Monday, January 24, 2022

Access Advance pool doesn't really intend to solve duplicate-royalty problem: video codec implementers remain victims of unfair licensing scheme

This is a follow-up to 'Access Advance' patent pool can rename itself 'Suffer Setback' after Dusseldorf court ruling: flagrant FRAND abuse concerning video codec patents. In the previous post I discussed the logic of the Dusseldorf Regional Court's holding that certain Access Advance licensors owe Vestel damages for FRAND abuse, and cannot obtain injunctive relief against the Turkish TV manufacturer.

Weeks before I commented on this, Access Advance already sent an email to its existing and prospective partners, claiming that the outcome of the Dusseldorf cases was largely a win (as all of the asserted patents were deemed essential to the HEVC standard), and the denial of injunctive relief was disappointing but based on a narrow holding, which according to Access Advance wouldn't even have come down if a recent change to its Duplicate Royalty Policy had been made before--not after--trial. I disagree in at least three respects:

  1. Access Advance can't explain away the significance of a denial of injunctive relief by a German court on unprecedented grounds. Dusseldorf is a video codec patent enforcement hotspot, and MPEG LA's licensors never faced any such issue.

  2. While the court considered it dispositive that implementers who already had an MPEG LA license (such as Vestel) didn't enjoy legal certainty with respect to the avoidance or recovery of duplicate royalties when taking an HEVC Advance license, the court did express some skepticism concerning other aspects of the Access Advance business model--it just didn't have to analyze them to the full extent.

  3. The duplicate royalty policy of the HEVC Advance pool is publicly available, and it doesn't withstand scrutiny. The problem is structural. The inadequacy of that duplicate royalty policy is crystal clear if one takes into consideration the way the Access Advance pool optimized its dealings with third parties (licensors as well as licensees) for just the needs of its four owners (General Electric, Philips, Dolby, and Mitsubishi). That conflict of interest is only going to exacerbate, as those four companies own a much smaller piece of the VVC patent cake than the one for HEVC.

It's high time that someone told the story of what's wrong with the Access Advance scheme. The more I've looked into this, the more I consider Access Advance a liability not only for HEVC but even more so with a view to the industry's transition to VVC (H.266).

"Unprecedented" would be an understatement for Access Advance's Dusseldorf disaster

In Germany, patent enforcement is all about injunctive relief. Damages don't matter unless you're asserting an expired patent. Access Advance's defeat is all the more shocking when compared to other video codec judgments in the same jurisdiction. I've been able to research 32 video codec enforcement campaigns (27 over MPEG-2, 5 over AVC) that started in Dusseldorf and were in each case brought by multiple MPEG LA licensors against partly large and sophisticated defendants (even including Huawei). 32 is a rounding error compared to more than 7,000 license agreements concluded by MPEG LA without litigation, but in absolute terms it's a large enough sample to serve as a point of reference here.

In at least six of those disputes, injunctions came down. Time and time again, MPEG LA's terms were considered FRAND, from the Dusseldorf Regional Court (where all those cases were filed) all the way up to the Federal Court of Justice. Is it just because MPEG LA's lawyers are better? Well, Krieger Mes's Axel Verhauwen and patent attorney Gottfried Schuell ("Schüll" in German) of Cohausz & Florack are extremely well-respected in the German patent litigation community. But I believe even they could not have defended Access Advance's duplicate royalty policy--a type of issue that never once came up in an MPEG LA case.

Access Advance's scheme to attract patent holders who are large-scale implementers

The duplicate-royalty issue facing those who previously took an MPEG LA (or direct) license cannot be fully understood without looking into how Access Advance entices a certain category of patent holders to join its pool as licensors. Not the only but by far the most important patent holder of this kind is Samsung, which holds far more HEVC patents than any other Access Advance member (arguably, Samsung alone accounts for about 40% of the pool)--but which is also an ultra-large-scale implementer with its phones, tablets, and TVs.

For a long time, during which the focus was almost exclusively on AVC/H.264, companies like that were actually happy to work with MPEG LA. They had an interest in encouraging widespread adoption of those standards, but due to their high-volume implementations of video codec standards they wanted to limit their spend on license fees.

So what was Access Advance able to offer an organization like Samsung--other than impeding the adoption of a standard and driving up licensing costs, none of which would normally be too appealing?

