Sunday, April 16, 2023

European Commission's take on patent pools has turned negative: draft impact assessment makes up and distorts facts, relies on conflicted "researcher"

The European Commission's U-turn on standard-essential patent (SEP) pools is remarkable and apparently attributable to lobbying by certain parties, facilitated by DG GROW's mistake of relying on an adviser whose business benefits from complex licensing processes entailing many bilateral negotiations (and disputes).

  1. From "promotion" (2014) to skepticism (2021)

  2. Article 11 of the leaked draft regulation

  3. Distortions and unsupported assertions in draft impact assessment

  4. IPlytics' obvious conflict of interest

1. From "promotion" (2014) to skepticism (2021)

In 2014, a study on Patents and Standards ("prepared for the European Commission Directorate-General for Enterprise and Industry") stated the following about patent pools (click on the image to enlarge or read the text below the image):

Promotion of patent pools

Patent pools provide a one-stop solution for licensing a bundle of standard essential patents owned by different entities, thereby aiming to mitigate transaction costs, avoid royalty stacking and create a level playing field. Given these benefits the study has examined the following aspects:

  • Strengthening the relation between SSOs and pools;

  • Providing incentives to SEP holders to participate in patent pools;

  • Encouraging entities such as universities and SMEs to participate in patent pools.

That was not the last time the Commission recognized the benefits of patent pools, which also happened in connection with the horizontal cooperation guidelines.

Two years ago, DG GROW started to question the benefits of pools, asking a lot of questions in the description of a webinar. But at least it listened to both sides, and invited people with different perspectives, among them the president of the only major European patent pool administrator--Sisvel--as well as a Europe-based executive of Avanci.

2. Article 11 of the leaked draft regulation

The leaked draft of an EU SEP regulation (see my previous post on that one for a link list) imposes new transparency requirements on patent pools:

Article 11

Information to be provided by patent pools

Patent pools or any entity representing a collaborative licensing group shall publish on their websites at least the following information:

(a) standards [...]; (b) the administrative entity’s shareholders or ownership structure; (c) process for evaluating SEPs; (d) list of evaluators having residence in the Union; (e) list of evaluated SEPs and list of SEPs being licensed; (f) [sample claim charts]; (g) list of products [...]; (h) royalties and discount policy [...]; (i) standard licence agreement [...]; (j) list of licensors [...]; (k) list of licensees [...].

That article is an example--one of many in that draft regulation--of what happens when there is no proper consultation process on specific regulatory ideas. Whoever drafted or contributed to that article must live in an ivory tower.

Item (b) is misplaced because the disclosure of shareholders and ownership structure is a subject of corporate--not patent--law, and determined by national laws.

It is unclear what a pool should say about the "process for evaluating SEPs": when would a pool run afoul of that part of the regulation?

Item (d) is a typical example of regulatory zealots (almost a euphemism) wanting the EU to cut its nose to spite its face: it actually creates an incentive for pools to work with evaluators based outside the EU, and for such evaluators to move out of the EU, especially since their work is not location-dependent and they can find lower taxes and better weather elsewhere. It's also not clear why the disclosure of shareholders would affect entities (be it the pool administrator firms or their shareholders) based outside the EU while the part concerning evaluators is limited to the EU. Apart from that, it is a bad idea because patent pools have good reasons to shield their evaluators from attempts to exert pressure or otherwise influence their views.

To the extent that item (e) wants pools to publish a list of their patents, there are pools that do so already, but as long as the names of the licensors are known, licensees can find out anyway. The bigger issue is that a publication of the "list of evaluated SEPs" will invite validity challenges (and possibly also actions for declaratory judgment of non-essentiality) targeting those patents in particular. Again, whoever came up with or supported that idea is clueless.

Item (f) about claim charts should be left to the way the courts apply Huawei v. ZTE.

Pools tend to be quite transparent about their standard royalties. The term "discount policy" in item (h) is again unclear. Does it include duplicative-royalty policies?

Some pools publish their standard license (item (i)), but why should everyone have to do that? When implementers inquire, they'll get an offer.

While disclosing licensors (item (j)) is non-controversial, item (k) even goes against the interests of licensees: in practice, it is typically the licensees who don't want to be named. Anyone who followed automotive SEP licensing in recent years knows that Avanci has for some time had more licensees than the brands listed on its website. A pool that is successful would like to name all licensees, but some licensees insist on confidentiality.

Article 11 is deeply flawed, but what the draft impact assessment says about patent pools is even worse.

3. Distortions and unsupported assertions in draft impact assessment

In my previous posts and in the first part of this post I've mostly focused on what the draft regulation itself says. But the draft impact assessment, which leaked at the same time and will accompany the legislative proposal, makes laughably off-base claims regarding patent pools.

