On November 6, 2023 I submitted a response to the public comments which can be found here. I have also included my comments in full on this blog in a series of posts including the below. The only change in my submission is that for each posts the footnoting was renumbered for just the individual post.
David L. Cohen’s Response to the USPTO, the ITA, and NIST call for Public Comments
On September 11, 2023, the U.S. Patent and Trademark Office (“USPTO”) published a notice titled “Joint ITA–NIST–USPTO Collaboration Initiative Regarding Standards; Notice of Public Listening Session and Request for Comments” (88 FR 62349), announcing that the USPTO, the International Trade Administration (ITA), and the National Institute for Standards and Technology (NIST) are seeking stakeholder input on the current state of U.S. firm participation in standard development,[1] and the ability of U.S. industry to readily adopt standards to grow and compete, especially as they relate to the standardization of critical and emerging technologies. The request included twelve (12) questions. The following statement comprises the response to the 12 questions by David L. Cohen, president of Kidon IP Corporation, in his personal capacity.
David L. Cohen has been an expert in the area of standards essential patents for fifteen years. Mr. Cohen has been named world-leading IP strategist in the 2023, 2021, 2020, 2017, and 2016 editions of the IAM Strategy 300 and The World’s Leading IP Strategists. He writes the Kidon IP blog that provides deep analysis of intellectual property issues including standards essential patents and policies related to them, see https://www.kidonip.com.
RESPONSE TO QUESTIONS FOR PUBLIC COMMENT
Do the intellectual property rights policies of foreign jurisdictions threaten any of U.S. leadership in international standard setting, U.S. participation in international standard setting, and/or the growth of U.S. SMEs that rely on the ability to readily license standard essential patents?
Yes.
While most intellectual property rights are national, technical consensus standards are global, as is the development, manufacture, sale, and use of most standardized products. As a result, the vast majority of participants in global standards development must take a global view of standardization. One of the many, many challenges in standardization is that what happens in a first jurisdiction can quickly impact standards participants in other jurisdictions – even if the participants never directly interact with that first jurisdiction. It is for this reason (and others) that most standards participants take a global outlook toward standards. When the question of intellectual property rights is added into the mix, the international interplay becomes crucial. To understand why it is important to remind ourselves of how patent rights work in the field (i.e., the real world) as opposed to the simplified theoretical models of economists.
Sophisticated licensing executives recognize three general categories of patent licenses: (1) stick licenses, (2) carrot licenses, and (3) patent licenses combined with other things of value.[2] When examined carefully, most observers will agree that only stick licenses – i.e., licenses entered through the threat of litigation, explicit or not, produce adequate results that more accurately reflect the value of a technology. By contrast, carrot licensing, or convincing a third party to take a license when they are under no compulsion to do so and are divorced from stick licensing, simply does not achieve sustainable financial results for the patent owner that invested in the development of the technology. Finally, patent licenses combined with other things of value are typically comprehensive business deals with a few patents added for flavor.[3] Under this framework, standards-essential patents (“SEP”s) are special case examples of stick licenses because SEPs must necessarily be infringed by a party implementing the standard, as adopted by one or more standards-development organizations (“SDO”s).[4] SEPs may also be declared by either a patent owner or an SDO as essential to standards promulgated by that SDO, although many U.S. SDOs successfully utilize a blanket patent declaration policy which does not require identifying specific patents.[5] Moreover, certain SDOs publish detailed descriptions of their standards. Publication of a standard makes it easy for the implementer to implement sophisticated proprietary technology without a license. Hence, the only reason to license – all else being equal – is expectation of enforcement. The accumulation of laws, regulations, economic analysis, and polite lies licensing executives like to tell each other when negotiating over an SEP license (i.e., the F/RAND framework) helps obscure the fact that if the threats are not credible, SEPs, have little inherent value.
To understand why the basic truths of licensing often get lost with SEPs, an understanding of F/RAND licensing is a critical first step.[6] SDOs, such as the European Telecommunications Standards Institute (“ETSI”), typically adopt intellectual property rights policies (“IPR policies”) which govern the declaration of licensing intentions related to standards that may be or may become essential to a standard. ETSI is a significant SDO because the overwhelming majority of SEPs are declared using ETSI’s IPR policy.[7] These policies typically try to balance public use of the standard and the rights of IP owners.[8] In other words, the SDO generally seeks to ensure that access to SEPs is available to companies seeking to implement its standards, while also ensuring that patent owners are adequately compensated for the use of their proprietary technology.
