IP Experts Remind UKIPO: Global Device Markets Thrive Under Arm’s-Length SEP Licensing

On October 7, a coalition of 25 experts in intellectual property and competition law who serve or have served as U.S. judges, U.S. government officials, legal scholars and economists submitted a comment to the United Kingdom Intellectual Property Office (UKIPO) as part of that agency’s Open Consultation on Standard Essential Patents (SEPs) in order to correct various misconceptions regarding SEPs that have arisen in both scholarly and political debates. The letter from IP and competition law experts underscores the lack of empirical evidence substantiating claims of patent holdup and royalty stacking and highlights cautionary tales from the European Commission’s recent failures to establish SEP rate determination procedures like those proposed by UKIPO.

In the wireless industry, where technological standards support several modes of telecommunication, SEPs support billions in annual private investment into chip development, preserve incentives for participating in standards and enhancing device interoperability, and enable licensing relationships ensuring that those standards are disseminated. Despite these beneficial impacts, the IP experts’ letter notes that debate is rife with contentions that SEP owners are able to impose one-sided licenses, holding up manufacturers from selling products and ultimately inflating consumer prices.

SEP Owners Incentivized to Ensure Early Adoption, Minimize Transaction Costs

However, not only has empirical research failed to substantiate those negative claims, it has instead found that aggregate royalty burdens for manufacturers remain in the single digits. Further, quality-adjusted prices in SEP-intensive device markets have fallen, affording consumers greater functionality at lower prices. Many claiming that SEP enforcement results in holdup behavior base claims on simple counts of either patent assertions or requests for injunctive relief in U.S. district court, which are simply requests for legal relief and not credible evidence of holdup, the IP experts contend.

SEP owners are incentivized to license at rates that encourage early adoption by implementers and ensure repeat business in future standards, which the IP experts cite as mechanisms of the wireless communications market that undercut the assumption that SEP owners hold unwieldy market power. Although SEP owners are subject to fair, reasonable and non-discriminatory (FRAND) licensing obligations, those obligations should not preclude courts from granting injunctive relief as some commentators have suggested. Indeed, the IP experts point out that the World Trade Organization (WTO) has taken action against legal regimes in countries like China for denying relief through the use of anti-suit injunctions preventing lawsuits in other jurisdictions.

Another FRAND misconception targeted by the IP experts’ letter is that those obligations require that SEP licensing occur at the component level, or the smallest saleable practicing patent unit (SSPPU). As they point out, percentage royalties can be adjusted to reflect the technological contribution of the particular SEP portfolio being licensed, making it irrelevant to sophisticated parties at which point of the supply chain the royalty rate is determined. Further, the IP experts found it implausible that either regulators or courts setting a one-size-fits-all approach would set more efficient licensing levels than the market players involved in the relevant markets daily.

In fact, device-level SEP licensing, a long-standing practice in the wireless communications industry, provides multiple benefits to the innovation ecosystem according to the IP experts’ letter. This type of licensing maximizes the accuracy of assessing royalties by using the measure of economic value closest to the point of sale revealing consumer demand for the technology. Further, it’s difficult for either licensors or licensees to manipulate revenue data for device sales, and device-level licensing consolidates royalty measurement and payment, minimizing transaction costs. The IP experts also note that the U.S. Court of Appeals for the Federal Circuit has rejected arguments that infringement litigation involving multi-component devices must use the SSPPU standard for determining a reasonable royalty.

EU Commission’s SEP Rate Determination Proposal Nixed Due to Innovation Concerns

Current SEP licensing markets already exhibit the capacity to address transaction-cost obstacles to licensing small- and medium-sized enterprises (SMEs). SEP owners in information and communications technology (ICT) markets have engineered several different licensing practices to maximize adoption including patent pools, bilateral transactions and licensing consortia. Non-exclusive licensing practices in these markets undercut the notion that patent owners would withhold access to SEP portfolios for technologies that quickly depreciate in the face of potential competition from substitute technologies.

Although the UKIPO’s consultation has proposed a rate determination track that would provide an independently adjusted licensing rate for SEPs through administrative procedure, the IP experts point out that the European Union recently withdrew a similar measure. In April 2023, the European Commission proposed an SEP regulation that contemplated aggregate royalty rate assessments and directed parties toward a conciliation process prior to the filing of patent infringement suits. However, concerns over the lack of empirical evidence supporting the need for such regulation, and the resulting shift of bargaining leverage to large device producers, led the EU Commission to rescind the proposal this February.

Three decades of a thriving global market in wireless communication technologies has resulted from the SEP licensing regime that has naturally developed from licensing-based businesses able to engage in arm’s-length negotiations. The letter from the IP experts concludes that this prosperity will continue if courts are able to continue providing robust enforcement of both IP rights and the licensing agreements predicated on those rights.

Signatories to this letter include Paul Michel, Chief Judge (Ret.), U.S. Court of Appeals for the Federal Circuit; Randall Rader, Chief Judge (Ret.), Federal Circuit; Susan Braden, Chief Judge (Ret.), U.S. Court of Federal Claims; Andrei Iancu, Former Director, U.S. Patent and Trademark Office; Adam Mossoff, Antonin Scalia Law School; and Kristen Osenga, University of Richmond School of Law.

Image Source: Deposit Photos
Image ID:5437156
Copyright:ra2studio