U.S. Congressional Research Service Report on Public Performance Right in Sound Recordings

The U.S. Congressional Research Service has published a Report with a nice overview of the public performance right in sound recordings, including history as well as licensing rates and revenue trends.  Importantly, the Report reviews two pieces of related proposed legislation.  The Report, in part, states:

Two pieces of legislation introduced in the 118th Congress focus on public performance rights for sound recordings transmitted by broadcast radio. The first, a nonbinding resolution known as Supporting the Local Radio Freedom Act (LRFA, H.Con.Res. 13 and S.Con.Res. 5), would effectively declare support for maintaining the status quo. LRFA would resolve that Congress should not impose any new performance royalty (or other fee, tax, or charge) for the public performance of sound recordings by a local radio station via over-the-air broadcast or on any business for such public performance of sound recordings via an over-the-air broadcast. The second, the American Music Fairness Act (AMFA, H.R. 791 and S. 253), would expand the public performance right for sound recordings to include any audio transmission, including broadcast radio transmissions. AMFA would subject performances by radio stations to the statutory license applicable to noninteractive digital services and place caps on royalties for broadcast stations with annual revenue under $1.5 million in the preceding year (unless owned by an entity with annual revenue over $10 million).

How to derive and apply aggregate royalty rates for SEP FRAND determinations

Among numerous legal, economic and commercial concerns about the European Commission’s proposed legislation for Standard Essential Patent (SEP) licensing, its plans for aggregate rate setting and mandatory Fair, Reasonable and Non-Discriminatory (FRAND) rate determinations in various technology standards raises all kinds of issues and alarms.

Following publication of the proposed legislation and impact assessment on April 27, the Commission has been seeking online feedback submissions by August 10, 2023.

In a previous posting here and in my initial feedback submission the Commission 14th June, I have argued against the Commission’s apparent intention to abandon the established approach of using comparable licensing agreements directly as benchmarks in FRAND rate determinations, and instead apportion rates among SEP owners based on their respective shares of total SEPs using the top-down approach.[1] For example, I was critical about use of patent counting methods. My new feedback submission to the Commission focuses on aggregate royalty rate setting.

Any aggregate royalty rates set must be precisely defined, derived and applied. Aggregate rate setting for standards, as proposed by the Commission, will enable proposed rates to be depicted and manipulated in ways which are anticompetitive, unfair and will under-value patented standard-essential technologies. According to the proposed legislation, “‘aggregate royalty’ means the maximum amount of royalty for all patents essential to a standard.”[2] The Commission also indicates “uncertainty about the SEP royalty burden” and that “Stakeholders consider that the FRAND licensing concept could benefit greatly from some clarification, notably with regard to the determination of an aggregate royalty burden.”[3]

Aggregate royalty rates proposed to or set by the EUIPO could be in quantification of the total payment burden to be paid or of the rate to be used in determining individual FRAND royalty rates with the top-down approach.[4] The latter should be a higher figure than the former to allow for SEPs that remain unlicensed and for which there is no payment.

Either of these aggregate royalty rate percentages might be derived somehow from among various different formulations of aggregate rates reported. However, these reported rates vary enormously, for example, global rates from more than 35% to less than 5% of a smartphone’s selling price. The maximum aggregate rate burden implementers will have to pay and the correct Aggregate Royalty Rate for Apportionment (ARRFA) in a top-down approach FRAND determination will fall well within those two extremes.

An alternative approach in aggregate rate setting is to estimate value in standards with use of techniques including hedonic pricing or conjoint consumer preference analysis, and then apportion value somehow between SEP licensors and implementers.

If aggregate rates are to be set at all—as they are for patent pools in their rate cards, but in the opinion of many is unnecessary and dysfunctional in bilateral licensing[5]—such rates must be derived in the applicable context. Collective action—such as in patent pools—where some major licensors are typically also major licensees will tend to set rates that are lower than would be agreed bilaterally. Another crucial difference is that patent pool aggregate rates are the rates licensees actually pay.

