How the UKIPO’s SEP Proposal Misunderstands the Real Problem

A couple of years ago we wrote about how the European Commission (EC) was using concerns over an alleged  lack of “transparency” and “hold-up” to justify a proposed regulatory framework for governing patents subject to declarations regarding Fair, Reasonable and Non-Discriminatory (FRAND) licensing, which proposed framework was abandoned earlier this year. Notably, the EC expressed particular concern for small and medium-sized enterprises (SMEs) wanting to implement standardized technology. Subsequent to the EC’s proposal, the Commerce Department and United States Patent and Trademark Office (USPTO) released a notice titled “Joint ITA [International Trade Administration], NIST [National Institute of Standards and Technology], and USPTO Collaborative Initiative Regarding Standards; Notice of Public Listening Session and Request for Comments” (“Notice”), which similarly expressed concern for SMEs. Harfang IP made a public submission in response to this Notice and further wrote about the initiative here (see “Policy” section).

Somewhat late to the party, the UK Intellectual Property Office (UKIPO) launched a consultation on standard essential patents (“Consultation”) in July of this year, with the stated goal of creating “a more balanced system that works for everyone involved – from the innovators who create patented technologies to the businesses that use them to create products we all depend on” (see Ministerial foreword; emphasis added). And like the EC and aforementioned agencies of the United States government, the UKIPO takes up the mantle of protecting SME interests. While the Consultation, for the most part, seeks feedback on the solutions being proposed, analyzing the underlying problems purporting to be addressed is equally, if not more, important. For the reasons discussed below, we believe the UKIPO misses the mark on why more deals are not being done, provides insufficient evidence for the problems it seeks to address, is overbroad in its approach, and risks further unbalancing a system that already favors implementers.

The Alleged Problems

As summarized in the “Ministerial foreword” and “Executive summary”, the Consultation posits several issues with the current state of Standard Essential Patents (SEP) licensing (emphasis added):

“The current SEP ecosystem presents challenges that may hinder innovation and investment, particularly for smaller businesses. For example, licensing costs are often unclear due to confidentiality agreements, making it difficult for companies to plan effectively. Additionally, resolving disputes can be costly and time-consuming—one recent case cost £31.5 million—driving up expenses that may ultimately be passed on to consumers.”   [Ministerial foreword]

“Available evidence indicates there are systemic issues in the SEPs ecosystem around transparency and dispute resolution that may require government intervention. Without intervention, we believe there could be a risk that innovation will be stifled in emerging industries that depend on technical standards, such as connected vehicles and green technology.”  [Executive summary: Paragraph 2.]

See also the section titled “Challenges in the SEP ecosystem” (paragraphs 29 – 45). Notably, the Consultation does not take a firm position on these alleged problems (instead introducing them with terms such as “can”, “may” and “could be”) and, more importantly, does not point to any studies or reports in support thereof. Instead, the UK IPO refers to survey responses (see paragraph 33) and anecdotal evidence (see paragraphs 36, 45 and 53).

Further, despite acknowledging that “SEPs are of growing importance to technological innovation…” (paragraph 23), the UK IPO appears to confuse who, between inventors of standardized technology and those who make products that rely on standards, are the innovators. Consistent with the UK IPO’s views that those who implement standardized technology are the real heroes, its stated objective is to “help implementers” (paragraph 46).

But is the ecosystem really unbalanced in favor of patent owners and, if so, is a lack of transparency and dispute resolution efficiency the real issues? Or is there, perhaps, something else going on?

The Real Problem: Efficient Infringement

In previously articles we explored how interpreting the obligation to be “prepared to grant irrevocable licenses…” (as set forth in the European Telecommunications Standards Institute’s (ETSI) Intellectual Property Rights Information Statement and Licensing Declaration [“ETSI Declaration”]) so as to apply to damages for past infringement, and such that the obligation cannot be discharged, encourages hold-out. For why pay for parking if the fine is no greater than the fee, and if the fee can be paid at any time? Especially if one can profit from infringing and use that money to challenge the need for licenses and drive up a patent owner’s enforcement costs (a dynamic recently described in a Statement of Interest filed by the United States of America regarding the appropriateness of injunctive relief: see pages 14-15). And this is effectively what UK courts do by allowing implementers to delay deciding on FRAND licenses (including with respect to the past) until after a patent owner establishes infringement and defends validity, and until after the terms and conditions of a worldwide FRAND license have been adjudicated (as reflected in paragraph 62 of the Consultation).

