Part V - Patent Enforcement, Wireless Markets, and Global Competitiveness

9 The Geopolitical Implications of Patent Holdout and the Ensuing Race to the Home Court

Jorge Padilla and Andrew Tuffin

I. Introduction

During the last few decades, patent holders and implementers participating in standards developing organizations (SDOs) have successfully cooperated to develop new wireless standards that have benefited consumers all around the world. Thanks to such collaborative efforts, consumers around the world can communicate with each other, play games, watch movies, and enjoy various other activities using wireless networks.¹

The standardization process has been successful because it has made all its participants – innovators, implementers, governments, and consumers – better off. The future of collaborative standards hinges on ensuring that this remains to be the case. That requires two necessary conditions: Implementers must have access to the best technological solutions under terms and conditions that allow them to profitably commercialize the products embedding those standards, and innovators must receive fair compensation for their research efforts.²

Much of the policy debate during the last 10 years has focused on how to reduce patent holders’ leverage in negotiations with implementers that aim to license their technologies to avoid the risk of patent holdup and, therefore, ensure that the first necessary condition holds (that manufacturers can profitably commercialize products embedding standardized technology). Several authors have repeatedly warned about the risk of patent holdup in the licensing of standard-essential patents (SEPs).³ Holdup is a classic problem in economics; it arises in circumstances when firms negotiate trading terms after they have made costly, relationship-specific investments.⁴ Since the costs of these investments are sunk when trading terms are negotiated, they are not factored into the agreed terms. As a result, depending on the relative bargaining power of the firms, the investments made by the weaker party may be undercompensated. In the context of SEPs, patent holdup would arise if SEP owners were able to take advantage of the essentiality of their patents to charge excessive royalties to manufacturers of products reading on those patents that made irreversible investments in the standard.

After years of heated debate, however, there is no consensus about whether holdup exists. Some argue that there is no evidence of holdup in practice.⁵ If patent holdup were a significant problem, manufacturers would anticipate that their investments would be expropriated and would thus decide not to invest in the first place. But end product manufacturers have invested considerable amounts in standardized technologies. Others claim that while investment is indeed observed, actual investment levels are “necessarily” below those that would be observed in the absence of holdup. They allege that, since that counterfactual scenario is not observable, it is not surprising that more than 15 years after the patent holdup hypothesis was first proposed, empirical evidence of its existence is still lacking.⁶

The second necessary condition for the proper functioning of the standardization process, namely that patent holders be properly compensated, has received much less attention from scholars and policymakers. As Epstein and Noroozi explain:

By “patent holdout” we mean […] that an implementer refuses to negotiate in good faith with an innovator for a license to valid patent(s) that the implementer infringes, and instead forces the innovator to either undertake significant litigation costs and time delays to extract a licensing payment through court order, or else to simply drop the matter because the licensing game is no longer worth the candle.⁷

Arguably, the possibility of patent holdout is especially relevant in the standardization context. As SEP owners that made a commitment to license on fair, reasonable, and nondiscriminatory (FRAND) terms are typically limited in their ability to request an injunction in case of patent infringement, they have little or no leverage when negotiating a licensing deal. The very same restrictions that limit the bargaining power of licensors to deal with the alleged risk of holdup aggravate the risk of patent holdout and the likelihood of undercompensating innovation. Furthermore, the risk of holdout is more significant for SEP owners with many complementary patents reading across jurisdictions. Patentees with large and global patent portfolios naturally seek to license their portfolio of SEPs at once to minimize transaction costs. Yet, some implementers refuse to negotiate in this way and choose to challenge the validity and/or essentiality of the SEP portfolio “patent-by-patent” and/or “jurisdiction-by-jurisdiction.”⁸ This strategy involves excessive litigation costs and is, therefore, inefficient. It may also lead to excessively low royalties and undercompensation.⁹

While patent holdout concerns have attracted the attention of the leadership of the US Department of Justice (DOJ) and the United States Patent and Trademark Office (USPTO) in the recent past,¹⁰ some authors have rejected them as relatively immaterial.¹¹ However, the risk of holdout is not a mere theoretical curiosum. Heiden and Petit empirically document that some implementers do engage in patent holdout by ignoring correspondence, postponing negotiations, or simply by making counteroffers that are inconsistent with industry practice.¹² Other strategies include trying to affect the policies of SSOs or appealing to competition authorities. Of course, by delaying and stalling negotiations, potential licensees aim to obtain better licensing terms.

Indeed, the extant debate about patent holdout is not about whether implementers engage in so-called efficient¹³ infringement; they do.¹⁴ Heiden and Petit argue that the delay and the costs associated to patent holdout may also be related to the significant decrease in licensing coverage in the mobile phone industry, which has dropped from 73% to 36% between 2006 and 2016. Rather, what some scholars, such as Shapiro and Lemley,¹⁵ claim is that the patent holdout concern is a theoretical and groundless “chimera,” which at most affects only the distribution of surplus from innovation, stating that, in any case, it could be addressed through ex post court-mandated damages. FTC Commissioner Rebecca Slaughter maintains a similar position:

Holdout, as long as it is unilateral and not done collusively among licensees, fits squarely into the box of problems that have patent law solutions. If a potential licensee has engaged in willful infringement, the patent holder has remedies in patent law, including the potential for enhanced damages. Unilateral holdout does not involve the abuse of market power to stymie consumer choice that holdup does, and therefore does not trigger antitrust concerns in the same way.¹⁶

In plain English, their claims are that when a licensee takes actions to stop paying licensors for the patents, it matters to the licensors, but (a) it should not concern consumers, because the latter’s slice of the pie is unchanged, (b) it should not bother the licensees’ competitors that pay religiously for the use of the innovator’s technologies, and, in any event, (c) the licensor can always be compensated in court.

However phrased, these claims are wrong. In a recent paper, Llobet and Padilla show that patent holdout can engender significant social-welfare losses under a wide range of realistic circumstances.¹⁷ The implications of patent holdout are not merely distributional. They find that implementers may have the incentive to incur significant costs to litigate SEPs sequentially (that is, patent-by-patent and/or jurisdiction-by-jurisdiction) even when this is socially inefficient. Such a strategy leads to lower royalty payments and may result in undercompensation of innovation. Furthermore, it is likely to cause the dissipation of social surplus, as it leads to excessive litigation and leads to the exclusion of other implementers that, due to their smaller size or because of their start-up nature, cannot afford to engage in a similar litigation strategy.

In addition, there are powerful reasons to conclude that ex post court-mandated damages are likely to be insufficient to deter such a socially costly holdout strategy. First, it is obvious that if the cost of a patent holdout strategy is payment of reasonable royalties ex post, then (rational) implementers will have no incentive to pay early, given that a dollar today is worth more than a dollar in the future.¹⁸ Second, when all that the SEP holder can recover in adjudication is cash royalties, not the other terms and conditions (for example, a cross license) that it would have been able to obtain during good faith bilateral negotiations, then an injunction is strictly needed to make the SEP holder whole. Likewise, when a delay in payment causes the SEP holder’s bankruptcy or undermines its ability to fund valuable R&D, either by exhausting its internal funds or weakening its credit relative to third-party investors, then an injunction may also be strictly needed.¹⁹ This is especially likely because holdout tends to occur in cascades: Once a major licensee engages in holdout, all others, insofar as they compete with the former, have an incentive to shirk on their payments too. As we subsequently explain, not even enhanced damages may be able to address the problems identified.

In Llobet and Padilla’s paper, inefficient patent holdout can be prevented in a global court or when a local court is empowered to determine the validity of patents across all jurisdictions. However, this finding rests on some strong (and unrealistic) assumptions. Most importantly, local courts typically lack the authority to adjudicate with respect to the validity and infringement of foreign patents.²⁰ In addition, Llobet and Padilla assume that local courts approach patent disputes based on a similar legal framework – statutes and case law – and possess the same level of technical competency, and their decisions are unbiased (that is, based exclusively on objective information about the patent portfolio and, possibly, the outcome of previous trials). Finally, they implicitly assume that if a court with global jurisdiction were created de novo, it would also apply a similar legal framework and be unbiased.

As of today, we are not aware of any realistic initiative to create a multilateral institution with authority to resolve SEP disputes globally. Instead, we observe courts in various jurisdictions (for example, the United Kingdom and China) attributing to themselves the right to decide global license terms.²¹ We also see how licensors and licensees file anti-suit, anti-anti-suit injunctions, and anti-anti-anti-suit injunctions seeking to influence which court ends up setting global terms. These maneuvers only make sense if courts are heterogenous, whether their differences are driven by differences in legal statutes, case law, speed, or objectivity.

In this chapter, we explore the implications of these developments for the future of the standardization process. Specifically, we consider the implications of extraterritoriality when licensors and licensees are located in different jurisdictions and local courts may be biased in favor of local litigants.

The pursuit of domestic industrial policy objectives through the biased enforcement of the law is likely to backfire and generate negative effects for everyone. Yet countries and their companies may face a prisoners’ dilemma in which all litigants strive to get their disputes resolved by their local courts. This prisoners’ dilemma may undermine the creation of global standards that, in the past, have contributed to the development and diffusion of technologies, such as mobile telephony, so successfully. It may cause the fragmentation of global standards along geopolitical lines: US firms would contribute with technologies covered by US patents to standards with a US-only geographic scope; EU firms would contribute with technologies covered by EU patents to standards with an EU-only geographic scope; and Chinese firms would contribute with technologies covered by Chinese patents to standards with a Chinese-only geographic scope; and so forth. This fragmented landscape will result in delayed innovation and result in worse and more expensive end products around the world due to lost economies of scale and scope.

The remainder of this chapter is organized as follows. In Section II, we detail the conditions under which patent holdout is socially inefficient. In Section III, we explain why ex post damages, even if somewhat enhanced, are likely to be insufficient to deter willful infringement. In Section IV, we explain how a global dispute resolution mechanism – a global court or mandatory arbitration tribunal – could eliminate the incentives to engage in socially inefficient patent holdout litigation strategies and discuss the institutional framework that would make that possible. In Section V, we document that, in the absence of a global dispute resolution mechanism, local courts around the world are moving to set global license terms and explain the risks and challenges posed by these developments. Most importantly, we expose the risk of fragmentation of otherwise global standards. Section VI concludes with a discussion of alternative ways of dealing with such risks.

II. Socially Inefficient Patent Holdout

As noted in the Introduction, the real debate about patent holdout concerns two issues: (a) whether it only affects the distribution of surplus from innovation, and (b) whether it can be addressed through ex post court-mandated damages. In this section, we explain that patent holdout’s implications are not merely distributional; rather, patent holdout is socially inefficient under realistic conditions. Then, in the next section, we show that patent holdout’s adverse consequences are unlikely to be effectively addressed in the absence of injunctions – for example, through the award of ex post damages.

A. Conditions for Inefficient Patent Holdout

Llobet and Padilla model the negotiation between a licensor owning a SEP portfolio with patents in two jurisdictions and a global implementer that needs access to the patented technology to develop its products.²² Due to its commitment to license on FRAND terms, the innovator is constrained to set the same royalty in both jurisdictions (to the extent that those jurisdictions are similarly situated) and to honor the offer made prior to litigation even after it is successful on validity in court.

The theoretical model rests on the following realistic assumptions. First, the SEP owner possesses many complementary patents and therefore seeks to license its whole portfolio at once to minimize transaction costs. Second, because standardized products are sold globally and the SEP portfolio at issue includes patents from different jurisdictions, the global implementer can challenge the validity of patents in that portfolio in different national courts (that is, “jurisdiction by jurisdiction”).²³ Third, the implementer has the option to challenge the validity of these patents simultaneously (for example, globally) or sequentially (for example, patent by patent or jurisdiction by jurisdiction). Fourth, in sequential lawsuits, the result of a trial affects the probability that each party wins the following one. That is, if the implementer wins the first trial, it has a higher probability to win the second, as a first victory may uncover information about the validity of other patents that relate to the same type of innovation, which will be less likely to be upheld in court. Fifth, the impact of a validity challenge on royalty payments is asymmetric: Payments are reduced to zero if the patent is found to be invalid but are not increased if it is found valid (and infringed). This last assumption is consistent with the commitment to license on FRAND terms, whereby the innovator is constrained to set the same royalty across jurisdictions and to honor the offer made even after it is successful in court.

Llobet and Padilla show that the features of the legal system described in the last three assumptions can be strategically used by the manufacturer to reduce the compensation received by SEP owners even when that strategy entails a significant social cost. This result does not rely on the differential legal costs that global and local litigation might entail but, rather, on informational spillovers across jurisdictions.

The intuition is as follows. Suppose, for the sake of argument, that the innovator sets a royalty for each patent for which, in the simultaneous trial case, the implementer would be indifferent between settlement and litigation.²⁴ Under sequential litigation, however, the implementer may be willing to challenge a patent because of the gain in a future trial. This is due to the asymmetric effects that winning or losing the second trial has on the royalty rate that the implementer will have to pay. If the implementer wins the first trial, so that the first patent is invalidated, its probability of winning the second one increases, which means that the innovator is likely to settle for a lower royalty for the second patent or see both patents invalidated in court. In the opposite case, if the innovator wins the first trial, so that the second is also likely to be unfavorable to the implementer, the latter always has the option to pay the original royalty rate and avoid the second trial. In other words, the possibility that the implementer might be able to negotiate the royalty rate downward after a victory in the first trial, without the risk of it being increased in case of a defeat, fosters sequential litigation and results in lower royalties than the simultaneous litigation of all patents would produce.

When the innovation has a moderate value, the implementer’s sequential litigation strategy forces the patent holder to lower its royalty to avoid being dragged from court to court. In contrast, a patent holder with a high-value innovation might decide to increase its royalty even if that generates inefficient litigation. When the patent is highly valuable and the informational spillovers between jurisdictions are sufficiently strong, raising the royalty, rather than decreasing it, might be profitable for the patent holder. Its success in court in the second jurisdiction is very likely upon success in the first one, and this implies that the downstream producer would settle even if the royalty were high. In that case, the patent holder trades off the losses from the initial litigation with the higher royalty payment in the second jurisdiction after an initial success.

When the value of the innovation is moderate, the implementer clearly prefers to litigate sequentially since that leads to a lower royalty. Yet, it also prefers to do so when the innovation is highly valuable even if that means that legal costs are incurred, and the royalty is higher. In this case, since the patent holder chooses a high royalty rate, litigation will take place in the first jurisdiction whether litigation is sequential or not. But, sequential litigation, by making the success probabilities in the second jurisdiction more extreme, always discourages one of the parties from going to court again, which, since litigation is costly, makes both parties better off.

B. Patent Holdout and SEPs

The risk of socially inefficient holdout, while being applicable to any portfolio that includes patents the validity of which is related, becomes more significant in the context of SEPs for the following reasons. The first is the difficulty of SEP holders in adjusting their royalties upward after the first successful trial, as it might be considered a breach of their FRAND commitments. Indeed, we find that while a sequential litigation strategy may prove socially inefficient when the patent holder can revise the royalty upward, the distortion is more likely and more severe when the royalty initially chosen by the patent holder cannot be revised upward after a success in court.

