Context: Not only is the debate over a proposed EU regulation on standard-essential patents (SEPs) in full swing (March 15, 2024 ip fray article), but there is also an initiative by the EU Commission’s Directorate-General for Competition in the form of an amicus curiae intervention (March 26, 2024 ip fray article). Those advocating weaker patent enforcement are now also hoping to restrict access to non-SEP injunctions in the EU (March 30, 2024 ip fray article). And there are lobbying activities in non-EU jurisdictions, with a recent flurry of submissions to the Indian government being just one example.
What’s new: At a Chinese conference last month and at a recent Licensing Executives Society event, SEP licensing and enforcement were discussed. In this article, ip fray would like to address some fallacies and inconsistencies. While some court decisions have been made in recent years, particularly in Germany, that went too far and disadvantaged implementers, the SEP ecosystem is not in an existential crisis that warrants calling every single one of its aspects into question now.
At an “IP Forefront” event in Shanghi last month, automotive supplier Continental’s head of SEP matters, Dr. Michael Schloegl, delivered a key note on “emerging issues in licensing and enforcement of SEPs” and advocated for the proposed EU SEP Regulation (according to what ip fray has meanwhile heard).
Continental’s customers (possibly without a single exception, but at least to an overwhelming extent) have a license from the Avanci automotive patent pool (at least 4G, and some of them have already upgraded to 5G). They could also have opted for bilateral licenses, as Daimler initially did until the company (now named Mercedes) determined that the terms of an Avanci license were a superior option for them.
Where Dr. Schloegl has a point is that the Munich I Regional Court’s IP Bridge v. Ford decision of two years ago rewarded a refusal to negotiate a bilateral license. How seriously Ford was interested in a bilateral license is hard to tell, but the public redacted version of the judgment comes down to a doctrine according to which there are no proportionality considerations in such a scenario: an implementer held to infringe one valid SEP may be forced to license 10,000 SEPs at once. One need not support that approach, and one can also disagree with some other SEP rulings. But it’s also a fact that Avanci’s contract does not preclude SEP holders from entering into bilateral agreements. It was a large part of the reason why a Conti v. Avanci lawsuit in the U.S. got nowhere, and there are real-world examples of bilateral license agreements between Avanci contributors and implementers at different levels of the automotive supply chain.
In that presentation, Dr. Schloegl went on to assert that “[s]ome patent pools are part of the problem rather than the solution and have exacerbated the need for European legislation.” To have a factual discussion, the evidentiary hurdle must be fairly high before a claim that a mere option (an alternative to bilateral licensing) can exacerbate a situation. If the nearby supermarket sold bad apples, how would the existence of another retailer across the street, selling apples (possibly as part of an optional multi-fruit offer), make anything worse? If it came to worst, one could always go back to the original supermarket. One can blame the second option for failing to be good enough for one’s own taste, but nothing more than that.
Maybe Dr. Schloegl should actually criticize Conti’s (presumptive) customer Ford then. After that IP Bridge ruling, Ford folded and took the pool license. The alternative would have been for Ford to at least file an emergency motion for a stay with the Munich appeals court. They could have focused on the very issue Dr. Schloegl is concerned about. And while things usually take longer in Brussels, Ford could have asked the EC’s DG COMP to file an amicus brief with the Munich appeals court, supporting a motion to stay the injunction so that the appeals court could have clarified that proportionality question. Ford would have been large (and should have been sophisticated) enough to at least try that before accepting the IP Bridge decision in that particular form.
The analysis of a “but for” world also shows that the availability of the Avanci one-stop option cannot have “exacerbated” the situation and won’t have led the EC to take a legislative initiative. In a world but for Avanci, car makers would still have used cellular SEPs, they would still have had to license them, and if they hadn’t done so, they would have been sued. But in that case they’d have had to work out thousands of individual agreements (dozens of car makers and dozens of SEP holders). Not every one of those patentee/automaker combinations would have given rise to litigation, but even if a small percentage of them had, the automotive industry would have begged for something like Avanci to be created.
Another point made by Dr. Schloegl in Shanghai needs to be addressed. One of his slides said there are 75K SEPs worldwide, representing less than half a percent of all patents registered worldwide, but 22 out of 90 infringement cases before the UPC (24.4%) involve SEPs. From those numbers, he concludes that “SEPs are heavily litigious and overrepresented before courts which underscores the need for regulation” (and says judges have criticized the current framework).
SEPs are indeed overrepresented in some contexts, also including patent assignments. But there are different explanations to consider before jumping to the conclusion that the SEP system is broken:
- Many non-SEP infringements are simply never identified. Chances are, for instance, that numerous patents are being infringed by cloud services as we speak, but such infringements often aren’t identifiable from the outside. In that case, there would be a problem non-SEP underenforcement rather than SEP overenforcement. The numbers alone don’t rule it out.
