Part I - Intellectual Property and Competition Policy in Global Wireless Markets

1 Restoring and Revitalizing Technology Markets for Mobile Wireless Geopolitical Dimensions of Patented Technology Embedded in Standards

David J. Teece

I. Introduction

Standards are important to the further development and rollout of technologies, including 5G and the Internet of Things (IoT), self-driving cars, and artificial intelligence (AI). The United States’ technological leadership is no longer assured in many frontier technologies. Indeed, America’s strategic rivals, and in particular China, are focused on and committed to taking away American, European, and Japanese technological and marketplace leadership in emerging technologies. Standards will play a role in such outcomes. This chapter focuses mainly on the licensing of standard-essential patents (SEPs) in foundational or “enabling” 5G wireless technology.

Many policy issues are at hand, have tremendous geopolitical consequences, and cannot be looked at in isolation. For instance, the US Department of Justice (DOJ) is reviewing its antitrust policies toward SEPs. These issues are complicated.

The best way forward with technology development is to incent business enterprises operating in the United States and in allied nations to invest heavily in research and development (R&D), as several of them have done in the past. Success in this regard will promote competition and is the best chance the liberal democracies have to maintain technological leadership – and, along with it, achieve long-term economic growth and national security while advancing long-term consumer welfare.

Given US industrial weakness in manufacturing, it is especially important that the research-intensive sector of the US economy remains viable and robust. The development of the foundational technologies stage of the value chain has anchored US competitive advantage in recent decades, and this advantage needs to be sustained and enhanced, if possible. Doing so will require maintaining the viability of the open innovation model in technology development under guidance from the European Telecommunications Standards Institute (ETSI).¹ Competition authorities tend to applaud open innovation models,² because they favor new entrants (as compared to the vertically integrated model, which is in effect a closed model because research by the implementer is done in-house).

This chapter endeavors to scope the true nature of SEP issues. It will focus almost entirely on ETSI, whose intellectual property (IP) policy, and its functioning as a standards development organization (SDO), is important to the world economy. In particular, the development and future evolutions of 5G (and 6G that may follow it³) have considerable economic and geopolitical implications for the United States, Europe, and Japan. The chapter also explores the implications for US global technology leadership, competitiveness, and national security of taking a step backward by reinjecting specious antitrust concepts into the analysis.

II. Intellectual Property Rights Matter

In policy circles, there is an all-too-common failure to understand that the weakening of IP results in less innovation and undermines open innovation approaches, thereby favoring vertical integration. At a time when many policymakers and analysts are concerned about (integrated) Big Tech,⁴ it is paradoxical that many of the same individuals favor the weakening of IP. Yet it is the SEP licensing model that enables open innovation and new entry into existing ecosystems. This policy contradiction indicates a lack of clear understanding that standards development, at least for mobile wireless, is an expensive undertaking that requires spending billions of R&D dollars to create new technologies, which get folded into technological ensembles that become next-generation standards technologies available for licensing to industry. The interoperability and interconnections aspect of SEP licensing is just the wrapper. In particular, five issues are often misunderstood and are addressed in this chapter. These issues arose from:

1. (i) An implicit belief that new standards technology arrives more or less like “manna from heaven.” The reality is that royalties from SEP licenses provide the income stream that supports the R&D that improves the underlying technology. If the royalty rate is reasonable, and if unlicensed use is minimized, the required R&D can be funded. Absent a robust patent licensing model, vertical integration (closed innovation) is the model that technology implementers would be forced to adopt.

2. (ii) An implicit belief that standards development is little more than a matter of agreeing on interconnection protocols. It is quite different. In the case of mobile wireless, the SDO provides the platform for what is likely the largest cooperative R&D endeavor the world has ever seen – bigger and arguably even better than Bell Labs of yesteryear, the disappearance of which was unnecessary collateral damage from an antitrust-driven divestiture of AT&T, which paid too little attention to the future funding of breakthrough innovation.

3. (iii) A failure to understand that only four to five companies, most of them in the United States and Europe, provide more than 80% of the most important technology that gets embedded in standards, and that there are over 1,000 implementers, a number that is likely growing with 5G and IoT.

4. (iv) A failure to understand that unlicensed use of standards technology is common. Its presence threatens the technology licensing model and hence the open innovation business model that undergirds it.

5. (v) A failure to understand that patents are not self-enforcing. Nor is there a unified global enforcement mechanism for SEPs. As a consequence, there is not only unlicensed usage but also forum shopping. Implementers try to “divide and conquer.”

These misunderstandings reflect a lack of appreciation that technological contributions to standards development (with the process managed under ETSI governance rules) require innovators to license their technology (and associated patent rights) to implementers, thereby giving up the right to sole use. This bargain works only if there is the expectation and the reality of royalty income sufficient to support past and future technology development activities. If this aspect is not understood and is not at the core of US public policy deliberations, then companies that seek to avoid paying market rates for the use of standards technology will likely succeed and, in doing so, undermine the long-term viability of the ecosystem. If policymakers and the courts allow even quasi free riding, the United States would be playing into the hands of those who have undermined US technological leadership, manufacturing capacity, and economic security.

A balanced approach is needed. If policy favors either side too much (implementers or upstream innovators), then the robust innovation ecosystem that has historically supported mobile wireless is put at risk.

In the early days of mobile wireless (that is, 2G and 3G), standardization activity was dominated or heavily influenced by vertically integrated firms. Today, the success of the open innovation global standards model has enabled nearly seamless wireless compatibility around the globe and allowed hundreds of new implementers to enter the mobile wireless ecosystem. These companies (for example, Apple, Samsung) typically do not contribute significant patented technology to assist in the creation of high-performance standards. They would prefer to use standards technology for free or for a nominal fee. Inasmuch as implementers can lobby government agencies, their sheer numerosity has tended to drown out the voice and perspective of technology developers. In 5G, for instance, the numbers of likely implementers are in the thousands, whereas the majority of the quality contribution comes from a small handful of companies (most notably, Qualcomm, Ericsson, Nokia, Interdigital, and Huawei) that spend heavily on R&D.⁵

In sum, for decades now interoperability standards have also incorporated technology covered by IP. However, this system is now at risk because the licensing landscape has changed somewhat: (1) The ratio of technology developers/contributors to implementers has diminished; and (2) US (and some foreign) antitrust agencies have injected antitrust issues⁶ into FRAND⁷ deliberations, creating uncertainty that has compromised the functioning of the market for technology. Some of this confusion was cleared up under Makan Delrahim’s tenure as head of the DOJ Antitrust Division, but such progress is under threat of reversal under the Biden Administration.

III. The Geopolitical Environment

A. Complex System

It is no longer acceptable – indeed, it is incredibly risky for Western democracies – for antitrust agencies to formulate policy without consideration of geopolitical consequences. Potential short-term domestic consumer welfare issues pale in comparison to many potentially existential geopolitical threats. Fortunately, dealing presciently with these issues will aid competition and innovation in the United States and elsewhere.

There is reason for concern. In the past, antitrust enforcement actions (including by the Federal Trade Commission (FTC)) in the global technology marketplace have been misadventures in terms of their impact on not only competition but also US global competitiveness. Many are by now aware that China is endeavoring to stack international standards bodies with individuals who swear fealty to China. “China Standard 2035” lays out objectives for blockchain, quantum computing, AI, and other technologies. Impacting and controlling 5G standards development is also part of China’s national mission. The Western democracies must be mindful of these activities and the underlying strategy. It is important to prevent the politicization of the standards development process.⁸ The 14th Five-Year Plan for National Informatization released in December 2021, for example, restates China’s goals to “create a closed-loop innovation mechanism” to promote “standards building” in prioritized areas such as 5G, Big Data, AI, blockchain, industrial Internet, and so forth, and accelerate the completion and perfection of existing data sharing and data application standard systems. It also anticipates greater integration of China’s information standards efforts into all sectors of the Chinese economy relying upon this “closed-loop” innovation system.⁹ Policymakers and executives and members of standards bodies must be mindful of these activities and the underlying strategy.

The United States’ antitrust policy, if the FTC is to be used as a guide, already has inadvertently strengthened the hand of China. The problems associated with standards technologies are not unlike the problems that the Western democracies are confronting with all emerging technologies. David Delpy, University College London, put it this way:

Now, it’s very difficult for countries to make sure that they get at least a fair share of the return on investment on emerging technologies …. If everybody’s playing by the same rules, it’s fine. But everybody isn’t playing by the same rules. The issue is, value capture: how do liberal economies capture value in a world where not everybody is liberal?¹⁰

Western democracies must double down on R&D and strengthen the technological capabilities of business firms. That is a big – but necessary – task. The required R&D must, in the main, be private sector funded. For private sector R&D investment to occur, national policy must make sure that SEP owners receive fair compensation, sufficient to support the business models of those Western firms that generate the technology that ends up as part of the standards technology ensemble. Supporting the SEP licensing process so that it can, in turn, support the R&D necessary for technology development ought to be the critical policy objective of the DOJ, the United States Patent and Trademark Office, and the US National Institute of Standards and Technology. If achieved, it also will support subsidiary goals with respect to competition and consumer welfare.

B. The Changing Geopolitical Landscape

“China Standards 2035,” mentioned in Section III.A, was a galvanizing publication that can serve to remind executives and policy analysts that they need to develop a broader perspective with respect to standards development and standards setting. This initiative builds on “Made in China 2025” and heralds plans and financial and regulatory support for Chinese enterprises, public and private, to take control of the decentralized private (and substantially professionally driven) global standard development process. If successful, China will change the governance of global business, which in turn will augment China’s geostrategic power. There are far-reaching consequences for international business, national security, and competition.