The second is that, following recent intellectual property (IP) and competition law litigation in the United States,²⁵ the European Union,²⁶ and other jurisdictions, SEP owners are restricted in their ability to seek injunctions even in case of willful infringement.²⁷ By increasing the cost of holdout, injunctions curtail the incentives for the downstream producer to engage in sequential litigation and can help restore efficiency. However, while the threat of injunction mitigates the incentive to litigate sequentially and, therefore, excessively (that is, even when such litigation reduces social welfare), Llobet and Padilla demonstrate that it is unlikely to eliminate it.

The third reason is that patent holdout may undermine the standardization process. A recent Draft Statement published by the DOJ, USPTO, and the National Institute of Standards and Technology (NIST), states that:

At the same time, when standards implementers are unwilling to accept a F/RAND license or delay licensing negotiations in bad faith, these strategies can lessen patent holders’ incentives to participate in the development process or contribute technologies to standards voluntarily. Without adequate incentives to contribute to a consensus-based process, patent holders may opt for closed, proprietary standards that do not offer the same benefits of interoperability and enhanced consumer choice.²⁸

We agree that if potential licensees are allowed to delay licensing negotiations in bad faith, this may lessen patent holders’ incentives to participate in SDOs or contribute technologies to standards voluntarily.²⁹ But that is not the only, or even the most important, cost of such nefarious strategies. As explained earlier, patent holdout often leads to socially excessive litigation and causes innovators to be undercompensated, thus hurting innovation. Patent holdout strategies may also distort competition in markets where implementers engaging in such strategies compete if there are asymmetries in the ability to engage in costly litigation (see Section II.C). Furthermore, and most importantly, such strategies risk undermining the integrity and efficiency of the patent system. As a result, far fewer innovations will be developed in the first place, irrespective of whether they end up being standardized or not.

As explained by Haber and Lamoreaux,³⁰ patents are valuable because the right to exclude that they confer protects innovators against the free riding of their ideas, and because that right takes the form of a temporary property right that can be sold, licensed, and traded. This is of fundamental importance, since many innovators are just not good at running businesses and often prefer to transfer the task of commercialization to others. As these authors state,

[t]he temporary property right that comes with a patent grant provides the requisite assurance [that their ideas will not be stolen by the licensees], facilitating a division of labor in which innovators can specialize in what they do best.³¹

Policy interventions that weaken the bargaining position of patent holders vis-à-vis unwilling licensees will discourage innovation by specialized firms, which depend for their existence on the proper functioning of markets for technology where they can license their technologies.³² Such misguided interventions may force implementers to divert their own R&D resources to address the gap, which may limit their ability in terms of simultaneously developing new products or services. Moreover, they may allow large, vertically integrated firms, mostly relying on secrecy, which is socially inefficient in a dynamic sense,³³ to protect their discoveries and capture all returns from innovation. Policy measures that place markets for technology at risk cannot constitute appropriate public policy.

Geradin et al. explain that:

the effects of patents in the hands of upstream specialists are far more complex than is recognized in much of the policy debate, by the lower courts, by some competition officials, or in segments of the academic literature. In fact, patents held by NPEs can offer a number of pro-competitive benefits. First, IPRs, and especially patents, assist the entry of specialists into a market, which has direct implications for the level of competition and therefore the prices that consumer pay. Second, as is well recognized, specialization can mean higher quality. This is no less a factor in IP contexts. Third, when it is upstream, specializing can also translate into more innovation, as rival firms are pushed to innovate in order to remain competitive in the market. These many positive effects must be weighed against the negatives presented by blocking patents and opportunistic ex post licensing.³⁴

Standardization enables smaller and non-vertically integrated innovators to collaborate to create valuable technologies that rival the proprietary solutions in the control of a handful of vertically integrated companies. Such pure or horizontal innovators deserve an appropriate return on their investments, which may not occur unless implementers are required, or at least incentivized, to negotiate in good faith.

C. Patent Holdout and Antitrust

Llobet and Padilla find a second motivation for the holdout strategy: business stealing. Global implementers may engage in inefficient patent holdout – that is, litigate excessively – to gain a valuable cost advantage over their competitors, especially those who may not be able to afford such a costly strategy because they are relatively small, are financially constrained (as many startups are), or have a local dimension. Global implementers may prefer to litigate, even when litigation costs are so large that it would be preferable for society to avoid litigation, because their royalty burden may be reduced both in absolute terms and, in particular, relative to the royalty burden for its rivals if successful in litigation (while it would not go up if the patents are found valid). This business stealing incentive will result in undercompensation of innovators, but, importantly, it may also result in the anticompetitive foreclosure of more efficient downstream competitors.

Llobet and Padilla consider a scenario in which a large implementer with the ability to fund protracted litigation competes in a downstream market with a competitive fringe, comprising small firms for which litigation is not an option. In this scenario, the large manufacturer may choose to litigate to force the innovator to settle on a low royalty. The large manufacturer exploits the asymmetry with its defenseless small rivals to reduce its (relative) IP costs. In some jurisdictions, it may also exploit yet another asymmetry in the legal system to achieve an even larger cost advantage. If both the large manufacturer and the innovator choose to litigate and the former wins, the patent is invalidated, and the large manufacturer avoids paying royalties altogether. Whether this confers a comparative advantage on the large manufacturer depends on whether the invalidation results in the immediate termination of all other existing licenses or not. If not, then an additional competitive advantage is obtained.

III. On the Inadequacy of Ex post Compensatory Damages

It is often argued that monetary damages will usually be adequate to fully compensate a SEP holder in cases of strategic patent holdout. For example, Shapiro and Lemley state that:

[w]hile courts may have difficulty calculating those damages, they tend to err on the side of paying patent owners too much, not too little. Plus, a defendant deliberately infringing a patent must also pay punitive damages for willful infringement, and often attorneys’ fees as well. Some companies may try to “hold out” by infringing a patent and refusing to pay reasonable royalties, but the law can and does call them to account for it. Patent holdout might be a worry if we did not have a patent system, but that system by design prevents patent holdout.³⁵

This proposition is incorrect. Absent injunctions, remedies available at law are inadequate to compensate for willful infringement. That is, reasonable royalties may be insufficient to deter patent holdout. Even enhanced damages may prove insufficient.

As explained by Vincenzo Denicolò and coauthors,³⁶ licensing negotiations are multidimensional, typically encompassing all IP issues between two companies.³⁷ Cross-licensing can be a part of the negotiations even for non-practicing entities (NPEs), for example, when follow-on research relies in part on complementary patents held by others. Courts, however, do not have the authority to order an infringer to grant a cross-license of the infringer’s patents to the successful patent holder plaintiff, nor to impose any other terms. Thus, all that the patent holder can recover in adjudication is cash royalties, not the other terms and conditions it would have been able to obtain during good faith bilateral negotiations. If shifting bargaining power reduces parties’ ability to reach agreement on these terms, patent holders cannot be made whole through reasonable royalty awards alone.

Furthermore, because patents have expiration dates, timing issues must be considered when assessing the adequacy of monetary damages.³⁸ Patent holders face substantial delays in receiving payment, delays that might jeopardize their operations. If court proceedings moved at a quick pace, ignoring delays might be reasonable, but, in reality, patent infringement cases can take years to wend their way through the courts. Any delay in payment benefits the infringer and harms the patent holder, since a dollar today is always worth more than a dollar tomorrow. This is especially true for R&D-focused NPEs,³⁹ which rely on licensing for their revenues. Thus, infringers tend to have strong incentives to drag out proceedings, while patent holders generally have incentives to settle.

Even when courts finally enforce payment, patent holders face considerable dangers. If a court sets royalties too low, it will not only cost the patent holder in that one transaction but also will hinder its future negotiations with other potential licensees, as no other party will pay more than the judicially determined royalty rate. The opposite is not true, since it is not necessarily in the patent holder’s benefit to enforce a ruling involving very high royalties (given the adverse volume effects).⁴⁰ This dynamic may reinforce patent holders’ incentives to settle on a license, even when it appears that they will win a court case, just to avoid judicially determined rates, and conversely strengthens the incentives of infringers to engage in delaying tactics.

Finally, while SEPs are usually licensed on a portfolio basis, they are generally litigated on a patent-by-patent and jurisdiction-by-jurisdiction basis, even when that is socially inefficient. Damages awarded on this basis are therefore inadequate (by an order of magnitude) when compared with the trespass on intellectual property and the losses incurred.

For all these reasons, not even enhanced damages may be able to address the problems we have identified, though, of course, that depends on the magnitude and nature of the penalty imposed.

IV. Global Dispute Resolution in a No-Injunction World

So far, we have established that patent holdout is a real-world problem with significant efficiency effects and potential antitrust implications. We have also shown that the incentives to engage in patent holdout are unlikely to be addressed effectively by means of ex post damages awards, even if the damages awarded exceed compensatory royalties. We have also discussed that injunctions, if available, would mitigate the problem, but are also unlikely to eliminate all incentives to infringe in cases involving SEPs. So, is there any more effective solution?

A. Mandating Global Litigation

In Llobet and Padilla, implementers litigate jurisdiction by jurisdiction (and/or patent by patent), even when that strategy entails socially wasteful litigation, to force licensors to set lower royalties or, more generally, to reduce their expected royalty burden. In this model, the way to defeat such a strategy is to compel patent holders and licensees to accept a global jurisdiction where the validity of all patents, irrespective of their geographic scope, is determined by one of the local courts. That is, inefficient patent holdout can be prevented when patent validity across jurisdictions is decided either by a global court or a local court making extraterritorial determinations. Llobet and Padilla find that global litigation is more efficient than a system where each patent is independently tried in each jurisdiction even if the legal costs of global litigation are higher than the costs of litigating in multiple jurisdictions (that is, even in the absence of economies of scale in the legal process).

This conclusion holds because Llobet and Padilla assume that local courts have the authority to adjudicate with respect to the validity and infringement of foreign patents, approach patent disputes based on a similar legal framework – statutes and case law – and possess the same level of technical competency, and their decisions are unbiased (that is, based exclusively on objective information about the patent portfolio and possibly the outcome of previous trials rather than the identities of defendant and plaintiff). They also assume that if a court with global jurisdiction were created de novo, it would adopt a similar legal framework and be unbiased. These are all very strong assumptions. In particular, local courts typically lack the authority to adjudicate on validity and infringement with respect to foreign patents.⁴¹

B. Mandatory v. Voluntary Arbitration

While mandatory global arbitration would produce similar outcomes to global litigation, it seems unclear how to create such an obligation in practice. This is important because, unfortunately, voluntary global arbitration cannot play a similar role. Licensees unwilling to pay the royalty rate proposed by a patent holder could, in principle, voluntarily submit their pledge to an arbitrator that would produce a globally binding ruling. Yet they have no incentive to do so. Since there is no commitment to arbitration before the royalty is chosen, the option to arbitrate does not affect the implementer’s incentives to engage in sequential litigation. The implementer will engage in socially costly sequential litigation (holdout) under the very same circumstances in which it did so in the absence of the arbitration alternative.

C. Global Rate Setting

In any event, as of today, we are not aware of any realistic initiative to create a multilateral institution with authority to resolve patent validity disputes globally, whether this is a court of justice or an arbitration tribunal. Yet, as noted by Contreras:

Courts adjudicating FRAND disputes face a dilemma. On one hand, patents are issued under national law and, by definition, have legal effect only in the issuing jurisdiction. On the other hand, the parties to FRAND disputes are often multinational corporations with operations (and patents) in jurisdictions around the world. Moreover, many of these parties privately negotiate worldwide license agreements to cover their global operations, without regard for the particular patents issued in any given country.⁴²

In the absence of a global rate setting body, as the one proposed by Contreras, we observe courts in various jurisdictions (for example, the United Kingdom and China) asserting the right to decide global royalty terms.⁴³ Because FRAND disputes are essentially contractual disputes, national courts may have the jurisdictional authority to determine a global rate for the portfolio licensed under the agreement at issue.⁴⁴

The move toward global rate setting started in 2017, when the UK High Court for Patents ruled in Unwired Planet v. Huawei that it was authorized to set the terms of a global FRAND license between the parties, covering not only the SEP holder’s UK patents but also foreign patents covered by its FRAND commitment.⁴⁵ The court concluded that a licensor and licensee acting reasonably and on a willing basis would agree on a worldwide license, since country-by-country licensing would be highly inefficient. A similar approach was taken by the US District Court for the Central District of California in TCL v. Ericsson.⁴⁶ Most recently, courts in China have also moved to adopt global FRAND rates.⁴⁷

V. Setting Global Terms by Biased Domestic Courts

These developments have given rise to what Contreras characterizes as a “race to court,”⁴⁸ where licensors and licensees have been filing anti-suit injunctions (ASI),⁴⁹ anti-anti-suit injunctions (AASI),⁵⁰ and even anti-anti-anti suit injunctions (AAASI), seeking to influence which court ends up setting global royalty rates. Of course, these maneuvers only make sense because courts are heterogenous, with asymmetries driven by differences in legal statutes, case law, speed, or objectivity. Leaving aside differences in substantive law and procedure, these strategic races to the courthouse appear to be motivated by actual or perceived institutional capture and domestic favoritism. In short, foreign litigants may be trying to avoid Chinese courts because of fear of bias and vice versa. The race to court is in practice a race to the “home court.”

A. The Race to the Home Court

Like other regulatory instruments, such as antitrust or merger control,⁵¹ IP law and contract law enforcement might be used in unorthodox ways to favor domestic firms competing in global markets at the expense of foreign competitors and economic integration. A small country, or a country in which new technologies are mostly used as inputs by domestic manufacturers, might find it optimal to adopt a pro-implementer bias and, hence, use the law to reduce the cost of IP of its domestic firms. Lower IP prices need not have negative effects on that country’s economy if the incentives of high-tech multinationals supplying domestic manufacturers to develop new technologies are warranted by bigger markets in other countries.

A country could, for example, use antitrust policy and, in particular, the laws against abusive conduct by dominant firms, opportunistically. Companies licensing their valuable IP to domestic manufacturers may be accused of charging excessive prices and compelled to license their IP at rates that are disproportionately low to grant domestic manufacturers a competitive advantage over their foreign counterparts, both domestically and in foreign markets.

These concerns are real. In February 2015, for example, the US chipmaker Qualcomm paid $975 million to Chinese authorities to end a 14-month antitrust investigation into its patent licensing practices.⁵² The fine was then the largest fine in China’s corporate history. The settlement required Qualcomm to reduce the royalty rates on its standard-essential patents applied to sales of mobile phone made in China by Chinese smartphone makers, such as Xiaomi, Lenovo, and Huawei. We do not intend to discuss whether the decision was justified or not. We simply note that the move must have helped Chinese manufacturers to compete against market leaders Apple and Samsung in the growing Chinese mobile phone market and, possibly, elsewhere.

