“The Avanci business review letter and the 9th Circuit ruling in FTC v. Qualcomm together provide a beacon of certainty, clarity and a useful guidepost for anyone contemplating a patent licensing marketplace for portfolios of assets.”
Several weeks ago, the Antitrust Division of the U.S. Department of Justice announced a positive Business Review Letter (BRL) concluding an eight-month review of Avanci’s new platform for licensing 5G standard essential patents.
“In sum, the proposed 5G Platform has the potential to yield efficiencies by reducing transaction costs and streamlining licensing for connected vehicles,” wrote Assistant Attorney General Makan Delrahim, who heads the DOJ Antitrust Division. “Together these efficiencies may allow cellular standards-essential patent owners and vehicle manufacturers to focus resources elsewhere, such as investment in further research and development in emerging 5G technologies and applications. This possibility could enhance competition in these technologies, improve safety, and benefit American consumers.”
The finding that the Avanci 5G platform could enhance competition is critically important for Avanci, and positively affects the technology licensing landscape.
BRLs Provide Meaningful Guidance for Industry
“We were pretty sure we were doing everything right,” Kasim Alfalahi, founder and CEO of Avanci, told IPWatchdog. “But this means a lot to us because when you are creating something as big as this for the industry—with 5G— it is great to take away all doubt because you never know how some companies may look at it.”
Alfalahi also told IPWatchdog that there were a lot of companies that had been asking for market-based end product licensing so they didn’t need to take a license from so many different companies.
But what is a BRL and what does it really mean for Avanci? And will this BRL provide any insight into how the Antitrust Division will view other similarly situated actors?
Those concerned about the legality of proposed business conduct can ask the DOJ to review the proposed conduct and issue a statement regarding its current enforcement intentions. These reviews are allowed, not mandated, by 28 C.F.R. 50.6, and culminate in a BRL declaring “the enforcement intention of the Division as of the date of the letter.” While the BRL does not have application to any party that does not join in the request, given the letter does provide the current interpretation and enforcement intention of the Antitrust Division, BRLs are extremely useful guidance, not just for the party requesting the BRL—in this case Avanci—but also for other similarly situated companies that might wish to model their business practices after those disclosed to the Antitrust Division. In that way, the BRL process allows for meaningful guidance by the DOJ to inform businesses how to best coordinate their business dealings to ensure they do not run afoul of what can sometimes be rather byzantine antitrust laws.
DOJ BRLs have long played a key role in the development of antitrust analysis for the licensing of patents, particularly patents dedicated to standard essential patents. For example, BRLs analyzing essential patent licensing programs were issued to RFID (Gen-2 standard), MPEG-LA (MPEG-2 standard), a DVD standard pool, and a 3G platform (3G cellular standard).
As useful as BRLs are for the industry, and for government to gently direct businesses to act in accordance with best practices, it has been a while since the Antitrust Division has conducted a review and provided guidance on a patent licensing program. So, the Avanci BRL is a timely development sure to be welcomed by patent owners.
Launched in 2016, Avanci offers a wireless connectivity licensing platform for IoT devices, currently offering a 2G/3G/4G program for cars and a parking meters program. The new Avanci 5G platform reviewed by the BRL, and launched a day after it was issued, aims to license 5G essential patents to the automotive industry, whose profitable use of cellular technology via connected cars is only increasing as automakers race to make their cars ever more connected hubs.
The BRL describes the safeguards built into Avanci’s 5G platform, including: (i) essentiality reviews; (ii) maintaining licensors’ right to independently license outside the platform; and (iii) a royalty distribution structure based on the number of essential patents submitted, licensors’ comparable licensing revenue, and parties’ technical contributions to the standard. In short, the 5G patent licensing platform includes many “safeguards that reduce the risk of competitive harm,” wrote Delrahim.
