Tag: SEP

Categories
FTC Patent Law Patents

FTC Chair and Commissioners Weigh in on SEP Litigation at the ITC

The following post comes from Jack Ring, a rising 2L at Scalia Law and a Research Assistant at C-IP2.

a gavel lying on a table in front of booksI. INTRODUCTION

In a previous blog post, we discussed the dispute surrounding standard essential patents (SEPs) between Philips and Thales. That dispute included an investigation before the United States International Trade Commission (ITC).[1] As part of that investigation, Chair Lina Khan and Commissioner Rebecca Slaughter of the Federal Trade Commission (FTC) submitted a public interest statement to the ITC (Public Interest Statement or Statement).[2] Commissioner Christine Wilson responded to the Statement in a speech at the “IP & Antitrust: Hot Issues” Conference Organized by Concurrences Review (Response or Remarks).[3]

These competing statements by FTC commissioners illustrate a point of contention regarding SEP policy. The Public Interest Statement, submitted by Chair Khan and Commissioner Slaughter, took a policy stance that an exclusion order against an SEP implementer unfairly favors the SEP holder. Meanwhile, Commissioner Wilson’s Response countered that this policy instead tips the balance heavily in favor of implementers, which in her opinion could stifle SEP-holder innovation. This dichotomy of policy goals underlays some of the decisions discussed in the previous blog post about the Philips v. Thales appeal. There, Chief Judge Colm Connolly of the United States District Court for the District of Delaware avoided making policy in his decision, explicitly reserving that for a higher court.[4] The ITC’s Commission opinion in the ITC Investigation took no position on many issues, potentially to avoid tackling these tough issues.[5] And finally, the Federal Circuit affirmed Chief Judge Connolly’s order on the narrowest grounds, likewise sidestepping the policy concerns debated in the Public Interest Statement and Response.[6]

Additionally, as Commissioner Wilson’s Remarks note, Apple and Ericsson are now involved in SEP litigation spanning U.S. courts, international courts, and the ITC.[7] This will once again provide ample opportunity for multiple jurisdictions, including the ITC, to weigh these policy and public interest concerns.

II. CHAIR KHAN AND COMMISSIONER SLAUGHTER’S PUBLIC INTEREST STATEMENT

Chair Khan and Commission Slaughter’s Statement advanced a broad policy argument through the lens of an “increasing[] concern that SEP holders . . .  are seeking exclusionary orders . . . for the purpose of gaining leverage.” Through that lens, the Public Interest Statement sought to answer the question, “Is it in the public interest to issue an ITC exclusion order based on a standard essential patent (SEP) where a United States district court has been asked to determine fair, reasonable, and non-discriminatory (FRAND) licensing terms?” Answering its own posed question, the Statement urged the ITC to consider the statutory public interest factors[8] with particular attention to the impact an exclusion order obtained by a SEP owner against an SEP implementer would have on competition and consumers in the United States.

Chair Khan and Commissioner Slaughter’s concern focuses heavily on misconduct—hold-up—by SEP owners. Hold-up refers to an SEP holder’s demand for a royalty rate in excess of a FRAND rate after an implementer is locked into the standard. Alternatively, hold-out refers to an implementer’s bad faith delaying of constructive licensing negotiations or unilaterally rejecting of a license.

The Public Interest Statement argues that an SEP owner seeking an exclusion order of SEPs at the ITC perpetuates an imbalance in bargaining power. Chair Khan and Commissioner Slaughter recognize that opportunism may arise from either side, but they view an exclusion order as granting unfair leverage for an SEP holder. This one-sided view was discussed by Commissioner Wilson in her Response and will be discussed below.

The Public Interest Statement further recognized the ITC’s enforcement role in intellectual property rights and the ITC’s view on that enforcement in footnote twelve. However, Chair Khan and Commissioner Slaughter argue that SEPs present different issues than other patents. In their opinion, a royalty negotiation under threat of an exclusion order tips the scale in favor of the SEP owner, who made a FRAND commitment—a commitment that may have helped them get the standardization in the first place. In their view, the exclusion of firms that are willing and able to take FRAND licenses discourages investment in standard driven products and technology.

Additionally, hidden in the first footnote, the Statement declined to address whether “seeking an exclusion order for FRAND-encumbered SEPs would violate Section 5 of the Federal Trade Commission Act.” Section 5 of the FTC act covers unfair acts and practices. If the FTC began enforcing Section 5 against SEP owners seeking exclusion orders in the ITC, that would have some of the most drastic short-term changes in SEP policy. Whether that short-term policy change would stand up to judicial review or be the best policy for cultivating innovation remains to be seen.

The Public Interest Statement ultimately moves on to a larger policy rejecting exclusion orders—the only remedy available from the ITC—whenever a court has been asked to set FRAND terms and can make SEP holders whole. (“As a general matter, exclusionary relief is incongruent and against the public interest where a court has been asked to resolve FRAND terms and can make the SEP holder whole.”) In closing, the Public Interest Statement urges the ITC to take its advice that “under no circumstances should Section 337 remedies . . . take effect” until a court asked to resolve the FRAND rate has rendered its decision.

