This is a follow-up to my recent commentary on IP Europe's call for a do-over of the proposed EU standard-essential patent (SEP) regulation. There really is an evidentiary issue because a proposal with potentially far-reaching consequences (throughout and beyond the European Union) can only be justified by and with reasonably hard evidence. There's always going to be someone who disputes that the evidence is strong enough--that's politics. But in this case I think there can be no reasonable doubt about a failure of proof.
While the proposal talks a lot about transparency, it is ultimately about the circumstances and parameters that will--or will not--result in patent injunctions if a SEP holder and an implementer cannot agree. In the vast majority of cases, litigation isn't necessary, and that fact is often overlooked. In the minority of cases where SEPs are actually enforced in court, the central question is almost always just whether an injunction will issue after an infringement of a valid SEP has been identified.
Put differently, no one would care about an asymmetry of information or anything else like that if there were no injunctions. But "no injunctions" is not the answer. It definitely wasn't the answer the European Court of Justice gave in 2015 when it decided the preliminary reference in Huawei v. ZTE. The answer was--in other words--that neither hold-up nor hold-out are acceptable. EU competition rules protect against hold-up, but their purpose is not to incentitive hold-out either.
From an innovation policy point of view, both types of conduct are harmful. Hold-up will result in a misallocation of resources by allowing SEP holders to overleverage their intellectual property rights. That means money will be siphoned off of those who implement standards to make products. Hold-out, however, has the effect of sometimes highly profitable implementers eating the seed corn of those whose innovations involve contributions to standards. That, too, is a misallocation of resources.
The European Commission's Directorate-General for the Internal Market (DG GROW) acted as if there was an urgent need to act. But there isn't. As always, there are some interested parties who want someone to put a thumb on the scales in their favor, and they don't want to wait. But where's the clear and present danger? It's not like small and medium-sized companies are being sued into oblivion by ruthless SEP holders. DG GROW's official impact assessment only quotes from some submissions by unidentified companies telling stories of all sorts, some of which are not at all plausible. Unverified and unverifiable anecdotes shouldn't count as evidence, especially when there are known astroturfing operations that orchestrate questionable submissions and interviews.
I've criticized conflicts of interest on the part of a couple of the "researchers" contracted by DG GROW in this context, and I've voiced disagreement (and will voice even more disagreement) with their findings going forward. But I do want to give them credit for this perfectly honest paragraph that comes down to saying there is no evidence there for either hold-up or hold-out:
"Existing empirical evidence on the causal effects of current SEP licensing conditions is largely inconclusive. Empirically observable outcomes do not indicate the existence of pervasive 'opt-out' from standards-related innovation as a consequence of SEP licensing conditions; i.e. it does not appear that the observed challenges in SEP licensing are sufficiently severe as to systematically discourage potential contributors from participating in standards development, or discourage potential implementers from creating products that use technology standards subject to potential SEPs."
So if we ask ourselves what DG GROW should really do to enable the EU Council and the Parliament to legislate on the basis of a particular proposal, the number one priority must be an analysis of the hold-out vs. hold-up question. The answer is not that DG GROW simply--and conveniently--ignores what its own researchers say: they don't have that kind of evidence in the record. At least not yet.
The issues are not only evidentiary, but also structural. I mentioned before that I was on a SEP panel at a Concurrences-King's College London conference last week. None of us five panelists thought that the EU proposal was flawless and workable in its current form. One of them, a UK patent litigator, had a different focus. All others raised issues that are problems regardless of whether one philosophically wants the EU to go in that direction or not. In fact, the two academics on our panel cannot be blamed for being unreceptive to implementers' concerns.
It would probably be unprecedented, but it would be an honorable and reasonable decision to go back to the drawing board. The question of hold-up vs. hold-out should be analyzed. Researchers commissioned by the EC could be provided with real-world evidence by industry (SEP holders as well as implementers). And to the extent that a few SMEs claim there are issues, their stories should be independently evaluated by law scholars and economists as opposed to taking at face value what may simply have been submitted by some at the behest of astroturfers.
Some argue that there is evidence for hold-up, but none for hold-out. Some suggest the opposite. My perspective is actually a centrist one. I would encourage the Commission and the researchers it relies on to look into both issues. Where companies took licenses under the threat of an injunction, the question is whether the terms were supra-FRAND or simply market rates. At the same time, cases in which companies refused for many years (in one extreme case that is publicly known even for well over a decade) to take licenses, also need to be analyzed. The first step is to understand the two kinds of problems; the second one is to understand whether one of those problems--and if so, which one--is so prevalent that intervention is warranted.
If there was a pressing problem, the paragraph that I quoted from the impact assessment study would not have been written that way.
