entity entitled to Eleventh Amendment immunity. This, indeed, is precisely the point of the Eleventh Amendment, which is the preservation of the dignity afforded to sovereign states. “The preeminent purpose of state sovereign immunity is to accord States the dignity that is consistent with their status as sovereign entities.” FMC, 535 U.S. at 760 (citing In re Ayers, 123 U.S. 443, 505 (1887)). When sovereign immunity conflicts with legislation, Congress may abrogate sovereign immunity if it has unequivocally expressed its intent to abrogate the immunity and has acted pursuant to a valid exercise of power. Seminole Tribe, 517 U.S. at 55. Petitioner does not point to, and we do not find there is, an unequivocal, express intent by Congress in the AIA to abrogate immunity for the purposes of inter partes review.  

[Footnote 4 states: Because there is no related federal district court patent infringement (or declaratory judgment of validity) case brought by Patent Owner, we do not decide here whether the existence of such a case would effect a waiver of sovereign immunity.]

Further, we are not persuaded that an application of sovereign immunity to inter partes review will do violence to the patent system. The Supreme Court in Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527 U.S. 627 (1999) held that Congress does not have authority to abrogate Eleventh Amendment immunity with respect to patent infringement by the States, for “Congress identified no pattern of patent infringement by the States, let alone a pattern of constitutional violations.” Id. at 640. Based on the record before us, there is no evidence that the harm to the patent system, described by the Petitioner, will come to pass, let alone exists as a basis to divest States of sovereign immunity.

Finally, we are not persuaded that our tribunal cannot perform the fact-finding duties that Petitioner alleges would be required to determine whether an entity is entitled to sovereign immunity. Our rules and procedures provide for discovery and motion practice which, at a minimum, would provide the parties an opportunity to present arguments and supporting evidence pertaining to sovereign immunity.  

The Federal Circuit decision on this issue will be interesting, particularly if public universities continue to bring more litigation matters involving patents.  However, if there is a pending federal patent infringement claim brought by the university, I believe the PTAB (and Federal Circuit) will find a waiver of sovereign immunity.  The monetization firm argument is interesting.  [Hat tip to the Goodwin Keeping Tabs on the PTAB Alert for the lead to the case.]

U.S. Chamber of Commerce Releases 2017 International IP Index

In February of 2017, the U.S. Chamber of Commerce (Chamber) released its 2017 International IP Index.  (Index).  Unsurprisingly, the overall conclusion is that IP is the medicine for all that ills countries.  The 148 page Index contains a helpful description of the purpose and function of the Index:

Now in its fifth edition, the U.S. Chamber’s International IP Index continues to provide an important industry perspective on the IP standards that influence both long- and short-term business and investment decisions. The Index is a unique and continuously evolving instrument. Not only does it assess the state of the international IP environment, it also provides a clear roadmap for any economy that wishes to be competitive in the 21st century knowledge-based global economy. Large, small, developing, or developed—economies from across the world can use the insights about their own national IP environments as well as that of their neighbors and international competitors to improve their own performance and better compete at the highest levels for global investment, talent, and growth.

Notably, part of the Index focuses on the “Innovation and Creativity Life Cycle.”  In examining the life cycle, the Index notes that there is a strong correlation between robust IP rights and “knowledge intensive jobs,” “biotechnology innovation,” “greater access to licensed music content,” “creative outputs,” “nearly 50% more attractive to foreign direct investment,” and “online activity” to name a few.  Perhaps the most interesting data in the Index concerns the analysis of individual countries and a breakdown of “key strengths” and “key weaknesses” in their respective IP systems.  The full Index can be found, here.