New Papers on FRAND, SEP Issues Part 2

1.  Herb Hovenkamp has posted a paper on ssrn titled FRAND and Antitrust.  Here is a link, and here is the abstract:

This paper considers when a patentee’s violation of a FRAND commitment also violates the antitrust laws. It warns against two extremes. First, is thinking that any violation of a FRAND obligation is an antitrust violation as well. FRAND obligations are contractual, and most breaches of contract do not violate antitrust law. The other extreme is thinking that, because a FRAND violation is a breach of contract, it cannot also be an antitrust violation.

Every antitrust case must consider the market environment in which conduct is to be evaluated. SSOs operated by multiple firms are joint ventures. Antitrust’s role is to evaluate how challenged restraints operate within the venture and condemn unreasonably anticompetitive practices. In her Qualcomm decision Judge Koh devoted considerable space to standard essential patents and FRAND commitments, but she addressed the antitrust refusal to deal and exclusion claims with little reference to standard setting or FRAND.

Breach of a FRAND commitment violates the antitrust laws when it causes competitive harm. For §1 of the Sherman Act, this requires an agreement that threatens to reduce market output. If the conduct is reasonably ancillary to other procompetitive activity, this requires an assessment of market power and anticompetitive effects. For §2 of the Sherman Act or §3 of the Clayton Act, it will require a showing of unreasonably exclusionary conduct by an actor with market power.

The antitrust issue of unilateral refusals to deal is too often confused with the essential facility doctrine. The essential facility doctrine is based on the idea that some assets are so essential to commerce that the owner has a duty to share them. By contrast, the refusal to deal rule is rooted in conduct – namely, a specific prior contractual obligation, reliance and path dependence, and subsequent repudiation. Many joint ventures involve a significant sunk investment in assets that are dedicated to the venture. If one firm can later extract itself and commandeer the relevant technology, it can leave the remaining firms at a significant competitive disadvantage, with the effect of transferring market share, reducing output, raising prices, and ultimately undermining the competitive promise of such ventures. This makes antitrust refusal to deal rules particularly important for collaborative networked industries.

While the essential facility doctrine is conducive to competitor passivity, the Aspen rule facilitates competitor investment. The idea that a facility is “essential” indicates that rivals need not bother to develop their own alternatives. Instead, they should seek a right to connect into the dominant firm’s facility. By contrast, the Aspen rule is based on a premise of voluntary commitment to invest jointly. If one firm later reneges on that commitment in a way that threatens to undermine it, those investment backed expectations are lost. The Aspen rule thus serves to protect the integrity of investment when noncompetitive outcomes are threatened.

The debate over “holdup” or “holdout” in the FRAND setting has occasional antitrust relevance. While holdout is a real problem, there is little empirical evidence that it occurs frequently in FRAND settings. Holdout occurs when implementers conspire to exclude patentees or suppress royalties. But standard essential patents are largely self-declared and, as it appears, significantly over declared. Further, “holdout” hypothesizes agreements to force patentees to accept infra-market royalties, but FRAND royalties are determined post-commitment by independent tribunals, and there is no evidence of systematic undercompensation.

One objection to finding antitrust liability when the defendant’s conduct has also violated its FRAND obligation is the threat of double liability. There is little basis in fact or law for this concern. Many federal antitrust violations violate various common law and statutory rules. The remedy in these cases is not to dismiss one or the other claim at the onset, but rather to avoid double counting of damages for the same harm.

Finally, while some object to using antitrust law to discipline firms for seeking injunctions on FRAND-encumbered patents, existing antitrust doctrine on the point is clear and sufficient: a firm has the right to seek relief in court unless its prospects are so poor that the lawsuit must be regarded as a “sham.” The antitrust question of injunctions on FRAND patents is thus quite fact-specific and depends on the extent to which the law is settled.

Very good paper, though perhaps the abstract could use its own abstract.

2.  Mark Lemley & Tim Simcoe have published a paper titled How Essential Are Standard-Essential Patents?, 104 Cornell L. Rev. 607 (2019).  Here is a link, and here is the abstract from the ssrn version:

Courts, commentators, and companies have devoted enormous time and energy to the problem of standard-essential patents (SEPs) – patents that cover (or at least are claimed to cover) industry standards. With billions of dollars at stake, there has been a great deal of litigation and even more lobbying and writing about problems such as how if at all standard-setting organizations (SSOs) should limit enforcement of patent rights, whether a promise to license SEPs on fair, reasonable, and non-discriminatory (FRAND) terms is enforceable in court or in arbitration, what a FRAND royalty is, and whether a refusal to comply with a FRAND commitment violates the antitrust laws.

In this study, we explore what happens when SEPs go to court. What we found surprised us. We expected that proving infringement of a SEP would be easy – they are, after all, supposed to be essential – but that the breadth of the patents might make them invalid. In fact, the evidence shows the opposite. SEPs are more likely to be held valid than a matched set of litigated non-SEP patents, but they are significantly less likely to be infringed. Standard-essential patents, then, don’t seem to be all that essential, at least when they make it to court.

At least part of the explanation for this surprising result comes from another one of our findings: many SEPs asserted in court are asserted by non-practicing entities (NPEs), also known as patent trolls. NPEs do much worse in court, even when they assert SEPs. And the fact that they have acquired a large number of the SEPs enforced in court may bring the overall win rate down significantly.

Our results have interesting implications for the policy debates over both SEPs and NPEs. Standard-essential patents may not be so essential after all, perhaps because companies tend to err on the size of over-disclosing patents that may or may not be essential. The failure of NPEs to win cases even with what seem like they should be a strong set of patents raises interesting questions about the role of NPEs in patent law and the policy efforts to curb patent litigation abuse. 

I mentioned an earlier draft of this paper here.

3.  Martin Stierle published Conference Report:  Injunctions and Flexibility in Patent Law--Civil Law and Common Law Perspectives, in the June 2019 issue of GRUR (pp. 599-601).  The report provides an overview of a conference, in which I participated this past April, at Ludwig Maximilian University in Munich.  For discussion elsewhere of the Munich conference, see here; see also my paper, which will be published in a forthcoming issue of  Zeitschrift für Geistiges Eigentum/Intellectual Property Journal.