Wednesday, August 30, 2023

EU SEP Regulation and potential rate-setting cartels: soft law and conflicting rules are not enough to eliminate serious risks in different jurisdictions

In the paper I mentioned yesterday, Dr. Justus Baron flags a number of issues relating to the aggregate royalty setting part of the EU SEP Regulation. Besides many of his points being valid, what makes that paper significant is that he is an actual researcher as opposed to some corporate representatives that were also retained by the EC in the SEP Regulation context but have commercial interests such as selling services to licensors and licensees or getting paid by the EC later on to set up and run an EU SEP Register (in the latter scenario, the Court of Auditors should investigate).

I'd like to follow up on one thing that is not central to Dr. Baron's latest paper but worth commenting on in its own right. In connection with current practice he notes that maximum aggregate royalty rates are rarely announced by SEP holders despite "existing guidance from the EU Commission [which] makes it clear that joint announcements of maximum aggregate royalties by groups of SEP holders do not, in principle, violate EU competition law." A footnote then points to para. 474 of the EC's Horizontal Cooperation Guidance, which I'll quote now:

474. Standard development agreements providing for the ex ante disclosure of the most restrictive licensing terms for standard-essential patents by individual IPR holders or of a maximum accumulated royalty rate by all IPR holders [emphasis added] will not, in principle, restrict competition within the meaning of Article 101(1). In that regard, it is important that parties involved in the selection of a standard be fully informed, not only as to the available technical options and the associated IPR, but also as to the likely cost of that IPR. Therefore, should an SDO’s IPR policy choose to provide for IPR holders to disclose prior to the adoption of the standard their most restrictive licensing terms, including the maximum royalty rates or maximum accumulated royalty rate to be charged, this will generally not lead to a restriction of competition within the meaning of Article 101(1). Such ex ante unilateral disclosures of the most restrictive licensing terms or maximum accumulated royalty rate would be one way to enable the parties involved in the development of a standard to take an informed decision based on the disadvantages and advantages of various alternative technologies. [emphases added]

The above does not--and presumably was not deemed by Dr. Baron to--dispel cartel concerns over the aggregate royalty determination part of the proposed regulation:

  • Art. 18 of the proposed EU SEP Regulation (unlike Art. 15-17, which are the other articles relating to aggregate royalty rates) opens the conciliation process for aggregate royalties to implementers. The paper raises various policy issues concerning the participation of licensees. The Horizontal Guidelines allow ex ante announcements of royalty rates (with the limitations I'll discuss in the next bullet points), but they do not allow licensee negotiation groups (by the way, the UK Competition &: Market Authority doesn't condone LNGs either). The following paragraph from Dr. Baron's paper, referencing Dr. Igor Nikolic, discusses what could go wrong from a cartel law point of view when licensees gang up on licensors during such a process:

    "Instead, net licensees have an incentive to use the process for problematic concerted action. They may for instance exchange competitively sensitive price information. More immediately, licensees may use the process for a concerted push to depress royalty levels. If major net licensees agree among themselves not to pay more than a certain amount, SEP licensors may find it difficult to build market acceptance for their FRAND licensing offers. Such negotiations among net licensees on maximum rates resemble a buyer[s'] cartel, and are clearly concerning from an antitrust perspective (Nikolic, 2023)."

  • Even for licensors, there is no real safe harbor. The language of the Horizontal Guidelines has its limitations, but it's also just soft law. I struggled to decide with which of those two limitations to begin (that it's not binding on courts or that the wording isn't hard and fast). I'll start with the language:

    If something is "in principle" or "generally" acceptable, that is far from a safe harbor. One can have a debate over whether it is a presumption of legality or, possibly, just the negation of a presumption of liability ("it's not a per se violation"). Whatever it may be, it relates only to joint announcements of that kind, with participation being either voluntary or required by a standard-setting organization.

    Through limiting words like "generally", the guideline explicitly leaves room for potential misconduct surrounding such announcements. The simplest and clearest example would be that the relevant parties might agree not only on a maximum but also on a minimum rate (potentially both being the same). While it is easy to say that it's generally unharmful if some companies they say they're not going to ask for more than a specified amount, it's a rather different analysis when they say it's not going to be less than a certain number. Another example is that there might be patent holders with partly congruent and partly incongruent interests. They might engage in horse trades like "we'll support low royalties with respect to a particular codec if you guys support higher royalties for 5G." In the EU Council that happens all the time, but that's politics and not a potential cartel.

  • The Horizontal Guidelines are just a Commission communication. That's soft law. It means DG COMP itself will investigate the conduct surrounding such maximum aggregate rate announcements only under the most egregious of circumstances. But even without para. 474 of the Horizontal Guidelines, the Commission will find it hard to go after anyone abiding by a regulation it proposed (though lawmakers have the final say). That is, in fact, another reason for which the EU's legislative bodies must be careful because the Commission has already limited, for political reasons, its ability to curb abuse in that context (should the proposal be adopted in that form or a materially consistent one).

  • The EU courts are not bound by it, but very often side with the Commission.

  • The national courts of EU member states won't necessarily be impressed with a non-legislative document from Brussels, and even less so in cases where there is a reasonable (though not necessarily a very strong) argument that the challenged conduct is related--but not inherent--to the announcement of the maximum aggregate rate.

  • And like in some other contexts, the EU SEP Regulation is not well-thought-out with a view to what will happen in other jurisdictions. If the combination of the Horizontal Guidelines and the EU SEP Regulation matters in the EU, why should a court outside the EU care? There could be investigations by regulators or private enforcement actions against the participants in a rate-setting cartel in some non-EU countries where no EU law, hard or soft, will serve as an excuse if those markets are impacted (and they will be, as the EU wants those rates to be global).

All I wanted to do with this post is explain why the idea of aggregate royalty determinations based on potential agreements between SEP holders could get companies into trouble. In a world in which at least one automotive supplier sued a patent pool that does not preclude its licensors from entering into bilateral agreements (with that supplier still litigating against one such licensor in Delaware state court), there is always the risk of someone arguing that even an announcement of a maximum rate (hypothetical worst case for implemeneters) was unlawful, maybe not per se but in light of case-specific facts or circumstances. And implementers, too, would have to be careful so they don't end up forming a buyers' cartel.

New Mercedes-Benz statement: despite Avanci 5G license, EU should enact regulation on standard-essential patents in accordance with DG GROW's legislative proposal

Mercedes-Benz (formerly known as Daimler, though Mercedes has been its most famous brand for a long time) recently became known as the first licensee to participate in the Avanci 5G standard-essential patent (SEP) platform. The company previously engaged in bilateral licensing of 4G patents with Nokia and others, only to then opt for Avanci's 4G pool as a one-stop solution.

Last month, the European Commission published the car maker's feedback to the proposal for an EU SEP Regulation by the Commission's Directorate-General for the Internal Market (DG GROW). According to Mercedes, the proposed regulation "is urgently needed to eliminate the current lack of transparency and the associated imbalance in license negotiations on standard essential patents." The document advocates moving the needle even further to suit the interests of implementers.

I reached out to Mercedes to help me understand whether, after securing the vast majority of cellular communications licenses they need, there is any practical reason at this stage for them to call for legislative intervention. A spokeswoman replied later in the day. Let me show you the original statement in German, followed by my translation:

Mercedes-Benz steht für Innovation und wird mit der neuen E-Klasse die 5G Konnektivität als einer der ersten Automobilhersteller in den Markt einführen (Herbst 2023).

Wir bekennen uns klar zu den FRAND-Regeln und werden trotz eines derzeit erst entstehenden Lizenzmarktes nur lizenzierte Produkte in den Verkehr bringen.

Mercedes-Benz hat sich auch aus wirtschaftlichen Erwägungen entschieden, die angebotenen Rechte über den 5G-Avanci-Pool zu lizenzieren. Grund dafür waren mangelnde Transparenz z.B. in Bezug auf Preise und Schutzrechte sowie fehlende effiziente Alternativen.

