Deep Dive Episode 260 – The EU’s Proposed Regulations of SEP Licensing and Litigation: A Solution or Setback for the Global Innovation Economy?
The European Union is considering adopting a wide-ranging regulatory regime for the licensing and litigation of standard essential patents (SEPs). Proposed for release on World IP Day (April 26, 2023), a leak revealed the EU plan to create an administrative tribunal to perform mandatory “essentialit
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
Introduction: Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.
On April 21, 2023, The Federalist Society’s Regulatory Transparency Project hosted a virtual event titled “The EU’s Proposed Regulations of SEP Licensing and Litigation: A Solution or Setback for the Global Innovation Economy?” The following is the audio from the event.
Sarah Bengtsson: Good afternoon and welcome to this Regulatory Transparency Project webinar. My name is Sarah Bengtsson, and I’m Associate Director of RTP here at The Federalist Society. Today, April 21, 2023, we are pleased to host a discussion titled “The EU’s Proposed Regulations of SEP Licensing and Litigation: A Solution or Setback for the Global Innovation Economy?” After the discussion, we will have an opportunity for audience Q&A, so please enter any questions you have into the Q&A function at the bottom of your Zoom window. Please note that as always all expressions of opinion on today’s program are those of the speakers.
Our moderator for today’s discussion is Urška Petrovčič, Senior Fellow at the Hudson Institute. Her work focuses on antitrust and intellectual property. Since 2017, Urška has acted as the European Commission’s nongovernmental advisor for the unilateral conduct working group of the international competition network. She was chosen as the inaugural scholar of the American Bar Association’s International Scholar in Residence Program, and there she conducted research in cooperation with the Office of Policy Planning at the U.S. Federal Trade Commission on antitrust enforcement concerning SEPs. In interest of time, I’ve kept my introduction short, but you can read the full bios for each of our speakers at regproject.org. Thank you all for joining and, with that, Urška, the floor is yours.
Urška Petrovčič: Thank you, Sarah, and thank you to The Federalist Society for having me here. It’s a pleasure to moderate this webinar on European Commission regulation on standard essential patents, a topic that has drawn so much attention during the last two weeks. So to understand better what the regulation is about, what are its potential benefits and what are the concerns with its adoption, we have with us a terrific panel of speakers. In alphabetical order, we have with us Jorge Contreras, professor of law at the University of Utah; Adam Mossoff, professor of law at George Mason University; and Elisabeth Opie, founder and principal solicitor at Opie International Technology Lawyers. Welcome, everyone.
So as you know, several weeks ago a draft of an EU regulation on standard essential patents was leaked. As it’s clear from the name itself, this regulation does not concern patents in general but rather introduces a specific regime for the so-called standard essential patents, which are patents that are essential to practice industry standards that have been developed through an open and comparative process. Example of such standards includes 4G, 5G. European Commission has been working on a regulation on standard essential patents for many years, so the fact that a regulation was being presented was not really surprising.
What was surprising for many was the content of the regulation. And let me be a little bit more clear about that. So many believe the European Commission regulation would introduce a procedure that would provide more accurate information as to whether patents that have been declared as essential to practice specific standards are essential in fact. And that’s because there is a concern that the current declaration process is not working very well, and there is insufficient transparency with respect to essential patents. And indeed, there is a part of the regulation that focuses on this topic.
However, the leaked version of the regulation contains much more, and most notably it includes a procedure for setting a cap on royalties for all SEPs that underpin a given standard. And it also includes a so-called conciliation process through which a panel of experts would determine royalties for these SEPs. And it was the introduction of this price setting mechanism that was a surprise for many.
And what was also surprising is that this price setting mechanism would not be performed by courts but by an administrative body within the EU intellectual property office, which is not the patent office but rather is the agency responsible for the registration of EU trademark and registered community design. And since the regulation was leaked, we have seen many comments online, including by some of our panelists. I’m sure they will talk about their comments.
And just yesterday, a bipartisan group of former U.S. public officials from the U.S. PTO, DOJ, NIST, and FTC has written a letter to the president of the European Commission urging the commission to halt the process, reasoning that the adoption of the regulation would create—and I’m quoting—“great harm to European and U.S. innovation economies and permit global competitors to continue to erode the value of intellectual property rights.” So let me start by asking our panelists to share their views on the pros and cons of the regulation. Jorge, would you like to go first?
Jorge Contreras: Sure. Thanks very much and thanks to Adam also and The Federalist Society for inviting me to participate in this very rapid and timely discussion. So I was surprised as everyone was by the leaked draft but pleasantly surprised in some respects. And I’ll tell you why.