III. COMMISSIONER WILSON’S RESPONSE

Shortly after Chair Khan and Commissioner Slaughter filed their Statement, Commissioner Wilson of the FTC responded with her own critiques. Her Response recognized the same issues but approached those issues from a balancing standpoint. The Response advocated for weighing the rights of SEP holders and implementers and considering both short- and long-term goals.

Commissioner Wilson expressed concern that Chair Khan and Commissioner Slaughter only view hold-up as an antitrust issue. (“In other words, the actions of SEP holders may be unlawful under the antitrust laws, but the actions of patent implementers are immune from scrutiny under those same laws.”) Commissioner Wilson’s Remarks generally pushed the FTC to embrace a balanced approach that favors neither innovators nor implementers but instead focused on incentivizing competition and innovation.

Responding directly to the Public Interest Statement’s call for the ITC to reject exclusion orders where a court has been asked to set FRAND rates, Commissioner Wilson reasoned that the ITC’s public interest analysis already accounts for this type of analysis. Quoting an article from former ITC commissioner and chair Deanna Tanner Okun, the Response explained that the ITC’s public interest factors and process allow allegedly infringing parties the opportunity to argue the SEP holder violated its commitments to the standard setting organization[9] (the point being, why set a blanket prohibition on exclusion orders when the ITC’s processes already account for considering multiple factors in its public interest analysis?).

Commissioner Wilson’s Remarks also touched on the Apple and Ericsson SEP litigation presently occurring in multiple venues, including the ITC. Those proceedings offer another chance for the ITC to consider the Statement and Response’s policy arguments. However, as Commissioner Wilson flagged, unlike in the Philips proceedings, Apple has not committed to accepting the District Court’s FRAND rate. Apple’s non-commitment could be evidence of hold-out, which Commissioner Wilson specifically raised in her Remarks. This change in the fact pattern from the Philips/Thales dispute illustrates how complex and fact-specific SEP proceedings can be.

At bottom, the Response is concerned that the Public Interest Statement’s proposal would tip the balance in favor of SEP implementers when—in Commissioner Wilson’s view—there should be no thumb on the scale. The Response expressed concern with adoption of a one-size-fits-all approach of denying exclusion orders at the ITC whenever a court has been asked to set a FRAND rate. Rather, she posits that the ITC’s public interest factors anticipated complex litigations like those discussed above. Therefore, by the time a case has reached the final stages at the ITC, the Commission or administrative law judge has the necessary information to evaluate the public interest.

IV. TAKEAWAYS

These two policy proposals from FTC commissioners illustrate the complexity of the SEP policy debate, particularly regarding exclusion orders at the ITC. Moving forward, the Apple and Ericsson disputes in multiple courts including the ITC will provide another opportunity for multiple forums to grapple with these competing policies.

[1] Certain UMTS & LTE Cellular Communications Modules & Products Containing the Same, Inv. No. 337-TA-1240 (USITC).

[2] Written Submission on the Public Interest of Federal Trade Commission Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter, in the Matter of Certain UMTS and LTE Cellular Communication Modules and Products Containing the Same, Inv. No. 337-TA-1240 (USITC May 16, 2022),

https://www.ftc.gov/system/files/ftc_gov/pdf/Written_Submission_on_the_Public_Interest_if_Chair_Khan_and_Co mmissioner_Slaughter_to_ITC.pdf.

[3] Christine Wilson, Comm’r, Fed. Trade Comm’n, Remarks at “IP & Antitrust: Hot Issues” Conference Organized by Concurrences Review (June 8, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/Wilson-SEPs-speech_FINAL-06-13-2022.pdf.

[4] Koninklijke Philips N.V. v. Thales DIS AIS USA LLC, C.A. 20-1713 (D. Del. May 21, 2021).

[5] Certain UMTS & LTE Cellular Communications Modules & Products Containing the Same, Inv. No. 337-TA-1240, Comm’n Notice (USITC July 6, 2022) (EDIS No. 774681).

[6] Koninklijke Philips N.V. v. Thales DIS AIS USA LLC, No. 2021-2106 (Fed. Cir. July 13, 2022).

[7] Certain Mobile Telephones, Tablet Computers With Cellular Connectivity, & Smart Watches With Cellular Connectivity, Components Thereof, & Products Containing the Same, Inv. No. 337-TA-1299 (USITC).

[8] 19 U.S.C. §§ 1337(d)(1), (f)(1).

[9] Deanna Tanner Okun, Policy Shift Against SEP Rights Poses Risks for U.S. Innovation and Undermines Mandate of the ITC, IPWATCHDOG (May 18, 2022), https://www.ipwatchdog.com/2022/05/18/policy-shift-sep-rights-poses­risks-u-s-innovation-undermines-mandate-itc/id=149116/.

