Delrahim puts standard-setting organizations, implementers on notice over SEP licenses

15 November 2017 6:58pm
Patent Keyboard

🔊 Podcast: US sides squarely with owners of technology standards in patent licensing negotiations

MLex Chief Global Digital Risk Correspondent Mike Swift and Senior Antitrust Correspondent Josh Sisco discuss the shift in policy at the Department of Justice on licensing practices for standard essential patents.

13 November 2017. By Joshua Sisco.

In a forceful speech Friday in Los Angeles, the Department of Justice’s new antitrust leader planted his flag in the polarized world of standard essential patents, putting licensees on notice that their bargaining is being watched for potential abuses.

“I worry that we enforcers have strayed too far in the direction of accommodating the concerns of technology implementers who participate in standard-setting bodies,” Assistant Attorney General Makan Delrahim said during a lunchtime keynote for a conference at USC ‘s law school.  “Perhaps we’re risking and undermining the incentives for [intellectual property] creators who are entitled to an appropriate reward for developing breakthrough technologies.”

Delrahim’s position on negotiations for technologies used in standards and their corresponding patent royalty rates has been known for some time. In dissents to some recommendations from the Antitrust Modernization Commission that ended in 2007, Delrahim said there is little empirical evidence for patent hold-up, the practice by SEP holders of withholding a license to obtain anticompetitive royalty rates.

By contrast, he said at the time, the implementers of those technologies can use their bargaining power to “hold out” for lower rates, exposing the patent owner to a “buyer’s cartel.”

Now he is in a position to direct antitrust enforcement priorities, and at USC on Friday Delrahim doubled down. “Too often lost in the debate over the patent hold-up problem, is recognition of a much more serious risk. That’s the hold-out problem.”

This marks a reversal from President Barack Obama’s administration, which was concerned that SEP holders would use the market power conferred on them by the use of their technology in standards to seek anticompetitive royalty rates.

That view was expressed in a 2015 business review letter from the DOJ written by Renata Hesse, then deputy assistant attorney general for civil and criminal operations.

The letter signed off on policy changes at the Institute of Electrical and Electronics Engineers, or IEEE, a standard-setting organization for some key Internet and Wi-Fi standards. Hesse made sure to point out the letter wasn’t official DOJ policy on all standards activity, and that different policies may be more beneficial for other standard-setting organizations, or SSOs.

Still, it is one of the strongest indicators of where officials stood at the time on the controversial issue. The IEEE's policy change came in response to statements by the Justice Department about its concerns on SEPs, particularly an October 2012 speech by Hesse.

In the speech — which outlined actions SSOs could take to promote competition — Hesse discussed potential problems with patent hold-up, but made no mention of patent hold-out.

The update — first proposed in August 2013 and approved in 2015 — limited the ability of patent holders to seek injunctions on standard-essential patents, required patent holders to make their intellectual property available to component makers, as opposed to only licensing to end-users, and stated patent royalties or damages should be calculated based on the “smallest saleable unit.”

In blessing the IEEE’s policy shift, companies on both sides of the issue — so-called innovators such Qualcomm, Ericsson, Nokia and implementers such as Apple and Samsung — interpreted the DOJ as siding with licensees of essential patents.

Without mentioning the IEEE by name, Delrahim took an axe to all three line items, particularly in relation to standard-setting organization policies initiated at the behest of licensees.

“While the so-called smallest salable component rule may be a useful tool among many in determining patent infringement damages for a multiple-component product, its use as a requirement by a concerted agreement of implementers as the exclusive determinant of patent royalties may very well warrant antitrust scrutiny,” he said.

Likewise, compulsory licensing schemes “effectively devalue” intellectual property rights, Delrahim said. Standard-setting organization mandates to that effect should be viewed “with suspicion,” he said.

“The antitrust division will closely scrutinize what appears to be cartel-like anticompetitive behavior among SSO participants, either on the innovator or implementer side,” Delrahim said.

He urged antitrust agencies “to take a more humble approach” when evaluating unilateral violations of commitments to SSOs by patent owners. And he promised a “fresh look at concerted actions within SSOs that cause competitive harm to the dynamic innovation process.”

Notably, in speaking about injunctions, Delrahim made no distinction between patents used in standards and those that are not. To some observers on both sides of the divide, the remarks played down the market power inherent in standards.

“Patent holders can't violate the antitrust laws by properly exercising the rights that patents confer,” Delrahim said. That includes “seeking an injunction or refusing to license such a patent unilaterally,” he said.

Concerted action by any group is always subject to the antitrust laws, Delrahim said. But he was clear that licensees typically should not have remedies against an SEP-holder under antitrust law. SEP owners must license on fair, reasonable and non-discriminatory — or Frand — terms, and those disputes are fair game under contract and fraud laws, he said.

But when implementers hijack the Frand-determination process for particular patents, there can be an antitrust problem. “SSO rules purporting to clarify the meaning of reasonable and non-discriminatory that skew the bargain in the direction of implementers warrant a close look to determine whether they are the product of collusive behavior at the SSO,” Delrahim said.

Delrahim did not mention any SSO or implementer by name or indicate whether any enforcement actions are underway. But in a signal that cases could be coming, he said SSOs “would be well-advised” to maintain internal antitrust compliance programs.

*"Application of Competition Policy to Technology and IP Licensing;" University of Southern Califoria Gould School of Law; Los Angeles, California. November 10, 2017.

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