As we’ve heard a little bit, there are issues and contention around the resolution of disputes that involve standard essential patents. And one of the aspects of these disputes that is problematic in my view has been for about the past five years increasing discrepancies in the ways that national courts have been resolving these disputes. And we’ve seen as a result of that discrepant results. We’ve seen things happening with injunctions inconsistently from jurisdiction to jurisdiction, and we’ve seen what appears to be jurisdictional competition for these types of cases.
So to be more specific about that, there’re basically three different types of problems that have arisen. One is the tendency of courts in some jurisdictions to set a global rate for a party’s standard essential patents beyond the patents that are actually at issue when issued in that jurisdiction. Going along with that, we’ve seen the rise of antisuit injunctions and responsive anti-antisuit injunctions where courts who are trying to do this will try to prevent courts in other jurisdictions from proceeding with their own rate setting by imposing potential penalties on parties who try to avail themselves of those remedies. And then finally, we have some very serious discrepancies in how injunctions have been set and issued, particularly in Germany with respect to these FRN disputes.
And so the EU proposal that was leaked would do a few things to help alleviate some of these international tensions and problems. One, and Urška mentioned this very briefly, but I think a big benefit is simply the publication function that the EU IPO offers here. And just to be clear, rate caps would not be set by the EU IPO. In the proposal, at least the version that I’ve seen, parties at SDOs who decided to get together and come up with aggregate rate caps for particular standards could do that and then be the center. And the EU IPO would simply publish those as a matter of dissemination of knowledge. I think that’s a very positive but fairly minor function to be very honest.
I think the more important piece of this proposal and also more important than the essentiality testing which maybe others will talk about — I think the most important piece of this is the conciliation procedure whereby rates for SEPs would be set by a panel of conciliators that either an implementer or an SEP holder could invoke. Those rates would be nonbinding on the parties, which frankly I find to be problematic and makes this procedure less useful than it could be. They also would be confidential, which also I believe makes them much less useful than they otherwise could be because they’re not going to be available to other parties who are out there negotiating these licenses at the same time.
However, there are benefits of the procedure even as it’s been proposed. One of those, and this has been something that’s been pointed to by other commentators as a drawback, is that it would delay the rapid issuance of injunctions in the European countries themselves. Right. This is an EU or would be EU legislation. It would prevent a German court effectively from issuing an injunction very quickly in a litigation before the result of this procedure is available to them or at least before the procedure has been completed. That alone I think is a benefit.
I think from the more international standpoint, though, the benefit is that this procedure would establish or at least provide a pathway to establishing a European Union rate for SEPs. And I think — and again, this is really just my own assessment of the situation. I think that courts in other jurisdictions will have a tendency to honor that and that they will be less likely to try to set rates for the European Union themselves if they know that there is a parallel EU rate setting procedure that these parties are involved in. Foreign courts don’t have to do this, but I think that they will for the sake of international comity. So I think that that would help to address some of the issues certainly that have been highlighted in the United States and in Europe around China and its courts apparent willingness to set global rates.
Also, I’m speaking to you from the United Kingdom. I’m visiting this semester at the London School of Economics. And the UK courts are also in that group of courts who have taken it upon themselves to set rates globally. And I think that some of that could be curbed, even though these jurisdictions are not in the EU, simply because there’s knowledge that an EU rate setting procedure is happening. So that’s a quick take on the procedure. I’m happy to engage on these points later.
Urška Petrovčič: Thank you, Jorge. Elisabeth, maybe just before that a clarification about the royalty cap. Jorge, you’re absolutely correct that the parties could agree on the royalty cap, but if they fail to do so, my reading of the regulation is that there could be a request to the EU IPO to provide an expert opinion on the royalty cap, so just to clarify. Elisabeth.
Elisabeth Opie: Thank you and it’s a great pleasure to be part of the discussion today. I will touch upon a few different elements to what Jorge mentioned. As was noted in the introduction, many have struggled to identify an element of the proposal which does not offend against sustainable innovation and industrial policy, industry led and market driven solutions in the legal operation commercial framework for both international technology standards development and licensing. And even if unintentional, the proposed regulation could have extraterritorial impact and encroach upon all international standards development organizations, which presently comply with the WTO technical barriers to trade agreements. That’s open participation, etc., lack of buyers.
The International Technology cooperation which takes place through the 3GPP, to put this in context, provides complete system for global mobile telecommunications. And any SDO, standard development organization, that’s participating in that if they’re contributors on European patents are potentially exposed. That would include an American national standard body, ATIS, which is one of the organizational partners of the 3GPP.
