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.