Undermining Investment in Standard Setting by Weakening Patents: How a Recent Justice Department Business Review Letter Gets Things Wrong

Alden Abbott —  24 March 2015

As I explained in a recent Heritage Foundation Legal Memorandum, the Institute of Electrical and Electronics Engineers’ (IEEE) New Patent Policy (NPP) threatens to devalue patents that cover standards; discourage involvement by innovative companies in IEEE standard setting; and undermine support for strong patents, which are critical to economic growth and innovation.  The Legal Memorandum focused on how the NPP undermines patentees’ rights and reduces returns to patents that “read on” standards (“standard essential patents” or “SEPs”).  It did not, however, address the merits of the Justice Department Antitrust Division’s (DOJ) February 2 Business Review Letter (BRL), which found no antitrust problems with the NPP.

Unfortunately, the BRL does little more than opine on patent policy questions, such as the risk of patent “hold-up” that the NPP allegedly is designed to counteract.  The BRL is virtually bereft of antitrust analysis.  It states in conclusory fashion that the NPP is on the whole procompetitive, without coming to grips with the serious risks of monopsony and collusion, and reduced investment in standards-related innovation, inherent in the behavior that it analyzes.  (FTC Commissioner Wright and prominent economic consultant Greg Sidak expressed similar concerns about the BRL in a March 12 program on standard setting and patents hosted by the Heritage Foundation.)

Let’s examine the BRL in a bit more detail, drawing from a recent scholarly commentary by Stuart Chemtob.  The BRL eschews analyzing the risk that by sharply constraining expected returns to SEPs, the NPP’s requirements may disincentivize technology contributions to standards, harming innovation.  The BRL focuses on how the NPP may reduce patentee “hold-up” by effectively banning injunctions and highlighting three factors that limit royalties – basing royalties on the value of the smallest saleable unit, the value contributed to that unit in light of all the SEPs practiced the unit, and existing licenses covering the unit that were not obtained under threat of injunction.  The BRL essentially ignores, however, the very real problem of licensee “hold-out” by technology implementers who may gain artificial bargaining leverage over patentees.  Thus there is no weighing of the NPP’s anticompetitive risks against its purported procompetitive benefits.  This is particularly unfortunate, given the absence of hard evidence of hold-up.  (Very recently, the Federal Circuit in Ericsson v. D-Link denied jury instructions citing the possibility of hold-up, given D-Link’s failure to provide any evidence of hold-up.)   Also, by forbidding injunctive actions prior to first level appellate review, the NPP effectively precludes SEP holders from seeking exclusion orders against imports that infringe their patents, under Section 337 of the Tariff Act.  This eliminates a core statutory protection that helps shield American patentees from foreign anticompetitive harm, further debasing SEPs.  Furthermore, the BRL fails to assess the possible competitive harm firms may face if they fail to accede to the IEEE’s NPP.

Finally, and most disturbingly, the BRL totally ignores the overall thrust of the NPP – which is to encourage potential licensees to insist on anticompetitive terms that reduce returns to SEP holders below the competitive level.  Such terms, if jointly agreed to by potential licensees, could well be deemed a monopsony buyers’ cartel (with the potential licensees buying license rights), subject to summary antitrust condemnation in line with such precedents as Mandeville Island Farms and Todd v. Exxon.

In sum, the BRL is an embarrassingly one-sided document that would merit a failing grade as an antitrust exam essay.  DOJ would be wise to withdraw the letter or, at the very least, rewrite it from scratch, explaining that the NPP raises serious antitrust questions that merit close examination.  If it fails to do so, one can only conclude that DOJ has decided that it is suitable to use business review letters as vehicles for unsupported statements of patent policy preferences, rather than as serious, meticulously crafted memoranda of guidance on difficult antitrust questions.

Alden Abbott

Posts

I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

6 responses to Undermining Investment in Standard Setting by Weakening Patents: How a Recent Justice Department Business Review Letter Gets Things Wrong

  1. 

    Are you really that surprised the BRL was one sided? Look at the author. Ms Hesse is married to a partner at a firm that represents Intel. This BRL is clearly pro-Intel. As to the effect of the new IEEE patent policy that was essentially drafted by a buyers cartel, well we’ve already seen Qualcomm and InterDigital push back.

    • 

      Loaded language like “buyers cartel” aside — by noting that “we’ve already seen Qualcomm and InterDigital push back” aren’t you noting precisely why this does not raise valid antitrust concerns?

      Patent holders are perfectly capable and free to push back, if they don’t like IEEE terms. They are not obligated to participate in IEEE standards efforts, and they are not obligated to commit to IEEE’s notion of FRAND licensing, even if they do participate. If they have truly critical IP, then IEEE will be forced to include their IP in any standard they issue (or not to produce a standard), even if they don’t commit to IEEE’s notion of FRAND licensing. If they have IP that is avoidable, then IEEE will probably choose to avoid it, absent such a commitment. That is entirely reasonable, and as it should be, for both sides.

      And if they have truly critical IP, patent holders can take their business to a different standards forum, or even create their own private consortium to produce targeted standards, as has been done with many other successful technologies.

      So exactly what is the basis for claiming that patent holders are improperly harmed? That they don’t get the ridiculous advantage they have enjoyed in the past of having non-critical technologies adopted based on an assurance of ostensibly FRAND licensing, but without having to make any actual commitment as to what FRAND licensing means, so that they are free to demand any terms they want, after the fact??

      Why is it that patent holders need special protection from the government, if by holding critical IP, they possess all the power to determine which standards efforts will succeed, and which will not?

  2. 

    I write extensively on patents as an author, practicing patent attorney, and blogger. I agree that the IEEE change is designed to weaken patent rights, however using either the legal or economic analysis of anti-trust law to support patents seems a little oxymoronic (althought I understand why you did so). Anti-trust law (economics) is a contradiction in terms. A proper understanding of anti-trust needs to start with the Statute of Monopolies, which limited the power of the government and protected property rights. The Sherman Anti-trust turned this on its head increased the power of government at the expense of private property rights.

  3. 

    Well, I suppose that would put the DOJ’s BRL in the same bucket as your own writings on this topic, for as was amply demonstrated in our exchange when you last opined here on this topic, your own, oft-repeated argument that the IEEE policy represents a competitive harm and economic threat is, itself, embarrassingly one-sided and would merit a failing grade as an economics exam essay.

    • 

      Thanks. Respectfully, my policy views, right or wrong, are irrelevant. The point of a Business Review Letter has always been to set forth a detailed antitrust analysis to clarify a tricky area of antitrust law. This letter fails to do that, and therefore is a failure as an antitrust document. DOJ and the Administration are perfectly free to say that, as a matter of public policy, they believe that returns to patent rights should be curbed, and that the IEEE policy does a good job in that regard. But they should not pursue their objective by ignoring the serious legal issues, rooted in antitrust law, that are raised by the IEEE statement. This is a confusion of legal analysis and policy. Certainly policy can and should help inform antitrust analysis, but the problem is that the DOJ document essentially is all policy (unsupported, by the way, by empirical content) and close to zero antitrust legal analysis. This is a disservice that devalues the coin of the business review letter enterprise.