Chinese firms have already obtained substantial representation in the international standard-setting process. Unlike Western representatives, Chinese representatives, whether corporate or government, are held accountable to the nation-state. The Swedish Institute of International Affairs recently noted:

For decades, and almost unnoticed by the general public and politicians, technical standards have been a driving engine behind globalization … they [now] run the risk of turning into a core subject of great power competition over high technology … Europe emphasizes its commitment to rules-based institutions in world affairs. Hence, it cannot simply adapt the new power approach to technical standards, since this undermines the existing institutional framework.¹¹

The report further noted that China’s state-directed approach to standards development “radically breaks with both the U.S. and European approaches that are both industry driven.” Other sources draw attention to China, noting:

The CCP has seized on the importance of these [standards development] bodies for the dual and mutually reinforcing objectives of increasing national competitiveness and building international influence on technology adoption.¹²

As a result, one might say that China is “inventing patents,” in the sense that it is diligent about filing for both minor and major inventions. It also is very active at standards-setting meetings and on standards-setting governance.

Unfortunately, there is sometimes limited sophistication in understanding what is going on in the global technology marketplace. Some of this flows from the misreading of patent statistics.

Citing patent analytics company iPlytics, an article in the Wall Street Journal recently noted that companies from China own “36% of all 5G standard essential patents” and that “U.S. firms including Qualcomm and Intel hold just 14%.” The article went on to state:

Chinese companies own such a significant share of the patents [that] the Western companies need to pay to license from them, that is, the net royalty payments will be from Western companies to Chinese companies.¹³

This statement could be true only if the quality of Chinese patents is equivalent to or better than Western companies’ patents, or if the infringing sales of Western firms are greater than that of Chinese firms. The licensing jurisdictions also need to be similar for such equivalences to be drawn.¹⁴ The famous quote “not everything that can be counted counts, and not everything that counts can be counted” seems relevant in this context. However, it would be very imprudent to assume that all Chinese patents are valueless.

Patent statistics can be misleading. Regardless, the United States and its allies – including other liberal democracies, particularly Sweden, Finland, South Korea, and Japan – still maintain a fragile lead, even as the trends do not favor liberal democracies. Policy mistakes now could lead to the rapid dissipation of this fragile leadership by the liberal democracies, with very negative knock-on effects for the US economy and competition. In the next section, I step back and review the context in which SEPs need to be understood – at least with respect to mobile wireless.

C. The 5G Technological Ensemble

The mobile wireless industry has a remarkable track record of developing continuously evolving and improving interoperable systems technology. GSM, Wideband Code Division Multiple Access (WCDMA), and, more recently, Long Term Evolution (LTE) are examples of successful technologies developed privately and separately, but combined by the 3rd Generation Partnership Project (3GPP), using consensus-driven governance, into a platform with massive economies of scale and scope.

Technology development for 5G occurs in a distributed manner with limited overall end-to-end supervision. A very few companies – such as Qualcomm, Nokia, and Ericsson – work hard to help ensure a high degree of end-to-end operability. Without these special efforts, 3GPP could fail. As an organization, 3GPP does not have its own resources to sponsor the development of “gap-filling” technology that, on a standalone basis, may not be financially viable. The real contributions of individual members are hard to calibrate and are not measured merely by counting the number of technical contributions made or patents declared by particular companies.

With 5G, 3GPP has the task of governing a collaborative effort among hundreds of different entities with different interests and incentives. Governance comes in at the time technologies are to be considered for inclusion in a standard. It oversees an iterative, nonlinear, consensus-based approach to technology selection and resulting standards development – systems engineering managed privately and in a decentralized manner. It has worked well, in part because the professionals involved are engineers. Historically, an engineering culture and commercial considerations dominated, and politics were held at bay. Members collectively (by vote) decided on the best technologies to go into a “standard” or new technological ensemble. This may change as Chinese national politics intervene.

Participating firms need confidence that each technology advanced for consideration is robust, has been or will be tested, and can be manufactured, and that the requisite software and applications support will be available. Sponsors of technology then are required to demonstrate that the technology is or can be commercially viable. Hence, by the time that patented technology becomes embedded in the standard, it already has undergone an early assessment as to commercial viability. Licensing executives need to understand this process, as it indicates that patents that are “truly essential” have in all probability passed a litmus test of commercial viability, and thus are likely to have value if indeed they are truly essential and not just “declared essential” by the patent owner.

Feedback from the validation and testing activities is critical and often leads to further development of the technology and/or changes in specification. This process is shown in Figure 1.1. Steps in validation include review, modeling, prototyping, and “plug tests/plug fests,” where designers of equipment or software using the technology proposed for the standard test interoperability of products and designs with those of manufacturers. As standards go through revisions, multiple firms may submit proposals and work together toward final adoption of the standard.

Figure 1.1. Some elements of standards development

The standard-setting for 5G is a continuous process. Updates are issued periodically. Licensing practices have evolved to support the open interoperable mobile wireless ecosystem, with royalties being set in the marketplace via negotiation at levels sufficient to encourage at least a few companies to make the large investment required to develop new 5G technologies.¹⁵

D. Technological Ensembles and the Global Open Standardization Miracle

As noted earlier, some observers have the naïve belief that standard-setting is just a matter of choosing compatibility/interoperability standards – like choosing between two- and three-pin electrical sockets and plugs. In reality, the situation is radically different.

Standard development is a distributed global R&D activity that takes place under loose 3GPP/ETSI governance.¹⁶

It is perhaps helpful to recognize that 3GPP is akin to a special kind of global technology development consortium that functions as the mobile wireless ecosystem’s R&D arm for developing, assembling, and then standardizing foundational technologies.¹⁷ Tens of thousands of engineers work on 5G foundational technologies. They are loosely coordinated by SDOs that work with 3GPP. This amazing technology development program – with billions of R&D dollars spent each year – is mainly privately funded, and the technologies are combined in powerful ensembles by engineers operating under rules established by 3GPP/ETSI.

3GPP periodically releases documents incorporating important new advances in the foundational technologies from the research activities of global mobile wireless technology companies. For example, Release 16 was published in July 2020.¹⁸ After a release document is published, it usually takes at least a year before cell phone and other subscribers have access to the fruits of the new technology. Infrastructure companies such as Ericsson, Nokia, Samsung, LG, Huawei, and Cisco have to design the technologies into their equipment; and chip and device manufacturers such as Samsung, Apple, LG, Motorola, ZTE, and Huawei have to embed them in new modems and in new generations of their devices. The network service providers also must install the requisite equipment upgrades for benefits to be realized. They do so, however, long after the standards technology is developed, whereas those that develop standards technology do so without the confidence that their technologies will ever be incorporated in the standards or have commercial payoff of any kind.

3GPP epitomizes cooperative global technology development at its apogee. It is a corollary of the US and European-led post–World War II liberal system of cooperative innovation and distributed economic organization. It is the de facto orchestrator of discoveries and inventions relevant to the mobile wireless ecosystem. With China’s rise and expressed desire to dominate standards setting, this delicate organizational arrangement will be put at risk, particularly if the United States does one more antitrust policy zigzag.¹⁹

The type of governance that 3GPP affords is unique as to its global scale and scope. It is rule based and consensus driven. Constituencies include technology developers, systems operators, device makers, and governments around the world.

As described in Section IV, patents are important in the mobile wireless cooperative ecosystem, because patent licensing is how the global sharing and financing of new technology is achieved. Proprietary 2G, 3G, 4G, and now 5G technologies, many of them foundational, have been made available via nonexclusive patent licenses to the whole world, generation after generation. This is a major reason for the success of the mobile wireless ecosystem over the past 30 years. It has afforded countless benefits to billions of users, and fueled competition and economic growth in the United States and abroad. The licensing system promotes both interoperability and entry by device manufacturers by providing a necessary suite of technology input solutions.

IV. The Salience of Patents and Patent Licensing to Competition and the Robustness of the Innovation Ecosystem

While technology is adopted into the standards by vote of the members, developers who contribute patented technology do so only because of SDO rules requiring that patent owners who provide patents for inclusion in the standard “make licenses available” on the expectation that implementers/users take licenses and pay royalties, rather than infringing willy-nilly. That is, everyone can have access to 5G standardized technology (at least for a reasonable period of time) through patent licenses, but licensees must be willing to pay royalties. Commercial terms nevertheless must be FRAND. This two-way commitment somehow must be enforced for the open global R&D super consortia that is 3GPP to be viable.

As already noted, the open innovation mobile wireless technology model has become fragile. There are now thousands of downstream device manufacturers, but only a handful of firms provide 80% of the foundational technology that is incorporated into standards.²⁰ 5G connectivity would not be possible without decades of upstream R&D on foundational technologies by companies such as Ericsson, Nokia, Qualcomm, Samsung, and LG, as well as new players such as ZTE and Huawei. However, many downstream device manufacturers try to avoid paying royalties altogether.

A smoothly functioning market for patent rights cannot simply be assumed. A primary reason is that patents are not self-enforcing. When patents are issued, the invention is available for use worldwide through concurrent publication of the patented invention. The patented technology does not enjoy an automatic monetary collection mechanism. To some (unscrupulous or simply opportunistic) industry participants, the publication of patents and associated standards is an invitation for unlicensed use of the patented technology, because policing unlicensed usage is difficult and often costly. “Catch me if you can” is an all-too-common attitude that sometimes is aided and assisted by poorly designed competition policies.

Furthermore, the 2006 US Supreme Court decision, eBay, Inc. v. MercExchange, LLC,²¹ had the effect, as a practical matter, of eliminating injunctive relief as a remedy for patent infringement in a wide range of circumstances. The decision put the US technology market and R&D spending to support standards at risk. I signed an amicus brief against eBay, because handicapping the right to enjoin would deeply compromise the licensing marketplace. Many of my fears have been realized, as “holdout” – discussed at length in the next part – is indeed a major problem today.

In sum, if the patent owner does its part and “makes licenses available,” there is no guarantee that users will take a license and begin to pay royalties. The patent owner still needs to develop a licensing program and persuade unlicensed users to sign up and pay royalties. In the absence of injunctive relief and/or strong business ethics, that is a difficult and costly mission. Put differently, the patent owner is left with very limited means to bring putative licensees to the bargaining table unless courts or international trade regulators block market access for infringers.

