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FRAND Determinations Under the EU SEP Proposal: Discarding the Huawei Framework

ICLE Issue Brief Abstract The European Commission’s recently unveiled proposal to overhaul the EU’s licensing system for standard-essential patents (SEPs) would see conciliators issue mandatory, albeit nonbinding, pre-trial . . .


The European Commission’s recently unveiled proposal to overhaul the EU’s licensing system for standard-essential patents (SEPs) would see conciliators issue mandatory, albeit nonbinding, pre-trial determinations of fair, reasonable, and non-discriminatory (FRAND) terms. This issue brief investigates the relationship between the proposal’s FRAND-determination process and the test developed by the Court of Justice of the European Union (CJEU) in Huawei v. ZTE, which currently represents the guiding framework for SEP-licensing negotiations in the EU. It aims to demonstrate that, even if the SEP proposal were not intended to displace Huawei, the anti-injunction approach it endorses is inherently inconsistent with the CJEU’s stance, and is essentially a direct response to German case law. Therefore, to the extent that the proposal’s FRAND determinations will coexist with the Huawei bargaining framework, the proposed regulation appears likely to add significant confusion and uncertainty, and to induce licensing disputes, rather than supporting balanced and successful SEP-licensing negotiations.

I.       Introduction

In April 2023, the European Commission unveiled a proposed regulation to overhaul the EU’s licensing system for standard essential patents (SEPs).[1] The initiative aims to address the causes of allegedly inefficient licensing, such as a lack of transparency with regard to SEPs; fair, reasonable, and non-discriminatory (FRAND) terms and conditions; licensing in the value chain; and limited use of dispute-resolution procedures.[2]

A perceived need to enhance transparency, predictability, and efficiency of SEP licensing is not new to the EU policy agenda.[3] The status quo is perceived as particularly unsatisfactory in the context of the Internet of Things (IoT), where newer players with few resources and little licensing experience (i.e., startups and small and medium-sized enterprises) have entered the market for connectivity.[4] As the number of declared SEPs continues to proliferate and a growing number of industrial, business, and consumer applications make use of standards that include SEPs, the European Commission has increasingly seen the need for a smoother and more balanced SEP-licensing system.[5]

Against this background, the Commission’s SEP proposal would alter the current framework by introducing mandatory registration for enforcement purposes; a system for essentiality checks; and a process to determine both aggregate royalties and FRAND terms and conditions. Unsurprisingly, the proposal has drawn criticism for nearly all its provisions, with some questioning its very rationale. Critics charge that such an intrusive and extensive intervention is unnecessary and dangerous, and that there is no economic justification for the initiative.[6] Indeed, proponents of the proposed regulation justify it by citing limited circumstances and situate their case within a market-failure framework. There is, however, no discernible evidence of a market failure to address. Notably, the concerns reported in the Impact Assessment[7] do not match the results of the primary study that informed it.[8]

The Commission’s Impact Assessment raised concerns that SEP-related disputes will increase because of the growing demand for connectivity (particularly for the IoT) and that, because of high transaction costs and licensing uncertainties, both SEP owners and implementers may be discouraged from participating in standards development and the creation of products that use technology standards potentially subject to SEPs, respectively.[9] The empirical evidence that the Impact Assessment used as its primary input, however, does not support these findings and illustrates a significantly different landscape.

In short, the prevalence of SEP litigation is low relative to non-SEP disputes, and it has not increased over time;[10] the caseload of SEP litigation is relatively stable in Europe (while falling in the United States and increasing in China) and, in more recent years, the share of declared SEPs subject to litigation has fallen;[11] and empirically observable data do not indicate that SEP-licensing conditions have led to pervasive opt-outs from standards-related innovation.[12] Therefore, there is no evidence that FRAND-licensing frictions have caused either SEP owners to contribute less to standards development or SEP implementers to opt for alternative (i.e., without FRAND licensing) standards. There is also nothing to indicate that current SEP-licensing conditions systematically suppress or delay standards implementation.[13]

A further criticism directed at the Commission’s SEP proposal regards its decision to delegate the primary duties related to the licensing and litigation of SEPs to the European Union Intellectual Property Office (EUIPO).[14] The EUIPO has no meaningful experience with patents, but would be placed in charge of one of the most complex areas of patent policy.[15] Moreover, the tasks undertaken by EUIPO (more precisely, by the competence center established under the purview of EUIPO) would undermine the authority in SEP enforcement of national courts and the newly established Unified Patent Court (UPC).

This issue brief will focus on provisions of the Commission’s proposal that would introduce mandatory (albeit nonbinding) pre-trial FRAND determinations by conciliators.[16] Under the SEP proposal, such dispute resolution must be initiated by the SEP holder or implementer prior to the initiation either of a patent-infringement claim or a request to determine or assess FRAND terms and conditions before a competent court of an EU member state.

The brief investigates the relationship between the proposed FRAND-determination process and the test developed by the Court of Justice of the European Union (CJEU) in the landmark ruling Huawei v. ZTE, which represents the current guiding framework for good-faith SEP-licensing negotiations.[17] Indeed, mandatory conciliation is expected to benefit SEP holders and implementers in reaching license agreements more quickly and without costly court proceedings, and it is proposed as a complement to—rather than replacement for—the Huawei process,[18] it is equally evident that the proposed regulation underscores the Commission’s dissatisfaction with the Huawei framework and its implementation by national courts.

Furthermore, the proposed approach marks a consequential departure from the one adopted by the CJEU. While the latter elaborated the so-called “willing licensee” test in order to strike a fair balance among the relevant interests, compulsory pre-trial conciliation would reduce the scope of injunctions for SEP holders beyond Huawei, tilting the balance in favor of implementers. Indeed, implementers would be free to challenge SEPs, but patent owners could not initiate infringement proceedings without first going through the mandatory FRAND-determination process. This issue brief aims to demonstrate that, even if the SEP proposal does not displace Huawei, the proposed conciliation process represents an attempt to discard the CJEU’s framework, rather than complement it.

Furthermore, the proposed restraints on the availability of injunctive relief would appear to reinstate the conflict between the Commission and the German courts that apparent prior to the Huawei decision, when opposing approaches emerged in the Motorola and Samsung cases[19] and the Orange Book Standard ruling, respectively.[20] It was the national courts’ differing interpretations of FRAND determination that provided the original impetus for harmonization at the EU level under Article 114 TFEU.[21] The largest number of SEP disputes are, however, litigated in Germany,[22] and the Commission has appeared sensitive to stakeholder complaints that German court practice is overly friendly to patent owners, and that it contradicts Huawei by expanding the availability of injunctions and amounts to a de facto reinstatement of Orange Book Standard.[23] As a result, the SEP proposal’s no-injunction approach, as well as the length of its proposed FRAND-determination procedure, may alter the bargaining process by imposing costs on patent owners and unduly favoring opportunistic behavior and delay tactics by implementers. The effect would be to make hold-out more attractive.

Finally, this brief questions the expected added value of the SEP proposal’s conciliation process. While distrust of the role of courts in FRAND disputes finds no support in the empirical evidence—which instead demonstrates the absence of an SEP-litigation problem in the EU—the new provisions risk generating confusion and uncertainty, which could fuel further litigation. Such risk is further exacerbated by the proposal’s extraterritorial effects. Indeed, while the regulation would apply only to patents in-force in the EU, the FRAND determination may refer to global rates.[24]

The remainder of this issue brief is structured as follows. Sections II and III compare FRAND determinations under the SEP proposal and the Huawei bargaining framework, respectively. Section IV addresses the relationship between the Huawei code of conduct and the solution advanced by the European Commission. Section V investigates the implications and potential side effects of the SEP proposal. Section VI concludes.

II.     FRAND Determinations Under the SEP Proposal

Disagreements regarding the meaning and implementation of FRAND (i.e., about what constitute FRAND terms and conditions, as well as the nature, scope, and implications of FRAND obligations) are among the primary drivers of complexity in SEP licensing.[25] To reduce costs and simplify and speed negotiation of FRAND terms,[26] Title VI of the Commission’s SEP proposal introduces mandatory dispute resolution, which would serve as a precondition to access to the competent court of an EU member state. Indeed, a FRAND determination by a conciliator, selected among candidates proposed by the competence center,[27] would be a mandatory step before an SEP holder could initiate patent-infringement proceedings, or an implementer could request a determination or assessment of FRAND terms and conditions before a competent court.[28] National court enforcement would also be precluded when a determination of FRAND terms and conditions is raised in abuse-of-dominance cases, namely in the national application of the Huawei framework.[29]

The obligation to initiate FRAND determination before the relevant court proceedings is, however, not required for SEPs covering use cases of standards for which the Commission establishes (by means of a delegated act) that there is sufficient evidence that SEP-licensing negotiations on FRAND terms do not give rise to significant difficulties or inefficiencies.[30] Furthermore, the obligation to initiate FRAND determination does not preclude either party’s right to request (pending the FRAND determination) that the competent court of a member state issue a provisional injunction of a financial nature against the alleged infringer.[31] In any case, the provisional injunction would exclude seizure of the alleged infringer’s property, as well as the seizure or delivery of the products suspected of infringing an SEP.

While it would be obligatory to commence the conciliation before initiating a court action, the parties would be free to decide on their level of engagement and would not be prevented from leaving the process at any time.[32] It is even possible to proceed with the FRAND determination with the participation of just one party. Where a party does not reply to the FRAND determination request, or does not commit to comply with the outcome of the FRAND determination, the other party should be able to request either the termination or unilateral continuation of the FRAND determination.[33] The same applies if a party fails to engage in the FRAND determination after the conciliator has been appointed.[34] Where a parallel proceeding is initiated in a third country (i.e., a jurisdiction outside the EU) that results in a legally binding and enforceable decision, the conciliator (or the competence center) shall terminate the FRAND determination upon the request of any other party.[35]

The FRAND determination should be concluded within nine months.[36] At the conclusion of the procedure, the conciliator would make a proposal recommending a FRAND rate.[37] Either party would have the option to accept or reject the proposal. If the parties do not settle and/or do not accept the conciliator’s proposal, the conciliator would be asked to draft a report of the FRAND determination, including both a confidential and a non-confidential version. The latter should contain the proposal for FRAND terms and conditions and the methodology used, and should be provided to the competence center for publication in order to inform any subsequent FRAND determination between the parties and other stakeholders involved in similar negotiations. The Commission’s SEP proposal, however, offers no guidance on how conciliators should set a FRAND royalty or what factors they should consider.

III.   FRAND Determinations Under Huawei

Under existing European law, the evaluation of FRAND commitments in the standard development context is guided by the CJEU’s ruling in Huawei v. ZTE,[38] whose pivotal role was recently confirmed by the Commission’s guidelines on the application of antitrust law to horizontal cooperation agreements.[39]

Huawei represents the most significant attempt to provide a framework for good-faith SEP-licensing negotiations to guide licensors and licensees toward a mutually agreeable FRAND royalty. Toward this aim and in order to strike a fair balance among the relevant interests,[40] the CJEU identified the steps that patent holders and implementers must follow in negotiating a FRAND royalty. Indeed, a balance should be pursued between maintaining free competition and the requirement to safeguard a proprietor’s intellectual-property rights and its right to effective judicial protection.[41]

The exercise of an exclusive right linked to an intellectual-property right may in “exceptional circumstances” involve abusive conduct for the purposes of competition law.[42] In this regard, the CJEU has shown a preference for FRAND determination in the context of negotiations between the parties, using the threat of antitrust liability and patent enforcement as levers to steer both parties toward a mutually agreeable FRAND royalty level. Compliance with the Huawei code of conduct would shield SEP holders from the gaze of competition law and, at the same time, protect implementers from the threat of an injunction and the resulting disruptive effects on sales and production.

More specifically, transposing the essential-facility doctrine’s “exceptional circumstances” test to the standard development scenario,[43] the CJEU finds that the exceptional circumstances in this context are that the patent be essential to standards established by a development organization, and that those patents obtain essentiality status only in return for the holder’s irrevocable commitment to license on FRAND terms.[44]

These premises yield a willing-licensee test. While the alleged infringer must demonstrate more than just a mere willingness to negotiate, the SEP holder is burdened with making the first move and respecting the corresponding behavioral requirements. It is up to the SEP holder to alert the infringer of an alleged violation by naming the patent and specifying how it has been infringed. It is also up to the SEP holder to present a specific and written license offer on FRAND terms, specifying the amount of the royalty and how it is to be calculated.

By contrast, it is up to the alleged infringer to respond diligently to that offer, in accordance with well-established commercial practices, and in good faith, implying that the alleged infringer must not employ delay tactics. If the alleged infringer does not accept the offer, it must make a concrete counteroffer under FRAND conditions within a short period of time. From the point that this counteroffer is rejected by the patent holder, the license seeker already using the patent must provide adequate security, namely by providing a bank guarantee or by depositing the required amounts. In addition, the license seeker must present a precise accounting of past acts of use. If the patent infringer’s conduct does not meet these requirements, or if it employs delay tactics, an allegation of abuse of dominant position against the patent holder would not apply.

