The FSA, ACT, and several other Big Tech associations have sent a letter and position paper to the Biden Administration’s new Attorney General, Merrick Garland. They advance many of the misleading narratives historically used by certain large standard implementers with the objective of reducing the costs of standardised technologies developed by third parties, by devaluing standard essential patents (SEPs) and driving down FRAND royalty rates. If accepted, these positions would likely undermine private sector investment in 5G and 6G.
Let’s take a look at what they are asking for. The position paper asks Attorney General Garland to:
“Highlight and address the innovation-inhibiting challenges of patent hold-up—the ability of licensors to demand and obtain royalty payments based on the market power gained by the investments of industry to comply with the standard, rather than the value of the patented technology before the standard was set as compared to alternatives”.
This assertion claims that patent holders can use their bargaining power to extract excessive (i.e. supra-FRAND) royalties but fails to recognise that the notion of hold-up is an old, theoretical contrivance for which there is no empirical evidence. The lack of credible evidence is striking given the heated academic debate that this hold-up notion has generated in the patent licensing world for more than two decades.
One reason why no evidence of hold-up exists is because of SEP holders’ commitments to offer licenses on fair, reasonable, and non-discriminatory (FRAND) terms. If the parties do not agree on the license terms, the SEP holder can only enforce its patents via court intervention. Given the FRAND commitment, the court-awarded damages are unlikely to exceed a FRAND rate. The SEP holder could also ask the court to issue an injunction. However, courts are unlikely to grant an injunction unless there is an evidentiary record that an implementer has been unwilling to take a FRAND licence, or refuses a licence offered by the patent owner that is considered by the court to be FRAND. Therefore, if a court sees that a patent holder is trying to extract supra-FRAND royalties, it will not issue an injunction.
Flipping reality on its head, the position paper suggests that patent hold-out is not a problem. Instead, it suggests that patent hold-out is:
[N]othing more than prospective licensees taking reasonable precautions in licensing negotiations to assure themselves that patents offered for licence are, in fact, valid and infringed, and that the royalties demanded reflect the FRAND commitment.
Hold-out occurs when the implementer of a standard acts in bad faith and delays or refuses to take a licence for the relevant SEP portfolio it uses. Unlike hold-up, patent hold-out can and does occur routinely. Multiple courts have stated such, as shown by the findings by courts in member states of the European Union and in other jurisdictions. Recent cases in Germany, e.g. involving Daimler and a variety of SEP holders (Sharp, Conversant and Nokia), clearly demonstrate that hold-out is a growing problem. So do the Sisvel v. Haier decisions from the German Federal Court of Justice.
When an implementer acts in bad faith and refuses to take a FRAND licence, the SEP holder is left with no alternative but to litigate or to give up seeking a licence. However, litigation is costly and not all SEP holders have the necessary resources to effectively protect their patent in courts, particularly when they face widespread infringement, which requires them to files legal actions against numerous parties across multiple jurisdictions.
There is also increasing evidence that hold-out sometimes involves collusive, potentially illegal, behaviour – including by a signatory to the letter cited above. In the 2020 annual report of the ESMIG, a smart meter trade association, Managing Director Williem Strabbing wrote:
Another initiative that started in 2019 was the development of a mutual approach for licensing 3G/4G “Standard Essential Patents. Together with associations such as the Fair Standards Alliance, we lobby for the best economic and general solution for our industry and avoid individual settlements with patent holders. Annual Review: Activities and Members 2020, ESMIG, at 7. (downloaded January 2021) (emphasis added).
Notably, when patent holders began calling attention to this admission, the ESMIG quietly replaced the document with a version that omits the reference to collusive hold-out. Readers can view the original text using Wayback machine (see here).
Next, the position paper turns to the old SSPPU warhorse, asking the Attorney General to:
Undertake advocacy to clarify that reasonable royalties for SEPs should be based on the value of the patented technology itself, and should not extend to cover the contributions and innovations of others. The concept of the “smallest saleable patent practicing unit” is important to ensure that royalties do not capture value beyond the scope of what the patent actually covers.
