Tuesday, March 5, 2013

Chief economists of EU Commission and FTC make proposals for FRAND dispute resolution

Competition Policy International (CPI) has published a six-page paper entitled "Standard Setting Organizations [SSOs] Can Help Solve the Standard Essential Patents Licensing Problem" jointly authored by three professors, two of whom currently head the economics departments of the European Commission's Directorate-General for Competition (Kai-Uwe Kuehn, or "Kühn" in German) and the United States Federal Trade Commission (Howard Shelanski) and one of whom recently served as the Chief Economist of the Antitrust Division of the United States Department of Justice (Fiona Scott-Morton). The three antitrust experts believe their proposed reforms to the IP policies of leading SSOs "would greatly improve efficiency in patent licensing" and help address the "holdup" problem (SEP holders seeking supra-FRAND royalties at the threat of injunctions).

A footnote clarifies that "[t]he views expressed in this article are solely those of the authors and do not necessarily reflect those of the European Commission, Department of Justice, or Federal Trade Commission". That disclaimer does not diminish in the slightest the enormous weight that the authors of this paper have within their institutions and in the public debate.

FRAND licensing issues continue to be at the heart of numerous pending litigations and various ongoing antitrust investigations. Earlier today I reported on the first Asian pro-FRAND ruling (made by the Tokyo District Court last week and published in part today). There is nothing that SSOs can do to retroactively improve the FRAND pledges made back when today's relevant industry standards were defined (apart from the fact that statements by SSOs can have some persuasive impact on court decisions). Courts and regulators are still going to be needed in this field for a long time to come, but SSOs can and should do more to address the problem.

The authors of the paper are realistic and state in more diplomatic terms that the memberships of SSOs are divided on the question of SEP enforcement: "SSOs typically specify very little as to the meaning of 'fair' or 'reasonable,' perhaps partially because there is heterogeneity among the firms, technologies, and products within a given SSO." SSOs can bring parties together to talk, as the ITU did last fall (and continues to do regularly), but as long as some of their members reject any serious proposals for improvement, no agreement can be reached. At any rate, the antitrust experts' paper definitely gives air cover to the camp advocating more meaningful FRAND rules inside SSOs. And its Section III, The Hold-Up Problem, may very well be quoted in some FRAND-related pleadings going forward because it warns against the various negative effects of SEP owners "obtain[ing] payment far in excess of the ex ante value of the technology".

Section IV proposes better processes, and the following sentence struck me as a particularly strong message to SSOs that they aren't really doing their job with respect to the potential for FRAND disputes:

"In the view of all three of us, many existing SSO policies are not strong or clear enough to achieve the above goals ["to ensure that [SEP] market power is constrained so that consumers can benefit as much as possible from standard-setting activity, and so that SEP owners cannot discourage innovation by engaging in hold-up"] reliably or efficiently."

The antitrust thought leaders want less hold-up, lower litigation costs, and more innovation. In order to achieve these goals, they say, "[a]ny F/RAND commitment should also be understood to include a commitment to certain processes of dispute resolution and transfer of F/RAND obligations". They propose the following improvements:

  1. There appears to be considerable frustration among antitrust enforcers with FRAND commitments that "become[] weaker or more vague upon the sale of a patent". This concern is shared by major industry players. For example, Microsoft's SEP policy statement contains a clear commitment that "Microsoft will not transfer {its] standard essential patents to any other firm unless that firm agrees to adhere to the points outlined [in that policy paper]".

  2. The authors would like each FRAND commitment to "include a process that is faster and lower cost for determining a F/RAND rate, or adjudicating disputes over F/RAND, than litigation". They are concerned about friction, transaction costs, and entrance bariers for smaller businesses. They're not opposed to the idea of "leaving litigation as one possible option", but they clearly prefer "arbitration and alternative dispute resolution within the SSO". The last passage is not 100% unclear. Arbitration is a form of alternative dispute resolution. Do the authors mean that arbitration should also take place within the SSO, or do they consider arbitration (by arbitration organizations such as the AAA) one option and ADR within an SSO another option? I guess they mean the latter, but I'm not sure. Apple and Qualcomm stand on different sides of the SEP enforcement debate but for disparate reasons aren't convinced that arbitration is generally a better mouse trap than litigation. Anyway, the authors want the SSOs to make such procedures (wherever they may take place) more efficient by "defining, for example, the specification of the base to which a royalty should apply or other factors that would simplify the assessment as to whether a particular licensing offer is F/RAND". The royalty base is a key issue that Apple has emphasized more than any other participant in the FRAND debate, and I agree with it on that one. Presumably Apple will be very happy to see this example in that paper.

  3. The paper also advocates that a cash-only option must be available, and they believe that cash prices are easier to evaluate than complex packages of cross-licenses. If a party choose a cross-license, then it considers it to have advantages over a cash-only deal, but cash-only offers are easier to evaluate.

  4. Finally, the paper wants SEP owners to follow a process "before they can seek an injunction or exclusion order". They want to ensure that disputes over FRAND rates, validity, or essentiality/infringement can be resolved without the threat of an injunction. One company that clearly doesn't like this approach is InterDigital, which says that Huawei and ZTE aren't "willing licensees" as they are willing to license only valid patents that they actually use.

    The last three sentences of the paper sound very much like Judge Posner's thinking on FRAND:

    "The essence of the F/RAND commitment is that the firm has voluntarily chosen to accept royalties rather than pursue a business model based on exclusion. This suggests that there can be no irreparable harm from the use of the SEP. Limits on the use of injunctions or exclusion orders are therefore appropriate."

    The proposed FTC-Google settlement unfortunately does not reflect this thinking because it imposes onerous conditions on defendants who have to prove that they are "willing licensees" in order to avoid sales and import bans -- and who face the risk of injunctions only because of another party alleging that any non-SEPs they are asserting are essential to some standard under some, possibly very far-fetched, theory.

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