Comments to the DOJ on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments
ITIF submitted comments in response to the Department of Justice’s request for comment on the Draft Policy Statement on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to F/RAND Commitments. The agencies’ Draft Policy Statement must minimize the potential for opportunistic behaviors from both SEP holders and implementers as opportunism generates considerable transaction costs and decreases welfare by harming consumers and deterring innovation.
Introduction
President Biden’s executive order on competition issued in July 2021 asked federal agencies “to avoid the potential for anticompetitive extension of market power beyond the scope of granted patents, and to protect standard-setting processes from abuse…” More specifically, the presidential order asked the Attorney General and the Secretary of Commerce, “to consider whether to revise their position on the intersection of the intellectual property and antitrust laws, including by considering whether to revise the Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments issued jointly by the Department of Justice, the United States Patent and Trademark Office, and the National Institute of Standards and Technology on December 19, 2019.”
Pursuant to the presidential executive order, the Department of Justice, the U.S. Patent and Trademark Office, and the National Institute of Standards and Technology (the Agencies) requested public comments on December 6, 2021, on the Draft Policy Statement on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to F/RAND Commitments (the Draft Policy Statement).
The Draft Policy Statements aims at fostering “efficient licensing” between standard-essential patent (SEP) holders and implementers, noting the risks of opportunistic behaviors from both parties. The Draft Policy Statement codifies a regrettable trajectory over the last decade whereby courts have gradually and consistently emphasized the hold-up problem while discarding the economic rationale for injunctive relief by SEP holders.
The Draft Policy Statement reverts to the 2013 policy statement and brushes away the 2019 policy statement which contributed to a rebalancing from the implementers’ concerns to SEP holders’ concerns. The Draft Policy Statement fails to contribute to the much-needed strengthening of intellectual property (IP) rights by overlooking the benefits and availability of injunctive relief.
Additionally, despite noticeable efforts to delineate such a framework, the Draft Policy Statement fails to provide clear guidance on a good-faith framework under fair, reasonable, and non-discriminatory (FRAND) terms.
In other words, the Draft Policy Statement is the wrong approach at the wrong time. It is the wrong approach because it further weakens IP rights since the unavailability of injunctive relief tends to further shift away from the protection of patents from a property regime toward a liability regime: Injunctive relief becomes increasingly unavailable as agencies and courts increasingly accommodate for technological trespasses.
The Draft Policy Statement comes at the wrong time. First, the so-called “New Madison Approach” articulated through the 2019 policy statement has not yet produced its effect and the Agencies readily exacerbate the policy swings. This legal uncertainty justified by President Biden’s executive order on competition is nevertheless detrimental for market actors. Sufficient time needs to pass before the 2019 policy statement can be considered to be a misguided approach: Lack of such evidence cautions from stripping away the 2019 policy statement.
Second, the European Commission and the United Kingdom are currently engaging in revised policy positions with respect to SEP licensing under FRAND commitments. Given the need to prevent regulatory divergence across major patent jurisdictions, and given the need to make full use of the EU-U.S. Joint Technology Competition Policy Dialogue, the Agencies must actively engage with transatlantic partners to adopt a joint approach to reach principles of efficient licensing whereby strong protection of IP rights fosters innovation and promotes dynamic competition for the welfare of global market actors and consumers across these jurisdictions.
Finally, the Draft Policy Statement, by weakening IP rights and providing a further economic rationale for so-called “efficient infringement” of SEPs by opportunistic implementers, contributes to reward (and not sanction) for foreign patent violators. In short, in the global race for technological leadership where patent protection determines entrepreneurial competitiveness, the Draft Policy Statement represents a considerable policy gift from the Agencies in favor of, say, Chinese patent infringers who now know that, at worst, they may pay royalties that they would have paid had they complied with FRAND terms. Therefore, the Draft Policy Statement contributes to making American ingenuity an engine of patent infringement, a place prone to patent violations favoring foreign competing powers.
Moreover, the Draft Policy Statement fails to provide the necessary clarification needed from the 2019 policy statement regarding what constitutes “good faith” in FRAND negotiations–and in particular, what constitutes a “willing” or “unwilling” licensee. In short, because it represented the right approach and policy swings without evidence must be avoided, the 2019 policy statement needed mere clarifications and not repeal, contrary to what President Biden’s executive order suggested. The Agencies should provide an alternative statement that builds upon the 2019 policy statement to clarify the definition of a “willing licensee” as part of FRAND negotiations.
Consequently, the Agencies need to defer the adoption of the Draft Policy Statement and work together with European and United Kingdom counterparts to clarify the details of FRAND negotiations compliant with the “good faith” principle.
More generally, both consumers and firms benefit from interoperability standards. When network effects are present, interoperability between the products of different firms increases consumers’ valuation of the product. Consumers also benefit from increased price competition when there are multiple sellers of compatible products. Interoperability standards benefit firms by taking advantage of scale economies brought about by a larger market.
The benefits from higher consumer valuations and scale economies incentivize firms to make their products compatible and, as a result, inefficient de facto standards may arise. Coordination problems with de facto standards may lead to delay in adopting beneficial technologies or to adopting inferior technologies when firms are wary of adopting risky new technologies or do not want to be stranded supporting old technology. Voluntary, consensus-based standards development organizations (SDOs) can resolve the coordination problems associated with de facto standards by identifying important new innovations and encouraging their adoption.
In addition to resolving the coordination problem associated with de facto standards, SDOs also encourage follow-on innovation. All patents, by their very nature, are intended to disseminate knowledge, and SEPs are no exception. Many SDOs require their participants to disclose SEPs that may read on standards under development and to make licenses to those patents available on FRAND terms. This means that these disclosed patented technologies are largely available to others to develop follow-on innovations. One measure of the effect of SDOs’ liberal licensing policies on follow-on innovation is the forward citations to disclosed patents (i.e., new patents citing disclosed patents as prior art). Marc Rysman and Timothy Simcoe find that patent disclosure to an SDO increases the patent’s forward citations by 19-47 percent, suggesting SDOs are an essential factor in follow-on innovation. Given the importance of SDOs for identifying and endorsing important innovations and encouraging follow-on innovation, the Agencies’ guidance should discourage opportunistic conduct related to FRAND licensing disputes that threaten this innovation.
Among the 11 questions identified by the Agencies for comments, the present comments focus on questions 1, 2, 7, and 9, namely:
1. Should the 2019 Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments be revised?
2. Does the draft revised statement appropriately balance the interests of patent holders and implementers in the voluntary standards process, consistent with the prevailing legal framework for assessing infringement remedies?
7. Will the licensing considerations set forth in the draft revised Statement promote a useful framework for good-faith F/RAND licensing negotiations? In what ways could the framework be improved? How can any framework for good-faith negotiations, and this framework in particular, better support the intellectual property rights policies of standard-setting organizations?
9. The draft revised statement discusses fact patterns intended to indicate when a potential licensee is willing or unwilling to take a F/RAND license. Are there other examples of willingness or unwillingness that should be included in the statement?