More generally, research points out that domestic bias in law enforcement is pervasive – whether developed or developing countries, centers of innovation or centers of manufacturing, or other differences in industrial policy. Bhattacharya and coauthors, for example, show that there is a lower probability of adverse US court judgments for US domestic companies compared to foreign companies.⁵³ This could reflect a conscious bias (an explicit tool of industrial policy) or unconscious bias (that is, courts ideologically sympathetic to a particular position or domestic companies just know their way around the local legal system better).

B. The Global Costs of Biased Domestic Enforcement

Regulatory capture in the enforcement of competition, contract, and IP law could cause significant distributional effects, shifting rents from efficient and innovative foreign firms to less efficient domestic companies, to the ultimate detriment of local and foreign consumers. This reallocation of rents could distort incentives to invest and innovate and hence reduce the overall growth potential of the global economy. The risk of domestic bias also creates regulatory and legal uncertainty, thus reducing the incentives of foreign companies to invest both domestically and overall.

One can distinguish between four channels through which investment decisions can be affected by domestic bias in law enforcement. First, capture increases uncertainty: Political interference in the enforcement process makes it more difficult to predict the final outcome of a court case. Regardless of what that outcome could be, the mere inability to anticipate it reduces the incentive to invest.⁵⁴

The second channel is through direct distorting effects: These arise if the main objective of political intervention is to protect domestic companies. Political intervention that biases enforcement in favor of local players might have effects on the competitiveness of foreign companies already present in the domestic market, undermining their competitive position in both domestic and international markets. Foreign companies may be forced to revise downward their expectations about future profits from innovation, which would reduce their incentives to invest and innovate.

The third channel is through indirect effects if the distortions introduced by political interference in law enforcement affect domestic markets in such a way that it is less appealing for foreign investors to produce or invest in that country.

Finally, there are potential dynamic effects. Strategic trade theory suggests that the more leeway countries have in using the law to pursue protectionist goals, the greater the risk that penalized companies’ countries of origin will retaliate by implementing equally distorting measures. The end result is a reduction of the inflow and outflow of trade for all jurisdictions involved.⁵⁵

C. The Prisoners’ Dilemma of Biased Domestic Enforcement

In the long term, the pursuit of domestic industrial policy objectives through the (possibly unconscious) biased enforcement of the law is likely to backfire and generate negative effects for everyone. Any short-term advantages conferred on domestic firms by the strategic use of the domestic laws will evaporate once trading partners respond to those abuses and retaliate. A well-functioning global economy requires laws designed and enforced without bias. Yet, countries and their companies may face a prisoners’ dilemma: All of them would benefit if local courts seeking to adjudicate on global royalty terms acted objectively so that no litigant benefited from a home court advantage, but because all have the incentive to act opportunistically, they are likely to end up in a world where all litigants strive to get their disputes resolved by their local courts, making use of ASIs, AASIs, and AAASIs or whatever needed to secure and protect that advantage.

The impact of this prisoners’ dilemma on royalty payments and, therefore, on the balance of interests between innovators and implementers is unclear. Assuming local courts adopt the objectives of their local constituencies, we may have pro-licensor rulings in jurisdictions where (pure or horizontal) innovators hold sway, pro-implementer rulings where implementers dominate, and unbiased decisions when neither group has greater political clout. However, irrespective of the direction of the bias, the uncertainty associated with its existence is what causes the problem.

Ultimately, our main concern is that this prisoners’ dilemma may undermine the creation of the sort of global standards that have contributed so successfully in the past to the development and diffusion of technologies such as mobile telephony. Firstly, biased courts may shift rents away from innovators (respectively, implementers) if rates are decided by local courts biased in favor of local implementers (respectively, local innovators). Secondly, they may cause innovators (or implementers) to be under- or overcompensated depending on their nationality, irrespective of the incremental contributions of their technologies. Thirdly, biased adjudication may lead to conflicting legal determinations across jurisdictions and, therefore, to enhanced business uncertainty and protracted conflict. Lastly, and most importantly, for all these reasons, the decisions of domestically biased courts may cause the regional fragmentation of global standards into, for example, the United States, the European Union, and Chinese zones. These competing standards may compete outside their respective home bases, as GSM and CDMA did in the past.

Standards’ success depends on their ability to take advantage of economies of scale and scope, which would be lost if standards become geographically fragmented. Competition across standards may result in wasted duplication of R&D expenses, limit the scope for specialization, and, ultimately, and perhaps more importantly, cause technological and economic divergence and raise new geopolitical tensions.

VI. Solving the Prisoners’ Dilemma

Contreras suggests that the solution to this dilemma could be that:

while international bodies develop a more comprehensive, efficient and transparent methodology for assessing global “fair, reasonable and nondiscriminatory” (FRAND) royalty rates, national courts voluntarily “stand down” from assessing global FRAND rates and instead limit their assessments to FRAND royalty rates applicable to patents within their own jurisdictions.⁵⁶

While we understand the logic of this proposal, we do not believe it to be the solution to the problem. The global adjudication of SEP disputes has a logic that cannot be denied: It makes no sense to resolve disputes involving SEP “global” portfolios on a “jurisdiction by jurisdiction” basis. The voluntary moratoria proposed earlier could perpetuate indefinitely. The solution is radical action: the creation of an impartial global FRAND rate setting tribunal.⁵⁷ SDOs’ IP policies would require that SEP holders and implementers resolve their license disputes through that impartial body.

This is not a new solution. SDOs overcame self-interest from companies and countries when developing computing and communications standards. They need to do it again for remunerating contributions to developing and implementing those standards.

10 China’s Practice of Anti-suit Injunctions in Standard-Essential Patent Litigation Transplant or False Friend?

Mark A. Cohen

I. Introduction to the Anti-suit Injunction Transplant

Based on published data from various sources, in late 2020, China emerged, at least temporarily, as the largest grantor of anti-suit injunctions (ASIs) against overseas assertions of standard-essential patents (SEPs) in the world with the issuance of five ASIs.¹ This unexpected development was attributed to China “transplanting” Chinese ASI practices from other countries. A legal transplant is “the borrowing and transmissibility of rules from one society or system to another.”² In a typical ASI, a Chinese court will order parties appearing before it to refrain from pursuing litigation on the same matter in one or more foreign countries on the basis that the foreign litigation would have a substantially negative impact on Chinese litigation. It may also involve imposing penalties on a litigant who seeks an ASI in another jurisdiction. If the order seeks to prohibit the litigant from filing an anti-suit injunction in another country, it is more precisely known as an “anti-anti-suit injunction” or AASI. ASIs entered Chinese legal practice in maritime disputes³ and then quickly emerged as a tool for litigants to seek control over non-Chinese patent litigation. In Chinese civil litigation practice, an ASI is accomplished by a Chinese court granting a Behavior Preservation Order, which is similar to a preliminary injunction. Chinese ASIs have not yet extended into other areas of law, including in international commercial arbitration.⁴ Prior to their adoption by Chinese courts, they were long in use in common law countries, including the United States, particularly in matters where courts of equity conflicted with the law courts or ecclesiastical courts.⁵

ASIs are the newest of several Chinese tools to undermine foreign parallel intellectual property (IP) litigation. As with any legal transplant, questions may be raised concerning the ability of China to “customiz[e] and assimilate[e] the imported standards based on local needs, interests, conditions, and priorities.”⁶ In view of its motives and implementation, an alternative perspective is to view China’s ASIs as a type of “false friend.” A “false friend” is a linguistic term referring to words in a foreign language bearing resemblance to words in one’s own language but having different meanings. A Chinese saying describes this legal phenomenon: “similar appearance, different spirit” (形似神异).⁷ In legal terms, a false friend may manifest itself as a legal transplant that has significantly departed from the original purposes of its “exporting” country. In this sense, a false friend may present itself as a more extreme form of the challenges in legal and cultural adaption of a transplant, which are often themselves “endemically riddled with value laden, open-ended notions” of a country’s legal culture.⁸ However, when a system is transplanted but is widely divergent (or unstable), characterization as a transplant, which is inherently value-neutral, may also lead to undue acceptance of borrowed practices that may be fundamentally different, or even experimental in nature.⁹

As an example of prior efforts to normalize an IP transplant, China on two separate occasions sought to justify an expansion of its administrative system for IP protection on the basis that the United States had a similar system administered by the United States International Trade Commission (USITC). The first such effort occurred in 2004. At that time, China legislated a procedure to exclude infringing imports under China’s Foreign Trade Law modeled on US law. However, Chinese Customs already had the authority to exclude infringing imports without the necessity of extensive and costly USITC-style administrative proceedings.¹⁰ As far as I know, this system has never been implemented. Another effort at transplanting USITC practice occurred in 2015, when China sought to justify a 23-fold increase in its vast domestic administration for patent enforcement over a six-year period on the basis that the USITC had a similar procedure. As a consequence, China had nearly 1,000 times more cases than the USITC by 2015. In fact, China’s administrative system did not replicate the USITC remedy, an in rem enforcement remedy used solely to address the challenges of infringing imports, based on US civil procedure, and the subject of a published docket. In a sense, USITC remedies were transplanted twice, and not at all.¹¹ China’s efforts to transplant USITC practice also shared a common theme of legal experimentation with ASIs, which can make it especially difficult to anticipate how a legal transplant can develop in China over time.

Unlike other recent foreign transplants in China’s IP regime, such as the recent introduction into China’s civil practice of punitive damages, burden of proof reversals, and “patent linkage” in pharmaceutical IP disputes,¹² ASIs do not address domestic lawsuits but are directed exclusively to overseas cases. One scholarly Chinese commentator has explicitly disavowed the possibility of a domestic ASI regime, by noting that Chinese ASIs “can only be used in international or extraterritorial parallel litigation situations” and that they are a legal tool to deal with “differences arising from different legal systems.” This scholar has contrasted the Chinese system with other countries, such as the United States, where ASIs can also affect federal/state judicial relationships.¹³

Put another way, there does not appear to be a Chinese interest in a domestic counterpart to China’s practice of ASIs. This is not because it is unneeded. Conflicts can arise from China’s extensive multiple-track domestic IP litigation system, including overlapping civil, criminal, administrative, and customs remedies and conflicts; delays attributed to separation of IP validity and infringement proceedings; and conflicts that may arise between national and local government authorities.¹⁴ The Chinese government has attempted to mitigate those differences through national and local coordinating agencies and through policies mandating cooperative interactions. However, due to the lack of a separation of powers doctrine and limited opportunity for judicial review of administrative action, Chinese courts have no general authority to countermand the action of another domestic court or administrative agency.¹⁵ Chinese ASIs stand out in part because they are, in the words of Judge Zhu Jianjun, who has adjudicated many key SEP decisions, intended to help assist China “to build the main battlefield for foreign-related dispute resolution.”¹⁶

This outwardly facing approach of issuing ASIs also differs from prior approaches of the Chinese courts and governmental institutions toward transnational parallel litigation. In the past, China typically used domestically focused civil strategies to ensure that foreign litigation did not impact Chinese domestic litigation. Judge Zhu described this approach: “China’s traditional legal system mainly focuses on resolving domestic disputes, which is coupled with a relatively inward-facing traditional culture (including legal culture). Chinese laws mainly deal with foreign-related disputes based on the rules and experience of handling domestic disputes.”¹⁷

Arguably, all courts rely on domestic law in the treatment of cases. What I believe instead distinguished China’s prior approach from the common law system in handling parallel litigation was something more narrow: the judicial attitude of “not formally recognizing or enforcing” ASIs.¹⁸ There are, indeed, arguments to be made that China’s new system of extraterritorial ASIs is now instead a part of a tradition within Chinese law of enacting separate institutions, procedures, and rules for dealing with foreign-related matters. These differences today include a separate tribunal for foreign-related civil cases at China’s Supreme People’s Court (the Number 4 Civil Tribunal), separate time frames for the resolution of foreign-related cases pursuant to China’s Civil Procedure Law (CPL) (Art. 277), an inability of foreigners to sit for the bar and an inability of foreign law firms to appear before Chinese courts,¹⁹ and a greater likelihood for intervention in a case by an “Adjudication Committee,” rather than the judges listening to the case, in resolving a dispute involving a foreigner.²⁰ While the utility and necessity of disparate treatment of foreigners in China’s civil IP system is a general topic that is beyond the scope of this chapter, differential treatment of foreigners, in fact, has a long history in China’s legal system and could be considered a distinguishing feature of China’s ASI regime.

China’s historical approaches to foreign ASIs were also based on judicial practices that generally respected the territoriality of IP rights by not considering validity, infringement, or damages in overseas patent litigation, unless there was consent by the parties to consider extraterritorial issues. China instead relied on certain advantages of its legal proceedings to exert some influence over parallel proceedings, including an expedited court docket, expert judges, and the near-automatic granting of injunctive relief to stop the manufacturing or sales of infringing products within China. Unlike US patent litigation, but like continental legal systems, Chinese injunctions are granted nearly 100% of the time when requested by a successful patent litigant who is suing on patents that have not yet expired.²¹ Injunctions have traditionally been important for litigants in China due to traditionally low damages for patent infringement. Chinese injunctions have also become increasingly valuable with the growth of China’s manufacturing prowess and the expansion of its domestic consumer markets. Injunctions may also provide a significant incentive toward settlement of a global SEP litigation.

China has also taken other nonjudicial steps to insulate itself from foreign parallel cases, such as by limiting possibilities for dismissal of cases on grounds of forum non conveniens²² or limiting exposure to enforcing foreign SEP judgments through mutual legal assistance agreements. One narrowly tailored example of the latter is found in the “Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region,” which specifically excludes “cases on the confirmation of the license fee rate of a standard-essential patent heard by a court of the Mainland or a court of the Hong Kong Special Administrative Region.”²³

A turning point in China’s approach toward ASIs occurred about the time of the Huawei v. Samsung litigation that resulted in a US court issuing an ASI against Huawei.²⁴ Huawei had simultaneously filed parallel rate setting proceedings in the Northern District of California and Shenzhen, China. Judge Zhu described China developing its own ASIs as a necessary response to this type of ASI:

The extraterritorial court issued ASIs to Chinese wireless communication companies that were seriously affected and hindered in the civil litigation rights enjoyed by Chinese civil litigants in accordance with Chinese law. These ASIs may further affect and hinder civil substantive rights. At the same time, although the object of an ASI issued by an extraterritorial court is a party to a civil lawsuit in China, it will hinder the normal development of civil lawsuits in my country, and even lead to the termination of civil lawsuits already underway in my country or unenforceable judgments. The extraterritorial ASI directly or indirectly affects the exercise of judicial jurisdiction by Chinese courts over SEP disputes and interferes with and undermines China’s judicial sovereignty.²⁵

Judge Zhu’s reference to an extraterritorial court issuing an ASI may suggest the negative pregnant that there are Chinese territorial courts issuing domestic ASIs. As noted, this does not appear to be the case in China. His focus on “sovereignty” is also not atypical in Chinese discussions of ASIs. As Professor Vivienne Bath has noted, “Chinese cases and judicial documents dealing with international legal matters tend to refer both to the important concept of judicial sovereignty … and to the more general idea of reciprocity. The phrase ‘judicial sovereignty’ is used in connection with the protection from foreign encroachment of the jurisdiction and autonomy of Chinese courts.”²⁶ Judge Zhu also does not account for the fact that Huawei was the plaintiff in both the US and Chinese Huawei v. Samsung cases. According to Judge Orrick in the California dispute, Huawei had requested a global rate determination from the US court.²⁷ Huawei v. Samsung may not, therefore, be a good example of why China should develop its own ASI system, as the offending party was Huawei when it initiated duplicative lawsuits in two jurisdictions. Indeed, the ASI decisions subsequent to Huawei v. Samsung, such as Samsung v. Ericsson,²⁸ have looked to the minimization of inefficient duplicative litigation as a reason for granting an ASI and rejected comity arguments to defer to an overseas court. Arguably, a Chinese court could also have considered Huawei estopped by subsequently pursuing a contrary position in its parallel litigation in Shenzhen. This position also appears to be supported by Article 100 (now Art. 103) of China’s CPL regarding “Behavior Preservation,” which Chinese courts have utilized as the legislative basis for granting extraterritorial ASIs. In its current form, it primarily seeks to address damages caused to a litigation based on behavior of the “other party.”