For example, under the ETSI IPR Policy, when a patent owner believes that it has a patent that may be or may become essential to an ETSI standard, ETSI requests that the patent holder make an “undertaking in writing that it is prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory (“FRAND”) terms and conditions under such IPR…” ETSI IPR Policy § 6.1. The meaning of this commitment is hotly debated – and historically an even greater debate is whether companies that implement a standard (“Implementers”) have any obligation on their part to take a license to relevant SEPs and, if so, what is the precise nature of such an obligation.
As a result, many companies use that debate to simply infringe – manufacturing products without taking a license and thereby paying no or low royalties for the use of valuable SEPs. They can do so because many believe that when the SEP owner finally shows up to seek a royalty, they can misuse that owner’ FRAND commitment as: (i) a shield to minimize their risk of adverse litigation outcome; (ii) a vehicle for disagreement over whether the offered terms are or are not FRAND and a resulting delay in actually having to pay royalties to the SEP owner; and (iii) a ceiling on any court-awarded royalties they may have to pay.
Viewed in this way, sophisticated implementers view FRAND as a security blanket that facilitates opportunistic infringement while carrying with it no cost because they misleadingly argue that the FRAND commitment imposes little or no requirements on them.[9] It is essentially a classic “one way” street. And it is a one-way street. That matters. In classic Nash bargaining, negotiated outcomes are driven by the value of the parties outside options.[10] If the relative cost of outside options like litigation becomes less risky, then there is less motivation to reach a negotiated resolution.
If the primary basis for a patent’s worth is in terrorem value, the cost benefit analysis of acquiring SEPs for licensing becomes relatively straightforward: what does it cost to receive an SEP and what is the likely litigation outcome?
Since I first discussed this over five years ago[11] prices have increased dramatically. For a typical SEP profile of US patent and 4 counterparts, I assume fixed prosecution and annuity costs of $300,000 and litigation and IP costs for a single assertion of over $4 MUSD (where multiple assertions are possible).[12] We omit for simplicity’s sake the cost of R&D that was a necessary perquisite to coming up with the invention that led to the patent (even though the failure to reward the SEP owner for this risky investment could actually have a direct effect on future innovation); the in-house costs for vetting and applying for the invention; the in-house costs associated with determining whether a patent should be declared to an SSO, and declaring it; and the time value of money. This leaves $4.3M on the cost side of the ledger. The average US damages award across all patents is approximately is $8.9M.[13] According to a number of studies plaintiffs (ignoring patent type) have on average 33% chance of success.[14] This chance of success, is overstated for SEPs and needs to be reduced substantially since most SDOs keep highly detailed records of the proceedings leading up to the issuance of a standard, i.e., prior art, all relatively easily available for the picking. Moreover, since many (if not most) SEPs employ method or system claims and the subject matter of SEPs are rooted in software or recite process steps without my underlying structure disclosed, the subject matter eligibility of many SEPs may be put into question under the Supreme Court’s Alice regime. It is no wonder, therefore, that according to RPX, in the US, SEPs are likely to be less than half as successful as non-SEPs.[15] Thus, looking at the issue simply as a matter of patent infringement liability (before even addressing contractual or competition law issues that a potential licensee may throw into the mix), it is worth noting that the SEP holder has to spend $4.3 MUSD to receive a 1 in 6 chance – effectively rolling the dice –to double their money. If we looked simply at probabilistic outcomes then, an SEP owner spends $3.6 million in a one-SEP patent enforcement action where the risk-adjusted return is likely only $1.3 million in rough terms.
In no small part to account for this fact (and the sheer transaction costs of evaluating SEP’s on a patent-by-patent basis), most SEP owners try to hedge their bets (and reduce transaction costs) by licensing on a portfolio basis.[16] Owners of larger SEP portfolios generally insist that putative licensees take a license to the larger portfolio of SEP’s for a given standard.[17] The idea is that there exist at least a handful of SEPs in the larger portfolio whose in terrorem value more than balances out the other SEPs (even with the licensee’s security blanket of likely litigation outcomes and FRAND constraints).[18] Reasonable and willing licensees generally prefer this approach as well because they do not want to leave open the risk that they infringe other SEP’s and will have to deal with that fact at some point in the future. In other words, if they enter into a license agreement, they want complete and final “patent peace” between the parties.[19] There is a strong logistical challenge, however, when a potential licensee rebuffs the SEP portfolio holder. While the SEP portfolio might have a value as a whole, only a small subset can actually be litigated in court and courts have been extremely reluctant to take the value of the entire portfolio into account when considering the damages owed for being found to infringe just a handful of the patents in the larger portfolio.[20] Thus, short of agreeing to global arbitration or massive, multi-patent, multi-jurisdictional global patent warfare, the sophisticated implementer knows that an SEP owner can only ever receive damages for the patent being asserted on a piecemeal basis and at great costs to the SEP owner.
