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Laurie Fitzgerald

In a forceful speech[1] delivered on November 10, 2017, the new leader of the Antitrust Division of the United States Department of Justice, Assistant Attorney General Makan Delrahim, signaled a return to longtime policies relating to standard essential patents that are subject to a voluntary, fair, reasonable, and non-discriminatory (FRAND) licensing commitment by the patent holder.

Speaking in Los Angeles at the Application of Competition Policy to Technology and IP Licensing Conference, Delrahim expressed “worry that we as enforcers have strayed too far in the direction of accommodating the concerns of technology implementers who participate in standardsetting bodies,” and concern that “[p]erhaps risk undermining incentives for [intellectual property] creators, who are entitled to an appropriate reward for developing break-through technologies.” Delrahim’s remarks are a positive development for owners of standard essential patent portfolios, who seek to be appropriately rewarded for the use of their inventions by companies who use those patents when implementing the standards.

The full text of Delrahim’s speech is available here.                  

Key Points

Key points made by Delrahim include:

  • The FRAND commitment is not a compulsory licensing scheme.
  • “Patent hold-out” poses a serious risk to innovation that outweighs any problems arising from “patent hold-up.”
  • The act of enforcing a standard essential patent by seeking injunctive relief is not an antitrust violation.
  • A patent holder’s alleged violation of its FRAND commitment should be addressed through contract law; antitrust law is not necessarily the appropriate remedy.
  • The Antitrust Division will be skeptical of imbalanced standards development organization rules that appear designed to shift bargaining leverage from innovators to implementers, or vice versa.
  • The tension between innovators and implementers is to be resolved by the free market, in the form of freely negotiated licenses.

Summary

The FRAND commitment is not a compulsory licensing scheme. According to Delrahim, “[w]e should not transform commitments to license on FRAND terms into a compulsory licensing scheme. … If [a standard setting organization] requires innovators to submit to such a scheme as a condition for inclusion in a standard, we should view the [standard setting organizations]’s rule and the process leading to it with suspicion, and certainly not condemn the use of such injunctive relief as an antitrust violation where a contract remedy is perfectly adequate.”

Patent hold-out is a more serious risk than patent hold-up. Delrahim expressed his view that “[t]oo often lost in the debate over the hold-up problem is recognition of a more serious risk: the hold-out problem. Standard setting typically occurs against the backdrop of negotiations between innovators, who develop technologies through private investment and own [intellectual property] rights, and implementers, who hope to market and use the technology through a license and pay the [intellectual property] holder a royalty. The hold-out problem arises when implementers threaten to under-invest in the implementation of a standard, or threaten not to take a license at all, until their royalty demands are met.”

Delrahim further recognized that “the hold-up and hold-out problems are not symmetric … It is important to recognize that innovators make an investment before they know whether that investment will ever pay off.  If the implementers hold out, the innovator has no recourse, even if the innovation is successful. In contrast, the implementer has some buffer against the risk of hold-up because at least some of its investments occur after royalty rates for new technology could have been determined. Because this asymmetry exists, under-investment by the innovator should be of greater concern than under-investment by the implementer.”

A patent holder does not violate antitrust laws by requesting an injunction. Delrahim’s position is that “[a] patent holder cannot violate the antitrust laws by properly exercising the rights patents confer, such as seeking an injunction or refusing to license such a patent. … Under the antitrust laws, I humbly submit that a unilateral refusal to license a valid patent should be per se legal.” In his view, “the right to exclude is one of the most fundamental bargaining rights a property owner possesses.  Rules that deprive a patent holder from exercising this right—whether imposed by [a standards development organization] or by a court—undermine the incentive to innovate and worsen the problem of hold-out. After all, without the threat of an injunction, the implementer can proceed to infringe without a license, knowing that it is only on the hook only for reasonable royalties.”

Antitrust law is not the most appropriate vehicle to address an alleged FRAND violation. Delrahim doubts that the “the heavy hand of antitrust” is the appropriate remedy where a patent holder is alleged to have violated its FRAND commitment. He instead favors a breach of contract action, where “a party can litigate the facts regarding what constitutes a ‘reasonable’ or ‘nondiscriminatory’ rate or commitment.  If there is a violation of a reasonableness standard, the factfinder can decide it, like they do in other instances of contract violations. Antitrust enforcers should exercise greater humility and enforce the antitrust laws in a manner that best promotes dynamic competition for the benefit of consumers.”

