The following post comes from Connor Sherman, a 2L at Scalia Law and a Research Assistant at CPIP.
By Connor Sherman
The field of intellectual property (IP) can sometimes be wrong in its approach towards promoting economic health, especially when that approach overlaps with antitrust law. An example of this is laid out in a new article by CPIP Senior Fellow for Innovation Policy Jonathan Barnett at Competition Policy International’s Antitrust Chronical entitled How and Why Almost Every Competition Regulator Was Wrong About Standard-Essential Patents. In the article, Prof. Barnett explains how antitrust regulators discourage investment and limit innovation when they take enforcement actions without first gathering rigorous evidence of market harm.
A standard-essential patent (SEP) is a core innovation that entire industries build upon—in other words, an innovation that is necessary to include in a product in order to comply with an industry specific standard. A business cannot just slap Wi-Fi or Bluetooth onto its new smart lightbulb without including the functions associated with those standards. This protects consumers from false advertising, but it also protects the goodwill or quality assured by those standards.
For many years, the consensus among academics, courts, and general opinion has been that the owners of these SEPs will, if given the chance, engage in a form of economic harm called a “patent holdup.” As used in the article, a holdup can be understood as raising the cost of using a patent once it has been identified as a standard innovation. In response to this consensus, regulators have attempted to use antitrust law to prevent patent holdup from occurring.
However, Prof. Barnett encourages skepticism of this premise for several reasons. Most prominently, claims of patent holdup often will fail to meet the basic antitrust injury standard of causing competitive harm. In fact, more often than not, legal issues relating to the licensing of SEPs are resolved under exactly the fields of law one would expect—that is, under patent law with regard to the validity of the patent and under contract law with regard to the validity of the licensing agreement. Another reason presented by Prof. Barnett is the lack of empirical evidence of the expected harm to justify the intervention. Without sound evidence of anticompetitive harm, it makes little sense to employ policies aimed at preventing the nonexistent harm from occurring.
Both the 1995 and 2017 Antitrust Guidelines, issued by the Department of Justice and the Federal Trade Commission, view IP licensing as having procompetitive effects, yet the actions of regulatory agencies have been inconsistent with that understanding. Prof. Barnett states that the rush to include antitrust considerations may reflect an ongoing failure to appreciate the functionality of patent licensing agreements. After all, if a patented innovation demonstrably harms competition in an already established industry, one can presume that the innovation was either so obvious as to be improperly issued or so revolutionary as to deserve the benefits provided by the patent. In the former situation, that patent will likely be invalidated, and in the latter, the patent owner deserves the reward for creating a useful innovation.
Prof. Barnett states that a strong indictment of the current policy is reflected in the Ninth Circuit’s opinion in FTC v. Qualcomm, which overturned the lower court’s imposition of an antitrust penalty based on an erroneous view of SEPs. The lower court’s position was that Qualcomm would continue to invest in innovation under the same licensing-based business model while receiving lower rewards. Prof. Barnett argues that the more likely outcome would have been for Qualcomm to begin vertical integration, freeing it from the duty to deal with obligations of antitrust law. He then explains that the hypothetical harm of patent holdup would be minor compared to the harm that would occur from encouraging the consolidation of businesses around closely guarded, industry-changing innovations.
Prof. Barnett reasons that where patents are weak and antitrust laws are strict, the monetization structure of firms will be internal—even if funding for innovations remains robust. In the inverse situation, however, the range of feasible monetization structures are expanded to include third party firms. Thus, Prof. Barnett argues that in such a situation, an IP owner will be encouraged to license out its patents to all interested users at a modest rate in order to encourage widespread adoption of the invention.
It remains to be settled whether the long-held skepticism of SEP licensing is counterproductive, as Prof. Barnett claims. However, if Prof. Barnett is correct, this period of SEP uncertainty will perhaps provide an excellent lesson about enacting antitrust policy without the empirical evidence to back it up.
The following post comes from Terence Yen, a 4E at Scalia Law and a Research Assistant at CPIP. This is the first of two posts (see day two recap) summarizing our two-day 5G at the Nexus of IP, Antitrust, and Technology Leadership conference that was held online from George Mason University Antonin Scalia Law School on October 7-8, 2020.
By Terence Yen
On October 7-8, 2020, CPIP hosted its Eighth Annual Fall Conference, 5G at the Nexus of IP, Antitrust, and Technology Leadership, online from George Mason University Antonin Scalia Law School in Arlington, Virginia. The conference featured a keynote address by the Honorable Andrei Iancu, and it was co-hosted by Scalia Law’s National Security Institute (NSI).
This conference addressed fast-emerging intellectual property (IP), antitrust, and technology leadership issues in the 5G and “Internet of Things” innovation ecosystem. Coverage included standard-essential patents (SEPs) along with established and emerging markets on a regional and global basis. Speakers were drawn from the academic, industry, and policymaking communities, with an emphasis on using objective fact-based analysis to explore points of convergence among legal, economic, and geopolitical perspectives on the IP and regulatory infrastructures that underlie these critical industries.
OPENING REMARKS & INTRODUCTIONS
CPIP Executive Director Sean O’Connor opened the conference by welcoming everyone to this year’s event and explaining that the conference was limited to a few hours each day to avoid “Zoom burnout.” Prof. O’Connor discussed the developing technologies of 5G and Internet of Things (IOT), which represents the systems that connect everyday objects and allow them to communicate with each other in real time. This technology increases the capability of a wide variety of industries, including automotives, home appliances, healthcare systems, and more.
CPIP Deputy Director Joshua Kresh then highlighted the various topics that would be covered during the four panel sessions and the keynote address and fireside chat by USPTO Director Andrei Iancu. Mr. Kresh also thanked the CPIP team, including Kristina Pietro, Devlin Hartline, and Mary Clare Durel, and the conference sponsors for making the conference possible.
SESSION 1: USING DATA TO INFORM POLICY: EMPIRICAL EVIDENCE ON SEPS, SSOS AND FRAND ROYALTIES
The first panel focused on the use of data to inform policy, compared with the use of theoretical models for standard-essential patents (SEPs), standard setting organizations (SSOs), and fair reasonable and non-discriminatory (FRAND) commitments. The panelists included Dr. Anne Layne-Farrar of Charles River Associates, Prof. Stephen Haber of Stanford University, and Prof. Daniel Spulber of Northwestern University, and the panel was moderated by Ted Essex of Hogan Lovells.
The panelists discussed how one of the biggest issues in this field is the setting up of royalty rates for industries such as the automotive sector, which utilize 5G and IOT. In the past, economists have warned the public about the looming problem of royalty stacking. Royalty stacking is a theory about industry collapse, wherein market power is exercised excessively and repeatedly. The theory is based on the concept that one monopoly is bad, two monopolies is worse, three monopolies is even worse, and so on. The fundamental concept is that each monopolist sets its price without taking into consideration the prices charged by other monopolists, leading to a situation where, as the number of patent owners increases, the aggregate royalty grows unsustainably and output collapses.