V. The FRAND Royalty Approach

A. FRAND and the Open Innovation Ecosystem

The mobile phone industry was in its infancy when ETSI was founded. The focus then and now is on what, in modern terms, we think of as creating a robust innovation ecosystem.

… the ETSI IPR POLICY seeks a balance between the needs of standardization for public use in the field of telecommunications and the rights of the owners of IPRs …. IPR holders whether members of ETSI and their AFFILIATES or third parties, should be adequately and fairly rewarded for the use of their IPRs in the implementation of STANDARDS and TECHNICAL SPECIFICATIONS.²²

In what follows, I give consideration to these issues, with specific reference to ETSI policy. I also consider the cost of error and elaborate the point that under-rewarding the patent holder of an enabling technology²³ has very high societal costs and should be avoided.

From the outset, ETSI recognized the need for a forward-looking approach to technology development on mobile wireless. The original architects of ETSI’s IP policies sought a “balancing of the interests” of technology contributors (patent owners) and implementers.

ETSI started as a European governmental initiative to assemble a broad set of actors committed to fairness and benefits to the broader telecommunications sector (ecosystem) and consumers. This broad constituency is still apparent today and includes chipset designers and fabricators, handset and base station makers, cellular service providers, app developers, and, of course, consumers.

The standards development system was not designed to favor one constituency over the others, or downstream over upstream. Indeed, initial versions of the ETSI IP policy that did not attract technology developers were rejected in favor of versions that yielded “balance.” When standards technology contributors enable so much of the subsequent downstream innovation, it is critical that technology developers not be shortchanged. This conclusion is not only consistent with ETSI IP policy, but also economically desirable and therefore entirely reasonable from a public policy perspective.

SDOs require that, before technologies are accepted into a standard, members that own patented technologies are “prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory (‘FRAND’) terms and conditions under such IPR.” What is “fair and reasonable” (FR) and what is “nondiscriminatory” (ND) often raise questions. In this chapter, I will address only the FR aspect of FRAND, in the context of ETSI.

There is little doubt – and Dr. Bertram Huber, an ETSI founder representative, confirms this view²⁴ – that ETSI was concerned with establishing a vigorous standards process to support the development of a robust telecommunication industry in Europe and around the world. ETSI requires FRAND commitments from its technology contributors, with the expectation that implementers would take a license under FRAND terms.

B. Patent Holdup: A Theory in Search of a Problem

As noted, a vigorous mobile telecommunication industry requires a robust innovation ecosystem. Various parties and occasionally antitrust regulators have clumsily tried to undo ETSI’s rules with respect to FRAND issues by advancing the concept of “patent holdup.”²⁵ Patent infringement by implementers is excused and even encouraged by a “fig leaf” in the form of this antitrust theory of “patent holdup”: “holdup” because the implementer supposedly only knows the royalties they must pay after they have committed capital. The theory chooses to disregard the R&D investments made by the technology developers.

By way of background, consider the sequencing of investment in the development and deployment of standardized technology. Figure 1.2 shows the sequencing of investments, which has important implications for licensing dynamics. Stage one investments are made having no guarantees that they will be successful; and even if it is technologically successful to some degree, the discoveries may not be good enough to go into the 5G standard. The fact that R&D to develop foundational technologies takes place before the equipment and device makers invest puts the licensor in a weak bargaining position with respect to the implementers/licensees. Moreover, there is no guarantee that the technology will be adopted over competing alternatives. This position is amplified by the twin facts that patents are not self-enforcing and injunctions nearly impossible to come by in the United States post-eBay. Enforcement requires a court of law to back up the patent owner with an injunction or something similar. Otherwise “strategic” or “unscrupulous” putative licensees will engage in the similar sounding – but essentially inverse – practice of “holdout.” As Makan Delrahim, then the head of the DOJ Antitrust Division, noted:

If the implementers hold out, the innovator has no recourse, even if the innovation is successful. In contrast, the implementer has some buffer against the risk of hold-up because at least some of its investments occur after the royalty rates for new technology could have been determined. Because this asymmetry exists, under-investment by the innovator should be of greater concern than under-investment by the implementer.²⁶

Figure 1.2. Sequencing of development and deployment of wireless infrastructure technology

Put differently, implementers can “hold out,” not take a license, and try to dodge paying royalties. To explore these issues further, one must examine in more detail FRAND issues

The mischief comes from implementers, aided and abetted by theoretically oriented academic economists whose models appear to have impacted antitrust enforcement agencies. Academic economic models of “patent holdup” ignore sunk R&D investments by technology developers. They also ignore longer-term business model issues associated with funding R&D. These proclivities create a penchant for seeing royalties as SEP “taxes” and not precious fuel to support R&D.

The intellectual history of patent “holdup” theory is checkered. In my view, in the context of SEPs, it is a theory in search of a problem. It has been an economically damaging red herring that has compromised licensing activities and US technology leadership.

The first (mis)application of the holdup concept to the realm of patents was a paper published by Carl Shapiro in 2001.²⁷ Some IP scholars in the legal academy subsequently became aware of, and actively advanced, these patent holdup theories. Meanwhile, other scholars and practitioners actually close to the world of licensing understood this work to be theoretical musing and little else. There was considerable surprise when it was taken seriously by antitrust agencies and some courts.

The assumptions of rampant opportunism and guile by upstream technology providers lie at the heart of holdup theory.²⁸ Needless to say, there is no empirical support for either assumption in the context of patents. The theory also assumes that patents are self-enforcing (that is, there is an injunctive right appended to every patent exercisable at the discretion of the (SEP) patent owner), despite eBay. This constellation of assumptions is quite fanciful.

The theory – and theory is all it is – is sometimes articulated in terms of a patent owner promising to one or more implementers one rate, and specific investment is made by an implementer on the basis of that promise. The narrative is that patent owners subsequently, without good reason, strategically increase royalty demands once the implementer is locked in and committed to downstream investments. There is no evidence that patent holdup has ever occurred.

More commonly, the patent owner promises to make licenses available on FRAND terms, but without specifying in great detail until later on which rates it would seek to charge. Moreover, the right to enjoin, when it exists, requires the action of a court. There are, of course, reputational risks that technology developers would have to take should they act egregiously. Needless to say, there are contractual protections for implementers, which are, according to the law of many jurisdictions, third-party beneficiaries of the agreement between the SDO and the patent owner to set royalties that are FRAND.²⁹

Technology developers, by contrast, can negotiate only after they have sunk their R&D investments and after their technology has survived a selection process to get into the standard. Thus, technology developers are at least as vulnerable to “reverse holdup” or, as it is more commonly known today, “holdout” by implementers, as implementers are vulnerable to hold up by developers.³⁰ Indeed, given that implementers could, but rarely do, seek licenses before they start making standards-compliant products, and the length of time that it takes licensors to conclude agreements with industry players, and the considerations noted below arising from the nature of the enforcement of patent rights, the dangers of holdout are quite real and substantially underestimated.³¹ Although the theory of holdup historically has been advocated more vocally, it is holdout that is the greatest risk to licensing of ETSI standards.

Nevertheless, numerous implementers and some nation-states making standards-compliant products have found it convenient to claim to be victims of “holdup.” China, for example, has also tried at the World Trade Organization (WTO) to have all SEPs declared barriers to trade.³²

C. Patent Holdout

Fortunately, in recent years, policy concern over holdout has received some attention. As noted earlier, Makan Delrahim, the former head of the DOJ Antitrust Division, made considerable progress in helping develop the understanding that “collective holdout” behaviors in standard-setting are more pernicious and likely than unilateral holdup by SEP holders.³³ The recognition that holdup is a red herring is what may have led Contreras to argue that:

To the extent that hold-up impedes the efficient operation of standard-setting processes, SDOs can, and have, adopted internal procedures, including disclosure and licensing requirements, to curtail that behaviour … it may thus be time to close the debate over the systemic prevalence of this form of behaviour.³⁴

From an empirical perspective, Heiden and Petit note the emergence of a “long tail” of implementers or micro-vendors that are individually small but collectively account for a reasonable share of industry revenue, and that are not licensed.³⁵ Many of these implementers are based in China. They note in this context that “a systematic patent trespass effect can be deemed to occur when 30% or more of a relevant market is unlicensed.” They relate this to a collective action problem: “why take a license if your competitors do not?” They note that the “systemic effect of patent trespass is primarily experienced through the impact on the technology market through the development of consensus-based standards.”³⁶ Heiden, Padilla, and Peters note the presence of a similar “collective action” problem resulting in widespread holdout in the IoT sphere.³⁷

These empirical observations echo the findings of Judge Essex of the US International Trade Commission (as summarized by Renaud, Wodarski, and Badin):

[T]here is no evidence to support the notion that owners of SEPs have engaged in patent hold-up either in the investigations before him or in the telecommunications industry more generally. Rather, the evidence is all on the side of patent hold-out. The implementers of the standards are using the patented technology incorporated in the standards without authorization and without even engaging in licensing negotiations because they know that the worst that can happen is that they get sued, are found to infringe and are made to pay the same FRAND rate that they would have had to pay for using the patented technology in the first place.³⁸

In summary, then, the very non-self-enforcing nature of patent rights directly indicates why holdout rather than holdup is a problem that we should expect to see in licensing SEPs. My own experience with examining the smartphone licensing landscape in the context of litigation, and the empirical observations of other commentators, supports this. Royalty revenues are a small share of both the overall value-added from mobile telecommunications and smartphone implementers’ revenues.³⁹ This calls into question the predictions of holdup theory and is consistent with the reality that holdout is an important characteristic of the licensing landscape today.

The reason that holdout is a present, and perhaps growing, danger is because it is a profitable strategy for implementers. It is profitable in part because of the weakness of injunctive relief, the fragmentation of the patent enforcement landscape at the global level, and the lack of corrective mechanisms in damages and license awards by courts.