Just as importantly when talking about global innovation ecosystems, the proposal appears to remove or at least significantly dilute the incentive for a particular class of standard contributors to participate in standards development. That is the owners of European standard essential patents who need to rely on generating licensing revenue. The incentive to contribute is undermined by blocking both the ability to protect standard essential patents and also to block the ability to generate licensing revenue, regardless of whether the licensing program originates in Europe, the U.S., the UK, Japan, just name a country.
So without any evidence of systemic inefficiency or dysfunctionality for global trade based on standardized ICT-based technology, with respect, the Commission appears to wrongly assert that there is a high risk of litigation regarding standard essential patent; the companies holding SEPs automatically are in a dominate position in the market if requesting license fees; that European members think courts are ill equipped to deal with the relatively few cases which arise from SEP licensing negotiations; the Unified Patent Court yet to commence could be inept at fulfilling its mandate; and that elements of a pivotal court case issued by the European Court of Justice—that’s Huawei v. ZTE—should not apply where an owner of European SEPs seeks license fees.
The timing imperative for concluding an appropriate license promptly and without undue delay is removed. So too appears to be the removal of the obligation on a potential licensee to place money on account if technology continues to be used without a license. This has been observed in the letter which you referred to earlier, Urška, the letter to the president of the European Commission by the former heads of the U.S. Department of Justice, Antitrust Division, the Federal Trade Commission, U.S. Patent and Trademark Office, and the National Institute of Standards in Technology, all of whom had leadership roles spanning multiple administrations and have reviewed this policy area.
That letter observes that the draft regulation takes SEP licensing disputes—and I’m pretty much quoting from the letter here—“out of the hands of the institutions that actually have the requisite knowledge to resolve disputes about licensing that may arise. It creates duplicative and therefore unnecessary processes. For example, registration through to mandated essentiality checks in a particular format. These obligations would not be imposed on all owners of European standard essential patents, only those seeking license fees.”
ETSI, the premier European standard organization, has spoken out against the suggestion that there be a registration mechanism. Furthermore, on my reading of the regulation it would effectively mandate an undefined time period whereby the owner of the European standard essential patent could not generate FRN license fees from any user of its technology and could not enforce its patents in national courts of competent jurisdiction. For technology with a time critical shelf life, this would completely de-value not only European but the global portfolio of company assets and disincentivize a certain class of contributor from being part of this innovation ecosystem.
These elements alone raise WTO level issues regarding IP protection of (inaudible 00:19:11), as well as participation in international standards development. Looking at substance over form, one really has to wonder whether some kind of compulsory licensing would be in place, particularly if a cap, albeit a nonbinding cap, but a cap would be placed on what can be paid for a standard. And that fundamentally undermines the sustainable and successful innovation ecosystem. It also undermines the role of courts, due process, and the protections that are otherwise afforded by national laws and European level laws as well. It’s unclear how various laws will be impacted, so is the statute of limitations put on hold for a particular class of SEP owners as they go through what is mandated or could be mandated in the regulation?
As a practicing lawyer in Germany, I have to say that there is very sound case law in Europe. I’ve had significant experience setting up licensing programs, bilateral and through pools. I’ve had significant experience in engaging licensing negotiations and have also been involved in patent litigation in Germany. There is certainly a mature and well settled body of case law that’s been developed over more than a decade.
So from what I’m hearing, what is the market considering? Or more correctly, what is one type of contributor to innovation being forced to reflect upon? There’s a weighing up of should we contribute to the development of an international standard against how can we successfully participate in global markets as an innovator if we do not participate in international standards development which enables interoperability?
Other questions which have to be addressed, why give a FRN commitment, and why hold European patents? And all these questions ultimately highlight that we could be heading to an era of fragmentation of international standards, as well as global trade in these foundational technologies. Everybody’s aware that open standards are effectively accessible. They are automatically available for wide implementation around the world. The standards are published. The patents are published. The way to implement a standard is published.
My clear message I guess that I could give is that there does appear, again with respect to be a foray into policy based evidence making. There are incorrect assumptions. There’s misinterpretation of the law. There’s a dichotomy created that really divides the types of contributors that can participate in the future. International technical cooperation, the role of SDOs, how markets currently — the activity in the market is currently taking place, and just generally the process for international licensing. All of these would be disruptive.
To put forward a regulation — I know that we’ve just seen the draft. We probably haven’t seen the latest draft. But moving forward with such a proposed regulation would introduce overregulation. It would create inefficiencies and significant uncertainty. It would also curtail and vulcanize global innovation. Ultimately, there’d be no winners.
It ignores that there’s a codependency of all actors in an innovation ecosystem with one success building further success. Given the duplicity as well — duplication, I beg your pardon, as well certainly in the mandating of certain things, it would certainly undermine the commerciality and security of global commerce based on international technology standards. And I don’t know if it’s a saying that’s said often in America, but we have a saying that you cannot unfry an egg. Those are my opening comments. Thank you.
