Special Feature: 5G And Standard Essential Patents In The US

NEW YORK — A panel at the recent IP Dealmakers Forum including a US Federal Trade Commission official, a former US judge on a key patent case, and a telecommunications industry licensing expert walked through issues and prospects for the coming of the 5G next generation wireless technology. Views differed on points but panellists agreed that changes are needed to the system for standard-essential patents, including a bigger role for standard-setting organisations. Below is an in-depth account of the discussion. The discussion also included the latest state-of-play at the FTC, which currently has its lowest number of commissioners ever.

The IP Dealmakers Forum was held on 16-17 November. The panel entitled, “Anticipating 5G: An Investor’s Primer on SEPS and FRAND” (standard-essential patents and fair, reasonable and non-discriminatory licensing terms) took place on the second day.

The speakers were: Hon. James Holderman (ret.), former US District Court Chief Judge, Northern District of Illinois; Suzanne Munck, chief counsel for IP, US Federal Trade Commission; and Matteo Sabattini, director, IPR Policy, Ericsson in Washington, DC. The moderator was Matt Larson, technology litigation analyst at Bloomberg. Speakers were generally speaking on their own behalf and not on the part of their employers.

Sabattini opened by saying that with 5G, the smartphone is going to be only one part, as they anticipate billions of devices will be connected. On timeline, he said they expect the first releases of 5G in 2018. Work in 2018 will be on “new radio” (a global 5G standard), which initially will work with old radio, then will go on devices that have new radio only. Japan has said it would like initial trials in time for the 2020 Olympics, and now it could be in trial at the 2018 Winter Olympics in South Korea, and there are trials in the US as well, he said. Investment is already happening on 5G.

5G will have billions of devices connected. The smartphone will be only one – Ericsson’s Matteo Sabattini

His company, Ericsson, spends a billion dollars a year on R&D and strongly believes in open standards and working together, Sabattini said, as it is up to the stakeholders to bring the best minds together and come up with the best technology. They believe there will be a return on the investment.

On standards, he stressed that technology that makes it into a standard is generally seen as the most valuable technology. “That is a misconception,” he said. A technology makes it into a standard generally because it is the best technology to solve a specific need, he said.

There is fierce competition at standards-setting organisations to make sure your technology makes it into the standard. And there are a lot of standards that do not “take off,” he said, do not really work. For those standards that are widely accepted and successful, there has to be some compensation to the technologies that are not in the standard that helped the standard take off, he said.

Munck said she is an antitrust enforcer and works on competition policy at the FTC, and they look at what to do when a number of companies come together to build a platform. They focus on what is the best way to promote competition, innovation and the best product for consumers. The FTC recently revised its guidelines related to intellectual property, and in it the FTC and Department of Justice continue to say that there are not special rules for intellectual property, she said. In competition analysis, the FTC treats IP the same as other factors, said Munck, adding that competition seems healthy in IP licensing.

They have a saying that “standards are one of the engines of the modern economy,” she said, adding that 5G is the knitting together of 3G, 4G open standards with 5G being pro-competitive, so you’re going to see “a real mashup in this space.” The FTC’s position, she said, is that this is pro-competitive, and all of those things lead to important innovations for society. They have brought enforcement actions, in particular instances when they needed to step in, but the default position is to let these technologies work together.

The good news is there have been only a few disputes in 3G and 4G on FRAND – Judge (ret.) James Holderman

Holderman said the good news is that there have only been a few disputes in 3G and 4G on FRAND issues, which means people are being very efficient about coming to agreement on FRAND. The bad news is that if a case does get to court, it takes too long, is too expensive, and in his view, there is a judicial trend that diminishes the FRAND rate value. Judges do not have the ability to understand the issues like patent attorneys do, he noted, so it is more difficult. He suggested that when they move into the 5G area, standard-setting organisations need to provide more guidance to assist the dispute resolution process.

Sabattini said most FRAND licences come from good faith negotiations. Unfortunately, we’re seeing “concerning growth” in holdout, he said, arguing that the focus on patent trolls, and focus on holdout, has distracted from the real problem. For Wifi for instance, he said, the issue is that technology providers and implementers have the same objective of balance, and that disrupting the balance will affect the innovation system. Specifically, he took aim at recently issued standards by the US-based standard-setting body IEEE. “Giving guidance is one thing, putting a thumb on the scale is a different thing.” The IEEE policy changes favour implementers, he said, with a focus on cost and the short-term that does not provide the right incentive.

Since the new policy was put in place at IEEE, argued Sabattini, letters of assurance (to observe FRAND) have fallen and letters stating that the company is not ready to licence under FRAND terms have gone up. Ericsson is committed to FRAND, he said, but has a problem with the new policy.

Munck interjected to ask how many different companies are responsible for the letters of concern, and also asked, isn’t IEEE a consensus-based organisation? For the FTC, “voluntary, consensus-based standard-setting is the way to go,” she said. Munck also noted that there is competition among standards, for instance for Wifi.

Sabattini backed off slightly, saying IEEE did act by its own rules, and did not do anything wrong. But there was a strong influence by implementers, basing it on cost, he charged.

