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.