Mercedes-Benz hält es weiterhin für erforderlich, dass der von der EU-Kommission vorgelegte Entwurf einer Verordnung über Standard-Essentielle Patente umgesetzt wird. Eine solche Verordnung kann einen klaren und vorhersehbaren Rechtsrahmen sowohl für SEP-Inhaber als auch für die Implementierer schaffen.


Mercedes-Benz promotes innovation and, with its new E-Class generation in the fall of 2023, will be one of the first car makers to launch 5G-connected automobiles.

We are clearly committed to the FRAND regime and will only release licensed products into commerce, even though the licensing market is currently just developing.

Mercedes-Benz decided for economic reasons to license the relevant intellectual property rights via the Avanci 5G pool. The reason was a lack of transparency with respect to fees and intellectual property rights as well as the absence of efficient alternatives.

Mercedes-Benz continues to deem it imperative that the European Commission's proposal for a regulation on standard-essential patents be implemented. A regulation of that kind can establish a clear and predictable legal framework for SEP holders as well as implementers.

The part that has me particularly puzzled is the one about a lack of transparency concerning licensing costs and IPRs:

  • The Avanci 5G fee is public: it's on the Avanci website.

  • The licensors are all listed on the same website.

  • Mercedes can find out via ETSI and other standards development organizations, or certain patent databases maintained by private enterprises, what patents those licensors have declared essential to 5G.

  • The alternative to Avanci 5G would have been bilateral licensing, which they tried with 4G and apparently deemed inefficient in 2021. They could have reached out to patent holders and inquired about bilateral licensing terms.

Pragmatic or dogmatic?

Mercedes sees value in Avanci and doesn't want to risk a new round of infringement litigation (like they experienced with 4G), but the feedback they submitted to the European Commission and the statement they provided to me suggest that they believe they could get a better deal from their perspective if the EU proposal was passed into law.

This is like if one of their customers said "yes, I'll buy the new E-Class because I think it's a good deal, but I want an even better one, so I'll ask lawmakers to regulate the market so I'll get it at a lower price next time."

The praise they heap on the EU proposal is premised on two assumptions:

  • that the costs of an EU SEP Register and the related essentiality checks and FRAND determinations (to be conducted by expensive experts) will not only be borne but also internalized by SEP holders; and

  • that the EUIPO-appointed "conciliators" will set low aggregate and bilateral royalty rates.

What Mercedes is hoping for here may very well be consistent with DG GROW's intention. But it may just not be how the market is going to work.

Mercedes is far from the only car maker to have endorsed the EU proposal. I will comment on various other submissions (and resumed my commentary on the EU SEP Regulation with yesterday's post on Dr. Justus Baron's new paper). They are, however, the first Avanci 5G licensee, which they clearly say made economic sense for them. In other words, Avanci 5G is part of the solution. The problem is practically solved given Avanci 5G's sky-high share of the overall 5G SEP landscape. There's not a lot of 5G SEPs left outside that pool over which anyone would have to fear infringement actions. The ones who do seek to generate licensing revenue overwhelmingly participate in the program.

The Avanci 5G rate is presumably a lot less than what Mercedes will charge its customers for just one year of mobile data service (after the first couple of years, which are typically included). Mercedes also knows for how many years its cars are used: typically like 15 years or more. The license fee, however, is paid only once per car.

All of that leaves me to wonder whether Mercedes is just trying to get a better deal or whether there is a difference between the business perspective ("good deal") and a legal philosophy ("we want more of an opportunity to hold out").

I'm sure that I'm not the only one who raised that question. EU lawmakers (in the Parliament as well as the Council's experts, who are de facto--though unelected--legislators) can easily see that the automotive industry has a solution for cellular SEPs that makes economic sense. Against that background, there is no case for massive legislative intervention. As FT columnist Brooke Masters wrote last week, "heavy-handed intervention from Brussels could be counter-productive" and "[g]overnment price-setting rarely works as intended."

It would be interesting to see "government price-setting" in the automotive sector, including for automotive data plans. When it comes to the transparency of fees, many purchasers of cars don't even know what they will be charged for data services after the first few years until they get an email or letter telling them to pay up. There's also no transparency of how the annual fees for those services are split between the car maker and whatever carrier it partnered with.

Tuesday, August 29, 2023

European Commission's DG GROW takes inconsistent positions on majority voting in standard-essential patent policy context: DG GROW-commissioned researcher voices criticism

This week, EU politicians and officials are returning to Brussels from their summer vacations (their "rentrée"). As they catch up with news, I hope that those concerned with regulating standard-essential patent (SEP) licensing and enforcement will agree that some additional industry-led solutions have recently been put in place (see Ericsson-Huawei cross-license, Avanci 5G, and Huawei's differentiated IoT patent licensing terms). The case for intervention has definitely become weaker over the summer.

What should also give policy makers pause is the fact that one member of the group commissioned by the Directorate-General for the Internal Market (DG GROW) to conduct an impact assessment study, Dr. Justus Baron, has published a paper (SSRN) advocating that Articles 15-18 (the part on aggregate royalty determinations for entire standards) be stricken. I largely agree with that new paper, while I disagreed with parts of his work for the Commission, particularly in the context of essentiality checks. Arguably, Dr. Baron is the most relevant member of that research group: there's no question that he is a researcher (as opposed to self-serving corporate representatives of service providers like IPlytics and Darts IP), and in addition to his contributions to the impact assessment study, he authored a separate one on essentiality checks.

It is fair to mention that his new paper was supported by 4ip Council, which is SEP holder-friendly. It is equally appropriate to note that Qualcomm stands most to lose from a strict top-down approach (as its share of overall cellular SEP royalties is extremely high), and patent pool administrators--while primarily concerned with the excessive requirements that might be imposed on them--would also find those aggregate royalty determinations unhelpful. But even a company that collects relatively modest royalties relative to the size and strength of its portfolio--Huawei--has publicly criticized the proposed EU SEP Regulation as a whole. And Dr. Baron's paper makes a number of valid points that cannot be attributed to anyone's agenda.

I agree with Dr. Baron that--in my words, not his--the overall perception of the legislative initiative is that it is meant to bring down SEP royalties. And I, too, consider it symptomatic of DG GROW's devaluation agenda that the proposal would result in actual aggregate royalties being paid that would be substantially below a determined aggregate rate as some SEP holders never collect royalties (in some cases presumably because they know their declared-essential patents are of questionable value). If there truly was a concern that excessive royalties resulting from the construct called "royalty stacking" reduce the output of implementing products, the focus would be on what is paid on the bottom line.

There's a lot more to say about his paper, and I'll be sure to reference it going forward. For today I just want to focus on something that is easy to understand and shows some of what's wrong with that legislative proposal: DG GROW's inconsistent positions on the reliability of majority votes among experts.

There is a risk of the aggregate royalty determination process being overused. Theoretically there are deadlines, but as Dr. Baron notes, "there are yearly new releases of the hundreds of technical specifications that define complex technologies such as 5G" and there are new types of implementations all the time, so there would always be some event to point to when requesting another aggregate royalty determination. The paper explains that net licensors and net licensees are unlikely to agree, with or without aid from so-called conciliators. Therefore, the most common outcome will be an expert opinion by the panel. With each panel member spending only two workweeks (that's the budget that DG GROW has in mind), those expert opinions won't be all that well-considered given the complexity of the technical and economic questions involved. And a majority of two members will be able to adopt a decision over the objection of the third member.

Judicial panels of three typically do decide by majority vote. But they do so after thorough briefing, and above all, they're independent. They may hold certain views, but they're not picked from a pool of consultants as DG GROW envisions it to work.

The combination of an insufficient budget, many pool members being potentially very biased, an opaque process, and majority voting is troubling (if not toxic). This has the potential to turn aggregate royalty determinations into a lottery.