The Antitrust Division will be skeptical of imbalanced standard development organizations’ patent policies. Delrahim cautioned that the Antitrust Division will be skeptical of rules imposed by standard setting organizations “that appear designed specifically to shift bargaining leverage from [intellectual property] creators to implementers, or vice versa. [Standard setting organization] rules purporting to clarify the meaning of ‘reasonable and non-discriminatory’ that skew the bargain in the direction of implementers warrant a close look to determine whether they are the product of collusive behavior within the [standard setting organization].”

Further, in comments that appear aimed at the IEEE standard development organization and the new patent policy it adopted in 2015,[2] Delrahim cautioned that “[i]f [a standard setting organization] pegs its definition of ‘reasonable’ royalties to a single Georgia-Pacific factor that heavily favors either implementers or innovators, then the process that led to such a rule deserves close antitrust scrutiny. While the so-called ‘smallest salable component’ rule may be a useful tool among many in determining patent infringement damages for multi-component products, its use as a requirement by a concerted agreement of implementers as the exclusive determinant of patent royalties may very well warrant antitrust scrutiny.” He also warned that, if an standard setting organization requires innovators to agree to limits on their right to seek injunctions as a condition of their innovations being included in a standard, “we should view the [standard setting organization]’s rule and the process leading to it with suspicion.” All of these elements are found in the IEEE’s new patent policy.[3]

There is a risk of technology-buyers’ cartels in standard development organizations. Delrahim advised that “enforcers should carefully examine and recognize the risk that SSO participants might engage in a form of buyer’s cartel, what economists call a monopsony effect.” This remark, too, appears aimed at the process that led to the IEEE policy change, which has been characterized by multiple scholars as violating antitrust laws.[4]

The tension between innovators and implementers should be resolved by the free market, not by regulators. According to Delrahim, “[t]he dueling interests of innovators and implementers always are in tension, and the tension is resolved through the free market, typically in the form of freely negotiated licensing agreements for royalties or reciprocal licenses.”

The Antitrust Division should strive to balance innovation with antitrust concerns. Delrahim indicated that, under his direction, the Antitrust Division will focus on innovation and dynamic competition. His “priority as Assistant Attorney General is to help foster debate toward a more symmetric balance between the seemingly dueling policy concerns between intellectual property and antitrust law. Unfortunately, in recent years, competition policy has focused too heavily on the so-called unilateral hold-up problem, often ignoring what fuels dynamic innovation and efficiency. New inventions do not appear out of the ether, and excessive use of the antitrust laws rather than other remedies can overlook and undermine the magnitude of investment and risk inventors undertake for the chance at being included in a standard.”

In summary, Delrahim’s remarks indicate a renewed focus by the Antitrust Division on promoting and protecting the rights of companies that contribute technology to standards development organizations and hold standard essential patents, and increasing scrutiny going forward on collusive behavior by participants within standards development organizations that appears potentially anti-competitive.     

[1] Take it to the Limit: Respecting Innovation Incentives in the Application of Antitrust Law, Makan Delrahim, Assistant Att’y Gen., Antitrust Div., U.S. Dep’t of Justice, Remarks as Prepared for Delivery at USC Gould School of Law – Application of Competition Policy to Technology and IP Licensing, Los Angeles, CA, Nov. 10, 2017.

[2] See Joshua Sisco, Comment: Delrahim puts standard-setting organizations, implementers, on notice over standard-essential patents (MLEX Market Insight, 13 Nov. 2017).

[3] See Hugh M. Hollman, IEEE Business Review Letter: The DOJ Reveals Its Hand, CPI Antitrust Chronicle March 2015 (2), available here.

[4] See, e.g., Marco Lo Bue, Are These Cartels? Price Guidelines Adopted by Standard Setting Organisations (US, Institute of Electrical and Electronics Engineers), Journal of European Competition Law & Practice, Volume 7(8), 15 August 2016, 537–543, available here; Roy. E. Hoffinger, The 2015 DOJ IEEE Business Review Letter: The Triumph of Industrial Policy Preferences Over Law and Evidence, CPI Antitrust Chronicle March 2015 (2), available here.

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