Munck discussed a case she worked on in which the FTC sued Google and MMI for seeking injunctive relief for intellectual property licensing under FRAND terms. In the remedy in the case, which applied only to Google and MMI (Motorola Mobility), the Commission did not say what the rate should be, but rather tried to create a path forward for these disputes.

Some people think FTC got it right, some didn’t, she said. But the point was that most negotiations happen just fine, while there are some negotiations where they hit a roadblock, and what do they do then, isn’t there a role for standard-setting organisation (SSO) to play in resolving those disputes, she asked.

SSOs may have a greater role to play – Suzanne Munck, FTC chief counsel for IP

The reason the FTC is involved is because standards are by nature competitors coming together, said Munck. FRAND was developed by SSOs as a way to try to avoid patent holdup, she noted, which is once you are locked in to a standard you pay up to the value of your switching costs, not necessarily the value of your intellectual property. SSOs may have a greater role to play, she suggested.

Delrahim’s Stake in the Sand

Speakers pointed to a much-discussed recent speech by the new Assistant Attorney General for Antitrust, Makan Delrahim, in which he talked about patent holdout.

Munck said there are patent tools to address holdout, and Delrahim talked about antitrust tools as well, and the two cross over. We have patent tools and antitrust tools if companies are not offering FRAND licences, she said, and if you only look at one, you will get “an incomplete result.”

A slide presented on the panel highlighted these remarks by Delrahim:

“The Antitrust Division will carefully scrutinize what appears to be cartel-like anticompetitive behavior among SSO participants, either on the innovator or implementer side.”

“I therefore urge antitrust enforcers to take a more humble approach to the application of antitrust to unilateral violations of SSO commitments and to take a fresh look at concerted actions within SSOs that cause competitive harm to the dynamic innovation process.”

“SSOs would be well advised to implement and maintain internal antitrust compliance programs and regularly assess whether their rules, or the application of those rules, are or may become anticompetitive.”

“[E]nforcers 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.”

“The enforcement of valid patent rights should not be a violation of antitrust law. 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.”

“We should not transform commitments to license on FRAND terms into a compulsory licensing scheme.”

Holding Off Holdout

Holderman said what needs to be done with FRAND is if there appears to be holdout in what might appear to be good faith negotiations but are not, they need to come up a new mechanism, whether a standard-setting organisation, with the companies involved setting up a private dispute settlement system.

Courts take too long, and are too expensive – Holderman

If there’s evidence of holdout, the implementer should buy the absence of an injunction, said the judge. In other words, why not ask the implementer to pay what the implementer thinks is right, he said. Courts are too slow and it’s too expensive, so if the implementer is not willing to put up the funds then maybe an injunction would be in order, he said, adding that would expedite the process.

SSOs could make it a contractual obligation of implementers. If you’re going to implement your technology to standard, the courts have determined you are a third-party beneficiary, but you buy your beneficial interest by paying your FRAND rate, and then you litigate, he said. “We don’t leave innovators out in the cold with free riders for years and years and years,” said Holderman.

Munck supported that idea, saying all but one commissioner have taken that view and looked at willingness. You have to be able to separate out people who are not paying from people who simply have a difference of opinion on negotiating strategy, she said.

Sabattini agreed, saying FRAND is a “two-way street.” Innovators commit to giving on FRAND terms and the implementers are also committing in taking those licences. There’s got to be a way to identify who is negotiating in good faith and who is not, he said. He said he liked the last quote on the slide from Delarahim’s speech, in which he said FRAND is not compulsory licensing.

Munck noted that it only becomes an antitrust issue when you have competitors coming together. Holdout is a problem, but not an antitrust problem unless there is collusion.

On compulsory licensing, she said, “The US is not in favour compulsory licences.” But when talking about voluntary consent to standards, she said you have to look at the patent holders choosing to commit to licence on FRAND terms. That’s what drives to an “eBay analysis” at least in US courts, said Munck, adding that a lot of it trying to stitch business certainty on top of legal rules. One of the things you have to show in eBay is that monetary remedies will not make you whole, she noted. When you’ve committed to licence on FRAND terms, that’s like saying monetary remedies will make me whole, and that’s how you get to this issue in the injunction analysis, she said.

Sabattini said the problem they are facing now is that the market is flooded with unlicensed players, which he said is not fair to implementers. And they are also seeing the phenomenon called “efficient infringement”. There is no interest to talk about the licence until there is some stronger push, he said, and recent cases in Europe are not helping. The FRAND rate applied to patents is not the right incentive.

What incentive do I have as an implementer to even start a negotiation when in a worst-case scenario when I get sued all I pay is the FRAND rate – Sabattini

“What incentive do I have as an implementer to even start a negotiation when in a worst-case scenario when I get sued all I pay is the FRAND rate,” asked the industry representative. He suggested regulators take a second look at how the market has evolved and look at incentives for those innovators.

Munck said what is needed is a Supreme Court decision, bringing a few chuckles.