As a result, there is no FRAND determination under Huawei. The CJEU did not attempt to specify the content of FRAND, but instead crafted a negotiation framework with mutual obligations for the SEP holder and potential licensees. The goal was to bring parties back to the negotiation table, using the threats of antitrust liability and intellectual-property enforcement as levers to reach a mutually agreeable FRAND royalty level and, ultimately, to avoid a third-party determination. Further, recognizing the existence of different FRAND conditions is implicit in the back-and-forth dialectic of Huawei etiquette. By allowing parties to make diverging FRAND offers and counteroffers, the CJEU acknowledged that there is no unambiguous FRAND point and that several distributional FRAND prices may exist. Therefore, FRAND comprises a range of terms. After all, it is unclear how a rule establishing there could be just one “true” FRAND rate would help parties to negotiate successfully, while identifying a range of legitimate FRAND terms confers on the parties significant and desirable flexibility.[45]

In summary, instead of the methodological approach deployed in the United States, which is concerned with developing tools that allow courts to define royalty rates, the European approach relies on a set of conditions that assess the licensing parties’ FRAND compliance during the negotiations, in order ultimately to leave the actual determination of FRAND rates to the parties themselves.[46] The goal of such an approach is to yield economically efficient royalty rates,[47] and that goal is shared by the European Commission. Indeed, in the 2017 communication on “Setting out the EU approach to Standard Essential Patents,” the Commission stated that the parties are “best placed to arrive at a common understanding of what are fair licensing conditions and fair rates, through good faith negotiations,” and that “there is no one-size-fits-all solution to what FRAND is,” since what can be considered fair and reasonable differs from sector to sector and over time.[48]

  1. The Commission’s Assessment of Huawei

In its SEP proposal, the European Commission appears to agree with the Huawei decision’s premise that the relevant parties are best-positioned to determine the terms most appropriate for their specific situation.[49] According to the Commission, however, Huawei has proven inadequate to handle the complexities of SEP-licensing negotiations. as both licensing and enforcement remain inefficient.[50]

Notably, the Commission observes that national courts have adopted differing approaches to FRAND determinations and the process for negotiating FRAND terms and conditions—in particular, with regard to certain specific aspects of the Huawei test.[51] As affirmed in the study that informed the Commission’s Impact Assessment, despite the Huawei procedural framework’s added value of legal certainty, the Commission believes many uncertainties remain and that the framework fails to resolve several contentious debates regarding the scope and content of FRAND obligations, which has, in turn, led national courts to divergent interpretations of the various steps.[52] The Commission therefore justifies its intervention at the EU level by arguing that approaches taken by member states could diverge “partly depending on whether businesses in those Member States are predominantly SEP holders or implementers.”[53]

Few would dispute that the CJEU left a number of issues unresolved in Huawei (e.g., the existence of dominant position with respect to SEPs, the possibility of applying the framework to non-practicing entities, the definition of FRAND terms) and national courts, especially in Germany, have been busy filling those gaps.[54] Diverging approaches have sometimes been adopted, in particular with regard to implementation of the parties’ duties. Among these are determining the proper order to follow in scrutinizing the FRAND nature of offers and counteroffers; the timing and basis for counteroffers; and the ways in which implementers are expected to behave to demonstrate their willingness to strike a deal. But over the years that Huawei has been implemented, national courts have performed their roles effectively, tackling the risks of both hold-up and hold-out, and untangling various contentious questions about SEPs.[55]

Moreover, empirical evidence does not support the Commission’s findings. Indeed, as already noted, inputs provided to the Impact Assessment found that the volume of SEP-litigation cases has been stable in Europe and represent only a very small proportion of patent disputes overall. There is also no evidence that SEP-licensing conditions systematically suppress or delay standards implementation, thus inducing parties to opt out from standards-related innovation.[56]

Other data further contradict the Commission’s narrative. Discrepancies among national interpretations do not appear particularly significant, as the bulk of SEP disputes are litigated in just one member state (i.e., Germany).[57] The same applies to the suspicion that diverging interpretations may reflect the geographical concentration of SEP holders, since around 80% of all SEPs held by EU companies are owned by just two companies (i.e., Nokia and Ericsson), which are established in Finland and Sweden respectively.[58]

IV.   Co-Living Dangerously

The SEP proposal’s FRAND determinations are supposed to coexist with the Huawei bargaining framework. The Commission has been keen to point out that the initiative will “neither interpret the CJEU case law nor adopt methodologies for FRAND determination per se,”[59] and that the conciliation procedure “will complement and not replace the Huawei v ZTE process.”[60] Moreover, according to the Commission, as the proposal “will establish mechanisms that promote the necessary transparency, increase certainty and reduce the potential for inconsistent rulings,” this will be “a significant improvement in the courts’ abilities to handle SEP disputes.”[61] These statements are hard to believe, however, as the rationale for the conciliation process is to replace national courts in implementing Huawei, and the approach the proposal takes is at odds with Huawei.

The Commission seeks to justify the new procedure on grounds that it is needed to address purported uncertainties stemming from diverging national applications of the Huawei procedural framework that, the Commission contends, make it unfit to ensure an efficient SEP-licensing and enforcement ecosystem. Therefore, to prevent or at least limit divergent interpretations, the conciliator would act as a more informed and presumably wiser judge. Indeed, the SEP proposal’s implicit assumption is that conciliators would have greater expertise than courts and would succeed where they have failed. As a consequence, the conciliator will examine the parties’ offers and counteroffers, and consider the Huawei negotiation steps.[62] Further, its final report will contain a summary of the process and include that information needed to assess whether the SEP holder engaged in the Huawei process with an implementer.[63] Moreover, the conciliator’s suggested FRAND royalty could also be used by both SEP holders and implementers to determine the appropriate amount of security the implementer needs to provide under Huawei.[64]

But ultimately, the SEP proposal endorses an anti-injunction approach inconsistent with the CJEU’s stance. In Huawei, the CJEU attempted to strike a fair balance among the relevant interests. Toward this aim, as the SEP proposal notes, the CJEU recognized SEP holders’ right to seek to enforce its patents in national courts.[65] The CJEU acknowledged that the exercise of remedies to protect intellectual-property rights may be considered unlawful for the purposes of competition law only in exceptional circumstances, and subordinated any limitation of injunctions to the demonstration of the licensee’s willingness to sign a FRAND deal.

In contrast, under the SEP proposal, injunctive relief would become unavailable by default and patent holders would be restricted from filing an infringement suit prior to initiating a FRAND determination, regardless of implementers’ willingness. Implementers, meanwhile, would remain free to request determinations of invalidity, as well as declarations of noninfringement and non-essentiality. Indeed, the FRAND determination would also be carried out even if the implementer failed to provide appropriate security, as required under Huawei.

As a result, in contrast to the CJEU’s approach, the SEP proposal would create an imbalance and an uneven bargaining position between licensors and license seekers. Rather than tackling both hold-up and hold-out opportunistic behavior, the Commission appears concerned only about the former—holding that the ability to negotiate a FRAND rate “without the threat of an injunction is important for any implementer.”[66] The only measure proposed to balance the obligations on both sides would be the issuance of provisional injunctions of a financial nature against the alleged infringer, which would ostensibly provide SEP holders who have agreed to license their SEPs on FRAND terms with the necessary judicial protection.[67] This right to an “injunction” would, however, preclude seizing the alleged infringer’s property, including the seizure or delivery of products suspected of infringing a SEP. Moreover, in determining whether a provisional injunction of a financial nature is adequate, the proposal suggests considering, among other things, the applicant’s economic capacity—in particular for small and medium-sized enterprises (SMEs)—in order to prevent abusive use of such a measure.[68]

While it is highly doubtful that the proposed provisional injunctions would discourage hold-out, the conciliation mechanism does not provide any measure that would offer implementers incentives to reach an agreement and accept the results. In addition to being nonbinding, the SEP proposal establishes that the FRAND determination procedure may take as long as nine months, thus potentially granting implementers the ability to benefit from a delay of patent holders’ requests for injunctive relief against infringement.

As reported by the Impact Assessment, SEP holders who responded during the public consultation identified their main problem as being the various reasons used by implementers to delay taking up a license.[69] In this regard, the conciliation process’ nine-month timeframe should be added to the long negotiations that SEP holders already face, as well as the time spent on potential litigation.[70] While the mandatory conciliation procedure would greater expose SEP holders to opportunistic conduct by implementers, the latter would be able to take advantage of further delays without losing any leverage. Indeed, given that the FRAND determination is nonbinding, implementers that pursue hold-out tactics might simply wait until SEP owners complete the process and, if dissatisfied with the outcome, challenge the results.[71]

  1. New Between the Commission and German Courts

Reconciling the different approaches taken by the SEP proposal and the Huawei framework will prove particularly interesting in Germany. Since the majority of SEP disputes in the EU are litigated there, the Huawei framework has primarily implemented by German courts.[72] Hence, it is evident that any reference to divergent interpretations at the national level mainly points in the direction of Germany. Indeed, the Commission mentions German case law several times with regard to disagreements and controversies over FRAND terms and conditions.[73]

Further, and more importantly, the Commission’s concern regarding the impact of injunctions on implementers (i.e., the risk that the mere threat of an injunction may place undue pressure on negotiations and force the potential licensee to accept non-FRAND rates) is in striking contrast with the German courts’ traditional stance. Indeed, as a result of the public consultation, the Impact Assessment reported the claims of some respondents according to which: “the national court practice increasingly favours SEP holders” and this “particularly applies in Germany after the Sisvel v. Haier decisions of Germany’s Federal Court of Justice”; “some courts have (mis)interpreted Huawei v. ZTE to impose unrealistic requirements on implementers to prove their willingness”; “injunctions for SEPs under FRAND commitment have become more readily available … in particular [because of] the decision of the Germany’s Federal Court of Justice Sisvel v. Haier.”[74] More explicitly, it is argued that the German Federal Court “effectively contradicted the CJEU’s judgement Huawei v. ZTE and brought back the Orange Book Standard … re-shift[ing] the main burden of negotiations on licensees and increase[ing] the availability of injunctions.”[75]

This background conflict between the European Commission and German courts, which predates Huawei, resurfaces in the Commission’s SEP proposal. After all, the Huawei test itself was developed in response to a request for a preliminary ruling advanced by a German court, the District Court (Landgericht) of Dusseldorf.

The CJEU ruling is usually interpreted as being opposed to the framework previously crafted by the German Federal Court of Justice (BGH) in Orange Book Standard.[76] According to the Orange Book framework, a defendant seeking to rely on a competition-law defense against an SEP holder’s claim for injunction would have to advance an unconditional license offer (i.e., the signing of a FRAND license cannot be made conditional on a court’s findings regarding infringement or the validity of the patent in question) and would be required to behave from the point of offer as if the plaintiff had accepted it. Hence, the defendant must have already paid the offered royalties, albeit in escrow.

In contrast to this approach, which allowed the competition-law defense in a very few cases, the Commission took a different stance in Motorola and Samsung. Those rulings established that infringers could avoid an injunction by stating a (rather unspecific) willingness to license and by accepting the binding determination of a third party.[77] Faced with these differing evaluation criteria endorsed by the BGH and the European Commission—which appeared one-sided in favor of patent holders and infringers, respectively—the CJEU set its own framework to pursue a novel and more balanced approach.

In the aftermath of Huawei, the Sisvel v. Haier decisions aligned German case law with the new European framework, setting the general principles according to which implementers are required to show an unequivocal and unconditional willingness to sign a FRAND license and to engage in constructive negotiations to pursue this aim. This does not, however, preclude the infringer from reserving the right to challenge the use of the license.

Because of the difficulties inherent in applying the willingness criteria in concrete example, Huawei’s case-by-case detection remains challenging, as proven by the German lower courts’ jurisprudence.[78] But despite the perception that German case law is overly friendly to patent owners, however, the attention devoted to the conduct of implementers is consistent with the principles set out by the CJEU, as Huawei revolves around the willingness of license seekers.[79]

V.     The SEP Proposal’s Uncertain Added Value

The apparent incongruity between the Commission’s SEP proposal and the existing Huawei framework raises a more general question about whether the initiative could possibly be effective, which is further underscored by the inference that the proposed FRAND-determination process is essentially a response to the German courts’ approach.

Given the differing perspectives embraced by the European Commission and German courts, it is not unreasonable to wonder to what extent the conciliator’s advisory opinion will exert any influence on courts, as the conciliation procedure is mandatory but nonbinding. Indeed, courts may simply disregard the FRAND rate proposed by the conciliator. Further, it is unclear whether courts would consider the degree of the licensee’s engagement in the conciliation procedure as a factor for the willingness assessment under Huawei.

Furthermore, the core of the SEP proposal (including the FRAND determination) would not apply to identified use cases of certain standards, or parts thereof, for which there is “sufficient evidence” that SEP-licensing negotiations on FRAND terms do not give rise to “significant difficulties or inefficiencies.”[80] Therefore, certain standards or implementations can be deemed exempt by means of a delegated act, in particular those for which there are “well established commercial relationships and licensing practices,” “such as the standards for wireless communications.”[81] The Commission offers no guidance or specifications, however, on the meaning of the terms that would justify such an important exemption.

Moreover, the newly envisaged FRAND-determination procedure closely resembles the already established alternative-dispute-resolution methods, such as the mediation of FRAND disputes offered by such organizations as the World Intellectual Property Organization (WIPO). As there is no indication that a mediation process overseen by the EUIPO would hold greater appeal to the relevant parties, a further question is raised regarding how the new process would provide additional benefits compared to the solutions already in place.

Finally, although the new regulation would apply to SEPs in-force in one or more member states, FRAND determinations will nevertheless also concern global SEP licenses, unless otherwise specified by the parties in case both parties agree to the FRAND determination or by the party that requested the continuation of the FRAND determination.[82] The EU has been concerned recently by the forum-shopping strategies some companies have undertaken, which have led to increasing requests of antisuit injunctions (ASIs)—that is, orders restraining a party from pursuing foreign proceedings or enforcing a judgment obtained in foreign proceedings.[83] This surge of ASIs and the risks related to their opportunistic use in the SEP landscape is linked to the role that certain national courts (particularly in the United States, United Kingdom, and China) have come to play in establishing themselves as de facto global licensing tribunals. In such a scenario, ASIs may represent a new and dangerous unfair practice adopted, in particular, by Chinese companies, with the support of Chinese courts and authorities. The presumed goal is to promote domestic economic interests and undervalue foreign patents by setting significantly lower FRAND rates. For these reasons, the EU has filed a case against China at the World Trade Organization (WTO) for preventing EU companies from going to foreign courts to protect their SEPs.[84]

If it is true, however, that national courts’ willingness to establish themselves as global licensing tribunals has spurred a race to the courthouse, thereby offering incentives for forum shopping and the adoption of countermeasures such as ASIs, the extraterritorial effects of the SEP proposal may contribute to such a race to the bottom among jurisdictions. Indeed, from a geopolitical perspective, the provision simply appears to be a retaliation against “certain emerging economies” that are taking a “much more aggressive approach in promoting home-grown standards and providing their industries with a competitive edge in terms of market access and technology roll-out.”[85]

All these elements call into question the added value provided by the European initiative and its effective capacity to pursue the identified objectives—namely, to achieve more transparency, predictability, and efficiency in SEPs licensing. Because of these illustrated uncertainties, the SEP proposal appears likely to add confusion and to induce licensing disputes, rather than supporting balanced and successful SEP-licensing negotiations.

VI.   Conclusion

The Huawei bargaining framework represents the EU’s distinctive approach in SEP-licensing negotiations. It revolves around the principles that the relevant parties are best-positioned to determine the terms most appropriate to their specific situation, and that the exercise of remedies to protect intellectual-property rights may be considered abusive only in exceptional circumstances. Against this background, the willing-licensee test aims to ensure a balance among the differing interests of licensors and license seekers.

