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.