While there can be no doubt about DG GROW's intention, I'm not even sure that net licensees would be all that happy in the end if this regulation got passed into law. There might be "buyer's remorse" once the first royalty determinations (aggregate royalties as well as those relating to a particular licensor-licensee combination) actually do come out. Where we are now, policy makers can't base their decision on any reliable prediction of what the outcomes will be. The question is now whether the contemplated structures and mechanisms make sense.

Dr. Baron rightly recalls that "[t]he Commission itself discouraged the 15 experts it had appointed to the SEP Expert Group from voting on policy proposals." Let that sink in: the Commission didn't want to rely on a majority vote among 15 experts, but it would delegate important decisions to random panels of 3.

It's telling and not really funny that the Commission itself ultimately didn't even care about what the majority of 15 experts determined. The proposal to make aggregate royalty determinations for entire standards was viewed unfavorably by the majority of the members of that group. In fact, the related proposal (proposal 43) in the Expert Group Report, which received only 2.5 stars, "was overall viewed less [favorably] than neutrally by the group’s members, and is among the 8 least endorsed of the 79 proposals included in the Report." In other words, it's in the bottom 11% of all proposals, which didn't dissuade DG GROW from making it part of a legislative proposal.

Whenever the proposal is criticized, DG GROW defends itself by pointing to the multi-year consultation process. They have not answered (and probably never will) to the very specific criticism that any past consultation did not take place on the basis of specific proposals. And in that consultation process they include polls among the participants in webinars, or the SEP Expert Group Report even where they adopt proposals that were disfavored by that group. DG GROW also relies on the "research group" rather selectively. They point to those studies as if they supported the proposal at hand, which in some respects is not even the case.

All of this shows that there isn't even a sufficient evidentiary basis for starting the legislative process. I'm concerned that they'll go ahead anyway in Brussels, but it would be better to send the EC back to the drawing board.

Friday, August 25, 2023

Long-term patent cross-license announced by Ericsson and Huawei: emphasis on respect for IP, balance, and cooperation on standards

Ericsson and Huawei just announced that they "have renewed a multi-year global patent cross-licensing agreement that covers patents essential to standards relevant to the products of the parties, including 3G, 4G, and 5G cellular technologies." The agreement is a two-way street that gives both parties access to each other's standard-essential patent (SEP) portfolios with a view to "sales of network infrastructure and consumer devices." And it is the latest example of market-driven solutions that the contemplated EU SEP Regulation would complicate rather than facilitate.

Financial terms and the exact term of the agreement were not announced. While Ericsson's press release notes that its full-year 2023 intellectual property licensing revenues would amount to approximately SEK 11 billion (USD 1 billion), today's announcements don't say explicitly who will be the net payer. In fact, they may not even know yet how things will play out over the entire term of a multi-year agreement, how each other's product sales develop. A cross-license means that rights and payments are going in both directions. The net balance may be predetermined, but in a dynamic environment it may depend on future sales. I'm sure that Ericsson was the net licensor under past license agreements with Huawei, and the fact that Ericsson raised its licensing-revenue guidance suggests that this is still the case as we speak.

What does "long-term" (a term that is also found in a statement by Huawei's IP chief Alan Fan) presumably mean in this context? Apart from temporary standstill agreements, the shortest term of a license agreement that I have seen so far is the three-year term of the Nokia-OPPO agreement that expired in mid 2021. A pretty standard term is five years--a duration so common among patent license agreements that I wouldn't necessarily call it "long-term" in this context. Various major license agreements have been announced in the wireless industry with a known seven-year term. My guess is that "long-term" means at least seven years for the new Huawei-Ericsson deal, though presumably not more than a decade.

Let's look at what both parties say in their respective press releases:


"'We are delighted to reach a long-term global cross-licensing agreement with Ericsson,' said Alan Fan, Head of Huawei's Intellectual Property Department. 'As major contributors of standard essential patents (SEPs) for mobile communication, the companies recognize the value of each other's intellectual property, and this agreement creates a stronger patent environment. It demonstrates the commitment both parties have forged that intellectual property should be properly respected and protected.'"


"'We are pleased to announce our renewal of our global cross-licensing agreement with Huawei,' said Christina Petersson, Chief Intellectual Property Officer at Ericsson. 'Both companies are major contributors to mobile communication standards and recognize the value of each other's intellectual property. This agreement demonstrates the commitment of both parties that intellectual property should be respected and rewarded, and that leading technological innovations should be shared across the industry. A balanced approach to licensing ensures that the interests of both patent holders and implementers are served fairly, driving healthy, sustainable industry development for the benefit of consumers and enterprises everywhere.'"

Those two statements reflect a meeting of the minds. There was no litigation (as I'm sure that any infringement actions would have been announced), and presumably not even alternative dispute resolution. It looks like both companies shared the vision that IP should be respected, innovation should be rewarded, and above all they wanted to ensure smooth cooperation on technology development. Both are major contributors to standards, such as the further evolution of 5G as well as its successors (there will not only be 6G but also something already referred to in some reports as 5.5G).

The fact that they compete on network infrastructure in some markets does not prevent them from approaching IP as a topic that is simply part of the ordinary course of business, and to collaborate on wireless development at the level of standards-development organizations like ETSI (a Europe-based organization of world repute that certain initiatives by the European Commission--not only but also the proposed EU SEP Regulation--threaten to marginalize).

Would the EU's envisioned, EUIPO-organized rate-setting process have been of assistance here, even though it indisputably wasn't needed to reach this agreement? There would have been no value-add because those companies, with their specialized departments, understand their own and each other's patent portfolios better than a single "conciliator" could after a nine-month process.

Today's announcement must be viewed in light of last month's innovation and intellectual property presentation by Huawei. The company does not view patent licensing as a strategic business area or profit center, but as a logical and necessary activity that helps finance the next round of innovations. Given the strength of Huawei's patent portfolio and a growing range of product categories that incorporate standardized technologies, the total amount of Huawei's licensing revenue ($560M in 2022) appears moderate or at least not excessive. It's also interesting to look at Huawei's differentiated, SME-friendly license terms for the IoT industry.

While there are significant differences between the two companies, today's announcement shows that both of them believe that if you use someone else's IP, you should pay a fair royalty for it, but that this goes both ways.

They are both among Avanci's 4G and 5G licensors (Ericsson was there from the beginning while Huawei's involvement became publicly known only this month).

Wednesday, August 23, 2023

Competition Appeal Tribunal's role in keeping UK open for business is vastly underestimated: Microsoft's acquisition of Activision Blizzard may now be cleared on modified basis

Yesterday the UK Competition & Markets Authority closed the original Microsoft-ActivisionBlizzard merger decision by issuing a final order based on its April 26 blocking decision, but simultaneously opened a new investigation of a modified version of the deal with a Phase 1 deadline on October 18 (which is also--and not coincidentally--the last day of the extended term of the merger agreement). The title of the new investigation is Microsoft / Activision Blizzard (ex-cloud streaming rights) merger inquiry. The long form of the parenthesis is "excluding Activision Blizzard, Inc.’s non-EEA cloud streaming rights."

The stock market views that announcement, taken together with public statements by the CMA's CEO, as a sign that the deal is now very likely to close. The spread is at its lowest. And Bloomberg is already describing this merger as (potentially) "one of the biggest comeback stories in the history of mergers" (which is an underestimated as it will indisputably be the biggest merger story ever).

This post--which may in fact be the last one on that merger before (all going well) some final comments on the closing of the deal--has three parts. In the first two parts, I want to talk about who and what is not getting enough credit so far for having--if Wall Street is right--very likely resolved an incredibly delicate situation. The third part serves the purpose of explaining more specifically what is known about the modified transaction and why I believe it should put the matter to rest, though I believe there is no legal basis for any regulator to request any behavioral or structural remedies given that this deal doesn't even get close to what a court of law--as opposed to political institutions overleveraging their hold-up powers--would consider to raise competition concerns. There are only fake concerns. Made-up stuff that is a miscarriage of justice. Most competition authorities cleared the deal unconditionally. Those regulators got it right because they faithfully and honorably applied the law, which is too much to ask for in the U.S., the EU, and the UK when a Big Tech company makes an acquisition these days...