Article 100 was based in part on China’s experience in granting preliminary injunctions in IP matters, as was required by its accession to the WTO. It was a rarely used IP remedy, that has since been made broadly available in all civil disputes:

Chapter IX Preservation and Preliminary Execution

Article 100 In the event that the judgment on the case may become impossible to enforce or such judgment may cause damage to a party because of the behavior of the other party to the case or because of any other reason, the people’s court may, upon the request of the said party, order the preservation of the property of the other party, specific performance or injunction; in the absence of such request, the people’s court may, where it deems necessary, also order property preservation measures.

When a people’s court adopts any preservation measure, it may order the applicant to provide security; where the party refuses to provide such security, the court shall reject the application.

When a people’s court receives an application for preservation in an emergency, it shall decide within 48 hours after the receipt of the application; if the court accepts the application, such measures shall come into force immediately.²⁹

Article 100 was also an odd basis on which to consider the situation posed in SEP cases such as Huawei v. Samsung. As Zhang Weiping, a noted scholar of China’s CPL, has pointed out, Article 100 was drafted with “the understanding that its significance did not include ASIs.”³⁰ Moreover, by its own terms, it is primarily intended to “resolve domestic disputes.”³¹ It gives no guidance concerning its potential extraterritorial application. “Chinese law,” one commentator has noted, “does not explicitly permit the courts to issue anti-suit or anti-arbitration injunctions.”³² Chinese academics and others have justified these actions as responses to similar actions taken by foreign courts on SEP-related litigation involving China,³³ either more generally on the basis that this was a “legal transplant” that was part of the “ping-pong”³⁴ of conflicting ASIs from different jurisdictions, or the “gaming”³⁵ by litigants in pursuit of optimal judicial fora, which China was fully in its rights to enter. Not surprisingly, in light of its domestic orientation, Article 100 does not explicitly consider the impact of an ASI on a foreign jurisdiction, nor is it reflected in a Judicial Interpretation of the Supreme People’s Court regarding behavior preservation orders in IP-related cases that are intended to provide more granular guidance under China’s CPL.³⁶ Comity was subsequently introduced as a consideration in the landmark Huawei v. Conversant decision and has thereafter been followed in other ASI cases.³⁷ In that decision, the Chinese court ordered an ASI directed to the pendency of a potentially conflicting German court decision regarding a patent royalty rate that was significantly higher than the calculation of a Chinese court. By contrast, courts in Wuhan have since issued global ASIs precluding lawsuits anywhere in the world that might interfere with their efforts to set global FRAND rates, as did the Shenzhen court in Oppo v. Sharp.

Descriptions of Chinese procedures as a “transplant” based on outward similarities might also be understood as part of a broader effort to normalize novel actions by Chinese courts toward other sovereign courts. Such euphemistic nomenclature downplays any deficiencies in a domestic court’s practices. One misleading aspect of that description is that it does not account for changes that the transplant “receiver” must make to adjust to a new legal institution. China’s experience with ASIs to date shows that ASIs have required reinterpretation of China’s CPL and adoption of other measures. Judge Zhu has noted that Article 100 did not explicitly contemplate the complexities entailed in granting an ASI compared to other types of provisional measures called for under Article 100.³⁸ Other changes have also occurred to accommodate this more aggressive posture of the Chinese courts, including global FRAND rate setting,³⁹ judicial jurisdiction based on the situs of negotiations,⁴⁰ imposition of daily recurring penalties for continuous violation of the ASI despite a Judicial Interpretation that had provided otherwise,⁴¹ and creation of a new sui generis cause of action for a FRAND rate setting.⁴²

Another possible indication of the unique challenges posed by this transplant is the conflicts with foreign countries that have arisen from a Chinese court’s granting of ASIs. Foreign courts have issued preemptive ASIs forbidding parties from seeking or enforcing ASIs in a Chinese court. Judge Gilstrap in Ericsson v. Samsung imposed an indemnity on Samsung for any fine imposed by a Chinese court for Ericsson seeking relief in a US court.⁴³ In March 2022, the Defending American Courts Act was introduced in Congress.⁴⁴ It could impose penalties upon foreign litigants seeking ASIs involving US court proceedings. As the Chinese decisions directly impact foreign courts, the lack of transparency over the cases has also been troubling. The European Union filed a WTO “transparency” request pursuant to Article 63 of the TRIPS Agreement during the summer of 2021, which has since been followed by a request for WTO consultations filed by the European Union on February 18, 2022.⁴⁵ The United States, Canada, and Japan have all requested to join these consultations.⁴⁶

Other indications that a rush to normalize ASIs may be premature are the attendant instabilities of China’s ASI practice as it seeks to address the challenges just noted. Judge Zhu and others have called for China to further clarify how China should grant ASIs, including harmonizing varying local Chinese judicial approaches to granting ASIs, incorporating the experience of the Conversant decision, and carefully considering the experience of foreign countries in handling ASIs.⁴⁷ As one indication of a possible change in direction, there appear to have been no new published decisions on ASIs since the initial spate of late 2020 when China emerged as the global leader in granting ASIs. Another indication of that possible reconsideration is the decision to publish the Lenovo v. Nokia case in March 2022 on the website of the IP Court of the Supreme People’s Court, about 14 months after its decision date.⁴⁸ In that case, a Chinese plaintiff was denied an ASI in circumstances that seemed quite similar to other cases where ASIs were granted.⁴⁹ Judge Zhu was a member of the judicial panel deciding that case. This is an important decision, as it may be the first Chinese case where a party was denied an ASI. The case may also have not been well known in the West prior to publication, as it is not referenced in recent English-language academic literature on ASIs as transplants or otherwise,⁵⁰ nor does it appear in recent WTO proceedings.

II. Chinese ASI Practice in Historical Context

Chinese efforts to control foreign parallel patent litigation have a long history, stretching back to the late Qing dynasty in 1897, when two foreigners sued each other before the US Consulate in Shanghai over infringement of a US patent for the manufacture of cigarettes. During that era, US patents also had extraterritorial effect in China.⁵¹ As the United States Consul General of Shanghai, acting in his judicial capacity, noted in Mustard and Co. v. R. H. Wright et al., “The treaty between the United States and China provides that no American citizen residing in China can have his right adjudicated except in the consular courts of his country sitting in the Empire of China, such courts being United States Courts and governed by laws passed by the Congress of the United States.” Furthermore, the Consul General noted, “the fact that the plaintiffs resided in China cannot except them” from “the legal principle announced as securing business certainty and safety” of a patent “granted and recorded” in the United States.⁵² Disputes like these lend credence to Chinese arguments that patents were a tool of humiliation and extraterritorial oppression against China’s own autonomy, “judicial sovereignty,” and industrial growth. They also continue to be cited in the academic literature on legal transplants and ASIs.⁵³

Another dispute at about the same time also revealed the difficulties foreigners faced in China’s nontransparent and nascent patent regime. It involved the assignment of a Chinese patent to two Americans, who subsequently filed two patent applications in the United States based on this original application. Despite the intervention of the US State Department in support of the American assignees of the patent, the Chinese government advised that there was no law affording foreign buyers of Chinese patents the authority to address infringement in China.⁵⁴ Although much has changed in China’s IP system since that time, issues related to transparency, national treatment, extraterritoriality, fairness, and politics have continued to raise concerns.

China’s concern with foreign IP assertions, including SEP litigation, began most prominently with debates over royalty payments for patents that read on optical media equipment. Peking University Professors Zhang Ping and Ma Xiao described the environment facing China two decades ago in their highly influential treatise “Standardization and Intellectual Property Strategies” (标准化与知识产权战略) (2005):

In recent years, hot issues have multiplied on the topic of standardization and intellectual property. Beginning in early 2002 with the DVD patent royalties, continuing with Cisco suing Huawei, the appearance of the EVD standard, controversies over digital TV standards, the promulgation of TDS-CDMA standards, the WAPI standard running aground, up until INTEL’s suit against DongJin in Shenzhen, we have seen too many cases of IP disputes arising from technical standards.⁵⁵

In 2003, the former State Administration for Industry and Commerce (SAIC) commissioned the report “The Competition Restricting Behavior of Multinational Companies in China and Counter Measures.” The report notes that multinationals “squeeze” the Chinese market by refusing to license IP.⁵⁶ The study reflected the view that had been widely adopted in China that “patent holdup” was an increasing problem for Chinese manufacturers. It also expressed an urgent need for an Antimonopoly Law (AML) to address this anticompetitive behavior.⁵⁷ The study provided an example of an unidentified company, presumably Cisco, that refused to license its IP to permit interconnectivity with its equipment. The report was released about the time that Cisco successfully won a preliminary injunction against Huawei in Texas in a trade secret dispute in June 2003.⁵⁸ Cisco and Huawei would ultimately settle their dispute in August 2004, which occurred shortly after the release of the final report.⁵⁹ Since that time, various other reports have surfaced regarding legal and extralegal threats placed by China on foreign companies to improve China’s position in parallel litigation on SEPs involving a Chinese party.⁶⁰

In another development in 2004, Wuxi Multimedia and Orient Power brought an unsuccessful lawsuit in the United States against the DVD patent pool, arguing that the pricing strategies of that pool violated the Sherman Act.⁶¹ The claimants argued that the optical media licensing program was a vehicle for price-fixing and monopolization of the DVD-player market, and that it included so-called nonessential patents in the package license, which the plaintiffs claimed amounted to illegal tying. Prof. Huang Yong noted at the time that future legislation on monopolies needs to stipulate clear criteria for activities deemed anticompetitive, and the ongoing DVD suit could be an example for legislators to study.⁶² This case was one of the few efforts by Chinese companies to bring their disputes overseas to companies seeking to license technology to China. The AML itself was finally enacted in 2007, after over a decade of discussion and legislative proposals. It has since been revised in 2022.⁶³ AML cases have since been used to establish FRAND rates in addition to civil litigation.

Another effort to address overseas litigation was made when China amended its Foreign Trade Law in 2004. The law authorized the Ministry of Commerce (MofCOM) to “take such measures as prohibiting the import of the relevant goods from being produced or sold by the infringer within a certain period.”⁶⁴ The effort, as with ASIs, was often cloaked in the language of countering an alleged growing threat of foreign patent assertions.⁶⁵ As previously discussed, this was a transplant that was unnecessary, as China already had procedures in place to address imports that infringed Chinese patents.

In August 2005, still another effort was undertaken to develop legislation to compel licensing of SEPs by foreigners through Chinese standardization policy. Ms. Dai Hong of the High Technology Department of the Standardization Administration of China (SAC) noted at a conference hosted by the US government that “if a patentee refused to … permit exploitation of a patent, the Standardization Administration of China will suspend the implementation of the standard and will petition the Chinese patent office for a compulsory license.”⁶⁶ Her comments were projected on a screen but were not otherwise recorded, leaving many in the audience to guess the intentions of SAC regarding compulsory licensing of SEPs to discourage SEP assertions, including the relationship with international standardization processes and China’s emerging antitrust laws,⁶⁷ as well as the role of SAC in coordinating these procedures with other Chinese agencies.

Shortly after that time, China’s State Intellectual Property Office (SIPO) also attempted to enter the fray. A draft of the proposed third amendment to China’s patent law set forth an elaborate flowchart to compel licensing of patents in national standards based on an SAC recommendation for a compulsory license.⁶⁸ This process, however, was also ultimately never adopted by the National People’s Congress in the amended patent law (2008), nor did it appear in more recent revisions of the patent law (2020).

In 2006, MofCOM also sought to convince WTO members that the incorporation of patents constituted a “technical barrier to trade” and should therefore be regulated by the WTO:

China is of the view that, IPR issues in preparing and adopting international standards have become an obstacle for Members to adopt international standards and facilitate international trade. It is necessary for the WTO to consider negative impacts of this issue on multilateral trade and explore appropriate trade policies to resolve difficulties arising from this issue.⁶⁹

At about this time, China’s courts also began to explore their potential role in reducing royalty payments involved in standardization. The IP Division of the Supreme People’s Court issued an “instruction letter” to the Liaoning High People’s Court advising that “if … a patent has been included in a standard, the People’s Court may deem that the patentee has licensed others to use its patents to implement standards. Such use does not constitute infringement under … the Patent Law.” However, this practice was also not ultimately widely implemented.

During the period after the AML and before China’s transplanting ASIs, Chinese courts occasionally undermined foreign cases through expedited decisions in their own jurisdiction. China’s CPL mandates that first instance cases are required to be completed in six months, and second instance cases are required to be completed in three months (Arts. 152, 164). According to one database of 7,885 cases, first instance patent litigation in China was completed on average in 5.9 months.⁷⁰ By comparison, most US “rocket” dockets commit to trying a patent case within one year.⁷¹ Appeals of patent cases at the Federal Circuit take considerably longer due to lengthy docketing and briefing periods and an estimated period of 180 days after oral argument before a final decision is rendered.⁷² In many cases, a Chinese appellate court may render a final decision before discovery has been completed in US district courts or the USITC.

Pursuant to Article 277 of the CPL, litigation time limits are also suspended when a foreign party is involved. A Chinese court may leverage this flexibility to issue rulings at key junctures in a foreign court proceeding, effectively undermining foreign cases by rendering final judgments in advance of foreign decisions. Although adjustment of time frames may sometimes be necessary to accommodate foreign litigants, the unconstrained ability to adjust time frames raises concerns over national treatment under TRIPS. Such national treatment exceptions should be narrowly tailored to avoid undue discrimination.

A US district court enjoining a Chinese-backed defendant for infringement of an IP right or a USITC decision granting an exclusion order may be of little moment if the US plaintiff becomes a defendant in the parallel Chinese case, and especially if the US defendant in the Chinese case has sufficient market presence in China to be placed at risk of an adverse Chinese court or administrative decision.⁷³ A Chinese judgment could stop the US company’s sales, manufacturing, and exports without incurring the attendant controversy of issuing an ASI.