Despite some points of criticism and unresolved issues, the economic literature supports the European way. By promoting cooperative solutions and thus moving the parties away from the courtroom and toward the negotiating table, the Huawei framework is more likely to result in economically efficient royalty rates than alternative approaches.

The European Commission apparently does not share this view. By imposing a mandatory conciliation procedure that would impede SEP holders from seeking injunctive reliefs and would allow implementers to further delay the attainment of a license, the SEP proposal seeks to discard Huawei. The intervention seems essentially motivated by dissatisfaction with the German courts’ interpretation and implementation of Huawei, namely with their supposed patent-owner-friendly and pro-injunction approach.

The proposed FRAND-determination procedure, however, represents a solution to a problem that does not exist. The empirical evidence informing the Commission’s initiative shows that there isn’t an SEP-litigation problem in Europe. Moreover, the proposal would just add confusion and uncertainties to the current landscape, both because of its troublesome relationship with Huawei and because some provisions—such as those granting extraterritorial effects to FRAND determinations—would favor litigation and a race to the courthouse.

If the expected added value of the SEP proposal is questionable, at best, it appears far from the Commission’s purported goal of providing “a uniform, open and predictable information and outcome on SEPs for the benefit of SEP holders, implementers and end users, at Union level.”[86]

[1] European Commission, Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents and Amending Regulation (EU) 2017/1001, COM(2023)232.

[2] Id., Recital 2.

[3] See Group of Experts on Licensing and Valuation of Standard Essential Patents, Contribution to the Debate on SEPs, (2021) https://ec.europa.eu/docsroom/documents/45217 (all websites last visited 28 Sep. 2023); European Commission, Making the Most of the EU’s Innovative Potential. An Intellectual Property Action Plan to Support the EU’s Recovery and Resilience, COM(2020) 760 final; European Commission, Setting Out the EU approach to Standard Essential Patents, COM(2017) 712 final; European Commission, ICT Standardisation Priorities for the Digital Single Market, COM(2016) 176 final.

[4] European Commission, Intellectual Property – New Framework For Standard-Essential Patents, Call for Evidence for an Impact Assessment (2022). https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13109-Intellectual-property-new-framework-for-standard-essential-patents_en.

[5] Id.

[6] See, e.g., Centre for a Digital Society of the European University Institute, Feedback to EU Commission’s Public Consultation (2023), https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13109-Intellectual-property-new-framework-for-standard-essential-patents/F3432699_en; Christine A. Varney, Makan Delrahim, David J. Kappos, Andrei Iancu, Walter G. Copan, & Noah Joshua Phillips, Comments on European Commission’s Draft “Proposal for Regulation of the European Parliament and of the Council Establishing a Framework for Transparent Licensing of Standard Essential Patents,” (2023), available at https://ipwatchdog.com/wp-content/uploads/2023/04/Comments-on-European-Commission-Draft-SEP-Regulation-by-Former-US-Officials-1.pdf; Robin Jacob & Igor Nikolic, ICLE Feedback to EU Commission’s Public Consultation, International Center for Law & Economics (2023). https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13109-Intellectual-property-new-framework-for-standard-essential-patents/F3433917_en.

[7] European Commission, Impact Assessment Report Accompanying the Document Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents and Amending Regulation (EU) 2017/1001, SWD(2023) 124 final.

[8] Justus Baron, Pere Arque-Castells, Amandine Leonard, Tim Pohlmann, & Eric Sergheraert, Empirical Assessment of Potential Challenges in SEP Licensing, Study for the European Commission (2023), available at https://www.iplytics.com/wp-content/uploads/2023/04/Empirical-Assessment-of-Potential-Challenges-in-SEP-Licensing.pdf.

[9] Impact Assessment, supra note 7, 11-17 and 25.

[10] Baron, Arque-Castells, Leonard, Pohlmann, & Sergheraert, supra note 8, 108.

[11] Id., 109-110.

[12] Id., 185.

[13] Id., 164.

[14] SEP Proposal, supra note 1, Article 3.

[15] Varney, Delrahim, Kappos, Iancu, Copan, & Phillips, supra note 6.

[16] SEP Proposal, supra note 1, Title VI.

[17] CJEU, 16 July 2015, Case C-170/13, Huawei Technologies Co Ltd v. ZTE Corp, ECLI:EU:C:2015:477.

[18] Impact Assessment, supra note 7, 43 and 58.

[19] European Commission, 29 April 2014, Cases AT.39985 and AT.39939.

[20] Bundesgerichtshof (BGH), 6 May 2009, Case KZR 39/06.

[21] SEP Proposal, Explanatory Memorandum, supra note 1, 4; European Commission, supra note 4, 3.

[22] Baron, Arque-Castells, Leonard, Pohlmann, & Sergheraert, supra note 8, 71-73.

[23] Impact Assessment, supra note 7, 154 and 158. See also BMW Group, Feedback to EU Commission’s Public Consultation (2023), https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13109-Intellectual-property-new-framework-for-standard-essential-patents/F3434362_en; Mercedes-Benz Group, Feedback to EU Commission’s Public Consultation (2023), https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13109-Intellectual-property-new-framework-for-standard-essential-patents/F3430251_en; and Volkswagen, Feedback to EU Commission’s Public Consultation (2023), https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13109-Intellectual-property-new-framework-for-standard-essential-patents/F3430555_en (welcoming the SEP Proposal for ensuring that, parallel to FRAND determination, any filed proceedings are suspended and that no injunction request may be brought before national courts, “particularly in Germany”); Baron, Arque-Castells, Leonard, Pohlmann, & Sergheraert, supra note 8, 96 (arguing that German courts are relatively strict on the interpretation of the Huawei step regarding the assessment of whether the response has been expressed diligently and without engaging in delaying tactics).

[24] SEP Proposal, supra note 1, Recital 8 and Article 38(6).

[25] Impact Assessment, supra note 7, 15 and 51-52.

[26] SEP Proposal, supra note 1, Recital 32; See Impact Assessment, supra note 7, 43-44 (estimating that the total cost of a conciliation will be eight times lower than the average SEP court cost and that up to 24 court cases could be avoided).

[27] SEP Proposal, supra note 1, Article 39.

[28] Id., Article 34.

[29] Id., Article 56(4).

[30] Id., Article 1(3-4).

[31] Id., Article 34(4).

[32] Id., Recital 34.

[33] Id., Article 38.

[34] Id., Article 46.

[35] Id., Article 47.

[36] Id., Article 37.

[37] Id., Articles 50-58.

[38] Huawei, supra note 17.

[39] European Commission, Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Cooperation Agreements, C/2023/4752, (2023) OJ C 259/1, Chapter 7.

[40] Huawei, supra note 17, para. 55

[41] Id., para. 42.

[42] Id., para. 47.

[43] CJEU, 6 April 1995, Joined Cases C-241/91 P and 242/91 P, RTE and ITP v. Commission, ECLI:EU:C:1995:98; CJEU, 26 November 1998, Case C-7/97, Oscar Bronner GmbH & Co. KG v. Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co. KG, Mediaprint Zeitungsvertriebsgesellschaft mbH & Co. KG and Mediaprint Anzeigengesellschaft mbH & Co. KG, ECLI:EU:C:1998:569; CJEU, 29 April 2004, Case C-418/01, IMS Health v. NDC Health, ECLI:EU:C:2004:257; General Court, 17 September 2007, Case T-201/04, Microsoft v. Commission ECLI:EU:T:2007:289.

[44] Huawei, supra note 17, paras. 49 and 51.

[45] See, e.g., UK Court of Appeal, Unwired Planet [2018] EWCA Civ 2344 (overturning the single FRAND rate definition endorsed by Justice Colin Birss in Unwired Planet [2017] EWHC 1304 (Pat) and stating that the economic evidence does not support such an inflexible approach and that it is unrealistic to suggest that two parties, acting fairly and reasonably, will necessarily arrive at precisely the same set of license terms as two other parties, also acting fairly and reasonably and faced with the same set of circumstances).

[46] See Chryssoula Pentheroudakis & Justus A. Baron, Licensing Terms of Standard Essential Patents: A Comprehensive Analysis of Cases, JRC Science for Policy Report (2017), 123-124, https://publications.jrc.ec.europa.eu/repository/handle/JRC104068 (arguing that, in order to determine a single royalty rate within a hypothetical negotiation framework, U.S. courts are methodologically sophisticated when they approach FRAND, while European courts are more reluctant to define a single royalty rate and instead focus on the conduct of the parties during the bilateral negotiations to assess whether they complied with the specific FRAND commitments made prior to awarding injunctions).

[47] Id., 13 and 165 (arguing that the theoretical concepts behind FRAND and the empirical data available to determine FRAND rates for specific patents and products merely allow for the determination of a potentially broad FRAND range, rather than a unique FRAND rate, thus suggesting that implementation of the FRAND range should not seek to calculate a single royalty).

[48] European Commission, supra note 3, 6.

[49] See SEP Proposal, supra note 1, Recital 31 (stating that the regulation’s primary objective is to facilitate negotiations and out-of-court dispute resolution).

[50] European Commission, supra note 4, 3.

[51] SEP Proposal, Explanatory Memorandum, supra note 1, 4-5; European Commission, supra note 4, 3.

[52] Baron, Arque-Castells, Leonard, Pohlmann, & Sergheraert, supra note 8, 58-59 and 96.

[53] European Commission, supra note 4, 3.

[54] For analysis of the German case law, see Andrea Aguggia & Giuseppe Colangelo, SEPs Infringement and Competition Law Defence in German Case Law, Queen Mary Journal of Intellectual Property (forthcoming); Giuseppe Colangelo & Valerio Torti, Filling Huawei’s Gaps: The Recent German Case Law on Standard Essential Patents, 38 European Competition Law Review 538 (2017).

[55] See Jacob & Nikolic, supra note 6 (referring, e.g., to the guidance provided regarding what the FRAND rate between the parties ought to be, the scope of a FRAND license, the meaning of a FRAND commitment’s non-discrimination requirements, and whether FRAND commitments require SEP owners to offer licenses at different levels of the production chain); see also Adam Mossoff, Feedback to EU Commission’s Public Consultation (2023), https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13109-Intellectual-property-new-framework-for-standard-essential-patents/F3434471_en.

[56] Baron, Arque-Castells, Leonard, Pohlmann, & Sergheraert, supra note 8, 108 and 164.

[57] Id., 71-73.

[58] Impact Assessment, supra note 7, 8.

[59] SEP Proposal, Explanatory Memorandum, supra note 1, 5.

[60] Impact Assessment, supra note 7, 58.

[61] SEP Proposal, Explanatory Memorandum, supra note 1, 5.

[62] Impact Assessment, supra note 7, 32.

[63] Id., 42.

[64] Id.

[65] SEP Proposal, Explanatory Memorandum, supra note 1, 3.

[66] Impact Assessment, supra note 7, 42; see also Apple, Feedback to EU Commission’s Public Consultation, (2023) 3, https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13109-Proprieta-intellettuale-nuovo-quadro-per-i-brevetti-essenziali/F3434446_it (arguing that, if properly developed and implemented, the conciliation would limit SEP holders’ ability to use injunction threats to hold up licensees and coerce above-FRAND royalties).

[67] SEP Proposal, supra note 1, Recital 35 and Article 34(4).

[68] Id., Recital 35.

[69] Impact Assessment, supra note 7, 12.

[70] Id. (reporting the findings of the study conducted by Baron, Arque-Castells, Leonard, Pohlmann, & Sergheraert, supra note 8, 145, according to which negotiations amount, on average, to three years and that litigation may add another 2.5 years).

[71] Igor Nikolic, Some Practical and Competition Concerns with the Proposed Regulation on Standard Essential Patents, 4iP Council EU AISBL (2023) 5, https://www.4ipcouncil.com/research/some-practical-and-competition-concerns-proposed-regulation-standard-essential-patents.

[72] Impact Assessment, supra note 7, 58.

[73] See, e.g., European Commission, supra note 4, 3; Impact Assessment, supra note 7, 154 and 158; SEP Proposal, Explanatory Memorandum, supra note 1, 4. See also Baron, Arque-Castells, Leonard, Pohlmann, & Sergheraert, supra note 8, 59 (arguing that, in many member states, there currently are only a limited number of decisions under Huawei and that, in light of the controversies and diverging court approaches observed in Germany, it may be difficult for parties to SEP-licensing negotiations to predict how the courts of these EU member states would decide).

[74] Impact Assessment, supra note 7, 154, 155, and 158. The reference is to BGH, 5 May 2020, Case KZR 36/17, Sisvel v. Haier (Einwand I) and BGH, 24 November 2020, Case KZR 35/17, Sisvel v. Haier (Einwand II).

[75] Impact Assessment, supra note 7, 158.

[76] Supra note 20.

[77] Supra note 19.

[78] See Aguggia & Colangelo, supra note 54.

[79] Id.

[80] SEP Proposal, supra note 1, Article 1(4).

[81] Id., Recital 4.

[82] Id., Article 38(6).

[83] For a comparative analysis, see Giuseppe Colangelo & Valerio Torti, Anti-suit Injunctions and Geopolitics in Transnational SEPs Litigation, 14 European Journal of Legal Studies 45 (2022).

[84] European Commission, EU Challenges China at the WTO to Defend its High-Tech Sector, (2022) https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1103.

[85] SEP Proposal, Explanatory Memorandum, supra note 1, 2.

[86] Id., 10.

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Intellectual Property & Licensing

ICLE Comments to USPTO on Issues at the Intersection of Standards and Intellectual Property

Regulatory Comments We thank the International Trade Administration (ITA), the National Institute of Standards and Technology (NIST) and the U.S. Patent and Trademark Office (USPTO) for this . . .

We thank the International Trade Administration (ITA), the National Institute of Standards and Technology (NIST) and the U.S. Patent and Trademark Office (USPTO) for this opportunity to comment on its call for evidence concerning a new framework for standard-essential patents.[1] The International Center for Law and Economics (ICLE) is a nonprofit, nonpartisan research center whose work promotes the use of law & economics methodologies to inform public-policy debates. We believe that intellectually rigorous, data-driven analysis will lead to efficient policy solutions that promote consumer welfare and global economic growth. ICLE’s scholars have written extensively on competition, intellectual property, and consumer-protection policy.

