Friday, December 17, 2021

Acer is not alone: licensing negotiation groups draw ever more criticism from academics, practitioners, and patent holders

At the start of this year, Nokia v. Daimler was the most significant automotive standard-essential patent (SEP) dispute. Summer had barely started when that one settled out. Now that the year 2021 is drawing to a close, Acer v. Volkswagen is the most "inspiring" automotive patent spat, at least judging by the traffic my previous post gets (though Sisvel v. Ford is a not-exceedingly-distant second).

Acer's complaint mentions the proposal of licensing negotiation groups (LNGs) as a pillar of Volkswagen's alleged hold-out tactics vis-à-vis the Avanci pool. It is the latest criticism of the LNG idea. In recent weeks, there have been at least two webinars on the subject, and I'd like to share some observations on them here.

The European Commission's expert group report on SEPs tosses out the idea of LNGs as Proposal 75, but let's not forget that the entire expert group report is not a Commission communication, as the Commission itself clarified on more than one occasion. Also, a key participant (Ericsson's Monica Magnusson) distanced herself from the report by means of a published dissent. Still, when a facial absurdity--given that it's fundamentally at odds with existing cartel law--appears as a "proposal" in something that is not formally but almost an official EU document, I can see why some are concerned, and why webinars are held (or blog posts written, as in this case) to discuss the thing. It's like people are standing in front of an aquarium and staring at some big sharks inside: in a way you rely on being protected by the thick glass between you and the predators, yet there's this thought of what would happen if--against all odds, but you never know--the glass broke...

4IP Council held a webinar on LNGs last month, and a recording is still available. The two panelists were Dr. Igor Nikolic, who is a Research Fellow at the European University Institute, and doctoral student Haris Tsilikas. They looked at LNGs strictly from a competition law perspective, but taking into account an important difference between physical goods and patent rights: while physical goods are simply not delivered to someone unless an agreement on the terms has been reached, implementers are typically already using the patented techniques.

Dr. Nikolic clearly took the position that LNGs are not merely anticompetitive by effect (though he has no doubts about the effects being very significant) but by object, which I would informally call "by design." For example, one major concern Dr. Nikolic raised (and which I had not brought in prior blog posts on the subject) is that competitors must share sensitive information in order to discuss pricing, and when you have large parts of an industry--if not even an entire industry--sitting at the same table and establishing a maximum price (which is what that Proposal 75 suggests), you're simply getting what is called price-fixing.

What would happen if the maximum price an LNG deems reasonable is below the SEP holder's demand, but the SEP holder's position is actually FRAND? Probably a group boycott...

As Dr. Nikolic noted, there is a tension between reducing transaction costs and forming a group that has monopsony ("purchasing monopoly") power. This is a notable difference from SEP pools, which by definition aggregate complementary patents, while the members of an LNG would normally be competitors.

Mr. Tsilikas accurately noted that EU competition law only recognizes efficiency gains as desirable if they are achieved without reducing (let alone eliminating) competition. He also made a good point when he stated a simple truth: while there is some talk about how small and medium-sized enterprises might benefit from participating in LNGs, the political push for LNGs is clearly not coming from SMEs.

Last week, Lexology/IAM hosted an online panel discussion of LNGs entitled FRAND Licensing: The Curious Incident of the LNG Concept. The title indicates an understandable disbelief concerning how an idea that flies in the face of everything we know about competition law could make it into a document like that expert group report.

Fraunhofer's patent and licensing chief Stefan Geyersberger and Sisvel president Mattia Fogliacco looked at the subject from the angle of organizations that are concerned with keeping the licensing process efficient. As Mr. Geyersberger noted, Fraunhofer has for a long time been contributing patents to pools in order to speed up the adoption of new technologies. Sisvel is a pool operator, but also an acquirer of patents--and it's been around for ages.

Some implementers may disagree with Mr. Fogliacco's rosy picture of how the SEP licensing process works at the moment ("innovation is not stifled at all") or with his unsurprisingly positive view of the two Sisvel v. Haier decisions by the Federal Court of Justice of Germany. But he made a number of points that I agree with. For example, it is indeed against common sense that implementers would gather and determine a (maximum) price without the actual owners of the relevant technology sitting at the table.

The most enlightening part of the Lexology webinar was Mr. Fogliacco's discussion of the important ways in which Sisvel's 2018 license deal with multiple implementers via RPX differs from the proposal of automotive LNGs. Apparently, various RPX customers (or "members" as it's sort of a club) asked RPX to work out a deal in order to explore economies of scale, i.e., group discounts reflective of reduced transaction costs. RPX is not an LNG--companies become RPX customers (or "members") for other reasons. There was no intent by RPX and its members to determine the maximum royalty level before working out a license agreement.

In other words, Sisvel-RPX was a voluntary group purchase transaction, which some were invited to participate in--and the process was conducted in the shadow of existing competition law, while certain automotive industry players would like to achieve an exemption from cartel law in order to be allowed to form LNGs, which would then be above the law in some rather significant ways.

What might be acceptable in the case of a cooperation between a few IoT startups (simply in light of market share thresholds--15% in the EU, 20% in the U.S.) is not necessarily desirable when large automotive companies join forces. As the European Commission recognized in one of its communications, joint purchasing by companies with a high market share in the aggregate typically doesn't even result in any savings being passed on to consumers.

While Sisvel and Fraunhofer raised fundamental concerns regarding LNGs, Sullivan & Cromwell partner Garrard Beeney didn't want to rule out the possibility of there being a place for LNGs (and the prerequisite modification of competition rules) in some contexts, provided that several requirements would be met and that certain safeguards would be put in place. For example, it is key to Mr. Beeney that an LNG can't organize a group boycott. While IoT companies may like the fact that Mr. Beeney is not categorically opposed to LNGs, the criteria he laid out are clearly not going to be met by the automotive industry.

Looking at the opinions expressed by the speakers at those two webinars, there was a consensus that the kinds of LNGs the automotive industry has in mind cannot be reconciled with competition law as it stands, and that a departure from long-standing principles of cartel law is not warranted.

What's next? I guess LNGs will rear their ugly head again in the first half of 2022, in the form of proposals and debates in different jurisdictions, but in a year from now, the idea will probably be considered to have gone nowhere, as it creates more problems than it could ever solve.

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