In FRAND determinations for bilateral licensing there is always a shortfall between the ARRFA and what is actually paid because the SEPs in any given standard are never fully licensed. The aggregate rates from which bilateral licensing rates are derived are never fully paid due to notional royalty allocations to patents that remain unlicensed. Any aggregate royalty setting must recognize this difference if such rates are to be used to determine FRAND rates using the top-down approach.

To mitigate shortcomings in rate setting, some guiding principles must be established on what the “SEP royalty burden” and ARRFA should include and exclude, as well as how and by whom such rates should be derived and applied. The interests of both SEP owners and implementers must be safeguarded while reflecting industry realities with the many factors that shape varied financial and other terms in established licenses. Application of economic theory must have full and proper regard for what royalty figures reported in the industry represent and how licensing actually gets done.

My full submission to the Commission can also be downloaded from WiseHarbor.

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[1] Feedback on draft EU legislation by Keith Mallinson, WiseHarbor; June 14, 2023

[2] Article 2 (10).

[3] Proposed regulation (page 8) and Impact Assessment (2.3.2)

[4] “A SEP holder or an implementer may request the competence centre for a non-binding expert opinion on a global aggregate royalty.” Article 18

[5] Various court decisions including Unwired Planet v. Huawei and  InterDigital v. Lenovo have avoided or explicitly rejected aggregate rate setting, while others including Optis v Apple, also in the UK, have also primarily used comparable licensing benchmarks in their FRAND determinations.

Bill to Map the United States Pharmaceutical Supply Chain

A fair amount of concern has been raised concerning the security of supply chains, including the pharmaceutical supply chain.  U.S. Senator Gary Peters (Michigan) has introduced legislation to make a step in the direction of protecting the pharmaceutical supply chain.  The Press Release states:

U.S. Senator Gary Peters (MI), Chairman of the Homeland Security and Governmental Affairs Committee, introduced bipartisan legislation that would help the federal government better prepare for future public health threats by creating a database to map vulnerabilities in the pharmaceutical supply chain. The database would include the country of origin, quantity and other key information about critical drug products to identify supply chain weaknesses that could lead to shortages or other challenges in a future public health emergency.

The legislation builds on recommendations from two reports released by Peters in 2019 and 2023 that identified national security concerns related to our nation’s overdependence on foreign sources for critical drug products and insufficient visibility into U.S. pharmaceutical supply chains. Peters’ 2023 report found that both industry and the federal government lack visibility into the entire pharmaceutical supply chain – from the key ingredients needed to make drugs to the distribution of those products, presenting both health and national security risks. The COVID-19 pandemic exacerbated many of these longstanding challenges, and a 2022 Peters report examining the federal pandemic response found that federal agencies struggled to obtain needed supply chain data in critical early months that could have informed federal actions to mitigate shortages.  

“As we saw firsthand during the COVID-19 pandemic, federal agencies did not have enough visibility into our reliance on foreign manufacturers and other chokepoints in the supply chain, limiting their ability to anticipate and respond to drug shortages and related challenges,” said Senator Peters. “This bipartisan legislation will provide the federal government with a more comprehensive understanding of the weaknesses in our pharmaceutical supply chains so we can take steps to address them and prevent future shortages.”

The Mapping America’s Pharmaceutical Supply (MAPS) Act would require the Secretary of the Department of Health and Human Services (HHS) to establish a federal database to map the origin of each drug, the location of the facilities used to manufacture them, and associated inspections and risks, such as recalls and import alerts. HHS will use this information to make data-driven decisions on supply chain threats and how to increase resiliency through strategic investments in domestic manufacturing. The bill also requires HHS to report to Congress on how they are using the database to predict and prevent vulnerabilities for critical drug supply chains and what gaps in data remain.

This legislation follows Peters’ efforts to mitigate national security risks within the pharmaceutical industry. This Congress, he introduced a bipartisan bill to address the U.S. dependency on foreign drug manufactures. Earlier this year, as Chairman of HSAGC, Peters released a report and convened a hearing on the national security risks presented by continued drug shortages.

U.S. Disruptive Technology Strike Force Brings First Cases

The relatively newly created Disruptive Technology Strike Force of the U.S. Department of Justice and U.S. Department of Commerce announced five new cases in May.  These are the first cases brought by the new multi-agency task force.  The press release, in part, states:

The Justice Department today announced criminal charges in five cases and four arrests from five different U.S. Attorney’s offices in connection with the recently launched multi-agency Disruptive Technology Strike Force.

