A Critique of Glory Days and How Reports of Anticompetitive Risks of Pools Have Been Greatly Exaggerated

In a previous article, we laid out the basics of “patent pools”, which license patents that are declared essential for technology standards. A recent article published in the University of San Diego Law Review, titled Glory Days: Do the Anticompetitive Risks of Standards-Essential Patent Pools Outweigh Their Procompetitive Benefits? (Glory Days), criticized patent pools, alleging inefficiencies and anticompetitive risks of pools for standard essential patents (SEPs). While the authors make several rebuttable suggestions, the crux of the authors’ complaints about SEP patent pools is that SEP pools should bear all the burdens and expenses of verifying with a litigation-grade level of certainty that all patents in the pool are essential and valid before an implementer will even engage in a licensing discussion with the pool. This approach is not economically or practically realistic and is designed to justify hold out and provide cover for implementers to refuse to engage in licensing discussions.

Glory Days Misses the Point of Patent Pools: Efficiency

Perhaps the most troublesome suggestion in Glory Days is that SEP pools should undertake a litigation-grade analysis of validity and essentiality for all patents in a pool. This suggestion is flawed for two main reasons. First, SEP pools have no obligation to evaluate the validity of their patents, as patents are presumed valid. Any suggestion otherwise is contrary to established black letter patent law and is merely an excuse from the implementer to refuse to negotiate. Second, while pools should and normally do undertake a reasonable check on essentiality, it is not realistic or economically feasible to impose on the patent owner an obligation to provide something capable of communicating or demonstrating, at the outset of a licensing discussion, post-litigation grade certainty regarding essentiality; even assuming something of that kind could be created. In reality, such a requirement would provide implementers a tool for efficient infringement by demanding from the SEP owners something that they cannot, and need not, supply. The suggestion is therefore commercially unreasonable, and voices the perspective of an unwilling—and bad-faith—licensee. Even if such checks could be put in place, it would still not deter efficient infringers, which would bear none of the costs associated with this scheme, and would therefore have no incentive to change their behavior.

Authors’ Suggestion that Pools Hire Technical Experts to Screen the Validity of Each Patent Is Commercially Unreasonable

A requirement that pools hire independent technical experts to perform litigation-grade validity checks on each and every patent in a pool, as the Glory Days authors urge, would impose an outrageous financial burden on pools, while imposing no reciprocal cost on the efficient infringers. Article at 21, 28. A good comparison to what the authors are proposing is the inter partes review (“IPR”) process which is marketed as an efficient and cost-effective mechanism to adjudicate patent validity. According to the American Intellectual Property Law Association’s Report of the Economic Survey for 2017, the average cost of an IPR petition through institution and final decision was around $350,000, with an increase of an additional $100,000 to $150,000 if the decision is appealed to the Federal Circuit. Expecting pools to pay $500,000 to determine the validity—not even the essentiality—of one patent, when pools may contain hundreds to thousands of patents, is simply not economically feasible. Even Unified Patents, a well-known organization whose main purpose is to “improve patent quality and deter unsubstantiated or invalid patent assertions,” recognized that manual review of these characteristics is impossible. For example, instead of manual reviews for essentiality, Unified Patents is creating AI that can more efficiently and accurately conduct this analysis. As even Unified Patents recognizes, “there is currently no economically sensible way to evaluate” whether all patents declared essential to a standard are in fact essential. See id. The same analysis applies with equal, if not greater, force to validity.

Economics aside, the authors’ suggestion also attempts to rewrite patent law. Under 35 U.S.C. § 282, patents are presumed valid and the burden of proof is on the challenger to prove invalidity. What the authors propose rejects over 70 years of established black letter patent law in an effort to appease implementers over innovators, and would instead require patent holders to prove validity. If anything, the opposite should be the case: if an implementer believes a declared SEP is invalid, the burden should be on the implementer to spend its resources to challenge the patent in question. See 35 U.S.C. § 282. The SEP pool should not be required to do anything to undermine the patents in the pool.

Exemplifying the point, recent decisions illustrate that SEP jurisprudence is developing rapidly in Germany, the U.S., the U.K., and China. Since Glory Days was written, this SEP jurisprudence clearly places the burden of a validity challenge on the implementer—where it should be per current law. See Bundesgerichtshof, [BGH] [Federal Court of Justice], May 5, 2020, KZR 36/17. Suggestions otherwise are merely attempts to provide implementers a reason to not engage in licensing discussions, and should be rejected by the market.

Authors’ Proposed Essentiality Screening Method Eliminates Efficiency

The authors suggest that “the screening methods put into place by many pools do not appear to be effective[]” and “. . . the vast majority of SEPs that have been tested in court have been found to be either non-essential or invalid.”  Id. The mistake the authors make is in their own statement: they demand that pools perform litigation grade checks on essentiality, to be paid for by the pool, rather than checks of a reasonable scope that is sufficient to initiate good faith licensing discussions from willing parties. To that point, the authors’ suggestion would destroy the central purpose of pools (and patent licensing generally): improved efficiency and the avoidance of litigation costs. Rather than avoid these costs, the authors want only the pool to bear them.

