Tuesday, July 27, 2021

SEP Licensing Negotiation Groups -- Part III: legalization of buyers' cartels would invite group boycott and collective hold-out

This is the final part of a trilogy on licensing negotiation groups: automotive industry cartels that would collectively negotiate standard-essential patent (SEP) licenses with major patent holders and pools. In Part I, I discussed the rich history of automotive cartels, and couldn't help but conclude that the LNG proposal is, at best, a solution in search of a problem. Part II looked at the implications for SEP enforcement. Patentees would hardly be able to hold an individual implementer responsible for the positions taken by an LNG in negotiations, no matter how unconstructive.

Paragraph 208 of the European Commission's horizontal agreement guidelines states the following on when the collective market power of companies that are otherwise competitors but enter into a joint-purchasing cooperation gives rise to competition concerns:

"There is no absolute threshold above which it can be presumed that the parties to a joint purchasing arrangement have market power so that the joint purchasing arrangement is likely to give rise to restrictive effects on competition within the meaning of Article 101(1). However, in most cases it is unlikely that market power exists if the parties to the joint purchasing arrangement have a combined market share not exceeding 15 % on the purchasing market or markets as well as a combined market share not exceeding 15 % on the selling market or markets. In any event, if the parties’ combined market shares do not exceed 15 % on both the purchasing and the selling market or markets, it is likely that the conditions of Article 101(3) are fulfilled."

In other words, up to 15% market share a purchasing alliance is probably acceptable, and above that threshold it depends on the specifics. In the first months of this year, the Volkswagen Group alone had a market share of 26% in Europe. In light of that number, it's hard to imagine that Volkswagen lacks leverage in negotiations with SEP holders, but its chief patent counsel would like licensing negotiation groups to welcome both multiple car makers as well as multiple suppliers as members. If, for example, Stellantis and Renault joined Volkswagen, the collective European market share of the three organizations would be between 55% and 56%.

In a mid-June blog post (with the second half of which I agree to a substantially greater extent than with the first), David Cohen accurately described the LNG proposal as a "monopsonistic approach to SEP licensing." A monopsony is the purchasing-side mirror image of a monopoly.

If multiple car makers collectively negotiated with SEP holders (be it with individual SEP holders or a pool like Avanci), they'd act jointly and uniformly most of the time, except when a particular member opportunistically elects to enter into a license agreement outside the LNG. When the members of an LNG jointly decide on their response to a SEP holder's or pool's licensing offer, and if that response is "too high" (which it will be most of the time), the net effect is collective hold-out (on this one, too, I agree with David Cohen) or, to put it differently, a group boycott.

SEP holders would then face the choice of either not getting paid in the near term or doing business with implementers on their preferred terms. That is not the balance that the courts in major jurisdictions have struck.

Even if there were (as there not, at least to my knowledge) any serious issues relating to SEP pools (as opposed to issues with patent enforcement), authorizing collective hold-out would not be the answer because two wrongs don't make a right.

An exceedingly permissive stance on buyers' cartels in one context would set a dangerous precedent not only within that industry (notably, the automotive industry is no stranger to purchasing cartels) but even beyond. It would become ever harder for competition authorities to draw the line somewhere when a group of companies in another field argues that only a coordinated approach to purchasing is capable of addressing whatever issues allegedly exist.

The European Commission's SEP Expert Group Report's Proposal 75 on Collective Licensing Negotiation Groups (others say "Joint Licensing Negotiation Groups") acknowledges--in different words--that the idea may not be permissible under the antitrust laws. The Commission itself did not endorse the findings in that report anyway. Volkswagen, however, would want to go beyond: not only should the Commission endorse horizontal cooperation but also vertical cooperation under the same umbrella. That would be a two-dimensional cartel.

Proposal 75 wasn't exclusively about automotive companies. One key consideration appears to have been that many IoT companies may be too small to be in a position to negotiate license agreements with major SEP holders. Critical mass is a non-issue in automotive. Those companies are large enough, they can hire sophisticated people if they want, and they tend to be represented by top-notch law firms in patent infringement litigation.

It would be as principled as it would be pragmatic to reject a proposal that has a clear downside and no discernible upside except for those seeking to engage in hold-out.

If only a single competition authority in a major market declined the automotive industry's invitation to permit a buyers' cartel, that fundamentally flawed idea couldn't come to fruition. And when there are such serious issues, it's quite likely that someone, somewhere, will say no.

I've previously (Part II) explained that LNGs don't mix with the European approach to SEP enforcement. They're also clearly against U.S. case law. The Ninth Circuit ruling in FTC v. Qualcomm as well as Continental's miserable failure so far in its U.S. cases against Avanci and Nokia are pretty clear, as is the Avanci Business Review Letter. Also, U.S. courts don't allow themselves to be used as a tool by antitrust plaintiffs trying to force defendants to business on plaintiffs' preferred terms. The LNG approach is structurally different--not an antitrust complaint--but designed to have the same effect: by arguing that LNGs (which inherently complicate licensing) are needed to counterbalance patent pools (which facilitate licensing if their terms are reasonable), the automotive industry tries to obtain permission for organized hold-out.

There are legal concerns in Asia as well. The Japanese Ministry of Economic, Trade and Industry (METI) published a report (PDF, in English) yesterday that mentions a number of potential issues concerning "joint licensing negotiations by multiple implementers." In a nutshell, LNGs might be acceptable from the Japanese point of view if they're all just IoT startups, but here are just two key caveats I found in the report:

  • "It is necessary for companies to conduct horizontal joint negotiations with caution, as competition law issues may arise when the total market shares of participating companies become high."

  • "If implementers jointly negotiate the price, it will possibly fall into the unfair"

The METI report also questions the "need for horizontal joint negotiations."

I'm not even sure it's good for all car makers and suppliers. Some of them are so naïve in the IP space that they may not have figured it out yet: a LNG would easily be dominated by the likes of Toyota, Volkswagen, and General Motors. Those corporations have some luxury brands like Lexus, but are mostly in the volume business. Their interests are not the same as those of smaller car makers. With Volkswagen already having indicated in public that Tesla should pay higher patent royalties than many others, why should Tesla even be interested in joining a VW-dominanted LNG? They'd probably fare better with a single per-unit royalty rate for each standard.

Car manufacturers' leverage over suppliers is another issue I have with this horizontal and vertical (i.e., two-dimensional) type of cooperation. What role are suppliers going to play? They're going to scramble to please their large customers. Are they going to vote against Volkswagen, Toyota, and GM? Are they going to act constructively with respect to past infringement and existing license and purchasing agreements even if one or more of their key accounts are more interested in a group boycott?

After more than two years of litigation between Nokia and Daimler, the outcome was a car-level license. Daimler described that one as a good deal, leaving no doubt that from the beginning the whole fight had only been about money, with supply chain licensing questions just being raised to bring down license fees. It didn't work out, and others are not even going to try. Car-level licensing has won; component-level licensing will still happen in some cases. For my credibility's sake I have to tell it like it is.

Let me end this trilogy on a hilarious note. There's this saying from the 19th century that whenever three Germans meet, they create an association. A German state-owned broadcasting company, Deutsche Welle, concedes that "there seems to be a club for everything in the country." However, clubs are legal--cartels are not.

Beware of a dangerous precedent.

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