Despite the fears generated by royalty stacking models, however, this issue has not seemed to materialize in the real world. For example, the actual cumulative royalty yield on a smartphone is less than one-twentieth of that predicted by royalty stacking models. The reason we don’t observe this in the real world is that the theory is built on the notion of “one-time” play, meaning the people setting royalties do so independently of each other. As the data shows, this is an inaccurate portrayal of how royalty rates are set up.
The panel then went on to explain that it is important to check theories against data and real results. At the beginning of FRAND litigation, courts worried that implementers were being anticompetitively harmed by high royalty prices. As such, decisions were issued with the policy goal of protecting implementers. Over time, however, we have begun to see more balance from the courts and a higher demand for data prior to the acceptance of theoretical models.
Courts have now recognized that there is a very real problem of people using products without licenses, and that strategic or opportunistic behaviors can happen on either side of the bargaining table. As such, they are now more willing to act as gatekeepers to enforce good faith on both sides, often falling back to comparable licenses as a basic standard.
With this new emphasis on fair play from the courts, most royalty decisions are now being settled through out-of-court negotiations. Evidence shows that practically all SEP licenses are now subject to negotiation. While patent pools are often cited as the main exception, even they generally still have the option of negotiation. Evidence also suggests that SSOs develop standards through consensus decisions that are procompetitive, and most SEP licenses are mostly negotiated and enforced with contract law, making litigation rare. FRAND commitments have generally been found to be clear and effective, and it is believed that excessive regulation and antitrust intervention would impede standardization. Data shows that FRAND commitments encourage the adoption of standards, do not generate market power, and are consistent with invention and innovation.
The increase in negotiation eliminates many predicted outcomes for theories, which makes data even more important. Accurate real-life data informs public policy, and research in this field is shifting towards new techniques for gathering and analyzing big data, as well as increased use of AI and big data.
This trend helps to avoid policy decisions based on guesswork and provides evidence-based analysis helpful to courts and agencies.
KEYNOTE ADDRESS & FIRESIDE CHAT
“IP controls the destiny of virtually every industry.” Andrei Iancu, Under Secretary of Commerce for Intellectual Property and Director of the USPTO, started his keynote address with this bold statement. Advanced digital technologies are transforming virtually every product, manufacturing process, and logistical system, and protecting the IP rights to those technologies is not only a right mentioned in the Constitution, but is the foundation of wealth creation for our nation.
As Director Iancu explained, the advancement of 5G and IOT technology will form the backbone of a new system of autonomous vehicles, smart cities, intelligent appliances, telerobotic surgeries, precision agriculture, and much more. However, our nation faces the reality that the United States is falling behind in the intellectual property arms race.
Twenty years ago, the number of patent applications being filed by Chinese citizens was practically zero. By 2018, however, that number reached almost 1.5 million per year, approximately three times the number of American applications. Chinese applications have increased at an average rate of 26% each year, as opposed to a 2-3% annual increase for the U.S. While some may call into question the quality of these Chinese patent applications, Director Iancu noted that the sheer magnitude indicates that China is at minimum attending diligently to its intellectual property portfolios in areas critical to the next technological revolution. This remarkable trend can in part be attributed to China’s extensive system of government incentives for IP, which include tax incentives, subsidies for patents, and other monetary and nonmonetary rewards. As foreign nations like China continue to outperform the U.S. in amassing a rich depth of technological patents, U.S. companies may end up paying billions in royalties as those patents become increasingly vital to the upcoming technological revolution.
Director Iancu went on the explain that the U.S. must take steps to ensure that American technology is able to keep up with foreign technological development. To do so, we must have a robust system of predictable patent rights to maintain the incentives to innovate. If we are forced to use only technologies that are in the public domain, standards will inevitably be stunted.
Recognizing that private sector inventions are the primary source of SEPs, Director Iancu explained the need for a market-driven licensing system and the role of the government in the transition to 5G. He emphasized that it is the Patent Office’s goal to maintain balance between licensors and licensees, and he ended his presentation with the promise that the “USPTO will be steadfast in ensuring that we have a fair and balanced licensing system driven by the needs of the industry.”
Director Iancu then went on to have a fireside chat with CPIP Executive Director Sean O’Connor, taking questions from the audience at the end.
SESSION 2: IP MEETS ANTITRUST AROUND THE GLOBE: POLICY DEVELOPMENTS IN THE LEGAL TREATMENT OF SEPS AND FRAND
The final session of the day included panelists Maureen Ohlhausen of Baker Botts, Dr. Urška Petrovčič of the Hudson Institute, Prof. Daniel Sokol of the University of Florida, and Prof. John Yun of Scalia Law. The panel was moderated by Prof. Henry Butler, Dean of Scalia Law and Executive Director of the law school’s Law & Economics Center.
The panelists discussed how innovation is crucial to the U.S. economy and how IP has been one of the primary drivers of the economy for the last 60 years. Throughout that time, IP and antitrust law have consistently been found to be complementary fields, as both are aimed at encouraging innovation, industry, and competition.
FRAND issues arise in the context of standards setting, as SDOs commonly adopt patent policies to promote access after a standard is adopted. In tech areas especially, hundreds of patents are often necessary to create a working product. This requires standards for fair and reasonable licensing policies, though there is some dispute as to whether the breach of FRAND commitments is an antitrust concern. Blanket licensing policies can offer higher efficiencies related to reduced transaction costs and patent peace, but the concern is that it may be a form of tying arrangement. However, it should be noted that U.S. antitrust agencies have long acknowledged that blanket licensing does not always raise antitrust concerns.
One issue of contention is the topic of injunctions. The confusions raised on the subject have drawn the attentions of the DOJ and FTC, most recently with their post-Madison approach. The DOJ holds that patent holdup is not an antitrust problem and that SSOs should better protect against holdout to ensure maximum incentives to innovate. It believes that patent owner injunction rights should be protected, not persecuted, and that a unilateral and unconditional refusal to license a valid patent should be per se legal. The FTC agrees with some of that approach, with the opinion that breach of FRAND alone is not an antitrust problem, but both hold-out and hold-up can raise serious concerns.
As a general trend, U.S. courts have begun to move away from the idea that IP owners are very constrained by antitrust and must license. However, the advent of 5G is sure to raise a whole new slew of issues, and the 5G battle will be a very different conflict from what we have seen before. Up until now, many of the most politically connected companies around the world have not played a significant role in this debate. With 5G being the future of IOT, however, many more elements of the supply chain will be involved on this issue, and many previously uninvolved players will want to shake up the case law in their favor.
Thus far, European courts have also moved towards the trend of acknowledging that FRAND compliance may make injunctions more difficult, but there are no rules specifically barring injunctions, so the option remains on the table. European courts have generally put forth the opinion that they want to protect the interests of both implementers and SEP owners, and they are currently less willing to adopt conclusions based on categorical rules or abstract theories, preferring evidence-based analysis instead.
At the center of this multisided issue is SSOs. SSOs balance the interests of two competing groups with different incentives: the innovators and the implementers. By design, SSOs are avoiding cracking down on the issue with bold decisions so as not to disrupt the balance between two sides.
