Context: Last week, the European Parliament’s Legal Affairs Committee (JURI) approved, with an unusually slim majority, a proposal for an EU regulation on standard-essential patents (SEPs) (ip fray article).
What’s new: Post-JURI discussions on social media show that “transparency” (or the alleged lack thereof) is still one of the key policy goals stressed by those in favor of the proposal. It’s worth taking a closer look at whether there is a transparency problem in SEP licensing, whether (or to what extent) the SEP Regulation would enhance transparency and whether the organizations claiming to promote transparency practice what they preach.
Direct impact: The proposal remains controversial and needs to be put to a plenary vote followed by interinstitutional consensus-building. It won’t be passed into law before the end of the current EU legislative term.
Wider ramifications: In another context that involves de facto essential intellectual property rights that confer monopoly power, the primary backer of SEP devaluation advocacy is an enemy of transparency. Partly the same lobbyists and astroturfers who support Apple on SEPs also defend Apple’s anti-transparency and supra-FRAND positions in other contexts, including one in which the European Commission will now have to take enforcement action culminating in a FRAND determination against Apple.
The purpose of this article is to bring transparency into the EU debate over transparency concerning SEPs. As ip fray stated on the occasion of the JURI vote (January 24 article), both sides of the debate are right in some respect, but the fundamental flaws of the proposal clearly tip the scales in favor of its withdrawal.
SEP enforcement case law requires transparency
Germany favors SEP holders more than any other jurisdiction, which is actually the sole reason for the EU initiative on SEPs. But even there, SEP enforcement case law is very much pro-transparency:
- Other than charging duplicative royalties (double-dipping in the combination of a bilateral license agreement and a pool license), an insufficient production of comparable license terms is the greatest risk for SEP holders in Dusseldorf.
- In Mannheim, no such case has come to judgment, but there was one in which a SEP holder’s inability to present certain confidential agreements would have led to the denial of an injunction.
- In Munich, no case is known where transparency was about to prove outcome-determinative, but the Munich I Regional Court’s different patent divisions have repeatedly reminded SEP holders of their disclosure obligations.
Transparency is a behavioral question. Pre-judgment conduct is what the German courts always try to base their SEP decisions on. They don’t want to get into any serious economic analysis. That’s why a lack of transparency is probably the #1 risk factor for SEP holders seeking to enforce in Germany.
Side letters and complex quid pro quo structures
It is a known issue that SEP licensing terms are often difficult to infer from complex business agreements that involve SEPs, non-SEPs, potentially licenses going in both directions (such as Nokia-OPPO (ip fray article)) and often also other business transactions. For instance, the 2017 Nokia-Apple agreement involved product sales (and potentially even services, but in any event, it went clearly beyond a pure IP license agreement).
The EU SEP Regulation wouldn’t solve that problem, and there actually is no solution to it because companies must have the right to enter into commercial agreements that go beyond a one-way-street SEP license. It would be a recipe for even more litigation if license agreements couldn’t be portfolio-wide (including non-SEPs) and bilateral. It would complicate settlement efforts if companies couldn’t make concessions in a non-patent context in which they identify a mutual business opportunity.
The EUIPO-led royalty determinations for entire standards or for particular bilateral deals would be of very limited value. In the end, if parties need or simply want a multifaceted deal, they’ll do it anyway.
To the extent that side letters are abused to hide relevant facts such as kickbacks, it is up to the courts to ensure that those who don’t come clean will lose their cases and potentially even be sanctioned on top.
Do licensees actually reward transparency?
With all of that talk about how the EU SEP Regulation is allegedly needed for transparency’s sake, it’s odd that even when licensing offers are extremely transparent, it doesn’t mean everyone jumps to take a license.
Avanci and Sisvel publish their pool rates on the internet, as do other pool administrators (but these two are the ones who most frequently get mentioned in the EU SEP Reg debate). That doesn’t mean everyone immediately takes a license. When terms are disclosed, the same ones who are pushing for the EU SEP Regulation are still going to complain because they’d like to pay less.