If you wish to go straight to the part that explains the modified deal, click here.

1. Underappreciated: the Competition Appeal Tribunal's decisive action and guidance

It really annoys me to see the CATribunal (or just CAT) underestimated every step of the way. When the CMA issued its Apri 26 merger blocking decision, so-called experts described the appeal (which Microsoft announced immediately after the decision) as futile. They said that the Judicial Review standard--the applicable standard of appellate review in the UK for government agency decisions--presented an insurmountable hurdle. They said the CMA would ultimately avoid an "irrationality" holding if it just throws all sorts of "there could be an issue there" conclusions into a decision, with the CAT then supposedly being unable to find that if the CMA identified smoke in all sorts of places, it was irrational to see a 50% likelihood of fire. They said the CAT would--and allegedly (which is at least debatable) even had to--remand any decision to the CMA for further consideration, causing not only major delay but also leading to the same outcome anyway.

In this particular case here, I believe the CAT would likely have thrown out the CMA decision in such a way that it could either have found that a remand was pointless or, if it had remanded anyway, there would have been no wiggle room left for the CMA. That would have proven those "experts" wrong. They were lucky to avoid this because it appears that a solution has been found that will obviate the need for further litigation over this merger in the UK.

The CMA engaged in stalling because it wanted to avoid not only a CAT ruling but also a multi-day hearing, which I believe would have been a nightmare for the agency.

Some people wrongly believed that the CMA became interested in a constructive solution because the FTC lost its bid for a preliminary injunction. In reality, that was the expected outcome. In the other event, the merger would have been abandoned in all likelihood, and then there wouldn't have been a point in a new UK investigation of a modified deal. But if there was one thing in connection with this whole merger that definitely won't have shocked the CMA, it was the FTC's defeat in court.

The CAT clearly made its presence felt. And when the CMA and Microsoft agreed to stay the appeal of the April decision (shortly before a hearing was going to take place), the CAT's president, Mr Justice Marcus Smith, summoned both sides' counsel to his courtroom to discuss at a case management conference whether there was a good-faith basis for putting the UK appeal on hold. The day before that hearing, Microsoft announced a 10-year Call of Duty deal with Sony (obviously subject to the condition precedent of this acquisition being consummated), which Mr Justice Smith read about and suggested as a basis for clearing the merger now on the basis of a major change of circumstance (MCC).

I was live-tweeting about that hearing, and instantly supported the court's proposal. I was disappointed that counsel (on both sides) was unreceptive to that idea. But then, toward the end of July, Microsoft actually did make a filing that formally asked the CMA to clear the original deal (without a divestiture of streaming rights) in light of the Sony agreement and other key facts and developments. In my opinion, the CMA's April 26 decision was wrong, and yesterday's rejection of that MCC argument was also wrong. But I can see the CMA's institutional interests here:

They faced a dilemma. They may have realized that their April decision was completely wrong, and they must know how isolated they are on the world stage (with the greatest respect for Australia and Canada, those jurisdictions would not be able to prevent the deal from closing, especially not at this stage). There was and still is a debate over whether the UK's regulatory environment is hostile to business and a turn-off for foreign direct investment. So it would have been good in some ways for the CMA to just clear the deal yesterday.

But they also had another consideration here: their sacrosanct procedures. It is an oddity that the final report (which in this case was rendered in April) is the final "decision" (and can be appealed), but is followed by an interim order and, subsequently to that one, a final order, which is like a regulatory injunction. The final order is meant to be consistent with the final report except under the most egregious of circumstances. They just didn't want to act in a way that might encourage the parties to future merger reviews to take certain measures (such as restructuring a deal) only between the final decision and the final report. I have no doubt that this was the decisive consideration, as the CMA's CEO said in one of her interviews yesterday that what's happening here shows to merging parties that they should propose certain solutions early in the process.

If the CMA clears the deal on its modified basis, there may still be some discussion over whether the CMA is a liability for the prosperity of the UK, but it won't be too bad. Timing is also a consideration. The UK's prime minister gave the CMA a strategic steer that stressed, among other things, the need to make swift decisions so as not to hold up business. There must be due process, but they should be able to wrap up that Phase 1 investigation of the modified deal way ahead of schedule. In some other major jurisdictions, the Phase 1 timeline is closer to one month while in the UK it's closer to two.

The UK merger reform situation should be reformed in any event. There are issues. It's an opaque process, which makes it particularly unfair. The CMA should not always get a second bite at the apple when the CAT overrules it. And even though I believe the CMA's errors in this case could have been corrected even under the UK's exacting Judicial Review standard, that one should change. Even in connection with the DMCC Bill, which is the UK's equivalent of the Digital Markets Act, I believe the CMA's decisions should be subject to a full appellate review (as opposed to just "legal error" and "irrationality"). And I'm saying that even though I'm an outspoken critic of Apple and Google's app store duopoly.

If Microsoft's acquisition of Activision Blizzard is consummated in the end, the CAT will have played a key role, though in a world of two-second attention spans and "experts" who don't know what they're talking about, it would have taken a more binary outcome (such as a CAT ruling that would have quashed the CMA decision on multiple grounds) for more people to realize it. I look not only at binary outcomes but also at the first or second derivative, and that's why I think the CAT has been great here, even though it may never have to rule on the case.

2. Undervalued but (hopefully) ultimately rewarded: Microsoft's tireless dealmaking

Besides the important role that the CAT played, there is another factor here that is often overlooked. Even when many people (also including most merger arbitrageurs) deemed the deal dead, Microsoft never stopped trying to work out solutions with other market actors, including the only vocal merger opponent, Sony. And now the Ubisoft deal that creates a new merger situation.

Many other companies would have had a "fight or flight" instinct. They'd either have decided to bet on litigation ("fight"), or they'd have given up ("flight"). Microsoft was appealing the UK decision, but never stopped trying to find constructive solutions. They held on to their vision of bringing more games to more gamers through more channels.

I don't know if any acquirer has ever made such a Herculean effort on the dealmaking front to get a deal cleared--and in this case, we're talking about a deal that was legally above board regardless of any remedial agreements or other concessions.

In such dealmaking processes, there are unsung heroes. Those negotiations do not take place in public. The results speak for themselves.

A Microsoft-internal email has been leaked to the press. Microsoft Gaming CEO Phil Spencer reportedly credited Xbox VP Sarah Bond for her "exceptional leadership throughout this process." I saw her testimony at the San Francisco federal courthouse (very convincing), and I follow her on X (Twitter). We'll never know what exactly Mr. Spencer was referring to, but chances are that Mrs. Bond achieved major breakthroughs on the dealmaking front that paved the way for regulatory clearance.

3. New deal: Ubisoft acquires Activision Blizzard streaming rights

What the CMA and Microsoft announced yesterday was just a high-level summary of what makes the new merger situation different from the original one. What we know is that Ubisoft will acquire the streaming rights to all existing Activision Blizzard PC and console games as well as all the ones to be released during a period of 15 years following the closing of the deal. Whatever falls under that capture clause is then perpetually available to Ubisoft, though customer demand will obviously shift to newer games, such as new sequels.

This will not limit Microsoft's ability to offer Activision Blizzard titles as part of its Game Pass subscription service, and Microsoft will be able to stream those games on its xCloud service. However, Ubisoft will also have all of those games, and it will apparently be able to sublicense them as well. So there is simply no such thing as a foreclosure risk then.

It is an academic question of semantics whether this is a structural or behavioral remedy. There are strong arguments for it being structural as it is an acquisition: Ubisoft buys something and is then in charge. And while there is a time limit, a 15-year capture clause and perpetual rights to whatever falls under the capture clause should satisfy even the most demanding regulator.

