Feb 8, 2022

Remarks to the Japanese Patent Office on Standard Essential Patents

Alden Abbott Senior Research Fellow

The Japanese Patent Office (JPO) recently held a forum to discuss standard essential patents (SEPs) and other topics related to intellectual property law. Many countries are in the process of revisiting or revising their SEP policies and guidelines.

The following is a lightly edited transcript of remarks provided by Mercatus Center Senior Research Fellow Alden Abbott, a former general counsel with the Federal Trade Commission, on the status of SEPs in the United States. Abbott focused on evolving U.S. Department of Justice policy statements from 2013, 2019 and 2021 (the latter in draft form), and on what these statements mean for SEP policy moving forward.

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Hello. Greetings from the United States. I am Alden Abbott, senior research fellow at the Mercatus Center at George Mason University. I will be speaking about SEP licensing in the United States.

Is policy changing? I will start with a history of statements dealing with SEPs — standard essential patents. First of all, thank you. Many thanks to Toshi Futamata of the University of Tokyo for having invited me to participate in this forum and for Shizuno Tomoki of the JPO for his kind assistance in facilitating my presentation.

The views I express today are solely attributable to me; they do not necessarily represent the views of the Mercatus Center. I might add that formerly, prior to joining the Mercatus Center in January 2021, I was general counsel of the United States Federal Trade Commission.

I will focus today primarily on the 2013, 2019, and 2021 versions of the “Policy Statement on remedies for Standard Essential Patents,” subject to voluntary F/RAND commitments, referred to in my slides as the 2013, 2019, and 2021 PS. These were issued by the United States Department of Justice, or DOJ, the Patent Trademark Office, or PTO, and the U.S. National Institute for Standards and Technology, or NIST.

Let me turn to a short background on SEPs and antitrust. We will not focus on antitrust today, but a general understanding that antitrust is in the shadows of this discussion in the United States is important. In the United States, unlike some other countries, standard-setting private sector-driven efforts go forth. Private-sector driven is the key. Government has not played a major role in guiding standard-setting policy in the United States.

When not resolved privately, SEP disputes that go to U.S. courts are usually resolved by judges using contract, tort, patent law concepts under our common law system. Now, the United States Federal Trade Commission settled some antitrust investigations involving SEPs in recent years. They also brought and lost the Qualcomm case charging anticompetitive licensing by Qualcomm's SEPs.

The Justice Department has also offered some advisory letters, giving general antitrust advice and particular standard-setting questions. The Trump Justice Department proposed what they called a “New Madison Approach” that flatly opposed rejecting injunctions and applying antitrust to SEP licensing disputes. However, the Biden Justice Department rejects the New Madison Approach and is against granting injunctions to SEP holders and it may apply antitrust if the circumstances are right.

What are the arguments for strongly protecting SEPs? Why should you worry about that? SEPs are important in incentivizing investment in standardized technology and SEP licenses spread innovation throughout the economy. This argues for strong legal protection for SEP licensing.

Following the 2006 U.S. Supreme Court decision on eBay, United States lower court holdings made it almost impossible for SEP holders to get injunctions. The practical unavailability of injunctions for infringement has favored implementers over SEP holders in licensing negotiation. Weakening the bargaining leverage of SEP holders could over time reduce investments in standards, lower their quality, and slow innovation.

Now, let me briefly describe in general the 2013, 2019, and 2021 policy statements before going into details.

These three policy statements are not legally binding on private parties. They are not laws. Also, unlike agency guidance documents, such as merger guidelines, they do not express federal enforcement policy intentions because they deal with negotiations between private parties in which the government is not involved.

The SEP statements are useful as general statements of U.S. executive branch thinking on patent policy, and relatedly on the application of antitrust laws to patent licensing disputes. Now some private parties may choose to follow certain negotiating suggestions in the 2020-21 policy statement, which I will discuss soon, but the courts will not require that the suggestions be followed.