The EU Commission’s Directorate-General for the Internal Market (DG GROW) and certain Members of the European Parliament don’t really give credit to major pool administrators who have been providing for years a very high level of transparency. Also, the fact of the matter is that whatever the EU proposal wants pools to do beyond what Avanci and Sisvel are already doing would conflict with many implementers’ desire to keep their license agreements confidential.
There can almost always be more transparency, but that doesn’t mean there’s an intransparency issue
When someone demands transparency, it’s obviously not an option to advocate opacity. But it is necessary to distinguish between sub-100% transparency of the workable kind and a degree of intransparency that gives rise to serious concern.
Comparing the SEP licensing situation to other commercial transactions, there’s actually more transparency in that field than in some others that affect the same companies that need to license SEPs. If an automaker buys a component, be it a digital one or a tire (Continental offers both), it also won’t go into the negotiations knowing everything about the supplier’s business terms with other parties. Of course, the difference is that those components are usually substitutable, while an implementer must license all patents that are essential to a given standard. But that’s why there’s Huawei v. ZTE and the related disclosure requirements that were mentioned further above.
The proposed EU processes would be less transparent than conventional litigation
One just has to look at the text of the proposal and can immediately see that it involves certain proceedings that are actually more transparent when the same determinations of essentiality or FRAND rates are made by the courts of law.
Implementers don’t want total transparency concerning their licensing activity
In the current debate, representatives of implementers argue that SEP holders should make all sorts of information (also concerning demand letters to small and medium-sized enterprises) public. But their demand is asymmetrical. On the same basis one could also require disclosures concerning how many license agreements those companies have in place, what they pay in the aggregate of all of them relative to their product sales, how many involved litigation and in how many cases the license agreement in question had already expired (or was just about to expire) at the time of a renewal.
Such information could theoretically also be put into an EU SEP Register. But implementers don’t seem to want that.
Lobbying entities and MEPs aren’t 100% transparent
There are two organizations pushing for the EU SEP Regulation that don’t apply the same transparency standard to themselves:
- ACT | The App Association has been exposed by Bloomberg to be funded primarily by Apple while pretending to represents SMEs (that’s called astroturfing (Wikipedia article)).
- The Fair Standards Alliance (FSA) does list all of its members on its website and there is no reason at all to assume that anyone outside of that list is paying them. Therefore, the FSA does not engage in astoturfing, but it could distance itself from it more consistently. The FSA hired a former ACT lobbyist who publicly (on LinkedIn) thanked ACT for organizing an event related to the EU SEP Regulation. The FSA is likewise funded by Apple, and while there is no discrepancy between who funds them and whom they claim to represent, they don’t (and in ip fray‘s opinion don’t have to) publish a list of their members with the amounts and/or percentages of their contribution. To the extent that the FSA makes SME arguments, one can tell based on their published member directory that they’re not really an SME organization, which is different from what ACT claims to be the case.
MEPs are subject to a much softer transparency rules than their colleagues in various major national parliaments. They just provide some general aggregate information, though many of them actually receive more money from companies and lobbying entities than from EU taxpayers.
Apple’s fight against transparency and FRAND in the App Store context
Apple doesn’t allow app makers to tell their users what Apple charges, and a U.S. court ordered an injunction to require Apple to allow app makers to point users to alternative purchasing options (games fray article). And now Apple has just thrown down the FRAND gauntlet to the EU institutions with respect to its App Store terms. Essentially, Apple is telling the EU Parliament, the EU Council and the EU Commission that it doesn’t care about the legislative intent behind the Digital Markets Act (DMA) to open up app distribution (latest games fray article), and will instead defend supra-FRAND rates in court for years to come (games fray article on Apple’s FRAND-centric strategy).
To add insult to injury, Apple even tells influencers such as John Gruber, “the King of the Apple Geeks” as Business Insider dubbed him (and with whom games fray has a constructive agree-in-part agree-to-disagree-in-part relationship), that the EU DMA has opened the door to adult content apps in the EU. Sadly, that is so far the only app genre for which Apple’s supra-FRAND and onerous terms might work, given that Apple would never allow such apps on its own App Store and such offerings can easily charge users enough to be viable (while the EU’s actual objective of having alternative app stores for games and productivity apps won’t be reached, at least not to any meaningful degree).