Categories
FTC ITC Patents

Philips and Thales’ Standard Essential Patent Fight at the Federal Circuit, District Court, and ITC

The following post comes from Jack Ring, a rising 2L at Scalia Law and a Research Assistant at C-IP2. Click here for a related post.

a gavel on a desk in front of booksI. INTRODUCTION

On July 13, 2022, the Federal Circuit affirmed the denial of Thales DIS AIS Deutschland GMBH’s (Thales) motion to enjoin Koninklijke Philips N.V. (Philips) from proceeding in a parallel investigation against Thales at the United States International Trade Commission (ITC).[1] This dispute, stemming from SEP licensing negotiations dating back to 2015, seemed poised to be a vehicle to set SEP policy. It offered an opportunity for the District Court and the Federal Circuit to prevent a party from seeking an exclusion order from the ITC when a court was asked to set FRAND rates. It further offered the ITC the opportunity to apply its public interest factors broadly to the same ends. However, all three courts that heard this dispute sidestepped the policy debate.

On the same day in 2020, Philips brought a district court case in Delaware[2] and an ITC investigation[3] against Thales asserting the same four essential patents. In response, Thales moved for a preliminary injunction to prevent Philips from proceeding at the ITC. Thales claimed inter alia that the ITC investigation was causing irreparable harm to its business by disrupting business and deterring customers. Chief Judge Colm F. Connolly, presiding in Delaware, denied Thales’ preliminary injunction, reasoning that Thales’ claims failed to illustrate irreparable harm.

While Thales’ motion sought to enjoin Philips, granting the preliminary injunction would have effectively stripped the ITC of its jurisdiction. This would have been at odds with the ITC’s statutory scheme. As Chief Judge Connolly acknowledged during his ruling on the motion, Congress authorized patentees to pursue ITC and district court proceedings on parallel tracks. Chief Judge Connolly noted the potential policy issues with granting SEP owners exclusion orders, but he reasoned that he was not the one who should make policy, instead deferring to Congress or a higher court.

On appeal, the Federal Circuit agreed, ruling that Thales failed to present evidence of a likelihood of irreparable harm beyond conclusory customer concerns. The Federal Circuit’s opinion came just seven days after the ITC’s final determination finding no violation of Section 337 and multiple claims of the Asserted Patents invalid.

This appeal and the ITC investigation seemed poised to tackle those big policy issues Chief Judge Connolly declined to answer. However, the subsequent rulings avoided any policy decisions. The Federal Circuit’s narrow holding did not discuss any policy issues, solely focusing on the lack of irreparable harm. The ITC’s finding of no violation meant it needed not consider the statutory public interest factors. The Commission’s prior request for public interest statements request garnered a statement from Chair Lina Khan and Commissioner Rebecca Slaughter of the Federal Trade Commission (FTC), which lobbied the ITC to deny relief to any Complainants asserting patents that are subject to FRAND-setting litigation in other forums.

II. DISTRICT COURT ACTION

Philips brought two district court cases in Delaware and an ITC investigation against Thales and three of its customers on December 17, 2020.[4] The ITC investigation, Inv. No. 337-TA-1240 (the “ITC investigation”) and one of the Delaware cases, C.A. No. 20-1713 (the “District Court Action”) shared the same asserted patents, which Philips claimed are essential. Those patents are U.S. Patent Nos. 7,944,935, 7,554,943, 8,199,711, and 7,831,271 (collectively, the “Asserted Patents”). The second district court case brought by Philips asserted six additional, non-essential patents, against the same parties, C.A. No. 20-1709[5].

Philips’ complaint sought declaratory judgment setting worldwide FRAND licensing terms and alleged infringement of the Asserted Patents. Thales counterclaimed, alleging breach of contract of Philips’ contractual duties to the European Telecommunication Standards Institute (ETSI)[6] and seeking declaratory judgment setting FRAND terms.[7] Contemporaneous with its answer, on March 5, 2021, Thales filed a motion for a preliminary injunction to enjoin Philips from pursuing the ITC investigation. Thales claimed the ITC action divested the district court of its authority and was an attempt to extract a supra-FRAND royalty rate.

Thales argued it was likely to succeed on its breach of contract claim in addition to its declaratory judgment claim because both parties requested the same relief, a FRAND rate determination by the court. On irreparable harm, Thales claimed imminent risk of losing market share, customers, sales, and business opportunity, as well as business disruption, as a result of Philips’ seeking an ITC exclusion order. Thales clarified that the irreparable harm was “the uncertainty and the cloud hanging over our head from now until [the ITC rules].”

At the preliminary injunction hearing in May 2021,[8] Chief Judge Connolly, ruling from the bench, denied Thales’ motion. Chief Judge Connolly found the irreparable harm evidence conclusory and that litigating on parallel tracks in the ITC and District Court did not constitute irreparable harm. Chief Judge Connolly also ruled that Thales had not established likelihood of success. Following denial of the preliminary injunction on May 21, 2021, Thales noticed an appeal to the Federal Circuit on June 21, 2021. The Delaware Action was stayed and administratively closed on August 20, 2021, pending resolution of the ITC investigation.