The panelists agreed that, as of right now, nothing is set in stone. Antitrust, especially in combination with IP and contract law, remains in a state of flux. This has led to a lot of uncertainty in investments, which may impact our ability to innovate. Amongst its concluding thoughts on the issue, the panel noted that there are titanic conflicts yet to come, and as far as this field is concerned, “winter is coming.”
The following post comes from Colin Kreutzer, a 2E at Scalia Law and a Research Assistant at CPIP.
By Colin Kreutzer
The LeadershIP conference is dedicated to promoting an open dialogue on global issues surrounding innovation, intellectual property, and antitrust policy. On September 10th, LeadershIP kicked off its 2020 series of virtual events with a panel discussion featuring three government agency leaders: PTO Director Andrei Iancu, NIST Director Walter Copan, and Assistant Attorney General Makan Delrahim of the DOJ’s Antitrust Division.
Moderator David Kappos, a former PTO Director and current partner at Cravath, Swaine & Moore LLP, led a discussion about the role of standard-essential patents (SEPs) in modern industry and the legal effect that an SEP designation has on patent owners. The main topic of discussion was the importance of retaining the right to injunctive relief against infringers. The panelists had released a joint statement on this subject last year, following some unwelcome court decisions and what they viewed as misinterpretations of an earlier statement from 2013. View the video of the panel discussion here.
SEPs and F/RAND
The adoption of industry-wide technical standards helps industries to thrive by promoting efficiency and interoperability among competitors. A group that authors such standards is known as a standards developing organization (SDO), and it can include representatives from governments, private companies, and universities all over the world. For example, mobile communications standards such as 4G broadband technology are developed by the ITU, a group within the United Nations.
Developing a complex technical framework necessarily involves the use of many patented technologies. When the use of a certain patented technology is essential for adhering to the industry standard, it is known as a standard-essential patent.
Since owning an SEP can give the patent owner leverage over an entire industry, SDOs often require an agreement from patent owners before electing to use their technology in the standard. To be included, owners must commit to licensing their invention to all interested parties on terms that are fair, reasonable, and non-discriminatory (FRAND). Some forms of this agreement omit the word “fair,” leaving only “RAND.” They can be collectively referred to as F/RAND commitments.
Holdup and Holdout
The combination of public standards and private property rights can create perverse incentives for both patent owners and technology implementers alike. Once a company is bound to an industry standard, a patent owner may refuse to honor its F/RAND commitment and demand licensing fees that are grossly disproportionate to the patent’s actual value. A practice like this is known as “holdup.” But the presence of F/RAND agreements can encourage the licensee to practice “holdout” as well. In that case, a company will simply use the technology without paying any fees, ostensibly because the owner would not agree to fair and reasonable terms. Holdup and holdout can both weaken standard-setting efforts by breeding distrust and discouraging participation.
The panelists talked about the chain of events that they feel resulted in too much emphasis on preventing holdup at the expense of giving holdout a green light.
The 2013 and 2019 Letters
In 2013, the PTO and DOJ released a joint policy statement on the issue of appropriate legal remedies for SEP owners. The statement said it may not always be proper seek an injunction in a district court or to ban importation of products using an exclusion order at the International Trade Commission. Citing “an effort to reduce . . . opportunistic conduct” and the need to “provide assurances to implementers of the standard that the patented technologies will be available,” the letter suggested that a voluntary F/RAND commitment may imply that “money damages, rather than injunctive or exclusionary relief, is the appropriate remedy for infringement in certain circumstances.” The letter indicated that, at least under certain circumstances, no remedies should be available that would halt the actual flow of products or impede the implementation of a technical standard. Instead, the SEP owners could expect only monetary judgments that would be decided after the fact.
In the years following this statement, several court decisions were handed down denying injunctive relief in SEP infringement cases. In Apple v. Motorola for example, the N.D. Illinois court reasoned that when an SEP owner commits to licensing its patent to everyone, the dispute narrows to one of price: “[b]y committing to license its patents on FRAND terms, Motorola committed to license the [patent] to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation.” On appeal, the Federal Circuit objected to this rationale as a per se rule, but it upheld the denial of injunctive relief all the same.
The agencies became concerned that an entirely different legal standard was being applied when the patent in question was encumbered by a F/RAND commitment. So in 2019 the USPTO and DOJ, now joined by the NIST, released a new statement. In this one, they sought to clarify that, while F/RAND commitments should be considered as a factor, they “need not act as a bar” to injunctive or exclusionary orders. The three agency heads were unified on the importance of keeping these remedies available.
Andrei Iancu, Director, USPTO
Director Iancu talked about the critical role that innovation plays in the United States economy and the need to be vigilant in our protection of IP. Inventors must be certain that their protections are reliable, whether regarding infringement, remedies, march-in rights, or any other current issue. He discussed the various measures the Office is taking to improve our IP system. This includes COVID-response actions, such as fee deferral for small entities and the switch to an all-electronic filing system.
For an IP system to be robust, it must be founded on sound policy considerations. In this vein, Director Iancu discussed various PTO policies. Recent changes at the PTAB are designed to ensure a balance between patent owners and petitioners. The Office has issued new guidance on § 101 issues to provide greater clarity on what constitutes patentable subject matter. The PTO’s chief economist reported that “uncertainty” has decreased by 44% following this new guidance. And, of course, the joint policy statement is a step toward restoring all available remedies.
On the main topic, Director Iancu kept it simple: SEPs are patents. He emphasized that injunctive relief truly goes to the heart of the property rights conferred by a patent, as the right to exclude is explicitly provided in our Constitution. He rejected the notion that a special set of rules should apply when a F/RAND commitment is involved, and he warned about what would happen if there were: “One of the fundamental principles here is that if you have categorical rules, whether in fact or as perceived, then you create a system that leads to perverse incentives and bad outcomes.” There will be far less incentive to negotiate a license agreement up front when infringers “know categorically that they will not be enjoined.”
Walter Copan, Director, NIST
Director Copan discussed the various roles that NIST play in our economy and in promoting innovation, including: advanced 5G communications, standards leadership and cooperation with the private sector, cybersecurity, biotech innovation and protection, and manufacturing and supply chain security.
His most important objective at NIST is strengthening America’s competitiveness in the world. A strong IP system is the “bedrock” of this position and SEPs figure in prominently. The U.S. share of worldwide IP is on the decline while that of China is growing. One avenue that China is using to assert itself on the world stage is through China Standards 2035, a 15-year plan to become the leader in standards development for next generation technology. Copan and others made a case for the desired SEP remedies as part of an effort to maintain or improve the United States’ global standing on issues of IP and standards development. He said that our international partners are starting to see “the value and power of injunctive relief” to discourage infringement at will.
He also emphasized the same core ideas as the other panelists: SEPs are patents, and they are entitled to the same remedies as any other patent. Rather than favoring one of holdup or holdout over the other, we should focus on encouraging good-faith negotiation.
