Competition in Information Technologies: Standards-Essential Patents, Non-Practicing Entities and FRAND Bidding

Standard Setting is omnipresent in networked information technologies. Virtually every cellular phone, computer, digital camera or similar device contains technologies governed by a collaboratively developed standard. If these technologies are to perform competitively, the processes by which standards are developed and implemented must be competitive. In this case attaining competitive results requires a mixture of antitrust and non-antitrust legal tools. FRAND refers to a firm’s ex ante commitment to make its technology available at a “fair, reasonable and nondiscriminatory royalty.” The FRAND commitment results from bidding to have one’s own technology selected as a standard. Typically the FRAND commitment is not a promise to charge any particular price, but only a price that meets FRAND expectations. This permits members of a standard setting organization (SSO) to focus on technical issues and worry about the price later. Two important questions that a FRAND commitment typically leaves open is the royalty base and the royalty rate. A strong case can be made that the base should be the smallest saleable unit containing the patented technology. While that base is not entirely free from problems, it does provide a more-or-less common currency. The FRAND obligation that the rate be nondiscriminatory typically, but not always, provides a set of yardsticks for measuring the rate. The non-practicing entity (NPE) that voluntarily declines to participate in an SSO process should generally be held to the FRAND royalty as its measure of its damages, even though its particular patents are not FRAND-encumbered. In this case a “reasonable” royalty is the royalty that the patent holder would have obtained in the competitive market in which it might have participated. The case for limiting NPE damages in this way is strongest when the NPE had actual or objectively reasonable knowledge of the SSO process but declined to participate. The case is weakest when the SSO’s processes were not well communicated to outsiders or the NPE in question was not permitted to participate. FRAND commitments should “run with the patent,” in the sense that owners of FRAND-encumbered patents should not be able to free them simply by assigning the patents to someone else. One fundamental principle of property law is that a property owner cannot transfer away a larger interest than it owns. The entire FRAND commitment process would be worthless if patent holders were able to evade it by the simple device of assigning encumbered patents in order to remove the encumbrance. The question of injunctive relief is only a little more complex. A FRAND commitment is on its face an offer to license to all who employ that patent in their standards-compatible product. True, the precise royalty terms are typically not specified in advance, but that entails that the FRAND royalty will be determined by reference to common indicia such as rates paid for similar technologies in the same or perhaps another situation. Further, the FRAND commitment effectively turns the royalty issues into a breach of contract claim rather than a litigated royalty claim. Permitting the owner of a FRAND-encumbered patent to have an injunction against someone willing to pay FRAND royalties is tantamount to making the patent holder the dictator of the royalties, which once again is the same thing as no FRAND commitment at all

Antitrust Rulemaking as a Solution to Abuse on the Standard-Setting Process

While many recognize the critical role that technology plays in modern life, few appreciate the role that standards play in contributing to its success. Devices as prevalent as the modern laptop computer for example, may be governed by over 500 interoperability standards, regulating everything from the USB drive to the memory chip. To facilitate adoption of such standards, firms are increasingly turning to standard-setting organizations. These organizations consist of members of an industry who agree to abide by the organization\u27s bylaws, which typically regard topics such as patent disclosure and reasonable licensing. Problems arise, however, when members violate these bylaws after a standard has been adopted. Where a member asserts its patents against other members in violation of the organization\u27s bylaws, that member engages in what is known as patent holdup. Both private and public litigation have focused on curbing this practice, but the current regime remains imperfect. This Note argues that the best approach to the current problem of patent holdup requires the Federal Trade Commission to promulgate an antitrust rule. This approach combines the advantages associated with traditional enforcement with the beneficial aspects of agency rulemaking

Patent Misuse and Antitrust: Rebirth or False Dawn?