And it is for that reason that patent litigation, has been described as the Sport of Kings.[21] Patent litigation does not come cheap, especially when the litigation transmogrifies into a multi-jurisdictional slugfest. When managing a global patent fight, it is important to keep this in mind and understand when continued fighting makes sense and when it does not. One rough and ready tool is to compare the ratio between the current royalty demands and the anticipated litigation costs in one’s case to other historical litigations.[22]
It is no surprise, therefore, that, that the phenomena of reverse hold-up, also known as holdout, has become well-known where companies implement patented technology without compensating patent owners.23 While an injunction might otherwise have evened the playing field, in the context of SEPs, injunctions are nearly impossible to obtain in certain jurisdictions. Moreover, many current theories of patent value almost guarantee de minimis damages award for SEPs. One does not need a fancy PhD in law and economics to predict the inevitable result: certain companies are manufacturing infringing product and are trying to avoid compensation indefinitely. This is forcing SEP owners either to license SEPs far below their true value or face costly and drawn-out litigation to obtain royalties they should have received at the outset. Or even worse, withdraw from future standardization efforts.
Since most of the technical consensus standards are global, U.S. companies are subject to numerous non-U.S laws and policies and are therefore negatively affected by them.
The challenges of licensing SEPs outlined above simply relate to disputes between private parties. However, when a foreign country is actively involved in pursuing foreign standards participants and using their national antitrust and patent laws as weapons against foreigners, then things start to become highly problematic. We have discussed the way China abuses its antimonopoly law as a weapon against foreigners multiple times.[23]
[1] While the notice used the term “standard setting” these comments throughout utilize the more accurate legal and technical term “standard development”. Most of today’s standards, especially those that standards essential patents read on, are sophisticated performance standards that are developed, not “set”. Similarly, Congress and the U.S. Government generally speak of “standards development” not “standard setting”. See, for example, 5 U.S.C. §§ 4301-4306 The Standards Development Organization Act of 2004 5 U.S.C. §§ 4301-4306 https://uscode.house.gov/view.xhtml?req=granuleid%3AUSC-prelim-title15-section4301&edition=prelim and OMB Circular A-119.
[2] See, e.g., https://en.wikipedia.org/wiki/Stick_licensing.
[3] See, e.g., Niklas Ostmann, How to create the “pull” for Patent Licensing, (Published on September 6, 2016, available at: https://www.linkedin.com/pulse/how-create-pull-patent-licensing-niklas-%C3%B6stman?trk=prof-post.)
[4] Note this definition of SEPs elides over many controversies compare Sidak, J. Gregory. “The meaning of FRAND, Part II: injunctions.” Journal of Competition Law and Economics 11, no. 1 (2015): 201- 269 with Mark A. Lemley, Intellectual Property Rights and Standard-Setting Organizations, 90 Cal. L. Rev. 1889 (2002).
[5] For example, the patent policy of the Institute for Electronics and Electrical Engineers (IEEE) utilizes a blanket patent policy.
[6] A perfect example of missing the forest for the trees can be seen in the Joint Research Centre of the European Commission’s science and knowledge service report from 2017. Pentheroudakis, Chryssoula and Baron, Justus, Licensing Terms of Standard Essential Patents: A Comprehensive Analysis of Cases (January 12, 2017). JRC Science for Policy Report, 2017; ISBN 978-92-79-64458-0, Available at SSRN: https://ssrn.com/abstract=2898394. This otherwise excellent summary of the theories behind FRAND and the associated case law rings hollow as a guide to policy because it fails to address the actual costs and challenges of people doing actual licensing including the costs of getting and enforcing SEPs and defending against SEP assertions.
[7] See, e.g., IPlytics Landscaping Study on Essential Patents p.11 finding over 70% of all SEPs to be declared to ETSI (http://ec.europa.eu/growth/tools-databases/newsroom/cf/itemdetail.cfm?item_id=8981).
[8] See, e.g., ETSI IPR Policy § 3.1, available at http://www.etsi.org/images/files/IPR/etsi-ipr-policy.pdf.
[9] See, e.g., Defendant’s Skeleton Argument for the CMC, Vringo Infra, Inc. v. ZTE (UK) Ltd.,HC12D03985/HC12B04711 (Chancery UK) ¶¶44 – end (arguing that a putative licensee of SEPs need not express a willingness to take a license until after receiving a judgment that a particular patent is valid and infringed and then it only need to express such a willingness with respect the particular patent in suit and not to any larger subset of the putative licensor’s portfolio) available at https://www.scribd.com/document/678932743/Vringo-v-ZTE-ZTE-s-Skeleton-Argument-for-CMC-Final-Draft.
[10] See generally VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1332 (Fed. Cir. 2014) (discussing an expert’s use of Nash bargaining).