As a patent owner himself, he has been through a number of injunctive processes and knows first-hand that this form of relief is a “key part in the suite of remedies” available. He expressed excitement about the new policy statement and the international momentum that accompanies it, but he cautioned that this effort “is a journey” and there is a long way to go.
Makan Delrahim, Assistant Attorney General, USDOJ Antitrust Division
Assistant Attorney General Delrahim described the issues in the context of his New Madison approach to IP and antitrust policy, and the four core principles that form the basis of the New Madison approach.
First, patent holdup is not an antitrust issue. The DOJ has long recognized that SDOs are procompetitive institutions, and that the interoperability they provide is a major benefit to consumers. However, that does not mean that SEP holdup is an inherently anticompetitive practice, or that antitrust law is the appropriate forum in which to settle such disputes. He described as “radical” the idea that a patent owner could be accused of an antitrust violation simply for reneging on F/RAND obligations, and that contract law would be far more appropriate.
Second, SDOs shouldn’t be used as “vehicles” by which either implementers or patent owners gain advantages over each other. Instead SDO policies should strive for a balance which maximizes the incentives for innovators to innovate and for implementers to implement. “Negotiating in the shadow of dubious antitrust liability is not only unnecessary, it dramatically shifts the bargaining power between patent holders and implementers in a way that distorts the incentives for real competition on the merits.”
Third, as discussed above, the fundamental right conferred by a patent is the right to exclude. Courts should be very hesitant to take that right away. Doing so can effectively create a compulsory licensing regime, which has been largely disfavored in the U.S. for decades.
Finally, at least from an antitrust perspective, the refusal to license a patent should not be considered per se legal. This will allow F/RAND negotiations to take place “in the shadows of contract law” without the threat of treble damages under the Sherman Act, and thus without “skewing the negotiations in favor of an implementer.”
Conclusion
In closing, the panelists were unified in their views as laid out in the joint policy statement. They were optimistic about the direction in which the law is headed, both in the U.S. as well as with international partners such as Germany and the U.K. And they looked forward to continuing the full restoration of a critical remedy for owners of standard-essential patents.
In a new CPIP policy brief entitled The End of Patent Groupthink, CPIP Senior Fellow for Innovation Policy Jonathan Barnett highlights some cracks that have emerged in the recent policy consensus that the U.S. patent system is “broken” and it is necessary to “fix” it. Policymakers have long operated on the basis of mostly unquestioned assumptions about the supposed explosion of low quality patents and the concomitant patent litigation that purportedly threaten the foundation of the innovation ecosystem. These assumptions have led to real-world policy actions that have weakened patent rights. But as Prof. Barnett discusses in the policy brief, that “groupthink” is now eroding as empirical evidence shows that the rhetoric doesn’t quite match up to the reality. This has translated into incremental but significant movements away from the patent-skeptical trajectory that has prevailed at the Supreme Court, the USPTO, and the federal antitrust agencies.
Prof. Barnett first looks at how, for the past decade or so, the groupthink about “royalty stacking” and “patent holdup” has led to efforts by the FTC and DOJ Antitrust to limit the enforceability and licensing of standard-essential patents (SEPs) that underlie the global smartphone market. However, this past December, the DOJ and USPTO changed course, saying now that SEP owners should be treated just like any other patent owner and instead expressing concerns about the possibility of “patent holdout” by well-resourced infringers. As Prof. Barnett explains, the theories and stylized models that influenced these federal agencies are now being displaced by empirical data and real-world models that better reflect how the smartphone market actually operates.
Turning to the Supreme Court, Prof. Barnett discusses the overlooked dissent in Oil States by Justice Gorsuch, which was joined by Chief Justice Roberts, in 2018. On the one hand, the Oil States majority continued the Court’s recent spate of cases reflecting the groupthink skepticism towards patents. Justice Gorsuch’s dissent, on the other hand, perhaps reflects a nascent movement among some members of the Court to revisit this conventional wisdom. Prof. Barnett points out other underdiscussed examples of this growing phenomenon within the Court, from cabining the powers of the PTAB in SAS Institute, to questioning the PTAB’s immunization from judicial review in Cuozzo, to finding that federal agencies lack standing to invoke AIA challenges in Return Mail.
Finally, Prof. Barnett addresses the current move away from the old groupthink at the USPTO, where the current leadership has expressed its support of robust patent protection. For starters, empirical evidence has discredited the widely-repeated view that the USPTO is a “rubber stamp” that approves almost all patent applications. As to inter partes reviews (IPRs), Prof. Barnett notes that, early on, institutions and invalidations were the common outcome. While this could support the conclusion that “bad” patents were being struck down, the data is also consistent with the conclusion that the process is sometimes being used opportunistically to invalidate “good” patents. Responding to this concern, recent changes in the examination process, such as the narrower claim construction standard and broader claim amendment opportunities, may enable patentees to survive unjustified validity challenges at the PTAB.
Moving forward, Prof. Barnett suggests that the tide may be turning in the patent policy world as widely shared assumptions behind patent-skeptical groupthink are subjected to rigorous empirical scrutiny. The inescapable truth is that the U.S. innovation economy has flourished while commentators have suggested it should have languished under the supposed burdens of strong patent protection. Prof. Barnett points out that skeptics may have failed to appreciate how robust patents support private incentives to bear the high costs and risks of innovation and commercialization. Current signs of a “redirect” from the old groupthink are a welcome change for preserving the intricate infrastructure that supports a vigorous innovation ecosystem.
The Federal Trade Commission’s unfair competition case against Qualcomm, Inc., has now concluded. The parties gave their closing arguments on Tuesday, January 29, and all that remains is Judge Lucy Koh’s ruling. To prevail, the FTC needed to demonstrate actual, quantifiable harm. It completely failed to do so.
The FTC’s complaint charged Qualcomm with using anticompetitive tactics to maintain its alleged monopoly position as a supplier of certain baseband processors (chips that manage cellular communications in mobile products). Specifically, the FTC alleged that Qualcomm engaged in “exclusionary conduct” through a “no license, no chips” policy in which it supplied CDMA[1] and Premium LTE chips[2] only on the condition that cell phone manufacturers agreed to Qualcomm’s license terms. The FTC claimed that Qualcomm’s conduct reduced competitors’ ability and incentive to innovate and raised prices paid by consumers for cellular devices.
In support of this position, the FTC offered Carl Shapiro, an Economics Professor from Berkeley, as an expert witness. Shapiro argued that Qualcomm’s “no license, no chips” policy gave it the market power to demand “supra-FRAND”[3] royalties. He claimed these royalties harmed competition by raising rivals’ costs, weakening them as competitors, and deterring them from doing R&D. Shapiro asserted that Qualcomm had monopoly power over CDMA and Premium LTE markets through 2016.