The authors’ point that some patents in a portfolio are possibly either not infringed or invalid is also unremarkable: infringement and validity are contested in nearly every patent litigation. See Unwired Planet v. Huawei [2020] UKSC 37 ¶ 6 (stating validity and essentiality determinations are “matters for the relevant national courts” – not ETSI). Moreover, that observation is true of every circumstance where the parties enter a license and thereby avoid litigation. The real source of inefficiency here is not because some patents in a pool may ultimately be declared non-essential during a litigation, but rather from a potential licensee’s efficient infringement based on the rationale that the expense of challenging patents and pursuing litigation will be cheaper than engaging in good faith licensing discussions with a willing licensor. This is especially the case where an implementer argues, as Huawei did recently and unsuccessfully before the UK Supreme Court, that an SEP owner with a global portfolio must chase the recalcitrant licensee around the world to secure a license to its worldwide portfolio, and only after overcoming a series of challenges to essentiality and validity on a country-by-country, patent-by-patent basis. Thus, even if SEP pools were to attempt to implement the process suggested by the authors, recalcitrant implementers would still be incentivized to hold out while they put the pool in an untenable position:  it must either try and provide something that is cost-prohibitive and may not be possible to create in any event, or try to provide something more cost-effective, only to be accused of providing insufficient information to kick start a licensing discussion. That would be a fool’s errand.

The fundamental problem with the author’s construct is that is fails to acknowledge that every commercial negotiation necessarily involves some amount of an information deficit. Again, while most SEP pools afford potential licensees with some evaluation that the patents within the pool are essential to the standard, the Glory Days authors take it to an unjustifiable extreme by suggesting that the pools must eliminate any reasonable information deficit regardless of the cost.

The Efficiencies That Pools Create Must Be Mutual

Pools allow entities to obtain licenses to large numbers of patents with minimal transaction costs. In the technology sector, there are potentially tens of thousands of SEPs across various standards, all of which would need to be individually researched, negotiated, and licensed. As the World Intellectual Property Organization (“WIPO”) stated in a comparative analysis on pools, “[p]atent pools represent [sic] a common instrument to deal with that kind of inefficiencies allowing complementary IP assets to be organized under a single contract (the pool) to be not only cross-licensed among the patent pool members, but also licensed to interested third parties. . . . This may have positive effects by keeping prices under a competitive pressure and by possibly ensuring that the patent pool is actually welfare-enhancing.” Patent Pools and Antitrust – A Comparative Analysis, World Intellectual Property Organization (WIPO), 9 (Mar. 2014), (citing Josh Lerner, Jean Tirole, Efficient Patent Pools, The American Economic Review, vol. 94, n.3, June 2004, available at www.nber.org/papers/w9175 (last visited on February 19th, 2013)) (emphasis added).

In addition to reduced transaction costs, pool efficiencies manifest in reduced or eliminated litigation costs. Id. at 9-10. Implementers are less likely to infringe pool SEPs without a license if each and every required patent is in one convenient location. This ease lends itself to transacting on the front end, instead of litigating on the back end. The gained efficiencies aid both patent owners and implementers. The authors’ flawed suggestions eliminate the efficiencies that would be mutually beneficial for all parties, and propose a one-sided system that only benefits implementers, by forcing innovators (i.e. patent holders) to bear all the cost. If efficiency and cost saving are primary objectives (which it should be for commercial entities), then this common sense approach undermines the authors’ fear of the possibility that some number of non-SEPs will sneak by the gatekeepers, where the pool otherwise holds a significant number of SEPs that are valid and infringed. Even if certain patents within the pool’s portfolio might arguably not be essential-in-fact, it doesn’t change the economics of the licensing opportunity, nor the mutually beneficial efficiencies of licensing through the pool. Indeed, the same question would arise when engaging in bilateral licensing discussions—implementers frequently enter bilateral licenses with patent holders where some patents are likely not infringed and/or invalid, without requiring that the patent holder verify with certainty that each patent is valid and infringed.

Missing the Point

While we respect the authors’ views, their one-sided suggestions miss the point of pools. They focus solely on how implementers should benefit from pool licensing, rather than on how innovators and implementers should mutually benefit from the voluntary market mechanism. No one is suggesting that implementers pay excess fees. Rather, innovators should be properly compensated for the innovations they bring to the market, and the discussions to provide this compensation should be negotiated between willing participants. Of course, litigation and administrative validity challenges are always available, but licensing, especially through an efficient pool mechanism, is, and is intended to be, a means to avoid those proceedings, not an implementer’s proxy for them.

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Author: iqoncept
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