Ubisoft is a well-resourced, sophisticated market actor. And the company has been independence for decades (it belongs to its founders, the Guillemot family).

One of the problems the CMA would have faced in the CAT is the question of comity (respecting other jurisdictions). It is unfortunate that the Microsoft-Ubisoft deal is global as opposed to UK-specific. I don't think UK politicians want the CMA to act as the world's policeman for mergers. It doesn't reflect favorably on the UK from a foreign investment point of view. It suggests that serious reform is needed. But if it allows the merger to be consummated, then so be it.

The Microsoft-Ubisoft agreement has a carve-out for the European Economic Area (which is the UK plus Norway, Iceland, and Liechtenstein). That's because Microsoft had made a remedy commitment to the European Commission. While I disagree with the bogus concerns the European Commission raised in its (meanwhile published) decision, those royalty-free streaming rights were appreciated by gamers worldwide. The Microsoft-Ubisoft deal, according to what was announced, keeps that type of remedy intact for the European Economic Area. That benefits such companies as Nvidia and Boosteroid.

The EC now has to think about whether this requires a formal new merger notification. And if the conclusion was that a new review was formally necessary, I still don't anticipate major problems. In the end, all that matters is that there will be more choice and competition than otherwise. Ubisoft is not going to monopolize cloud gaming, and it is a French company, which the European Commission couldn't officially consider a reason for clearance but politically it will play a role.

All of this is unnecessarily complex, and I hope it will be over soon--with a positive outcome. The CMA's concern was all about Microsoft leveraging Activision Blizzard's games to dominate cloud gaming. The mere fact that Microsoft is now prepared to enter this deal shows that there were and are indeed other priorities (above all, mobile gaming).

Monday, August 21, 2023

UK Competition & Markets Authority rightly declines to support Apple, auto industry efforts to devalue standard-essential patents and legitimize collective holdout through licensing negotiation groups

The Competition & Markets Authority (CMA) of the United Kingdom has recently been in the news primarily for its stance on mergers, particularly Microsoft's acquisition of Activision Blizzard (the final order deadline is only eight days away). Horizontal cooperation agreements are actually closer to merger control than any other field of competition law. Major jurisdictions now have more specific rules governing merger reviews (such as the HSR Act in the U.S., certaion sections of the UK Enterprise Act, and the EU Merger Regulation). But a merger is just the ultimate form of cooperation.

It would have been somewhat inconsistent for the CMA to hold merging parties to a high standard while condoning cartels, though Apple--which effectively made three submissions to the CMA on its draft horizontal guidance, one of which amounts to deceptive lobbying--and its allies, such as certain automotive industry players, would have liked it to happen. Market forces are not a bad thing only because some companies believe they could otherwise save money (on patent license fees).

What Apple (along with its allies and astroturfers) wanted would also have created a potential conflict between the CMA and UK Intellectual Property Office (IPO). The UK IPO, which is the country's patent and trademark office, correctly notes that SEP licensing is a field in which any potential intervention must be approached with caution, which contrasts nicely with the regulatory activism exhibited by the European Commission's Directorate-General for the Internal Market (DG GROW).

In late January, the CMA published its draft guidance on horizontal agreements and launched a public consultation. In the section on purchasing agreements, there was the following passage that became a bone of contention and has, fortunately, been deleted (final version):

"Groups of potential licensees may seek to jointly negotiate licensing agreements for standard essential patents with licensors in view of incorporating that technology in their products (sometimes referred to as licensing negotiation groups)."

LNGs are a bad idea. I agree with the Qualcomm executive who said that everyone involved with LNGs should go to jail. About two years ago I posted a series of articles (1, 2, and 3) on the subject, which I was happy to see referenced by Acer in a U.S. patent infringement complaint against Volkswagen.

Yet there are some who continue to lobby for the permission to form LNGs regardless of market share. I wouldn't have a problem with a couple of startups cooperating within reason. But an alliance of, say, Volkswagen-Stellantis-Toyota would go too far. Way too far. The risk of group boycott clearly outweighs any purported efficiency gains.

Apple basically made three submissions to the CMA on its draft horizontal guidelines: one in its own name, one through the Fair Standards Alliance (which is at least reasonably transparent), and one through its astroturfing operation named ACT | The App(le) Association. When I reached out to the UK IPO about ACT's lobbying, they acknowledged the ACT-Apple link. The CMA is presumably aware of it as well. Not only is it obvious that (small) app developers have no SEP licensing issues but the CMA also understands the problems app makers have with Apple and Google's mobile app store duopoly. ACT consistently supports Apple against--but falsely claims to defend the interests of--app developers.

Just last month, a Politico Europe newsletter reported on a partial victory scored by watchdog NGOs Corporate Europe Observatory (CEO) and LobbyControl.

While the EU Transparency Register's secretariat deemed a complaint over ACT inadmissible, it nevertheless got ACT to adjust its register entry. And the following statement by ACT's head of communications, Karen Groppe, is hilarious:

"We do receive approximately half of our support from Apple in the EU. By accepting sponsorship from companies and organizations, we can keep membership from our small business members cost-free."

Again, the CMA is aware of the fundamental conflict between virtually all app developers (case in point, not a single app developer testified for Apple at the Epic Games trial two years ago) and Apple. It's an insult to human intelligence to suggest that a largely Apple-funded organization (and "approximately half" is most likely a gross understatement) would actually represent app makers against the heavyhanded and highly abusive monopolist.

Cleary Gottlieb, a firm with Google and Sony ties, also supported the idea of endorsing LNGs. However, Cleary would have preferred for the CMA to consider LNGs an intellectual property-specific topic as opposed to a joint purchasing agreement. Cleary's argument is that joint purchasing agreements are about physical goods, not non-material property rights. However, that doesn't convince me, given that joint purchasing of IP (such as copyrighted works) is common. The CMA made the best choice anyway by dropping LNGs from its guidelines altogether.

Even if the CMA had indicated that SEP LNGs might be acceptable, the proponents of that collective hold-out vehicle would still have been far from ready to proceed with their plan: it just takes one major jurisdiction to keep such licensing cartels illegal. And right now there isn't a single major jurisdiction, at least in the Western hemisphere, that is prepared to allow LNGs.

But the lobbying effort will continue. Deceptive lobbying included.

Sunday, August 20, 2023

Not a single patent injunction has been denied or tailored by German courts based on two-year-old 'reform' statute, but plaintiffs need to adjust to new reality of preliminary invalidity opinions

A certain June 11, 2021 press release by industry body ip2innovate didn't age well:

"'German patent law has finally arrived in the 21st century. We welcome the fact that the Bundestag has passed a balanced reform' said Ludwig von Reiche, chair of the German group within European trade group, IP2Innovate.

"The reforms adopted during an overnight session of the Bundestag this morning will for the first time enable courts to apply the principle of proportionality in cases where injunctive relief would represent a disproportionate hardship to the alleged infringer or third parties as well as to substitute compensatory payments for injunctive relief, instead of courts automatically handing out injunctions.

"'After consulting widely with science, industry and the judiciary, a change in the law is now being implemented that for the first time takes into account the complexity of modern products in the digital age,' says Mr von Reiche."

Mr. von Reiche and his allies may have to await another century before actual change kicks in. The supposedly game-changing injunction statute has been in force and effect for more than two years without having made an impact in a single defendant's favor.

The press release I just quoted from was issued right after the German parliament's vote. Subsequently, the Federal Council (which has co-legislative powers but would have needed a supermajority to influence the outcome of this process) decided not to object; the Federal President signed the bill into law; and on August 17, 2021 the modified patent statute was published in the Federal Law Gazette (click on an image to enlarge):

I have consistently explained why the statutory language was not going to make a difference. It turns out that I was right and some others were wrong. They were too optimistic and they way overestimated their abilities.