III. ITC INVESTIGATION

While Thales and Philips litigated in Delaware, the ITC investigation proceeded at full pace. As discussed above, Philips filed its complaint at the ITC on December 17, 2020, the same day as the District Court Action. The complaint asserted the same four patents against Thales and the same three customers plus Telit Wireless Solutions, Inc. and Telit Communications PLC.[9] The Commission instituted the investigation on January 19, 2021.[10]

Following an evidentiary hearing in October 2021, Administrative Law Judge David Shaw found no violation in the Final Initial Determination (ID) on April 1, 2022. In addition to finding no violation, ALJ Shaw found multiple claims of the Asserted Patents invalid. On July 6, 2022, the Commission released a Notice of Determination reviewing certain findings, taking no position on many findings, and affirming portions of the ID. The Commission maintained the finding of no violation, and adopted only the following other findings:

(1) the asserted claims of the ’935 patent, the ’711 patent, the ’943 patent, and the ’271 patent are not infringed; (2) Philips did not satisfy the technical prong of the domestic industry requirement with respect to any of the four asserted patents; (3) claim 9 of the ’711 patent and claim 12 of the ’943 patent are invalid as indefinite; and (4) the asserted claims of the ’271 patent are invalid as indefinite and for lack of written description.

As part of its review, the Commission requested public interest statements from the public. One submission, from Chair Khan and Commissioner Slaughter of the FTC urged the ITC to utilize its Public Interest statute to deny relief to any Complainants asserting patents that are subject to FRAND-setting litigation in other forums.[11] In light of the finding of no violation, the Commission did not need to consider the effect of the proposed remedy on the public interest as required by statute.[12]

IV. APPEAL AT THE FEDERAL CIRCUIT

On July 13, 2022, one week after the ITC released its Final Notice, the Federal Circuit affirmed the District Court’s denial of Thales’ preliminary injunction and awarded costs to Philips. Chief Judge Kimberly Moore’s opinion focused exclusively on Thales’ failure to show it was likely to suffer irreparable harm from Philips’ ITC action. Like Chief Judge Connolly, Chief Judge Moore found the evidence presented conclusory. Thales did not meet its burden because it failed to present evidence that it lost customers, had customers delay purchase, or struggled to acquire new business because of the ongoing ITC proceedings. Rather, the ITC investigation caused customers to voice concerns or express doubt. The Court reasoned that “This type of speculative harm does not justify the rare and extraordinary relief of a preliminary injunction.”

V. TAKEAWAYS

While this dispute seemed prepared to make policy waves in the SEP space, there will be future cases that give rise to similar issues. Even now, Apple and Ericsson are litigating SEPs at the ITC and in District Court.[13] That dispute may reach some of the policy questions raised in this case and specifically in Chair Khan and Commissioner Slaughter’s Public Interest Statement from this investigation.

[1] Koninklijke Philips N.V. v. Thales DIS AIS USA LLC, No. 2021-2106 (Fed. Cir. July 13, 2022).

[2] Koninklijke Philips N.V. v. Thales DIS AIS USA LLC, C.A. 20-1713 (D. Del.).

[3] Certain UMTS & LTE Cellular Communications Modules & Products Containing the Same, Inv. No. 337-TA-1240 (USITC).

[4] The customers include CalAmp Corp., Xirgo Technologies, LLC, and Laird Connectivity, Inc.

[5] Koninklijke Philips N.V. v. Thales DIS AIS USA LLC, C.A. 20-1713 (D. Del.).

[6] Both Philips and Thales are members of ETSI, a standard setting organization for digital cellular communications.

[7] Thales USA answered separately on April 5th and did not include counterclaims. Thales USA moved to be severed and dismissed as misjoined party under Fed. R. Civ. P. 21 on April 5, 2021.

[8] The transcript of the May 21, 2021, hearing can be found attached to Philips’ Opening Brief to the Federal Circuit.

[9] Philips also asserted the four essential patents against Telit in Delaware District Court, Koninklijke Philips N.V. v Telit Wireless Sols., Inc., C.A. 20-1711 (CFC) (D. Del.).

[10] 86 FR 7305 (Jan. 19, 2021).

[11] https://www.ftc.gov/system/files/ftc_gov/pdf/Written_Submission_on_the_Public_Interest_if_Chair_Khan_and_
Commissioner_Slaughter_to_ITC.pdf.

[12] 19 U.S.C. §§ 1337(d)(1), (f)(1).

[13] Certain Mobile Telephones, Tablet Computers With Cellular Connectivity, & Smart Watches With Cellular Connectivity, Components Thereof, & Products Containing Same, Inv. No. 1299 (USITC); Ericsson Inc. v. Apple, Inc., C.A. 6:22-cv-60 (W.D. Tex.).