In this comment, we express concerns about global regulatory developments in the standard-essential patent (SEP) industry. The European Union is in the process of considering legislation that would fundamentally alter the landscape of global standards setting, making it more difficult for inventors to enforce their intellectual-property rights.[2] Not only will this legislation have profound ramifications for companies located all over the globe but—as the USPTO’s call for comments recognizes—the EU risks kicking off a global race to the bottom in regulating SEPs that will ultimately harm innovation and slow the diffusion of groundbreaking technologies.

We are concerned that a tit-for-tat response intended to counteract bad policies in the EU (and among other allied nations) is doomed to do more harm than good. Erecting what amount to protectionist barriers—even if in response to similar regulations abroad—would diminish U.S. interests, as well as those of our partners. Instead, the agencies should be seeking opportunities to influence the policy decisions made in foreign jurisdictions, in the hope that those entities will pursue better policies.

For obvious reasons, the way intellectual-property disputes are resolved has tremendous ramifications for firms that operate in standard-reliant industries. Not only do many of the firms in this space derive a large share of their revenue from patents but, perhaps more importantly, the prospect of litigation dictates how firms structure the transfer of intellectual-property assets. In simple terms, ineffectual judicial remedies for IP infringements and uncertainty concerning the resolution of IP disputes discourage firms from concluding license agreements in the first place.

The key role that IP plays in these industries should impel policymakers to proceed with caution. By virtually all available metrics, the current system works. The development of innovative technologies through standards development organizations (SDOs) has led to the emergence of some of the most groundbreaking technologies that consumers use today;[3] and recent empirical evidence suggests that many of the alleged ills that have been associated with the overenforcement of intellectual-property rights simply fail to materialize in industries that rely on standard-essential patents.[4]

At the same time, “there is no empirical evidence of structural and systematic problems of holdup and royalty stacking affecting standard-essential patent (“SEP”) licensing.”[5] Indeed, “[t]he notion that implementers in such innovation–driven industries are being suffocated by an insurmountable patent royalty stack has turned out to be nothing more than horror fiction.”[6] Yet, without a sound basis, the anti-injunctions approach increasingly espoused by policymakers unnecessarily “adds a layer of additional legal complexity and alters bargaining processes, unduly favoring implementers.”[7]

Licensing negotiations involving complex technologies are legally intricate. It is simply not helpful for a regulatory body to impose a particular vision of licensing negotiations if the goal is more innovation and greater ultimate returns to consumers. Instead, where possible, policy should prefer allowing parties to negotiate at arm’s length and to resolve disputes through courts. In addition to maintaining the sometimes-necessary remedy of injunctive relief against bad-faith implementers, this approach allows courts to explore when injunctive relief is appropriate on a case-by-case basis. Thus, over the course of examining actual cases, courts can refine the standards that determine when an injunctive remedy is inappropriate. Indeed, the very exercise of designing ex ante rules and guidelines to inform F/RAND licensing is antagonistic to optimal policymaking, as judges are far better situated and equipped to make the necessary marginal adjustments to the system.

Against this backdrop, our comments highlight several factors that should counsel preserving the rules that currently govern SEP-licensing agreements:

To start, the SEP space is far more complex than many recognize. Critics often assume that collaborative standards development creates significant scope for opportunistic behavior—notably, patent holdup. The tremendous growth of SEP-reliant industries and market participants’ strong preference for this form of technological development, however, suggest these problems are nowhere near as widespread as many believe.

Second, it is important not to overlook the important benefits conferred by existing IP protections. This includes the advantages inherent in pursuing injunctions rather than damages awards.

Third, weakening the protections afforded to SEP holders would also erode the West’s technological leadership over economies that are heavily reliant on manufacturing, and whose policymakers routinely undermine foreign firms’ intellectual-property rights. In short, while IP promotes innovation, weakened patent protection has second-order effects that are often overlooked, such as ceding advantages to China’s manufacturing sector and thereby exacerbating U.S.-China tensions.

Fourth, while mandated transparency in SEP negotiations may appear beneficial, the reality is more complex, as disclosure requirements can have mixed effects. Further, transparency mandates would likely require government interventions, such as essentiality checks, which can be very costly.

Finally, collective SEP rate-setting raises antitrust issues that stem from firms’ need to share sensitive data in order to determine a standard’s value. Vertically integrated SEP holders setting collective royalties on the inputs they manufacture could enable price-fixing and collusion. Safeguards like third-party mediation in patent pools may be needed so that joint SEP rate negotiation does not violate antitrust rules barring competitors from fixing prices.

I.        Regulatory Developments in Foreign Jurisdictions

In their call for comments, the agencies essentially ask whether regulatory developments in foreign jurisdictions threaten U.S. technological leadership in industries that rely on standard-essential patents and, if so, how the United States should respond:

Do the intellectual property rights policies of foreign jurisdictions threaten any of U.S. leadership in international standard setting, U.S. participation in international standard setting, and/or the growth of U.S. SMEs that rely on the ability to readily license standard essential patents?

If responding affirmatively to question 1, what can the Department of Commerce do to mitigate the effects of any adverse foreign policies relating to intellectual property rights and standards? Please clearly identify any such adverse foreign policies with specificity.[8]

Recent regulatory developments in the European Union loom large over the agencies’ two questions. On April 27, the European Commission published its Proposal for a Regulation on Standard Essential Patents (“SEP Regulation”). The SEP Regulation’s proclaimed aims are to ensure that end users—including small businesses and EU consumers—benefit from products based on the latest standardized technologies; make the EU attractive for standards innovation; and encourage both SEP holders and implementers to innovate in the EU, make and sell products in the EU, and be competitive in non-EU markets.[9]

While we share the agencies’ concern, responding to this foreign legislation (and other international responses that are likely to arise) by enacting similar policies would only exacerbate the situation and further erode U.S. technological leadership. In fact, several of the EU legislation’s shortcomings that would be rendered more destructive if the United States responded in kind.

As ICLE-affiliated scholars have explained in comments on the draft European legislation,[10]  the available evidence does not support a finding of market failure in SEP-licensing markets that would justify intrusive regulatory oversight. Instead, the Commission’s own evidence points to the low incidence of SEP litigation and no systemic negative effects on SEP owners and implementers. The mobile-telecommunication market, which is claimed to have the most SEP litigation and licensing inefficiencies, has over the years seen rapid growth, expansion, declining consumer prices, and new market entry.

Some market imperfections are necessary-but-not-sufficient conditions for regulatory intervention. Regulation might not be necessary or proportionate if its aims could be achieved with less costly instruments.

The EU’s proposed SEP Regulation appears to pursue the value-redistributive function of imposing costs on only one group (SEP owners), while accruing all benefits to non-EU (or US)-based standard implementers. It is difficult to find justification for such value redistribution from the evidence presented on the functioning of SEP licensing markets.

The proposed EU SEP Regulation applies to all standards licensed on FRAND terms. It is unclear how many standards would be caught and why all standards licensed on FRAND terms are presumed to be inefficient, requiring regulatory intervention. One early study identified 148 standards licensed on FRAND terms in a 2010 laptop. No evidence was presented that licensing inefficiencies of these standards caused harms in laptop markets.

The EU legislation would require evaluators and conciliators that need to be qualified and experienced experts in relevant fields. There are unlikely to be enough evaluators to conduct essentiality checks reliably on such a massive scale.

To make matters worse, the proposed SEP Regulation raises competition concerns, as it requires SEP owners to agree on global aggregate royalty rates. No safeguards are provided against the exchange of sensitive commercial information and possible cartelization.

There is also a risk that legislation seeking to make the standardization space more transparent, by mandating aggregate royalty-rate notifications and nonbinding expert opinions on global aggregate royalty rates, may lead to even more confusion for implementers.

Finally, the EU’s proposed SEP Regulation would have extraterritorial effects. Indeed, while the SEP Register and system of “essentiality checks” created by the regulation would apply only for patents in force in EU Member States, its system of nonbinding opinions on aggregate royalties and FRAND determination would apply worldwide, covering portfolios in other countries. Other countries—including the United States—may follow suit and introduce their own regulations on SEPs. Such regulations may be used as a strategic and protectionist tool to devaluate the royalties of innovative SEP owners. The proliferation of regulatory regimes would make SEP licensing even more costly, with unknown effects on the viability of the current system of collaborative and open standardization.

Considering the above, it would appear unwise for the United States to mimic the EU’s draft SEP regulation. In its current form, the regulation is likely to harm both U.S. and European innovators. In turn, this threatens the west’s technological leadership on a global stage and will serve the interests of jurisdictions whose economies rely heavily on implementing standard-essential technologies and that generally have weaker IP protection than either the United States or the EU.

Instead, the agencies should look for opportunities to work with their foreign counterparts to improve the proposed EU legislation (and other similar measures in other jurisdictions). Neither EU nor U.S. interests will be well-served by these sorts of regulatory endeavors, least of all if both areas enact ill-advised SEP policies. Sound policy should be focused on ensuring that the successful SEP ecosystem continues to perform as impressively as it has to date. Enacting defensive measures against the EU legislation will create a tit-for-tat dynamic that will double the obstacles faced by innovators in both the EU and the United States, allowing foreign rivals to take advantage of the situation.

II.      Regulatory Restraint

In their call for comments, the agencies ask what private entities can do to boost America’s participation in international standard-setting efforts:

What more can other entities do, such as standards development organizations, industry or consumer associations, academia, or U.S. businesses to help improve American leadership, participation in international standard setting, and/or increased participation of small to medium-sized enterprises that rely on the ability to readily license standard essential patents?[11]

While this is a good way to look at the issue (today’s standardization practices were born of spontaneous market interactions, rather than government fiat, which leaves private entities with a clearly significant role to play in this space), one should not overestimate the extent to which governments can identify inefficiencies that may afflict standard-reliant industries and nudge private parties to resolve them—e.g., by asking SDOs to curb the use of injunctions or encourage collective royalty-setting agreements.

It’s tempting for lawmakers to look at the complex SEP licensing process as a Gordian Knot to be solved through regulatory fiat. But pursuing Alexander’s solution, though expedient, would similarly leave the SEP licensing ecosystem in tatters.

Consider smartphones: Tens of thousands of patents are essential to making smartphone technology work.[12] Some critics posit that this makes it extremely difficult to market smartphones effectively, but no evidence supports this claim, and the proliferation of smartphones suggests otherwise.[13] It is worth considering that cellphone technology marks the culmination of research efforts spanning the entire globe. The coordinated efforts of these numerous firms are not the result of government coercion, but the free play of competitive forces.

Coordination on such a vast scale is no simple task. And yet, of the vast array of options available to them, an increasing number of firms have settled on one particular paradigm to solve these coordination problems: the development of new technologies and open standards within SDOs. These organizations and their members are responsible not only for wireless cellular technologies (e.g., 3G, 4G, 5G) but also for such high-profile technologies as Wi-Fi, USB, and Blu-ray, among many others.[14]

Throughout history, economic actors have sought to reap the benefits of specialization and interoperability. This has led to the emergence of various standardization practices, ranging from de facto standards and competition for the market, to complex standard-setting procedures within SDOs.

Ultimately, because interoperability standards rely on firms being able to coordinate their behavior, standardization necessarily implies a degree of incentive compatibility. That is, parties will coordinate their behavior only if they expect that doing so will be mutually beneficial. “This mutuality of considerations has been at the heart of the voluntary FRAND bargain from the outset, given that any risks of holdup or misappropriation of information are bilateral—that is, such risks work in both directions.”[15] This implies that SDOs must design balanced internal rules that bring both patent holders and implementers to the table through mutually agreeable interoperability standards, and guarantee that they will continue to work together into the future as new technologies emerge.[16]

Establishment of SDO interoperability standards typically follows a process by which interested parties come together and identify technological problems that they might be able to solve cooperatively.[17] SDO members include a wide range of stakeholders, including (among others): companies that manufacture products implementing the technology, companies that market services that use the standards, companies that operate networks that practice the standards, technology firms that create technologies that are included in the standards, academic institutions, and government agencies.[18]

The SDO provides information to interested parties about the standard-setting project and a forum for collaboration.[19] Members attend standard-setting meetings, vote on standardization decisions, and make technological contributions. Participation in standard setting can be subject to a substantial fee and always entails considerable time. There are policies and procedures (“bylaws”) that govern the process of adoption and standard development. Participation in SDOs is voluntary and is subject to acceptance of the terms and conditions set out in the bylaws. These aim to allow the most appropriate technology to become standardized, based on several factors. This is a democratic and consensus-based process designed to ensure that no single participant can manipulate it. Many SDOs also allow for post-adoption appeals by dissenting members. This ultimately leads to a series of technical specifications upon which implementers can build products.

Throughout this process, a critical challenge for SDOs is to ensure that their internal regulations remain “incentive compatible.” To optimize their technological output and ensure the success of their standards, SDOs must attract the right mix of both implementers and innovators. “Most succinctly, the ‘right membership’ comprises a significant portion of each class of stakeholder whose active support is needed to achieve broad adoption.”[20] They thus need to design internal procedures that strike a balance between the sometimes-diverging interests of these stakeholders.

This is no simple task. Although there are numerous ways in which these rules may favor a particular group of participants, allocating the profits of standardization is perhaps the most salient. To a first approximation, SEP holders will tend to favor internal rules that allow them to charge prices that are close to the monopoly benchmark (though not the double-marginalization one). Conversely, implementers will generally prefer policies that limit SEP holders’ returns (so long as this does not dry up the supply of inventions). However, these first-order incentives may not always hold true in the real world. Practical considerations may, for instance, urge SEP holders to accept a pricing structure that is not “profit maximizing” in the short run, but which may incentivize further cooperation or the adoption of an underlying technology.[21]

The above has important consequences for patent and antitrust policy in SEP-reliant industries. As we have explained, collaborative standard development gives rise to complex incentives, as well as a web of heterogeneous and deliberately incomplete contracts (i.e., where the parties choose not to specify some aspects of their agreement).[22] Given this diversity, uniform and centralized policies that needlessly constrain the range of negotiation—such as a federal-enforcement presumption against injunctions—would likely lead to fewer agreements and inefficient outcomes in numerous cases, especially compared to case-by-case adjudication of F/RAND commitments under the common law of contract.[23]

In short, “standards organizations and market participants are better than regulators at balancing the interests of patent holders and implementers.”[24] Interfering with the emergent norms of the standard-development industry thus risks undermining innovators’ expectations of a reasonable return on their investments:

Each of the innovative companies that agrees to be an SSO participant does so with the understanding of the investments they have made in research, development, and participation, as well as the risks that their innovations may not be selected for incorporation in the standard. They bear these investments and risk with the further understanding that they will receive adequate and fair remuneration as part of the FRAND commitment they have made to the SSO.