The story was that the likes of Samsung could still license all of MPEG LA's patents at the usual rate, but by joining HEVC Advance they also got the other patents in that (normally very expensive) pool at an extremely low cost in exchange for getting only a small payout from Access Advance relative to the actual size of their portfolios. If Samsung got its fair share of HEVC Advance's royalty distribution, it would get--like I said--about 40%. But it would drive up its royalty costs as an implementer, as Access Advance is like four times as expensive as MPEG LA. The oversimplified version is that Access Advance invited them to join the pool and the primary incentive was to save costs as an implementer, not to generate much of a license fee income as a patent holder--though the latter is what Access Advance's owners (GE, Dolby, Philips, Mitsubishi) very much care about.

Intuitively, one may ask: "What's wrong with that? Shouldn't patent holders who are also implementers be free to optimize their bottom line?"

Of course they can do that. The problem with the Advance scheme is just that its key success factor is not a more reasonable royalty rate--it's that others must be treated unfairly in order for Access Advance's owners to maximize their revenues and for certain patent holders who are large-scale implementers (first and foremost, Samsung) to optimize their bottom line.

And that takes us full circle back to the problem with duplicate royalties.

Access Advance's duplicate-royalty economics

Access Advance is not merely about double-dipping, such as if a patent holder licensed a supplier and had actually exhausted its patent rights, but tried to get paid again somewhere downstream. The problem is more fundamental than that:

  • By the time HEVC Advance started, and especially by the time some other major patent holders defected from MPEG LA as a result of the type of deal I outlined in the previous section, wide swaths of the implementer landscape had already taken an MPEG LA license, and therefore remain licensed to some companies' patents even after those patent holders left MPEG LA. But Advance is all about "let's charge several times more." Its business model critically depends on extracting higher royalties from some who already have a license to many of those patents.

  • It would seem logical that if a licensee can get a cheap license to a set of patents or an expensive one, the licensee will prefer the less expensive option. Alternatively, some might argue that the principled approach is that the first license you take is a done deal and must be respected, so any pool licenses you take subsequently must factor out the patents to which you are already licensed. Whether one agrees with the first approach (let the customer choose) or the second (earlier-concluded license shall remain in force), there is just no principled--FRAND--basis on which the second pool can tell licensees they should pay for another (and more expensive) license to patents they've already licensed, and should then seek a refund from the first pool when the second pool is way more expensive than the first. But that's what Advance has been trying for a while, and what it's still trying, though the Dusseldorf court has just complicated--if not thwarted--that scheme.

  • Advance's economics just wouldn't work if they had to do the right thing, which is to reduce the royalty rate if a licensee is already licensed to many of the patents in the pool. That's because large parts of the portfolio come from patent holders like Samsung, who don't actually get much money out of the pool (because they joined with their interests as net implementers in mind). If, say, a licensee had to pay $100 million, 40% of which would be distributed to Samsung (minus management fees, which I'll talk about in a moment), and the licensee already had a license to Samsung's patents, then the royalty payment could be reduced to, say, $60 million. But here, while Samsung's patents would be used by the Advance pool in order to inflate the portfolio value when a court has to evaluate or determine a royalty rate, Samsung wouldn't get $40 million anyway, so there isn't really anything that Access Advance can deduct without its owners losing money on the deal.

  • What makes all of this even more complicated is that Access Advance is known to charge very high management fees. In the aggregate of multiple types of fees and charges, Access Advance keeps roughly 40% of the royalty income, which is several times more than MPEG LA's cut according to what people in the industry say about it. The higher the management fee, the more of an incentive the pool administrator has to avoid any reductions (no matter how reasonable in light of prior licenses), and the harder it is to make an adjustment work economically for all parties involved.

For the reasons I've just explained, it is essential to the Advance scheme that implementers are forced to take a license at a far higher rate than the MPEG LA rate.

Access Advance's duplicate-royalty policy is fundamentally flawed and deficient

Having laid the foundation in the previous passages, let's now look at HEVC Advance's Duplicate Royalty Policy. That one is a joke.

The first glaring deficiency is that it talks only about patents that are "also included in the patent list of another patent licensing pool, or joint licensing program," without addressing the scenario in which someone took a direct (bilateral) license, which is not at all uncommon in this industry. Bilateral licenses can result from license agreements or even from patent exhaustion. The Access Advance folks know that, and it must be attributed to bad faith that their Duplicate Royalty Policy fails to address that problem.