Categories
Uncategorized

Comment of 25 Law Professors, Economists, and Former U.S. Government Officials in Response to EU Commission Call for Evidence on Standard-Essential Patents

Led by Prof. Adam Mossoff and C-IP2 Senior Fellow and Senior Scholar Prof. Jonathan M. Barnett, twenty-five law professors, economists, and former United States Government officials—including C-IP2 Advisory Board members the Honorable Andrei Iancu, the Honorable David J. Kappos, the Honorable Paul Michel, and the Honorable Randall R. Rader; Faculty Director Prof. Sean M. O’Connor; Senior Scholar Prof. Kristen Osenga; and Scholar Dr. Bowman Heiden—submitted a letter in response to a “call for evidence” on the licensing, litigation, and remedies of standard-essential patents (SEPs). The response discusses core functions of SEPs in the wireless ecosystem, the lack of evidence of Patent Holdup and Royalty Stacking, assumptions about SEPs and Market Power, the importance of the potential for injunctive relief even for FRAND, levels of licensing, and SEP licensing in SME markets. The letter is available here on SSRN.

Categories
International Law Patent Law Patent Litigation

Hudson Institute Panel Focuses on Patent Litigation in China

The following post comes from Wade Cribbs, a 2L at Scalia Law and a Research Assistant at CPIP.

a gavel lying on a desk in front of booksBy Wade Cribbs

Questions about how Chinese patent protection operates in the international patent landscape are relevant to both companies doing business in China and policymakers in the United States. China is becoming an increasingly frequent patent litigation location for major international corporations. With this new forum for patent disputes come questions about how China can handle anti-suit injunctions and parallel proceedings regarding fair, reasonable, and non-discriminatory (FRAND) agreements for standard-essential patents (SEPs).

To discuss these questions, the Hudson Institute hosted a virtual panel presentation last week entitled Patent Litigation in China: Navigating a Changing Environment. The panel, which was moderated by Hudson Institute Senior Fellow Urška Petrovčič, included Mark Cohen (Distinguished Senior Fellow, University of California Berkeley; Director, Berkeley Center for Law & Technology, Asia Intellectual Property Project), Vivienne Bath (Professor of Chinese International and Business Law, University of Sydney), and He Jing (Founder, GEN Law Firm; Executive Director, Beijing Zhongguancun Intellectual Property Strategy Research Institute).

Mr. Cohen sees differences in patent litigation between western countries—such as the United States and the European Union—and China, particularly with injunctions due to China’s quasi-civil law system and the Chinese economy’s size. He does not view the recent emergence of anti-suit injunctions in China as unusual because they were not necessary, given that China readily awards injunctive relief. It is not unusual for the courts to get through litigation and appeal in China before a U.S. court has commenced discovery. Therefore, a litigant could initiate proceedings in China after suing in the United States and receive an injunction from the Chinese court, using it to compel the party to settle any parallel proceedings.

Mr. Cohen sees no real difference between the current practice of anti-suit injunctions and Chinese courts’ prior practice of ignoring any parallel proceeding. He agrees with Prof. Bath that the shift of Chinese courts to anti-suit injunctions is motivated by judicial sovereignty and the desire to exercise power over international FRAND rate disputes in order to protect Chinese business interests. Mr. Cohen is concerned that this desire is expanding to dictate international behavior in technological markets by leveraging SEP holders.

Mr. Jing believes that the most important SEP disputes in China are focused on the issuance by Chinese courts of anti-suit injunctions, which he notes are relatively recent for these courts. Chinese courts award these injunctions in such circumstances as preventing Huawei from enforcing a German court’s holding of a FRAND rate that was significantly higher than the rate issued by the Chinese courts. Similarly, Chinese courts have issued preliminary anti-suit injunctions against Sharp Corporation, preventing Sharp from initiating litigation in Germany after it began litigation in China.

Mr. Jing admits the logic is straightforward in the case of cell phone manufacturing, since most of the global manufacturing occurs in China. Therefore, he posits that China should have a say in cell phone SEP FRAND rates. However, he is unsure whether there is proper jurisdiction for such cases. To claim jurisdiction in some cases, Chinese courts docket FRAND disputes as contract cases. Mr. Jing’s problem with FRAND as a contract is that there is no concluded contract, and he is not convinced that such disputes meet the specific legal standard required by Chinese law to hear foreign and international contract disputes. Mr. Jing is concerned that Chinese courts are stretching beyond their bounds for jurisdiction and service to hear cases.

Prof. Bath observes that since the Chinese court systems are now fully equipped to handle IP cases, they are incredibly litigious. In this setting, the Chinese Communist Party is trying to tighten its control over the courts’ behavior as the courts streamline the process and improve injunctive enforcement. Prof. Bath sees these two forces resulting in the Chinese court system seeking to use Chinese law in an international setting through attracting dispute resolution to China. The China International Commercial Court and the one-stop diversified dispute resolution, which combine mediation and litigation in the court system, are examples of how the Chinese government is trying to attract foreign arbitration to China.