We agree that reasonable royalties should be based upon the value of the patented technology. But the price of the SSPPU (smallest saleable patent practicing unit) is unrelated to the value contributed by the patented technology to the final product. Not surprisingly, courts in the European Union, United States, and other jurisdictions have consistently rejected the argument that royalties for SEPs must use the SSPPU as a royalty base.
Moreover, recent Court decisions in Germany and the UK make it clear that FRAND royalties should be based upon the value that the technology brings to the final product. This is not the price of the final product, but rather the value added to the final product. To understand this concept, you can look at the price of a product sold with and without the cellular technology. Thus, you can look at tablets that are sold both with and without cellular technology, and the price difference can give you an indication of the value of the cellular technology to that product. Similarly, you can conduct econometric studies to determine the value that cellular connectivity add to products such as cars. These are evidence-based ways of looking at the value of a technology.
The position paper goes on to advocate the license-to-all concept arguing that the Attorney General should:
Undertake advocacy to clarify that a FRAND commitment means making SEP licences available to all parties that seek to make, use, or sell products that support a standard, regardless of their position in a supply chain.
The first thing to note here is that it is unclear what a ‘license-to-all’ scheme means. It could mean that there is an obligation to license each and every level of the supply chain. Alternatively, it could mean that you need to offer a licence to any level of a supply chain that requests a licence. Neither paradigm has never existed in any shape or form. And for good reason: they are unworkable.
You cannot license all participants in a supply chain as a patent licences have exhaustive effects. Once one level of a supply chain is licensed to certain patents, then downstream members of the same supply chain cannot be licensed to the same patents due to patent exhaustion. And if different levels were licensed to the same patents, that would be patent misuse, i.e. double-dipping.
A further complication is that such a scheme would negatively impact transparency and raise questions regarding FRAND as each level of the supply chain would be licensed to different patents. Moreover, determining which patents and which rates would apply to different levels of a supply chain could lead to endless litigation and enormous inefficiencies.
The situation is not much improved if the obligation to license is limited to just those levels of a supply chain that request a licence. If different levels of a supply chain seek similar licences, that becomes impossible due to patent exhaustion and could lead to patent misuse, as noted above
Moreover, there is a further complication of this model of providing licences to actors at any level of a supply chain that ask for one. Imagine that one level of a supply chain is initially licensed for all of the relevant patents. And then imagine that an actor from another level of the supply chain demands a licence. What is to be done? Does this mean that the first licence then needs to be reworked? And what if two different supply chains ask to be licensed at different levels? Then you could have one supplier being licensed and another, similarly situated one not being licensed. Would this then raise arguments that such conduct is discriminatory?
The complications of any license-to-all scheme are mind-boggling. In almost any instance in which you enable licensing at multiple levels, you create risks of patent misuse and discrimination. Moreover, for every additional level that is licensed, you need additional lawyers and negotiators to complete the licence, which leads to greater costs passed on to consumers. This is why a license-to-all scheme has never existed.
There is a reason licensing typically occurs at a single point in a supply chain: it is efficient and avoids or reduces the risks of so-called double-dipping. This is why the current practice of licensing at a single point in the supply chain is the way private parties have always ordered their licensing affairs. Again, this is why there never has been an effective license-to-all scheme.
Finally, the position paper asks the Attorney General to address the “New Madison” approach articulated by former US Assistant Attorney General Makan Delrahim. The paper asks that Attorney General Garland:
Clarify that the Biden Administration’s policy of acknowledging the role of competition concerns and antitrust law in FRAND disputes is based on sound economics, in contrast to the “New Madison” approach.
The “New Madison” approach simply stands for the proposition that not every patent or contract dispute gives rise to antitrust or competition issues. A FRAND-committed SEP is a patent for which a FRAND commitment was made; a violation of that commitment is actionable under contract law. Antitrust laws should only be applied when the challenged practice breaches competition law.
These positions advanced by the FSA, ACT, and the other signatories are simply designed to lower the input costs of the large, entrenched platforms and implementers that finance them, irrespective of the long-term consequences to further standards development. Their positions are inconsistent with the existing jurisprudence, established industry practices, and with private investment in 5G and 6G. Their arguments should be disregarded.