Let's start with a 2013 policy statement issued during the Obama administration.

That statement, which was issued only by the Justice Department and NIST, focused solely on the availability of U.S. International Trade Commission (USITC) exclusion orders under Section 337 of the U.S. Tariff Act, which authorizes such orders to block imports that infringe U.S. patents.

A footnote in that document said similar principles apply to the granting of injunctive relief in U.S. federal courts, making the policy statement more generally applicable. The only harm the policy statement discussed was patent holdup, which is asserting a patent to exclude a competitor from the market or to obtain a higher price for its use than would've been possible before the standard was set, when alternative technologies could have been chosen. In short, it's using threats to get monopoly returns that you haven't legitimately earned. That's what the critics call “holdup.”

The 2013 policy statement ignored possible holdout by infringing implementers in which they try to take advantage of the patent holders. We'll talk a little bit about that later. Now, the 2013 policy statement said that the USITC exclusion order may still be an appropriate remedy in some circumstances. For example, if a punitive licensee refuses to pay what has been determined to be an F/RAND royalty, or refuses to engage in a negotiation to determine F/RAND terms. But the 2013 policy statement still urged money damages, not an injunction, as the appropriate F/RAND remedy.

The 2013 policy statement failed to refer to any specific licensing commitment or patent policy of any standard-setting organization bearing on F/RAND. According to a recent article from January 6th in IPWatchdog.com, which is an American published blog on patents, the notion that nearly submitting a licensing commitment should deprive the patentee of a right to pursue an injunction for an infringement is not supported by the actual language licensing commitment, patent policies, or any patent or ITC antitrust rulings related there to, or at least involving, ETSI. ETSI, of course, is the European Telecommunications Standards body, the governing body in most F/RAND disputes. You may want to read that article, it's an interesting one.

The 2019 policy statement issued under the Trump administration, issued by the Justice Department, PTO and NIST, rescinded, pulled out, withdrew, nullified, the 2013 statement.

The 2019 policy statement, which, as I said, rejects the 2013 statement, says, "A patent owner's F/RAND commitment is a relevant factor in determining appropriate remedies, but need not act as a bar to any particular remedy." The general framework for deciding these issues remains the same as in other patent cases.

The statement argued injunctions should be possible. It argued that the court should not automatically reject injunctions. It should, in effect, treat SEP holders as well or equally to other patent holders.

It also highlights a holdout threat "when an infringer unilaterally refuses an F/RAND royalty or unreasonably delays negotiations to the same effect." The particular F/RAND commitment by a patent owner and the SSOs policies according to the 2019 statement may be relevant in deciding SEP remedies, case by case.

The 2019 policy statement is balanced and flexible, recognizing abuses go both ways. It emphasizes both SEP and non-SEP patent holders should have access to all statutory patent remedies based on case-specific circumstances. It points out that U.S. courts, including the federal circuit, which is the patent appeals court in the United States, had no special rules limiting remedies for SEP infringement.

It recognizes the importance of good faith while leaving it up to patentees and implementers to negotiate specifics of particular licenses. It does not seek to establish specific government licensing negotiation guidelines, thus giving maximum flexibility to the negotiating parties to set their own negotiating rules.

Now, again, I will mention the 2019 policy statement said injunctions should be available or appropriate, but in reality, the U.S. federal courts basically have rejected granting injunctions for infringement of standard-essential patents at least up to now, so we will see how that develops in the future.

The 2021 policy statement issued by the Biden administration in draft form in January a few weeks ago, this will be issued in final form by the Justice Department, PTO, and NIST, and public comments are being made on it up until February. The Justice Department and those agencies plan to issue a final statement after reviewing the comments.

The 2021 statement acknowledges the importance of balanced standard-setting, reflecting the interests of both implementers and SEP owners, but its substantive analysis strongly favors the interest of implementers at the expense of the sources of standards innovation, the SEP holders.