Out of an abundance of caution, I asked many people about a week ago whether anyone was aware of a single German patent case in which the new Art. 139 language made a difference. Silence.

Incredibly, that June 2021 press release by ip2innovate even argued that other EU member states should follow suit:

"Unfortunately, like Germany so far, many other EU countries also fail to respect the proportionality principle.

"IP2Innovate and its members will keep a close eye on the implementation of the reforms and will continue to push for a modern and balanced patent system across Europe which respects the proportionality requirement."

If IP Europe has indeed "[kept] a close eye on the implementation" of that statute, then no one can come up with any excuses anymore. Not after two years. To people who know how things work, including Germany's best patent litigators, it was already clear two years ago. And not long after the new law entered into force, judges explained at different conferences that nothing was going to change in the end.

By now, all eyes are obviously on the Unified Patent Court. But patent holders still have access to German national courts as the UPC continues to be optional on a patent-by-patent basis.

While the lobbying failure of the anti-injunction movement is beyond reasonable doubt, a different aspect of the reform bill actually has moved the needle in defendants' favor, and it appears to me that patent holders seeking to enforce their rights in Germany have yet to adjust to that new reality. The Federal Patent Court is not absolutely required to hand down its non-binding preliminary opinions within six months of the filing of a nullity suit, and it could meet that target simply by outlining the issues in the case without giving a thumbs up or thumbs down. But what happens now in most cases is that a negative preliminary opinion is provided, which massively complicates enforcement.

German patent injunctions are every bit as near-automatic as they always used to be, and those who thought otherwise should be ashamed of their incompetence--but their second priority was to close the injunction gap (i.e., enforcement of an injunction prior to an actual validity determination), and the situation has indeed changed in that regard.

The validity-related statutory change took effect in May 2022, and after more than a year, it's clear that plaintiffs trying to get leverage in Germany must act more forcefully or they're not going to get their way.

Conventional wisdom would say that a license deal is preferable over litigation; that short-lived disputes are preferable over protracted ones; and that it's better to prevail on only a small selection of patents than to come across as very aggressive by asserting, say, 10 or more patents at the same time.

That conventional wisdom no longer applies in a situation in which the Federal Patent Court declares patent after patent invalid on a preliminary basis. In the past, suing over 3 or 4 patents was normally enough. For instance, when Microsoft and Motorola were suing each other in Germany over a decade ago, they started with just a few patents each. Same with Apple-Motorola. Samsung initially sued Apple over three standard-essential patents (and lost all three cases).

There are two things that plaintiffs must do differently or their German enforcement campaign are going to fail for lack of critical mass:

  1. Assert more patents. If you have a reasonably large portfolio, I don't think it makes sense to assert fewer than 7 or 8, and I would recommend 10-12 patents-in-suit at the start. You just have to factor in that the Federal Patent Court will render negative opinions on the vast majority of them. If you only sue over a few patents, there's a high risk of none of those cases giving you near-term leverage. Legal fees for a quick and successful campaign over 10 patents will be less than for a protracted one over a smaller number. And in the latter case you'll get license fees while in the former your effort may just be a waste.

  2. Harden your portfolio. Engage in patent Darwinism. Nokia has lost quite a number of patents in recent years, but they've also managed to identify a few killer patents that they can assert against defendant after defendant after defendant until they expire. It can be frustrating to have to litigate against a party over the course of more than two years (such as Nokia v. Daimler, and now also Nokia v. OPPO). But if you assert many patents, even some of those patents that the Federal Patent Court prematurely deems potentially invalid may survive, even if in a modified form. You then have some proven winners in your portfolio that you can leverage again and again--and that will, in fact, help you get more license deals because potential defendants will know what's going to happen if patent A is asserted in Munich or patent B in Mannheim.

Fortune favors the brave. And the bold.

Saturday, August 19, 2023

Big Law-sponsored conference on standard-essential patents attracts first-rate speakers to Poland in September: underexploited non-UPC enforcement opportunity

This post is not just about a conference but also about forum diversification in patent enforcement. I was really surprised to see the roster of speakers on the website of a conference on Emerging issues in licensing and enforcement of Standard-Essential Patents that will be held in the Polish capital of Warsaw on September 7 and 8, 2023. Without endorsing any particular person's positions, I noted SEP "household names" including (but not limited to) Professor Jorge Contreras, German Federal Court of Justice patent judge Fabian Hoffmann, DG GROW IP official Kamil Kiljański, UKIPO SEP and regulation expert Jamie Lewis, German patent litigator Professor Tilman Mueller-Stoy, the European University Institute's Igor Nikolic, and Compass Lexecon's Jorge Padilla.

The timing couldn't be much better, given the "rentrée" of EU politicians and public servants after the summer break, with the deservedly controversial EU SEP Regulation on the agenda. Frankly, Europe has way more pressing problems to address than SEP enforcement. But some politicians and their advisers appear dead-set to forge ahead with a dumpster fire of a legislative proposal. A bill made in hell because it's just so fundamentally ill-conceived.

I don't attend a lot of conferences in person (and not even too many webinars to be honest). But in this case it's really just for logistical reasons: otherwise I'd go there and listen.

From what I heard, there's only been one or two SEP infringement lawsuits in Poland so far. And if it weren't for the legislative proposal I just mentioned, I'd actually predict an interesting future for Poland as a SEP enforcement venue with great potential to complement the UPC territory on the Eastern side.

Poland's GDP is approximately $700 billion, roughly a sixth of that of its large Western neighbor, Germany. But for some standards-implementing products, it is a sizeable market. And litigation expenses are presumably low compared to U.S., UK, UPC, or German actions.

I would recommend to SEP holders to file more cases in Polish courts. It's worth a try. However, should the EU SEP Regulation be enacted in any way, shape, or form similar to its current state, then there would be significant legal uncertainty throughout the EU. It's not a given that net licensees will benefit: the new system will be untested initially (by definition), and it might determine royalties that implementers will be none too pleased to pay. But uncertainty alone may be reason enough to focus more on non-EU jurisdictions such as the U.S., UK (despite recent setbacks for SEP holders), Brazil, Colombia, or India. Other non-EU jurisdictions such as Turkey (a population size at a level with that of Germany) or Switzerland (small but affluent) could be put on the SEP enforcement map by an EU stupidity.

Even in a worst-case scenario, though, that EU regulation won't really make an impact for well over two to three years. In the meantime, SEP holders in quest of leverage may file some experimental enforcement actions in Poland, especially if local patent litigators now have such a splendid opportunity to network with key members of the global SEP community.

Big Law firms Kirkland & Ellis and Cleary Gottlieb are among the conference sponsors, as is CMS, a European firm that has a Polish patent litigation practice, and some local players.

Wednesday, August 16, 2023

Avanci announces 5G patent pool with 58 licensors, notably also including Huawei, and former Nokia foe Mercedes as inaugural licensee

It's been well over two years since I first heard from industry colleagues about an Avanci 5G pool being supposedly launched in a matter of months. Things can always take longer, especially when the adoption of a new technology by a particular industry is somewhat slow. But now--right in the middle of a month with hardly any patent-related news--the 5G standard-essential patent (SEP) licensing program for the automotive industry has just been launched.

Compared to how huge this story is--arguably the biggest development in patent licensing this year--Avanci's press release is relatively short and low-key (apart from the firm describing itself as "the independent global leader in joint licensing solutions"). Two numbers are interesting:

  • 59 participants in the sum of licensors and licensees prove market acceptance for the new offering from Day One.

  • The reference to "more than 130 million connected vehicles" licensed by Avanci's 4G program recalls the platform's prior success.

When Avanci started with its 2G, 3G and 4G programs, there was only a small circle of licensors; eventually, BMW signed up as the first licensee; and it took several more years to achieve a high level of market penetration. I was a skeptic and a critic at the early stages, but recognized that an automotive suefest was not the answer and that bilateral licensing--which does (as it must) remain an option--is economically inefficient given the relatively low unit volume of most car makers (even the big ones have an annual unit volume comparable to any major smartphone maker's monthly output).

