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

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

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

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

US U-turns

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

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

He explained that:

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

Delrahim went on to opine:

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

In conclusion, he said:

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

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

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

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

European Commission also seeks fairer balance in its approach to SEPs

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

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

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

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

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

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

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

Policy guidance passé

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

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

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

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

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

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

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

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

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

Curing and reversing the contagion

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

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

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

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

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

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

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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.'

Keith Mallinson has more than 25 years of experience in the Telecommunications Industry: as a research analyst, consultant and testifying expert witness. Complementing his industry focus, he has a broad skill set including technologies, market analysis, regulation, economics and finance. Prior to founding WiseHarbor in 2006, Mallinson led Yankee Group's global Wireless/Mobile research and consulting team as Executive Vice President, based in Boston, from 2000. Until then, he had overall responsibility for the firm's European division, as Managing Director from 1995. Prior to that he was the European Research Director.

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