The Disruptive Technology Strike Force is co-led by the Departments of Justice and Commerce to counter efforts by hostile nation-states to illicitly acquire sensitive U.S. technology to advance their authoritarian regimes and facilitate human rights abuses. The Strike Force’s work has led to the unsealing of charges against multiple defendants in five cases accused of crimes including export violations, smuggling and theft of trade secrets.

Two of these cases involve the disruption of alleged procurement networks created to help the Russian military and intelligence services obtain sensitive technology in violation of U.S. laws. In the Eastern District of New York, a Greek national was arrested on May 9 for federal crimes in connection with allegedly acquiring more than 10 different types of sensitive technologies on behalf of the Russian government and serving as a procurement agent for two Russian Specially Designated Nationals (SDNs) operating on behalf of Russia’s intelligence services. In the District of Arizona, two Russian nationals were arrested for their involvement in a procurement scheme to supply multiple Russian commercial airline companies – which were subject to bans from engaging in certain type of commercial transactions – with export-controlled parts and components, including braking technology.

Two of the other cases announced today charge former software engineers with stealing software and hardware source code from U.S. tech companies in order to market it to Chinese competitors. In the Central District of California, a senior software engineer was arrested on May 5 for theft of trade secrets for allegedly stealing source code used in metrology software which is used in “smart” automotive manufacturing equipment. The defendant then allegedly marketed the stolen technology to multiple Chinese companies. In the Northern District of California, a citizen of the People’s Republic of China (PRC) and former Apple engineer is accused of allegedly stealing thousands of documents containing the source code for software and hardware pertaining to Apple’s autonomous vehicle technology. This defendant fled to China and is believed to be working for a PRC-based autonomous vehicle competitor.

The fifth and final case involves a Chinese procurement network established to provide Iran with materials used in weapons of mass destruction (WMDs) and ballistic missiles. In the Southern District of New York, a PRC national is charged with allegedly participating in a scheme to use his employer to conduct transactions with a U.S. financial institution for the benefit of a purported Iranian entity, as part of an effort to provide isostatic graphite, a material used in the production of WMDs, to Iran.

“These charges demonstrate the Justice Department’s commitment to preventing sensitive technology from falling into the hands of foreign adversaries, including Russia, China, and Iran,” said Assistant Attorney General Matthew G. Olsen of the Justice Department’s National Security Division. “We will not tolerate those who would violate U.S. laws to allow authoritarian regimes and other hostile nations to use advanced technology to threaten U.S. national security and undermine democratic values around the world.”

“Protecting sensitive American technology – like source code for ‘smart’ automotive manufacturing equipment or items used to develop quantum cryptography – from being illegally acquired by our adversaries is why we stood up the Disruptive Technology Strike Force,” said Matthew S. Axelrod, Assistant Secretary for Export Enforcement at the Department of Commerce. “The Strike Force actions announced today reflect the core mission of our Export Enforcement team – keeping our country’s most sensitive technologies out of the world’s most dangerous hands.” 

“The theft of technology and trade secrets from U.S. companies is a threat to our economic and national security,” said Assistant Director Suzanne Turner of the FBI’s Counterintelligence Division. “The charges announced today aren’t the only instances of foreign adversaries trying to steal our technology. Combating the illegal transfer of technology is one of the FBI’s highest priorities, and we will continue to work with our federal partners, including the Department of Commerce, to investigate those who steal U.S. technology to ultimately use it in weapons that threaten us and our allies.”

“The protection of sensitive U.S. technologies has been and continues to be a top priority for HSI,” said Assistant Director James Mancuso of Homeland Security Investigations. “HSI and the partners of the Strike Force will ensure that the U.S. maintains its technologic edge to protect the economic and national security interests of the United States. The Strike Force will be relentless in its pursuit of bad actors that attempt the theft of any sensitive U.S. technologies.”

. . .