Urška Petrovčič: Thank you, Elisabeth. So many things to unpack from your comments and I’m sure we’ll have time to go deep into some of the issues that you raised. But first, let me ask Adam, Adam, what is your view on the regulation?
Adam Mossoff: Thank you and I just want to say I love fried eggs. I’m delighted to be speaking here on this really important development in innovation policy and the innovation global economy more generally. And I’m just going to be making three quick points in my opening remarks, and hopefully we can dig into some back and forth as we talk throughout the hour.
As Urška mentioned, I’ve written on this issue already, and the general theme of my writing has been that this proposal is really a solution in search of a problem and that it really creates three concerns, both kind of going forward and concerns based on kind of what we already know from past practices. My first concern going forward is that this really raises serious, serious concerns about national security and the continuing engagement with the discriminatory industrial policies that have been implemented by China. In fact, this is well known now because the EU has officially filed a complaint with the World Trade Organization— I think Elisabeth referenced that—that has been joined by the United States and multiple other countries asking for sanctions against China for the abuse of its courts and its other governmental institutions in favoring its own domestic implementers that are artificially driving down licensing rates, royalty rates for SEP licenses to the prejudice of European and U.S. innovators.
This proposal undermines that effort to hold China accountable to continuing in proper equal treatment of all innovators and implementers. China will now be able to point to this proposal to acknowledge you yourself admit that the system is allegedly broken, that there’s lack of transparency, that there are too high royalty rates, that royalty rates need to be lowered, and so on and so on. And they will use that effectively and to their defense just as they have in the past.
This is not mere theory or prediction because this is exactly what China did when they were called to account over the past decade for the abuse of their antitrust regime in attacking U.S. and European innovators to artificially depress royalty rates through their antitrust laws. Chinese officials were notorious for quoting back to U.S. officials and representatives, as well as the EU, our own statements of our own antitrust officials as to the policies that the antitrust divisions had taken that were not reflective of actual patent law and actually courts ultimately had rejected such as in FTC v. Qualcomm as not reflecting underlying competition law either. And so we will see a repeat of this again with this new proposal.
Even if it’s not fully adopted, China will refer to it and will quote it back to both the EU and the United States whenever we try to hold them accountable for their manipulation either in court or by their antitrust officials of their own law to the discrimination against foreign innovators. And by the way, foreign innovators are U.S. and European innovators. The primary innovators of the modern telecommunications revolution and the mobile revolution that continues to this very day are U.S. and European companies like Ericsson and Nokia and Qualcomm and GE Digital. And in fact, studies confirm the majority of royalty payments that are made in the smartphone industry are paid to western innovative companies, primarily by Asian implementers in terms of assessing the global innovation economy. So this raises really serious concerns about it because EU has just in fact awoken to the competitive and national security threat represented by China as well as the United States. And this will make our efforts to hold China accountable to playing by the rules and following basic norms of the rule of law and due process more difficult going forward.
Second of all, I would just like to reinforce Elisabeth’s excellent description that the courts have been addressing licensing disputes in the context of standard essential patents and implementers. And they have been effectively addressing these disputes through application of core rules of law set forth by as she mentioned the Huawei decision in the Huawei framework and have been repeatedly identifying the various evidentiary features that account for this. And so we now have a well-established body of precedent. And I don’t find it to be as contradictory as either the DG GROW which is the directorate that developed this proposal or as Jorge characterized it as contradictory. In fact, I find it to be very consistent.
In fact we’ve got probably 40 or 50 cases now in multiple jurisdictions, in Germany, the Netherlands, Belgium, England, and now even throughout the world, in Brazil and Colombia and elsewhere where they’ve repeatedly identified the factors and conditions in which implementers primarily have been engaging in holdouts such as long delays in responding to requests for licenses, long delays in negotiating nondisclosure agreements, changing positions during litigation and so on and so on. U.S. courts have similarly been identifying these same factors as concerns. And more importantly, all of these European courts and other courts around the world have been issuing injunctions against implementers for engaging in these holdout practices.
So at the end of the day, what I’m primarily concerned with here—and this is my third and final point—is that what we have here in this proposal is a shift away from evidence based policy making and rulemaking that we have seen as developed in the courts over the past 10 or 15 years, towards as Elisabeth nicely framed it, policy based evidence making. Or more bluntly what I would assess here is implementers have been losing in courts where they follow rules of evidence and due process, where they have been asserting hold up and asserting that royalty rates are too high. And courts have been consistently repudiating these as not based in evidence and not supported rhetoric.
