“It is imperative that any informed application of competition law take into account the full body of published empirical evidence, rather than relying on theoretical models that may not track real-world markets, flawed working papers that are compromised by fundamental methodological errors, or incomplete and misleading characterizations of the scholarly literature.” – Mossoff-Barnett comment
On May 9, a comment signed by a coalition of 25 law professors, economists and former U.S. government officials, and co-written by Adam Mossoff, Law Professor at George Mason University’s Antonin Scalia Law School, and Jonathan Barnett, the Torrey H. Webb Professor of Law at the University of Southern California’s Gould School of Law, was submitted to the European Commission as a response to the EU governing body’s call for evidence on standard-essential patents. Like another recent response to the EU Commission by a group of scholars with the International Center for Law & Economics (ICLE), the Mossoff-Barnett comment attempts to dispel several misconceptions about the impact that SEPs have on the commercialization of new technologies, especially major communications technologies like 4G/LTE and WiFi that have been widely commercialized to the benefit of the vast majority of global consumers, thanks in large part to the patent rights that help to structure commercialization efforts.
Mossoff and Barnett: Patent Holdup Theories Mischaracterize Real-World Licensing Practices
Much like the ICLE response to the EU Commission, the Mossoff-Barnett comment points out that the vast majority of research on the market power of SEP owners offers absolutely no support for the idea that patent holdup or royalty stacking creates negative impacts on the commercialization of technological standards. Indeed, the comment cites several studies showing that the royalty burden on handset manufacturers related to SEP licensing is in the single digits and has consistently remained that low for years.
The comment notes that theories of patent holdup have largely been informed by arguments from defendants in SEP infringement lawsuits filed in U.S. district courts. The authors also pushed back on claims made in a 2019 paper published by the European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs, which they argue mischaracterized the available scholarly literature by indicating the possibility that there were any real-world instances of patent holdup.
It is imperative that any informed application of competition law take into account the full body of published empirical evidence, rather than relying on theoretical models that may not track real-world markets, flawed working papers that are compromised by fundamental methodological errors, or incomplete and misleading characterizations of the scholarly literature.
One of the many faulty assumptions supporting patent holdup theories is the idea that SEP owners possess the kind of market power that allows them to dictate licensing terms to standard implementers. As the Mossoff-Barnett comment points out, SEP owners are incentivized to ensure their SEP licensing rates are competitive, as manufacturers often have other standards available to them. Many SEP owners are also involved in multiple iterations of a technological standard, such as the telecommunications R&D firms that have contributed to every mobile networking standard since 2G. These R&D firms have a further incentive to ensure goodwill with manufacturers implementing those standards over multiple generations, which flies in the face of claims that SEP owners would subject standard implementers to exorbitant licensing rates once they were “locked in” to a chosen standard.
FRAND Obligations Do Not Require SEP Licensing at the Component Level
Although SEP owners are typically subject to fair, reasonable and non-discriminatory (FRAND) licensing obligations, the Mossoff-Barnett comment also pushes back on the notion that FRAND obligations might preclude injunctive relief for SEP owners asserting patent rights against infringing standard implementers. The authors note that the highest courts in the European Union and the United Kingdom, and even the U.S. Court of Appeals for the Federal Circuit, have each rejected the argument that FRAND obligations should eliminate the prospect of injunctive relief. “This near uniformity of judicial opinion in multiple jurisdictions reflects common sense,” the Mossoff-Barnett comment reads. “If SEP owners were flatly precluded from seeking injunctions, then infringers would have little reason ever to agree to, or negotiate in good faith, a license with a SEP owner.”
Without facing the prospect of an injunction, the worst-case scenario for many infringing implementers would be reasonable royalty monetary damages that are typically calculated based on a hypothetical negotiation process designed to mimic what the infringer would have paid as a willing licensee. Further, the Mossoff-Barnett comment notes that the elimination of injunctive relief produces a domino effect on all SEP licensing negotiations, handing the majority of the bargaining leverage to the standard implementers and undervaluing the contributions of innovative firms to technological standards.
Another misconception regarding FRAND obligations abjured by the comment’s authors is that such obligations require licensing at the component level, or what is often referred to as the “smallest salable practicing patent unit” (SSPPU). Mossoff and Barnett point out that no particular level of licensing is prescribed by FRAND obligations and that the firms involved in SEP licensing, both SEP owners and standard implementers, are sophisticated enough in patent licensing matters that they can determine reasonable royalties for SEP portfolios covering a range of technological contributions. Further, it is sometimes more efficient for both SEP owners and implementers to license at the device level rather than the component level, so a rigid application of FRAND that requires licensing at the SSPPU level would inject a great deal of inefficiency into the negotiation process that could impact consumer prices and licensing revenues for innovators.
Commentators who assert that device-level licensing does not comply with FRAND obligations overlook many benefits of licensing at that level, the Mossoff-Barnett comment states. Licensing at the device level allows parties to assess royalties for an SEP portfolio at the point closest to consumer demand, increasing the accuracy of assessing a technology’s value to the standard. Further, sales revenue is one of the more objective measures by which licensing rates for standardized technologies can be fairly determined. While some academics decrying the licensing behaviors of SEP owners have advanced the idea that U.S. courts require analyzing the SSPPU or component level in determining reasonable royalties, Mossoff and Barnett point out that the Federal Circuit has specifically rejected any requirement to adopt SSPPU calculations in multi-component products in cases like Commonwealth Scientific and Industrial Research Organisation v. Cisco Systems (2015), which reaffirmed that “more than one reliable method for estimating a reasonable royalty” can be applied and rejected “abstract recitations of royalty stacking theory” as being insufficiently reliable.
Current SEP Licensing Markets Have Enabled Widespread Commercialization of Wireless Standards
While the Mossoff-Barnett comment acknowledges that difficulties in securing licenses to SEP-protected technologies represent an important policy concern, current SEP licensing markets include many mechanisms designed to address obstacles to SEP licensing and maximize adoption of their technologies by implementers.
This result should not be surprising: a patented technology is a depreciating asset that typically faces actual or potential competition from substitute technologies, giving the patent owner (or third parties that administer patent pools) a powerful incentive to minimize any potential transaction-cost obstacles to maximal adoption of the relevant technology.
Further, theoretical models of SEP licensing that assume patent owners will withhold their technologies to demand the highest possible licensing rates are undermined by real-world evidence of non-exclusive licensing practices among many SEP owners. The Mossoff-Barnett comment concludes that the global market for wireless communications technologies has thrived over the past three decades because the legal infrastructure, including the prospect of injunctive relief against infringers, has allowed innovative firms to recoup the costs of research and development and invest in further innovation by allowing them to engage in arm’s-length negotiations with potential licensees on a more balanced playing field.
Along with Mossoff and Barnett, the comment’s signatories are impressive. They include: Alden Abbot, Senior Research Fellow at the Mercatus Center and Former General Counsel for the U.S. Federal Trade Commission; Robert A. Cass, Former Vice-Chairman and Commissioner at the U.S. International Trade Commission and Dean Emeritus of the Boston University School of Law; Douglas H. Ginsburg, Senior Circuit Judge of the U.S. Court of Appeals for the District of Columbia Circuit and Professor of Law at George Mason University’s Antonin Scalia Law School; Andrei Iancu and David J. Kappos, Former Undersecretaries of Commerce for Intellectual Property and Directors of the U.S. Patent and Trademark Office; Paul Michel and Randall R. Rader, Chief Judges (Ret.) of the Federal Circuit; and Kristen Osenga, the Austin E. Owen Research Scholar and Professor of Law, University of Richmond School of Law.
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