There are (at least) two glaring errors regarding the FTC’s and Shapiro’s arguments. First, the relevant market definitions for “CDMA” and “Premium LTE” chips are fatally flawed. Regarding CDMA, the FTC defined the relevant market solely as CDMA chips, yet the market includes both CDMA and WCDMA[4] chips, with WCDMA selling 5x more chips than CDMA. Regarding Premium LTE, there is no “premium” chip market separate from other mobile chips. What the FTC and Shapiro define as “premium” actually represents the end-result of a normal product evolution where newer, more innovative chips are incorporated first into higher-end devices. And even if one considers only Premium LTE chips, Qualcomm had a first-mover advantage because it invented the technology. A first-mover advantage is not an antitrust violation. The result of both flawed market definitions is an economic theoretical shell-game to divert attention from the fact that there is simply no evidence of harm to the properly defined actual market.[5]
And this leads to the second and even more critical point: the FTC presented no real-world evidence of harm to competitors or consumers from Qualcomm’s alleged exclusionary conduct. If R&D had been deterred by Qualcomm’s licensing practices, as Shapiro argued, he should have been able to identify at least one actual example.[6] Under his theory, the lack of ongoing R&D and harm to competitors should have resulted in an increasing number of inferior cell phones provided by a decreasing number of companies. To the contrary, more and more competitors have been entering the chip market with more and more innovations as cellular technology has advanced from 3G to 4G. Cell phone quality has dramatically increased over time, without concomitant quality-adjusted price increases.[7]
Notwithstanding the flawed market definition and lack of harm, the FTC has misconstrued the underlying basis for Qualcomm’s “no license, no chips” licensing policy, teeing it up as objectively anticompetitive and onerous. Yet, Qualcomm’s policy simply seeks to prevent “patent holdout” as a legitimate business strategy. Without this policy, device manufacturers could build phones using Qualcomm’s chips, then simply refuse to pay Qualcomm for its telecommunications patents. Qualcomm’s only recourse would be to sue for patent infringement, while the device manufacturers continue to profit from use of the chips. The “no-license, no chips” policy ensures that device manufacturers negotiate necessary patent licenses before receiving chips to build phones.
Assistant Attorney General for the Department of Justice, Makan Delrahim, has stated that condemning this kind of licensing practice, in isolation, as an antitrust violation, while ignoring equal incentives for patent holdout, “risks creating ‘false positive’ errors of over-enforcement that would discourage valuable innovation.” (Delrahim also recently criticized the FTC’s entire case saying that disputes about patent licensing should not be decided by antitrust law.)
The FTC, its experts, and its industry witnesses, however, are basically advocating for patent holdout as a legally legitimate, even preferable, strategy for dealing with patent owners like Qualcomm. Professor Shapiro’s model, in particular, advanced patent holdout in lieu of up-front patent licensing. Shapiro would require a patent owner to wait and then sue for infringement as a prerequisite to any license negotiations. But forcing the patent owner to pursue judicial recourse through a time-consuming and costly patent infringement suit leverages the cost of litigation to artificially decrease the ultimate reward to the patentee.
At the close of this case, one is left wondering why. Why did the FTC pursue a “midnight” filing at the tail end of the Obama Administration, just days before President Trump took office? Why did the FTC pursue the case over Commissioner Ohlhausen’s strong dissent in which she argued that the case was based on a flawed legal theory “that lacks economic and evidentiary support” and that “by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide”? And finally, why is the FTC attempting to cripple Qualcomm in the developing 5G technological space in favor of China’s Huawei[8], which will result in actual, quantifiable harm to the U.S.’s competitive advantage over China?
[1] CDMA, which stands for “code-division multiple access,” permits several transmitters to send information over a single communication channel and is a second generation (2G) network used in mobile device.
[2] LTE, which stands for “long term evolution,” is a fourth generation (4G) standard for high-speed wireless communication used in mobile devices.
[3] FRAND stands for “fair, reasonable, and non-discriminatory.”
[4] WCDMA stands for “wide band code division multiple access.” It is a third generation (3G) network used in mobile devices.
[5] This is the same game the FTC played in the 1990s with Microsoft where the FTC defined the relevant market as operating systems for IBM compatible PCs, but that argument only worked if one excluded Apple, Linux, and other operating systems. These type of games about defining the relevant market are common in the high-tech context, and the FTC is repeating it here.
[8] One also wonders why the FTC relied so heavily on Huawei’s testimony in this case given the Trump Administration’s repeated concerns about this company culminating in the Department of Justice’s recent 10-count indictment against Huawei for theft of trade secrets, wire fraud, and obstruction of justice.
As we highlighted in previous posts in this series (see here and here), a 2015 policy change at the Institute of Electrical and Electronics Engineers-Standards Association (IEEE)—a standard-setting organization (SSO) for mobile technologies—placed one-sided restrictions on patent owners that have demonstrably harmed innovator participation and technological advancement.
Writing about the policy revisions, economist Gregory Sidak, the Founder and Chairman of Criterion Economics LLC in Washington, D.C., explains how the IEEE made these profound changes to its patent licensing policies with the encouragement and blessing of the Antitrust Division of the U.S. Department of Justice. The amendments were intended to ameliorate the supposed problems of patent holdup and royalty stacking, but they went much further than necessary and weakened the rights of patent owners in the process.
Despite the lack of evidence of harm from patent holdup or royalty stacking, the Antitrust Division commended the IEEE for changing its policies. Mr. Sidak notes that the Antitrust Division simultaneously turned a blind eye to the collusion of the implementers who had pushed for the changes (and who benefited from them by way of suppressed royalty obligations at the expense of the patent owners), and he argues that this course of action was a dereliction of duty on the part of the Antitrust Division to dispassionately assess the competitive implications of such concerted activity.
To read the Sidak article, which was published in the Georgetown Law Journal, please click here.
Earlier this year, CPIP’s Adam Mossoff and Kevin Madigan detailed an in-depth empirical study on the troubling repercussions of policy changes at the Institute of Electrical and Electronics Engineers-Standards Association (IEEE).
In a rigorous study tracking the activity of creators and owners of technologies incorporated into standards by the IEEE, Kirti Gupta and Georgios Effraimidis show how policy shifts at the IEEE have required patent owners to effectively relinquish their legal right to stop the deliberate and unauthorized uses of their property. Unfortunately, as Gupta and Effraimidis explain, the current unbalanced nature of standard setting at the IEEE is resulting in inefficient licensing negotiations and delayed standards development, and it’s threatening the development of new and innovative consumer products at a crucial time for mobile technologies.
The full Gupta & Effraimidis study is available here, and the synopsis by Adam Mossoff and Kevin Madigan can be found here.
In advance of our Sixth Annual Fall Conference on IP for the Next Generation of Technology, the Center for the Protection of Intellectual Property will be highlighting works on the challenges brought by the revolutionary developments in mobile technology of the past fifteen years. These articles address issues related to patent licensing, standard setting in the mobile technology sector, and developing business models at the dawn of the 5G era. Contrary to the tread-worn claims that new technological developments render IP rights obsolete, these articles show how stable and effective property rights in innovative technologies continue to foster the groundbreaking advancements that benefit societies.