Before I point out some nonsensical details, let me start with a more fundamental question. Why take issue with the licensing terms (including, but not limited to, royalty rates) of patent pools in the first place? As long as bilateral licensing options exist, pools have to compete with those bilateral alternatives. None of the pools mentioned in the draft impact assessment bars patentees from entering into bilateral deals. Much to the contrary, I could immediately think of multiple examples for pools managed by those firms where such deals have indeed been struck (such as Huawei's agreements with Sharp and Conversant well after those companies had joined Avanci).

A pool's raison d'être is all about transactional efficiencies. If the pool rate or its other terms are too onerous, bilateral licensing will prevail, the pool will be marginalized unless it adapts, and the market--not the Commission--will have solved the problem.

The pools are not the problem, and it's not the pool administrators' fault that some German courts effectively require licensees to take an entire pool license without requiring the patent holder to make a bilateral portfolio offer (satisfying FRAND criteria) as another option. If an implementer is found to infringe a valid and essential patent, and there's a pool license on the table that costs very little and covers maybe a few dozen patent families, a court may reasonably interpret Huawei v. ZTE to the effect that a pool license is what a willing licensee would normally take--and can then determine whether the pool offer is FRAND. Admittedly, if a license fee is high and/or there are huge numbers of patent families in the pool, the market dynamics I described (pool competing with bilateral offers) are lost due to a "license or die" judgment.

If that is what the Commission is concerned about, its draft regulation is unable to solve the problem: there is nothing in there that would prevent the infringement courts from obligating an implementer to take a pool license while not requiring the patentee to make a bilateral offer. There would be a FRAND determination by the EU's trademark office, which the infringement courts can just ignore. There would also be an aggregate royalty determination for the entire standard, which the infringement courts can likewise ignore because they--not the Commission--decide whether to apply a top-down approach to valuation, and because they can disagree with the findings anyway.

The decision makers in the EU institutions must figure out one plain and simple truth: if an implementer takes a pool license, it's normally just because it's more efficient than taking numerous bilateral licenses.

The draft impact assessment is trying to understate Avanci's success. Avanci covers far more than the 60% of (up to) 4G cellular SEPs that the draft impact assessment states on page 9 (PDF page 13). The only explanation for the missing 40% is footnote 54:

"Companies missing from Avanci include among others Huawei, Samsung, Apple, Google, ETRI. Source of % IPlytics."

I'll talk about IPlytics further below. There's no substance there, the number doesn't make sense, and at any rate those five companies do not explain the missing 40% by far and away. In particular, Apple and Google--who acquired virtually of their SEPs--are not known to engage in outbound SEP licensing (they only cross-license), and that generally applies to Samsung with the sole exception of its participation in video codec patent pools. In other words, if a car maker takes an Avanci license, there is only a residual risk of litigation left.

On the same page, there is a Figure 4 that way understates the number of vehicles licensed by Avanci, and it does so by setting an arbitrary, capricious, and either incompetent or disingenuous cutoff date: August 4, 2022. Major car makers, especially from Asia, signed shortly after that date. The text above the charteven mentions Avanci's September 2022 announcement, so why didn't they update their chart accordingly? A picture is worth a thousand words, and that picture is grossly misleading.

The Commission doesn't appear to credit Avanci for the fact that it maintained a consistent pool rate over many years despite adding tremendous value--and it doesn't take that fact (the addition of licensors after the formation of a pool is announced) into consideration when discussing Sisvel. From an industrial policy perspective, it strikes me as odd that the Commission goes not only against Avanci but also against Sisvel, the only major European pool administrator. Other world economies appear to be more interested in the trade effects of intellectual property rights while the Commission would rather have EU companies send their royalty checks abroad.

The draft impact assessment lumps Sisvel--a major pool administrator--together with "specialized patent assertion entities" and incorrectly categorizes it as a former operating company:

"This includes state-owned entities (such as Japanese IPBridge or FranceBrevets), ‘privateering’ spinoffs from large operating companies (e.g. Unwired Planet from Ericsson, Panoptis from Panasonic etc), former operating companies who have ceased other activities to concentrate on patent licensing (e.g. Sisvel), and private companies acquiring patents from a variety of predecessors (e.g. IPcom, Uniloc, etc.). PAEs contribute to further fragmentation of the SEP owners market." (emphasis added)

Give me a break. Sisvel has been a patent licensing firm from the get-go. It never had an operating business.

It's also unclear to me on what factual basis (I believe there is none) the Commission distinguishes between Unwired Planet and IPCom. Why is one a "spinoff" from Ericsson and the other "acquir[ed]" patents from Bosch? But that's just another implausibility that shows some people at DG GROW don't know what they're talking about (and want the Commission as a whole to damage its reputation by proposing to put out such crap).

