Policy Derailed: Can U.s. Antitrust Policy Toward Standard Essential Patents Get Back on Track?

• Publication year: 2023

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Jonathan Rubin ^*

Abstract: A consensus at the intersection of patent and antitrust law was achieved after a series of decisions finding that in some circumstances owners of standard essential patents (SEPs) have an antitrust duty to deal with willing licensees. Beginning in 2017, however, the Department of Justice derailed U.S. policy by undermining the role and usefulness of antitrust for policing abuses of the standard setting process. This article traces the emergence of the consensus, its abrogation by the DOJ, and the resulting effects and prospects for the future.

Introduction

Technical standards are ubiquitous. They serve multiple purposes, including the assurance of minimum safety levels, the protection of health or the environment, the provision of information to consumers, and the reduction of transaction costs when selecting products or inputs. One of the most important functions of technical standards is to enable components and products designed and produced by different firms to communicate and interoperate. Interoperability standards are increasingly important for global commerce because they help to achieve economies of scale and scope within nations and across borders. ¹

Interoperability standards are often developed and adopted collaboratively by market participants within standard development organizations (SDOs). ² Increasingly, interoperability standards rely on technologies that are the subject of patents or patent

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applications, requiring implementers to secure a license before practicing the standard. Once a standard is adopted, firms may make significant investments in research, manufacturing, or marketing in reliance on the prospect of broad interoperability across a product category. These sunk costs can make it infeasible to switch from the standardized technology to an alternative technology. In such cases, the firm is said to be "locked in" to the standardized technology. When the owner of a patent that is essential for implementing a standard, a so-called standard essential patent, or SEP, seeks to extract royalties from a locked-in implementer in excess of the incremental value of the invention covered by the patent, it is known as "patent hold-up." ³

To guard against patent hold-up, SDOs have developed policies requiring participants in the standards setting process to disclose ex ante (i.e., before adoption of the standard and the occurrence of lock-in) whether the technology being proposed for the standard is patented and, if so, to commit voluntarily to licensing the patents essential to implementing the standard either royalty free or under terms that are "fair, reasonable, and nondiscriminatory," or FRAND. ⁴

A patent owner's FRAND commitment, like other pledges, such as voluntarily announcing a policy of royalty-free licensing, obligates the patentee to do things not required by the patent laws, while the opportunity for anticompetitive conduct in standard-setting activities draws antitrust scrutiny. In disputes over FRAND-encumbered SEPs, therefore, the patent and antitrust laws converge. In the period from the early 2000s until 2016, a consensus of sorts over the balance between patent law and antitrust was achieved through the interplay of various court opinions, administrative decisions, and agency policy statements. ⁵ In 2017, however, U.S. policy regarding SEPs began to diverge radically from the accepted consensus, exemplified by a 2019 Joint Statement issued by the Department of Justice's (DOJ's) Antitrust Division, the U.S. Patent and Trademark Office (USPTO), and the National Institute of Science and Technology (NIST). ⁶ The 2019 Joint Statement, together with the DOJ's other interventions and filings in various proceedings, have drastically altered the balance between patent rights and antitrust and severely impaired the capacity of

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U.S. antitrust law to address anticompetitive conduct by owners of FRAND-encumbered SEPs.

Seeking to realign policy more closely with the consensus of the recent past, the Biden administration included Section 5(d) in its Executive Order on Promoting Competition in the American Economy, ⁷ which encourages the Attorney General and the Secretary of Commerce "to consider whether to revise their position on the intersection of the intellectual property and antitrust laws," including whether to revise the 2019 Joint Statement. On June 8, 2022, the agencies withdrew the 2019 statement in a two-page abrogation of the Trump-era policy, but the statement did not reinstate the earlier 2013 statement. It simply states that the "DOJ will review conduct by SEP holders or standards implementers on a case-by-case basis to determine if either party is engaging in practices that result in the anticompetitive use of market power or other abusive processes that harm competition." ⁸ It is difficult to see how such a statement can have much of a course-correcting effect. Indeed, as we illustrate in this article, the evidence from recent cases suggests that the government's policy reversal is unlikely to exert much influence over the direction taken by the courts.

