A highly competitive economy is characterized by strong, legally respected property rights. A failure to afford legal protection to certain types of property will reduce individual incentives to participate in market transactions, thereby reducing the effectiveness of market competition. As the great economist Armen Alchian put it, “[w]ell-defined and well-protected property rights replace competition by violence with competition by peaceful means.”

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Abstract

This comment by 25 law professors, economists and former United States government officials was submitted to the European Union Commission in response to a “call for evidence” on the licensing, litigation, and remedies of standard-essential patents (SEPs). It details the principal concepts and substantial evidence relating to the constructive role of SEPs in efficiently promoting innovation and structuring commercialization activities in high-tech devices generally and the mobile revolution specifically. It also addresses widespread misunderstandings and misstatements about the commercialization and litigation of SEPs. It broadly makes three points.

First, in contrast to the evidence of the positive role of SEPs in promoting innovation and commercialization in wireless technologies, no published empirical study has found evidence of the predicted marketplace effects of “holdup” or “royalty stacking” theories, such as higher prices, less innovation, and less market competition in smartphones. Second, contrary to claims by some commentators that courts do not issue injunctions for the infringement of SEPs, the comment reviews some representative decisions from the substantial case law in Europe in which SEP owners have requested or obtained injunctions against implementers engaging in holdout tactics. Third, it explains how courts have consistently held that the fair, reasonable, and non-discriminatory (FRAND) commitment by SEP owners does not mandate a “license to all” rule nor that reasonable royalties be calculated according to the “smallest salable, patent practicing unit” (SSPPU) standard. These court decisions are consistent with the economic function and evidence of SEP licensing on FRAND terms.

The mobile revolution has created unparalleled economic and technological growth over the past three decades. So long as courts provide robust enforcement of intellectual property rights, and do not impede the licensing and other contracts predicated on those rights, there is every reason to believe that the mobile market will continue to thrive. The comment concludes with an Appendix listing the substantial, published literature addressing both the success of the SEP-based sector of the global innovation economy and the numerous substantive and methodological flaws in “holdup” and “royalty stacking” theories.

Introduction

We thank the European Commission for this opportunity to comment on its call for evidence concerning a new framework for standard-essential patents. 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 the commission’s plan to update the legal framework that underpins standard-essential patent licensing in Europe.

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;[1] 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.[2]

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.”[3] 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.”[4] 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.”[5]

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 the commission to preserve the rules that currently govern SEP-licensing agreements:

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

Second, weakening the protections afforded to SEP holders would have second-order effects that are widely ignored in contemporary policy debates. Weaker SEP protection would notably encourage firms to integrate vertically, rather than to specialize. It would reduce startup companies’ access to capital markets by making it harder to collateralize IP. Curbing existing IP protections would also erode the West’s technological leadership over economies that are heavily reliant on manufacturing and whose policymakers routinely undermine the intellectual property rights of foreign firms.

Finally, critics often overlook the important benefits conferred by existing IP protections. This includes the comparative advantage of injunctions over damages awards, as well as firms’ ability to decide at what level of the value chain royalties will be calculated.

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[1] See, e.g., Dirk Auer & Julian Morris, Governing the Patent Commons, 38 CARDOZO ARTS & ENT. L.J. 294 (2020).

[2] See, e.g., Alexander Galetovic, Stephen Haber & Ross Levine, An Empirical Examination of Patent Holdup, 11 J. COMPETITION & 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).

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

[4] 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).

[5] Borgogno & Colangelo, supra note 3, at 5.

 

Abstract

For much of its existence, the academic and policy debate on standards essential patents (SEPs) in mobile telecommunications was driven by the theory of “hold up”— the ability of SEP owners to supposedly extract value well beyond the contribution of their technology to downstream products. This theory of hold up was never empirically validated, and even as a theory, took no account of the non-self-enforcing nature of patents, including SEPs. Injunctive relief for infringement is far from automatic, and litigation is costly and carries asymmetric risks for licensors. In reality, licensors are often able to collect payment only several years after infringement began, may sometimes end up agreeing to rates that are too low to incentivise future investment, and may often be unable to collect payment for all the period of infringement by the implementer. Thus “hold out” by licensees who wish to delay, avoid and reduce payment for their use of SEPs is a potentially greater danger than “hold up.”

If injunctions are difficult to obtain and the eventual remedy for infringement is to take a license and pay damages based on FRAND rates, there is little positive incentive for licensees to take licenses. Instead, it is attractive for licensees to delay and force licensors into litigation. The attractiveness and increasing pervasiveness of such behaviour risks disrupting the “balance” of incentives that is sought by standards development organisations such as the European Telecommunications Standards Institute (ETSI), which has been responsible for shepherding the development of mobile telecommunications standards. The long-term consequences of disrupting this balance will likely be a diminished rate of future innovation, and the potential replacement of a remarkably successful model of “open innovation” by more closed models.

This paper suggests potential correctives to the holdout problem. The correctives involve the strengthening of injunctive relief regimes, and the recognition by Courts and policy-makers (especially antitrust or competition agencies) that achieving the “balance” sought out by ETSI may require limiting or withdrawing the unlimited availability of FRAND licenses for unwilling licensors. Courts and agencies should recognise that SEP holders are only obliged to be prepared to make FRAND licenses available, but also recognise that licensors are not compelled to conclude FRAND licenses with unwilling licensees. At the very least, Courts that are often asked to determine FRAND rates based on evaluating “comparable licenses” can still take measures that avoid putting unwilling licensees on the same footing as those who willingly negotiated “comparable” licenses.

