The Federal Government Should Reinstate the 2019 Policy Statement on Standard Essential Patents

“The [Draft Policy Statement’s] substantive analysis suffers from two serious flaws: the dismissive treatment it accords injunctive relief, and its unnecessary and inappropriate concoction of a suggested framework for SEP licensing.”

https://depositphotos.com/6496641/stock-photo-looking-at-the-opinion-section.htmlThe Justice Department’s December 6, 2021 Draft Policy Statement on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments (“2021 DPS”) badly misses the mark and merits a failing grade. By contrast, the 2019 PS (issued by the Justice Department, NIST, and the U.S. PTO) is eminently sound, and merits being reaffirmed.

The DPS should be viewed in the context of the benefits conferred on society by patents that read on standards, commonly referred to as standard essential patents (SEPs). Given the economic importance of SEPs, public policy should encourage investment in them and ensure that they receive adequate legal protection. Such sound policies inform the New Madison Approach (NMA), publicly described by Assistant Attorney General for Antitrust Makan Delrahim in 2018.

The practical unavailability of injunctive relief for SEP-holders has inefficiently skewed negotiating leverage to the benefit of technology implementers and to the detriment of patentees. As explained by leading patent scholars, it has created a de facto “liability rule” under which only damages (generally based on “reasonable royalties”) are available. In other words, by eliminating an innovator SEP-holder’s leverage, a de factor licensing scheme is created that inures to the benefit of the implementer.

The 2021 DPS gives lip service to the importance of balanced standard setting, reflecting the interests of both implementers and SEP owners. This superficial overview, however, is followed by a more substantive analysis of licensing that, though purporting to be balanced, in reality strongly favors the interests of implementers at the expense of the sources of innovation, the SEP holders. See Alden F. Abbott, “One Thumb Up for the New Draft Administration Statement on FRAND Licensing,” IPWatchdog, Dec. 9, 2021.

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The substantive analysis suffers from two serious flaws: the dismissive treatment it accords injunctive relief, and its unnecessary and inappropriate concoction of a suggested framework for SEP licensing.

First, the 2021 DPS errs badly in opining that SEP holders almost never should be able to obtain injunctive relief.

Specifically, the DPS opines that “[a]s a general matter, consistent with judicially articulated considerations, monetary remedies will usually be adequate to fully compensate a SEP holder for infringement.” Furthermore, it adds that “[w]here a SEP holder has made a voluntary F/RAND commitment, the eBay factors, including the irreparable harm analysis, balance of harms, and the public interest generally militate against an injunction.”

In short, the 2021 DPS adopts a reading of the Supreme Court’s decision in eBay Inc. v. MercExchange L.L.C., 547 U.S. 388 (2006) (formally holding that courts should apply a four-factor test in deciding whether to grant an injunction for patent infringement) that all but denies injunctive relief to SEP owners. As explained above, the unavailability of injunctions distorts bargaining between SEP holders and implementers and thereby disincentivizes economically beneficial investment in standards-related patenting.

To be sure, the 2021 DPS notes a situation in which an injunction might be granted, but this discussion is entirely unconvincing. The DPS notes that an injunction “may be justified where an implementer is unwilling or unable to enter into a F/RAND license.” The only example of such behavior proffered, however, is where an implementer refuses to pay what has been determined by a court or another neutral decision maker to be a F/RAND royalty. The likelihood that an implementer would openly flaunt a judge’s or neutral’s F/RAND determination would, however, be almost nil. Such an action presumably would be deemed in bad faith, supporting a possible future finding of willing infringement — something a rational commercial actor would want to avoid at all costs.

Notably, the 2021 DPS cites multiple examples of situations that do not involve unwillingness to take a F/RAND license, and therefore would preclude injunctions. In so doing, it fails to account for a wide range of opportunistic behavior by implementers, including knowing acts of infringement not involving genuine efforts to seek licenses (which almost never are characterized as willful by courts). The DPS also fails to address the economic harm due to the bargaining distortion created by the practical unavailability of injunctions.

In short, the highly defective treatment of injunctions presented in the 2021 DPS merits total repudiation.

Second, the 2021 DPS errs in propounding a framework for bargaining over SEP license terms.

The DPS “encourage[s] parties to consider” and delineates particular features of “good faith negotiations” over F/RAND licensing terms. It describes specific information the SEP holder should present to a potential licensee; describes five ways in which the licensee might respond; sets forth four potential elements of a good faith response by the SEP holder; describes what parties should do in the event negotiations break down; and “support[s] the development of SDO IPR policies that promote good-faith negotiation and facilitate voluntary F/RAND licensing.”

Although this framework is characterized as merely suggestive, it inevitably would induce many negotiating parties to adopt its strictures, in order to be “on the good side of the government” (and of many courts, which might cite to the framework in evaluating SEP licensing conduct). The DPS’s approach ignores Hayek’s knowledge problem(See Israel M. Kirzner, Economic Planning and the Knowledge Problem, 4 CATO JOURNAL 407 (1984))—government does not possess the market-specific knowledge available to private negotiators. As such, the government’s efforts to micromanage the steps of private licensing negotiations may be expected, as a general matter, to generate outcomes that are economic welfare-inferior to those arrived at through purely private negotiations.

By comparison, the 2019 PS avoids the inherent problems of the DPS. First, the 2019 PS emphasizes that all remedies available to patentees in general, including injunctions when appropriate, should be available to SEP holders as well. Second, the 2019 PS emphasizes that courts and other neutral decision makers should continue to determine remedies pursuant to general law, applying a balanced, fact-based analysis. It wisely eschews setting forth a governmental framework for negotiations, leaving it to private parties to develop the licensing contracts that best suit their needs.

In sum, the 2019 PS is far superior to the 2021 DPS as a matter of competition policy and economic welfare enhancement. The 2019 PS should be reaffirmed, and the 2021 DPS should be discarded.

 

Image Source: Deposit Photos
Image ID: 6496641
Copyright: stuartmiles 

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