Monday, July 26, 2021

SEP Licensing Negotiation Groups -- Part II: justice delayed is justice denied when unwilling licensees can hide behind a consensus-building effort

This is the second part of a trilogy on licensing negotiation groups (LNGs): automotive industry cartels that would collectively negotiate standard-essential patent (SEP) licenses with major patent holders and pools. In the first part, I outlined some of the issues and cautioned against a false symmetry between patent pools and buyers' cartels named LNGs.

There isn't any such thing as a conventional supply-and-demand mechanism in SEP licensing. For example, patent holders can't reduce output: if they abandoned some of their patents, they'd just reduce the value of a portfolio. By contrast, if the likes of Continental, Dunlop, Bridgestone and Firestone ganged up on car makers, they could drive up the price--which is why competition authorities wouldn't allow such a cartel.

As double patenting isn't possible (if it happens, only one of the patents survives), SEP portfolios are by definition complementary to each other. One SEP--or one portfolio--can't substitute for another. As an implementer, you can't "threaten" Huawei with the alternative of taking a SEP license from Ericsson instead (unless Huawei gives you a better deal). You need a license from both.

SEP holders have an obligation to grant licenses on a fair, reasonable, and non-discriminatory (FRAND) basis. Comparable licenses go into the FRAND analysis, but comparability and substitutability are separate things.

Where you do have a supply-and-demand mechanism is when one standard competes with another. After the industry has chosen a standard, the terms of individual license deals are effectively set by the courts, directly (in the event of infringement litigation) or indirectly (SEP licensing negotiations amount to a simplified simulation of what would happen if the patent holder went to court).

Let's talk about tires again. A Conti or a Bridgestone can't force anyone to buy their tires. But customers--even if they're as advanced as Tesla--will need some tires. The fact that cars can't move without them ensures demand. Cars do move without a SEP license, though. The sad reality is that most cars are rolling and infringing at the same time.

In SEP licensing, there is no demand without the prospect of losing infringement cases and, if it comes to worst, being enjoined. Apple's 2019 policy statement on FRAND-pledged SEPs is instructive. It postulates that "[b]oth SEP licensors and licensees should negotiate transparently and willingly based on an exchange of relevant information." Apple is a net licensee, but has acquired a sizable SEP portfolio (from Intel in no small part). There's probably no smartphone maker who negotiates SEP licenses as hard as Apple. Still, Apple stresses symmetry with respect to the willingness to reach an agreement.

That symmetry is merely consistent with the guidance the European Court of Justice provided in Huawei v. ZTE, and the way it is now applied by the German courts after Sisvel v. Haier I & II. Unwilling licensees incur the risk of SEP injunctions. Otherwise there isn't sufficient deterrence in certain jurisdictions, and infringement would be profitable.

Licensing negotiation groups don't mix with Huawei v. ZTE and Sisvel v. Haier. How can a court of law identify an individual company's unwillingness to take a license on FRAND terms if it can hide behind its LNG?

Currently, there are various ways in which courts can arrive at an unwillingness finding as the result of a multifactorial analysis. Just a few examples:

All of the above examples would no longer be workable criteria if lawmakers and/or regulators were to endorse LNGs. Those licensee cartels would presumably move slowly, and they could blame it on the time it takes to build internal consensus within a group. Their offers might fall far short of a FRAND rate, but how could the patentee prove that a particular defendant was responsible?

LNGs could take extreme positions in negotiations. Individual members could not be held responsible.

Volkswagen's chief patent counsel explained (in the presentation I mentioned in Part I) that the LNG would appoint someone who would organize the internal process and would be neutral with respect to the LGN's members, but would clearly have a mandate to vigorously defend the group's interests vis-à-vis patent holders. For example, Mr. Wiesner tossed out the idea that an official from German automotive industry association VDA could do the job. It's another question whether such an official would truly be neutral within the group, given that large members typically have disproportionate influence over such organizations. But even according to Mr. Wiesner's presentation, the LNG's appointed negotiator would have to defend implementers' interests against those of licensors.

In order to discharge his or her duties, the LNG's representative would have to optimize the licensing terms for the LNG's members. That means to minimize royalties, but SEP holders would have no leverage over the representative: they couldn't sue her or him. And if they sued individual members of the group, those would argue they can't be held responsible for group decisions or a "neutral" representative.

It's a safe assumption that LNGs would often assert that a particular tier of the supply chain is where the license should be granted. If an implementer takes the position in infringement litigation that someone else should take the license, the courts will not be impressed and may just order an injunction. Not so when each implementer is shielded by an LNG. According to Volkswagen's presentation, the members should be free to negotiate with SEP holders independently, but it seems they would only do that if they could get an even better deal that way.

Should the plan to be make LNGs optional, SEP holders would be free to sue individual implementers, who would in turn make their own counteroffers. In that case, LNGs would cease to serve their purpose.

In the absence of a convincing plan for how to make patent enforcement work even after LNGs have been blessed by regulators, there won't be good-faith licensing negotiations.

In the next and final part of this trilogy (though there will likely be posts further down the road to discuss the topic in light of future developments), I'll take an antitrust angle and explain why a buyers' cartel would likely lead to collective hold-out. LNGs would complicate, not facilitate, SEP licensing in the automotive industry--and they'd have the same negative effect on SEP enforcement and the judicial decision-making process.

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