Unfortunately, the actions of the courts and the proposals by commentators are greatly undermining the value and benefits of SSO participation that are expected….[25]

III.    The Importance of Injunctions

The agencies’ call for comments appears concerned that current standardization practices may be hindering U.S. innovation and the creation of startups in the SEP space:

Are current fair, reasonable, and non-discriminatory (FRAND) licensing practices adequate to sustain U.S. innovation and global competitiveness? Are there other international models which would better serve U.S. innovation in the future?

Are there specific U.S. intellectual property laws or policies that inhibit participation in standards development?

Are there specific U.S. intellectual property laws or policies that inhibit growth of SMEs that rely on licensing and implementing standards? [26]

While they are not mentioned explicitly in the agencies’ call for comments, the role of injunctions sought against implementers by SEP holders looms large over the above questions. The use of injunctions is arguably one of the most contentious—and widely misunderstood—topics in SEP policy debates. While often portrayed as a means for inventors to extract unreasonable royalties from helpless implementors injunctions are, in fact, a critical legal tool that encourages all parties in the standardization space to come to the negotiation table. In fact, even the EU’s draft regulation on SEPs—which in many other respects reduces the protections afforded to inventors—implicitly recognizes the crucial role that injunctions play, by ensuring that the various proposed SEP transparency and arbitration procedures do not undermine parties’ ability to obtain an injunction:

The obligation to initiate FRAND determination should not be detrimental to the effective protection of the parties’ rights. In that respect, the party that commits to comply with the outcome of the FRAND determination while the other party fails to do so should be entitled to initiate proceedings before the competent national court pending the FRAND determination. In addition, either party should be able to request a provisional injunction of a financial nature before the competent court.[27]

A.   The Fundamental Value of Injunctions

Historically, one of the most important features of property rights in general, and patents in particular, is that they provide owners with the power to exclude unauthorized use by third parties and thus enable them to negotiate over the terms on which instances of use or sale will be authorized.[28] While the ability to exclude is important in creating the incentive to innovate, it is equally—and perhaps more—important in facilitating the licensing of inventions.[29]

There are many reasons that someone may invent a new product or process. But if they are to be optimally encouraged to distribute that product and thus generate the associated social welfare, it is crucial that they retain the ability to engage supply chains to commercialize the invention fully.[30] “[T]he patent system encourages and enables not just invention but also innovation by providing the basic, enforceable property rights that facilitate (theoretically) efficient organizations of economic resources and the negotiations necessary to coordinate production among them.”[31] If a patent holder believes that the path to commercialization and remuneration is hindered by infringers, she will have less incentive to invest fully in the commercialization process (or in the innovation in the first place).

Removing the injunction option… not only changes the bargaining range (and makes infringement a valid business option), but, by extension, it lowers the expected returns of investing in the creation and commercialization of patents, in the first place…. With a no-injunction presumption…, as long as the expected cost of litigation is less than the expected gain from infringing without paying any royalties, potential licensees will always have an incentive to pursue this strategy. The net result is a shift in bargaining power so that, even when license agreements are struck, royalty rates are lower than they would otherwise be, as well as an increased likelihood of infringement.[32]

Because infringement affects both the initial incentive to innovate as well as the complex process of commercialization, courts have historically granted injunctions against those who have used a patent without proper authorization.

B.   Damages Alone Are Often Insufficient

Injunctions are almost certainly the most powerful means to enforce property rights and remedy breaches. Nonetheless, courts may sometimes award damages, either in addition to or as an alternative to awarding an injunction.[33] It is often difficult to establish the appropriate size of an award of damages, however, when intangible property—such as invention and innovation, in the case of patents—is the core property being protected.

In this respect, a key feature of patents is that they possess uncertain value ex ante. The value of a particular invention or discovery cannot be known until it is either integrated into the end-product that will be distributed to consumers, or actually used by consumers.[34] This massive upfront uncertainty creates the need for technology designers to carefully structure their investments such that the risk/reward ratio remains sufficiently low. This, in turn, means ensuring that their inventions’ commercialization can reasonably be expected to generate sufficient profits.

Commercializing highly complex innovations, such as pharmaceuticals and advanced technologies, requires a large degree of risk taking and capital investment, as well as massive foregone opportunities. As such, it will often be difficult, or even impossible, to adequately calculate appropriate monetary damages for the unauthorized use of a patent, even if the patent’s ex post value is knowable. Put differently, the inability to bargain effectively for royalties post-standardization may “deter investment… and ultimately harm consumers.”[35]

While it is necessary to establish damages for violations after the fact, it will nearly always be appropriate to award injunctions to deter ongoing violations. This would further allow the property owner to do their own value calculations, based on their investments, sunk costs, and—critically—lost opportunities that were foregone in order to realize the particular invention. “[A] property rule is superior to a liability rule when ‘the court lacks information about both damages and benefits.’ Without accurate information, the damages may be set below the actual level of harm, encouraging the ‘injurer’ (or infringer) to engage in an excessive level of activity—in our case, increased infringement.”[36]

C.   Injunctions Encourage Efficient Licensing Negotiations

In addition to the concerns outlined in the previous section, it is worth noting that curbs on injunctions pertaining to SEPs would make inventors bear the risk of opportunistic behavior, thus enabling  firms to opt out of commercial negotiations and wait for potential litigation. In turn, this would tilt the bargaining scale in their favor in subsequent royalty negotiations undertaken in the shadow of prior court proceedings.[37]

The U.S. Supreme Court’s 2006 decision in eBay v. MercExchange offers a case in point. The court rejected the “general rule” that a prevailing patentee is entitled to an injunction.[38] In the aftermath of the decision, courts refused to grant injunctions in considerably more cases.[39]

Nearly two decades later, however, questions remain regarding eBay’s effect on patent licensing, negotiation, and litigation.[40] In particular, it is likely that eBay systematically distorted the relative bargaining positions in SEP licensing in favor of implementers, at the expense of patent holders. One post-eBay assessment argues that limiting injunctions to prevent holdup results in more “false positives”—where patent holders with no designs of patent holdup are nonetheless denied injunctive relief—than it does deterrence of actual holdups.[41] The result is a reduction in the cost of willful infringement and “under-compensation” for innovation.[42]

One of the important features of injunctions that critics miss is that they are not solely a tool for simple exclusion from property, but a tool that promotes efficient bargaining.[43] If a property holder ultimately has the right to exclude infringers, there is relatively more weight placed on the importance of initial bargaining for licenses. “It is the very threat of the injunction right—and its associated high transaction costs—that brings the parties to the negotiating table and motivates them to draw upon the full scope of their knowledge and creativity in forming contractual and institutional solutions to the perceived holdup problem.”[44]

Post-eBay, “efficient infringement” becomes a viable choice for firms seeking to maximize profits. Thus, implementing firms seeking to pay as little as possible for use of an invention have incentive to disregard the bargaining process with a patent holder altogether. The relative decline in the importance of injunctions narrows the bargaining range. The narrower range of prices that an implementing firm will offer means that, even where it does bargain, agreement will be less likely. Where rightsholders can be reasonably expected to enforce their patent rights, by contrast, the bargaining range is expanded and agreement is more likely, because the initial cost of negotiating for a license is relatively less than always (or usually) opting for “efficient infringement”; that is, infringement becomes less efficient.

The ultimate tension is not between seeking damages or an injunction, but between whether a firm opts to negotiate or to litigate, while facing the risk of some combination of damages and injunction on the back end.

This reality is particularly important in the context of SDOs, where implementers and innovators are in a constant dance both to maximize their own profits as well as to facilitate the product of an incomplete, joint agreement that binds each party. “The seminal example of intentional contractual incompleteness is the F/RAND commitment common in many [SDO’s] IPR policies.”[45] Permitting one party, through weakened legal doctrine, to circumvent or artificially constrain the bargaining process inappropriately imbalances the careful commercial relationships that should otherwise exist.

In the SEP context, furthermore, it is rarely mentioned that “an implementer’s decision to reject a certifiably F/RAND license and continue to infringe is contrary to the spirit of the F/RAND framework as well.”[46]

Moreover, it is not typically the case that a negotiation process would end with an injunction and a refusal to license, as critics sometimes allege. Rather, the threat of an injunction is important in hastening an infringing implementer to the table and ensuring that protracted litigation to determine the appropriate royalty (which is how such disputes do actually end) is costly not only to the patentee, but also to the infringer. As James Ratliff and Daniel Rubinfeld explain:

[T]he existence of that threat does not lead to holdup as feared by those who propose that a RAND pledge implies (or should embody) a waiver of seeking injunctive relief. If RAND terms are reached by negotiation, the negotiation is not conducted in the shadow of an injunctive threat but rather in the shadow of knowledge that the court will impose a set of terms if the parties do not reach agreement themselves. The crucial element of this model that substantially diminishes the likelihood that the injunctive threat will have real bite against an implementer willing to license on RAND terms is the assumption that an SEP owner maintains its obligation to offer a RAND license even if its initial offer is challenged by the implementer and, further, even if the court agrees with the SEP owner that its initial offer was indeed RAND. Thus any implementer that is willing to license on court-certified RAND terms can avoid an injunction by accepting those RAND terms without eschewing any of its challenges to the RAND-ness of the SEP owner’s earlier offers.[47]

Ultimately, this means that an implementer that accepts nominally F/RAND terms need not be an actual “willing licensee,” but instead can gain that designation as a matter of law without ever accepting a royalty rate within the true bargaining range that includes the licensor’s valid injunction threat. “[B]y stripping the SEP holder’s right to injunctive relief, [a no-injunction rule] may enable a potential licensee to delay good faith negotiation of a F/RAND license and the patent holder could be forced to accept less than fair market value for the use of the patent…. Undermining this bargaining outcome using antitrust rules runs a significant risk of doing more harm than good.”[48]

For the purposes of this proceeding, the lesson is clear: U.S. policy needs to return to a neutral position in which both parties in a F/RAND negotiation are encouraged to reach mutually agreeable terms in arm’s length licensing transactions. The effects of eBay and its progeny have distorted that bargaining process. Here, the agencies have an important role to play in pressing the need for this change.

IV.    Increased Transparency Is No Free Lunch

The agencies’ call for comments asks whether increased transparency requirements in the SEP space could make SEP licensing more efficient:

What can the Department of Commerce do to mitigate emergence or facilitate the resolution of FRAND licensing disputes? Can requiring further transparency concerning patent ownership make standard essential patent (SEP) licensing more efficient? What are other impediments to reaching a FRAND license that the Department of Commerce could address through policy or regulation?[49]

But while fostering transparency may appear to be a win-win proposition for all parties in the standardization space, the reality is far more complex. In many instances, inventors are already required to disclose their standard essential patents—and these requirements have ambiguous effects.[50] Given this, demands for further transparency would almost certainly entail some form of government intervention, such as the creation of SEP registers and government-run essentiality checks, which seek to verify whether the patents that firms declare as standard-essential are truly so.

Unfortunately, these attempts to make SEP-reliant industries more transparent are anything but costless. The EU’s draft SEP regulation offers a case in point. The regulation would create a system of government-run essentiality checks and nonbinding royalty arbitrations that seek to make the process easier for implementers. But as ICLE scholars have written, this scheme will prove extremely difficult and costly to operate in practice.[51] Much the same would be true of attempts to introduce similar measures in the United States.

The proposed EU regulation would rely on qualified experts to work as evaluators and conciliators. Evaluators will need specialized knowledge of the particular technological area in which they will conduct essentiality checks. The European Commission estimates that there are about 1,500 experts (650 patent attorneys and 800 patent examiners) qualified to do essentiality checks in the EU.[52]

The sheer magnitude of the task, however, will require many more evaluators and it is very doubtful that the optimal number of potential qualified experts are even available to join this process. For certain, special arrangements would need to be made with patent offices to grant patent examiners leave to conduct essentiality checks. Each year, evaluators would need to test a random sample of up to 100 SEPs if requested by each SEP owner or an implementer per standard. Thus, the amount of work may exponentially increase depending on how many standards are caught by the regulation.

If 148 FRAND-licensed standards per laptop are to serve as a rough proxy, then we might expect more than 100-200 standards to be checked for essentiality every year. In addition, if SEP owners and implementers regularly use the possibility of testing up to 100 SEPs per standard and per SEP owner, the sheer magnitude of work may exceed the capacity of patent attorneys. Patent attorneys may find it challenging to regularly engage in such high volumes of essentiality checks while also serving other clients. And why should they do it at all unless the rate of pay is at least what they could earn in a patent law firm? To be blunt, the work would not be as much fun as acting for real clients, so the pay would probably have to be even higher to attract applicants.

Consequently, it is very unlikely that the capability even exists to annually perform a large number of essentiality checks of registered SEPs. If the requirements to become an evaluator were relaxed to address this workload, this would cast doubt on the reliability of the whole system. There is no point in building a battleship unless you are sure you can get a competent crew.

Additionally, the patent attorneys most likely to be familiar with these technologies may well also find themselves with conflicts of interest. They will probably have worked for some SEP owners or implementers. Elaborate rules to avoid such conflicts would need to be implemented to prevent patent attorneys who were, or still are, engaged with certain clients from becoming evaluators of those clients’ registered SEPs. The conflicts problem would, of course, apply not just to individual attorneys but to their entire firms.

Conciliators would also need to be experts in the field. They might come from the ranks of retired judges, seasoned former company officials, or experienced lawyers. Conflict-of-interest provisions would also be needed to ensure their independence and impartiality in mandatory FRAND determinations.  But the job would, again, have to be sufficiently attractive, both in remuneration and in work content and culture. The Commission has made no investigation as to whether a sufficiently large pool of credible individuals could be found to make the system work.

Of course, there are well-established voluntary systems of conciliators and mediators, some of which are used now to help resolve FRAND disputes. But the proposal adds the idea of compulsory mediation or conciliation. There is scant evidence that either system works in other commercial disputes around the world, and it is unclear why it should be assumed to work here.