Now, there are a few courts that have found to support it, but the majority of the decisions have rejected these claims. And so implementers have now taken their arguments from the courts and have taken them to public officials and regulators and elected officials who are not held accountable to the rules of evidence and due process. And these regulators and officials clearly are well meaning and well intentioned. But because they are not constrained by the law and the rules of evidence they are more susceptible to the effect of rhetoric in the arguments being made to them and in the proposals they make as regulations. And so this is why we need to be very concerned about this proposal for these core reasons. And I’m looking forward to engaging more with Jorge and Elisabeth throughout the rest of the event. Thank you.
Urška Petrovčič: Thank you, Adam. I have so many questions, but perhaps before going into the questions I would like to see if any of you would like to respond to the remarks that have been made so far. Please, Jorge.
Jorge Contreras: Yeah. Thank you. I’ll just briefly respond to a few points. On the question of whether there is dysfunction or contradiction in the way that these cases are handled, I think it’s pretty clear that there is. And I think that good evidence of the dysfunction in this system can be seen in the governmental complaints that have been made, for example, by the EU in its WTO complaint against China, which again has been joined by the U.S. Not only that, but also the legislation that’s been floated in the Senate judiciary committee in the U.S., the Defending American Courts Act, which was directly responsive to Chinese ASIs; the Standards Essential Royalty Act, the draft of which has been widely discussed. And I get the feeling that there’s more coming from the U.S. House and Senate in the near future all because there is a perceived dysfunctioning here.
And the contradictions, I think, are also extremely clear. The issuance of injunctions and the rules regarding the issuance of injunctions are extremely different in Germany versus, for example, the United States. And I don’t think anybody really could disagree that those are quite different sets of rules. We have not had injunctions in the United States where standard essential patents have been involved with these types of disputes. But again, that’s quite different. Also, the methodologies of calculating royalties seem to be pretty different in China versus the U.S. versus the UK. So there are differences. There are contradictions there.
As to the question about whether a regulation like this in the European Union would chill standardization, would lead to fragmentation, would lead to a return to proprietary systems, I just don’t buy that argument because it’s been made so many times before. And it’s never really come to pass. These same arguments were made when the worldwide web consortium was discussing its royalty free policy, when VITA developed its X antiroyalty disclosure policy. These are episodes that the exact same things were predicted. They did not come to pass.
And I don’t think it will happen again. Standardization is too important. The product markets are too big, and I don’t think companies will exit these markets as a result of, again, what I think is a fairly underpowered proposal here from the European Union.
As far as the timing delay, again, I don’t think that this really causes much time delay. I don’t think that this proposal is going to prevent entities who hold SEPs from getting needed royalty income. As we’ve seen in numerous cases, the testimony is that these royalty negotiations take three years or more. In the ordinary course, the litigation itself takes two to three years. I don’t think the front loaded determination policy that the European Union is proposing would add significantly to that. In fact, it might actually speed things up at least in many jurisdictions.
I’ve also heard sort of offhand comments and allusions to the body here, the EU IPO perhaps not being as qualified to make these sorts of decisions. And I think that, yes, while the EU IPO today primarily is responsible for trademark work, I would be quite surprised if they just appointed a bunch of trademark examiners to fulfill this function. And like any agency, I assume that they will hire qualified people, and there are plenty of qualified people out there who could assume these functions.
On the national security question, I don’t disagree with Adam at all that there are significant trade policy, commercial policy, industrial policy issues at stake here. I think that those are very important and need to be addressed. But I would not go so far as to say these are national security issues. And this is a separate debate, separate set of papers that all of us have written about this. But I think this is purely a commercial issue, a trade issue. I think it’s an overstatement to claim that national security, meaning defense and sort of armed conflicts, is really at stake here.
And so in conclusion, I think this is a pretty good example of evidence based policy making. The European Commission has been extremely deliberative as for the past decade they have gathered evidence. They’ve assembled expert committees, working groups, heard what stakeholders on all sides have had to say. They’ve had numerous letters, numerous position statements. I think this is just a very logical next step in what has been a pretty well considered and deliberative process that the Commission and the European Union have gone through for many years. Thank you.
Urška Petrovčič: Thank you, Jorge. Does anyone want to respond, or should I start with my questions?
Elisabeth Opie: If I could come in just briefly, please, Urška.
Urška Petrovčič: Of course.
Elisabeth Opie: I guess the — Jorge, you just mentioned we’re talking about international commercial arrangements. And it is very well established that the vast majority of licensing agreements are just put in place. Yes, there’s a relatively small number of licensing negotiations which lead the parties to the courts, and I guess something that always strikes me — the pivotal decision of Huawei v. ZTE, it recognizes that there are uses of technology that will put in place a license even before they launch their product to the market.