Much debate in the mobile technology sector has centered on recent policy changes in the standard setting organizations responsible for the development of global industry standards. In a recent paper focusing on the Institute of Electrical and Electronics Engineers Standards Association (IEEE), mobile industry expert Keith Mallinson explores the practical impact of policy changes made in 2015 by the IEEE that implemented the “patent holdup” theory by restricting the rights of owners of patents on technology that is contributed to standards.
Providing an empirical analysis of the activity of innovators of new standards technology since the 2015 change in the IEEE’s patent policy, Mallinson finds that innovators are not contributing their patents resulting from their massive investments over many years into risky research and development of cutting-edge technologies. This is evidence that the one-sided and unbalanced restrictions on innovators, and not on implementers, that were imposed by the IEEE in 2015 under the “patent holdup” theory have slowed the adoption and implementation of pioneering technologies. Mallinson explains that a more balanced and clear respect for the rights of owners of patented technologies that are contributed to standards must be restored in order to better facilitate technological advancements.
As the world prepares for the game-changing transition to 5G wireless systems, the high-tech industry must continue to efficiently develop and implement technologies and networks that work together across different platforms and devices. Few people are aware of how this happens, because it occurs solely between the companies who develop and implement technological products and services in the marketplace, such as Qualcomm, InterDigital, Microsoft, Apple, and others. These companies participate in private standard setting organizations, which develop technological standards agreed upon by these companies, such as three-prong electrical plugs, USB drives, hard disk storage drives, and even communications technologies such as Wi-Fi and 2G, 3G, and 4G.
In sum, the development of standards is a key part of how new technological innovations are efficiently sold and used by consumers and work for everyone. The reason standard setting organizations came into existence is because the alternative is neither efficient nor good for consumers. A standards “war” between companies in the marketplace leads to years of incompatible devices being sold while consumers wait for one company to establish (private) market dominance with its products and services such that everyone else must use that standard, such as what happened between VHS and Betamax in the 1980s or the market fight between Blu-ray Disc and HD DVD in the 1990s, to name just two examples. Standard setting organizations preempt this unnecessary and wasteful commercial war by bringing together the innovators and implementers of new technology to agree beforehand on a standard so that new standardized products and services can get into the hands of consumers faster.
Unfortunately, some standard setting organizations are changing their rules for the companies that invest hundreds of millions of dollars in long-term R&D to create groundbreaking technologies like those used in our smartphones. These new rules create uncertainty for these innovators. As a result, this uncertainty is threatening investments in new high-tech products and the ongoing growth in the U.S. innovation economy.
Detailing this troubling trend is a recently released, in-depth, and rigorous study by Kirti Gupta and Georgios Effraimidis, which tracks the changes in the rules for the creators and owners of the technologies incorporated into technological standards by one of the largest and more influential organizations—the Institute of Electrical and Electronics Engineers-Standards Association (IEEE). In 2015, the IEEE adopted a new policy governing how owners of patents on technologies incorporated into its technological standards can protect and secure their investments via their legal rights to their patents. This shift in policy required patent owners effectively to relinquish their legal right to stop deliberate and unauthorized uses of their property and thus made it harder for them to license reasonable royalties for the use of their technology equally among all industry stakeholders.
As Gupta and Effraimidis show through detailed analyses, the IEEE’s new policy has distorted the longstanding market processes and licensing negotiations that have led to billions of smartphones being sold to consumers at relatively low cost around the world over the past decade. This is a vitally important study, because it brings key data to the policy discussions about technological standards, patents, and the incredible products and services made possible by them and on which everyone relies on today.
A Quick Summary of Standard Setting Organizations and Patented Technologies
A traditional requirement of the IEEE and several other standard setting organizations is that innovators commit to license equally their patented technologies that are incorporated into an agreed-upon standard for all companies implementing this standard in products and services. The law already provides that a patent owner will receive a “reasonable royalty” as damages for any past unauthorized uses of a patented technology, and thus standard setting organizations added the contractual requirement that this reasonable royalty also be non-discriminatory. To create a pleasant-sounding acronym, the phrase used is that licensing rates for patented technologies incorporated into market standards must be fair, reasonable, and non-discriminatory (FRAND). The goal of FRAND is to ensure that all companies creating products and services that are sold to consumers in the marketplace pay the same rates for incorporating the necessary standardized technologies into these products and services, such as the standardized 4G transmission technology used by everyone’s smartphones.
About a decade ago, some professors and lawyers posited a theory based on an abstract, economic model that owners of patents on technologies incorporated into these standards could exploit their ability to seek injunctions for violations of their patents and thus impose unduly higher costs on the companies implementing these standards in things like smartphones, laptop computers, tablets, and other devices and services. It was a simple story about property owners “holding up” people who wished to use their technologies, cashing in on the ubiquitous knowledge that any property owner can post a sign that says “no trespassing.” Based on this “patent holdup” theory, which deduced from an abstract model that patent owners would demand inordinately high royalties from the companies that need to incorporate agreed-upon technological standards into their products and services, these academics argued for “reforms” in the law to stop “patent holdup.”
But the “patent holdup” theory is just that—a theory. More than a decade of rigorous empirical studies have not only failed to confirm the “patent holdup” hypothesis of systemic market failures in the patent-intensive high-tech industry, and instead have found market conditions that directly contradict the core claim of “patent holdup” theory (see here for a letter to Assistant Attorney General Makan Delrahim summarizing this research and listing many of the studies). One study has shown that the average royalty rate for key technologies used in smartphones is only 3.4%, which is contrary to the 67% royalty rate predicted by “patent holdup” theory. Another study, among others, found significant quality-adjusted drops in consumer prices of smartphones and increasing entry of new manufacturers of smartphones, as well as other market conditions in the smartphone industry, that directly contradict the predictions of “patent hold” theory.
Unfortunately, in response to lobbying and the successful pushing of the “broken patent system” narrative in Washington, D.C., antitrust regulators forged ahead at the DOJ to push for policy changes at standard setting organizations on the basis of this unproven “patent holdup” theory. (Thankfully, recent antitrust regulators have returned back to evidence-based, balanced policy-making.) Several years after the first article propounding the “patent holdup” theory was published in 2007, implementers began pushing this theory at the IEEE to effect changes in its internal patent policy, which ultimately responded to this effort by revising its patent policy in 2015.
IEEE Policy Changes for Owners of Patents on Technological Standards
As Gupta and Effraimidis explain, the IEEE’s new patent policy has been highly controversial and generated much discussion among academics and industry practitioners. Separate from what they disclose in their article, there have been allegations that the internal process at the IEEE in changing its patent policy was initially cloaked in secrecy and was not open to all IEEE members as to when meetings were held and as to what the substantive decision-making processes were at these meetings. One commentator referred to it politely as an “opaque decision-making process” by the IEEE. If true, this is very troubling given that this violates the exemption accorded to the IEEE under the antitrust laws for operating as a standards setting organization.