If one looks beyond the press release, the licensing program's website reveals the terms and who's involved:

  • The royalty rate is $29 per vehicle for those who sign up "before the later of February 16, 2024 or first sale of [a given car maker's] 5G connected vehicle." Thereafter, the price goes up to $32. About a year ago, many car makers signed up ahead of a $15-to-$20 price increase for 4G. For those who are already selling 5G vehicles, there is now a six-month window to secure the early-bird rate.

  • The first licensee is Mercedes (formerly known as Daimler, though arguably the Mercedes was always more famous than any of the organization's different corporate names). Its logo, the steering wheel-like star, is displayed on the website.

  • Qualcomm, Ericsson, Nokia, and InterDigital--the four major net licensors of cellular SEPs--are all on board again, as are dozens of others. (Last time, Nokia wasn't even on the initial list, but joined later on.)

  • The most famous new licensor (not only of Avanci 5G but also 4G) is Huawei. They have a huge and powerful portfolio of cellular SEPs (the 5G leader by some measure). Huawei very much emphasizes the pursuit of a balance between licensors' and licensee's interests and believes in application-specific licensing terms.

  • Two other Asian companies that are major automotive industry suppliers and were previously known to participate in Avanci's 4G program are also among the 58 initial 5G licensors: Samsung and LG.

  • What about absentees? Conversant participated in Avanci 4G and is not listed now, but its portfolio is pretty much expired anyway. Deutsche Telekom was an outlier anyway, given that it was the only member of the Fair Standards Alliance to participate. The only major 5G patent holder missing at this point despite having participated in the 4G pool is OPPO. But OPPO is embroiled in litigation with (at least) four other licensors: Nokia (that's the largest-scale SEP dispute at the moment), InterDigital, Philips, and now also Panasonic.

  • Avanci's 4G program kept adding licensors through the years, and we may see the same trend here, though the initial coverage is already impressively comprehensive.

  • From a half-dozen of patent holders who are listed among Avanci's 5G licensors but weren't (and apparently still aren't) involved with the 4G program, China Telecom stands out.

There'll be more to say about Avanci 5G in the months and years ahead. For now, suffice it to comment from a few interesting angles on today's story.

Rapid ramp-up: On the licensor side, the job is largely already done. For licensees, the decision shouldn't be hard. Those making 5G cars at this point will likely seize the opportunity. The reason I think so is that no one could stand up inside those organizations and put forward a superior plan. Infringement is illegal, bilateral licensing is (in this context) inefficient: too many portfolios to license. Not only would it take a lot of negotiations and potentially even lawsuits, but the aggregate licensing costs (not even considering transactional inefficiencies) would easily exceed the pool rate. In any FRAND dispute in a court of law, it would have to be considered that cars are in use for far longer periods than smartphones, and that car makers generate incremental revenues from data services over the years.

Licensing preferred over litigation: It's quite a coincidence that on the same day Mercedes is revealed as the first Avanci 5G licensee and Huawei as a new (4G and 5G) licensor. The former brought an EU antitrust complaint against Nokia in late 2018 (which went nowhere), and the latter was not just one more intervenor on the automaker's behalf in the Nokia v. Daimler infringement dispute but filed a third-party counterclaim seeking an exhaustive component-level SEP license from Nokia (as opposed to have-made rights, which Avanci has always offered, as have Nokia and others on a bilateral basis). That one was withdrawn last year, and a new cross-license agreement was concluded a little later. The two companies who disagreed with Nokia on automotive SEP licensing years ago are now on board--alongside Nokia--the next generation of the licensing program. It shows that reasonable people can work things out with each other.

Chinese dimension: The involvement of Huawei, China Telecom, and other Chinese entities as well as Sharp (Japanese, but owned by Foxconn) seems very significant in geopolitical terms. It would now make a lot of sense for Chinese car makers to take licenses.

EU patent policy: Among the quasi-legislative powers that the European Commission's Directorate-General for the Internal Market (DG GROW) is asking lawmakers to bestow upon the EC there is the decision on what standards and use cases should be subject to the proposed EU SEP Regulation. Arguably, automotive SEP licensing could be excluded as the market has solved the problem. Where's the value-add of the envisioned legislation? A rational analysis of what royalties wireless innovators are entitled to when their technologies are incorporated into vehicles could easily result in a substantially higher aggregate royalty rate. While DG GROW is creating unnecessary problems, licensors taking their FRAND commitment seriously and willing licensees are coming together.

Leaders: I rarely mention patent pool managers unless they speak at conferences. Here, I noticed that besides Avanci founder Kasim Alfalahi, whose vision has indisputably come to fruition, the press release also quotes senior VP Laurie Fitzgerald, a U.S. attorney based in Dublin whom different patent holders mentioned to me this year and last as their point of contact for the 5G program.

Today's announcement is a milestone. In order for autonomous driving (which will, of course, have limitations for many years to come) to materialize, connectivity is key, and the advantages of 5G are not just related to bandwidth, but 5G also reduces latency. Ideally, car makers and their suppliers will focus on innovative applications--and cross cellular SEP licensing off of their to-do lists, for the most part at least.

Tuesday, August 15, 2023

IP Europe submission criticizes proposed 'delegation of power by the Commission to itself and to the EUIPO': EU SEP Regulation

On Friday, industry body IP Europe responded to the European Commission's consultation on its proposed regulation on standard-essential patents (SEPs). A short blog post highlights some key issues, and IP Europe also published its 28-page consultation response.

While the long document has a hierarchical structure, it is a difficult read. There's a lot of trees there, but the contours of the forest could be made clearer. Certain themes are found throughout the document, such as evidentiary issues with the proposal (of which there are--I agree--plenty). An expert working group in the EU Council may find IP Europe's submission a treasure trove of strong analysis. I understand that it is a challenge to critique a legislative proposal that is flawed at all levels: there's so much to say. I'd just like it to be easier to figure out what the core messages and counterproposals are.

I try to understand both sides of the debate, but the problems with the EU SEP Regulation are structural. IP Europe is right that it's designed to bring down SEP license fees (whether it would ever achieve that in practice is actually unclear). When a proposal is unbalanced and unworkable, an independent commentator like me is left with no choice but to side with those who call for its withdrawal and/or overhaul. To be honest, while there obviously are various ways in which the proposal could be modified, I think the best solution would indeed be to toss it because it is, seriously, crap.

That, of course, does not mean that I agree with IP Europe across the board. Not only have I just voiced my honest opinion on its messaging but there are a few items in the submission that I would not support. For instance, it is IP Europe's position--and a legitimate one to take--that "the critical problem in the marketplace [is] the practice of 'hold-out.'" Hold-out is indeed an issue: I've attended patent trials, read court decisions, and unofficially heard of negotiations in which an unwilling licensee refused to engage in constructive negotiations. However, there are also cases in which SEPs (and other patents, but let's stay focused on SEPs here) get overleveraged, particularly through enforcement actions in Germany. In footnote 18, IP Europe says SEP royalties "have been, and can be, checked by the courts of EU Member States and now also the UPC." Unfortunately, that is not the case in Germany, and that's the country in which most European SEP infringement cases are filed.

If the EC's Directorate-General for the Internal Market (DG GROW) and organizations representing implementers (such as certain automotive industry associations) wanted to have a debate over whether the 100% behavioral, 0% economic approach of German courts--which may or may not be adopted by the UPC to that extent--is appropriate, I would say: let's discuss. Let's talk about that, let's not forget that there is also significant room for improvement with a view to hold-out, and let's think about what the EU could do to strike a better balance.

Instead, we are now faced with a proposal that--as IP Europe's submission accurately notes and documents--is all about price regulation by two EU institutions, with the stated goal of lowering those prices.

The evidentiary issues here start with the most basic question (which IP Europe also raises, but differently):

Why now? How is this urgent?