And so when we’re talking about litigation, we’re talking about the others that are implementing the technology and for whatever reason did not have a license in place when they’re selling their products in the market. And if that scenario occurs, there is actually an obligation both on the licensor and the potential licensee to engage in a good faith commercial negotiation. And each party needs to place sufficient information before each other in order to conclude the appropriate license agreement promptly and without undue delay. And this would all be turned on its head with the proposed regulation for those contributors to innovation that do need to rely on licensing revenue as return on investment.
And so to talk about whether or not injunctions will be granted, that’s not the point. The obligation’s actually on the negotiating parties. In Germany, it’s often said that you have automatic injunctions granted. That is simply not true. Every case is assessed on a case by case basis, and there are times where an injunction may be granted. There are times when an injunction may not be granted. Where it is granted, the courts feel that that should be a catalyst for the parties to get back to the bargaining table and conclude a commercial licensing agreement.
So I don’t know — I mean, obviously you can’t have a direct comparison with German law and U.S. law. Certainly in the U.S. where you’ve got an unwilling licensee, there’s an ability to get exemplary damages or treble damages. This is simply not available in Germany. And so the injunction acts as a catalyst, as I said, to bring the parties back together. And that’s after various factors of Huawei v. ZTE have actually been made out before the court with cogent evidence.
Adam Mossoff: Yeah. And I would just quickly add two things. One is that the general — yes, I mean, the specific doctrinal tests and the procedures vary from country to country but at a high enough level of abstraction they actually make the same inquiries. And the U.S. court of appeals for the federal circuit has explicitly said a standard essential patent owner can obtain and receive an injunction from an implementer who is not a willful licensee. And that is actually the essential basis, the same essential test that is being applied to the Huawei framework in which the repeated courts have issued injunctions against implementers engaging in holdout tactics as unwilling licenses.
And yes, Jorge is correct. No injunction has been issued in the United States. Well, that’s because no SEP owner has asked for an injunction in the United States. So again, that’s not evidence of variances and conflict in the case law. These are what economists call selection effects. When you don’t ask for an injunction, you’re not going to get one. And so you can’t point to the no injunctions issue in the United States as oh, there’s all these discrepancies and variations between the cases with Europe where they are receiving injunctions because they are requesting injunctions to the Huawei framework there.
So I would just really push back on that. And Jorge highlights heavily the abuse by China. But exactly, there’s abuse by China. And this regime doesn’t apply to China. And so to the extent that there are abuses by China — although I don’t know of a single antisuit injunctions that’s issued in now two years. So the antisuit injunction issue has largely fallen by the wayside as China has now taken it in house, into their competition authority agencies, which operate without any transparency and operate through a regulatory and administrative mechanism in the same way that this would and that this proposal would as well. And also, to claim that it will make things go more quickly, that’s just creating an additional administrative step that parties have to go through before they can litigate doesn’t make things go more quickly.
In fact I would just point out for the American audiences we saw this with the arguments for why the PTAB should be created. This will make litigation more efficient, patent litigation more efficient. And what we’ve seen over the past 15 years is the exact opposite. It’s added massive more costs, especially to patent owners, through serial petitioning and through all sorts of issues and appeals. The Supreme Court has now decided six cases out of the PTAB. So I would argue in fact that our experiences with creating agencies, even new agencies that create new administrative requirements and processes to be imposed on patent owners in litigating their patents is not going to be more efficient at the end of the day. And experience repeatedly has shown to the contrary.
Urška Petrovčič: Thank you.
Jorge Contreras: Can I just make one just quick rejoinder on the point of fact?
Urška Petrovčič: Sure.
Jorge Contreras: Which is that in the United States parties have certainly sought injunctions in SEP cases. I mean, that’s obviously why we got the Apple v. Motorola decision at the federal circuit. That activity has decreased —
Adam Mossoff: Jorge, can you tell me since 2013 what standard essential patent owners have asked for injunctions in the United States?
Jorge Contreras: Let me finish.
Adam Mossoff: Since the Apple v. Motorola decision.
Jorge Contreras: I didn’t hear you make a — qualify your argument with time. But once the federal circuit demonstrated that under the eBay test it’d be very unlikely to get an injunction, yes, parties have stopped, but not because they have been not interested in getting them but because it is very difficult under U.S. law to get one as demonstrated by the case law before that. That being said, it’s still standard practice for an SEP holders to seek exclusion orders at the International Trade Commission. This happens in pretty much every case at the ITC because that is the remedy at the ITC.