Abstract

Competition policy generally prohibits coordination among buyers or sellers, especially coordination on price, price-related inputs, and output. In licensing markets for standard-essential patents (“SEPs”), it has been periodically proposed that this rule should be relaxed to permit the formation of licensing negotiation groups (“LNGs”), which is expected to reduce transaction costs and the purportedly “excessive” royalties paid to SEP licensors. Based on the economic structure of wireless technology markets, and empirical evidence from over three decades of SEP licensing, this policy intervention is likely to degrade, rather than enhance, competitive conditions in wireless communications and other 5G-enabled markets encompassed by the “Internet of Things.” In the short term, LNGs would most likely result in a redistributive (not an efficiency) effect that shifts economic value from innovators to implementers in the wireless technology supply chain without necessarily passing on cost-savings to consumers. In the medium to longer term, LNGs are liable to impose significant efficiency losses by endangering the viability of licensing-based monetization models that have funded continuous R&D investment, promoted broad dissemination of technology inputs, facilitated robust entry in device production, and enabled transformative business models across a wide range of industries. While LNGs may reduce the transaction costs of SEP licensing, pooling structures have a demonstrated record of having achieved the same objective in patent-intensive information technology markets at a substantially lower risk of competitive harm.

Abstract

In this Article, we describe how to use artificial intelligence (AI) techniques to partially automate a type of legal analysis, determining whether a patent claim satisfies the definiteness requirement. Although fully automating such a high-level cognitive task is well beyond state-of-the-art AI, we show that AI can nevertheless assist the decision maker in making this determination. Specifically, the use of custom AI technology can aid the decision maker by (1) mining patent text to rapidly bring relevant information to the decision maker attention, and (2) suggesting simple inferences that can be drawn from that information.

We begin by summarizing the law related to patent claim indefiniteness. A summary of existing case law allows us to identify the types of information that can be relevant to the legal determination of indefiniteness. This in turn guides us in designing AI software that processes a patent text to extract information that can be relevant to the legal analysis of indefiniteness. Some types of relevant information include whether terms in a claim are defined in the patent, whether terms in a claim are not mentioned in the patent specification, whether the claim includes nonstandard terms coined by the drafter of the patent, whether the claim relies on vaguely-specified measurements, and whether the patent specification discloses structure corresponding to a means-plus-function limitation.

The AI software rapidly processes a patent text and identifies information that is relevant to the legal analysis. The software then provides the human decision maker with this information as well as simple metrics and inferences, such as the percentage of claim terms that are defined explicitly or by example, and whether terms that are coined by the drafter should be defined or renamed. This can provide the user with insights about a patent much faster than if the user read the entirety of the patent to locate the same information unaided.

Moreover, the software can aggregate the various types of information to “score” a claim (e.g., from 0 to 100) based on its risk of being deemed indefinite. For example, a claim containing only defined terms and lacking any vague measurements would score much lower in terms of risk than a claim with terms that are not only undefined but do not even appear in the patent specification. Once each claim in a patent is assigned such an indefiniteness score, the patent itself can be given an overall indefiniteness score.

Scoring groups of patents in this manner has further advantages even if the scores are blunt measurements. AI software ranks a group of patents (e.g., all patents owned by a company) by indefiniteness scores. This allows a very large set of patents to be quickly searched for patents that have the highest, or lowest, indefiniteness score. The results of such a search could be, e.g., the patents to target for detailed review in litigation, post-grant proceedings, or licensing negotiations.

Finally, we present some considerations for refining and augmenting the proposed methods for partially automating the indefiniteness analysis, and more broadly other types of legal analysis.

All too frequently, vocal advocates for “Internet Freedom” imagine it exists along just a single dimension: the extent to which it permits individuals and firms to interact in new and unusual ways.

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Abstract

Google v Oracle is a blockbuster copyright case. This decade-long lawsuit arose from Google’s unauthorized copying of 11,500 lines of code in the Java computer program in launching its Android smartphone to vast commercial success. When Oracle sued Google for copyright infringement, Google argued that the Java computer program was uncopyrightable or that its copying was fair use. On the first issue of copyrightability, the Supreme Court punted. Instead, Justice Stephen Breyer’s majority opinion sets forth a novel and sweeping fair use defense for Google’s unauthorized commercial copying of computer programs like Java (known as APIs).

This article first explains that the Computer Software Copyright Act of 1980 is clear that APIs are copyrightable, and that the Court should have explicitly addressed this issue. This copyrightability analysis is important, because it elucidates the peculiar nature of Justice Breyer’s fair use analysis in the substance of his opinion. At a minimum, it confirms the Court’s ultimate decision: a de facto denial of copyright protection in all APIs. In sum, the Google Court did not skip deciding that APIs are not copyrightable. Rather, Justice Breyer reached this same result through a novel and creative application of fair use doctrine.

Google’s significance cannot be understated: the Court held for the first time that an unauthorized copying of a copyrighted work for a commercial purpose to sell a competing product qualifies as a fair use. The Court ostensibly limited its analysis to only APIs, but academics and accused infringers are now arguing that Google applies to other creative works. Time will tell if Google has created a (fair use) exception that swallows the (copyright) rule.

U.S. antitrust policy seeks to promote vigorous marketplace competition in order to enhance consumer welfare. For more than four decades, mainstream antitrust enforcers have taken their cue from the U.S. Supreme Court’s statement in Reiter v. Sonotone (1979) that antitrust is “a consumer welfare prescription.” Recent suggestions (see here and here) by new Biden administration Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) leadership that antitrust should promote goals apart from consumer welfare have yet to be embodied in actual agency actions, and they have not been tested by the courts. (Given Supreme Court case law, judicial abandonment of the consumer welfare standard appears unlikely, unless new legislation that displaces it is enacted.)

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