The honest answer would be: because the current EU legislative term ends next spring. That, of course, cannot officially serve as justification. Let's face it: this here is all about institutional and individual ambition, not about sound industrial policy.

The DG GROW-commissioned impact assessment study itself makes it clear that there is no acute crisis, yet we see some EU officials in different institutions acting as if the house was on fire. Some people are rushing this like critical decisions at the height of the pandemic. The difference being that the total number of typos and grammatical errors found in all of the EU's COVID-related documents is dwarfed by all of the linguistic and editorial flaws (plus formatting inconsistencies) in that one SEP proposal.

For interinstitutional reasons, the Council and/or the Parliament should teach DG GROW (I'm not saying "Commission" because I haven't seen anything like this from any other Commission DG) a lesson. They should send DG GROW back to the drawing board, and tell them to get their act together next time in legal, evidentiary, and linguistic terms. That proposal is substandard in every respect. It's a disgrace for the EU.

IP Europe's paper raises various issues I've previously addressed, and points to numerous issues with the proposal. I commmend them for that work, and it will serve as useful reference material in the further process. For now I'd just like to talk briefly about one issue with the proposal that I haven't previously stressed:

DG GROW wants the EU's co-legislators to give overreaching powers to the Commission and to the EUIPO.

Important decisions such as on what standards the regulation should relate to or what methodology should be applied in FRAND rate determinations must be made democratically. The Commission may have left those questions open because it needed more time to make up its mind, or maybe the plan was to avoid any political debate over those questions. Whatever the motive may have been, it is unacceptable. And IP Europe is also right that the EUIPO can't just have the authority to remove patents from the register.

IP Europe's submission notes that the Commission seeks to "vest[] the EUIPO with the authority to act as a rate regulator, unilaterally setting FRAND royalty rates"--and that this goes far beyond an effort to "increase transparency."

There is no shortage of reasons to reject the proposal in its current form and to demand a withdrawal or complete overhaul. The excessive delegation of legislative power to the Commission and the access-to-justice issues relating to the EUIPO's management of the SEP Register are additional reasons to conclude that the proposal that was put forward in April is broken beyond repair.

The ECJ's Huawei v. ZTE decision was a good one. Its application could be improved, but not through the creation of an unchecked and burgeoning bureaucracy with an unconcealed and one-sided agenda to put a thumb on the scale.

Thursday, August 3, 2023

Huawei's patent license terms for cellular IoT devices are highly differentiated and example of market-driven solution that addresses EU concerns over transparency

When I reported on Huawei's annual innovation and intellectual property event last month, I summed up the standard-essential patent (SEP) licensing terms for cellular IoT products in a highly condensed format:

  • IoT-centric devices: 1% of net selling price, capped at $0.75/unit, for categories NB, M, and 1; category 4+ to be discussed individually

  • IoT-enhanced devices: from $0.30/unit for Category NB to $1.00/unit for Category 4+

Given that IoT is basically the "new frontier" in cellular SEP licensing, and in light of the IoT and SME-related concerns that led the European Commission's Directorate-General for the Internal Market (DG GROW) to launch an aggressive rule-setting initiative, a more elaborate discussion of Huawei's cellular IoT licensing terms is warranted.

Huawei provides details on that licensing program in the form of a dedicated web page as well as a two-page PDF that elaborates on the key definitions, particularly of product categories. That effort is laudable, but it also shows that the topic--regardless of whether a particular company makes a licensing offer--is not as straightforward as licensing smartphones or connected vehicles.

The price matrix has three royalty structures:

  1. The simplest scenario relates to IoT-enhanced devices. That categoriy includes certain products such as shared bicycles where a lot of value is in areas other than connectivity. A bicycle can serve its basic purpose--getting from A to B--with or without connectivity, though cellular connections obviously facilitate "sharing economy" services. For such products, Huawei charges a fixed per-unit rate (from $0.30 to $1.00).

  2. IoT-centric devices are the ones that basically combine limited other functionality (such as meters, sensors, or GPS) with connectivity, and it's really just that combination that makes them useful. In April I commented on a European Commission document that claimed to know that a certain set of IoT licensing terms (by a Sisvel pool) were not FRAND, but as I noted, the products in question are very simple devices: they measure something, and send the data somewhere. That's why a royalty rate that may seem high to some EC officials can very well be justified in light of the fact that cellular connectivity accounts for a very large part of the overall value of such products. I also thought the EC did not sufficiently take into consideration that such products tend to be in use for far logner periods than smartphones, for which two years are a common upgrade cycle.

    Normally, Huawei's royalty rate for products that fall into that category is 1% of the net selling price, but capped at $0.75/unit, which corresponds to a cap of the royalty bae at $75.

  3. For IoT-centric devices that fall into 3GPP LTE categories 4 or higher, Huawei's web page just says: "Contact us for rates." I've asked some people in the industry what types of devices would be IoT-centric (as opposed to merely IoT-enhanced) but meet 3GPP's criteria for category 4+, and it seems no one can conceive of a use case for that combination. Category 4+ devices would be rather expensive while IoT-centric devices such as smart meters tend to be cheap. Therefore, I assume that Huawei can't state a royalty rate because if someone actually created a product that against conventional wisdom makes category 4+ use of cellular connectivity but is a smart meter-like IoT-centric device, Huawei would have to see it to be able to make an offer. It's a theoretical combination, but one that may never come up in practice.

For licensees, the percentage-with-absolute-cap royalty structure for IoT-centric devices such as smart meters is advantageous because it means that a cheap device, such as a $25 asset tracker, gets licensed at a low per-unit rate. For IoT-enhanced devices, however, a fixed per-unit fee works because those are expensive enough that it's not necessary to start with a percentage, but the key thing is that a fixed per-unit fee is certain not to capture the value in any other components of such a product. For instance, if one shared bicycle comes with more expensive wheels and tires than the other, but both make the same kind of use of cellular connectivity, patent royalties don't capture a part of the premium price that would be paid for better wheels and tires.

Presumably it helps that Huawei continues to be a major implementer that pays about as much to other patent holders as it collects from implementers. And at the end of the day, what licensees do by taking a proper license to Huawei's SEPs is to support further research and development, which was a key message of Huawei's recent presentation.

The 3GPP device category definitions are obviously not a special feature of Huawei's licensing terms. They were created by a standardization body. Huawei's PDF just provides clarifies, such as that Category NB (narrowband) includes Category NB1 as well as Category NB2.

Huawei's PDF defines a basic IoT device as a "finished, complete, and ready-to-use terminal device that (1) implements Cellular IoT Standards for data transmission but not voice transmission, and (2) has an application/user function that is dependent on data transmission." Certain product types (such as phones, tablets, and PCs) are explicitly excluded. The PDF also makes clear that "Non-Human-Powered vehicles" (such as automobiles) are not included. There obviously are licensing options and rather different terms for those.

The PDF furthermore gives examples of IoT-centric devices (asset trackers and smart sensors) as well as of IoT-enhance devices (smart utility meters, point-of-sale machines, shared bicycles, and connected healthcare devices).

The EU institutions should have more faith in market-driven solutions. Huawei's terms are transparent, designed to avoid patentee overcompensation, and should also suit IoT SMEs. The terms of Sisvel's IoT pool--whether or not everyone at the Commission has understood the rationale--are also perfectly transparent and SME-friendly. And it's been only two weeks since Avanci announced European SME Axxès (highway toll collection technology) as a licensor of the Avanci Aftermarket pool. Solutions are being worked on, and they increasingly address the problem that some EC officials believe to have identified.

Constructive approaches to licensing should be encouraged by the European Commission, but the ill-conceived proposal that is currently on the table threatens to complicate or in some areas even disrupt (by encouraging holdout) the licensing process. As I argued in my previous post, at least the EU Council and/or the EU Parliament should obtain an opinion from their legal services, as fundamental rights and international comity are at stake.