While the UKIPO sees the costs of litigation as potentially being passed on to consumers (see the Ministerial foreword quoted above), the more likely explanation is that the cost of litigation is less than what implementers save by driving down licensing costs via litigating. Notwithstanding the UK IPO’s claims that “[t]he UK plays an important role in this global ecosystem and has increasingly become a forum of choice by businesses to resolve disputes in SEP licensing” (paragraph 30), recent cases indicate that the UK is only preferred by net licensees, further evidencing that the UK system is actually slanted in their favor. If we are correct in our assessment, no additional amount patent owner transparency and dispute resolution efficiency is going to change such hold-out behavior.

Critique of the UKIPO’s Transparency Concerns

According to the Consultation, an asymmetry of information exists in favor of patent owners both in terms of essentiality and pricing (see paragraphs 5, 6, 34, 37, 43, 73, 82 and 86).

With respect to “transparency around essentiality”, the UKIPO makes the following claims (emphasis added):

“There is a growing body of evidence indicating that, because SEP holders have all the information on their patent (e.g. on its essentiality and value), there is information asymmetry between them and the SEP licensees. It may be difficult for licensees and implementers to know which patents are truly essential to a standard, and therefore whether a licence is needed and what the licensing obligations are.”   [Paragraph 37]

But how exactly do SEP holders have “all the information on their patent” given patents, standards, and prior art are all publicly available? Which begs the following question: what is this “growing body of evidence” the UKIPO speaks of? Even more confusing is the notion that patent owners have a monopoly on information regarding essentiality given essentiality is a legal conclusion (as recognized in paragraph 42: “Only courts can provide a definitive ruling on essentiality…”). As we have discussed previously, such statements are often less about access to information and more about who, as between patent owners and those needing licenses, should shoulder the burden of analyzing such information (see, for example, Paragraph 41 regarding a lack of transparency making it “difficult for licensees to determine which SEPs they need to licence to implement a standard…” and “creat[ing] search costs for licensees seeking to understand which SEPs they need to license, and who to obtain a license from.”). But what is the UKIPO’s rationale and, more importantly, its basis in law or contract, for having these costs fall exclusively onto patent owners, instead of requiring implementers to do their own analyses and assume some of the risk of uncertainties?

Regarding “pricing transparency” the Consultation refers to licenses not being available for review by potential licensees on account of non-disclosure agreements which, the UKIPO alleges, can result in licensees overpaying (see paragraphs 33 and 36). What the authors fail to mention, however, is that confidentiality is typically insisted upon by licensees and, as such, is largely a problem of the broader licensee community’s own making. Further, the Consultation overlooks that European courts have held that the ETSI Declaration does not place a duty on patent owners to substantiate their offers are FRAND (see Koninlijke Philips N.V. vs. Asustek Computers Inc. et al. (Case number 200.221.250/01 (Court of Appeal of the Hague, May 7, 2019), pages 57-75)).

In any event, if the UKIPO is truly seeking a balanced system that works for everyone involved, where is its concern for patent holders being underpaid as a result of the asymmetry of information that favors implementers, e.g. with respect to licenses they have agreed to with third parties for other standards related patents, their knowledge of the features implemented on their products (or that likely will be in the future), and their past sales volumes? Unlike the mutual disclosure obligations set forth in the Civil Procedure Rules (which are referred to several times in the Consultation), the UKIPO, notably, only proposes additional disclosure obligations for patent owners (see Ministerial foreword). Even if one were to accept, for sake of argument, that increased transparency could result in more licenses with less legal friction, the exclusive concern for implementers is unsettling.

Coming back to efficient infringement, if we are correct that allowing implementers to litigate without risk of losing entitlement to FRAND treatment encourages hold-out, the UKIPO’s proposed “Rate Determination Track” (RDT) (paragraphs 56, 61-71) will be of little interest to implementers, especially given the proposed scope of the RDT is “limited to cases where infringement, validity and essentiality are not in dispute” (paragraph 66) which is rarely, if ever, the case. Similarly, the UKIPO’s proposal to encourage, but not mandate, alternative dispute resolution (ADR) (paragraphs 60, 90-101) is also unlikely to help. Suffice to say, implementers rejected a mandatory arbitration requirement being included in the ETSI IPR policy, and the reason was not a lack of familiarity with the process but rather the loss of potential legal defenses / challenges. See, for example, Apple’s Statement on FRAND Licensing of SEPs: “Parties have a fundamental right of access to national courts and a willing licensee does not become unwilling if it refuses arbitration, challenges the merits, or resorts to litigation because the SEP owner does not offer FRAND terms.”

