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.