Sabattini warned that if those incentives are not there, and we get to 6G wireless technology, it might look very different and they are not going to bring the same level of innovation and competition to the market.

Global Perspective

The moderator asked about the global perspective, such as not agreeing to a global FRAND rate but rather negotiating patent by patent. He said we’re starting to see more cases going overseas, to Germany, China and elsewhere where you can get a relatively quick injunction.

Sabattini replied that good faith negotiations work, and licensing is global in nature. A best practice that has worked to make US a leader in innovation is portfolio licensing, he said. Instead of going patent by patent that can lead to delay tactics, with a technical analysis, and not taking the view that an implementer should take. “We are an implementer, we want freedom to operate, and the best way to ensure that is to negotiate global licences,” he said. Anything that goes patent by patent, for him is just a way to push the negotiation further.

Judge’s View

Holderman said that is an issue he was dealing as the judge in the Innovatio case, because, he said, infringement is claim-by-claim, but licensing is portfolio-by-portfolio. The judge has to determine the FRAND rate for the portfolio for all of the families. A judge has to take into account a number of factors they wouldn’t be evaluating when dealing with infringement damages that result from particular patents, he said, adding that he believes it is difficult for federal district judges and appeals judges. Maybe the Supreme Court will address the issue someday, he said.

infringement is claim-by-claim, but licensing is portfolio-by-portfolio – Holderman

Holderman was asked what lessons can be learned from the Innovatio case he worked on. He noted the case was four years ago, and that in this industry everything changes in four years. He said at the time he did not have comparable licences, and he had to look at whether these particular patent families were standard-essential patents. He had to look at the standard, then make determination.

Sabattini said declarations are voluntary and the purpose of declarations is not licensing, it is to allow the standard-setting organisations to proceed.

He also talked about royalty levels that are being seen in the market, particularly the smallest saleable patent-practicing unit (SSPPU), which he said is misconstrued since it was used in a court for a particular case. It does not convey the licensing value in a negotiation. It mixes two things: cost and value. Value goes beyond the components that go into a product, and it is important to recognise value, he said, which is related to what the user is willing to pay for a technology.

Holderman said he agreed, but that for judges, “We have to be lemmings. We have to follow what we are told to do. If the Supreme Court jumps off a cliff, we have to do it with them.” In the Innovatio case he had to use the SSPPU approach, even though he didn’t want to, as it is the way the law says he should do it.

We have to be lemmings. We have to follow what we are told to do. If the Supreme Court jumps off a cliff, we have to do it with them – Holderman

A question was asked about the demographic representation of standards bodies. Sabattini said with 5G they haven’t seen significant growth across the spectrum, it’s basically the FTC. But he thinks it is going to happen. What has changed significantly has been the rise of China, he said.

Sabattini mentioned that while the US is eroding its system, China is advertising that it is really stepping up its game in providing a favourable ecosystem. China has a new standardisation law, encouraging indigenous innovation, he said.

Munck noted that so far standards development and enforcement has mainly been in the telecom space, though other areas are coming up. At the FTC, they have to look at how the law is developing and what the Federal Circuit is trying to do. There are thorny issues, as they are dealing with products with hundreds of thousands of components and hundreds of thousands of patents. And the claim before the court is on, say, two claims of one patent, so it is dealing with a very, very narrow thing, she said. But when companies are negotiating they are talking about the whole portfolio, not just those claims. This is the main question about how we move forward with 5G and make the US competitive with 5G, she said, but in terms of rate models and such, the FTC is agnostic unless there are antitrust concerns.

State of the FTC: Lowest Number of Commissioners Ever

Munck was asked to give a report on what is happening with the FTC. She said normally the FTC is supposed to have five commissioners, three who follow the majority party (currently the Republicans) and two from the minority (Democrats). Under Obama there were four, with two from each party.

Currently, they have only two commissioners, which she believes is the lowest number ever. They have one Republican and one Democrat. President Trump has signalled his intent to nominate Joe Simon into Democrat Terrell McSweeney’s spot, who is holding over. The acting chairman is Maureen Ohlhausen, a Republican. She would become chairman and another Democrat would be nominated, and there has been talk of a third Democrat coming in but this is not official. Going forward there should be three Republicans and two Democrats, Munck said.

But that doesn’t necessarily tell how things will play out, she said, as, for instance, Commissioner Thomas Rosch – who was the one who said there should never be an injunction – was a Republican. She mentioned that Simon has been at the FTC before under Chairman Tim Muris (who served under President Bush), and their acting bureau director at the Bureau of Competition was at the FTC before under Muris. So the business community can look at that as an indication of consistency.

To which Sabattini quipped, “Patent scepticism is bipartisan.”

Patent scepticism is bipartisan – Sabattini

On another question about determining a FRAND licence, Holderman repeated that he thinks it has to be portfolio-by-portfolio. “I think we as judiciary should follow more what’s happening in the real world,” he said. Fair, reasonable, non-discriminatory are “subjective concepts” that are played out on a daily basis in license negotiations, he added, and that’s what the law ought to address. He said he tried to address it that way in Innovatio, but was hamstrung by the law.

 

Image Credits: William New