This Article examines how two recent cases, F.T.C. v. Actavis and Kimble v. Marvel Enterprises Inc. could affect both the equitable defense of patent misuse and the patent-antitrust interface more generally. It begins by tracing the history of patent misuse and its reformulation into an “antitrust-lite” doctrine by the Federal Circuit. This Article presents new empirical data confirming this reformulation, and unveils the surprising influence of the Seventh Circuit and the Chicago School on that reformulation. The Article then explores Actavis and Kimble. It explains why Actavis will catalyze more antitrust challenges when patent rights are exercised, and why it also challenges the Federal Circuit’s formulation of patent misuse. The Article proceeds to observe Kimble’s misunderstanding of the patent policy underpinning the Supreme Court’s prohibition against post-expiration royalties. This Article confronts three key objections to a revival of misuse—its vagueness, lax standing requirements and punitive effects on patentees—and explains why these objections are misplaced. The Article concludes by recommending that judges and attorneys use the opportunity provided by Actavis to develop a more thoughtful framework for patent misuse that draws upon the strengths of its roots in patent policy and its interface with antitrust policy

The Political Economy of Patent Policy Reform in the United States

During the 1980s and 1990s, important legislative, judicial, and diplomatic initiatives emanated from the United States, strengthening patent and copyright enforcement systems both domestically and in the broader world economy. The political influences that led to these changes are interesting in their own right. Even more interesting, however, is the fact that governmental emphasis on patent systems increased in the wake of impressive new findings from economic studies showing that patents played a surprisingly minor role in well-established corporations' decisions to invest in research, development, and technological innovation. The opposing movements of the political and behavioral science currents will be a principal theme of this article.

Antitrust Rulemaking as a Solution to Abuse on the Standard-Setting Process

While many recognize the critical role that technology plays in modern life, few appreciate the role that standards play in contributing to its success. Devices as prevalent as the modern laptop computer for example, may be governed by over 500 interoperability standards, regulating everything from the USB drive to the memory chip. To facilitate adoption of such standards, firms are increasingly turning to standard-setting organizations. These organizations consist of members of an industry who agree to abide by the organization\u27s bylaws, which typically regard topics such as patent disclosure and reasonable licensing. Problems arise, however, when members violate these bylaws after a standard has been adopted. Where a member asserts its patents against other members in violation of the organization\u27s bylaws, that member engages in what is known as patent holdup. Both private and public litigation have focused on curbing this practice, but the current regime remains imperfect. This Note argues that the best approach to the current problem of patent holdup requires the Federal Trade Commission to promulgate an antitrust rule. This approach combines the advantages associated with traditional enforcement with the beneficial aspects of agency rulemaking

Proportionality Defenses in FRAND Cases – A Comparative Assessment of the Revised German Patent Injunction Rules and US Case Law

A new defense against injunctions in FRAND cases has arisen in Germany, and its relationship to the Huawei defense (whether viewed as a competition or contractual matter) is largely unexplo-red. In August 2021, the “Second Act for the Modernization of Patent Law” (Zweites Pa-tentrechtsmodernisierungsgesetz) took effect and modified the German Patent Act (GPA) in sever-al respects. Pertinent to our topic is an amendment to § 139(1) GPA which introduced an expli-cit proportionality defense against injunction claims. The new proportionality mechanism con-sists of three main elements: First, § 139(1)(3) GPA excludes the claim to an injunction in case of patent infringement to the extent such injunction would result, due to the particular circum-stances of the individual case at issue and with a view to the principle of good faith, in a hards-hip for the infringer or third parties that would be disproportionate and not justified by patent exclusivity. Second, § 139(1)(3), (4) GPA entitle the patentee to appropriate financial compensa-tion if the injunction is denied, without prejudice to its other claims for damages. Third, § 142(7) GPA exempts an infringer from penal law sanctions to the extent § 139(1)(3) GPA excludes an injunction. This article offers to market participants and the judiciary a proposed analytical framework for considering such a proportionality defense in German FRAND cases. While the introduction of this new defense presents various additional issues, we focus primarily on three aspects: (1) whether the proportionality defense and the FRAND license defense can be raised in parallel, (2) whether FRAND royalties are a suitable basis for calculating the appropriate finan-cial compensation in the sense of § 139(1)(4), and (3) how a court should assess whether the impact of an injunction in a FRAND case is disproportionate and not justified by the exclusivity conferred on the patent holder. In formulating an analytical framework to address the latter question, we also consider whether the injunction law of the United States, including various means by which it incorporates principles of proportionaltiy, may offer useful guidance, or at least cautionary notes, for the German context