[11] David L Cohen, Licensing Standard Essential Patents on FRAND Terms, AIPLA Spring Meeting (2017) (available at https://kidonip.com/wp-content/uploads/2017/07/Cohen_Paper.pdf .
[12] See, e.g., https://legaljobs.io/blog/patent-litigation-statistics/.
[13] See, e.g., https://www.greyb.com/blog/patent-infringement-damages-calculation/ ; Supra Note 9.
[14] Supra Note 9 at 15.
[15] Standard Essential Patents: How do they fare? P.9 (available at https://www.rpxcorp.com/wp-content/uploads/2014/01/Standard-Essential-Patents-How-Do-They-Fare.pdf); but see Lemley, Mark A. and Simcoe, Timothy S., How Essential are Standard-Essential Patents? (February 22, 2018). Stanford Public Law Working Paper, 104 Cornell Law Review 607 (2019), Available at SSRN: https://ssrn.com/abstract=3128420. There are a number of significant concerns with the Lemley report, but regardless, the success rate of SEPs in Europe is far worse. See Are Patents Merely Paper Tigers (https://media.bardehle.com/contentdocuments/event_documents/Papiertiger/Papiertiger_en.pdf ); but see Hüttermann, Aloys, Patents – Paper Tigers or Real Tigers? (May 2, 2016). Mitteilungen der deutschen Patentanwälte 2016, 101, Available at SSRN: https://ssrn.com/abstract=2773628. However, while the Huttermann paper notes the statistics are skewed in the Paper Tigers paper because they fail to account for the fact that most patent infringement actions in Germany are not countered with nullity suits, it does not address the fact that for SEPs (as a subcategory of patents) are invariably accompanied by nullity suits, and in fact are often pre-emptively attacked as invalid. For SEPs, the success rate has been historically quite low. See, e.g., Richard Vary, Bifurcation bad for business, https://www.unitary-patent.eu/sites/www.unitary-patent.eu/files/nokia_vary_bifufcation.pdf; Witness Statement of Ari Laakkonnen, https://www.scribd.com/document/349037075/2015-11-13-16th-Witness-Statement-of-Ari-Laakkonen-Signed; https://kidonip.com/wp-content/uploads/2018/10/Patent-Validlity-FINAL.pdf
[16] For a comparison of the current approach towards licensing and the extreme approach advocated by some implementers see David L Cohen, A Compulsory “License to All” World: A Counter-Factual Exercise, The Licensing Journal (Jan 2021), available at https://kidonip.com/standard-essential-patents/a-compulsory-license-to-all-world-a-counter-factual-exercise-published-in-the-licensing-journal/
[17] See, e.g., Ericsson Inc. v. D-Link Systems, Inc., No. 6:10-CV-473, 2013 WL 4046225 at *15 (E.D. Tex. Aug. 6, 2013) (Davis, C.J.).
[18] Id.; but see David J. Teece et al., SDO IP Policies in Dynamic Industries: A Submission in Connection with the October 2012 National Academy of Sciences Symposium on RAND Patent Policies, Submission to the ITU Patent Roundtable 19 (Oct. 10, 2012) (“[T]here is no reason to believe that the value of different patents (or portfolios of patents) is proportional to the number of patents in the portfolio, even for ‘essential’ patents.”).
[19] See., e.g., Keith Mallinson, Busting Smartphone Patent Licensing Myths (Center for the Protection of Intellectual Property Sept 2015) at 6 (“Portfolio licensing is the norm with standards because this unified approach is most convenient and cost efficient for licensor and licensee alike”).
[20] See, e.g., Vringo Infrastructure, Inc. v. ZTE (UK) Ltd. [2013] EWHC 1591 at ¶52-end (UK Chancery, Patents Court 2013).
[21]Douglas J. Kline, Patent Litigation: The Sport of Kings, MIT Technology Review (Apri; 28, 2004) available at https://www.technologyreview.com/2004/04/28/232981/patent-litigation-the-sport-of-kings/
[22] For a discussion on some of the expenses of a recent bout of global SEP litigation see David L Cohen, The Patent Litigation Money Pit (Kidon IP Blog March 4, 2021) available at https://kidonip.com/news/the-patent-litigation-money-pit/
[23] See, e.g., David L Cohen and Douglas Clark, China’s Anti-monopoly Law as a Weapon Against Foreigners, IAM Magazine (November/December 2018); David L Cohen, The Patent Litigation Money Pit (Kidon IP Blog August 2, 2018) available at https://kidonip.com/news/a-short-history-of-vringos-battle-with-zte/; David Cohen and Donal O’Connel, Trade Secret Theft in China, (ipstrategy.com March 4, 2019) available at https://ipstrategy.com/2019/03/04/trade-secret-theft-in-china/
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