Deterring the Adoption of Standardized Technology by SMEs

As noted above, the Consultation starts off by stating that “[t]he current SEP ecosystem presents challenges that may hinder innovation and investment, particularly for smaller businesses” (Ministerial foreword) and “[w]ithout intervention… there could be a risk that innovation will be stifled in emerging industries that depend on technical standards…” (Executive summary), specifically identifying a lack of transparency as a culprit (paragraph 43).

At the same time, however, the UKIPO recognizes the past success of the industry in finding its own solutions, including via patent pools (emphasis added):

Improved pricing transparency in SEP licensing is observed in technologies with more mature SEP markets, such as cellular technology. Patent pools have formed in these markets, with rates publicly disclosed on pool administrators’ websites. However, pricing transparency is poorer in markets for emerging technologies, though it may be expected to improve as these markets evolve.  [paragraph 35; see also paragraph 52]

So why the need for the UKIPO to step in now?  Even if one assumed, for sake of argument, that there was a potential problem with emerging markets, for example for cellular technology, why not exclude mature markets like smartphones for which there is no evidence SEP licensing is causing adoption, pricing or competition problems, instead of catching all markets in the drag net?

But is there really a problem with emerging markets for cellular technology? Not only does the UKIPO not provide any evidence for its assertion it also overlooks evidence to the contrary. For example, the Consultation states that “the successful adoption of [standardized] technologies in new or growing areas like Internet of Things and AI can turn on how fairly and easily SEPs can be licensed…” (Ministerial foreword; emphasis added), but makes no mention of Sisvel’s Cellular IoT program for which the patents being licensed, and the license terms, are disclosed on Sisvel’s website. Even more outrageously, the UKIPO states that there is “a risk that innovation will be stifled in emerging industries that depend on technical standards, such as connected vehicles…” (Executive summary; emphasis), without acknowledging Avanci’s highly successful, and transparent, vehicular programs, the first of which was launched nearly a decade ago, and the fact that most new cars sold today are cellular enabled. Also worth noting is the general lack of SME automakers to be concerned about. Is the UKIPO intentionally avoiding mentioning these alternative solutions, or is it simply unaware, and which is worse?

Stepping back, our question is this: why wouldn’t implementers in emerging industries be expected to do what implementers have done in mature markets for decades, i.e. implement standardized technology without a license and wait to be pursued by patent owners, especially while the SME’s sales volumes are small and not worth a licensor’s effort to pursue? Contrary to the impression often advanced by government regulators, implementers do not actually require licenses to begin commercializing infringing technology. As noted in Harfang IP’s public submission to the ITA, NIST, and USPTO the narrative that implementers are somehow losing sleep over not being able to determine which patents they need to license, before they start infringing, is simply not credible (which we also wrote about here). Rather, as reflected in the fact that very few SME implementers, if any, provided comments to the ITA, NIST and USPTO’s Notice, such regulatory proposals are more likely the result of lobbying and astroturfing efforts on the part of large implementers in mature markets (many of which did submit comments) than any grassroots movement of SMEs. If anything, given the barriers to entry for implementing standardized technology are much higher than participating in the creation of standardized technology, SMEs are more likely to find themselves in the innovator camp. As such, any regulations that increase patent owner obligations are more likely to harm SMEs than help.

Hold-Up

Last, but not least, the Consultation raises the specter of the hold-up bogey man, but without citing any specific evidence of a problem, instead referring to vague “concerns”, of who is not clear:

“We also wish to better understand how existing frameworks are functioning to ensure remedies in disputes are adequate and utilised. There are some concerns that the threat of injunctions is being used by some SEP holders to extract ‘supra-FRAND’ licence rates. The government would like to better understand this issue – the prevalence of these threats and the extent to which they impact on innovation.”  [Paragraph 59]

Somewhat beyond the scope of this article, suffice to say the UKIPO’s lack of concern regarding hold-out, and that SEP owners have no other way to prevent ongoing infringement other than via injunctive relief, as well as its failure to mention remedies for breach of contract (including specific performance) as a way to offset risks of implementers overpaying (as we wrote about here), is further indicative of its one-sided desire to help implementers.

Define the Problem

Albert Einstein has been quoted as saying that “if I were given one hour to save the planet, I would spend 59 minutes defining the problem and one minute resolving it” and that “a problem defined is a problem half solved.” Heeding such sage advice, we would recommend the UKIPO revisit the alleged problems while focusing on all available evidence before implementing any of its proposed solutions. Otherwise, the result will not be a more balanced system that facilitates increased licensing activity but rather a stifling of innovation by discouraging inventors from participating in standards development activities and, likely, an increase in the rate at which UK patents are abandoned.

Image Source: Deposit Photos
Author: merzavka
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