However, when it comes to international agreements, Prof. Bath notes, China has tended to agree to international instruments only where it is exempt from intellectual property judgments. Prof. Bath warns that, while China is taking steps to make its courts more available for international litigation, it is necessary to remember that the court does not always decide adjudication. Senior judges who did not sit for the case may make the final adjudicative decision, and this risks politicizing any crucial adjudication rulings.

Professor Bath sees the Chinese courts’ problem with parallel proceedings in the form of anti-suit injunctions stemming from its focus on judicial sovereignty. This focus results in China not having many tools to handle parallel proceedings. The Chinese courts will hear almost any suit brought before the court and will not refuse the case because it is already being heard elsewhere, unless a foreign judgment has already been issued and enforced in China. These practices result in foreign judgments being rarely enforced in China as a result of a Chinese court’s having already begun proceedings.

To watch the video of the panel discussion, please click here.

Categories
Antitrust Patents

Jonathan Barnett on Competition Regulators and Standard-Essential Patents

The following post comes from Connor Sherman, a 2L at Scalia Law and a Research Assistant at CPIP.

circuit boardBy 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.

Categories
Antitrust Innovation Patent Licensing

IP for the Next Generation of Mobile Technology: How the Antitrust Division Devalued Standard-Essential Patents

In advance of our Sixth Annual Fall Conference on IP for the Next Generation of Technology, we are highlighting works on the challenges brought by the revolutionary developments in mobile technology of the past fifteen years.

hand holding a phone with holographs hovering over the screenAs 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.

Categories
Innovation Patent Licensing

Focusing on IP for the Next Generation of Mobile Technology

hand holding a phone with holographs hovering over the screenIn 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.

To read the Mallinson article, which first appeared on the 4iP Council website in September 2017, please click here.

Categories
Innovation Patent Licensing

Study Finds IEEE’s 2015 Patent Policy Sowing Uncertainty and Slowing Innovation

dictionary entry for the word "innovate"By Kevin Madigan & Adam Mossoff

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.

Categories
Antitrust Innovation

Letter to Antitrust Chief Applauds DOJ’s New Evidence-Based Approach to IP Enforcement

hand under a lightbulb drawn on a chalkboardA group of judges, former judges and government officials, law professors and economists with expertise in antitrust law and patent law sent a letter to Assistant Attorney General Makan Delrahim earlier today applauding his recent announcements that the Antitrust Division of the Department of Justice (DOJ) would now take a balanced, evidence-based approach in applying antitrust law to patent licensing, especially to patented innovations that have been contributed to technological standards.

Signatories to the letter include Judge Douglas H. Ginsburg of the D.C. Circuit, former Chief Judge Paul Michel of the Federal Circuit, former FTC Commissioner Joshua D. Wright, and former Director of the U.S. Patent & Trademark Office David Kappos, among others.

A few weeks after his confirmation this past September, AAG Delrahim delivered remarks at a conference held at the USC Gould School of Law in Los Angeles, California. The comments signaled a major shift in intellectual property (IP) policy for the Antitrust Division from the policies pursued by the previous Obama Administration. Indeed, AAG Delrahim pointed out that he is the first head of the Antitrust Division to be a registered patent attorney, and his plans for protecting free market competition in the IP licensing realm reflected a robust understanding of what drives our innovation economy.

AAG Delrahim indicated that antitrust enforcers had “strayed too far” in protecting the interests of implementers of patented technology at the expense of innovators who create the technology in the first place. Such “misapplication of the antitrust laws,” he said, “could undermine the process of dynamic innovation itself.” In particular, AAG Delrahim stated that the recent focus on the “so-called ‘hold-up’ problem,” where innovators threaten to withhold licenses to implementers, fails to recognize the “more serious risk” of the “hold-out problem,” where implementers threaten to use the technology without taking licenses from innovators. AAG Delrahim explained that the “one-sided focus on the hold-up issue” posed a “serious threat to the innovative process.”

Last month, a group of industry representatives sent a letter to AAG Delrahim expressing concerns over the Antitrust Division’s new approach to IP licensing. The letter claimed that “patent hold-up is real, well documented, and harming US industry and consumers,” and it argued that the hold-out problem did not raise similar competition law issues. Remarkably, the industry representatives did not offer one citation to back up their broad claims about the supposed harm from “patent hold-up” or lack of harm from patent hold-out. Given the data connecting stable and effective patent rights and economic growth, the burden should be on the advocates for the “patent hold-up” theory to produce at least some evidence to support their position. Thankfully, AAG Delrahim made clear that he will let the evidence be his guide.

To that end, the letter submitted today by judges, government officials, legal academics, and economists points out the glaring omissions in the letter by the industry representatives: The claims about “patent hold-up” are merely theoretical, and they are “inconsistent with actual market data.” Moreover, today’s letter notes that the implications of the “patent hold-up” theory are testable, and that the empirical studies to date have failed to show that innovators are harming consumers or inhibiting innovation. To bolster its claims, the letter includes an appendix of rigorous empirical studies that directly contradict the “patent hold-up” theory proffered by the industry representatives.