D. Holdup versus Holdout: Time to Close the Debate

Empirical studies have established the irrelevance of holdup theories. Notwithstanding this fact, implementers remain willing and eager to advance such theories. At the same time, it is now widely accepted that contractual mechanisms to redress holdup are available, should it ever occur.⁴⁰

Galetovic, Haber, and Levine⁴¹ provide a sophisticated empirical analysis with regard to the holdup issue. They find that “products that are SEP-reliant have experienced rapid and sustained price declines over the past 16 years,” and that the “prices of SEP-reliant products have fallen at rates that are not only fast relative to a classic hold-up industry, they are fast relative to the patent-intensive products that are not SEP-reliant.” Using a quasi-natural experiment to study the effect of the eBay decision on relative price declines in SEP-reliant versus non-SEP-reliant industries, they also do not find that prices in SEP-reliant industries were more affected by eBay than in non-SEP-reliant industries. If holdup were more of a problem in SEP-reliant industries, one would have expected to see a greater effect of eBay in these industries than in those not driven by SEPs.⁴²

The Galetovic et al. findings are unsurprising. The presence of the FRAND commitment, the lack of availability of injunctive relief (particularly in the United States), the repeat-game nature of standardization,⁴³ and the bargaining power of many implementers (for example, their ability to prolong litigation) all militate against holdup. Most fundamentally, holdup is unlikely in a setting where the implementer or prospective licensee can use the technology without paying for it, and injunctions are close to nonexistent, except perhaps in European courts. There is no way that the SEP holder or licensor by itself can prevent infringing use. Accordingly, there is a fundamental difference between “ordinary” goods and services, on the one hand, and IP, on the other – a point that Germany’s Federal Court of Justice recently recognized:

[U]nlike buyers of goods and services– standards implementers are in the favorable position to be able to access protected technology needed for producing standard compliant products, even without an agreement with the patent holder.⁴⁴

The court’s observation is another way of saying that patents are not self-enforcing. A patent holder cannot do what most suppliers of goods and services can do, which is simply to withhold supply to those customers who do not pay for the good or service.⁴⁵ Instead, patent holders must resort to costly and time-consuming litigation to enforce their rights. In such litigation, the risks to licensors and licensees are asymmetric. For example, a court decision that is substantially different from the licensors’ position on the FRAND value of its portfolio potentially can have a significant adverse impact on that licensor’s longer-term licensing strategy. Akemann, Blair, and Teece note:

Intuitively, patent holders who face the prospect of having to litigate repeatedly against multiple infringers have to be concerned about what might be termed a “one-way ratchet” effect. If the patent holder wins one case against one infringer that does not mean that others will agree to take a license … [H]owever, if the patent holder ever loses a case – especially on validity grounds – then there is likely to be a significant adverse effect on the patent holder’s ability to gain license revenue from that patent in the future. In effect, the patent holder has to “win them all”, while the infringers may only have to “win one.” In this way … risks associated with a single loss … could lead to a set of rates in the marketplace that are significantly depressed relative to actual value.⁴⁶

As noted earlier, the antitrust frameworks that employ holdup are static. They take the funding of (foundational) wireless technology for granted. This further undermines their relevance. It is hard not to agree with Barnett that the academy has led the judiciary and policymakers astray.⁴⁷

Accordingly, it is time to shut down the antitrust ruse of patent holdup – not resurrect it, as the DOJ’s draft policy statement on remedies for the infringement of SEPs (issued in December 2021 and withdrawn in June 2022) sought to do.⁴⁸ Should evidence of holdup ever emerge, the theory can be resuscitated; but it doesn’t deserve time on the agenda now.

We nevertheless are left with the fallout of previous US policy misadventures in the form of: (a) some foreign competition agencies and bureaus using the holdup argument to support mercantilist policies and favor national champions;⁴⁹ and (b) a sense that the debate perhaps has come to a stalemate with legitimate arguments and evidence on both sides. The assessment in (b) is inappropriate. The weight of the evidence favors holdout as the problem. Holdup is merely a theoretical possibility remote from real-world situations. On the other hand, many SEP holders must wait years before they can achieve a license with implementers, or else must resort to litigation – a move that carries asymmetric risks for SEP holders, as discussed later – before they are able to obtain any payment. Moreover, the failure to enter license agreements with particular licensees almost always will have negative consequences for the SEP holder’s broader licensing program.

Additionally, through delaying tactics, licensors may be able to extract significant discounts for past use, benefit from statutes of limitations on past damages, and benefit from potential expiry of patents that they have infringed for many years. If the worst outcome for an infringer is that ultimately it ends up paying a FRAND rate on only some portion of its infringing sales, it will have a great deal of bargaining power to bring to negotiations with SEP holders, meaning that infringement and holdout usually will be profitable strategies.

I consider there to be an urgent need in many jurisdictions to bring “balance” to SEP licensing in the cellular mobile space. While important new cases are moving to recognize the key role of technology developers, implementers still can engage in holdout with only distant sanctions to worry about.

One obvious lever is to strengthen the existing injunctive relief regimes to provide the licensee with stronger incentives to negotiate a license.

However, changes to injunctive relief may be practically difficult to achieve. In this context, FRAND royalty determinations in litigations may play an important restorative role too. Critical to this endeavor of bringing balance is the recognition that infringement and holdout must not be profitable. Recalcitrant licensees must not be put on the same footing as those who were (more) willing to sign up for licenses on FRAND terms. Nor must competition enforcement agencies assist renegades in their quest to avoid paying royalties or to crank down FRAND rates to below reasonable levels.

An important question that should be addressed is whether an “unwilling licensee” – one that is not prepared to accept any license terms other than those that it deems to be FRAND – should lose the benefit of the licensor’s FRAND commitment. This means that not only should injunctive relief be immediate from the moment that the licensee’s unwillingness is established – as the UK courts recognized in a recent decision involving Apple and Optis, and as has been common in mainland Europe – but also potentially that royalty rates in damages awards need not be based on assuming that the FRAND constraint applies.

Inherently, a FRAND royalty rate is reasonably linked to the (likely) value contribution of the technology to the product. However, as discussed earlier (and in more detail later), holdout exerts other costs on the licensor, especially on its overall licensing program. Damage awards based solely on the value contributed to the product may not suffice to restore the licensor’s economic position to where it would have been absent the infringing behavior. Nor would they truly address the harm to the licensing marketplace that holdout behavior inflicts.⁵⁰

In practice, many licensees will obtain rates that are well within the FRAND range (and perhaps even below it), because the licensor will be prepared to accept low rates to achieve (relatively) quick settlement and avoid litigation. It would be wrong for courts to base rates for infringers on these negotiated rates without recognizing the context in which these rates were achieved. To do so would put the unwilling licensee on the same footing as the willing licensee. Instead, court-awarded rates (whether applied to licenses or past-use damages) at a minimum should be based on the FRAND (benchmark) rate. However, even this may be too lenient a corrective for the problem of holdout.

Further, the nondiscrimination (ND) prong of FRAND should not be invoked as a reason to base awards either on “best prices” or even averages across licensees – the ND prong cannot be interpreted in such a way that nondiscrimination trumps the fundamental idea of balance. The comparison of royalty rates achieved by different licensees is at most relevant for an ND analysis to the extent that differences in royalty rates distort competition.⁵¹ If two licensees operate very different business models and aim at very different market segments, then unwarranted distortions to competition are unlikely. Royalty rates paid to individual licensors are a small sliver of the implementer’s overall cost stack, and so differences in these rates paid are unlikely to distort competition.⁵²

As noted earlier in Section IV (especially Figure 1.2), the commonplace situation that exists is one in which an implementer begins manufacturing devices and implementing SEPs long before taking licenses to any of them. Many licensors issue notice letters to implementers years after use of the SEPs actually began. It is often at least a couple of years before licenses are agreed. Reasonably often, there is no agreement, and unlicensed use continues unabated. In many cases, perhaps something close to a decade will go by before litigation is launched, and then perhaps one or two further years will pass before any decision – and before any court-awarded damages or court-determined license are made available. In all, a decade or more might pass before the infringer pays anything for its use, by which point a new generation of the standard has replaced the old standard upon which the litigated decision was based!

Even then, the licensee may pay no more than a relatively low rate that is deemed to be FRAND – often on the basis of rates derived from comparable licenses without necessary adjustments to account for the difference between willing licensees and those who force the licensor into litigation. Alternatively, this rate may be based on inherently licensee-friendly formulations such as the “top-down” method of allocating some aggregate reasonable royalty among the different licensors. Either way, a licensee that delays or strings out discussions has little incentive to take a license – at worst, it will have to pay the same FRAND rate that it would have paid anyway. At best, it secures an advantage over its licensed rivals by remaining under the licensor’s radar.

Growing diversity in the nature and geographic loci of implementers and the emergence of new use cases such as those associated with IoT exacerbate the problem. The share of implementers with licenses likely is falling, and at least in some environments – such as the licensing of IoT implementers – a collective action problem is emerging in which widespread infringement may be self-perpetuating.⁵³ The source of the collective action problem is simple: Licensed users will see themselves as being competitively disadvantaged relative to unlicensed users.

That such pervasive problems exist is not surprising. The perverse focus on holdup and the introduction of antitrust lawsuits has made these problems worse. Attention to the specifics of licensing negotiations and actual business behavior always has suggested that holdout rather than holdup is the bigger problem.

VI. Restoring and Revitalizing Technology Markets

A. Why Corralling SEP Infringers Is Difficult

The primary issue that should animate competition policymakers and the courts is the threat posed to open consensus-based standards development by holdout behavior. At its root, a holdout licensee will do no worse than a willing one; and it might well do better. That is, it could end up paying nothing or, by negotiating a license late in the day (when most of its sales and profits from using the technology are safely in the past), pay heavily discounted rates.

Similarly, consider a situation in which the licensor offered a license on FRAND terms, and the licensee declined such a license and made counteroffers that were not FRAND or otherwise indicated its unwillingness to take a license on FRAND terms. In this case, even if the licensee were enjoined, it can still avail itself of a FRAND license at some point in the future.

