Monday, July 3, 2023

Dubious anecdotal evidence from SMEs adduced to justify EU proposal for regulation on standard-essential patents

On Friday, industry group IP Europe continued its series of blog posts on the proposed EU regulation on standard-essential patents (SEPs) with an article that focuses on small and medium-sized enterprises (SMEs). Above the article one can see a typewriter with "Fake News" coming out, and to my dismay I must admit they have a point. The lobbying efforts for the legislative proposal are steered and bankrolled by large corporations (essentially Apple and some automotive industry players), but places the emphasis on SME concerns, for which there is simply no evidence.

In fact, there isn't even evidence for hold-up affecting large corporations. It's worth nothing that Nokia just announced the renewal of a patent license agreement with Apple, six months prior to expiration of the one that is currently in force and without any litigation. This means Apple has recently renewed its license agreements with Ericsson, Nokia, and InterDigital, and only in one of those cases a limited amount of infringement litigation (it lasted less than a year) was needed. In the near term, there is nothing that Apple has to fear from the enforcement of SEPs in EU Member States. If anything, Apple has a long-term plan to keep SEP royalties down, and in the mid term it may be interesting to see what happens if Apple uses its own baseband processors and then negotiates a new patent license with Qualcomm.

The IP Europe article I mentioned further above explains that there is no evidence of SEP enforcement against SMEs, particularly no assertions of wireless SEPs. And it discusses the active participation of SMEs in standardization projects by the European Telecommunications Standards Institute (ETSI).

So there are no numbers. Not even anecdotal evidence in terms of verifiable accounts of actual problems. Just stories. Let's take a closer look at the problems allegedly "faced by SEP implementers" according to the impact assessment published by the European Commission's Directorate-General for the Internal Market (DG GROW) in April:

1. Remote patient health monitoring

"A manufacturer of medical devices for the treatment of critical health disorders may wish to implement cellular communication functionality in its products to enable remote patient health monitoring and efficiently improve patient adherence to treatment. Considering the multi-year (e.g. 5-10 years) medical device development process for homologation and certification from network operators, the company needs certainty at an early stage regarding the aggregate FRAND royalty for SEP licenses as it must take such factors into account during the development and commercialization phase and as it considers total cost and alternative technologies. In addition, the inability to negotiate with dozens of SEP holders individually and the prospect of being excluded from the market for an infringement of a single SEP is a further disincentive for using the connectivity standards risking the continued access of patients to telehealth services which are crucial for public health."

COMMENT: That story looks like it was authored by lobbyists/astroturfers trying to leverage a "public health" concern with buzzwords like "critical" and "crucial". While we can all agree on the potential benefits from remote patient health monitoring, the story itself fails a plausibility test:

  • Royalty rates are definitely not the only cost factor for which a device maker with a development cycle of "5-10 years" won't have definitive certainty "at an early stage". A lot of things can change in 5-10 years, and inflation is a reality, too.

  • Such specialized devices are sold at prices that dwarf cellular SEP royalties.

  • The alleged "inability to negotiate with dozens of SEP holders individually" is not explained, and in any event, the proposed EU SEP Regulation would not result in a single pool license.

  • The alleged "prospect of being excluded from the market for an infringement of a single SEP" makes no sense, given that SEP holders have no interest in excluding a device maker from the market (particularly not from a market in which they don't operate).

  • The "continued access of patients to telehealth services" is not in jeopardy: an injunction might affect the device maker, but not the patients. Even in the rare situations in which such devices are already in use but must be replaced, courts can tailor their injunctions as to allow repairs and replacements.

It just makes no sense. It's propaganda.

2. Smart meter manufacturer and its supplier

"A smart meter manufacturer is invited to take a licence from a SEP holder not only for the future but also for 5 years back.

What else did the Commission expect? Royalty-free use for the first few years?

"The smart meters are purchased by utility companies by public procurement contracts in order to promote the reduction of energy consumption under the EU Gas and Electricity Directives."

We're all in favor of energy efficiency. But then we must also ensure that the cellular technologies that enable certain energy-saving methods are funded, and patent royalties are the way to do that.