It argues that SEP holders almost never should get injunctions, which, as I've indicated, is really the reality in courts today. And also, the 2021 draft statement says although an injunction may be justified or an implementer is unwilling or unable to enter into an F/RAND license, that's the only example it gives, and the rejection of a royalty rate set by a judge is an unrealistic bad faith case.

In reality, it is in effect saying it's almost never justified to give an injunction to an SEP holder. The 2021 statement cites multiple examples of situations that do not involve an unwillingness to take an F/RAND license and therefore the statement would preclude the granting of injunctions in all such situations.

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. Those acts are almost never characterized as willful acts, prompting injunctions by U.S. courts. Again, opportunistic behavior is really existing at times, but it has not really led to the granting of injunctions or penalties by American courts.

The 2021 policy statement also fails to address economic harm due to the bargaining distortion created by the practical unavailability of injunctions, and … thus rejects the more even-handed approach of the 2019 policy statement.

Also, the 2021 policy statement established a detailed bargaining framework for licensing among private parties. There was no such framework in earlier statements. The 2021 policy statement encourages 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.

It lists five ways in which the licensee might respond and sets forth four potential elements of a good-faith response by the SEP holder. It describes what parties should do in the event negotiations break down, and it supports the development of SSO IPR policies that promote good-faith negotiation and facilitate voluntary F/RAND licensing. Again, these are all new in the negotiating framework in 2021. There was no such framework in 2019.

Now, the 2021 negotiating framework is characterized as merely suggestive, but it inevitably would induce some negotiating parties to adopt its details in order to be on the good side of government. Certain courts might take note of the framework in assessing licensing. What is the argument against the framework? It's an argument I have made in commenting on the draft statement, and my comments are a matter of public record. They were filed with the government and they are available at regulations.gov.

A key argument against the framework is that government lacks the market-specific knowledge available to private negotiators, so strict adherence to the government approach generally is inferior to a purely private approach. Now because the 2019 policy statement avoids suggesting a specific negotiating framework, it allows implementers and SEP holders to seek to negotiate mutually satisfactory arrangements subject to acting in good faith. For that reason, I think it is far superior to the draft 2021 statement.

What is the big picture? What is the likely influence of the 2020/21 statement?

The statement, first of all, shows a shift in the U.S. administration's thinking toward favoring implementers and disfavoring SEP holders. The 2021 statement, as I said, has not yet been finalized, and already critical comments, including my own, have been made, but it likely will be largely adopted as it now is. Why do I say that?

My sense is based on public statements by Justice Department officials that the statement very closely reflects the thinking of the administration, of the Justice Department, so I think it probably will be adopted, certainly, when the other agencies, NIST and PTO, have their heads put in place. I may be wrong, but I think any changes to that statement are likely to be minor.

The 2021 statement may not have a huge short-term impact on U.S. licensing. U.S. courts, as I've said already, almost never grant injunctions to SEP holders, limiting the bargaining power of SEP holders and thus constraining the nature of negotiations before the fact, so-called ex-ante negotiations.

Now, U.S. common law courts make their own decisions on royalty and remedies based on case law and market-specific facts on the ground. They may mention the framework, but their decisions will not be controlled by it. In sum, the move from the 2019 to 2021 statement looks very dramatic, but in reality, it's probably not a game-changer in the short term. However, it may reduce longer-term expected value return to SEPs.

In other words, it may discourage investments in SEPs, weaken incentives to invest in the SEPs that improve patent quality and standards quality, so standards — which are so important to the economy — may not be as strong as they might have been if SEPs are in effect treated as second class patents, which is the effect of the 2021 statement in my view.

In conclusion, the 2021 statement marks a change to more strongly favor implementers' interests over those of SEP holders in licensing policy and in antitrust. The short-term influence of the 2021 statement on SEP licensing negotiations is likely to be limited and its influence on U.S. judicial decisions likely to be insubstantial.

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