Even with respect to pools and joint licensing programs, that policy is merely reflective of the problem and does not provide a workable solution. In a duplicate-license sceario, Access Advance does nothing for licensees other than to "refer the request to the applicable Licensor(s)" (footnote 3), which falls far short of what the Dusseldorf court wanted, which was legal certainty for licensees. Unless a licensor and a licensee reach an agreement (in which case one doesn't need a policy anyway because they're on the same page), each licensor then gets to choose the lesser of two refund amounts:

  • the net distribution the Licensor received from Access Advance, or

  • the net distribution the Licensor received from another pool or joint licensing program.

Footnote 5 clarifies that net distribution "expressly exclude[s] all fees and other allocations/deductions made by Access Advance prior to apportionment and distribution of net royalty collections to all Licensors based on their respective patent portfolios." One of the problems is that Access Advance takes a huge cut, which the policy declares immune from a refund. With a much more reasonable pool management fee, even licensees might accept not getting that part refunded, but in the case of Access Advance, it's a major economic issue.

Furthermore, Access Advance is so intransparent and asymmetrical that you can't just look at the percentage of the patents you've licensed and you know what refund you'll get: a Samsung may contribute lots of patents but not actually get much (if any) money out of the pool.

Another problem with "net distribution" is that if Samsung makes products and obtains a cheaper license for them by contributing its patents to the pool, why should--to use the current Dusseldorf examples as examples--Vestel and Xiaomi (who compete with Samsung) indirectly pay for that by Samsung's true benefits from is membership in the Access Advance pool not being taken into consideration in the refund context? It's so unfair and unreasonable.

There will be some licensors who get a lot of money out of Access Advance (especially its founders). They're obviously going to elect the more profitable option for them: they'll refer implementers to MPEG LA for a refund. Someone like Samsung, however, could argue--based on Access Advance's policy--that they don't really get much money out of that pool, so there's pretty much nothing they can offer as a refund.

Access Advance should not become the fox in charge of the VVC hen house

The root cause of all of the problems outlined in here (and I don't even claim that this is an exhaustive list of issues) is that Access Advance serves the interests of its four founders, then does asymmetrical deals with patent holders who are major implementers, and in the end tries to let the Vestels and Xiaomis of the world pay the bill, which in turn impedes the widespread adoption of the standard.

The exorbitant pool management fees I mentioned in the previous section are just an example of a construct that is just meant to make GE, Philips, Dolby, and Mitsubishi more money. The implications of asymmetrical terms (with some getting a lot of money out of Access Advance, while others are just interested in reducing their own licensing costs) for refunds are another example. And now that the industry is transitioning to VVC, there's another problem to bear in mind: the collective share in HEVC patents belonging to Access Advance's founders is far greater than their positions in VVC. IPlytics held an "Unpacking VVC SEPs and standards contribution data" webinar last summer. IPlytics explained how difficult it is to analyze who owns how much of VVC, but they gave it a try, and one can see that some companies who held no AVC or HEVC patents are now pretty big significant contributors to VVC (TikTok operator Bytedance, for instance), while GE, Philips and Mitsubishi don't seem to play a major role in VVC. Dolby is still somewhat significant, but not a leading VVC contributor either.

For Access Advance's founders, HEVC is therefore more lucrative than VVC. That's why it makes economic sense for Access Advance to offer a combined VVC-HEVC license with a certain discount: its founders own a larger share of a combined VVC-HEVC pool than a VVC-only pool.

With respect to VVC, Access Advance is an early entrant and may be able to avoid the problem that licensees got a less expensive license through another pool before Access Advance came to them and wanted them to pay even more for a license they already had. But the root cause of the Dusseldorf disaster is deep and structural. It's that Access Advance games the SEP licensing system to the benefit of a small group of companies. It's not a transparent pool administrator who treats everyone at arm's length regardless of whether a patent holder is a shareholder in the pool firm or not. Instead, Access Advance is a scheme that makes its founders money, makes NPEs money, saves patent holders who are major implementers money by giving them terms that are fundamentally different from the terms offered to founders and other net licensors, and then has to prey on other implementers in order to make money.

This is not the right way forward for the industry.

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