I submitted comments to the US Department of Justice’s call for comments that we previously discussed here. Since they are rather long, I have decided to serialize them over a series of shorter posts. For those interested in reading my comments as a singular unit they are available on the DOJ’s website here.
The 2021 Proposed Policy Statement and Negotiation Framework
The December 6, 2021, proposed policy statement (the “2021 Proposal” or “2021 draft statement”) includes some positive aspects. First and foremost, unlike the 2013 Statement, which, as noted above, appears to have been issued as a political favor to Apple and Google, the 2021 Proposal was proffered for public comment – albeit initially (though thankfully no longer) with a very short time frame that made quite a few observers suspicious of the DOJ’s motives.[1]
Timing aside, the 2021 Proposal tries to balance the interests (broadly speaking) of SEP owners or innovators on the one hand, and SEP implementers on the other. Thus, for example, page 4 of the 2021 Proposal notes that in the context of SEP licensing “opportunistic behavior by both parties [licensee and licensor] can occur”. But almost as if to show the poverty of the authors’ imagination, the policy statement only recites examples of “opportunistic conduct” by SEP owners and does not provide any meaningful discussion of opportunistic conduct by putative licensees[2] Indeed, it has been shown time[3] and time[4] again,[5] that there is very little empirical evidence of holdup but it keeps popping up while examples of holdout keep multiplying. Indeed, while major implementers like Apple like to complain in the press or through their paid academics that the SEP royalty stack hovers between 20-30% of ASP,[6] based on testimony under oath, the judge overseeing the Apple-triggered FTC suit against Qualcomm found Apple pays less than $15/device in SEP royalties or less than 1.88% of the average sales price of its phone.[7] Moreover, in the absence of an injunction, there appears to be no penalty whatsoever for holdout and thus there is no incentive for implementers to pursue good faith negotiations– indeed, rational observers might easily conclude that Courts in fact reward holdout.[8]
Another puzzling aspect of the 2021 Proposal[9] is the apparent attempt to create a SEP licensing negotiation framework. The language of the 2021 Proposal hints at the Huawei v. ZTE framework[10] created by the European Court Justice’s opinion in Huawei v. ZTE.[11] What makes the apparent attempt to follow Huawei v. ZTE problematic is that the Huawei v. ZTE framework is, at its root a competition (antitrust) law safe harbor created because under EU law, unlike U.S. law, the seeking of an injunction could amount to a violation of Art. 102 of the EU Treaty. In the United States, with very few exceptions, the F/RAND framework is understood to be rooted in the contract.[12] By so closely following the Huawei framework rooted in competition law, observers might erroneously conclude that under US law seeking an injunction may be a violation of the Sherman Act. Such misunderstanding would be profound because the seeking of judicial remedies is generally immune from antitrust liability under the U.S. Constitution’s Noerr-Pennington doctrine.
Being confused about the true intent of the DOJ and/or US official policy as it relates to F/RAND is a real concern. Not the least because, as I and others have documented, certain lobbyists are actively working to encourage foreign (especially Chinese) regulators[13] to use antitrust law as a weapon[14] against foreigners who develop cutting-edge technology. Speaking personally, I never thought that SEP licensing could become a question of my own personal safety and liberty until I was a guest of China’s NDRC[15] where I was threatened with criminal antitrust prosecution and global extradition such that I would “not be able to leave the United States, ever.”[16] Based on informal discussions with similarly situated individuals, this was not an uncommon occurrence.[17]
Leaving aside the legal basis for the proposed framework, the real problem is that, at least for a licensee, it is precatory only. That is, while the statement recites various conceivable remedies for being unwilling licensees or licensors, it makes it seem that injunctions are a very rare, if almost impossible to achieve, remedy (see page 8 of the draft). Given all the defenses already available to licensees under patent law and under anti-trust law, absent a real and present threat of injunction there are few incentives for the licensees to follow the proposed framework.[18]
Sources:
[1] See With SEP Politics Eagle Eyes are Needed, or Senator Tillis’ Watchfulness Pays Off and Comments on the Draft Policy Statement Now Due February 4, Kidon IP Blog (December 13, 2021) https://kidonip.com/news/with-sep-politics-eagle-eyes-are-needed-or-senator-tillis-watchfulness-pays-off-and-comments-on-the-draft-policy-statement-now-due-february-4
[2] For an appreciation on implementer holdout see, e.g., Indranath Gupta, Vishwas H Devaiah, Shruti Bhushan,
Shifting focus on hold-out in SEP licensing: perspectives from the EU, USA and India Journal of Intellectual Property Law & Practice, Volume 14, Issue 1, January 2019, available at https://academic.oup.com/jiplp/article-abstract/14/1/12/5060533
[3] J. Gregory Sidak, What Aggregate Royalty Do Manufacturers of Mobile Phones Pay to License Standard-Essential Patents? The Criterion Journal on Innovation, Vol. 1 (2016) (finding SEP holders collected aggregate royalties in 2013-14 that were between 4 and 5 percent of global handset revenues).
