SEP licensing and competition law: DOJ and European Commission bless a new “patent-friendly” approach

Recently, the debate on the applicability of competition law to the licensing of standard-essential patents (SEPs) has come to a turning point. Indeed, both the US Department of Justice (DOJ) and the European Commission are making an attempt to provide a final answer to the following questions:

1) should the conduct of SEP-holders be subject to the application of competition law?

2) should standard-setting organisations (SSO) provide guidance on the meaning of “fair, reasonable and non-discriminatory” terms (FRAND), or would that guidance amount to a price-fixing cartel?

The past approach

For sake of clarity, let’s briefly recall that SEPs are those patents which are essential to implement standardised technologies, and that today all the most relevant internet-related technologies are standardised (i.e.: wi-fi or 4G). This means that without getting licenses on the technologies covered by SEPs, manufacturing companies could not legally manufacture smartphones, tablets, cameras or all the “internet of things” tools.

Over the past years, the DOJ and the Commission found that each SEP-holder is dominant under competition law and has to grant licenses to all the implementers at FRAND conditions. This finding restricted SEP-holders’ right to seek injunctive relief against infringers, but at the same time it left unanswered the question on how to calculate reasonable royalties.

In the EU, in 2014, the Commission found that SEP-holders seeking injunctions against implementers willing to license infringe article 102 TFEU (Motorola and Samsung). Later in 2015, the Court of Justice of the EU (CJEU) set up a number of specific obligations bearing upon the parties during the negotiation of licensing terms, and stated that the failure to comply with these obligations by the SEP-holder would give rise to an abuse of dominant position (Huawei).

The same occurred in the US, where, for instance, Google settled with the Federal Trade Commission after being investigated for enforcing its SEPs against Motorola.

Further to this, officials from the DOJ and the Commission invited the SSOs to clarify how to calculate FRAND rates. In particular, in 2015 the former DOJ Deputy Assistant Attorney-General Renata Hesse blessed the new IP policies adopted by the main US-based SSO (IEEE). These IP policies tied the concept of “reasonable rates” to the value contributed by the patented invention to the “relevant functionality of the smallest saleable compliant implementation”. According to major SEP-holders, the reform of IEEE’s IP policies was the outcome of a collusive strategy pursued by some implementers who allegedly commandeered the IEEE‘s decision-making bodies in order to artificially reduce the value of the royalties.

Also former EU Competition Commissioner Almunia encouraged SSOs several times to make the meaning of ‘reasonable rates’ clearer and, in general, adopted an aggressive approach toward SEP-holders. For example, in a speech in 2013, he said that “ideally, this principle should be implemented by the standard-setting organisations themselves. But since that is not happening, I am willing to provide clarity to the market through competition enforcement”.

The new approach

Having said that, in these days we are assisting to a shift in the policies adopted by the two main antitrust bodies in the world.

In the US, the new head of antitrust at DOJ, Makan Delrahim, delivered a speech on November 10 where he argued that antitrust enforcers have strayed too far in favour of implementers, and that a FRAND commitment cannot turn into a compulsory licensing scheme. Indeed, violation of a FRAND commitment should be dealt with through contract law, and enforcement of patents, whether essential to a standard or not, including through seeking an injunction, should never be considered an antitrust violation.

According to Delrahim, patent hold-out by implementers should be considered a more serious antitrust risk than hold-up, since “innovators make an investment before they know whether that investment will ever pay off”, while implementers do not invest in R&D and may just threaten not to take a license at all, until their royalty demands are met without suffering serious legal or economic consequence.

In this regard, the Assistant Attorney General emphasized the risk that technology-buyers might collude within SSO in breach of antitrust law. More specifically, he used the new IEEE IP policy as an example of an imbalanced policy and called for antitrust scrutiny on SSO rules which aim to clarify the meaning of “reasonable and non-discriminatory”, but skew the bargain in the direction of implementers.

This is an impressive U-turn compared to the approach of Renata Hesse and the former Administration, which decided not to challenge the new IEEE’s IP policies arguing that they would have translated into quicker negotiations, less litigation and faster implementation of technology.

In the EU, although the Commission will not apparently refrain from investigating patent hold-up in the future, it is currently working on a policy paper which will provide guidance on how to license SEPs at FRAND terms, and in particular on the definition of “reasonable rates”. The communication should be published by the end of 2017, but some leaks reveal that the Commission will allow SEP-holders charging different royalties for the same technology depending on the value contributed to the final product (i.e.: a smartphone, a tablet, an usb device..). As of today’s case law, this right is all but straightforward.

All in all, the approach which is prevailing on the two sides of the Atlantic appears a recognition by antitrust enforcers of the risk to disincentive investments in R&D and might lay the ground for a more reasonable application of competition law to IP rights. Indeed, while the exercise of IP rights shall not be exempted from competition law, regulatory-like interventions by antitrust authorities or courts, aimed at regulating every single step of the licensing negotiation, go beyond the scope of antitrust law and frustrate the proprietary nature of IP rights. It would be more effective and less harmful for innovation if competition offices focused their action on unambiguous cases of abuse or anticompetitive agreements within SSOs aimed at providing unbalanced definitions of what FRAND means. The rights to seek injunctions or to negotiate licensing agreements are fundamental IP rights and SEP-holders should be entitled to enjoy more legal certainty in this regard.

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