The perennial availability of a FRAND license weakens even the power of any injunctive relief remedy – where such is available. It encourages the licensee to try its luck in the courts rather than negotiate for a license. If the licensee escapes an injunction, it can continue to enjoy the benefit of infringement perpetually or until it forces the licensor into conceding terms that it likes.⁵⁴ Alternatively, if the licensee is informed, it may still have the option to have the injunction lifted by accepting a FRAND license – possibly the very same FRAND license it had been offered and turned down before. Nonetheless, the threat of injunction can still have a powerful effect on some recalcitrant licensees.

The present standardization and licensing systems lack sufficient corrective or countervailing forces to prevent this problem from not just entrenching itself but getting worse – as the unlicensed share of the industry increases, the stronger will be the incentives for other firms to resist taking licenses too. Short of some form of enhanced damages, there do not seem to be innate solutions to this problem of potential mass infringement – at least not for implementers who are not major contributors to standards and therefore do not face consequences for past opportunistic conduct.

Worse still, there is some indication that holdout is now something of a norm – for example, very few implementers sign a license anywhere close to their date of first infringement, and most limit the period of past use for which they pay royalties and/or are able to negotiate steep discounts for past infringement. Thus, as delay and discounts related to that delay become a norm across all implementers, the harder it becomes to sanction such behavior through the standard-setting process.

Instead, it seems that the best restraint on holdout is likely to arise from a willingness on the part of the courts (and the competition agencies) to engage with the intent of the FRAND commitment (that is, to recognize fully the centrality of balanced incentives to ETSI’s standardization activities). It also is important that antitrust enforcement agencies keep their distance and don’t provide a helping hand to infringing holdouts.

B. Strengthening Injunctive Relief

The most obvious factor encouraging holdout is the difficulty of obtaining injunctive relief. No US court has granted an injunction in a SEP-related case, at least not since eBay. The situation in Europe is somewhat better than that in the United States, and there is a well-developed framework (Huawei-ZTE) for assessing when injunctive relief is an appropriate remedy.⁵⁵ However, even that framework arguably provides too much leeway to the putative licensee or infringer. This can be understood usefully by contrasting the Huawei-ZTE framework to Germany’s “Orange Book” standard.⁵⁶

Under Germany’s Orange Book standard, an infringer could avail itself of a competition law defense against an injunction only if it had made an unconditional offer to license either on terms that the SEP holder could not reasonably refuse or at a rate proposed by the SEP holder but subject to review and modification by courts. Under Huawei-ZTE, the licensee is not required to make such commitments. Importantly, the “unconditional” commitment to license under Orange Book means that the acceptance of a license cannot be delayed through challenges to selected patents on validity and infringement grounds. The Orange Book standard was seen as very generous to patentees and was not designed in the context of ETSI SEPs, where the SEP holder has made an explicit FRAND commitment. Nonetheless, some of its provisions may have merit in the context of cellular SEPs. As a practical matter, the licensing of ETSI-related SEPs is almost always at the portfolio level. Portfolios that have been licensed and/or litigated frequently almost certainly contain at least some valid and infringed patents. In this context, the leeway of licensees to resist taking portfolio licenses by challenging specific patents on validity and infringement grounds (as allowed under Huawei-ZTE) is an avenue for delay and another mechanism by which licensees are able to raise SEP holders’ enforcement costs. The practical upshot is that under the Huawei-ZTE regime, holdout has become easier, and SEP-related injunctions have become harder to obtain.

The UK Supreme Court in Unwired Planet International Ltd v. Huawei Technologies (UK) Co. Ltd devised the concept of a “FRAND injunction.”⁵⁷ Injunctions were available only at the point that the licensee turned down a FRAND determination from the court. In practice, this allows licensees to go all the way up to the “FRAND trial” without any penalty for infringement – in the United Kingdom, the trial to determine FRAND terms would occur after a typically lengthy and costly process of validity and infringement trials, as well as trials on separate, discrete issues. Again, given this potential for delay and given that the licensee’s worst-case scenario is a court-determined FRAND license, the threat of an injunction in the UK court may not be a powerful motivation for implementers to negotiate a license with urgency. Indeed, some implementers may be quite happy to accept an injunction in the relatively small UK market if the alternative is to avoid a global license agreement on terms determined by a UK court.⁵⁸

C. Adjusting Damages to Disincentivize Holdout

Courts should recognize that holdout creates significant economic harms for the SEP holder in question, to the innovation ecosystem, and for the licensing marketplace. The problem in individual litigations is typically that a given SEP holder has failed to secure a license after a prolonged period of infringement by the implementer. As noted, the harm in that particular case is not just the cost of delayed payment to the patent owner, but the indirect harm to the SEP holder’s licensing program.

There are clear externalities in licensing – securing a given license can confer credibility and momentum for the SEP holder’s broader licensing efforts. Conversely, failure to secure a license can damage progress with other would-be licensees. In particular, some implementers – especially those in product segments such as IoT or among implementers focused on some emerging markets and on China – will seek to tie either the terms of a license (for example, payment) or the very signing of a license to the SEP holder’s success in signing on other implementers that they perceive as being in the same segment. There may be a broader impact on the licensing marketplace as a whole. Akemann, Blair, and Teece explain how widespread infringement begets more infringement, thus creating a “bandwagon effect”:

[W]hen there are many infringers, each infringer might believe there is a perceived safety in numbers, as each infringer might believe that the chance it will be pursued is low … the patent holder cannot refuse to supply the technology in the way that suppliers of tangible goods can …. We would therefore expect to see that royalties negotiated in a marketplace with widespread infringement will typically be lower than those negotiated in circumstances where infringement was less common …. In this regard it is worth emphasizing the significant and asymmetric risks that a patent holder faces as it tries to enforce its patent rights against a long line of potential infringers.⁵⁹

How courts handle issues such as damages or the terms of FRAND licenses can thus have an impact in terms of not just alleviating economic harm arising from prolonged infringement, but also correcting the distortions in the wider licensing marketplace that arise from allowing such conduct to persist. The actions that courts take today will dictate not just future litigation outcomes, but future negotiations in the marketplace – which always happen in the “shadow of the court.”

D. Limiting the Availability of FRAND

Consider an SEP holder that has been attempting to negotiate a license with an implementer for several years and finally has brought the matter to litigation. If the evidence suggests that the putative licensee essentially had no interest in negotiating a license on FRAND terms, is it adequate that the redress available is a license on FRAND terms, and damages for past infringement on FRAND terms? This is problematic for two reasons: (a) It potentially puts the litigious infringer on the same footing as more willing licensees; and (b) it actually does not restore the SEP holder into the position it would have been had the infringement never taken place, as the SEP holder will not be compensated adequately for the harm it has suffered as a result of the infringement. While in principle the harm caused by the delay in taking the license might be quantifiable, the harm to the wider licensing program may not be so readily quantifiable. With respect to addressing the harm caused just by the delay to taking the license, courts should be prepared to address this harm and to do so in an economically robust way – for example, instead of using statutory interest rates in damages awards, courts could use the licensor’s cost of capital or some other measure of economic opportunity cost to address the issue.

More importantly, instead of giving the licensee the choice of eventually taking a FRAND license, once a licensee has been found unwilling, the most obvious corrective is to withdraw the option of a FRAND license. The threat of being found unwilling and thus losing an entitlement to a FRAND license is likely more potent than the threat of being enjoined (which will only apply in a single jurisdiction anyway) and then being able to claim a FRAND license to lift the injunction. (If courts across different jurisdictions consistently applied this logic, then it would also prevent the situation wherein the implementer can swallow an injunction in a less important jurisdiction and then prevail upon another court to award it a FRAND license.)⁶⁰

These proposals might seem radical to some and might push courts into territory that seems controversial. After all, there is nothing explicit in the ETSI IP policy that suggests that the FRAND commitment applies regardless of the licensee’s willingness; but nor is there an explicit provision that limits its application in the case of an unwilling licensee. To the extent that above-FRAND awards might contain a deterrent element, they may be seen by some as legally difficult to justify, but they are economically very easy to justify.⁶¹ Nonetheless, at least the broader concept of restoring the licensor’s economic position by recognizing the harm it suffers from infringement fits in with the idea of restorative or equitable damages, rather than being punitive.⁶²

A minimalist measure that would at least somewhat restore the balance is that courts should not give unwilling licensees the same terms as willing ones. Quite often, the determination of FRAND rates is based (at least partly) on a review of the licensor’s “comparable” licenses. In many instances, the rates that the licensor negotiated with the licensee might reflect concessions that were made in the context of meaningful negotiations. The licensor has an interest not just in securing the best “rates” but in ensuring that its licensing program maintains momentum (given that concluding license agreements lends impetus to concluding other licensing agreements – that is, there are externalities at work). Clearly, such a calculus does not apply in the case of the unwilling licensee, and equally clearly, there is a compelling policy rationale for not putting unwilling and willing licensees on the same footing. Put another way, while a range of rates may be consistent with FRAND, the unwilling licensee ought not be entitled to the “best” rate in that range, or even the average rate in that range. In fact, it would still be quite accommodating to give it a rate that is at the top end of the FRAND range.

E. The Role of Competition Policy

With their endorsement of holdup theories, US competition agencies sometimes have eschewed an evidence-based approach to antitrust and wittingly or unwittingly aided and abetted patent holdout, thereby compromising the development of foundational technology that supports innovation and drives dynamic competition. The primary beneficiaries of this strategy are new entrants in China that end up receiving a discount, and/or escape royalty payments for many years – and often permanently.⁶³

Competition policy needs to favor the future and embrace innovation and business models that support innovation in the key enabling technologies. They must support innovation both upstream and downstream. Avoiding the temptation to resurrect patent holdup arguments is the most concrete step that can be taken to help innovation and competition. Challenging the open innovation model simply plays into the hands of those that might prefer vertical integration of upstream wireless technology and downstream devices.