Expedited civil procedures have long had the impact⁷⁴ of undercutting foreign parallel litigation, regardless of the availability of ASIs. A good example of the litigation race that China offers for SEP litigation is Huawei v. Samsung. The US and Chinese cases were filed at the same time by the same plaintiff (Huawei) on May 24–25, 2016. (Differences in dates were due to the international dateline.) On January 4, 2018, a judgment was issued by Shenzhen Intermediate People’s Court granting an injunction against Samsung.⁷⁵ Meanwhile, in the United States, on April 13, 2018, an ASI was granted in favor of Samsung, prohibiting Huawei from enforcing the injunctions issued by the Shenzhen court. Judge Orrick acknowledged the slowness of his court:

The Chinese actions have proceeded quicker than this one. In particular, the Shenzhen court has held trials on two of Huawei’s SEPs and two of Samsung’s SEPs. The trials addressed both FRAND issues and technical issues specific to each SEP. During these trials, the parties had full opportunities to present their evidence and argument [references omitted] …

We are scheduled to proceed to trial in December of this year.⁷⁶

The ASI was granted by the US court after a decision had already been reached in the underlying dispute and at best would be limited to enforcement of the order. The case was settled while it was on appeal to the Guangdong High Court on or about April 14, 2019,⁷⁷ well before the start of the US trial, which was rescheduled to September 2019. With its limited duration, Judge Zhu noted Judge Orrick’s ASI’s “influence on comity could be ignored.”⁷⁸

Chinese judicial practices of expediting domestic litigation to undermine foreign parallel cases are also found outside of the SEP context.⁷⁹ This is also not surprising in light of the important role that the courts play in breaking through patent “monopolies” and “technological stiff necks” (bottlenecks).⁸⁰ These bottlenecks are often described in the Chinese media as patents or patent families, whether or not incorporated into standards, that are under the control of foreign entities. This type of language has also been more widely used to justify other actions that constrain China’s techno-nationalist ambitions, such as high prices for patents⁸¹ and trade secret theft.⁸²

As Chinese judges are not part of an independent branch of the government, and Chinese courts are ultimately guided by Party policy, it is not surprising that Chinese judges also openly encourage utilization of Chinese judicial mechanisms to thwart Western technological assertions. Often this may occur through elevation of particular cases to a leading case for study, including awarding it a status as a “top 10,” “innovative” case, or similar language. Sometimes, the court may directly exhort rightsholders to learn from the case as well. The Presiding Judge of the Guangdong High Court who heard the appeal in Huawei v. InterDigital Corporation (IDC) (2013), an AML case involving SEPs, advised Chinese companies that they should utilize the AML to “break through technical barriers in the development of space for their own gain.”⁸³ A recent report from the Hubei Provincial High People’s Court discussed these “bottle-necked, key core technologies, emerging industries” with specific reference to two SEP cases adjudicated in the provincial capital of Wuhan involving American interests. In both cases, the courts issued two ASIs to halt litigation in the United States and elsewhere overseas:

Courts across the province heard key intellectual property cases, etc., involving bottleneck critical core technologies and newly emerging industries, in a fair and efficient manner in accordance with the law. Such as … Samsung Company v. Ericsson Company’s SEP royalty case …

In 2020, the Wuhan Intellectual Property Tribunal tried the ASI case filed by Xiaomi against the American IDC, ruling that IDC is prohibited from filing similar parallel lawsuits abroad, and thereby effectively safeguarded my country’s high-tech enterprises’ participation in intellectual property rights in transnational competition, and highlighted the wisdom and authority of China’s judicial protection of intellectual property rights.⁸⁴

These policies of thwarting foreign adjudications by protecting domestic entities were significantly elevated in January 2021, when Communist Party General Secretary Xi Jinping published an article in the leading Communist Party journal Qiushi (“Seeking Truth”). Secretary Xi called on China to “rigorously protect IP [to] safeguard indigenous Chinese R&D in core technologies in key fields.”⁸⁵ Xi also renewed the call for China to form an efficient “early warning system for international intellectual property risks” and “increase assistance for overseas intellectual property rights protection of Chinese enterprises.” Development of case law for lower courts to handle these types of cases was also especially critical, as Xi Jinping himself has propounded, “One case is better than a dozen documents.”⁸⁶

Whether in their policymaking or adjudication functions, Chinese courts have tended for some time to focus disproportionately on foreign-related IP cases due to their political sensitivity and their potential to disrupt domestic industrial plans, including those regarding technology, employment, and manufacturing.⁸⁷ These types of cases are identified by the court’s own rules as requiring “special treatment” in their adjudication, including by formation of collegial panels, involvement of the court’s leadership, or referral to Adjudication Committees for ultimate decision-making.⁸⁸ The Supreme People’s Court (SPC) has also specifically elevated consideration of ASIs into an important research topic for the courts in order to protect China’s “judicial sovereignty.”⁸⁹ The endgame, to quote the Hubei Provincial High Court, is to protect China’s role in “transnational competition.”

Despite much high-level rhetoric, it is difficult at this time to ascertain whether China’s changing policies toward overseas SEP assertions are durable long-term solutions to a perceived problem or short-term politicized responses and experiments. Efforts to date may be viewed as experimental in nature insofar as they are not fully codified into law. However, even codified transplants, such as China’s short-term experiment with “Section 337” litigation in China’s Foreign Trade Law, as previously discussed, may exist in name only. Economic changes may also drive changes in policy. An example of this shifting rhetoric is the change from China’s official position that patents constitute a technical barrier to trade to one where China is seeking a larger share of the patent royalties, based on China’s significant holdings of SEPs.⁹⁰ China’s ability to experiment with new laws and its continuous adaptation to changing economic and political circumstances in IP often makes it difficult to determine whether changes in Chinese legal practices are durable. IP especially has also been an area of experimentation for China’s legal system in a wide range of areas, including in such areas as specialized IP courts, preliminary injunctions, publication of cases, and precedent.⁹¹

While ASIs are a nominal “transplant” from common law countries, it is only by also considering the differences between Chinese and other systems that one can begin to determine whether China’s ASIs are also a type of “false friend” with foreign ASI practice. Some of the distinguishing features of China’s ASI practice from common law jurisdictions include:

1. (a) Chinese ASIs are part of long-term efforts by the Chinese government to increase the value of Chinese technology and decrease the value of foreign technology “monopolies.”

2. (b) Unlike common law countries, Chinese ASIs are exclusively extraterritorial in nature.

3. (c) Chinese ASIs are part of a national effort to increase the role of Chinese courts in establishing global judicial norms.

4. (d) Chinese ASIs have also precipitated other changes in the adjudication of SEPs to accommodate this more aggressive posture, including a greater willingness to set global FRAND rates, the extension of jurisdiction to foreigners based on situs of negotiations, recurring daily penalties for violations of ASIs, and the creation of a new civil cause of action for FRAND rate setting.

5. (e) China’s ASI practices have been promoted and endorsed by the highest levels of China’s political and judicial leadership.

6. (f) China’s ASIs may be experimental in nature.

Despite these differences, the extent to which these policy differences impact how ASIs are administered in China is difficult to determine, since China does not publish all its final decisions and does not usually publish interim measures. China’s emerging power in standards and its own domestic regulatory capacity, however, does raise concerns that it may yet become a significant “rules breaker” or even “rules faker,” where it adjusts adherence to the international order to better advance its own short- or long-term interests.⁹² China’s rejection of complete transparency in ASIs may therefore be seen as a strategic tool to maintain maximum regulatory flexibility in this evolving area. This decision is not cost-free, as it may also minimize the predictability afforded to the affected public by transparent judicial decisions.

III. Transparency: How China’s ASI Regime Fails

China’s use of Article 100 of the CPL (“Behavior Preservation”) has raised two major transparency concerns, one of which is long-standing: (1) the public availability of any final judicial decisions, as well as any behavior preservation orders that are final with respect to the issue at hand; and (2) the extent to which courts may act in an ex parte manner without disclosure to affected litigant(s) or other courts that may have an interest in the decision. Both aspects of transparency are governed by the international norms set by the TRIPS Agreement, which provides a useful, internationally recognized benchmark to judge regulatory compliance.

A. The Public Availability of Judicial Decisions

Article 63 of the TRIPS Agreement is entitled “Transparency.” It falls within Part V of the TRIPS Agreement regarding “Dispute Prevention and Settlement.” It is clear from these descriptions that the drafters of Article 63 intended to promote transparency in large part to prevent disputes and encourage their settlement. Article 63 provides:

1. 1. Laws and regulations, and final judicial decisions and administrative rulings of general application, made effective by a Member pertaining to the subject matter of this Agreement (the availability, scope, acquisition, enforcement and prevention of the abuse of intellectual property rights) shall be published … in such a manner as to enable governments and right holders to become acquainted with them ….

2. 3. Each Member shall be prepared to supply, in response to a written request from another Member, information of the sort referred to in paragraph 1. A Member, having reason to believe that a specific judicial decision or administrative ruling or bilateral agreement in the area of intellectual property rights affects its rights under this Agreement, may also request in writing to be given access to or be informed in sufficient detail of such specific judicial decisions or administrative rulings or bilateral agreements ….

During the summer of 2021, China received an Article 63 request from the European Union to disclose three SEP cases: Xiaomi v. InterDigital (Wuhan Int. Ct.), OPPO v. Sharp (Shenzhen Int. Ct.), and Samsung v. Ericsson (Wuhan Int. Ct.). The request asked for further information to enable rightsholders to “acquaint themselves with those decisions that are identified as typical, example cases.”⁹³ The European Union filed the request independently of, and prior to, the initiation of formal consultations that are a prerequisite to the formal WTO dispute process.⁹⁴ China briefly responded to the Article 63 request that these cases “mentioned in the EU communication are cases for reference and have no legal effect of general application” (para. 4) [emphasis supplied]. This response did not differ significantly from an earlier Article 63 request that the United States filed in 2005, where China responded that it was not obligated to provide cases, as China “does not follow the common law system.”⁹⁵ The United States also subsequently filed a dispute after it received this response. The EU request for consultations identified the same SEP cases, which China had failed to produce plus a fourth case, ZTE v. Conversant (Shenzhen Int. Ct). In addition, the European Union claimed substantive violations of WTO rules by reason of China’s ASIs prohibiting access to non-Chinese courts, creating legitimate barriers to trade, and imposing excessively high fines for the owners. The EU request has since been joined by the United States, Canada, and Japan.

The lack of “legal effect” identified in the Chinese response in its response to the EU Article 63 request introduces surplus language not otherwise found anywhere in the TRIPS Agreement. The precise treaty language in Article 63, without any qualifiers, is “general application.”

The issue of China’s obligation to publish precedential or quasi-precedential cases also appeared prior to the request during the Trade Policy Review of China at the WTO between the European Union (October 20 and 22, 2021).

EU Question No 80: Could China therefore clarify what is the status of these adjudication guidelines for deciding on an anti-suit injunction and daily penalties in light of the above reply?

Reply: The “major cases,” “typical cases,” “typical technical cases” and the key points of decisions selected by the Chinese courts are reference cases with no universal application. These cases and the main points of decisions summarized on the basis of which reflect the judicial philosophy, trial ideas and decision methods of the Supreme People’s Court in handling difficult, complex and new types of IPR cases. Their role is to summarize trial experience, strengthen the promotion of the rule of law, and provide reference for judicial practice and legal teaching and research.⁹⁶

By its terms, Article 63 also does not explicitly refer to, nor require, that the cases are precedential. Nor does it limit its application solely to cases arising in a common law system. In this respect, the travaux préparatoires (negotiating history) of the TRIPS Agreement is of legal significance under the Vienna Convention on Law of Treaties (Art. 32). The negotiating history indicates that there was a specific rejection of a Swiss proposal on October 1, 1990, to substitute “precedential value,” in favor of “general application.” Since the conclusion of the TRIPS Agreement, the language around what constitutes cases of “general application” has undergone little further clarification.⁹⁷

Application of Article 63 of TRIPS to Chinese SEP jurisprudence will ultimately entail careful consideration by a WTO panel of China’s evolving practice in using cases to guide judges and rightsholders, including their specific application to China’s recent ASI cases. This judicial practice is not unique to SEPs and has been widely used in IP. For example, a number of Chinese local courts recognized the significance of their “big” trade secret cases shortly after China amended its trade secret law.⁹⁸ Cases that have also sought to address the risks presented by parallel IP litigation have also had this recognition.⁹⁹ These cases generally fall within the category of “judicial normative documents.” This category of documents includes “trial practice documents, guiding cases, and reference cases.” According to Professor Susan Finder, “judicial normative documents are often cited by courts as a supplementary legal basis for a judgment and judges will recognize their validity and implement them in their judicial decision making.”¹⁰⁰

There is ample evidence that Chinese judicial institutions are utilizing precedents for various kinds of guidance, whether or not they are being cited in cases and despite a commitment in China to civil law norms.¹⁰¹ Dr. Zhao Hong, a former member of the WTO appellate body and MofCOM official, has similarly noted that “though the legal theories or concepts of the two major legal families [civil and common law] differ significantly, their practices actually have achieved similar effects in maintaining the consistency of decisions by judiciary bodies.”¹⁰² Widespread utilization of case law databases may also constitute a form of case “general application” by lawyers, litigants, policymakers, academics, and judges that use these services. As of May 22, 2022, the official Chinese judicial database alone had 87,284,333,307 hits since it first launched in 2013, with a library of over 132 million documents.¹⁰³ There are also private IP case law databases, which have additionally attracted significant usage for their search functions as well as the value-added services that they may provide.

Despite the great interest in cases and case law, SEP adjudication is not highly transparent. As a starting point, only about 46–54% of final patent decisions are published.¹⁰⁴ Only about 18% of SEP cases from 2010 to 2019 in the Chinese courts have been reported in a published decision of some kind.¹⁰⁵ Approximately 75% of these cases involved foreigners, and 96% of the cases were in the ICT sector. The data was sourced by contacting Chinese courts individually. It is especially difficult to estimate the percentage of interim behavior preservation measures that are published, as Chinese law does not require publication of nonfinal decisions. This general lack of transparency mandated that the opening paragraph to this article include the disclaimer that the discussion herein is based on “published data.” Non-publication or unofficial publication of cases can occur for many reasons and limits the ability to draw authoritative conclusions based on published data.¹⁰⁶

Since the early spate of ASI cases involving SEPs in China, there have also been several newer cases involving foreign SEP assertions, none of which have been officially published as of this writing (May 2022). The failures to publish cases may suggest a waning enthusiasm for ASIs, as they were previously granted. Many of these cases involve parallel litigation in other countries and may therefore be ripe for an ASI. These cases include Coolpad v. Pantech;¹⁰⁷ Oppo v. IDC;¹⁰⁸ ZTE v. Tinno Mobile;¹⁰⁹ and Oppo v. Nokia.¹¹⁰ The delayed availability of the Lenovo v. Nokia decision is another indication of possible substantive changes in China’s ASI practice as well as the continuing challenge of limited judicial transparency. A further indication of controversy around China’s practice of ASIs is the lack of information on any ASI cases in Wuhan, which had been an initial center for ASI litigation. Perhaps the EU case will bring additional pressure on both transparency and ASI reform. One Chinese scholar who favors reform of China’s ASI regime has pointed to the EU WTO case itself as an example of the evidence that the system and its implementation need to be “further perfected.”¹¹¹

While the lack of full transparency in judicial decisions in China is problematic with respect to these five SEP decisions, it is arguably even more problematic with respect to the SEP decisions to date or the several hundred thousand IP cases decided each year. It also remains impossible to address broader concerns, such as national treatment, without recourse to a complete judicial database where foreign and domestic litigants can be fully compared. Nonetheless, the relatively few ASI decisions and their legal significance underscore that the EU request has been limited in scope and should also be relatively easy to address for China.