Essentially, the IEEE patent policy was changed in 2015 in two key ways that impacted innovators. First, the new policy prohibits a patent owner seeking an injunction until all efforts at obtaining a license fee have been exhausted, including suing and litigating to a final judicial decision awarding a reasonable royalty. This of course incentives purported licensors to drag out licensing negotiations while they are infringing the patent, imposing large costs on patent owners in having to file lawsuits and pursue their legal remedies in court for many years and who have no choice but to allow the unauthorized use of their property during this time.
Extending these negotiations then allows licensors to take advantage of the second major rule change by the IEEE in its patent policy: the policy shifts licensing rates from the longstanding, market-based licensing of the technology given the value of the consumer device to the component level of the value of the chip itself. Of course, a smartphone without 4G or Wi-Fi is a beautiful 1995 cell phone with a very pretty, colorful screen and nothing more, which is why the free market settled on the value added to the entire smartphone for the basis of the licensing rate for this standardized technology. Moreover, calculating royalty rates based on the very cheap computer chips that contain the valuable technology fails to account for the hundreds of millions of dollars in R&D investments in developing the technology in the first place. Again, this is why the arrangement first reached in the free market between innovators and implementers was a balanced approach in device-level licensing rates that accounted for the costs of R&D and the costs of manufacturing the smartphones that contained the technology derived from this R&D. As a recent empirical study has shown, this is approximately 3.4% per smartphone, which is anything but an example of a massive payment to patent owners on 4G or Wi-Fi, especially for these core technologies that make a cell phone a “smartphone.”
Why then did IEEE change its patent policy? Consistent with the concerns about the “opaque decision-making process” at the IEEE, economist Greg Sidak has identified how the new rules were drafted by an ad hoc committee at the IEEE dominated almost entirely by implementers who license the patented technologies from the innovators who develop and contribute these technologies to the standard-setting process. In effect, the licensees strategically dominated the process and used their clout to push through a policy change that devalued the patented technologies, because they were seeking to lower their own manufacturing costs in implementing this technology in the consumer products and services they manufacture and sell in the marketplace. As evidence, Sidak shows that comments submitted in opposition to the new rules were rejected at nearly double the rate of those in support, reflecting a process that betrayed the IEEE’s core principles of openness, consensus, and the right to appeal. Instead of alleviating any alleged problems caused by patent owners, the IEEE’s rule changes actually facilitated collusion among implementers and resulted in “buyer-side price-fixing” of the patented technologies.
Negative Impact on Contributions of New Technology to Standards at the IEEE
The heart of the Gupta and Effraimidis article is not the theoretical and empirical background to the “patent holdup” dispute, but a detailed empirical study of the impact the new IEEE patent policy has had on the standard development process. Focusing on IP-intensive standards related to the development of Wi-Fi and Ethernet networks, the study first looks into the number of Letters of Assurances (LoAs) submitted to the IEEE in the years before and after the patent policy change took effect.
(LoAs are documents submitted by inventing companies who contribute new technological innovation in the standard-setting process. These technology contributors have patents on these innovations, and in these LoAs, they identify what patents may be essential to the standard that is being developed and they identify the terms under which they’re willing to license this technology if it ends up being incorporated into the standard that is ultimately set by the standard setting organization. An LoA is labeled “positive” if the contributor agrees to license its technology under the patent policy set by the standard setting organization or “negative” if the contributor declines to commit to these terms.)
The Gupta and Effraimidis study found that the number of positive LoA submissions has dropped a whopping 91% since IEEE changed its patent policy in 2015 and the number of negative LoAs rose to an all-time high in 2016. Gupta and Effraimidis explain:
The results suggest that many [patent] owners are reluctant to license their patent portfolio on the new FRAND terms. More importantly, the uncertainty on implementers’ side has increased, as new standards . . . have been approved despite the presence of negative and/or missing LoAs . . . .
Their article also tracks changes in the duration of the comments period that takes place before a new standard is approved—this is the period of time during which IEEE members discuss, debate, and resolve any concerns about a standardized technology before it is ultimately adopted as an official standard by the IEEE. Before the IEEE’s new patent policy went into effect in 2015, the average duration of the first two rounds of comments was 233 days. After the new patent policy took effect, Gupta & Effraimidis found a 42.5% increase in the comment period duration, resulting in an average resolution time of 332 days. This increase by almost half in the standard-setting process, especially in an industry marked by rapid development of new smartphones, laptops, and other high-tech consumer products and services, is concerning, to say the least. These delays are wasting private as well as public resources and impeding the commercial development of important IP-intensive technologies.
Finally, the Gupta and Effraimidis study analyzes the change in the number documents submitted at the IEEE that trigger the development of a new standard technology, which is a proxy for the development of new standards by the IEEE. Here, Gupta and Effraimidis’ findings contradict another recent study that alleged a high number of submissions in 2016 reflected a positive impact of the IEEE’s new patent policy. Gupta and Effraimidis reveal that hundreds of the submissions counted in the prior study either came from standards for which no patented inventions were contributed or were for standards of little or no value. Focusing properly on submissions for technologies that have significant value and produce an overwhelming majority of IEEE standards, they find submissions of new standards documents have in fact declined by 16% since 2015.
In sum, the changes in the internal standard-setting process at the IEEE since it adopted its new patent policy in 2015 represent a concerning shift following a strategic and collusive effort by implementers to devalue the patented technology created by innovators and contributed to standard setting organizations like the IEEE. The evidence is slowly building, showing that the IEEE’s new patent policy has devalued the innovative activity of technological innovators based on a purely theoretical and unproven claim that there is a systemic problem with so-called “patent holdup” in the smartphone and other high-tech industries. Unfortunately, in leaping into action on the basis of unproven theories, the IEEE has contributed to pervasive uncertainty and weakened incentives in the development and commercial implementation of innovative technologies, as is increasingly being documented and discussed by legal scholars and economists.
Moving Forward
The Gupta and Effraimidis study analyzes for the first time empirical data in fully detailing the effects of the IEEE’s new patent policy on the standard setting process. Their study shows that innovators are unwilling to continue to contribute the technologies they develop to the standard setting process under onerous terms requiring them effectively to give up their legal rights to their patents, and that these policies are having a perverse effect in creating inefficient licensing negotiations and delayed standards development. Their findings may sound intuitive to patent lawyers and innovators, but it is imperative to bring data into the public policy debates after ten years of concerted efforts to implement unproven theories, such as “patent holdup” theory, in both law and in the policies of private organizations like IEEE.
Gupta and Effraimidis conclude that a proper patent policy for a standard setting organization like the IEEE “should enhance incentives of technology contributors to innovate, while ensuring unlimited access to the new technology standards.” In considering its key role as a long-time professional association for the high-tech industry reaching back to Nikola Tesla and Thomas Edison, as well as its key role as standard setting organization in the innovation economy, the IEEE hopefully will reconsider its patent policy in light of actual economic and legal evidence. It should return back to the balanced patent policy that successfully promoted the computer and mobile revolutions of the past four decades. The future of new and innovative consumer products is at stake, such as the 5G technology that was first being developed many years ago and will start to be introduced into consumer products in the coming year.