VII. Conclusion

Markets for technology don’t function well without strong IP.⁶⁴ Technology still may get developed without IP protection, but such developments will be confined to vertically integrated enterprises. Technology needs to be embedded in, and priced into, goods and services supplied via integrated enterprises. That is how consumers and producers usually pay for technology licensing.⁶⁵ The same is true for many intermediate products, such as automotive parts. Only in unusual cases is the division of labor between technology developer and product maker nearly complete, at which point the technology is made available through licensing.

Mobile wireless is different. 3G, 4G, and (hopefully) 5G wireless telecommunications are cases in point. Competition agencies should rejoice and support rather than undermine the (licensing) business models. Paradoxically, competition policy advocates admire open innovation models. “Consumers benefit from open innovation strategies,” according to the FTC,⁶⁶ in part because it allows specialization to flourish. Open innovation models require that licensing regimes be supported with royalties that are paid in a timely fashion at levels sufficient to draw forth the investment needed to make the ecosystem robust.

Unlocking the full potential of 5G, 6G, and other frontier technologies will require robust patent protection to ensure rewards sufficient to induce investment in new technologies. Each generation of wireless technology – 3G, 4G, now 5G – has taken more than five years (10 years for 5G) to define and many more years to perfect. While initial 5G wireless standards have been set, there will be many updates and improvements.

If competition agencies fail to recognize holdout issues and use antitrust to shield unwilling licensees, such decisions will stimulate the emergence of a vertically integrated “Big Tech” business model in mobile wireless and transfer wealth to “net user” economies that primarily specialize in the adoption and imitation of new technologies, rather than into critical R&D for next-generation wireless. Not much in this scenario is appealing from a competition policy perspective. Should this scenario play out, it will be necessary to declare that policy mistakes helped destroy the greatest model of technological cooperation and innovation that Western civilization ever created. The poorest members of global society, who have benefited enormously from mobile technology, are likely to suffer disproportionately. Adopting a broader intellectual framework that recognizes the unique requirements of open innovation along with geopolitical realities should help avoid such a calamity.

2 Antitrust Convergence on Substantive Norms for SEP Licensing Negotiations Should and Could It Be?

Maureen K. Ohlhausen and Jana I. Seidl

I. Introduction

Two truths must guide antitrust agency policy and enforcement with respect to intellectual property (IP). First, strong patent rights foster innovation. Second, licensing is a cornerstone of a strong system of IP. With the advent of 5G and the proliferation of the Internet of Things (IoT), it is critically important that the US antitrust agencies calibrate policy and enforcement priorities with respect to IP in a manner that ensures efficient licensing – in turn, maintaining strong patent rights. The agencies can achieve this by striking the appropriate balance between the rights of innovators and those of implementers. They should take a cautious and clear approach to wielding antitrust as a tool to address licensing disputes lest they inadvertently exacerbate bargaining frictions resulting from legal standards that are ambiguous. European courts have gone further than US courts and agencies in some of these areas to date. Recent developments signal that the United States may be taking cues from the European approach going forward where courts have begun articulating guardrails surrounding the interplay of IP and antitrust with respect to licensing negotiations.

II. The Evolution of IP/Antitrust and SEP Licensing in the United States

Antitrust regulators have long sought to strike the right balance and tone in approaching and evaluating the exercise of IP. After all, the antitrust laws prohibit monopolies, while the patent laws confer exclusive rights on an IP holder. It comes as no surprise then that the evolution of the interplay between antitrust and IP – and specifically, whether and how antitrust should be brought to bear on situations involving IP – has taken some twists and turns over the decades.

This is especially the case where standard-essential patents (SEPs) are involved. Open standardization and healthy competition on the merits when technologies vie for inclusion in a standard carry tremendous consumer benefits, for example in the form of interoperability, safety, or energy consumption. And collaborative technical standards have been critically important to global growth. It bears emphasizing in this context that IP and antitrust are “two bodies of law [that] are actually complementary, as both are aimed at encouraging innovation, industry and competition.”¹ But innovation spurred by technical standards and progress toward new and improved standards such as 5G and new environments such as the IoT can only come about when innovators are assured that their contributions will secure them the appropriate return.

On the flip side, in order to realize these standards, implementers must be assured access to patented technologies incorporated into a standard once the standard-development process is complete. Voluntary commitments by innovators to make SEPs available to implementers on a fair, reasonable, and non-discriminatory (FRAND) basis emerged as a means to promote access after a standard is adopted. These FRAND commitments are contractual obligations between a SEP holder and standards-development organizations (SDOs), to which implementers are a third party and meant to facilitate and guide bilateral negotiations between SEP holders and implementers. Of course, the devil is in the details and disputes can arise during these bilateral licensing negotiations over what exactly constitutes FRAND rates and terms.

This is where industry participants have called for guidance from the antitrust agencies as to when and how antitrust law will step in. On one side of the debate are those who view most IP/antitrust issues to be a matter for contract law. Others call for a more expansive role for antitrust law in enforcing companies’ practices with respect to wielding their IP portfolios in what may be perceived to be an anticompetitive manner. As a result, depending on who you ask, US antitrust agency guidance over the years has been viewed as either too implementer friendly or too innovator friendly. As the agencies embark on what may be viewed as yet another shift in policy, it is critical that they be careful to shape policy in such a manner that bargaining frictions attendant to SEPs not devalue the contribution of patents to standards so much that innovators are incentivized to instead create walled garden technologies with closed standards. Historical shifts – and constants – can be instructive here.

A. An About-Face on Package Licensing

In the 1970s – long before the current disputes over SEP licensing – the then Deputy Assistant Attorney General of the Antitrust Division of the United States Department of Justice (Division) articulated a list of “Nine No-Nos” – patent licensing practices that the Division would likely view as presumptively unlawful.² One of these “No-Nos” was “requiring mandatory package licensing.”³ Package licensing is a license on a bundle or portfolio of patents, which can be charged at a single royalty rate or a formula that does not take into account the specific subset of patents used by the licensee. That approach was informed by the concern that aggregating licenses in such a manner may be a form of a tying arrangement that in certain circumstances violates antitrust law. Today, of course, package licenses – and global portfolio licenses – are often the norm as it pertains to standard-essential technology, including 5G. And for very good reason.

In 1979, the Supreme Court weighed in on package licensing when it decided Broadcast Music, Inc. v. Columbia Broadcasting System (BMI Decision).⁴ The Court unequivocally removed package licensing from the universe of per se prohibitions, announcing that these licensing arrangements should instead be evaluated under the rule of reason framework, a case-by-case, fact-based analysis. In its decision, the Court extolled the procompetitive virtues of such licensing arrangements: They provide for “unplanned, rapid, and indemnified access to any and all of the repertory of [works], and [provides rights owners] a reliable method of collecting for the use of their [intellectual property].”⁵ Indemnification and lowering monitoring costs promote patent peace. And aggregating licenses to IP into portfolios, or packages, lowers transaction costs to negotiating access to those rights. As such, the Court changed the trajectory of the IP/antitrust interplay in an important manner. Informed in large part by the BMI Decision, the Division characterized the “No-Nos” by 1981 as “contain[ing] more error than accuracy” when viewed through the lens of “rational economic policy.”⁶

In 2020, the Division issued a business review letter (BRL) to Avanci regarding its platform for joint licensing of SEPs for 5G telecommunications technologies for use in vehicles and other IoT devices.⁷ The Division reaffirmed the principles of the BMI Decision. By acting as a centralized agent for licensing a large percentage of 5G SEPs, the BRL notes that Avanci can facilitate licensing and help integrate emerging 5G technologies into vehicles faster, with less infringement risk, and at reduced transaction costs.⁸ And given Avanci’s scale, it could also reduce other transaction costs such as those associated with monitoring and compliance.⁹

B. Steadfast Adherence to the Principle that the Antitrust Laws Require Harm to Competition

In April 1995, more than a decade after jettisoning the “No-Nos,” the Division, together with the Federal Trade Commission (FTC), set out their first formal guidance on enforcement policies with respect to IP issues in their Antitrust Guidelines for the Licensing of Intellectual Property (1995 IP Guidelines).¹⁰ The two agencies (Agencies) then issued a joint report in 2007, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition,¹¹ that affirmed the principles of the 1995 IP Guidelines and applied them to conduct beyond licensing. The 2007 publication was bookended by two reports issued by the FTC: one in 2003, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy;¹² the other in 2011, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition.¹³ Both reports followed extensive hearings with industry participants to inform observations and recommendations.

The Agencies then modernized their 1995 IP Guidelines in 2017.¹⁴ The 2017 IP Guidelines largely reaffirmed the Agencies’ core enforcement philosophy first announced in 1995. Both the 1995 and 2017 IP Guidelines embrace the Agencies’ stance that recognized the procompetitive and welfare-enhancing effects of licensing IP. The 2017 Guidelines state:

Licensing, cross-licensing, or otherwise transferring intellectual property … can facilitate integration of the licensed property with complementary factors of production. This integration can lead to more efficient exploitation of the intellectual property, benefiting consumers through the reduction of costs and the introduction of new products. Such arrangements increase the value of intellectual property to consumers and owners.¹⁵

When the Agencies announced the proposed updates to the 1995 IP Guidelines, then Chairwoman Ramirez stressed that “U.S. antitrust law leaves licensing decisions to IP owners, licensees, private negotiations, and market forces unless there is evidence that the arrangement likely harms competition.”¹⁶ It is important to note that this principle applies to all patent licensing negotiations, including those over SEPs, subject to voluntary FRAND royalty rate commitments. Simply put, as courts have held repeatedly over the years in agreement with the Agencies’ approach, a breach of FRAND by itself cannot be a violation of the Sherman Act.¹⁷

Even when the Agencies seemed to have taken a divergent path on some IP/antitrust approaches during the Trump Administration (as further discussed), then Chairman Simons could not have been more clear that the FTC and the Division saw eye to eye on this fundamental principle: “We agree … that a breach of a FRAND commitment, standing alone, is not sufficient to support a Sherman Act case, and … the breach, fraud or deception must also contribute to the acquisition or maintenance of monopoly power … or involve an agreement that unreasonably restrains trade.”¹⁸