The rest of the paper proceeds as follows. The next section summarizes the key technological and industrial developments over the past few decades that elevated the importance of SEPs and brought fresh attention to the intersection of the patent and antitrust laws. The third section revisits the series of legal proceedings during the 2000s out of which a consensus arose that, in some circumstances, patentees have an antitrust duty to disclose patent rights on technology about to be incorporated into a standard and, when they pre-commit to FRAND licensing, to deal with implementers of the standard. The fourth section describes the effect of the FRAND commitment on a SEP owner's right to seek an injunction against an implementer unwilling to accept a license on the terms offered by the SEP owner. The question arises whether the owner of a FRAND-encumbered patent can satisfy the requirements of an injunction, which include establishing that an award of money damages will not adequately remedy the infringement. Over time, the contours of the kinds of conduct that risk antitrust exposure for SEP owners gained predictability. As described in the fifth section,

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the prevailing balance was upended by the DOJ's policy shift in 2017, which opened a chasm between the DOJ and the Federal Trade Commission (FTC) on the appropriate legal treatment of FRAND-encumbered SEPs. Some of the fallout of the DOJ's policy advocacy are illustrated in the sixth section, which examines two recent Circuit Court decisions that severely limit the role of competition analysis in resolving disputes involving FRAND-encumbered SEPs. The last section concludes with some remarks on the costs of the U.S. policy ambiguity and its implications for innovation and U.S. competitiveness.

The Rise of SEPs

Patent law is authorized by the U.S. Constitution, in Article 1, Section 8, Clause 8 (the "Copyright and Patent clause"), which provides that "[t]he Congress shall have the Power . . . to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries. . . ." To deter and remedy infringement, Congress has enacted patent and trade laws that allow a patent owner to bring an action for damages "in no event less than a reasonable royalty" ⁹ and to seek an injunction "in accordance with the principles of equity" in U.S. courts. ¹⁰ For infringing imported goods, a patentee may petition the International Trade Commission for an exclusion order banning the importation of the infringing product. ¹¹

It is widely accepted that a strong enforcement mechanism to protect intellectual property rights incentivizes innovation and its dissemination and commercialization. ¹² Some interpret this proposition to mean that the stronger the legal protection of the patent right, the greater the incentive to innovate or, conversely, that any diminution of patent protection will necessarily reduce the incentives of inventors and investors to innovate. ¹³

For over a century, the "more-protection, more-innovation" dynamic has enabled patent law to fulfill its Constitutional purpose to promote the progress of science and the useful arts. But industrial developments in the late twentieth century, particularly in information and communications technology, led to a proliferation of network industries employing complex technological devices,

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each of which may be required to observe potentially hundreds of standardized specifications in order to be compatible with the network. Each device might practice hundreds, or thousands, of patents, many of which are essential for compliance with one or more technical standards. The royalty for a license to practice a single patent (or a single "family" of patents on the same subject matter by the same inventor but granted by different jurisdictions) calculated according to the conventional metrics of patent law might be reasonable and economically feasible. But when multiple patent owners each seek to "stack" similarly calculated royalties, one upon the other, commercialization of the standard may become uneconomical. ¹⁴

Moreover, companies known as "patent assertion entities" began to practice a business model in which patentable inventions were created or patent portfolios constructed for the sole purpose of generating license fees rather than to protect the design of products the patent owners intended to bring to market. These firms contributed to the growing intensity of patent-licensing activity. Patent owners also began to recognize that inclusion of patented technology in a standard can considerably increase the value of its patent portfolio due to the reduction in competition that may occur after a standard has been chosen and lock-in has occurred. ¹⁵ In addition...