B. Extended and Opaque Ex Parte Decision-Making

Another transparency concern involves the disclosure of information to adversely affected parties in the issuance of an ASI. Concerns about a lack of transparency in ex parte ASIs have also been voiced by the Office of the United States Trade Representative in its annual Section 301 Report for 2021:

Right holders have also expressed strong concerns about the emerging practice in Chinese courts of issuing anti-suit injunctions in standards essential patents (SEP) disputes, reportedly without notice or opportunity to participate in the injunction proceedings for all parties. Since the first issuance of such an anti-suit injunction in August 2020, Chinese courts have swiftly issued additional anti-suit injunctions in other SEP cases. Several of these anti-suit injunctions are not limited to enjoining enforcement of an order from a specific foreign proceeding but broadly prohibit right holders from asserting their patents anywhere else in the world.¹¹²

Article 50 of the TRIPS Agreement sets up a skeletal standard for notice to affected parties of a provisional measure:

50.2 The judicial authorities shall have the authority to adopt provision measures inaudita altera parte where appropriate, in particular where any delay is likely to cause irreparable harm to the rightsholder.

50.4 Where provisional measures have been adopted inaudita altera parte, the parties affected shall be given notice, without delay after the execution of the measures at the latest. A review, including a right to be heard, shall take place upon request of the defendant with a view to deciding, within a reasonable period after the notification of the measures, whether these measures shall be modified, revoked or confirmed.

Application of Articles 50.2 and 50.4 to Samsung v. Ericsson, as one example, suggests that China may not be affording adequate opportunities to be heard in ASI litigation. In that case, Samsung sued on December 7, 2020, in Wuhan (qisu/起诉). Ericsson filed its case in Texas on December 11, 2020. Samsung filed its request for an ASI on December 14, 2020. The ASI was issued on December 25, 2020. There is no record of service or notice having been delivered to Ericsson for the initiation of the case, or on the motion for an ASI, although a minimum of 11 days had passed since Samsung requested its ASI. Article 100 of the CPL would otherwise require the court to decide within 48 hours if there is an emergency. By these domestic and international standards, the 11-day delay undercuts the argument that the provisional measure was necessary due to the possibility that “any delay” in granting the ASI would cause irreparable harm. This period was also more than adequate for a court to deny a motion to grant an ASI inaudita altera parte. On December 17, 2020, Samsung notified Ericsson of the Chinese action but did not provide Ericsson with any of the filings from the Chinese action. The Chinese civil complaint was not provided to Ericsson until December 22, 2020, or three days before the ASI motion was granted.¹¹³

These are not, however, the only periods of opacity in a Chinese proceeding involving an ASI. A party initiates a case by “suing” (qisu/起诉). When a party “sues,” it should file a complaint that meets the criteria set forth in Article 122 et seq. of the CPL, including setting forth the cause of action (Art. 124). The court has seven days to “accept and review” (shouli/受理) the complaint. After acceptance and review, the case will be “established” (li’an/立案). This process is generally not open to the public but could provide a starting point for notice to be delivered to an affected party. The Case Acceptance Division of the courts at one time also had primary responsibility for issuing preliminary injunctions in IP matters, the predecessor remedy to Article 100 (now 103) of the CPL.¹¹⁴ It is quite possible that Samsung had given notice to the Wuhan Court of its intent to seek an ASI when it originally filed its complaint with the Wuhan Court, one week before case acceptance. If so, this may further militate against a finding that delay would cause “irreparable harm,” given a delay that was 18 days from initial case filing, or 11 days from case acceptance.

Judge Gilstrap noted in the US counterpart to the Chinese case, Ericsson v. Samsung, that there is no Chinese “PACER”-type system making nonfinal judicial order publicly available (PACER, an abbreviation for Public Access to Court Electronic Records, is an electronic public access service for US federal court documents). Ericsson moved the court to require Samsung’s counsel to “promptly send documents filed in the Chinese Action to Ericsson.” Unfortunately, Judge Gilstrap denied this request to avoid the court “insert[ing] itself into matters of Chinese law or civil procedure” and because “it is not for this Court to require Samsung to operate in a foreign jurisdiction as though it were here.”¹¹⁵ As the TRIPS Agreement is not self-executing, Judge Gilstrap was not obligated to consider whether the lack of notice provided by China comported with China’s TRIPS obligations in his comity analysis. Nonetheless, reference to TRIPS might have been helpful, as it could have helped the court avoid requiring imposition of a US-centric standard that Judge Gilstrap thought would otherwise be inappropriate. The perspective that China’s procedures for ASIs should be understood in purely Chinese terms was also shared by former Supreme People’s Court IP Tribunal Chief Judge Kong Xiangjun, who submitted an expert declaration in Ericsson v. Samsung regarding Samsung’s lack of notice of its filing on December 14, 2020, that resulted in the court issuing its Christmas Day ASI: “Samsung’s notice in Wuhan lawsuit is consistent with the common practice under civil proceedings in China, where Samsung may choose to notify or not, or may choose to notify the other party of the lawsuit at any point in time. It is in line with the common practice of Chinese litigation.”¹¹⁶

Whether or not Chinese practice is in accordance with Chinese law, courts in the United States and in third countries have raised serious objections to China’s lack of transparency in its ex parte decisions, including the failure to advise counsel of pending decisions. The Delhi High Court in Interdigital Technology v. Xiaomi Corp & Ors. (May 3, 2021), after reviewing six separate times when counsel for Xiaomi had appeared before the court without revealing that it was undertaking steps to take away the court’s jurisdiction, stated that “the manner in which the defendants have acted borders on fraud, not only with the plaintiffs, but also towards this Court.”¹¹⁷ The Court also imposed a fine in the form of an indemnity against any penalty imposed by the Wuhan Court on IDC, the plaintiff in India.¹¹⁸ Former Federal Circuit Chief Judge Paul Michel noted in his amicus filing in Ericsson v. Samsung that Samsung’s behavior “raise[d] significant concerns about … sufficient notice and due process.”¹¹⁹

Foreign counsel may also bear some responsibility for this lack of transparency and unwillingness to inform foreign courts of pending ASIs. In another US case, Judge Sleet in Delaware, on hearing that he had been misled by ZTE into granting an ex parte ASI against Vringo’s global patent campaign by not being informed of an ongoing SEP case in the Southern District of New York in violation of the Federal Rules of Civil Procedure, Rule 65, noted that Vringo could have been within its rights to “lay [the judge] low” for granting that motion based on these misrepresentations of counsel. Judge Sleet promptly retracted his prior ASI.¹²⁰

“Submarine” ASIs of the type described previously raise difficult questions regarding how to accommodate two jurisdictions’ differing procedures, cultures, and professional behavior.¹²¹ Courts may not feel obligated to disclose key nonfinal decisions, service of process may not have been officially effected for initiation of the case, counsel may claim that there are violations of fundamental notions of due process or at least TRIPS obligations, and affected countries may complain of a lack of transparency. Judges may also raise concerns about the ethical responsibilities of counsel to inform bench and bar of developments affecting a court’s jurisdiction. Hearings and deadlines may be timed to conflict with national holidays. The issues of civility and professional responsibility raised by such decisions have thus far been handled inconsistently by courts throughout the world and are worthy of further research.

IV. Conclusion

China’s ASI regime is distinct from those of common law systems in many aspects. The most important distinctions may be its exclusively extraterritorial orientation and its high degree of politicization and experimentation. China’s lack of transparency also acts to shield China from an understanding by outsiders of its practices and maximizes China’s regulatory flexibility. Whether or not the legal regime is a transplant,¹²² it is not exempt from justified criticism, particularly if the transplant precipitates such undesirable consequences as not providing adequate respect for the jurisdictional priorities of other courts, limiting access by the public to key decisions, inducing attorneys to deceive their colleagues or a tribunal, or potentially depriving parties of adequate due process. These distinctions may suggest that other terminology, such as a “false friend,” may be more appropriate in describing how China’s ASIs function in practice.

Due to the continuing lack of transparency, it may be several years before we fully understand the impact of this particular transplant on China’s legal system as well as the impact on the global ecosystem for licensing SEPs.

11 Patents and Competition Commercializing Innovation in the Global Ecosystem for 5G and IoT

Hon. F. Scott Kieff and Thomas D. Grant

I. Introduction

For many decades, the products and services provided for and from our information and communication-related industries have required an ever-increasing number of technologies, many of which are patented, often from many firms, and often across several national borders. As the fifth generation (5G) of these communication tools gets deployed, users are enjoying vastly improved performance. 5G use cases include a broad range of applications, from enhanced mobile broadband for personal and autonomous communications, data processing, and entertainment devices, as well as massive levels of inter-machine communications needed for smart factories and cities, to ultrareliable and low-latency communications needed for potentially dangerous activities like self-driving cars and remote surgery. In turn, this is leading to newer uses and more complex interactions, such as those needed to support the Internet of Things (IoT) – as when home appliances and cars are directly communicating with each other, as distinct from the internet of devices that facilitate communications among humans, like personal computers, tablets, and phones. IoT use cases include smart homes, smart cities, telemedicine and telehealth, human and cyber security, building management, agriculture and aquaculture management, green energy management, enhanced and remote monitoring, and control of vehicles and other physical assets. To achieve these applications, a vast number of interactions and interconnections must take place, which in turn require immense transacting and private ordering, including a great deal of standard-setting.

Standards are the agreed-upon conventions that users of particular technologies follow to facilitate interoperability, like driving on the right or left side of the road to improve traffic flow and safety. Some standards are set informally through various coordination mechanisms, including passive ones, while many are set formally through active engagement among many participants in standard-setting organizations or standards development organizations (SSOs or SDOs). For 5G and IoT, standards are a significant part of the business ecosystem – such as standards for how cellular modems, Wi-Fi radios, or electronic memory operate – as well as a significant part of policy debates.

Early in the process of developing a given technology, an inventor might elect to seek patent protection instead of trade secret protection and might seek to advertise the invention or even encourage the development of standards to permit, require, or in some other way evolve to increase the value of the inventor’s technology. Similarly, an implementer might, while totally unaware of a particular invention, inventor, or even standard, invest heavily in some capital expenditure, such as a multibillion dollar chip fabrication facility (“fab”), or set of commercial relationships. Concurrently, other parties may be contracting with the inventor or implementer to buy, sell, license, coinvest, codevelop, or co-deploy in any of the relevant asset markets, including the markets for technologies, employees, equipment, investment, and corporate control. Third parties are also making investment decisions along the way, often choosing to remain third parties by designing around and avoiding either the inventor or the implementer and their respective investments.

A significant amount of subsequent time after an invention is made is almost always then also involved, for two main reasons. One reason is that technological and business development are inherently time-consuming, expensive, risky endeavors with a mix of first-mover and second-mover advantages. It can take up to a decade or longer for a new technology to be brought to market in the form of, or as a component of, a particular product or service. Getting inventions put to use by consumers or even businesses often takes a large amount of subsequent development. Not many practical solutions – products or services – emerge fully developed and perfected like the mythological Athena from the head of Zeus, as if necessity alone were the instant mother of every invention and every end-use later developed for that invention.

The second reason is that nearly all modern patent systems are inherently premised on a significant government examination of the patent application to make an evaluation of the formal requirements of the patent application and a preliminary evaluation of the legal and technological substantive requirements of the patent application.¹ This process of patent prosecution by the applicant and patent examination by the patent office often takes about two years, or much longer.² The major contributor to this time delay is the effort needed to get even a rough assessment of the relevant technological field of art so that the patent law conditions of novelty, nonobviousness, and disclosure can be assessed against the benchmark of the state of this prior art.

While all of that time is passing and all of these many actors are taking their own steps toward technology development, it is important to keep in mind that the patentees often will have filed their patent applications before moving too far into the marketplace or allowing too much time to lapse after inventing, in part because modern patent systems have rules that strongly encourage early filing, and in part because of what is often called the Arrow Information Paradox. Named after Nobel Prize-winning economist Kenneth Arrow,³ the gist of the paradox is that it is hard to sell new information like an invention without giving potential buyers enough of a taste for them to formulate their level of appetite for it. But if they have been shown enough of it to really understand it, they wouldn’t need to pay to make use of it. Having a patent application filed helps crack the paradox by turning someone using technology that may become patented into a potential infringer unless they strike a deal with the patentee for a sale or license of the patent.

In the middle of all of this wondrous complexity, a day – or decade – in the life of a commercial enterprise trying to implement a new technology can be viewed as quite hard. The technological and business challenges are exacerbated by the legal risks flowing from the reality that each issued patent gives its patentee a right – supported by the vibrant market for litigation financing and intermediaries like patent assertion entities (PAEs), which are sometimes called “patent trolls” – to threaten or actually bring various patent infringement lawsuits. These suits may include civil litigation in district court to allege patent infringement. Those district court actions typically seek damages, and these days, in some cases, also injunctions. Meanwhile, another type of patent infringement suit can be brought asking the United States International Trade Commission (ITC) to initiate an investigation that may lead to an order excluding the relevant articles from entry into the US market. The billions of dollars and vast human capital spent building that fab and those commercial relationships may be threatened, with each lawsuit or investigation alleging patent infringement typically costing up to ten or more million dollars in legal fees and associated expenses, often lasting five to seven years or longer in the case of district court litigation. And all of that is before appeals to the US Court of Appeals for the Federal Circuit, and possible appeal from there to the US Supreme Court. Even the mere threat or the mere initiation of these types of patent infringement proceedings can cause turbulent waves in the markets, whether they be the markets for the products the implementer wants to sell, the markets for commercial collaborators, or the markets for finance and corporate control. Critics of patent enforcement express great concern about the overall disruptive impact that patent enforcement and its threat can have on large technology-implementing companies like those of Silicon Valley fame.

But there is another side to the coin, with implementers on one side and patentees on the other. Disruptive too is a day – or decade – in the life of a patentee trying to commercialize a patented invention. Implementers also have their own rights around patents owned by others, which are also supported by the vibrant market for litigation financing, including to bring district court litigation seeking a declaratory judgment that the patent is invalid – which involve similar time and expense to those of infringement litigation – as well as to bring or help others bring a plethora of post-grant review procedures in the patent office to cancel some or all of the claims of an issued patent. As with the turbulent waves that implementers face from the mere threat or initiation of infringement proceedings, patentees face similar market disruption from the mere threat or initiation of invalidation or cancellation proceedings. Especially for small early-stage ventures, this can cut off the vital access to financing that they need to even keep afloat as a going concern.