Read the letter below or download it here: Letter to AAG Delrahim

***

February 13, 2018

Assistant Attorney General Makan Delrahim
Department of Justice Antitrust Division
950 Pennsylvania Ave. NW
Washington, DC 20530-0001

Dear Assistant Attorney General Delrahim,

As judges, former judges and government officials, legal academics and economists who are experts in antitrust and intellectual property law, we write to express our support for your recent announcement that the Antitrust Division of the Department of Justice will adopt an evidence-based approach in applying antitrust law equally to both innovators who develop and implementers who use technological standards in the innovation industries.

We disagree with the letter recently submitted to you on January 24, 2018 by other parties who expressed their misgivings with your announcement of your plan to return to this sound antitrust policy. Unfortunately, their January 24 letter perpetuates the long-standing misunderstanding held by some academics, policy activists, and companies, who baldly assert that one-sided “patent holdup” is a real-world problem in the high-tech industries. This claim rests entirely on questionable models that predict that opportunistic behavior in patent licensing transactions will result in higher consumer prices. These predictions are inconsistent with actual market data in any high-tech industry.

It bears emphasizing 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. Given the well understood role that innovation plays in facilitating economic growth and well-being, a heavy burden of proof rests on those who insist on the centrality of “patent holdup” to offer some tangible support for that view, which they have ultimately failed to supply in the decade or more since that theory was first propounded. Given the contrary conclusions in economic studies of the past decade, there is no sound empirical basis for claims of a systematic problem of opportunistic “patent holdup” by owners of patents on technological standards.

Several empirical studies demonstrate that the observed pattern in high-tech industries, especially in the smartphone industry, is one of constant lower quality-adjusted prices, increased entry and competition, and higher performance standards. These robust findings all contradict the testable implications of “patent holdup” theory. The best explanation for this disconnect between the flawed “patent holdup” theory and overwhelming weight of the evidence lies in the institutional features that surround industry licensing practices. These practices include bilateral licensing negotiations, and the reputation effects in long-term standards activities. Both support a feed-back mechanism that creates a system of natural checks and balances in the setting of royalty rates. The simplistic models of “patent holdup” ignore all these moderating effects.

Of even greater concern are the likely negative social welfare consequences of prior antitrust policies implemented based upon nothing more than the purely theoretical concern about opportunistic “patent holdup” behavior by owners of patented innovations incorporated into technological standards. For example, those policies have resulted in demands to set royalty rates for technologies incorporated into standards in the smartphone industry according to particular components in a smartphone. This was a change to the longstanding industry practice of licensing at the end-user device level, which recognized that fundamental technologies incorporated into the cellular standards like 2G, 3G, etc., optimize the entire wireless system and network, and not just the specific chip or component of a chip inside a device.

In support, we attach an Appendix of articles identifying the numerous substantive and methodological flaws in the “patent holdup” models. We also point to rigorous empirical studies that all directly contradict the predictions of the “patent holdup” theory.

For these reasons, we welcome your announcement of a much-needed return to evidence-based policy making by antitrust authorities concerning the licensing and enforcement of patented innovations that have been committed to a technological standard. This sound program ensures balanced protection of all innovators, implementers, and consumers. We are confident that consistent application of this program will lead to a vibrant, dynamic smartphone market that depends on a complex web of standard essential patents which will continue to benefit everyone throughout the world.

Sincerely,

Jonathan Barnett
Professor of Law
USC Gould School of Law

Ronald A. Cass
Dean Emeritus,
Boston University School of Law
Former Vice-Chairman and Commissioner,
United States International Trade Commission

Richard A. Epstein
Laurence A. Tisch Professor of Law,
New York University School of Law
James Parker Hall Distinguished Service Professor of Law Emeritus,
University of Chicago Law School

The Honorable Douglas H. Ginsburg
Senior Circuit Judge,
United States Court of Appeals for the District of Columbia Circuit, and
Professor of Law,
Antonin Scalia Law School
George Mason University

Justin (Gus) Hurwitz
Assistant Professor of Law
University of Nebraska College of Law

David J. Kappos
Former Under Secretary of Commerce and Director
United States Patent & Trademark Office

The Honorable Paul Michel
Chief Judge (Ret.),
United States Court of Appeals for the Federal Circuit

Damon C. Matteo
Course Professor,
Graduate School of Economics and Management
Tsinghua University in Beijing
Chief Executive Officer,
Fulcrum Strategy

Adam Mossoff
Professor of Law
Antonin Scalia Law School
George Mason University

Kristen Osenga
Professor of Law
University of Richmond School of Law

David J. Teece
Thomas W. Tusher Professor in Global Business
Haas School of Business
University of California at Berkeley

Joshua D. Wright
University Professor,
Antonin Scalia Law School
George Mason University
Former Commissioner,
Federal Trade Commission

 

Appendix

 

Richard A. Epstein & Kayvan Noroozi, Why Incentives for Patent Hold Out Threaten to Dismantle FRAND and Why It Matters, Berkeley Tech. L. Rev. (forthcoming), https://ssrn.com/abstract=2913105