The Agencies have not wavered in their conviction that efficient licensing boosts innovation and that antitrust laws should stay out of the way until and unless there is cognizable harm to the competitive process and thus cause to intervene to preserve consumer welfare. In fact, the Division reaffirmed this principle in several statements of interest filed during the Trump Administration. For example, in Lenovo v. Interdigital, the Division emphasized that alleged violations of FRAND commitments are not cognizable under Section 1 or Section 2 of the Sherman Act.¹⁹ In Continental v. Avanci, the Division again submitted a statement of interest arguing that alleged violations of FRAND commitments are not cognizable under Section 2.²⁰ In that case, the district court agreed and dismissed the claims.²¹

C. The Perceived Back-and-Forth Regarding Remedies Available for SEPs

In addition to the IP Guidelines, the Division also put forth in 2013, in collaboration with the US Patent and Trademark Office (USPTO), the Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/Rand Commitments (2013 Remedies Statement).²² Issues at the forefront of the ongoing IP/antitrust debate, especially with respect to SEP licensing negotiations, include the availability of injunctions for infringement of SEPs, the related issue of holdup versus holdout, and the essential facilities doctrine – that is, whether a duty to deal should apply to SEPs. Holdup refers to bad faith behavior by innovators, which is typically a threat of exclusion from the market to extract unreasonably high royalty rates or licensing terms that are unreasonably favorable to the SEP holder. Of course, effectuating such an exclusion requires the SEP holder to seek, and then be granted, a court order. Holdout, on the other hand, refers to conduct by implementers to drag out licensing negotiations and legal maneuvers such as anti-injunction suits that in effect prolong their SEP infringement and are meant to pressure innovators to accept unreasonably low royalty rates or unreasonable licensing terms in the implementer’s favor. The US International Trade Commission (ITC) has summed up holdout as follows:

[A]n implementer utilizes declared-essential technology without compensation to the patent owner under the guise that the patent owner’s offers to license were not fair or reasonable. The patent owner is therefore forced to defend its rights through expensive litigation. In the meantime, the patent owner is deprived of the exclusionary remedy that should normally flow when a party refuses to pay for the use of a patented invention.²³

There are divergent schools of thought in the United States on whether a SEP holder’s breach of FRAND or an implementer’s holdout should be considered an antitrust concern rather than a dispute to be left strictly to contract law. And there are disagreements over whether an implementer should be able to seek an injunction against an infringing potential licensee – mainly centering on whether that infringer is a willing or unwilling licensee.

The 2013 Remedies Statement aimed to address the availability of injunctive relief in ITC investigations under Section 337 of the Tariff Act of 1930.²⁴ Importantly, the Statement took the position in no uncertain terms that injunctive relief (in the form of an exclusion order by the ITC) may be an appropriate remedy in certain circumstances involving an unwilling licensee, including, for example, where a “putative licensee refuses to pay what has been determined to be a F/RAND royalty, or refuses to engage in a negotiation to determine F/RAND terms.”²⁵

Some industry participants, however, read the 2013 Remedies Statement, coupled with prior Division statements and speeches, as advancing an anti-injunction stance for SEPs.²⁶ For example, in 2012, the Division’s then deputy assistant attorney general, Renata Hesse, gave a speech calling on SDOs to clarify FRAND commitments, limit injunctions, create guidelines or arbitration provisions governing determinations of FRAND rates, and the like.²⁷ That same year, the Division, in its statement in connection with Google’s acquisition of Motorola Mobility (including its SEP portfolio), had also lauded “clear commitments” by rights holders to license on FRAND terms and “not to seek injunctions in disputes involving SEPs.”²⁸ In addition, the 2013 Remedies Statement was expressly invoked by the US Trade Representative in vetoing an ITC exclusion order in the high-profile dispute between Samsung and Apple over Apple’s infringement of cellular SEPs, in which Apple had failed to show that Samsung violated FRAND commitments. The US Trade Representative wrote, “[E]xclusionary relief … based on FRAND encumbered SEPs should be available based only on the relevant factors described in the [2013 Remedies] Statement.”²⁹ This was despite the fact that the 2013 Remedies Statement made clear the examples of factual scenarios in which an exclusion order may be appropriate “is not an exhaustive one.”³⁰

By 2014, the United States’ top specialized patent court, the US Court of Appeals for the Federal Circuit (Federal Circuit), clearly articulated in Apple v. Motorola that claims involving infringement of SEPs subject to FRAND commitments were to be treated as any other patent case would be in an analysis as to whether an injunction should issue in federal court.³¹ The Federal Circuit was explicit – the Supreme Court’s eBay framework for injunction standards, grounded in the traditional principles of equity, applies to SEPs:

To the extent that the district court applied a per se rule that injunctions are unavailable for SEPs, it erred. While Motorola’s FRAND commitments are certainly criteria relevant to its entitlement to an injunction, we see no reason to create, as some amici urge, a separate rule or analytical framework for addressing injunctions for FRAND-committed patents.³²

Similarly, with respect to damages, the Federal Circuit explained in Ericsson v. D-Link: “We believe it unwise to create a new set of Georgia-Pacific-like factors for all cases involving RAND-encumbered patents.”³³ The court thus made clear that cases involving SEPs do not warrant special rules.

Against this backdrop, during the Trump Administration, the Division took to heart calls for more clarity on its enforcement policy in the IP/antitrust space. The Division announced a policy change – the “New Madison” approach.³⁴ That new approach included several important points, namely that: (1) holdup is not an antitrust problem; (2) holdout is a danger to incentives to innovate; (3) injunctions for SEP infringement should be protected rather than persecuted; and (4) innovators have no duty to deal, for example, to license a valid patent. The FTC agreed with some of this approach but did not go so far as to minimize the antitrust risks from holdup. The Division then filed several statements of interest in cases involving issues at the core of the IP/antitrust debate as discussed earlier – all as part of its “multi-pronged effort to help educate and modernize the approach to antitrust and intellectual property law.”³⁵

The Division also explicitly disavowed prior guidance where it felt that developments showed that the intended message had been misunderstood. For example, in 2019, the Division withdrew the 2013 Remedies Statement over concerns it was misconstrued as calling for a different set of rules for licensing SEPs than nonessential patents. At the time, the Division issued a new remedies statement in conjunction with the USPTO and the National Institute of Standards Technology (NIST), Policy Statement on Remedies for Standard-Essential Patents Subject to F/RAND Commitments (2019 Remedies Statement).³⁶ The press release accompanying the 2019 Remedies Statement elaborated: “A previous statement on the matter issued in 2013 had been misinterpreted …. Today’s joint statement seeks to ensure that US patent law is appropriately calibrated … [and] sets a positive example for other jurisdictions that have sought to diminish the value of SEPs.”³⁷

The 2019 Remedies Statement made clear – in line with prevailing case law and pointing to the Federal Circuit’s Apple v. Motorola decision – that SEPs and non-standard-essential patents are subject to the same remedies, including injunctions, and that the same framework applies for any analysis as to the availability of remedies.³⁸ Specifically, the 2019 Remedies Statement advanced the position that “[a]ll remedies available under national law, including injunctive relief and adequate damages, should be available for infringement of standards-essential patents subject to a F/RAND commitment, if the facts of the case warrant them.”³⁹ The 2019 Remedies Statement also cited to examples of both holdout and holdup when discussing conduct of negotiating parties that would be relevant to remedies determinations.⁴⁰ Ultimately, the 2019 Remedies Statement pointed confidently to “courts – and other relevant neutral decision makers – [to] continue to determine remedies for infringement of standards-essential patents subject to F/RAND licensing commitments pursuant to the general laws” that would preserve competition and incentives to innovate.⁴¹

Similarly, the Division took “the extraordinary step to supplement”⁴² a 2015 BRL to an SDO, the Institute of Electrical and Electronics Engineers (IEEE), explaining that recent developments had “proven [the 2015 letter] outdated and [the Division] fear[ed] that reliance on its analysis, both in the United States and abroad, could actually harm competition and chill innovation.”⁴³ The Division pointed to three primary ways that the IEEE’s policy “may undercut current U.S. law and policy”: (1) by limiting the scope of rights available to a SEP owner, including that of seeking injunctive relief against an infringer (here the Division went so far as to suggest the IEEE consider changing its policy to make is easier for SEP holders to pursue injunctive relief); (2) by not dedicating sufficient attention to holdout, conduct that would undermine the bargaining position of innovators; and (3) by possibly limiting the scope of royalties.⁴⁴

D. There Is No Special Duty to Deal for SEPs in US Antitrust Law

The FTC’s highest profile case during the Trump Administration that brought antitrust law to bear in an IP dispute was its monopolization case against Qualcomm over licensing practices related to modem chips.⁴⁵ In that case, the FTC had actually filed its complaint in the last days of the Obama Administration and eventually took the case all the way to a request for rehearing en banc at the US Court of Appeals for the Ninth Circuit (Ninth Circuit). While an outlier, the district court’s decision in the case threw into flux well-settled antitrust law on the essential facilities doctrine when it ruled in favor of the FTC.⁴⁶ That decision inappropriately expanded a company’s antitrust duty to deal beyond any prior course of conduct by extrapolating from a prior course of licensing certain patents to certain limited parties a duty to deal across all patents and with all allegedly similarly situated parties.