The letter also explains that efforts by Avanci to eliminate substitute patents from the pool prevents the type of price fixing or elimination of competition that can sometimes arise when a pool does capture substitutes. In fact, the BRL explains that the Avanci 5G platform is more rigorous than “other pools that the Department has found to adequately prevent the inclusion of substitute patents,” and is also consistent with ETSI IPR policy. Thus, the BRL explained there can be significant benefits of collecting complementary patents for both licensees and licensors. In fact, the BRL acknowledges that offering a “one stop shop” as the 5G platform does prevent risk of patent stacking to licensees.
One of the criticisms of this type of market licensing program is that suppliers may be excluded from obtaining a license, as licensors may choose to license only to the vehicle manufactures. The BRL explained that this is not problematic for two critical reasons. First, the Avanci 5G platform’s field of use license includes “Have Made” rights, which would allow a vehicle manufacturer to have third-party component suppliers make components for their 5G connected vehicles. Second, the BRL correctly explains that since the patent owners are free to negotiate individually, if suppliers or component manufacturers wanted to obtain a license they could simply “bilaterally negotiate with licensors outside the Platform.” Thus, the fact that suppliers and component manufacturers are excluded does not present limitation to end product licensees that is likely to harm competition, according to the Antitrust Division.
The Letter concludes in describing the multiple pro-competitive benefits of licensing on the automotive end product level. It recognizes its “numerous efficiencies such as simplifying scope, pricing, and royalty collection” given the “complex” “fragmented and opaque” nature of the automotive supply chain. Another recognized benefit of end-device licensing through Avanci’s 5G platform is that it may “help ensure licensors are appropriately compensated for their innovation”. In line with letting licensing markets competitively run their course, “[t]he Department believes parties should be given flexibility to license in a manner, consistent with [their contractual] commitments, that best rewards and encourages innovation.”
One of the more useful elements of the BRL is its explanation that the choice to license solely at one level of the value chain (end-device level in Avanci’s case) is a legitimate and common field-of-use licensing feature that has been blessed by the Antitrust Division for decades. Of course, it has been blessed by the Antitrust Division because it has the virtue of also being black letter patent law. A patent is a bundle of rights and the patent owner is allowed to carve those rights up and license entities accordingly. If we are going to operate with the notion that a patent is an exclusive right, as the Patent Act states it is and the grant of the patent itself promises, the right of the patent owner to license in such a manner must remain sacrosanct where there is no competitive harm.
While some are undoubtedly disappointed, or perhaps even surprised, perhaps over the last several weeks we are witnessing multiple developments clarifying the contours of U.S. antitrust law and policy as it relates to patents in America. It is worth noting that not only is this Avanci BRL letter an important policy statement by the DOJ, but these DOJ conclusions received a boost from the 9th Circuit recently in its FTC v. Qualcomm opinion, in which the Court held that Qualcomm’s “OEM-level licensing policy…was not an anticompetitive violation of the Sherman Act” and that the “procompetitive justifications for [the] OEM-level licensing policy… appeared to be reasonable and consistent with current industry practice.”
With the district court issuing a 200+ page decision, many thought it would be unthinkable that any Court of Appeals panel would overrule it. But then the DOJ (together with the Departments of Defense and Energy) stepped into the fray, creating a split in government policy between the two primary antitrust regulating authorities. That must have caught the attention of the 9th Circuit. Clearly, the novel theories that went contrary to well-established Supreme Court precedent were a bridge too far. So, we have much reason to thank the first-ever Assistant Attorney General for Antitrust who is also a patent attorney—Makan Delrahim. He understands the purpose of a patent, why a patent is fundamentally pro-competitive and how patents foster innovation. He has placed his mark not only on the DOJ, but now, through the assistance of his Division, he has certainly helped shine a spotlight on these issues for the Judiciary, and led the 9th Circuit to clarify the law for all of us.
A Beacon of Certainty
The Avanci BRL and the 9th Circuit ruling in FTC v. Qualcomm together provide a beacon of certainty, clarity and a useful guidepost for anyone contemplating a patent licensing marketplace for portfolios of assets. Indeed, entire portfolios of standard essential patents have become more valuable, and one hold-out strategy will become more challenging. I’m sure, however, implementers will move on to the next challenge. They always do.
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