"The smart meter manufacturer buys communication components, which it integrates in its products. It directs the SEP holder to its supplier and the SEP holder prefers to negotiate with the smart meter manufacturer as it is its understanding that it can choose who to license. The smart meter manufacturer requests its supplier to indemnify it for the SEP royalties as per supply contract. The royalties are higher than what the supplier is willing and able to pay."

What the supplier is "able to pay" would have to be analyzed based on specific numbers.

"The supplier expresses its wish to take the licence itself as it used to have such licences in the past. However, it is unable to get such a licence at the conditions that are acceptable to it. Its (non-EU) competitors continue promising indemnifications to their customers."

The Commission itself has already recommended the solution to any competitiveness issues arising from (non-EU) competitors' infringement: enforcement.

Those non-EU competitors may have a different legal framework at home, but once they sell in the EU, they--or in this case, their customers--face the risk of patent infringement lawsuits there. So there is a level playing field with respect to the EU market.

"The supplier is pressured by all its worried customers manufacturing not only smart meters but also payment terminals, wireless charging, medical devices, tracking devices, etc. to keep the indemnification clauses and bear the risk of SEP licensing."

There is no indication (much less evidence) of why indemnification is a problem. All costs--including intellectual property licensing costs--must be factored in when setting prices for end products or for components.

3. Construction robot

"An EU SME developed a robot assisting in construction works. It is innovative due to an inventive electro-mechanical structure of the robot arm, wheel drive and motion control. The user controls this robot with a tablet comprising a specific Human-Machine-Interface. The communication between tablet and robot could be wired or preferably wireless. The most desired option would be WiFi, but due to the SEP license, Bluetooth fully licensed at chip level will be implemented. Another option is a wired USB connection, which also works but does not meet customers’ expectations."

WiFi patent royalties are relatively low (compared to cellular standards). The description of the product sounds like it is rather expensive, so it's unclear why that SME couldn't afford WiFi. If Bluetooth was chosen to maximize profitability, that's the device maker's choice.

4. Smart home appliance maker "not aware" of need to license WiFi SEPs

"An EU SME developed a smart home appliance for energy consumption control in a household. It can lower energy cost and optimise usage of renewable energy (solar, wind…). Collected data is sent to the company’s central server for analysis. Initially WiFi was considered to connect to a router in a household. The company was not aware that WiFi is subject to a SEP licence. To avoid SEP costs/litigation they chose a wired connection to a router instead."

What? First, how can someone assume that WiFi is royalty-free? Second, if they decided not implement WiFi for fear of SEP assertions, that proves that eventually they became aware of the fact that WiFi SEPs exist, and apparently long before they put out a product.

Smart meter maker unaware of chip not being licensed

"An EU SME developed a smart meter which is now implemented in hundreds of projects. Data between meters is sent using mostly Bluetooth, but for remote locations a chip with WiFi and 4G functionality was embedded. The company was not aware that the chip was not licensed for WiFi and 4G. If faced with litigation it will disable this chip in all its devices."

The unwareness problem could have been avoided in various ways. There must have been a disclaimer in the purchase agreement. Maybe the device maker should simply have read that contract. Alternatively, one may argue that the chipmaker should have alerted its customer to that fact beyond a clause in the agreement. None of that is the fault of SEP holders. And it does not seem unfair that a company making connected devices learns about SEP licensing.

From a patent law point of view, the last sentence makes no sense: if the chip infringes, then just disabling it won't do the trick with respect to product (apparatus) claims.

5. Health data reporting and choice of wireless standard

"An EU SME developed a product to help individuals track their health metrics and report results to their doctors in real-time. The SME and its competitors had a choice of technologies to choose from when developing their product regarding wireless connectivity. After unsuccessful attempts to license various wireless technology directly from known patent holders, the company built the product. After a robust and successful market developed, and after the point in time when the product design was “locked” in and could not be changed, numerous wireless patent holders approached the company and demanded they take a license. This effectively deprived the SME of choosing an alternative wireless technology and the patent holder did not consider other wireless technology that could have been used as a comparable value when deciding the royalty rate that was demanded."

Again, telehealth is great--but that's not the question.

Why were those "attempts to license various wireless technolog[ies] directly from known patent holders" unsuccessful, and why did they seek royalties later but declined to make an offer beforehand? Why would those patent holders not have complied with their obligations under Huawei v. ZTE? It's (at best) a mystery.