And this has happened in cases as recently as late last year. The ITC has never issued one of those exclusion orders since it was slapped down in 2013 in the Apple v. Samsung matter. But they’re still asking, and they ask every time. So it’s not for want of trying.
Urška Petrovčič: Thank you. Yeah, it’s interesting. While I wasn’t reading the regulation as basing, I see the problem in the international inconsistency in the court decision because I’m not sure the European Commission has wanted to introduce — harmonize the global approach. There is no discussion of injunction. But it’s interesting.
We have a lot of interesting questions from the audience. I want to go to those questions. So the first question, I will just read it. And it says “Do you think such a proposal would rise a useless duplicative effort in regard to the mandate of the unified patent court, which started to work on June 2023? The European Commission by this proposal isn’t already undermining the UPC, which would become the new spearhead on patent litigation? Regarding the expertise of future judges within the UPC compared to the EU IPO, it seems questionable.” Anyone?
Elisabeth Opie: I guess I could say a lot of people are just scratching their heads as to why from a timing perspective you are just bringing in a brand new court, stellar judges that will comprise the bench. And then that appears to be undermined or at least kicked down the road by virtue of what’s being proposed in the regulation. So it is puzzling I would say.
Jorge Contreras: I’ll say it certainly occurred to me that the UPC could have been the locus of this type of procedure. It didn’t have to be the EU IPO. It could’ve been the UPC. But as we all know, A, the UPC hasn’t started operations yet, not really clear how it will work. And not all EU countries are going to be part of the UPC. Right now it’s just a — I don’t know how many, if it’s 17 or I forget what the current count is. But you have some significant holdouts so to speak from the UPC. So this is a more Europe-wide solution than the UPC, which I think has benefit.
Urška Petrovčič: Yeah. I think there are three countries that are not members of the UPC: Spain, Poland, and Croatia.
Jorge Contreras: I think Ireland is voting on it soon. I just got back from Dublin. I think this is the case.
Urška Petrovčič: Okay. We have another question from the audience. And it’s “DG GROW’s proposed plan is to replace the established valuation and licensing method using comparable licenses with top-down rate setting. The latter has only had limited use, and it was recently rejected in the UK in InterDigital v. Lenovo decision. Isn’t it reckless to demand such as contentious valuation and to put this rate regulation in the hands of a novice agency at the EU IPO?”
Adam Mossoff: So I think the question raises a serious point about, again, the emphasis on evidence-based policy making. And that is that most of the courts that have addressed disputes over the FRN range — and there’s often a mistake often that there’s a specific FRN rate. And it’s not. It’s a range that courts constantly identify as the parties not being able to meet with an agreement within — have faced these arguments about what should be the methodology for determining that FRN range. And largely the courts have rejected the top-down matter — and top-down methodology and has really embraced the comparable method, which makes sense because you should be looking to comparables as helping you identify what are the market rates for these types of licensing activities of these types of patents.
And so to the extent that you do end up with a kind of top-down approach with this agency setting, this kind of aggregate level and then making basically determinations of percentage of rates within a total aggregate amount and doing this ex ante, which has also raised a tremendous number of concerns about not having full information about the actual market value and the nature of the patent innovation as deployed in a particular context, I think you have legitimate concerns about the lack of proper evidence being brought to bear. And it underscores, again, the perplexing decision to place this in the EU IPO. It would have been less perplexing if they put this with the EPO, which actually has some knowledge of patent law.
But to place this with an agency where the head of the agency has explicitly said “We will never have competency with respect to patents” — just last year the head of the EU IPO said that. They are now being asked to adjudicate and assess royalty rates, essential patents, and things of that sort for some of the most complicated patents within the broader domain of patent law. And so, again, this reemphasizes the points that I think Elisabeth and I were saying in our opening remarks about the lack of evidence based policy making, which is not reflected in how many hearings one holds and who one talks to. It’s the actual data and evidence that support the decisions that are being reached that we care about and that we’re concerned about here.
Urška Petrovčič: Any other comments?
Jorge Contreras: I’m happy to, but Elisabeth also in the chat asked to begin.
Elisabeth Opie: Thank you, Jorge. I would just observe that it’s really not in the interest of a standard developer to have the standard fail, particularly if dependent upon licensing revenue and the development of different product markets. In terms of how does one get what would be accepted as a market rate, there’s a huge amount of energy put into determining what could be an appropriate market rate. And this seems to be ignored by the proposed regulation. So if someone indicates they find a rate unreasonable, somehow the EU IPO or an expert could second guess what may already be an established market rate.
