Transparency in SEP Licensing

Towards the end of a paper I published in the Patently-O Law Journal in January titled Is Global FRAND Litigation Spinning Out of Control?, I wrote:

 

. . . while licensing agreements may be disclosed among parties to litigation, pursuant to confidentiality requirements that may differ in some respects among national courts, they generally are not matters of public record. Although the business rationales for keeping such information private are not hard to fathom, it is not at all clear how, in the absence of such information outside the litigation context, anyone can substantiate whether SEP owners are complying with their obligation to offer nondiscriminatory royalties (whatever the correct definition of “nondiscriminatory” happens to be)—or how decisionmakers can be confident that the comparables disclosed in litigation are representative of the whole. . . . That said, I don’t see any practical way for SSOs or, for that matter, even governments, to require such disclosure as a matter of course. . . .

 

Although I still think that it’s going to be difficult to solve this problem for the foreseeable future, some recently published papers give me hope that, at the very least, I am not alone in seeing these issues as something that desperately needs to be addressed.

 

First, as I noted not too long ago, in January the European Commission published a document titled Group of Experts on Licensing and Valuation of Standard Essential Patents ‘SEPs Expert Group’ - full contribution.  As other commentators have already noted—see discussions by Florian Mueller, Enrico Bonadio and Luke McDonagh (here and here), and Damien Geradin—the group didn’t reach consensus on very many issues.  Several members of the group nonetheless appear to have supported Proposal 47, which states “A confidential repository of SEP licensing agreements could be established to be used by courts, competition authorities, public arbitration boards, or trusted persons to promote transparency. . . . Having access to the terms and conditions of prior agreements would facilitate a comparison among terms and conditions offered to multiple parties, which is a key aspect of the ND assessment”; and also Proposal 67, which states “It is proposed to require parties to SEP licence agreements to submit these agreements (or specified key provisions of such agreements) to a market transparency office to be established, for building and maintaining a strictly secret repository of SEP licence agreements, solely for use by courts, competition authorities and possibly arbitration/expert boards and other trusted persons to be agreed upon.”  If proposals like these should come to pass, they would have the potential to reduce the risk of gamesmanship on all sides—though it should be noted that the specific disclosures envisioned would not go beyond the specified public entities or trusted persons.

 

In addition, several members also supported various proposals for encouraging collaborative efforts, such as the formation of patent pools, to streamline SEP licensing.  One proposal in particular that caught my attention was Proposal 75, in which it is “proposed to develop an appropriate mechanism and controls to allow licensee negotiation groups (industry associations representing member implementers or groups of individual implementers) to jointly negotiate licences with individual SEP holders and SEP patent pools without the risk of getting in conflict with antitrust regulation” (p.169).  The proposal calls to mind a similar proposal that was advanced by the U.S. Antitrust Modernization Commission in 2007, and which I wrote about at the time (see, e.g., here), under which joint bargaining prior to the adoption of the standard would be subject to antitrust scrutiny under the Rule of Reason (not per se illegal).  As I have also noted previously, however, the lone dissenting member of the AMC with regard to this proposal was one Makan Delrahim, who later went on to head the Antitrust Division of the U.S. Department of Justice during the Trump Administration.  Now that he is gone, though, I would expect that U.S. antitrust enforcers might be more inclined to take a favorable look at the sort of efforts contemplated by the AMC proposal or the SEP Expert Group’s Proposal 75.  Perhaps the time has come for some SSO to try this out.

Second, I would note a recent paper by Jorge Contreras and Richard Gilbert, titled Non-Discrimination—FRAND’s Last Stand?, CPI Antitrust Chronicle, Dec. 2020.  The authors argue, generally, that the “nondiscriminatory” aspect of the FRAND commitment “enables a level playing field for competition and investment by SEP licensees,” and “can be an effective means to assess fair and reasonable royalty rates in the fractious environment of FRAND compliance under some circumstances” (p.1). Further, “[i]f SEP holders commit to royalty terms before a standard is approved and released by the SDO, and if the ND prong of the FRAND commitment requires that such terms apply to future licensing negotiations, this would have the ancillary benefit of mitigating concerns about holdup that might arise after firms and consumers have committed to the standard” (id.).  To this end, the authors—noting that “[n]on-discrimination cannot be enforced without information about the royalty terms and conditions negotiated by other similarly-situated licensees” (p.7)—propose that “SSOs adopt measures to disclose royalty terms early in the development of a standard and limit rate escalation,” that is, to “post a royalty schedule for all patents that they declare essential to a standard early in the development of said standard,” and “impose caps on the rate at which royalties can increase for FRAND-encumbered patents” (pp. 7-8).  As they note, in 2006 one SSO (VITA) did adopt a requirement that members disclose maximum royalty rates ex ante, but to date no other SSOs have done so.  They suggest that such a requirement would reduce the risk of both holdup and holdout (p.8).