Who "deprived the SME of choosing an alternative wireless [standard]"? They made a choice at some point. No one forced them to implement a particular standard.

6. Global navigation satellite system receiver

"An EU Global Navigation Satellite System (GNSS) receiver designer and wireless cellular modem designer was asked by customers to reduce the “footprint” of their modules that were used in an end product. The EU design company could not accommodate the request because it could not directly license patents from the patent holders and the “have made” rights held by the end product company did not allow the designer to innovate. It could only “make” the product design given to it by the end product company. A non-EU competitor of the GNSS receiver and wireless cellular modem designer seized the opportunity."

Why would the company have to license SEPs to reduce the "footprint" of those modules? What exactly is meant by "footprint"?

Why would the "non-EU competitor" have had an advantage? Once its products (or those incorporating it) are sold in the EU, there is no strategic advantage based on country of origin. EU SEP enforcement rules will apply.

Oddly, there is a second version of that "EU Global Navigation Satellite System (GNSS) receiver designer and wireless cellular modem designer" story in the impact assesment, right after the first one. The second one largely overlaps, but then tells a different story. How credible is that? I mean, how likely is it that the Commission got feedback from two different companies of that kind reporting the same unspecified request for a reduced "footprint" but then telling stories with different outcomes?

Here's the second EU GNSS story:

"An EU Global Navigation Satellite System (GNSS) receiver designer and wireless cellular modem designer was asked by its EU customers to reduce the “footprint” of their modules that were used in an end product. The EU design company had a license with several cellular patent holders and took on the project. However, the EU end product company was warned there would be a significant price increase because their cellular patent license royalties were based on the average sales price of the module/modem and the combined GNSS/cellular module average sales price would be 3X higher. The EU end product company asked why the GNSS function was considered when determining cellular royalty owed and not removed from the average sales price. They learned it was standard practice in wireless licensing. The EU end product company abandoned the design improvement request."

7. IoT wireless module company

"An innovative EU IoT wireless module company that had been licensed for years by cellular wireless patent holders is now being denied licenses. The patent holders are changing to licensing only at the end product level. The patent holders claim the value of the patents they hold has increased by 4-6 times what the previous licenses demanded in royalties although many of the 3G and 4G patents have expired/are expiring and new high-speed 4G patents are not needed by the EU IoT company. The patent holders are demanding that the EU IoT companies license patents from their patent pool and that the EU IoT company acts as an agent between their customers and the patent pool, receiving a “kick-back” for doing so."

The impact assessment describes that company as "innovative" without explaining why. Such buzzwords do not enhance the credibility of a document accompanying a legislative proposal.

The paragraph is confusing. The last sentence refers to "the EU IoT companies" as well as "the EU IoT company". The plural term apparently means device makers while the singular term refers to the module maker.

It is not clear whether the licensor side or the licensee side are right in this case. Patent holders want more money and device makers want to pay less. That's normal, but without more information it's impossible to form an opinion on whether there is/was an issue.

8. Supplier lost IoT business opportunities

"Supplier explained that its sales teams regularly get questions from prospective Cellular and Wi-Fi IoT customers about “patents”, “IP rights” and “indemnification”. They consider themselves in a vacuum because there is no easy way to obtain a licence or to even know the price of such licence. It is unable to sell its products with all IP rights included, nor is it able to indemnify its customers should they receive an infringement or license claim in the future. The company has lost several Cellular IoT business opportunities to both EU and non-EU competitors making misleading or false statements with regards to “selling a licensed product” or “providing full indemnification”."

If those competitors make "misleading or false statements" concerning the licensing status of their components, then their customers will find out sooner or later. And whether or not there is "full indemnification" depends on what's in the agreements that those customers sign.

The remaining stories in that section of the impact assessment aren't more plausible or verifiable.

9. Confidential "testimonies" collected from FSA members

Why does the Commission outsource its job to the Fair Standards Alliance (FSA)? The FSA's members are free to communicate with the Commission, and the FSA can (as it presumably has) encourage them to do so.

The SME stories in DG GROW's impact assessment are not even anecdotal evidence. Frankly, some of them sound like fiction, and none of them points to a verifiable problem.

Responsible policy-making needs a much more solid basis.