In a November 2017 speech, Assistant Attorney General Makan Delrahim delivered remarks that could signal a shift in how the United States Department of Justice (“DOJ”) will analyze conduct between patent holders and technology implementers in the context of standard setting organizations (“SSOs”) and standard essential patents (“SEPs”). In a subsequent January 2018 speech, Delrahim indicated that DOJ is reviewing practices of various SSOs, including practices that appear to have been condoned in prior DOJ business review letters such as one issued to the Institute of Electrical and Electronics Engineers (“IEEE”) in 2015. In these speeches, Delrahim argued that antitrust enforcement had gone too far in accommodating the concerns of implementers of a given standardized technology at the expense of SEP owners, potentially undermining incentives to innovate.
Specifically, Delrahim stated that there had been too much emphasis on theories of potential “hold-up” by patent holders (demands for high royalties from technology implementers locked into a standard) and not enough emphasis on possible “hold-out” by implementers (bad faith bargaining by implementers leading to non-licensing or underpayment of royalties). Delrahim indicated that ex ante commitments by patent owners to adhere to “fair, reasonable, and nondiscriminatory” (“FRAND”) royalties in return for inclusion in a standard should not imply any sacrifice of the ex post right to bargain unilaterally over the determination of such royalty rates, including the right to refuse to license or seek an injunction. Delrahim stated that any resulting disputes over contract terms could be litigated through private actions, not government antitrust intervention. Further, Delrahim suggested that SSOs could potentially be challenged by DOJ for conduct that appeared to have been condoned by prior DOJ business letters, referencing the “IEEE” letter in which the DOJ said it would not challenge SSO statements that the value of SEP patents shouldn’t include the enhanced value stemming from the patented technology’s inclusion in the standard and that SEP patent holders should not seek injunctions except under very limited conditions.
Economists recognize that the ex post licensing negotiations between patent holders and standard implementers have many potential outcomes. For example, using a simple model, Langus, Lipatov, and Neven (2013) find that either “hold-up” or “hold-out” can occur in equilibrium. Specifically, they find that “hold-out” is more likely to occur if courts will not grant injunctions on patents that may be valid and infringed without evidence of additional factors, such as licensee unwillingness. These authors also find that a limitation on injunctions may make “hold-up” less likely, since the patent holder doesn’t have a credible threat of exclusion. Similarily, DOJ’s IEEE business review letter, while acknowledging the possibility of “hold-up,” also recognizes that potential “hold-out” by implementers (the “refusal [by implementers] of a [F]RAND license”) could skew patent negotiations.
The potential for “hold-out” makes it clear that there may be costs as well as benefits to putting limitations on an SEP holder’s ability to seek an injunction against an infringing implementer. For example, if the ability of a patent holder to seek an injunction is limited to the situation where there is an “unwilling” licensee who offers only what is judged to be a below-FRAND rate, the prospective licensee gains a strategic bargaining tool. The prospective licensee may risk offering a below-FRAND rate even if the patents in question are perceived to be strong, because there is the possibility that the court will find that the prospective licensee was “willing” to license and not find its offers to be below the FRAND rate. This type of “hold-out” can lead to lower rates for patent holders, which, as Delrahim argued, can reduce incentives to innovate.
The tradeoffs between the benefits and costs of limiting the right to exclude and seek injunctions are highlighted in a recent letter to Delrahim by a group of industry, academic and small business interests (including Apple and Intel among others). This letter states that SEP patent holders, by their voluntary agreement to participate in standards developments and thereby gain access to a potentially large and lucrative standardized market, are expressing their willingness, as a quid pro quo, to limit their ability to exclude implementers. Thus, in addition to reducing potential “hold-up,” the benefits of limiting the right to exclude and seek injunctions can extend to the patent holders as well by allowing them access in the first place to a potentially lucrative market. The FTC’s recent lawsuit against Qualcomm challenging its SEP licensing practices for modem chips necessary to making smartphones is based on a theory that a patent holder surrenders its right to exclude (particularly through denial of an input such as modem chips over which it has alleged market power) if it agrees to contribute its technology to a standard.
In recent years, SSOs have focused on limiting the potential for “hold-up” by SEP patent holders and some, such as the IEEE, have adopted language discouraging SEP holders from seeking injunctions. Antitrust authorities also have sometimes taken the position that the ability of an SEP holder to seek an injunction should be limited, and injunctions should only be granted in situations where the implementer has refused to participate in licensing negotiations or was “unwilling” to take a FRAND license. Some courts, e.g., Judge Posner’s U.S. District Court decision in Apple v. Motorola, have similarly ruled that when there is a FRAND commitment, injunctions should be rare and limited to a situation where potential licensees refuse to take what appears to be a FRAND license offer.
Delrahim, while recognizing the possible benefits of limiting injunctions on SEP patents, has indicated that the recent focus on potential “hold-up” has underestimated the costs of “hold-out.” Delrahim’s recent speeches suggest that DOJ is re-evaluating its policy regarding permissible SSO restrictions on SEP holders and their licensing obligations. If DOJ implements a different approach to SSO restrictions on a patent holder’s right to exclude, this could potentially result in challenges to SSO practices that had been condoned in prior DOJ business review letters.