Anne Layne-Farrar, Why Patent Holdout is Not Just a Fancy Name for Plain Old Patent Infringement, CPI North American Column (Feb. 2016), https://www.competitionpolicyinternational.com/wp-content/uploads/2016/02/North-America-Column-February-Full.pdf

Anne Layne-Farrar, Patent Holdup and Royalty Stacking Theory and Evidence: Where Do We Stand After 15 Years of History?, OECD Intellectual Property and Standard Setting (Nov. 18, 2014), http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/WD%282014%2984&doclanguage=en

Alexander Galetovic & Stephen Haber, The Fallacies of Patent Holdup Theory, 13 J. Comp. L. & Econ., 1 (2017), https://academic.oup.com/jcle/article/13/1/1/3060409

Alexander Galetovic, Stephen Haber, & Lew Zaretzki, An Estimate of the Average Cumulative Royalty Yield in the World Mobile Phone Industry: Theory, Measurement and Results (Feb. 7, 2018), https://hooverip2.org/working-paper/wp18005

Alexander Galetovic, Stephen Haber, & Ross Levine, An Empirical Examination of Patent Hold-Up (Nat’l Bureau of Econ. Research, Working Paper No. 21090, 2015), http://www.nber.org/papers/w21090.pdf

Douglas H. Ginsburg, Koren W. Wong-Ervin, & Joshua Wright, The Troubling Use of Antitrust to Regulate FRAND Licensing, CPI Antitrust Chronicle (Oct. 2015), https://www.competitionpolicyinternational.com/assets/Uploads/GinsburgetalOct-151.pdf

Douglas H. Ginsburg, Taylor M. Ownings, & Joshua D. Wright, Enjoining Injunctions: The Case Against Antitrust Liability for Standard Essential Patent Holders Who Seek Injunctions, The Antitrust Source (Oct. 2014), https://ssrn.com/abstract=2515949

Gerard Llobet & Jorge Padilla, The Optimal Scope of the Royalty Base in Patent Licensing, 59 J. L. & Econ. 45 (2016), https://ssrn.com/abstract=2417216

Keith Mallinson, Theories of Harm with SEP Licensing Do Not Stack Up, IP Fin. Blog (May 24, 2013), http://www.ip.finance/2013/05/theories-of-harm-with-sep-licensing-do.html

Jorge Padilla & Koren W. Wong-Ervin, Portfolio Licensing to Makers of Downstream End-User Devices: Analyzing Refusals to License FRAND-Assured Standard-Essential Patents at the Component Level, 62 The Antitrust Bulletin 494 (2017), https://doi.org/10.1177/0003603X17719762

Jonathan D. Putnam & Tim A. Williams, The Smallest Salable Patent-Practicing Unit (SSPPU): Theory and Evidence (Sept. 2016), https://ssrn.com/abstract=2835617

Gregory Sidak, The Antitrust Division’s Devaluation of Standard-Essential Patents, 104 Geo. L.J. Online 48 (2015), https://georgetownlawjournal.org/articles/161/antitrust-division-s-devaluation-of/pdf

Joanna Tsai & Joshua D. Wright, Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts, 80 Antitrust L.J. 157 (2015), https://ssrn.com/abstract=2467939

Joshua D. Wright, SSOs, FRAND, and Antitrust: Lessons from the Economics of Incomplete Contracts, 21 Geo. Mason L. Rev. 791 (2014), http://www.georgemasonlawreview.org/wp-content/uploads/2014/06/Wright-Website-Version.pdf

Categories
Patent Law Uncategorized

New Paper Addresses Flaws in Patent Holdup Theory

dictionary entry for the word "innovate"Stephen Haber and Alexander Galetovic of the Hoover Institution’s Working Group on Intellectual Property, Innovation and Prosperity (IP2) published a new working paper on the problems with Patent Holdup Theory. In “The Fallacies of Patent Holdup Theory,” Professors Haber and Galetovic show that Patent Holdup Theory is based on three fundamental errors. Professor Haber presented this work in October at CPIP’s 2016 Fall Conference.

At its core, Patent Holdup Theory asserts that patents impede innovation through holdup and royalty stacking, and that these problems are exacerbated in fields reliant on standard essential patents. First, the paper shows that Patent Holdup Theory contradicts basic understandings of holdup in Transaction Cost Economics. The second problem identified in the paper is that “royalty stacking” cannot occur in the way the Theory requires because holdup cannot occur multiple times to the same firm. Third and finally, Patent Holdup Theory implicitly requires the fallacious result that patents add little or no value to the markets they help create, particularly in the context of technology standardization.

Haber and Galetovic also make an interesting observation about the implications of Patent Holdup Theory that show why it should have been obvious that the Theory was flawed from the beginning. If the premises of Patent Holdup Theory were correct, innovation in industries where it occurred would be stagnant. The fact that innovation is strong in the high tech industries suggests that there is a problem with the Theory. This paper provides excellent insights into identifying the exact problems with the Theory.