- With SEPs, the fact that a patent reads on a standard is generally considered a sufficient basis for an infringement allegation under Rule 11 in the U.S. (with further details then being clarified through pretrial discovery) and in such jurisdictions as Germany, an initial infringement allegation based on the specification of a standard reverses the burden of proof.
- SEPs are about interoperability, and where there is interoperability, one can intercept messages or other data and conduct an infringement analysis.
- SEP implementers (especially if their own patents are largely non-SEPs) don’t like to hear this, but the enforcement discrepancy highlighted by Dr. Schloegl may in part also be attributable to the fact that SEPs are objectively valuable. The FRAND encumberment limits what right holders may charge, but at the outset of infringement litigation, it makes a major difference if there is a reasonable probability of being paid something (which doesn’t necessarily mean every SEP holder is suing to extract supra-FRAND royalties).
- What SEP implementers may not like to hear either is that if SEP enforcement was easier, there would be less litigation as there would be fewer unwilling licensees. And relative to the huge number of license agreements concluded without litigation (case in point, not a single Avanci 5G license so far required patent assertions), SEP enforcement is still an exception.
As an independent publication aiming to provide useful information to the entire patent law community (from pure implementers to pure licensors), ip fray does not intend to downplay or deny issues that exist. Instead, the objective is to encourage thorough analysis, which involves the distinction between correlation and causation. If critics of the status quo waste time and energy on the wrong targets, it is a lost opportunity to identify and address the real issues.
It may be tempting to try to topple the SEP system as a whole now, but it’s not going to work. There comes a point where policy makers will tell implementer advocates to content themselves with certain measures (and to wait and see how it works). That’s why the focus should be on real issues, not on imaginary ones.
In that regard, the recent LES event on SEPs and an article published by an implementer-friendly attorney about it also warrant some further comment.
The political hyperactivity of net licensees and their supporters creates an increasing problem of inconsistencies, non sequiturs and even fact-free “arguments”:
- According to a report, someone argued at the LES event that car makers need an Avanci license for $20 plus a license from another company for $15 that operates patent pools and holds some patents of its own, but is actually an Avanci contributor and doesn’t have an automotive pool of its own. Someone must have confused one company for the other, to the effect of believing there were two automotive patent pools charging comparable rates.
- That same article argues that dog food costs the same regardless of breed, and so should SEP licenses regardless of “use case” (such as whether cellular connectivity is incorporated into a car versus a phone). In that context, the article mentions Avanci. Not only does Avanci have identical royalty rates across all car brands (from the cheapest Toyota to the most expensive Lamborghini, which is the equivalent of dog breeds), but it has even been criticized by implementers over that very fact. Volkswagen’s then-chief patent counsel Uwe Wiesner went on the record at a European Commission webinar a few years ago, complaining that VW’s high-volume brands (with a lower average price per car) need to pay the same cellular SEP royalties as, for instance, Tesla. This means there are now contradictory voices from the net licensee camp on the question of whether the price of cellular connectivity should be the same regardless of the price of a car.
- The argument that use case doesn’t matter because everything is in a baseband chipset rings hollow. If a car maker buys some seats, then it can obviously incorporate them into whatever type of car. But those seats are then fully paid for, and there are market dynamics that presumably make it impossible for a supplier of seats to restrict use. With cellular baseband chips or connectivity modules, the situation is such, however, that those types of patents have traditionally been licensed at the end-product level, so one can’t just assume that all of the relevant patents were exhausted by the first sale of the relevant chip or module.
- Objectively, intellectual property just doesn’t work like physical components. A commodity has a price that is unrelated to the use case. Inventors, however, are entitled to fair compensation based on the value they create. If car makers charge customers ongoing fees for cellular connectivity after the first two or three years, that is another revenue stream to be considered in the FRAND analysis. If a car is used for 15 years while people replace phones after a couple of years, that is another factor.
- The ND part of FRAND cuts both ways. It’s not allowed to impose unequal terms in equal situations, but it’s also discriminatory to impose equal terms in unequal situations. Those advocating weaker SEP enforcement like to make arguments relating to IoT products. But they wouldn’t want the same per-unit royalty to apply to a smart meter or asset tracker as to a car.
- Another inconsistency is that the world’s most deep-pocketed advocate of the Smallest Saleable Patent-Practicing Entity (SSPPU) being the proper royalty base, Apple, does not consistently apply that principle to its own charges as a gatekeeper. Apple’s new Core Technology Fee (CTF) in response to the EU’s Digital Markets Act is a per-install per-year fee regardless of what kind of app it is and whether that app is more or less profitable. But Apple’s own App Store charges a percentage on digital transactions, and Apple even declined to make an exception for non-fungible token transactions (which tend to take place at prices far above regular in-app purchases).
For the avoidance of doubt, the problem is not that implementers have no valid reasons to criticize the status quo (in fact, SEP holders may have such reasons, too). It’s that the debate has gone off the deep end, in no small part because of the process that led to the EU SEP Regulation proposal and because of what has happened since.