Today’s actions were coordinated through the Disruptive Technology Strike Force, an interagency law enforcement strike force co-led by the Departments of Justice and Commerce designed to target illicit actors, protect supply chains, and prevent critical technology from being acquired by authoritarian regimes and hostile nation-states. Under the leadership of the Assistant Attorney General for National Security and the Assistant Secretary of Commerce for Export Enforcement, the Strike Force leverages tools and authorities across the U.S. Government to enhance the criminal and administrative enforcement of export control laws.

An indictment, complaint or criminal information is merely an allegation. All defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

 

Proposed U.S. Sensible Classification Act of 2023

U.S. Senators John Cornyn and Mark Warner have proposed an act as part of the National Defense Authorization Act which would update the U.S. government’s classification system.  The press release from Senator Cornyn’s office states:

WASHINGTON – U.S. Senator John Cornyn (R-TX) and Senate Select Committee on Intelligence Chairman Mark Warner (D-VA) released the following statements after their Sensible Classification Act of 2023, which would increase accountability and oversight of the classification system, limit overclassification, and direct federal agencies to justify security clearance requirements, passed the Senate as part of the Intelligence Authorization Act included in the National Defense Authorization Act:

“Sensitive information helps the U.S. stay one step ahead of our adversaries, but it’s also important for the federal government to be transparent with the American people and our allies,” said Sen. Cornyn. “By streamlining and modernizing the declassification process, this bill would help strike the delicate balance between transparency and secrecy, and it is critical it be included in the final defense authorization legislation.”

 “The government systematically overclassifies too much information, at a dangerous cost to both the nation’s security and the public trust.  At the same time, we too often fail to protect the nation’s most important secrets.  As chairman of the Senate Intelligence Committee, I think it is clear that our security classification system is badly in need of change,” said Sen. Warner. “Given the explosion in digital records, the status quo is no longer tenable. We’ve got too many people with access to a system that is devoid of accountability and has grown increasingly byzantine, bureaucratic, and outmoded. We need to protect our national security secrets, and then declassify those secrets when protections are no longer necessary.  I’m glad that Congress is taking some action to establish accountability.”

The legislation is also cosponsored by Senators Jerry Moran (R-KS), Ron Wyden (D-OR), Susan Collins (R-ME), Angus King (I-ME), Mike Rounds (R-SD), Martin Heinrich (D-NM), James Lankford (R-OK), and Bob Casey (D-PA).

Background:  

The classification system is in urgent need of reform. Technology has made it easier to classify files, but greater accountability and oversight is needed to ensure appropriate and timely declassification to rebuild trust between the government and the American people. Too many people have access to classified information, which contributes to rampant overclassification and lack of accountability.

The Sensible Classification Act of 2023 will codify classification authority, streamline the processes for declassification, direct training focused on sensible classification, invest in new technology to modernize the classification system, and direct a review regarding the necessity of existing security clearances to identify potential areas for additional reforms. This legislation:

• Codifies classification authority as the President, Vice President, head of an agency, or the individual to whom such authority has been delegated in line with current practice pursuant to Executive Order 13526 and specifies how the authority is delegated and the training required to receive it;
• Promotes efficient declassification for records under the Freedom of Information Act or Mandatory Declassification Review;
• Requires training to promote sensible classification;
• Improves the Public Interest Declassification Board (PIDB) by allowing for additional staff to be hired and allowing members to serve until a successor is appointed;
• Directs the federal government to develop a federated and integrated technology solution to the issue of classification and declassification;
• And directs federal agencies to conduct a study on the necessity of number and types of security clearances with sufficient justification.

Regional Comprehensive Economic Partnership Agreement: Some IP Provisions

The Regional Comprehensive Economic Partnership Agreement (RCEP) between Australia, Brunei, Burma (Myanmar), Cambodia, China, Indonesia, Japan, Laos, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam recently became effective in the Philippines.  The U.S. Congressional Research Service has a short discussion paper concerning the treaty, here.  The RCEP has several interesting provisions concerning intellectual property.  The RCEP includes a provision concerning an experimental use exception to patents:

Article 11.40: Experimental Use of a Patent Without limiting Article 11.38 (Exceptions to Rights Conferred), each Party shall provide that any person may do an act that would otherwise infringe a patent if the act is done for experimental purposes [fn 34] relating to the subject matter of a patented invention.