FRAND and Antitrust

This paper considers when a patentee’s violation of a FRAND commitment also violates the antitrust laws. It warns against two extremes. First, is thinking that any violation of a FRAND obligation is an antitrust violation as well. FRAND obligations are contractual, and most breaches of contract do not violate antitrust law. The other extreme is thinking that, because a FRAND violation is a breach of contract, it cannot also be an antitrust violation. Every antitrust case must consider the market environment in which conduct is to be evaluated. SSOs operated by multiple firms are joint ventures. Antitrust’s role is to evaluate how challenged restraints operate within the venture and condemn unreasonably anticompetitive practices. In her Qualcomm decision Judge Koh devoted considerable space to standard essential patents and FRAND commitments, but she addressed the antitrust refusal to deal and exclusion claims with little reference to standard setting or FRAND. Breach of a FRAND commitment violates the antitrust laws when it causes competitive harm. For §1 of the Sherman Act, this requires an agreement that threatens to reduce market output. If the conduct is reasonably ancillary to other procompetitive activity, this requires an assessment of market power and anticompetitive effects. For §2 of the Sherman Act or §3 of the Clayton Act, it will require a showing of unreasonably exclusionary conduct by an actor with market power. The antitrust issue of unilateral refusals to deal is too often confused with the essential facility doctrine. The essential facility doctrine is based on the idea that some assets are so essential to commerce that the owner has a duty to share them. By contrast, the refusal to deal rule is rooted in conduct – namely, a specific prior contractual obligation, reliance and path dependence, and subsequent repudiation. Many joint ventures involve a significant sunk investment in assets that are dedicated to the venture. If one firm can later extract itself and commandeer the relevant technology, it can leave the remaining firms at a significant competitive disadvantage, with the effect of transferring market share, reducing output, raising prices, and ultimately undermining the competitive promise of such ventures. This makes antitrust refusal to deal rules particularly important for collaborative networked industries. While the essential facility doctrine is conducive to competitor passivity, the Aspen rule facilitates competitor investment. The idea that a facility is “essential” indicates that rivals need not bother to develop their own alternatives. Instead, they should seek a right to connect into the dominant firm’s facility. By contrast, the Aspen rule is based on a premise of voluntary commitment to invest jointly. If one firm later reneges on that commitment in a way that threatens to undermine it, those investment backed expectations are lost. The Aspen rule thus serves to protect the integrity of investment when noncompetitive outcomes are threatened. The debate over “holdup” or “holdout” in the FRAND setting has occasional antitrust relevance. While holdout is a real problem, there is little empirical evidence that it occurs frequently in FRAND settings. Holdout occurs when implementers conspire to exclude patentees or suppress royalties. But standard essential patents are largely self-declared and, as it appears, significantly over declared. Further, “holdout” hypothesizes agreements to force patentees to accept infra-market royalties, but FRAND royalties are determined post-commitment by independent tribunals, and there is no evidence of systematic undercompensation. One objection to finding antitrust liability when the defendant’s conduct has also violated its FRAND obligation is the threat of double liability. There is little basis in fact or law for this concern. Many federal antitrust violations violate various common law and statutory rules. The remedy in these cases is not to dismiss one or the other claim at the onset, but rather to avoid double counting of damages for the same harm. Finally, while some object to using antitrust law to discipline firms for seeking injunctions on FRAND-encumbered patents, existing antitrust doctrine on the point is clear and sufficient: a firm has the right to seek relief in court unless its prospects are so poor that the lawsuit must be regarded as a “sham.” The antitrust question of injunctions on FRAND patents is thus quite fact-specific and depends on the extent to which the law is settled

Are Patents on Interfaces Impeding Interoperability?

Many commentators and policymakers have recognized that patents on interfaces can be and sometimes have been exercised to block the development of interoperable technologies. Out of concern about the exclusionary power of such patents, they have proposed a wide array of legal and policy measures to ensure that interoperability can occur. This Article is the first comprehensive analysis of the twenty-some policy responses that have thus far been proposed or implemented to blunt the power of interface patents.This Article makes four main points. First, there is less need for strong regulatory measures, such as barring patents on interface innovations or treating the exercise of interface patents to block interoperability as misuse of the patents, than some commentators seem to believe. Second, insofar as interface patents do emerge as more serious impediments to interoperability than they have been to date, there are adequate policy responses in place in various countries that can be used to address them. Third, some tailoring of patent rules and patent reforms may be advisable in order to promote greater interoperability among ICT systems. Fourth, patents are often less of an impediment to interoperability than the secrecy of interface information, which may be difficult or impossible to reverse engineer, and changes in interfaces that may attend new versions or features of an ICT system. The Article explains why it would be difficult to bring about more interoperability by mandating greater disclosure of interface information or regulating what kinds of changes firms can make to their interfaces