A great amount and variety of coordination mechanisms must be used well for all of this to occur relatively effectively and efficiently. In all of them, timing plays an important role, because there is a great deal of path dependency at stake, for almost everyone involved. One common coordination tool used in these settings is to have the SSOs deploy various approaches to facilitate the broad licensing of any patents that may be helpful or essential (so-called standard-essential patents, or SEPs) to practice a given standard. One such approach is to require parties to disclose pending patent applications, or to suggest which patents in a potentially large population of candidates are truly most likely to be adjudicated, infringed, and not invalid in a suit against those practicing the standard. Another such approach is to encourage or require that patentees participating in the SSO must make a commitment to license their patents on reasonable and nondiscriminatory (RAND) terms or fair, reasonable, and nondiscriminatory (FRAND) terms to those practicing the standard.

It may seem that many of these complexities, coordination challenges and opportunities, or risks or rewards is new, posing new questions calling for new policy responses. But that is not the case. They have each long been studied by scholars of the history of the interface between the patent and antitrust systems, in both the empirical economic literature and the legal literature.⁴ The upshot from the empirical economics literature is that a property rights approach to patents focused on commercializing innovation facilitates competition and access. This positive effect is evidenced by large decreases in quality-adjusted prices and steady ongoing entry even into markets for information and communications technologies with large numbers of patents and standards that are the focus of the debates about 5G and IoT.⁵ The upshot from the legal literature, which is the focus of this chapter and explored in more detail later, is that such a property rights approach to the patent system gives clear guidance about which choices to make between particular versions of the detailed legal rules actually implemented across the patent system, from those governing patent validity to those governing patent transactions and patent enforcement. These different legal rules and mechanisms enable patents to be so helpful in facilitating the vital coordination needed for the commercialization of new technologies.

II. Property Approach to Patents Has Support across the Political Spectrum

Debates about patents have long focused on the patent-antitrust interface.⁶ Especially in this context, the views offered about patents by antitrust enforcers⁷ have generally focused on the role that intellectual property (IP) in general and patents in particular can play, on the one hand, in providing beneficial incentives to create or invent, and, on the other hand, in enabling harmful concentrations of market power leading to increased prices and reduced output. Such discussions often then focus essentially on how much of the “good” is enough, how much of the “bad” is too much, and trade-offs between them.

In effect, those discussions highlight a direct tension between IP as a helpful incentive to create or invent and IP as the cause of deleterious anticompetitive monopoly effects. They then offer various approaches to legal regimes to address both sides of the tension. One set of approaches includes the use of other inducements or rewards for creation or invention in the place of, or in addition to, IP, such as regulatory exclusivity, tax credits, grants, prizes, and the like. A second set of approaches exempts particular fields of technology from eligibility for IP protection, such as those having to do with health care, software, or finance, usually with the expectation of significant, frequent, and ongoing updates to the boundaries of these exempted fields. A third set of approaches decreases the remedies available for IP infringement, including damages, injunctions, and exclusion orders. A fourth set of approaches directly addresses interactions between IP owners and IP users, including heightened antitrust scrutiny, compulsory licenses, and governmental takings of IP licenses or the entire IP rights themselves. Many other ideas are also offered.

A common theme across these approaches is to view IP more in the tradition of public law, or as regulatory entitlements, by focusing on the use of more extensive interactions between governmental bodies and private parties. The overarching goals across different perspectives in the literature are generally shared and laudatory: fostering access to creative or inventive technologies, competition, economic growth, and diverse and inclusive participation; improving both efficiency and fairness for all.

These shared goals also are championed by an intellectual approach to IP that is different than those briefly mentioned earlier. This different approach – a commercialization approach – has been embraced across the American political spectrum, including both the Carter administration and the Reagan administration,⁸ as well as by celebrated jurists of the last century coming from diverse philosophical perspectives, including Circuit Judges Learned Hand, Jerome Frank, and Giles Rich,⁹ who saw it as important to helping the economy and society.¹⁰ The roots of a commercialization approach to patents, in particular, reach back even further into American history, including Abraham Lincoln’s view that the patent system “added the fuel of interest to the fire of genius, in the discovery and production of new and useful things.”¹¹

A commercialization approach to IP views IP more in the tradition of private law, as property rights, by focusing on the use of IP in interactions between private parties, including contracts. Centered on the relationships among private parties, this approach to IP emphasizes a different target and a different mechanism by which IP can operate. Rather than target individuals who are likely to respond to IP as incentives to create or invent in particular, this approach targets a broad, diverse set of market actors in general. This large group encompasses the creator or inventor as well as all those complementary users of a creation or an invention who can help bring it to market, such as investors (including venture capitalists), entrepreneurs, managers, marketers, developers, and owners of other key assets, tangible and intangible, including other creations or inventions. Another key difference in this approach to IP lies in the mechanism by which the IP assets and these private actors interact. This approach sees IP as a tool for facilitating coordination among these diverse private actors, in furtherance of their own private interests in commercializing the creation or invention.

This commercialization approach sees IP rights serving a role akin to “beacons in the dark,” drawing to themselves potential complementary users of the IP-protected asset to interact with the IP owner and each other, exploring through the bargaining process the possibility of striking contracts with each other. Focusing on such a “beacon-and-bargain” effect can relieve the governmental side of the IP system of the need to amass the detailed information required to reasonably tailor a direct targeted incentive, such as each actor’s relative interests and contributions, needs, skills, or the like. Not only is amassing all of that information hard for the government to do, but large, established market actors may be better able than smaller market entrants to wield the political influence needed to get the government to act, increasing risk of concerns about political economy, public choice, and fairness. Instead, each private party can bring its own expertise and other assets to the negotiating table while knowing – without necessarily having to reveal it to other parties or the government – enough about its own level of interest and capability when it decides whether to strike a deal or not.

Such successful coordination may help bring new business models, products, and services to market. It also can allow IP owners and their contracting parties to appropriate the returns to any of the rival inputs they invested toward developing and commercializing creations or inventions – labor, lab space, capital, and the like. At the same time, the government can avoid having to then go back to evaluate and trace the actual relative contributions that each participant brought to a creation’s or an invention’s successful commercialization – including, again, the cost of obtaining and using that information and the associated risks of political influence – by enforcing the terms of the contracts these parties strike with each other to allocate any value resulting from the creation’s or invention’s commercialization. In addition, significant economic theory and empirical evidence suggest this can all happen while the quality-adjusted prices paid by many end-users actually decline and public access is high. In keeping with this commercialization approach, patents can be important antimonopoly devices, helping a smaller “David” come to market and compete against a larger “Goliath.”¹²

A commercialization approach thereby mitigates many of the challenges raised by the tension that is the focus of the other intellectual approaches to IP, as well as by their responses to that tension. Many of the alternatives to IP that are often suggested, such as rewards or tax credits, can face significant challenges in facilitating the private-sector coordination benefits envisioned by the commercialization approach. While such approaches often are motivated by concerns about rising prices paid by consumers and direct benefits paid to creators and inventors, they may not account for the important cases in which IP rights are associated with declines in quality-adjusted prices paid by consumers and other forms of commercial benefits accrued to the entire IP production team as well as to consumers and third parties, which are emphasized in a commercialization approach. In addition, a commercialization approach can embrace many of the practical checks on the market power of an IP right that are often suggested by other approaches to IP, such as antitrust review, government takings, and compulsory licensing, while at the same time showing the importance of maintaining self-limiting principles within each such check to maintain commercialization benefits and mitigate concerns about dynamic efficiency, public choice, fairness, and the like.¹³

To be sure, a focus on commercialization does not ignore creators or inventors or creations or inventions themselves. For example, a system successful in commercializing inventions can have the collateral benefit of providing positive incentives to those who do invent through the possibility of sharing in the many rewards associated with successful commercialization. Nor does a focus on commercialization guarantee that IP rights cause more help than harm in all circumstances. Significant theoretical and empirical questions remain open about how the system can be improved overall.

III. Property Approach Is Rooted in the Early US Patent System

Governments in many countries have used patent systems since the Renaissance. The British Empire used them like special monopolistic privileges given out by the Crown to its favorites. And even the British started to rein in that approach. Our Founders knew about this history and deliberately took a different approach. They thought it was so important to give Congress the power to create a patent system that they included it in the unamended text of the original Constitution. The early American patent system was designed carefully to work differently than the British one in that it was purposely restrained by objective facts and not open to political discretion. Economic historians credit those differences to the success of the early American patent system. By the mid-1800s, Charles Dickens was describing in his short story “A Poor Man’s Tale of a Patent” how the unending bureaucracy of the British patent system not only failed to bring new inventions to market but also left inventors – as he wrote – “quite wore out, patience and pocket.”

In modern debates about patent systems, there is really no need to speculate or invent new arguments. We’ve tried many approaches and seen many results. There’s not much reason to expect the unexpected here. The more the patent system fills up with bureaucratic steps and administrative and policy discretion, the more they favor the large politically connected people and businesses, and the more both innovation and competition suffer. But the more the patent system turns on objective facts and clear and predictable rules, the more it increases the number of new technologies brought to market, the ability for diverse consumers to access those technologies, and the diversity in sizes among the businesses in the market. That system won’t be against big business; but it won’t so favor big business that it’s against small and medium-sized businesses as well.¹⁴

So often in today’s debates about patents, people ask us to imagine the old men in wigs with the technologies of the late 1700s and tell us that we have to update our patent system to deal with the new technologies of today and tomorrow. But that’s where the genius of the American patent system comes into play. Rather than decide who gets a patent based on politics and fashion, we designed our patent system to turn on facts about the prior art and objective questions like novelty. So we don’t need to update our patent system to deal with new technologies, because the only technologies that are patentable in our patent system are the ones that are new.

A similar attempt to question the core value of patents by looking to history is by invoking Thomas Jefferson’s skeptical take on patents. Not only was Jefferson a leading figure in early American government in general, as a principal drafter of the Declaration of Independence, our first Secretary of State, our second Vice President, and our third President, he also was an inventor and ran our first patent office. Yet, when it came to broader views about patents, he was quite skeptical about property rights in ideas, writing:

He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me ….

I know well the difficulty of drawing a line between the things which are worth to the public the embarrassment of an exclusive patent, and those which are not.¹⁵

While this certainly makes the skeptical case for having a patent system at all, once a patent system has been offered to inventors, the path dependency of their decision to abandon trade secrecy and instead seek patent protection on the expectation that patents will enjoy predictable enforcement as property rights leaves patentees especially vulnerable to holdup. Sticking with Jefferson’s metaphor of a candle, it’s important to bear in mind that blowing out someone else’s light doesn’t make yours brighter; it just darkens the scene for everyone.

IV. Commercialization Is Helped by Objective Adjudication Rather than Political Administration

Commercialization does not merely depend on the specific legal rules operating within the substantive fields of IP and antitrust themselves. It also is meaningfully helped by objective approaches to government decision-making and analysis more generally, such as those operating within the courts and agencies implementing the patent system. The ITC is a prime example of a tribunal that can provide objective adjudication for patents; and its success in this area is neither an accident nor hard to reproduce.

Much has been written about the vital need to have government agencies, including those in both the fields of IP and antitrust, conduct careful, scientific, fact-based, analysis, and decision-making, that accounts for diverse views and perspectives.¹⁶ When the ITC celebrated its 100th anniversary,¹⁷ it had occasion to remember the difficult task our Nation’s first Treasury Secretary, Alexander Hamilton, had to manage when figuring out how to finance the operation of our new central government while at the same time hopefully helping or at least mitigating the harm to our then-fledgling domestic manufacturing industry.

For the first century of its existence, the federal government was financed essentially with tariffs on imports. There was no income tax back then. It took until 1913 for the Sixteenth Amendment to our Constitution to be ratified, giving the federal government the power to raise revenue from sources internal to the country such as via a tax on income.

Tariffs on imports can raise money for a national government. But that will only work to the extent that imported goods continue to flow into the country despite rising prices paid by purchasers. Tariffs also can protect domestic industries, including the then-fledgling manufacturing sector, from foreign competition in finished manufactured goods. But that will only work so long as the tariffs don’t also cover imported inputs to domestic manufacturing processes. Tariffs also can trigger reciprocal tariffs that can hamper exports. It can be tricky to figure out the net impact of these several forces that point in opposite directions.

Although sometimes seen as an attempt at protectionism, Hamilton’s effort brought a scientific approach to bear on these questions, which led him to compile a “Report on the Subject of Manufactures” as a study of this dynamic system and to offer more balanced recommended policy actions informed by such as study.¹⁸ To be sure, Hamilton’s report was just an initial effort; and the intense debates and problems surrounding the dynamic impact of tariffs continued for about a century until, together with slavery, they brought our country to war with itself in the Civil War.

By soon after the end of the Civil War, the confluence of two factors brought much-needed help. First was the evolution in the state of the art in economic science, including a much better understanding of how to gather data and analyze it. The second was the suggestion by Frank Taussig, Chairman of the Economics Department at Harvard, for a new approach to a government agency in this area.¹⁹ That new agency model, attempted a few times after the Civil War, eventually became the ITC. It has a few key structural characteristics that being replete with checks and balances coerce behavior that is collaborative, independent, analytical, and professional, while punishing prerogative. While many of the Bi-Partisan-Commissions in the US government are led by an odd number of Presidentially-Nominated-and-Senate-Confirmed Commissioners (usually five), the ITC is designed for deadlock with an even number: six. While most of the other Commissions have a Chair who generally can serve until replaced by the President, the ITC Chair is required to switch person and party every two years, among the existing Commissioners. And, at the ITC, the Commissioner terms are longer than at many of the other commissions (nine years) and generally nonrenewable, thereby further reducing incentives for responsiveness to pressure from politics and intellectual fashion. This unleashes and empowers the vast talent of our several hundred staff of professional economists, industry experts, and lawyers to do the sometimes unthinkable within organizations: call the shots like they see them.

While the ITC is, like the federal courts, deliberately structured to be removed from the political influence of only one political party, the Department of Commerce’s Patent Office, which operates the post-grant cancellation procedures for patents, as well as the Department of Justice’s Antitrust Division (DoJ), are ordinary Executive Branch agencies directly responsive to the political leadership of the President. Similarly, the Federal Trade Commission, which also conducts antitrust enforcement like the DoJ, is only somewhat less directly responsive to political influence, because it is structured as a five-member agency with a Chair appointable and removable by the President, backed up by a majority in the President’s party.

In addition to important differences in how these tribunals are structured internally, there also are important differences in how their basic substantive jurisdictional limits exacerbate the incentives for party advocates to engage in hyperbolic arguments. While the ITC and the federal courts have substantive power to simultaneously address issues relating to patent validity, patent infringement, remedy, and antitrust, the Patent Office, like the DoJ and FTC, do not. The Patent Office can only assess patent validity; and the DoJ and the FTC can only assess antitrust. When all four topics are in dispute within a single tribunal, each side of the case has powerful self-disciplining effect to make arguments more grounded in the record. The patentee has the selfish incentive when arguing about infringement and remedy to argue that the patent claims are broad (thereby sweeping in more infringements), but it also has the countervailing selfish incentive when arguing about validity and antitrust to assert that the patent claims are narrow (thereby avoiding the prior art and avoiding excessive market power). At the same time, the opposing party has the exact opposite set of mutually countervailing incentives. As a result, each side engages in self-restraint, providing the tribunal with a much more elaborate and thoughtfully presented (less hyperbolic) set of evidence and arguments.