It is undeniable that the patent system has been under stress for the past decade, as courts, regulators, and even the Patent Office itself (as the newly confirmed Director Andrei Iancu has acknowledged) have sowed legal uncertainty, weakened patent rights, and even outright eliminated patent rights. This is why a series of recent speeches by Assistant Attorney General Makan Delrahim—head of the Antitrust Division at the Department of Justice—have signaled an important and welcome policy change from the past decade. It’s just one step, but it’s an important first step to restoring reliability and predictability to property rights in patents, which, as Director Iancu has also been saying in recent speeches, drives innovation and economic growth by promoting investments by inventors, venture capitalists, and companies in the new inventions that make modern life a veritable miracle today.
Delrahim’s speeches are important because one significant point of stress for the patent system and the innovation economy over the past decade has occurred at the intersection of antitrust law and the licensing of patents in standard setting organizations (SSOs). Many people are unaware of this particular issue, and it’s understandable why it flies under the radar screen. The technical standards set by SSOs are the things that make everything work, such as electrical plugs, toasters, and pencils, among millions of other products and services, but they are not obvious to everyday consumers who use these products. Also, antitrust law is a complex domain of lawyers, policy-makers and economists. Still, the patented innovation that comprises technical standards, such as 4G, WiFi, USB, memory storage chips, and other key features of our smart phones and computers, have been essential drivers of innovation in the telecommunications revolution of the past several decades.
In a series of recent speeches, Delrahim has signaled an important and welcome change from his predecessors in how antitrust law will be applied to patented technology that is contributed to the standards that drive innovation in the high-tech industry. Delrahim’s predecessors at the DOJ gave many speeches criticizing (and instigating investigations of) alleged “anti-competitive behavior” by patent owners on technical standards. The DOJ’s approach was one-sided, unbalanced, and lacked evidence confirming the allegations of anti-competitive behavior. Instead, Delrahim is emphasizing the key importance of promoting and properly securing to innovators the technology they create through their long-term, risky, and multi-billion-dollar R&D investments (as succinctly described in two paragraphs here about Qualcomm’s R&D in 5G by an official at the Department of Treasury).
Delrahim has announced that he will return to an evidence-based, balanced antitrust policy at the DOJ. He will not take action against innovators unless there is real-world evidence of consumer harm or proven harm to the development of innovation. The absence of such evidence is well known among scholars and policy-makers. In February 2018, for instance, a group of scholars, former government officials, and judges wrote that “no empirical study has demonstrated that a patent-owner’s request for injunctive relief after a finding of a defendant’s infringement of its property rights has ever resulted either in consumer harm or in slowing down the pace of technological innovation.” It’s significant that Delrahim has announced that the DOJ will constrain its enforcement actions with basic procedural and substantive safeguards long provided to citizens in courts, such as requiring actual evidence to prove assertions of harm. This guards against unfettered and arbitrary regulatory overreach against innocent owners of private property rights. This self-restraint is even more important when overreach negatively impacts innovation, which portends badly for economic growth and the flourishing lives we have all come to expect with our high-tech products and services.
For example, Delrahim has rightly recognized that “patent holdup” theory is just that—a theory about systemic market failure that remains unproven by extensive empiricalstudies. Even more concerning, “patent holdup” theory—the theory that patent owners will exploit their ability to seek injunctions to protect their property rights and thus “holdup” commercial implementers by demanding exorbitantly high royalties for the use of their technology—is directly contradicted by the economic evidence of the smart phone industry itself. The smart phone industry is one of the most patent-intensive industries in the U.S. innovation economy; thus, “patent holdup” theory hypothesizes that there will be higher prices, slower technological development, and less and less new development of products and services. Instead, as everyone knows, smart phones—such as the Apple iPhone and the Samsung Galaxy, among many others—are defined by rapidly dropping quality-controlled prices, explosive growth in products and services, and incredibly fast technological innovation. The 5G revolution is right around the corner, which will finally make real the promise of the Internet of Things.
In sum, Delrahim has repeatedly stated that antitrust officials must respect the equal rights of all stakeholders in the innovation industries—the inventors creating fundamental technological innovation, the rights of the companies who implement this innovation, and the consumers who purchase these products and services. This requires restraining investigations and enforcement actions to evidence, and not acting solely on the basis of unproven theories, colorful anecdotes, or rhetorical narratives developed inside D.C. by lobbyists and activists (such as “patent trolls”). This is good governance, which is what fosters ongoing investments in the R&D that makes possible the inventions that drives new technological innovation in smart phones and in the innovation economy more generally.
We will delve more deeply into the substantive issues and implications of Delrahim’s recent speeches in follow-on essays. Since his speeches have been delivered over the course of the past six months, we have aggregated them here in one source. Read them and come back for further analyses of these important speeches (and more speeches that will likely come, which we will keep adding to the list below):
November 10, 2017. In a speech at the University of Southern California, Gould School of Law, Assistant Attorney General Delrahim discussed why patent holdout is a bigger problem than patent hold-up. “[T]he 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.” He further noted that antitrust law has a role to play in preventing the concerted anticompetitive actions that occur during holdout.
February 1, 2018. In a speech at the U.S. Embassy in Beijing, Delrahim noted that the proper antitrust focus should be on protecting the innovative process, not “short-term pricing” considerations. With this focus, using antitrust remedies should be approached with “caution.”
February 21, 2018. In a speech at the College of Europe, in Brussels Belgium, Delrahim observed that antitrust enforcers have aggressively tried to police patent license terms deemed excessive, and “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.” The real problem and solution he noted is that the “dueling interests of innovators and implementers always are in tension, but the tension is best resolved through free market competition and bargaining.”
March 16, 2018. In a speech at the University of Pennsylvania Law School, Delrahim expanded on his detailed remarks from his talk at USC by adding some historical context from the founding fathers. He also made the core point that “patent hold-up is not an antitrust problem,” noting that FRAND commitments from patent owners are part of the normal competitive process and are therefore appropriately policed by contract and common law remedies. He further describes the necessary impacts of having a right to exclude in the patent right, including that the “unilateral and unconditional refusal to license a patent should be considered per se”
April 10, 2018. In a keynote address at the LeadershIP Conference on IP, Antitrust, and Innovation Policy in Washington, D.C., Delrahim emphasized the harm that can occur when “advocacy positions lead to unsupportable or even detrimental legal theories when taken out of context.” He specifically noted that some advocacy about patent hold-up could undermine standard setting as “putative licensees have been emboldened to stretch antitrust theories beyond their rightful application, and that courts have indulged these theories at the risk of undermining patent holders’ incentives to participate in standard setting at all.”
By Connor Sherman
By Terence Yen
By Colin Kreutzer
In a new CPIP policy brief entitled 
The Federal Trade Commission’s unfair competition case against Qualcomm, Inc., has now concluded. The parties gave their closing arguments on Tuesday, January 29, and all that remains is Judge Lucy Koh’s ruling. To prevail, the FTC needed to demonstrate actual, quantifiable harm. It completely failed to do so.
As we highlighted in previous posts in this series (see