In short, it is doubtful that a government-operated scheme of essentiality checks and SEP-royalty arbitrations could reach satisfactory outcomes, as the expertise to do so is lacking and attracting potentially thousands of professionals from the private sector would be too costly. The result is that any government scheme along these lines is unlikely to have the necessary staffing to conduct its mission to the requisite standard. It would thus risk doing more harm than good.

V.      SEP Rights and China’s ‘Cyber Great Power’ Ambitions

In their call for comments, the agencies express a desire to protect the United States’ leading position in the field of standard development and implementation:

Are there steps that the Department of Commerce can take regarding intellectual property rights policy that will help advance U.S. leadership in standards development and implementation for critical and emerging technologies?[53]

The agencies essentially ask what active steps they could take to preserve the United States’ leading position. This, however, ignores the arguably more important question: What steps should the United States avoid taking? As we explain below, U.S. agencies should be particularly careful not to weaken intellectual-property protection in ways that may, ultimately, favor firms in other jurisdictions, such as China.

Observers often regard intellectual property as merely protecting original creations and inventions, thus boosting investments. But while IP certainly does this, it is important to look beyond this narrow framing. Indeed, by protecting these creations, intellectual-property protection—particularly that of patents—produces beneficial second-order effects in several important policy areas.

Consequently, weakening patent protection could have detrimental ramifications that are routinely overlooked by policymakers. This includes giving a leg up to jurisdictions that are heavily geared toward manufacturing, rather than  R&D, and specifically to  China (with knock-on effects for ongoing political tensions between these two superpowers).

As the USPTO has observed:

Innovation and creative endeavors are indispensable elements that drive economic growth and sustain the competitive edge of the U.S. economy. The last century recorded unprecedented improvements in the health, economic well-being, and overall quality of life for the entire U.S. population. As the world leader in innovation, U.S. companies have relied on intellectual property (IP) as one of the leading tools with which such advances were promoted and realized.[54]

The United States is a world leader in the production and commercialization of IP, and naturally seeks to retain that comparative advantage.[55] IP and its legal protections will become increasingly important if the United States is to maintain its prominence, especially when dealing with international jurisdictions, like China, that don’t offer similar levels of legal protection.[56] By making it harder for patent holders to obtain injunctions, licensees and implementers gain the advantage in the short term, because they are able to use patented technology without having to engage in negotiations to pay the full market price. In the case of many SEPs—particularly those in the telecommunications sector—a great many patent holders are U.S.-based, while the lion’s share of implementers are Chinese. Potential anti-injunction policies may thus amount to a subsidy to Chinese infringers of western technology.

At the same time, China routinely undermines western intellectual-property protections through its industrial policy. The government’s stated goal is to promote “fair and reasonable” international rules, but it is clear that China stretches its power over intellectual property around the world by granting “anti-suit injunctions” on behalf of Chinese smartphone makers, designed to curtail enforcement of foreign companies’ patent rights.[57]

In several recent cases, Chinese courts have claimed jurisdiction over F/RAND issues.[58] In Oppo v. Sharp, the Supreme People’s Court of China determined that Chinese courts can set the global terms of what is a fair and reasonable price for a license,[59] even if that award would be considerably lower than in other jurisdictions. This decision follows Huawei v. Conversant, in which a Chinese court for the first time claimed the ability to issue an anti-suit injunction against the Chinese company.[60]

All of this is part of the Chinese government’s larger approach to industrial policy, which seeks to expand Chinese power in international trade negotiations and in global standards bodies.[61] As one Chinese Communist Party official put it: “Standards are the commanding heights, the right to speak, and the right to control. Therefore, the one who obtains the standards gains the world.”[62] Chinese President Xi Jinping frequently (but only domestically) references China’s “cyber great power” ambitions: “We must accelerate the promotion of China’s international discourse power and rule-making power in cyberspace and make unremitting efforts towards the goal of building a cyber great power.”[63] Chinese leaders are intentionally pursuing a two-track strategy of taking over standards bodies and focusing on building platforms to create path dependencies that cause others to rely on Chinese technology.[64] As a Hinrich Foundation Report notes:

Trade and technical standards are inherently interrelated. They are mutually reinforcing. But Beijing treats standard setting, and standards organizations, as competitive domains. This approach risks distorting global trade. Beijing does not support a neutral architecture where iterative negotiating strives for technical interoperability. Instead, Beijing promotes an architecture that bolsters and cements Chinese competitiveness. Due to China’s size and centralization, the consequences of this approach will reverberate across the international system. Given the nature of emerging technology and standards, the consequences will endure.[65]

Insufficient protections for intellectual property will hasten China’s objective of dominating collaborative standard development in the medium- to long-term.[66] U.S. entrepreneurs are able to engage in the types of research and development that drive innovation because they can monetize those innovations. Reducing the returns for patents that eventually become standards will lead to less investment in those technologies. It will also harm the competitive position of American companies that refrain from collaborating because the benefits don’t outweigh the costs, including “missing the opportunity to steer a standard in the manner most compatible with a company’s product offerings, falling behind competitors, or failing to head off broad adoption of a second standard….”[67]

Simultaneously, this will engender a switch to greater reliance on proprietary, closed standards rather than collaborative, open standards. Proprietary standards (and competition among those standards) are sometimes the most efficient outcome: for instance, when the costs of interoperability outweigh the benefits. The same cannot be said, however, for government policies that effectively coerce firms into adopting proprietary standards by raising the relative costs of the collaborative standard-development process. In other words, there are social costs when firms are artificially prevented from taking part in collaborative standard setting and forced instead to opt for proprietary standards.

Yet this is precisely what will happen to U.S. firms if IP rights are not sufficiently enforceable. Indeed, as explained above, collaborative standardization is an important driver of growth.[68] It is crucial that governments do not needlessly undermine these benefits by preventing American firms from competing effectively in these international markets.

These harmful consequences are magnified in the context of the global technology landscape, and in light of China’s strategic effort to shape international technology standards.[69] With U.S. firms systematically deterred from participating in the development of open technology standards, Chinese companies, directed by their government authorities, will gain significant control of the technologies that will underpin tomorrow’s digital goods and services. The consequences are potentially catastrophic:

The effect of [China’s] approach goes far beyond competitive commercial advantage. The export of Chinese surveillance and censorship technology provides authoritarian governments with new tools of repression. Governments that seek to control their citizens’ access to the internet are supportive of Beijing’s “cyber sovereignty” paradigm, which can lead to a balkanized internet riddled with incompatibilities that impede international commerce and slow technological innovation. And when cyber sovereignty is paired with Beijing’s push to redefine human rights as the “collective” rights of society as defined by the state, authoritarian governments gain a shield of impunity for violations of universal norms.[70]

With Chinese authorities joining standardization bodies and increasingly claiming jurisdiction over F/RAND disputes, there should be careful reevaluation of the ways weakened IP protection would further hamper the U.S. position as  a leader in intellectual property and innovation.

To return to the framing question, yes, there are steps the agencies could take to secure and promote U.S. leadership in intellectual-property-intensive industries. The first step, as noted throughout this comment, is to refrain from promoting policies that unnecessarily imbalance the negotiation process between innovators and implementers. The second step is twofold. First, work with trustworthy partners, like the EU, to make sure that U.S. Allies’ IP policies are in alignment with and are geared  toward promoting neutral standards that allow tech industries to thrive. The second part is to advocate for trade policies that dissuade countries like China from using their domestic courts and regulatory agencies as protectionist entities designed simply to advance China’s national interests.

VI.    Competition Concerns with Aggregate Royalties

In the call for comments, the agencies ask:

Do policy solutions that would require SEP holders to agree collectively on rates or have parties rely on joint negotiation to reach FRAND license agreements with SEP holders create legal risks? Are there other concerns with these solutions?[71]

A host of competition concerns are implicated in this question, in that it requires SEP owners to negotiate and ultimately agree on aggregate royalty rates for standards.  This may require SEP owners to exchange sensitive commercial information relevant to establishing the value that devices derive from using the standardized technology. Competition-sensitive data could include projected revenues on a per-unit basis following the incorporation of connectivity in the end products, the number of end products sold on the market, actual and forecast sales, and price projections.[72] The competitive dangers inherent in this process are more serious for those vertically integrated SEP owners, who simultaneously hold SEPs and manufacture standard-implementing products. They would effectively agree to set the costs (royalties) for their inputs and exchange data about their downstream sales.

Jointly negotiated rates could therefore potentially run afoul of antitrust laws that prohibit companies from engaging in price-fixing and collusion. Requirements to jointly negotiate aggregate royalty rates should thus be accompanied by safeguards and guidance that ensure such negotiations comply with antitrust law. An example would be royalty-rate negotiations in patent pools, where pool administrators take a mediatory role, collecting and protecting confidential information from pool members.[73]

It is also unclear whether these joint royalty negotiations would be of much use to either inventors or implementers. For example, the EU has proposed introducing an aggregate notification regulation along these lines. The regulation appears to allow multiple groups of SEP owners to jointly notify their views concerning the appropriate royalties for a given technology. This could add even more confusion for standard implementers. For example, some SEP owners could announce an aggregate rate of $10 per product, another 5% of the end-product price, while a third group would prefer a lower $1 per-product rate.

Moreover, it is unclear how joint aggregate royalty-rate notifications would change the existing practice of unilateral announcement of licensing terms. Many SEP owners already publicly announce their royalty programs in advance. To be on the safe side, SEP owners may simply notify their maximum preference, knowing that negotiations would lead to different prices depending on the unique details of various licensees. As a result, aggregate royalty rates may not produce meaningful data points.

Nonbinding expert opinions on global aggregate royalty rates could also add to the confusion. Implementers would likely initiate the process, which would then proceed in parallel with SEP owners’ joint notifications of aggregate rates. All these differing and possibly conflicting estimates might lead to even greater uncertainty. Moreover, if those providing nonbinding opinions are not universally regarded as “experts,” the parties are unlikely to respect such opinions.

Aggregate royalty notifications and nonbinding opinions might be used in the top-down method for FRAND-royalty determinations. A top-down method provides that the SEP owner should receive a proportional share of a standard’s total aggregate royalty. It requires establishing a cumulative royalty for a standard and then calculating the share of the total royalty for an individual SEP owner. This may be the reason for having aggregate royalty-rate notifications and opinions. At the same time, essentiality checks would still be needed to filter out which patents are truly essential, and to assess each individual SEP owner’s share.

We caution strongly against relying too heavily on the top-down approach for FRAND-royalty determinations. It is not used in commercial-licensing negotiations, and courts have frequently rejected its application. Industry practice is to use comparable licensing agreements. The top-down approach was applied in Unwired Planet v Huawei only as a cross-check for the rates derived from comparable agreements.[74] TCL v Ericsson relied on this method, but was vacated on appeal.[75] The most recent Interdigital v Lenovo judgment considered and rejected its use, finding “no value in Interdigital’s Top-Down cross-check in any of its guises.”[76] Moreover, the top-down approach, as currently applied, relies solely on patent counting. It fails to consider that not every patent is of equal value, nor that some patents may be invalid or not infringed by a specific device.

In short, there are important legal and practical obstacles to the joint negotiation of aggregate royalty rates. Legal mandates to conduct such negotiations would thus be of dubious added value to players in standard-reliant industries.





[1] U.S. Patent and Trademark Office, Joint ITA-NIST-USPTO Collaboration Initiative Regarding Standards, Federal Register (Sep. 27, 2023), https://www.federalregister.gov/documents/2023/09/27/2023-20919/joint-ita-nist-uspto-collaboration-initiative-regarding-standards; U.S. Patent and Trademark Office, Joint ITA–NIST–USPTO Collaboration Initiative Regarding Standards; Notice of Public Listening Session and Request for Comments, Federal Register (Sep. 11, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-09-11/pdf/2023-19667.pdf (“Call for Comments”).

[2] European Commission, Explanatory Memorandum for Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents and Amending Regulation (EU) 2017/1001, COM (2023) 232 Final (“Explanatory Memorandum”).

[3] See, e.g., Dirk Auer & Julian Morris, Governing the Patent Commons, 38 Cardozo Arts & Ent. L.J. 294 (2020).

[4] See, e.g., Alexander Galetovic, Stephen Haber & Ross Levine, An Empirical Examination of Patent Holdup, 11 J. Competition L. & Econ. 549 (2015). This is in keeping with general observations about the dynamic nature of intellectual property protections. See, e.g., Ronald A. Cass & Keith N. Hylton, Laws of Creation: Property Rights in the World of Ideas 42-44 (2013).

[5] Oscar Borgogno & Giuseppe Colangelo, Disentangling the FRAND Conundrum, DEEP-IN Research Paper (Dec. 5, 2019) at 5, available at https://ssrn.com/abstract=3498995.

[6] Richard A. Epstein & Kayvan B. Noroozi, Why Incentives for “Patent Holdout” Threaten to Dismantle FRAND, and Why It Matters, 32 Berkeley Tech. L.J. 1381, 1411 (2017).

[7] Borgogno & Colangelo, supra note 5, at 5.

[8] Call for Comments, supra note 1, Questions 1 and 2.

[9] Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents and Amending Regulation (EU) 2017/1001, COM (2023) 232 Final (“Draft SEP Regulation”).


[10] Robin Jacob & Igor Nikolic, ICLE Comments Regarding the Draft Regulation on Standard Essential Patents (Jul. 28, 2023), available at https://laweconcenter.org/wp-content/uploads/2023/07/ICLE-Comments-to-the-SEP-Regulation.pdf.

[11] Call for Comments, supra note 1, Question 3.

[12] See, e.g., Jorge Padilla, John Davies, & Aleksandra Boutin, Economic Impact of Technology Standards: The Past and the Road Ahead (2017), available at https://www.compasslexecon.com/wp-content/uploads/2018/04/CL_Economic_Impact_of_Technology_Standards_Report_FINAL.pdf (Section 3 has an in-depth discussion of the adoption of standards and the benefits to the growth of mobile technology); iRunway, Patent & Landscape Analysis of 4G-LTE Technology 9-12 (2012), https://www.i-runway.com/images/pdf/iRunway%20-%20Patent%20&%20Landscape%20Analysis%20of%204G-LTE.pdf.

[13] See, e.g., Galetovic, et al., supra note 4; Keith Mallinson, Don’t Fix What Isn’t Broken: The Extraordinary Record of Innovation and Success in the Cellular Industry under Existing Licensing Practices, 23 Geo. Mason L. Rev. 967 (2016); Damien Geradin, Anne Layne-Farrar, & Jorge Padilla, The Complements Problem within Standard Setting: Assessing the Evidence on Royalty Stacking, 14 B.U. J. Sci. & Tech. L.144 (2008).