But decades of precedent establish that US antitrust law does not support a broad duty to deal. The Sherman Act imposes a duty to deal with or continue dealing with rivals only in the rarest circumstances because “once you start, the Sherman Act may be read as an antidivorce statute.”⁴⁷ The extremely limited circumstances include, for example, the unilateral termination of a voluntary (and thus presumably profitable) prior course of dealing that suggests a willingness to forsake short-term profits to achieve an anticompetitive end.⁴⁸

The Ninth Circuit reversed the district court’s Qualcomm decision,⁴⁹ making clear that the long-standing precedent of Aspen Skiing Co. v. Aspen Highlands Skiing Corp.⁵⁰ continues to be “at or near the outer boundary of § 2 liability”⁵¹ – the Sherman Act simply does not impose a duty to deal with or continue to deal with competitors absent the rarest exceptions.⁵² The FTC petitioned for rehearing en banc,⁵³ which the Ninth Circuit denied. FTC v. Qualcomm also brought to light a rift between the Division and the FTC as the Division filed a statement of interest at the district court level asking Judge Koh to schedule a hearing on a remedy should she find for the FTC, followed by an amicus curiae brief in which the Division sided with Qualcomm at the Ninth Circuit.⁵⁴ The Division’s amicus brief specifically addressed that antitrust law did not require Qualcomm to deal on specific terms with component-level manufacturers even if it was part of the FRAND commitment.⁵⁵

III. International IP/Antitrust Developments Go Further Than the United States Has to Date

Courts in the United States, Europe, and China have repeatedly found that where an SEP holder is seeking to license a worldwide portfolio of cellular SEPs, and the implementer’s operations are worldwide, a FRAND license is a global portfolio license.⁵⁶ In fact, a UK court in Unwired Planet v. Huawei specifically found that where a portfolio is “sufficiently large and has sufficiently wide geographical scope that a licensor and licensee acting reasonably and on a willing basis would agree on a worldwide licen[s]e. They would regard country by country licensing as madness. A worldwide licen[s]e would be far more efficient.”⁵⁷

In contrast to the United States, however, courts in Europe and the United Kingdom have provided industry participants more guidance in terms of FRAND licensing and the negotiation process by giving more examples and commentary around the contours of what is considered good faith negotiations and circumstances pertaining to the availability of injunctive relief. For example, in Europe, an innovator who does not provide notice of infringement and does not explain why the license terms and rates sought are FRAND – considered the proper negotiation process – risks losing its right to injunctive relief in case of a finding that it abused its dominant market position.⁵⁸ On the other hand, when an implementer is unwilling to take a license on FRAND terms or unduly delays negotiations, this conduct can open the path to injunctive relief for the innovator.⁵⁹ Some courts have found a delay of several months (for example, five months) to signal an unwilling licensee.⁶⁰ And European courts have found that a steadfast refusal to pay any royalties whatsoever to the SEP holder classifies as a case of holdout.⁶¹ In the United Kingdom, a “willing licensee” is “one willing to take a FRAND licen[s]e on whatever terms are in fact FRAND.”⁶²

Additionally, the case law in China has shifted on injunctive relief in line with European developments. In an encouraging development, in 2018, the Beijing IP Court handed down a landmark decision in Iwncomm v. Sony, upholding the first injunction related to a dispute over FRAND licensing terms for a SEP in that country.⁶³ The court made clear the circumstances under which a SEP holder may secure an injunction. It held that SEP holders may obtain an injunction where a potential licensee negotiated in bad faith (for example, procrastinated as a tactic to draw out discussions and avoid paying royalties).⁶⁴

European courts have also recognized that FRAND licensing negotiations are context-specific in assessing both the process and the terms offered.⁶⁵ As such, they have weighed in on specific issues such as making non-FRAND offers,⁶⁶ substantiating infringement claims,⁶⁷ considering comparable licenses,⁶⁸ requiring confidentiality and nondisclosure agreements,⁶⁹ licensing downstream users,⁷⁰ and selective licensing.⁷¹ And while some European courts have avoided wading into this particular area, the United Kingdom and at least one court in China have asserted jurisdiction to set global FRAND rates,⁷² offering an alternative to what is typically left for determination by a jury in the United States.⁷³

On the international front, it is concerning that, as some have remarked, China has both misunderstood or misapplied the essential facilities doctrine⁷⁴ and recently announced that it has a national policy to advance its own companies’ interests in standards organizations.⁷⁵ Neither of these developments serves to uphold strong patent rights and maximizes incentives to innovate. The United States should continue to lead by example here and avail itself of potential avenues for engagement to share its experience on these fronts.

IV. Where Do We Go Next: Is the United States Moving toward Substantive Convergence with Europe?

We have come a long way in refining the interplay of antitrust and IP. And US courts have certainly made some headway in clarifying in what instances antitrust can and should be used to address IP disputes. The Division and the FTC have sought to clarify their policy approaches but at times took divergent paths on some critical issues, creating uncertainty both within the United States and with respect to its global leadership on substantive convergence regarding principles impacting innovation incentives and technological progress.

Against this backdrop, when the American Bar Association’s Antitrust Law Section (Section) submitted its 2021 Presidential Transition Taskforce Report to the Biden Administration, it called for additional guidance on licensing practices and obligations associated with SEPs.⁷⁶ The Section’s “Presidential Transition Taskforce” reports – the tradition of which goes back to special reports first compiled with the election of President George H. W. Bush in 1988⁷⁷ – are prepared every presidential election year.⁷⁸ They are meant to educate the incoming administration on the then current state of antitrust and suggest areas of focus going forward.

The task force, chosen anew every four years, includes “attorneys in private practice, in-house counsel, and antitrust law and economics scholars.”⁷⁹ Its members typically also represent a cross section of “political, ideological, and professional views, … [leading to] often vibrant and spirited debate among the Members” who reach consensus on the recommendations in the task force report.⁸⁰ The intersection of IP and antitrust has featured in these transition reports since at least 2001, and the report’s observations and recommendations present a timely look at industry participants’ understanding of the state of agency enforcement policy and case law. Notably, the Section did not endorse a specific policy view for IP/antitrust in general but rather requested that the Agencies provide transparency and additional, more detailed guidance, for example, “on what may constitute exclusionary conduct where a breach of a FRAND commitment is involved” and “when seeking an injunction related to FRAND-encumbered patents might raise antitrust concerns.”⁸¹

Since then, President Biden issued Executive Order No. 14036 on Promoting Competition in the American Economy (Competition EO), which in part encourages the attorney general and the secretary of commerce to consider reevaluating their positions on the intersection of IP and antitrust to safeguard the standard-development process and potential harm to competition from industry participants leveraging their IP in anticompetitive ways.⁸² Specifically, the Competition EO questioned whether the Division’s 2019 Remedies Statement should again be revised. It did not take long for the Division to heed the Administration’s call – about five months later, the Division, in conjunction with the USPTO and NIST, released a new Draft Policy Statement on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments⁸³ and solicited public comments (2021 Draft Remedies Statement).⁸⁴

The 2021 Draft Remedies Statement followed a speech by the Division’s Economics Director of Enforcement, Jeffrey Wilder, that already walked back some of the statements contained in the 2019 Remedies Statement.⁸⁵ Comments from the Division’s Assistant Attorney General Jonathan Kanter during his confirmation hearings before the Senate Judiciary Committee were largely consistent with Mr. Wilder’s speech.⁸⁶ That speech previewed some significant potential shifts, including seemingly suggesting that a breach of FRAND may amount to deception under relevant IP/antitrust case law and as such present a cognizable antitrust claim,⁸⁷ while also promising “clearer guidance on what good-faith [licensing] negotiation looks like and how bad-faith conduct can hinder competition.”⁸⁸ Related to the latter, Mr. Wilder also seemed to indicate that the Division would favor IP policies that prescribe what licensing negotiations should look like.⁸⁹

The 2021 Draft Remedies Statement correctly described the purpose of the FRAND commitment as one to “facilitat[e] access on F/RAND terms to the technology needed to implement a standard and help[] to ensure that the rights of patent holders whose technology is used are appropriately respected.”⁹⁰ While the 2021 Draft Remedies Statement retained the central point of the 2019 Statement and developed case law that there is not “a unique set of legal rules for SEPs subject to F/RAND commitments,”⁹¹ other aspects were concerning. For example, the 2021 Draft Remedies Statement contained various legally unsupported suggestions of antitrust liability and vague references to what negotiators “should” do to act in good faith.

After a review of the many public comments received, the Division, USPTO, and NIST announced in June 2022 that they were withdrawing the 2019 Remedies Statement rather than revising it.⁹² Such a move, they concluded, “is the best course of action for promoting both competition and innovation in the standards ecosystem.”⁹³ USPTO and NIST spokespersons highlighted that the decision was informed by the importance of ensuring American companies’ continued global leadership in research and development as well as engagement by those stakeholders in international standards development.⁹⁴ The Division revealed its plan to use a case-by-case approach in evaluating conduct by SEP holders and implementers – with a focus on scenarios involving small- and medium-sized businesses or highly concentrated markets.⁹⁵

In implementing this case-by-case enforcement approach, the Division (and FTC) should be careful to heed clear case law that antitrust liability does not attach where a SEP holder merely seeks an injunction as a remedy to an infringing implementer or supra-FRAND rates or terms in SEP licensing negotiations. More is required for a cognizable antitrust claim. And with respect to lesser explored IP/antitrust issues in US case law to date, including, for example, factual scenarios that could indicate a party is either a willing or unwilling licensing negotiation participant, the Agencies would do well to look to European case law developments to benefit from lessons learned by European and UK courts that have already grappled with these issues in more detail than their US counterparts have done. This approach would also serve to foster convergence substantively on IP/antitrust principles and inject certainty for innovators and implementers alike who must negotiate global portfolio licenses. The important tenet that must remain front and center is that Agency guidance, even through case-by-case developments, must be clear, and it cannot stand settled case law on its head – lest the Agencies undermine efficient licensing negotiations and thereby undermine stability and certainty for industry participants.

V. Conclusion

A reliable IP system – one that maintains strong patent rights – is essential for enabling US companies to compete on a level playing field and maintain their leadership position. Case law developments worldwide have moved the needle to clarify legal rules and create an environment with at least some guardrails for SEP licensing that helps shape conduct by industry participants during negotiations. In the United States specifically, there is legal consensus that a breach of FRAND alone is not a cognizable antitrust claim under the Sherman Act, and injunctions for SEP infringement are properly sought and issued against an unwilling licensee (but not a willing licensee). Any next steps in terms of agency guidance, including its newly announced case-by-case enforcement approach, should be careful not to devalue technical contributions to standards by innovators or depart from the lessons learned to date not only in the United States but also abroad.