The combined effects of more internal independence and less hyperbolic arguments from advocates help courts and the ITC reach more reasoned determinations that are more transparently grounded in the record. Simply put, they enjoy the greater opportunity to be more informed by more diverse opinions and perspectives, and they face more discipline to ground their opinions in the public factual record.

One example of this politically diverse and independent approach of the ITC acting at the IP-antitrust interface is the several views that emerged engaging the specific factual record of the actual negotiating and litigation behavior of actual parties to an IP dispute in the Amkor v. Carsem “encapsulated integrated circuits” case involving the standard-setting organization called “JEDEC.” In that case, four of the six Commissioners provided additional views exploring various procedural safeguards akin to waiver and estoppel to maximize fairness and the ways that specific conduct of both the IP owner and the IP user can give rise to symmetrical concerns about holdup and reverse holdup.²⁰ Similar symmetrical concern for such procedural and substantive nuances is elaborated in the European Court of Justice’s (ECJ) Huawei v. ZTE decision, which may suggest the emergence of an international norm, at least for those parts of a government designed to operate more removed from the direct influence of only one political party.²¹

V. Intellectual Property Is Not That Different from Tangible Property

With tangible property like land, a car, or a cell phone, the property right includes a right for the owner to use the thing covered by the property right. If you own land, a car, or a cell phone, you can basically use it without needing permission from other people. The government likely will regulate your use in many ways; but if the government so restricts your use that you can’t use it at all, then you probably have a claim against the government for just compensation due from their taking.

With intangible property like IP, the main and basically only right that the owner gets is the right to exclude other private people or businesses from infringing. That means that if the IP owner can’t actually enforce that right to exclude, there’s not much incentive for infringers to avoid infringement or to negotiate for a license or purchase of the IP. That’s why the right to exclude is so important for IP.

With tangible property like land, a car, or a cell phone, everyone can easily tell if someone is using it, because you can see them on the land, in the car, or holding the phone. With intangible property like a mortgage, a share of stock, a bond, or a patent, we have to read the detailed written words to know what the thing is, what its boundaries are, and who is using it. The right to exclude is the only way IP owners can easily keep track of who is using their IP and at the same time easily interact with those users so that everyone can make informed choices about whether to infringe, negotiate for a license or sale of the IP, or design around the IP to avoid infringement.

For many forms of both tangible and intangible property, we can look to a government registry to tell who owns it. Those registries are not perfect, and it can take real time to comb through them to find what you might be looking to target or avoid. But much of that work gets done by owners of those assets when they knock on your door or write you a letter and tell you why you should consider taking a license under their patent or buying their patent. You surely won’t take their word for it that you should, but you also know now what your lawyers should read and consider before you decide to invest billions of dollars in a new product line that might infringe some of those patents.

Users of patented technologies complain they are too often surprised to learn they are infringers because patents can be hard to interpret. While some legal instruments are harder to interpret than others, the legal rules for each kind of instrument set the standard. In many of the patent cases that have made headlines over recent years – like eBay v. MercExchange, TiVO v. Echostar, and i4i v. Microsoft,²² the patents were adjudicated to have fully met each of patent law’s disclosure requirements – including enablement, written description, and definiteness. While we should always consider the pluses and minuses of making objective disclosure rules like these somehow more demanding on the patentee, there will always be a zone of uncertainty between what a patent does and does not cover.

But however uncertain things may be in some settings, we shouldn’t forget that in eBay, TiVO, and i4i, the patent infringements were adjudicated to have been willful. That means the infringer knew or should have known its conduct was wrong. It stretches the definition of surprise to reach a case where a lawyer’s legal advice would have told – or did tell – the user of the patented technology that its use would be adjudicated to be infringement.

The intangible nature of patent rights is not a reason to allow parties willfully to ignore those rights. Quite the opposite: It is the very reason society has predictable rules and reliable and transparent procedures for the enforcement of those rights. Imagine you own an electronics shop and come in one morning to find a broken window and some items strewn across the floor, but it’s hard to tell exactly what has been stolen. At least with tangible property like phones or chips or any physical goods in a shop you can count your inventory and see what was stolen. But, even with a theft like this of physical goods, your insurance company will still require a report by the police investigators verifying what’s been taken before they cut a check to cover the loss. With intangible property like a patent, you also need a process to sort out the facts, and perhaps even more so, because you might only imperfectly know exactly what a thief has taken. Patent infringement suits help everyone in the market figure how many of each specific type of inventory has been taken, whether the USPTO somehow made an error, and what remedies are appropriate. That’s why patentees often go both to the court and the ITC at the same time. The court has the full panoply of remedies in its tool belt, but takes much longer, usually several years, to reach a judgment. The ITC has many fewer remedy tools in its tool belt, but goes faster, and carries out at least as full and fair an adjudication that helps everyone in the market get a full and crisp picture of what actually has happened. It also happens to be the only venue in the US patent system today where a patentee who wins an adjudication of patent infringement has a reasonable likelihood of securing an injunction-like remedy, which at the ITC would be either an exclusion order to keep particular goods from being imported into the country or a cease and desist order preventing particular parties from taking particular actions.

Several long-standing doctrines of tangible property offer important lessons about how property rights in patents can accommodate the real apprehensions that implementers of patented technologies may be truly surprised to learn they are infringers. Property law doctrines that govern cases of a mistaken improver of another’s personal property or a mistaken building encroachment on another’s real property operate to protect both the interest of the mistaken infringer and the interests we all share in protecting property – including the interests of non-mistaken owners, second parties who may have invested in transacting with the owners, and non-mistaken third parties who may have invested in avoiding the property, such as by designing around the patented technology. These property doctrines go far in vindicating the accidental infringer’s holdup or hassle costs due mostly to path dependency (why tear down the big building built an inch over the property line?). They also go far in vindicating the autonomy interests (and emotional interests in expressing exasperation) of the property owner, second parties who elected to transact with that owner, and third parties who paid to get better surveys and design around that owner’s lot. The way property law meets those dual goals is not by making the property interest invalid or unenforceable, merely because of “innocent” infringement or evidence of “spite” in the suit. After all, aren’t we all allowed to reveal emotional pique when our autonomy and financial interests are aroused due to the unilateral acts of an infringer, however “innocent” or “accidental” the infringement? The way we meet those dual goals when it comes to building encroachments and mistaken improvements is that we tailor the remedy.²³ And, of course, the tailoring of the remedy to account for “spite” would include all of the usual tools our legal system uses to police bad faith litigation, including Rule 11 of the Federal Rules of Civil Procedure, that even the pro-patent Federal Circuit showed it would use against bad faith patentees who brought baseless litigation suits as in cases like Judin v. US, which was decided at a time when critics of a property rights approach to patents saw the court as being too property rights oriented.²⁴

Other long-standing legal doctrines set a very different backdrop than suggested by patent critics concerned about implementers surprised to learn they are infringers. Implementers may very well be surprised by a patent if they did not copy the patent or derive from it. But whether an implementer has copied or derived from a patent is not relevant to the basic question of patent infringement, because the infringement doctrine of the patent system is deliberately different than the infringement doctrine in the copyright system. Infringement determinations in the patent system focus on the scope of the written claim in the patent, while infringement determinations in the copyright system focus on copying of or deriving from an earlier work of creative expression. Implementers similarly may have excellent legal title to the physical goods they use when infringing a patent, whether by bona fide gift or good faith purchase. But legal title to physical assets is no bar to infringement under any of the intellectual property regimes, just as it is no bar to enforcement of the many regulatory regimes. Implementers may also be surprised about infringement if they thought some third party had a better claim to the patent’s title than the patentee. But our property law systems have since Roman law rejected the doctrine known as the jus-tertii defense that otherwise would stave off a property enforcement action brought by an owner due to the possibility of some third party with a potentially better claim to ownership.

At the same time, shifting the balance back toward patent enforcement from antitrust enforcement doesn’t eliminate antitrust enforcement. There remains plenty of room for ordinary antitrust enforcement where there is actual other evidence – other than the mere presence of a patent – of actual market power. There also remains plenty of room for antitrust action where the patent was procured with knowing fraud as in Walker Process, or when the patent enforcement is “a mere sham to cover what is actually nothing more than an attempt to interfere directly with the business relationships of a competitor” as in Handguards and is both objectively baseless and subjectively motivated to cause harm to the market as in PRE.²⁵

VI. Recent US Patent System Innovations Harm More Than Help Innovation

The major changes to the patent system over the past two decades, some through Congress and some through the courts, have harmed innovation, competition, and national security. They have all operated to do basically two things. One is to drastically shift many of the specific legal rules about patent validity, patent infringement, and patent transactions from generally turning on objective facts applicable the same way to everyone to generally turning on subjective discretion finely tailored to each different user. The second is to drastically add to the number and strength of administrative and bureaucratic procedures available to keep a patent from being enforced in court or at the ITC.²⁶ It’s as if we read Dickens’s story “A Poor Man’s Tale of a Patent” and decided that the tragic caricature of a broken patent system that he was telling everyone to avoid was something we should actually seek out and put into place.

Whenever a commercial law system is so finely adapted to policy preferences of politically motivated government actors and subjectively tailored by them to each different use and user, the only kinds of businesses that can engage that system are the huge politically powerful ones. Property rights are at their worst when they are created and changed and erased at the discretion of the government, and when private actors have to include the government in every decision about whether to bundle, divide, or license or sell the property rights. That kind of system forces market actors to constantly deal with the government, and that always favors big players with more political power. That just concentrates wealth and power.

When a property rights system is working well, the rules of the game are predictable, applicable to everyone, and private actors are generally given broad flexibility to bundle or divide and license and sell the property rights among themselves. That kind of system forces market actors to constantly deal with each other. That drives competition, innovation, economic growth, and jobs.

So, what are some principal reasons that large companies might like a patent system chocked full of weak patents? The big picture is that large firms have other ways to earn rents than relying on strong patents and many ways to earn rents that rely on weak patents. The BigCos can use weak patents to extract a range of significant economic benefits from various market regulators. For example, regulators focused on antitrust, consumer safety, the environment, or food and drug administration may see a BigCo’s portfolio of weak patents as sufficient evidence of innovation to justify more regulatory relief or leeway over pricing. Similarly, regulators focused on tax treatment of inter-business and international transfer pricing may see a BigCo’s portfolio of weak patents as appropriate offsets against sources of income that otherwise would be taxed at higher rates. Importantly, these BigCo benefits from portfolios of weak patents often can be extracted even if the patents are very weak, because unlike any of these regulatory or tax authorities, alleged infringers have strong incentives, expert access to technological facts, and expert ability to evaluate the host of issues that ordinarily arise in the context of a possible or actual patent infringement litigation in district court or at the ITC. But little firms have a vital need for strong patents and little use for weak patents, and the little firms face significant costs from the BigCos raising all available arguments against even the strongest of patents. Hence BigCos love a patent system full of lots of weak patents. The Goliaths can then be sure no Davids will show up with a fatal slingshot.

It is so tempting to think that IP is just about money and that money damages, or maybe even tax credits or other direct targeted incentives are all that is needed. Why gum up the works of the market with so many injunctions?

The better question is to ask why it’s best to have the government figure out everyone’s relative contribution, or merit, and trace it all the way through a complex commercialization process, and then pay each person her due, which presumably is just enough to entice them away from their other options to do each specific step, and no more and nothing else.

This ardent search for scientific evidence of the true value of an infringed patent is what unfortunately led even the distinguished Judge Posner to strike the economics experts of both sides of a patent case from offering damages testimony, because he viewed them as insufficiently grounded in scientific evidence or historical fact.²⁷ But where an infringer has decided to infringe rather than buy title or license to the patent, we also know the search for historical or scientific evidence of what price would have met the needs of both a willing buyer and a willing seller is entirely fictional. It will always be a frustrating search for scientific and historical fact when the specific topic has already been demonstrated to be a figment of imagination.

Commercializing innovative, creative, and distinctive goods and services requires a ton of coordination among a ton of private actors spread out across the marketplace. We are talking about much more than inventing or creating. We are talking about bringing it all the way to market. That takes a complex dance among inventors or creators, entrepreneurs, venture capitalists, managers, manufacturers, marketers, distributors, and owners of other key assets, tangible and intangible, including other creations or inventions.

When IP is governed by a predictably enforced set of rules and backed up by a right to exclude rather than a mere right to some payment, it stands like a beacon in the dark, drawing to itself all of those many different actors in the commercialization process. They can decide on their own to strike whatever deals with each other that they like, or not, and to practice the IP subject matter or design around. The government then needs to merely enforce whatever deals they strike. No player needs to reveal to any other player or to the government what outside options it is considering, or what internal economics it faces. That keeps the government far away from the need to do any fine-grained analysis of the specific merit and incentives that may have been best tailored to each step in the long and complex process of commercialization. The government doesn’t need to trace contributions or allocate values. All the government has to do is enforce any valid IP rights to exclude, and any contractual rights to payment negotiated by the parties on their own terms.

Justice Thomas is correct that a public right like a public franchise to build a toll bridge is something that requires intense scrutiny.²⁸ He’s also correct that the patent system that has evolved over the past 20 years has gone way too far in that same direction. But, of course, that’s just one more reason to steer course back to the patent system we had in the 1980s and 1990s. That was a patent system that brought us a massive increase in the number of new pharmaceuticals and new medical devices brought to market, while at the same time supporting both large pharmaceutical companies as well as a large pool of small and medium-sized biotechnology companies.

Notice also that the US patent system of the 1980s and 1990s was the product of both political parties in the United States. It also was unique to the United States. While many of the people and inventions and companies were located in Europe or Japan, only the patent system in the United States was operating so strongly at that time and that strong US patent system supported commercialization and competition for the world. It even supported the lesser-developed countries of the world. As those countries started to enforce these biopharma patents the same way as in the United States, distribution into areas of high poverty actually increased immensely while prices in those poverty-stricken areas did not increase beyond the small amounts associated with local regulation and distribution.²⁹

VII. Conclusion

Today’s technology and business professionals working to bring to market all the great promise of 5G and IoT are making an amazing contribution to our society today and tomorrow. Today’s legal and policy professionals wrestling on all sides of the debates about the patent-antitrust interface raise great questions, in good faith, with the shared goal of fostering a better and more diverse and more inclusive society for us all, today and tomorrow, fostered by innovation and competition. While the debates are of the moment, they are also echoes of those long waged at least across the past century and a half. A prudent policymaker of today can save a great deal of time, effort, and unintended consequences for all, by bearing in mind the ideas explored here, that are extracted from those historical debates and that have enjoyed great support from leaders across our domestic political spectrum.