Context: Licensing (or “Licensee”) Negotiation Groups (LNGs) were proposed by Volkswagen to various regulators a few years ago, but got no traction at the time. In a standard-essential patent (SEP) infringement complaint against Volkswagen, Acer mentioned that fact in late 2021. A Qualcomm executive said at an automotive IP conference in Munich (also in late 2021) that LNGs are just plain old “cartels” and “anyone involved should go to jail.” A U.S. government official raised cartel-related concerns over LNGs at a recent event in China.
What’s new: MLex reports that the three German automaker groups (Volkswagen, BMW and Mercedes) plus Thyssenkrupp are trying to revive the LNG concept, which they claim would counterbalance the market power of patent pools (LinkedIn post) and which would be open to other automotive industry players joining. Germany’s Federal Cartel Office has sent out a questionnaire. In other news relating to automotive industry cartels, companies including Continental, the most belligerent critic of SEP holders and pools, have been raided by the European Commission over suspicions of a tire price-fixing cartel (European Commission press release).
Direct impact: It is unlikely that the Federal Cartel Office will grant clearance. Moreover, even if it did, the participating companies couldn’t take the risk of violating any other jurisdiction’s antitrust laws, and it’s inconceivable that their proposal would get traction on a worldwide basis. While the tire cartel that the European Commission is investigating now is technically unrelated to the question of SEP licensing, one of the suspects, Continental, is a major critic of net licensors of SEPs and their pool (Avanci).
Wider ramifications: Certain Members of the European Parliament (MEPs) would like the EU SEP Regulation to endorse LNGs. Whatever the legislative or regulatory context may be, the authorization of LNGs would set a dangerous precedent for buying cartels beyond the SEP context and throughout and beyond the automotive sector with its rich history and consistent track record of forming illegal cartels.
While ip fray advocates a balanced SEP licensing framework, the end of giving one side more leverage doesn’t justify the means of turning cartel rules on their head.
The notion that LNGs mirror patent pools is fallacious at best. There’s a simple reason from which everything else can be inferred: an automotive SEP pool like Avanci is purely optional. It does not bar its licensors from entering into as many bilateral agreements as they wish to conclude. Therefore, it creates an additional choice without taking away any existing one. But an LNG would result in collective hold-out by companies with substantial collective market share, which means buying power.
The chief antitrust correspondent of MLex, Khushita Vasant, thankfully shared a brief summary of her report on a push by Volkswagen, BMW, Mercedes and Thyssenkrupp for regulatory greenlight by the Federal Cartel Office of Germany (“Bundeskartellamt” in German), which has asked questions of which ip fray is trying to obtain a copy.
It’s hard to think of any other industry than the auto sector in which cartels are such a recurring issue. Many companies in that industry are recidivists who have been investigated and fined again and again and again.
For the avoidance of doubt, ip fray disagrees (as does, presumably, the automotive industry) with case law that requires an implementer of a standard to license many thousands of patent families after a single patent has been held essential and infringed. That is disproportionate and results in an overleveraging of SEPs. While an obligation to take a pool license (under the threat of a sales ban) in the absence of a fair, reasonable and non-discriminatory bilateral licensing offer may be justifiable in connection with relatively small pools, there should be a reasonable ratio between the infringement(s) proven and the scope of the license that a defendant is expected to take. But that is an issue with the case law, and neither does the EU SEP Regulation address that one in the slightest way nor does the automotive industry ask lawmakers in the EU or in Germany to restore sanity in that regard. A ratio of 1:1,000 or 1:10,000 (if one counts different assets, and possibly even counts each national part of an EPO-granted patent) can’t be rationalized.
Unless the case law presents the issue discussed in the previous paragraph, the fact that bilateral licenses are available means that a patent pool doesn’t have market power: it competes with the alternative of multiple bilateral licenses, and will succeed only if it passes on some of the transactional efficiency gains to licensees. If the pool keeps all of the gains for itself and its licensors, it won’t succeed.
Ski resort analogy
A non-SEP analogy serves to explain the difference. A suitable analogy for this season involvs ski resorts. In fact, one of the most important U.S. antitrust precedents, Aspen Skiing. is about dealings between ski resorts (not about cartels, but the duty to deal, and it involved a unified multi-resort ticket that was temporarily available).
SEP pools offer patents from different right holders, and if each right holder owns at least one truly essential and valid patent, then an implementer needs to license all of those portfolios sooner or later. Imagine a situation in which there are multiple (say, three or more) ski lifts. Skiers need to take all those lifts in a row to get to the top of a mountain and then go down on the other side. Their problem is not solved if they take only the first one or two because on the side where the ski lifts operate, they can’t ski. They must get to the top. And taking the second without the first won’t work either because they must get there in the first place.
That gives every one of those ski lifts some degree of market power: it’s all or nothing for the skiers. But let’s assume there are rules in place to ensure none of them can just overcharge arbitrarily.
Now there’s someone like the Avanci pool firm and organizes a ticket that gives skiers access to all those lifts for an aggregate price that is lower than the sum of the parts. And not just that but it also saves transaction costs. In our example, let’s think of transaction costs as the inconvenience of skiers otherwise having to buy a separate ticket for each lift over the web or by lining up. For the ski lifts it’s also more efficient and convenient not to have to transact with all those customers individually.
As long as skiers retain the option of buying separate tickets from the various ski lifts, the entity organizing the multi-lift ticket doesn’t have market power. It’s part of the solution, not part of the problem (should there be one in the first place).
If skiers and travel companies were like certain automotive industry players, they would argue that if all the ski lifts are allowed to offer, through that Avanci-like entity, a combined ticket, they (the customers) should also have the right to “organize” as a buyers’ cartel. They should have the right to tell the different ski lifts as well as the entity offering the combined ticket that they’re not going to accept the price. They’re going to stay home until their demands are met.
In the SEP context it’s even worse than in the analogy, as they would be using those ski lifts before paying the first cent.
What those automotive companies have in mind is that an LNG would negotiate, but the result wouldn’t even be binding on its members. So any of the participants could first delay the conclusion of a license agreement by participating in the LNG, and when those negotiations have ended, any member of the LNG could try to drive the price down even more.
Like the proposed EU SEP Regulation. LNGs wouldn’t make the licensing process fairer or more efficient. The net effect of either idea is essentially just more hold-out, under the pretext of transparency, redressing the balance or whatever.