[14] Auer & Morris, supra note 3, at 5.

[15] Epstein & Noroozi, supra note 6, at 1394.

[16] See, e.g., Daniel F. Spulber, Standard Setting Organisations and Standard Essential Patents: Voting and Markets, 129 Econ. J. 1477, 1502-03 (2018) (“The interaction between inventors and adopters helps explain the variation of decision rules among SSOs, ranging from majority rule to consensus requirements…. Technology standards will be efficient when SSO decision making reflects the countervailing effects of voting power and market power.”).

[17] See Kirti Gupta, How SSOs Work: Unpacking the Mobile Industry’s 3GPP Standards, in The Cambridge Handbook of Technical Standardization Law: Competition, Antitrust, and Patents (Jorge L. Contreras ed., 2017).

[18] See Kristen Jakobsen Osenga, Ignorance Over Innovation: Why Misunderstanding Standard Setting Organizations Will Hinder Technological Progress, 56 U. Louisville L. Rev. 159, 178 (2018); Andrew Updegrove, Value Propositions, Roles and Strategies: Participating in a SSO, in The Essential Guide to Standards, https://www.consortiuminfo.org/guide (last visited Jan. 23, 2022).

[19] Adapted from Auer & Morris, supra note 3, at 18-19.

[20] Andrew Updegrove, Business Considerations: Forming and Managing a SSO, in The Essential Guide to Standards, https://www.consortiuminfo.org/guide/forming-managing-a-sso/business-considerations (last visited Nov. 6, 2023).

[21] See, e.g., Jonathan M. Barnett, The Host’s Dilemma: Strategic Forfeiture in Platform Markets for Informational Goods, 124 Harv. L. Rev. 1861, 1883 (2010) (showing that firms routinely forfeit their intellectual assets in order to boost the growth of the platform they operate).

[22] See Joanna Tsai & Joshua D. Wright, Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts, 80 Antitrust L.J. 157, 159 (2015) (“SSOs [standard-setting organizations] and their IPR policies appear to be responsive to changes in perceived patent holdup risks and other factors. We find the SSOs’ responses to these changes are varied, and that contractual incompleteness and ambiguity persist across SSOs and over time, despite many revisions and improvements to IPR policies. We interpret the evidence as consistent with a competitive contracting process and with the view that contractual incompleteness is an intended and efficient feature of SSO contracts.”) (emphasis added).

[23] See, e.g., Daniel F. Spulber, Licensing Standard Essential Patents with FRAND Commitments: Preparing for 5G Mobile Telecommunications, 18 Co. Tech. L.J. 79, 147 (2020) (“Adjudication of SEP disputes guided by common law principles and comparable licenses complements SSO FRAND commitments and market negotiation of SEP licenses. Adjudication based on common law and comparable licenses provides general rules for the resolution of SEP disputes that does not restrict SSO IP policies and or interfere with consensus decision making by SSOs. Such adjudication also does not interfere with efficient market negotiation of SEP licenses.”).

[24] Id. at 148.

[25] Osenga, supra note 19, at 213-14.

[26] Call for Comments, supra note 1, Questions 4, 5, 6.

[27] Draft SEP Regulation, preamble at (35).

[28] Richard A. Epstein, The Clear View of The Cathedral: The Dominance of Property Rules, 106 Yale L.J. 2091, 2091 (1996) (“Property rights are, in this sense, made absolute because the ownership of some asset confers sole and exclusive power on a given individual to determine whether to retain or part with an asset on whatever terms he sees fit.”)

[29] See generally Edmund W. Kitch, The Nature and Function of the Patent System, 20 J.L. & Econ. 265 (1977); F. Scott Kieff, Property Rights and Property Rules for Commercializing Inventions, 85 Minn. L. Rev. 697 (2001).

[30] See, e.g., Barnett, supra note 22, at 856 (“Strong patents provide firms with opportunities to disaggregate supply chains through contract-based relationships, which in turn give rise to trading markets in intellectual resources, whereas weak patents foreclose those options.”).

[31] Dirk Auer, Geoffrey A. Manne, Julian Morris, & Kristian Stout, The Deterioration of Appropriate Remedies in Patent Disputes, 21 Federalist Soc’y Rev. 158, 160 (2020).

[32] Id. at 163.

[33] See, e.g., Doris Johnson Hines & J. Preston Long, The Continuing (R)evolution of Injunctive Relief in the District Courts and the International Trade Commission, IP Litigator (Jan./Feb. 2013) (citing Tracy Lee Sloan, The 1988 Trade Act and Intellectual Property Cases Before the International Trade Commission, 30 Santa Clara L. Rev. 293, 302 (1990) (“Out of 221 intellectual property cases between 1974 and 1987, the ITC found that only five failed to establish sufficient injury… for injunctive-type relief.”)), available at https://www.finnegan.com/en/insights/articles/the-continuing-r-evolution-of-injunctive-relief-in-the-district.html.

[34] And even then, the specific contribution of a particular patent to ultimate consumer value will remain uncertain. See Robert P. Merges, Of Property Rules, Coase, and Intellectual Property, 94 Colum. L. Rev. 2655, 2659 (1994) (“The problems with [clearly defining harms/benefits] in the IPR field result from the abstract quality of the benefits conferred by prior works and the cumulative, interdependent nature of works covered by IPRs. Valuation, then, is at least as great a problem as detection.”)

[35] See Richard Epstein, F. Scott Kieff, & Daniel Spulber, The FTC, IP, and SSOs: Government Hold-Up Replacing Private Coordination, 8 J. Competition L. & Econ. 1 (2012) at 21, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1907450 (“The simple reality is that before a standard is set, it just is not clear whether a patent might become more or less valuable. Some upward pressure on value may be created later to the extent that the patent is important to a standard that is important to the market. In addition, some downward pressure may be caused by a later RAND commitment or some other factor, such as repeat play. The FTC seems to want to give manufacturers all of the benefits of both of these dynamic effects by in effect giving the manufacturer the free option of picking different focal points for elements of the damages calculations. The patentee is forced to surrender all of the benefit of the upward pressure while the manufacturer is allowed to get all of the benefit of the downward pressure.”).

[36] Merges, supra note 38, at 2666-67 (quoting A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 Stan. L. Rev. 1075, 1092 (1980)).

[37] See Auer, et al., supra note 35, at 163 (“It also establishes this lower royalty rate as the ‘customary’ rate, which ensures that subsequent royalty negotiations, particularly in the standard-setting context, are artificially constrained.”).

[38] eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006).

[39] See Benjamin Petersen, Injunctive Relief in the Post-eBay World, 23 Berkeley Tech. L.J. 193, 196 (2008), (“In the two years after the Supreme Court’s ruling in eBay, there were thirty-three district court decisions that interpreted eBay when determining whether to grant injunctive relief to a patent holder. Of these decisions, twenty-four have granted permanent injunctions and ten have denied injunctions.”). See also Bernard H. Chao, After eBay, Inc. v. MercExchange: The Changing Landscape for Patent Remedies, 9 Minn. J.L. Sci. & Tech. 543, 572 (2008) (“For the first time, courts are not granting permanent injunctions to many successful patent plaintiffs.”); Robin M. Davis, Failed Attempts to Dwarf the Patent Trolls: Permanent Injunctions in Patent Infringement Cases Under the Proposed Patent Reform Act of 2005 and eBay v. MercExchange, 17 Cornell J.L. & Pub. Pol’y 431, 444 (2008) (“However, the first few district courts deciding patent cases following that decision granted injunctions to patent owners in the majority of cases, at a rate of approximately two-to-one.”).

[40] See generally Epstein & Noroozi, supra note 6, at 1406-08.

[41] Vincenzo Denicolò, Damien Geradin, Anne Layne-Farrar & A. Jorge Padilla, Revisiting Injunctive Relief: Interpreting eBay in High-Tech Industries with Non-Practicing Patent Holders, 4 J. Comp. L. & Econ. 571 (2008).

[42] Id. at 608. See also Vincenzo Denicolò, Do Patents Over-Compensate Innovators?, 22 Econ. Pol’y 681 (2007) (noting that, with respect to patents in general, “a preponderance of what evidence is currently available points against the over-reward hypothesis”).

[43] See, e.g., Mark Schankerman & Suzanne Scotchmer, Damages and Injunctions in Protecting Intellectual Property, 32 RAND J. Econ. 201 (2001).

[44] Epstein & Noroozi, supra note 6, at 1408.

[45] Tsai & Wright, supra note 23, at 163.

[46] James Ratliff & Daniel L. Rubinfeld, The Use and Threat of Injunctions in the RAND Context, 9 J. Competition L. & Econ. 14 (2013).

[47] Ratliff & Rubinfeld, supra note 50, at 7 (emphasis added).

[48] Tsai & Wright, supra note 23, at 182.

[49] Call for Comments, supra note 1, Question 9.

[50] See, e.g., Rudi Bekkers, Christian Catalini, Arianna Martinelli, Cesare Righi, and Timothy Simcoe. Disclosure Rules and Declared Essential Patents, 52 Research Policy, 104618, 3 (2023) (“Thus, allowing blanket disclosure can be efficient if the main purpose of a disclosure policy is to reassure prospective implementers that a license will be available. On the other hand, blanket disclosure shifts search costs from the patent holder (who presumably has a comparative advantage at finding its own essential patents) onto other interested parties, such as prospective licensees who wish to evaluate the scope and value of a firm’s dSEPs; other SSO participants seeking to make explicit cost-benefit comparisons of alternative technologies before committing to a standard; and regulators or courts that might use information about relevant dSEPs to determine reasonable royalties.”).

[51] See Jacob & Nikolic, supra note 10.

[52] See European Commission, Impact Assessment Report Accompanying the Document Proposal for a Regulation of the European Parliament and of the Council on Standard Essential Patents and Amending Regulation (EU) 2017/1001, SWD(2023) 124 final (“Impact Assessment”), at 101.

[53] Call for Comments, supra note 1, Question 10.

[54] See, e.g., U.S. Patent Office, Intellectual Property and the U.S. Economy: 2016 Update (2016), available at https://www.uspto.gov/sites/default/files/documents/IPandtheUSEconomySept2016.pdf.

[55] Shayerah Ilias Akhtar, Liana Wong & Ian F. Fergusson, Intellectual Property Rights and International Trade, at 6 (Congressional Research Service, May 12, 2020), available at https://crsreports.congress.gov/product/pdf/RL/RL34292 (“Intellectual property generally is viewed as a long-standing strategic driver of U.S. productivity, economic growth, employment, higher wages, and exports. It also is considered a key source of U.S. comparative advantage, such as in innovation and high-technology products. Nearly every industry depends on it for its businesses. Industries that rely on patent protection include the aerospace, automotive, computer, consumer electronics, pharmaceutical, and semiconductor industries.”).

[56] See, e.g., Martina F. Ferracane & Hosuk Lee-Makiyama, China’s Technology Protectionism and Its Non-negotiable Rationales, ECIPE (Jun. 2017), available at https://ecipe.org/publications/chinas-technology-protectionism. Consider that, even for actual citizens of the People’s Republic of China, individual rights are legally subordinate to “the interests of the state.” Const. of the People’s Rep. of China, Art. 51, available athttp://www.npc.gov.cn/englishnpc/constitution2019/201911/1f65146fb6104dd3a2793875d19b5b29.shtml. One has to imagine that the level of legal protections afforded foreign firms is no better, and surely must be subordinate to the objectives of China’s industrial policy, including the goal of leapfrogging the United States in IP production. See, e.g., Karen M. Sutter, “Made in China 2025” Industrial Policies: Issues for Congress (Congressional Research Service, Aug. 11, 2020), available at https://sgp.fas.org/crs/row/IF10964.pdf.

[57] See China Is Becoming More Assertive in International Legal Disputes, The Economist (Sep. 18, 2021), https://www.economist.com/china/2021/09/18/china-is-becoming-more-assertive-in-international-legal-disputes (“In the past year Chinese courts have issued sweeping orders on behalf of Chinese smartphone-makers that seek to prevent lawsuits against them in other countries over the use of foreign companies’ intellectual property… so that they (rather than foreign courts) can decide how much Chinese firms should pay in royalties to the holders of patents that their products use.”).

[58] See Matthew Laight, Shifting landscape in SEP FRAND litigation – 2021 will see hard fought disputes in China and India, digital business (Dec. 9, 2020), https://digitalbusiness.law/2020/12/shifting-landscape-in-sep-frand-litigation-2021-will-see-hard-fought-disputes-in-china-and-india.

[59] See RPX Corporation, China: Chinese Courts Can Set Global SEP License Terms, Rules Supreme People’s Court, Mondaq (Oct. 21, 2021), https://www.mondaq.com/china/patent/1120114/chinese-courts-can-set-global-sep-license-terms-rules-supreme-people39s-court.

[60] Id.

[61] See Rush Doshi, Emily De La Bruye?re, Nathan Picarsic, & John Ferguson, China as a “Cyber Great Power”: Beijing’s Two Voices in Telecommunications, Brookings Institute Foreign Policy Paper (Apr. 2021) at 16, available at https://www.brookings.edu/wp-content/uploads/2021/04/FP_20210405_china_cyber_power.pdf. (“In March 2018, Beijing launched the China Standards 2035 project, led by the Chinese Academy of Engineering. After a two-year research phase, that project evolved into the National Standardization Development Strategy Research in January 2020. The ‘Main Points of Standardization Work in 2020’ issued by China’s National Standardization Committee in March 2020 outlined intentions to ‘strengthen the interaction between the standardization strategy and major national strategies.’”).

[62] Quoted in id.

[63] Id. “The phrase ‘cyber great power’ is a key concept guiding Chinese strategy in telecommunications as well as IT more broadly. It appears in the title of almost every major speech by President Xi Jinping on China’s telecommunications and network strategy aimed at a domestic audience since 2014. But the phrase is rarely found in messaging aimed at external foreign audiences, appearing only once in six years of remarks by Foreign Ministry spokespersons. This suggests that Beijing intentionally dilutes discussions of its ambitions in order not to alarm foreign audiences.” Id. at 3 (emphasis added).

[64] See Danny Russel & Blake Berger, Is China Stacking the Technology Deck by Setting International Standards?, The Diplomat (Dec. 2, 2021), https://thediplomat.com/2021/12/is-china-stacking-the-technology-deck-by-setting-international-standards.