I’ve dealt with certain licensing programs, one with over 1,000 licensees. It’s still contested whether or not the market rates that are being offered with that number of licensees for this technology. So you’ll always have somebody that’s doubting it or not wanting to pay the price. They want to get their special deal. That forever is going to be part of the commercial negotiation. But to have some form of methodology imposed, I think it was actually in a different context, but there is U.S. case law, CSIRO v. Cisco, to just put one methodology forward for determining what is the appropriate market rate is untenable.
And those with the expertise that are working in the area know comparable technologies. They can appreciate what the step change is in terms of technology development. They are best placed to work out what is FRN’d. And again, this was acknowledged by Huawei v. ZTE.
Urška Petrovčič: Jorge?
Jorge Contreras: Thank you. Just two quick points on this. One, I think it’s a distraction to focus this argument and this discussion on the competency of EU IPO. Again, to call them a novice agency and so forth, I just think that’s unfair. They will hire people from EPO, from the Commission, from wherever, from the private sector, who are experts in this field.
Agencies do not have expertise. People have expertise, and I think that I would at least trust the Commission and the EU IPO enough to know that they will hire competent people and, again, will not have a bunch of trademark examiners making these decisions. And I think we should all at least trust the agencies to that degree. Maybe that’s misplaced.
On the substance of top-down royalty setting, I honestly — as you probably all know I’m a big fan of the top-down methodology. I think that it is the only logical methodology to deal with setting royalty rates when you’ve got over 100 different SEP holders that have thousands of patents covering a particular standard. The bottom-up comparables method inevitably leads to the stacking problem and the corner compliments and all these issues that we’ve seen manifest themselves in these types of cases.
And I would just add to that this top-down methodology is not new. It’s not some newfangled method that people just made up here. This is a well-understood methodology that is applied by courts and agencies extensively in the copyright area in the U.S., in the UK, in many other countries where things like cable, retransmission of broadcast, television shows and music licensing royalties are decided in a top-down manner. And I will assure you that the television networks and content owners and providers and the cable companies are just as litigious and tend just to fight just as much as SEP holders and implementers in the telecom space. Yet, that industry seems to work fine where we have rate setting done at a top-down level by competent bodies like the copyright rate board and the copyright rate tribunal in the United States and in the UK.
Urška Petrovčič: Adam, I see that you have your microphone on. Would you like to respond?
Adam Mossoff: I can respond, but we’re coming up to the top of the hour. I don’t know if you want to ask us maybe for final comments, or I can respond as my final comment, make it more official.
Urška Petrovčič: Very quick comment, yeah.
Adam Mossoff: Okay. Yeah. Just that I would challenge anyone to talk to actual creators like songwriters if they think the top-down rate setting has been beneficial for them as opposed to the implementers and the users of their created works. And I think that we’re going to see replication of that with such administrative programs that are being proposed here in the EU.
Moreover, again, I just want to reset the context. In the smartphone industry very quickly we have had some of the fastest rates of innovation that has ever been seen in all of history. We’ve had the quality adjusted price drop, and we’ve had incredible rates of new technology being adopted and new entrants entering into the market. And all of this contradicts the predictions of patent hold up theory and of royalty stacking that have been repeatedly asserted by advocates for regulatory regimes like has been proposed in the EU and have been asserted in court and have been rejected because they contradict the actual evidence in the marketplace. And more people have smartphones now today than have access to potable water around the world.
So this just shows you that this is a market that is working. It’s efficient. We have super computers we carry in our pockets that we call phones. And the fact that there’s these assertions that the system is broken and that we need this massive regulatory regime as a solution to something that is allegedly broken shows you that this is actually in fact the classic solution in search of a problem. And it’s just going to create more problems and threaten that very innovation that we’ve been experiencing.
Urška Petrovčič: Thank you. I think we have come to the end of our event. I would like to give 15 seconds in case Elisabeth and Jorge would like to make final remarks. If not, I think we would thank our audience. As you can see, it’s a very interesting discussion, a lot of topics that will need to be discussed. So this issue is not going anywhere. I’m sure we will hear a lot about it. Sarah, back to you.
Sarah Bengtsson: Thank you, Urška. And I just want to thank all of our speakers again for sharing your time and your expertise with us today. And again, thank you to our audience for tuning in. You can find more of our content on our website at regproject.org or follow us on any major social media platform @fedsocrtp to stay up to date. With that, we are adjourned.
Conclusion: On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch Podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcast, Google Play, and Spreaker. For the latest from RTP, please visit our website at regproject.org. That’s r-e-g project.org.
Professor of Law
University of Utah College of Law
Professor of Law
Antonin Scalia Law School, George Mason University
Founder and Principal Solicitor
Opie International Technology Lawyers
The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the speaker(s). To join the debate, please email us at [email protected].