US Department of Justice throws its weight behind SEP holders and patent pools in FRAND disputes

31.07.2020

The debate in FRAND and competition law about licensing component suppliers rather than end manufacturers has been simmering for some time now (for example see here, here, and here) and more recently reached close to boiling point (see our post here on the wave of litigation relating to ‘connected cars’).  Since Makan Delrahim became Assistant Attorney General for the Antitrust Division of the US Department of Justice (DoJ), he has made a number of speeches in favour of the rights of patentees.

It perhaps comes as little surprise therefore that recent interventions by the DoJ make clear that it is firmly on the side of SEP holders.  In July 2020 it published a business review letter endorsing the licensing practices of the Avanci platform as well as filing a statement of interest in support of InterDigital as it defends a claim by Lenovo that it has violated the Sherman Act through its SEP licensing practices.

Avanci and connected cars

The DoJ’s letter was a response to Avanci’s request for a statement of the DoJ’s enforcement intentions regarding Avanci’s new 5G licensing platform for connected cars.  As the letter explains, Avanci is a patent pool that aggregates SEPs from a number of patentees and offers licences to those SEPs at flat rates.  The SEPs are reviewed for essentiality before being included in the pool (although this is clearly not a guarantee that they would prove essential if tested in court), and the revenues from granted licences are divided up amongst between the SEP holders based on a number of quantitative and qualitative factors, including numbers of patents, other licensing revenues, and contributions made to the standard.  Avanci also operates a platform for 4G/3G/2G, which has grown over the last few years to include 38 licensors encompassing almost 50% of declared 4G and 3G families worldwide.

Probably the most controversial aspects of Avanci’s automotive licensing platform is that it will offer licences only to the manufacturers of connected cars and will not offer licences to component manufacturers higher up in the supply chain, such as those producing telematics units (the module of a connected car that makes use of 5G technology).  The DoJ takes the view that limiting the field of use of Avanci’s 5G platform in this manner does not necessarily make the platform anti-competitive.  It goes on to conclude that on balance the platform is unlikely to harm competition, and the DoJ therefore has no intention of challenging the platform.

In reaching this conclusion, the DoJ makes an important (and possibly controversial) distinction between antitrust and FRAND: “To be clear, the Department makes no assessment of whether end-device licensing will be successful in the automotive industry or whether it is the correct approach to licensing in this space.  We also do not assess whether licensors could be held liable for breaching their individual FRAND commitments if they choose not to license outside the proposed Platform to suppliers. We simply opine, based on Avanci’s representations and our review, that Avanci’s approach, which has the potential to aggregate a significant number of cellular SEPs in the marketplace and streamline licensing, is unlikely to harm competition.”

From a European perspective, there seems to be scope to question the DoJ’s assessment that limiting licences to connected vehicles with 5G functionality, as distinct from (for example) telematics units, is in fact a true field of use restriction, as opposed to a customer limitation.   It also remains to be seen how any individual licensing by pool members to companies upstream of the customer base (such as the recent reported deal between Sharp and Huawei) will affect uptake of the pool.

Nevertheless, this conclusion to the business review letter is unsurprising, given the position taken by the DoJ in its statement of interest filed in February 2020 in the case of Continental v Avanci, which is currently pending before the US District Court.  There is at least a plausible possibility that the outcome of that case will diverge from a position ultimately adopted the European Commission, which is understood to be investigating similar issues.

Lenovo v InterDigital – statement of interest

The DoJ espouses a similar line of reasoning in its more recent statement of interest in Lenovo v InterDigital, in essence arguing that SEP holders can violate FRAND pricing commitments without infringing antitrust laws.  More specifically, in response to Lenovo’s allegations that InterDigital has engaged in anti-competitive conduct in violation of the Sherman Act (the main instrument of US antitrust law), the DoJ claims that:

  • Allegations of a breach of FRAND commitments by an individual licensor cannot amount to a Section 1 infringement (i.e. an anti-competitive agreement, roughly equivalent to Article 101 TFEU). Upholding Lenovo’s claim that InterDigital’s licensing terms jeopardise the legality of the original standard settling agreement would condemn an otherwise lawful standards process based on the actions of one company would create what the DoJ describes as a “sea of doubt in standards development”.
  • It could chill participation in standards development processes altogether, and jeopardise important patent disclosures, if it were a Section 2 infringement (i.e. unilateral monopolisation, somewhat – though deceptively – similar to Article 102 TFEU) for an SEP holder to charge high royalties or to over disclose SEPs. The DoJ refers several times to the principle that  “[p]ossessing monopoly power, or charging monopoly prices, does not on its own constitute exclusionary conduct”.  Rather, the DoJ suggests that only ‘deceit’ from the SEP holder during the standard development process engages antitrust laws.  The DoJ also notes that Lenovo has not articulated how the over-disclosure of SEPs could harm competition as required by Section 2.  While Lenovo claims that InterDigital declared thousands of its patents as essential “without regard to whether those patents [were] actually—or reasonably [might have] become—essential” and says that this is “misleading conduct”, the DoJ responds that the “courts have consistently limited Section 2 liability to circumstances in which a representation was intentionally deceptive”.

The DoJ concludes that it “requests that the Court reject the overbroad interpretations of the antitrust laws reflected in Lenovo’s complaint”.

Comment

The DoJ (as currently constituted) appears determined to ensure that no link is made between a violation of an SEP holder’s contractual FRAND commitments and antitrust laws.  Its Avanci Business Review Letter treats these topics as distinct, and its Lenovo statement is dismissive of Lenovo’s antitrust claims in a FRAND context.  What is not clear is the metric against which a contractual breach is to be assessed, if antitrust is not considered relevant in that assessment.  Indeed, from a European perspective, the development of the ETSI IPR Policy was clearly informed by competition policy considerations (see, for example, here) which may in turn affect the interpretation of the contract itself.

It is interesting to contrast the DoJ’s position with the CJEU’s acceptance that Article 102 TFEU can play a role in FRAND, given its finding in Huawei v ZTE that it may be an abuse of dominance if an SEP holder seeks injunctive relief in certain circumstances.  The CJEU has not yet considered how Article 102 might apply to the excessive pricing / over-declaration points made by Lenovo.

As a general matter, EU law is – at least in theory – less tolerant than US antitrust law of pure pricing violations, given the specific reference to “unfair purchase or selling prices” included within Article 102.  Clearly the factual matrix in relation to licensing of SEPs is not directly comparable to the pharma sector, which has seen much of the recent activity in this area, but the possibility of foreclosure seems difficult to dismiss entirely if SEP holders are able to charge monopoly prices for licences without infringing antitrust laws.  This is a particularly important consideration as the expansion of the Internet of Things means that more small and medium sized enterprises become immersed in the world of FRAND licensing.  The DoJ’s position in its statements of intervention is that both antitrust and IP laws promote dynamic innovation.  While that is true, antitrust arguably has a broader remit than (say) patent law, and seeks to protect innovation in relation to matters such as product range, terms of sale and branding.

If SEP holders are not restrained by competition laws, it removes a line of defence for these smaller entities which may also be highly innovative on other parameters.  Such companies may be forced to make difficult choices between paying high royalty fees that they may not be able to afford, facing the prospect of lengthy FRAND litigation, or exiting the market altogether.

Sophie Lawrance

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Matthew Hunt

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