[65] Emily de la Bruyere, China’s Quest to Shape the World Through Standards Setting, Hinrich Foundation (Jul. 2021), at 11 (emphasis added), available at https://www.hinrichfoundation.com/research/article/tech/china-quest-to-shape-the-world-through-standards-setting.

[66] Although China is currently under-represented in most SDOs, that is already rapidly changing. See Justus Baron & Olia Kanevskaia, Global Competition for Leadership Positions in Standards Development Organizations, Working Paper (Mar. 31, 2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3818143. As Baron and Kanevskaia note, “[t]he surge in the number of leadership positions held by Huawei… [have] raised concerns that… Huawei [may] gain an undue competitive advantage over Western commercial and strategic interests.” Id. at 2.

[67] Updegrove, supra note 19.

[68] See id. at 30-36 (surveying the economic benefits from standardization). See also Soon-Yong Choi & Andrew B. Whinston, Benefits and Requirements for Interoperability in the Electronic Marketplace, 2 Tech. in Soc’y 33, 33 (2000) (“Economic benefits of interoperability result in lowered production or transaction costs typically utilizing standardized parts or automated processes. In the networked economy, the need for interoperability extends into an entire commercial processes, market organizations and products.”).

[69] Anna Gross, Madhumita Murgia & Yuan Yang, Chinese Tech Groups Shaping UN Facial Recognition Standards, Financial Times (Dec. 1, 2019), https://www.ft.com/content/c3555a3c-0d3e-11ea-b2d6-9bf4d1957a67 (“‘The drive to shape international standards… reflects longstanding concerns that Chinese representatives were not at the table to help set the rules of the game for the global Internet,’ the authors of the New America report wrote. ‘The Chinese government wants to make sure that this does not happen in other ICT spheres, now that China has become a technology power with a sizeable market and leading technology companies, including in AI.’”).

[70] Russel & Berger, supra note 67.

[71] Request for Comments, supra note 1,  Question 11.

[72] Igor Nikolic, Licensing Negotiations Groups for SEPs: Collusive Technology Buyers Arrangements? Their Pitfalls and Reasonable Alternatives, Les Nouvelles 350 (2021).

[73] Hector Axel Contreras & Julia Brito, Patent Pools: A Practical Perspective – Part II, Les Nouvelles 39 (2022).

[74] Unwired Planet v Huawei [2017] EWHC 711 (Pat).

[75] TCL v Ericsson, Case No. 8:14-cv-003410JVS-DFM (C.D. Cal. 2018); TCL v Ericsson, 943 F.3d 1360 (Fed. Cir. 2019)

[76] Interdigital v Lenovo [2023] EWHC 539 (Pat) 733.

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Intellectual Property & Licensing

Hit the Road Jack: The Auto Industry as the Next Vehicle for Predatory Infringement

Scholarship Abstract While patents, patent litigation, and patent pools have been part of the automotive industry since the late-1800s, the prevalence of technology covered by standards . . .


While patents, patent litigation, and patent pools have been part of the automotive industry since the late-1800s, the prevalence of technology covered by standards and accompanying standard essential patents (SEPs) is much more recent. Today’s smart cars and the widespread incorporation of telecommunication and Internet of Things standards in vehicles raise concerns about how well the automotive industry will be able to adapt to this new SEP-laden future.

This article predicts that predatory infringement of SEPs for two related reasons. First, although some industries, such as telecommunications, have long dealt with SEPs, the incorporation of standardized technology is more recent in automotives. The automotive industry has experience with patents and will undoubtedly mature into a level of comfort with SEPs, but because they are late to the SEP game, it is likely that automotive SEP policy will be driven by existing precedent from other industries. This is a problem because of the second reason, which is the fact that the history of patent licensing in the automotive industry has been quite different from that in telecommunications. Although patent licenses had usually been taken at the component manufacturer or supplier level, SEPs are often licensed at the end-user or final product level. This licensing shift in the car industry, coupled with its infancy in the SEP space, create an easy road for predatory infringement to occur.

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Intellectual Property & Licensing

Antitrust Mercantilism: The Strategic Devaluation of Intellectual Property Rights in Wireless Markets

Scholarship Abstract Policy approaches to the enforcement and licensing of standard-essential patents (SEPs) in wireless communications markets reflect the competing interests of entities that specialize in . . .


Policy approaches to the enforcement and licensing of standard-essential patents (SEPs) in wireless communications markets reflect the competing interests of entities that specialize in the innovation or implementation segments of the technology supply chain. This same principle can anticipate the policy preferences of national jurisdictions that specialize in the chip-design or device-production segments of the global technology supply chain. Consistent with this principle, the legal treatment of SEP licensing and enforcement by regulators and courts in the People’s Republic of China reflects a strategic effort to deploy competition and patent law to reduce input costs for domestic device producers that rely on wireless communications technology held by foreign chip suppliers. This mercantilist use of antitrust law has derived its intellectual foundation from patent holdup and royalty stacking models of market failure developed principally by U.S. scholars and has borrowed excessive pricing, essential facility, and other doctrines from E.U. competition and U.S. antitrust law, which have then been applied expansively by Chinese regulators and courts in service of geopolitical objectives. While this strategy promotes the short-term interests of a national economy that specializes in the implementation segments of the technology supply chain, it is unlikely to promote the global economy’s longer-term interest in preserving the funding and transactional structures that have supported innovation and commercialization in the wireless technology ecosystem.

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Patent Injunctions and the FRAND Commitment: A Case Study in the ETSI Intellectual Property Rights Policy

Scholarship Abstract Many academics and government officials claim that owners of patents on standardized technologies, such as 5G or Wi-Fi, cannot obtain injunctions as a remedy . . .


Many academics and government officials claim that owners of patents on standardized technologies, such as 5G or Wi-Fi, cannot obtain injunctions as a remedy for infringement of their patents. They believe this is mandated in the contractual commitment by an owner of a standard essential patent (SEP) to license on fair, reasonable, and non-discriminatory (FRAND) terms. This conventional wisdom is profoundly mistaken. FRAND agreements do not prohibit SEP owners from receiving injunctions for continuing infringement of their patents. One of the oldest, exemplary FRAND agreements evinces this basic legal truth: the FRAND commitment set forth by the European Telecommunications Standards Institute (ETSI). According to the plain text, contractual context, and historical provenance of the ETSI FRAND commitment, it is clear that it does not prohibit injunctions as remedies for infringement of SEPs. In recent years, this has been confirmed by courts in jurisdictions throughout the world repeatedly issuing injunctions to SEP owners under the ETSI FRAND commitment. Unfortunately, the mistaken belief that FRAND prohibits injunctions persists among American academics and courts. It is important to clarify the legal requirements of FRAND and the availability of injunctive relief for SEP owners because normative theories or economic models about SEP licensing and litigation should be based in legal facts. Otherwise, incorrect claims about FRAND allegedly prohibiting injunctive remedies will continue to proliferate among academics and officials, provoking unnecessary litigation and unjustified agency actions by antitrust officials. These legal errors impose costs on innovators and implementers alike, which undermine the efficient growth in the global innovation economy.

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Devaluing SEPs: Hold-Up Bias and Side Effects of the European Draft Regulation

Scholarship Abstract The EU Commission’s recent proposal for a regulation on standard essential patents (SEPs) envisages a radical overhaul of the current framework, introducing an essentiality . . .


The EU Commission’s recent proposal for a regulation on standard essential patents (SEPs) envisages a radical overhaul of the current framework, introducing an essentiality check system, a conciliation process for fair, reasonable and non-discriminatory (FRAND) terms, and a mechanism to determine a reasonable aggregate royalty. However, both the economic justification and the approach endorsed by the proposal are questionable. Indeed, on one hand, there is no evidence of a market failure to justify the initiative and, in addition, the provisions appear to be one-sided, apparently being aimed only at addressing a hold-up problem and pursuing a value-distribution goal from SEP owners to implementers. Accordingly, this paper views the proposal critically, arguing that it departs from the well-established meaning and rationale of FRAND commitments by disregarding hold-out problems, and it jeopardises the suitability of SEPs to serve as valuable financial collateral, thereby endangering future investments in innovation.

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Intellectual Property & Licensing

Letter to Chairs and Ranking Members of House Ways and Means and Senate HELP Committees on Prescription Drug Price Controls

Written Testimonies & Filings Dear Chairman Sanders, Ranking Member Cassidy, Chairman Smith, and Ranking Member Neal: As former judges, former government officials, and scholars who are experts in patent . . .

Dear Chairman Sanders, Ranking Member Cassidy, Chairman Smith, and Ranking Member Neal:

As former judges, former government officials, and scholars who are experts in patent law, healthcare policy, or both, we write to express our concerns about lobbying efforts for the government to impose price controls on patented drugs. Some activists and academics have written to Congress and to agency officials arguing that existing laws are “tools” for the government to impose price controls on patented drugs to lower drug prices.[1] Their arguments mischaracterize these statutes by inaccurately claiming that Congress has endorsed the imposition of price controls on patented drugs. It has not.

Drug pricing presents a multi-dimensional policy issue because the U.S. healthcare system comprises a complex, intermingled system of federal and state laws and regulations, as well as a myriad of equally complex and intermingled set of public and private institutions. Yet, activists and others inaccurately reduce the causes of drug prices to a single issue: patents. They argue that the federal government can “lower drug prices by breaking patent barriers,”[2] and they claim that two statutes can be used to achieve this policy goal: the Bayh-Dole Act and 28 U.S.C. § 1498.

Neither the Bayh-Dole Act nor § 1498 are price-control statutes, and thus they do not authorize the federal government to impose price controls on patents. This is clear by their plain legal text, as well as by their consistent interpretation by courts and agencies. The Bayh-Dole Act promotes the commercialization of patented inventions that may result from government funding of research, and § 1498 secures patent-owners in obtaining compensation for unauthorized uses of their property rights by the government. Neither law says anything about drug prices. If the government used either law to impose price controls on patented drugs, this would conflict with the clear purpose of these statutes. It would also represent an unprecedented and fundamental change in U.S. patent law. From 1790 through the twentieth century, Congress rejected bills that would impose compulsory licensing on patents.[3] The calls to use the Bayh-Dole Act or § 1498 for similar purposes fundamentally are at odds with these statutes and threaten to undermine the U.S. patent system’s historic success as a driver of U.S. global leadership in biopharmaceutical innovation.

This letter explains why neither the Bayh-Dole Act nor § 1498 can be used to break patents to impose price controls on drugs. First, it sets forth the proven success of the patent system as a driver of innovation in healthcare, which is the framework to evaluate the argument to “lower drug prices by breaking patent barriers.”[4] This argument threatens to undermine the legal system that has saved lives and improved everyone’s quality of life. It then describes the Bayh-Dole Act and § 1498, explaining how neither authorizes price controls on patented drugs. The policy argument seeking to impose price controls on drugs contradicts the clear text and purpose of these statutes.

Read the full letter here.

[1] See Letter to Senator Elizabeth Warren from Amy Kapczynski, Aaron S. Kesselheim, et al., at 1 (Apr. 20, 2022), https://tinyurl.com/yt62wt4t. Professor Kapczynski and Professor Kesselheim are the co-authors of this letter, which is based on their articles, and thus this letter is identified as the “Kapczynski-Kesselheim Letter.”

[2] Id. at 8

[3] See, e.g., Bruce W. Bugbee, Genesis of American Patent and Copyright Law 143-44 (1967) (discussing the rejection of a Senate proposal for a compulsory licensing requirement in the bill that eventually became the Patent Act of 1790); Kali Murray, Constitutional Patent Law: Principles and Institutions, 93 Nebraska Law Review 901, 935-37 (2015) (discussing 1912 bill that imposed compulsory licensing on patent owners who are not manufacturing a patented invention, which received twenty-seven days of hearings, but was not enacted into law).

[4] Kapczynski-Kesselheim Letter, supra note 1, at 8.

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Intellectual Property & Licensing

Protecting Innovation in the Mobile Wireless Ecosystem: Understanding and Addressing ‘Hold-Out’

Scholarship Abstract This paper builds on previous work addressing the problem of “hold-out” in the licensing of standards essential patents (SEPs) in mobile cellular communications technology. . . .


This paper builds on previous work addressing the problem of “hold-out” in the licensing of standards essential patents (SEPs) in mobile cellular communications technology. Given the pervasiveness of mobile technology, and the need to maintain continued innovation in such technology, the robustness of the licensing marketplace for patents is an economically important issue. We show how the ease with which implementers of such technology such as smartphone makers can use the technology without having agreed to licenses is a major structural factor that shifts bargaining power in licence negotiations towards the implementers. Together with frictions in the enforcement process, and the increasing propensity to resist licensing by new groups of implementers (i.e., “hold out”) we explain why there is an elevated risk that the licensing marketplace may produce outcomes that are inconsistent with the “balance” that Standards Development Organizations (“SDOs”) such as ETSI have sought out. The ability of the licensing marketplace to strike this balance is critical to the continued robustness of the wireless ecosystem. We explain that there is a risk that the SEP holders’ obligation to be prepared to make licences available on Fair, Reasonable and Non-Discriminatory (FRAND) terms can be used to “bound” the worst case scenario for an implementer– i.e., that it can never do worse than receiving the “FRAND” royalty. We discuss how courts and policymakers should sensibly interpret the bounds and limits of the FRAND commitment, in order to respect the overarching goals of “balance” and robust innovation in the ecosystem.

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Stronger Patent Law Increases the Allocation of Resources to External Relative to Internal R&D: Empirical Evidence

Scholarship Abstract How should a technology firm adjust resource allocation between external and internal R&D in response to stronger patent protection? External R&D provides the firm . . .


How should a technology firm adjust resource allocation between external and internal R&D in response to stronger patent protection? External R&D provides the firm with another channel of earnings to mitigate diminishing returns to internal R&D, but yields the firm only a fraction of the additional profit generated. Theoretically, if the marginal return to external R&D diminishes more slowly than the marginal return to internal R&D, the firm should increase external R&D more than internal R&D. Exploiting regional differences in the strengthening of patent protection due to the U.S. Court of Appeals for the Federal Circuit (CAFC), we find that the CAFC was associated with 35 percent more external R&D vis-a-vis 20 percent more internal R&D. The difference was more pronounced in industries where patents were less effective in the appropriability of product inventions and among firms more specialized in technology.

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