[4] Keith Mallinson, Cumulative mobile-SEP royalty payments no more than around 5% of mobile handset revenues, WiseHarbor, on cumulative mobile-SEP royalties for IP Finance, 19th August 2015 <available at> https://www.wiseharbor.com/pdfs/Mallinson%20on%20cumulative%20mobile%20SEP%20royalties%20for%20IP%20Finance%202015Aug19.pdf
[5] Alexander Galetovic, Stephen Haber, Lew Zaretzki, An estimate of the average cumulative royalty yield in the world mobile phone industry: Theory, measurement, and results, Telecommunications Policy 42 (2018) 263-276 (finding average cumulative royalties yield on a smartphone in 2016 would not exceed 5.6 percent).
[6] Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, Texas Law Review vol.86: 1991) at 2226-27; Ann Armstrong, Joseph J. Mueller, Timothy D. Syreet, The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones, available at https://www.wilmerhale.com/-/media/ed1be41360634d1fa5c3ab08647e8ada.pdf.
[7] Federal Trade Commission v. Qualcomm Inc., Case 5:17-cv-220(LHK) doc.1490 (May 21, 2019) at 85, discussed in David L. Cohen, The SEP Royalty Stacking Myth – Apple Calls its Own Bluff, Kidon IP Blog (July 22, 2019) available at https://kidonip.com/standard-essential-patents/the-sep-royalty-stacking-myth-apple-calls-its-own-bluff.
[8] If courts follow the view of Judge Selna in TCL v. Ericsson, 8:14-cv-341 (CD CA 2017) overturned for other reasons 943 F.3d 1360 (Fed. Cir. 2019) that implementers who enter a license after six months and implementers who refuse to enter into a license after four years and multiple litigations deserve the same royalty rates, then there is absolutely no incentive for implementers to follow the proposed guidelines. Indeed, “[b]y delaying taking a license, TCL secured one of the best deals without assuming any of the risks that its competitors took in agreeing [to] early terms or lump sums.” Richard Vary, Dissecting TCL v. Ericsson -what went wrong? IAM (Sept/Oct 2018) at 14.
[9] 2021 Proposal at 5-6.
[10] See, e.g., Rainer K Kuhnen, Huawei v ZTE – ECJ sets the framework for injunctive relief regarding SEPs, IAM (11 April 2016) https://www.iam-media.com/huawei-v-zte-ecj-sets-framework-injunctive-relief-regarding-seps
[11] Huawei Technologies Co. Ltd v ZTE Corp., ZTE Deutschland GmbH (Case C-170/13) (CJEU July 16, 2015).
[12] F.T.C. v. Qualcomm, Inc., 969 F.3d 974, 997 (2020).
[13] David L Cohen, Anti-Patent Leadership Taking IEEE-SA on The Road to Knowhere? Part I, Kidon IP Blog (Nov 10, 2019) available at https://kidonip.com/standard-essential-patents/changes-to-ieees-ipr-policy-make-no-sense.
[14] David L Cohen & Douglas Clark, China’s Anti-monopoly Law as a weapon against foreigners, IAM (Nov/Dec 2019)
[15] Simon Denyer and Ellen Nakashima, a U.S. firm alleges China’s government colluded with a local competitor, Washington Post (Sept. 13, 2015).
[16] See A Short History of Vringo’s Battle with ZTE, Kidon IP Blog (Aug 2, 2018) at footnote 81, available at https://kidonip.com/news/a-short-history-of-vringos-battle-with-zte.
[17] Bill Merrit the CEO of Interdigital was the most vocal, see, e.g., Lance Whiteney, InterDigital execs threatened with arrest in China, C|Net (Dec 16, 2013) available at https://www.cnet.com/news/interdigital-execs-threatened-with-arrest-in-china. But Mr. Merritt was not the only executive so threatened. While many individuals I have spoken to over the years are reticent for personal and business reasons to come forward, I personally know quite a few executives who were similarly threatened with explicit or more subtle threats. Moreover, many individuals involved in SEP licensing in China told me about being followed both inside and outside the country, having their rooms searched (and occasionally ransacked), and the like. Thankfully, I know no one in SEP licensing that had to suffer like Peter Humphrey, see, e.g., James Griffin, Peter Humphrey was once locked up in China. Now he advises other prisoners and their families how to take on Beijing, http://CNN.com Dec 14, 2020, < https://edition.cnn.com/2020/12/13/asia/peter-humphrey-china-prisoners-intl-hnk/index.html>, but I refuse to take any chances and will no longer travel to any China administered territories, especially since in my counsel’s last communication with the NDRC (occurring months after Vringo and ZTE settled) he was informed that the investigation “remains open.”
[18] This is likely no accident. I have been personally told by multiple high-level regulators around the world that the only recourse for licensee holdout is successfully suing for patent infringement. However, if there are no injunctions, and courts follow the view of Judge Selna in TCL v. Ericsson, 8:14-cv-341 (CD CA 2017) overturned for other reasons 943 F.3d 1360 (Fed. Cir. 2019) that implementers who enter a license after six months and implementers who refuse to enter into a license after four years and multiple litigations deserve the same royalty rates, then there is absolutely no incentive for implementers to follow the proposed guidelines. Indeed, “[b]y delaying taking a license, TCL secured one of the best deals without assuming any of the risks that its competitors took in agreeing [to] early terms or lump sums.” Richard Vary, Dissecting TCL v. Ericsson -what went wrong? IAM (Sept/Oct 2018) at 14.
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