I certainly agree that increasing transparency in licensing would be beneficial.  Indeed, I would go farther and question why the nations of the world tolerate not only SEP owners’ keeping secret the terms of their licenses, which in the present context can frustrate efforts to substantiate compliance with the FRAND commitment; but also, more generally, patent owners’ R&D expenses (e.g. in the pharmaceutical industry).  After all, if we buy into the “patent bargain” construct—we grant patents in return for inventors disclosing how to make and use their inventions—it seems odd to me that we don’t also require, as a condition of the bargain, that we be provided with the information that would be necessary to evaluate whether the public is getting its money’s worth.  (To be sure, we may well be getting our money’s worth; it’s just that it’s impossible to tell, if there is no public examination of the books.  I also recognize that trade secret or other laws might, in theory, pose an obstacle to rules requiring the public disclosure of licensing information, R&D expenditures, and so on.  For present purposes, I will not be delving into the merits of such arguments, though they might make for an interesting research project at some point.  Of course, if trade secret or other laws do pose an obstacle, the question arises whether those laws themselves are too protective.)  But how to get from here to there is the key question.  As the authors cited above note, and as I have noted as well, it isn’t easy to get SSOs to agree on more expansive disclosure requirements for a variety of reasons, including the heterogeneity of their membership—although the SSOs’ exposure to antitrust liability, at least, may be somewhat diminished with the change in administration in the U.S.  Moving forward therefore will be difficult, and may require affirmative, and bold, action by governments to break the logjam.  Alternatively, there have been calls from time to time (principally by economists, in my experience) for considering whether SSOs should be liable for violating the antitrust laws, if they don’t take more aggressive steps to curtail their members from exploiting the substantial market power that the SSOs themselves confer upon them by adopting standards that inevitably wind up incorporating members’ patented technologies.  (See, e.g., here.)  For now, this remains a minority view, but perhaps over time it will gain strength.

 

Finally, I will note a recent paper by Jan Schmitz, a Policy Officer of the European Commission, and Fabian Hoffmann, a judge on Germany's Bundesgerichtshof, which suggests that maybe we could forgo the use of comparables altogether (or at least reduce our reliance on them) when setting FRAND royalties.  (Whether this would address the “nondiscriminatory” issues flagged above is another matter.)  The paper is titled SEP Royalty Rate Calculation on the Basis of the Present Value Added (PVA), 49 AIPLA Q.J. __ (forthcoming 2021).  As the abstract notes:

 

The most common method for standard essential patent (SEP) valuation and to determine a fair, reasonable and non-discriminative (FRAND) royalty rate is based on comparable license agreements. This method is relatively simple to apply, but has several disadvantages. Firstly, license agreements are often not comparable on important points. Secondly, they are usually based on a selection by the submitting party, who has an interest to select only favorable license agreements for comparison. And thirdly, those selected agreements might not result from a fair negotiation, because of possible market power by either of the two sides. 

 

As an alternative to the use of comparables, the authors propose a present value added (PVA) methodology that attempts to determine the incremental value of the patent or patents in suit to the relevant product (end product or component), and then to apportion that incremental value between the SEP owner and the implementer on a 50-50 basis.  The authors then provide some illustrative examples of how this would work.  As they note, their methodology would be easiest to carry out when it is possible to compare two products, one that embodies the patented technology and one that does not (as was the case, I would note, in the Japanese Apple/Samsung SEP litigation from a few years ago, where the IP High Court was able to do precisely that, see discussion here at p.20.  I would also note that the concept of estimating the incremental value of the patent in suit and apportioning it in some fashion between the patentee and the implementer is something that my coauthors are I recommended in the Reasonable Royalties chapter of the edited volume Patent Remedies for Complex Products, see here at pp. 16-17.  What Schmitz and Hoffmann are proposing could be a practical way of extending and carrying out this core idea.)  They also note that carrying out their methodology will be more complex when there are not “comparable products with and without the implemented patented technology” (p.23), but suggest that econometric techniques including hedonic price regression, choice modeling, conjoint analysis, and the estimation of full demand systems could be used (id.).  They conclude, however, that “the full estimation of a demand system,” while “theoretically the most sound option,” “requires much more information about the market and real transactions, including prices and volumes” (pp. 23-24).  I’m not familiar with this technique myself, and probably should educate myself by consulting the sources the authors cite; there is also a brief discussion of this technique in Annex 6 of the SEP Expert Group Report noted above, which is worth reading.