On page 25 (page 29 of the PDF), the Commission again does Sisvel injustice. It claims--without any factual basis whatsoever--that in the IoT SEP licensing space, "[t]he FRAND royalty expectations are likely to be higher than the market would suggest" and then points to footnote 139:

"For example, Sisvel launched a new IoT pool with 20 licensors who claim to represent about 30% of all SEPs. The price for a smart meter is announced at USD 2, so the total aggregate royalty would be around USD 7 (EUR 6.7 on 15 February 2023). The value of a consumer smart meter is reported to be around EUR 65."

No source is given. They're not even just saying "IPlytics" (which wouldn't be a sufficient answer anyway). There's no evidence of Sisvel "claim[ing]" that the respective pool represents 30% of all SEPs, while it is clear that Sisvel will try to attract more and more licensors to the pool (as I mentioned before in connection with Avanci), so there will be greater value to licensees for the same price.

How can the Commission claim to know what is FRAND?

I would argue that the extremely poor quality of DG GROW's draft regulation and of the impact assessment reflect anything but a good understanding of FRAND.

The alleged value of a consumer smart meter ("around EUR 65") is a sandbagged figure. It's more like twice that amount. But even if we assumed that EUR 65 was correct, and if we furthermore believed the Commission's unsubstantiated royalty-stacking analysis, I can't even see why an aggregate royalty rate of roughly 10% would necessarily be supra-FRAND given that smart meters are very simple devices:

  • They measure something, and

  • they send the data somewhere.

Cellular technology is a large part of what those devices are about. It's obvious that a cellular SEP royalty rate is, percentage-wise, lower on a connected vehicle than a baseband chipset, as the latter does nothing but implement cellular standards.

In any event, that Sisvel pool--like all of its other pools--competes with the alternative of implementers taking a multiplicity of bilateral licenses.

What is the Commission's agenda? To harm specific (even EU-based) companies? To encourage hold-out? The latter would be an interesting strategy as it would result in more litigation, which the Commission would then point to in order to argue that its proposal must be adopted as quickly as possible...

4. IPlytics' obvious conflict of interest

There is more than one factor that has led to the current mess. The solution is for the Commission to refrain from putting out a premature and ill-conceived proposal in favor of serious discussions of specific proposals with competent people.

In a recent post I quoted the draft impact assessment's footnote 283, which casts serious doubt on the quality of a DG GROW-commissioned study co-authored by IPlytics founder Tim Pohlmann.

It's possible that the Commission has listened to him too much, especially in connection with patent pools. He has a conflict of interest with respect to Avanci and other pools (regardless of whether pool firms are his customers, as some--though not all--are) for a simple reason: because successful pools greatly simplify patent licensing, they reduce the need for IPlytics' services. IPlytics thrives when there's complexity, confusion, and especially a huge number of negotiations and a lot of litigation. That is when parties on both sides of the negotiating table will look for material to underpin their positions.

Earlier this month, Mustafa Cakir ("Çakır" in Turkish) published a YouTube interview with Tim Pohlmann. Around minute 34, the discussion of automotive SEP licensing starts, and Mr. Pohlmann tries hard to downplay Avanci's success and the benefits it delivers. He even expresses, between the lines, unsubstantiated doubts about its royalty rate (a rate accepted by the vast majority of licensees) and about Avanci's ability to put together a 5G pool.

Where he discusses the situation faced by automakers, he focuses a lot on the modus operandi of those companies' patent departments prior to the widespread adoption of vehicle connectivity. Can car makers expect SEP licensors to change their business model only because they otherwise have to learn about cellular SEPs? Automakers incorporated those technologies into their cars, and they've also been able to have existing employees learn about cellular SEPs. In some cases, they've poached IP professionals from companies like Siemens.

IPlytics has only one problem with Avanci: that Avanci streamlines the cellular SEP licensing process for the automotive industry. As I mentioned further above, those who don't join Avanci are largely the ones who don't engage in outbound licensing anyway. Mr. Pohlmann's business would obviously benefit from an environment in which 50+ licensors have to approach approximately 100 car makers to work out bilateral licenses. Every infringement notice and every start of a negotiation process is potentially money in IPlytics' pockets--and every time a car maker takes an Avanci license, that opportunity is diminished.

Avanci is just an example. IPlytics has the same problem with any pool that is--or likely will--be successful. Then there were monks who copied books in a type of room called scriptorium and didn't welcome the arrival of the printing press. It's just that the decision makers didn't really listen to them, and DG GROW didn't exist at that time.