[fn 34 provides: “For greater certainty, each Party may determine, consistent with Article 11.38 (Exceptions to Rights Conferred), what acts fall within the meaning of “experimental purposes”.”]

The RCEP also includes a provision concerning genetic resources, traditional knowledge and folklore.  According to WIPO Magazine, WIPO members have fast-tracked a treaty on the subject.  The RCEP provision states: 

SECTION G GENETIC RESOURCES, TRADITIONAL KNOWLEDGE, AND FOLKLORE[fn 41]

Article 11.53: Genetic Resources, Traditional Knowledge, and Folklore

1. Subject to its international obligations, each Party may establish appropriate measures[fn 42] to protect genetic resources, traditional knowledge, and folklore.

2. Where a Party has disclosure requirements relating to the source or origin of genetic resources [fn 43] as part of its patent system, that Party shall endeavour to make available its laws, regulations, and procedures with respect to such requirements, including on the internet where feasible, in such a manner as to enable interested persons and other Parties to become acquainted with them.

3. Each Party shall endeavour to pursue quality patent examination, which may include: (a) that when determining prior art, relevant publicly available documented information related to traditional knowledge associated with genetic resources may be taken into account; (b) an opportunity for third parties to cite, in writing, to the competent examining authority, prior art disclosures that may have a bearing on patentability, including prior art disclosures related to traditional knowledge associated with genetic resources; and if applicable and appropriate, the use of databases or digital libraries which contain relevant information on traditional knowledge associated with genetic resources.

[fn. 41: “For greater certainty, this Section is without prejudice to the position of any Party on genetic resources, traditional knowledge, and folklore, including in any bilateral or multilateral negotiations through any fora, such as the WIPO Intergovernmental Committee on Intellectual Property and Genetic Resources, Traditional Knowledge and Folklore.”]

[fn. 42: “For greater certainty, the Parties understand that such “appropriate measures” are a matter for each Party to determine and may not necessarily involve its intellectual property system.”]

[fn. 43: “The Parties recognise the fact that some Parties also require, if applicable, in their patent systems, evidence of prior informed consent and access and benefit sharing for genetic resources and associated traditional knowledge.”]

Professor Andrew Schwartz's "Investment Crowdfunding"

Professor Andrew Schwartz has published a book titled, "Investment Crowdfunding," and the University of Colorado, Law School, is hosting a symposium launching the book.  I look forward to reading it.  The symposium is on Friday, September 8, 2023, from 9:00 am to 4:00 pm MDT.  The details are below:

Investment crowdfunding is a new form of online venture capital market, open to the public, that was legally authorized less than a decade ago; it’s like Kickstarter, except you get a share of stock.

This symposium marks the launch of Investment Crowdfunding (Oxford University Press 2023), the debut book by University of Colorado Law Professor and Fulbright Scholar Andrew A. Schwartz.

Professor Schwartz will introduce the book and thought leaders from across the country, including Todd Zywicki (George Mason University) and Allison Herren Lee (former SEC commissioner), will offer comments and discussion over the course of two panels moderated by Colorado Law faculty.

Enjoy the plenary sessions as well as the hallway track experience during provided breakfast, lunch, dessert reception, and book signing with Professor Schwartz at Wolf Law Building, home of Silicon Flatirons at University of Colorado Law School.

Copies of Investment Crowdfunding will be made available for purchase and/or signing onsite by Boulder Book Store.

US GAO Releases Short Report on Generative AI

The U.S. Government and Accountability Office has published a short and helpful paper on the basics concerning Generative AI.  The paper describes the operation of Generative AI in relatively simple language.  Additionally, the paper raises, at a high level, some of the pressing concerns related to Generative AI, such as bias, intentional and unintentional misinformation creation, copyrighted material used by Generative AI and privacy concerns.  Notably, the paper briefly addresses national security concerns with cybersecurity, including the use of AI to "rewrite code" to make identification of sources of attacks difficult and utilization of AI to improve cyberattacks by adversaries with low technical skills—"Generative AI: The Democratization of Cyberattacks.” 

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

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

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

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

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

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

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

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

Regulated royalties are unwarranted

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

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

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