An Analysis of India s Concerns Involving FRAND-Assured SEPs

Transcription

1 ttthe An Analysis of India s Concerns Involving FRAND-Assured SEPs Koren W. Wong-Ervin Global Antitrust Institute Antonin Scalia Law School George Mason University New Delhi, India August

2 2 Overview I. Excessive Pricing II. Non-Disclosure Agreements

3 I. Excessive Pricing GLOBAL ANTITRUST INSTITUTE 3

4 4 Excessive Pricing U.S. Approach U.S. antitrust law does not regulate price. Firms are free unilaterally to set or privately negotiate their prices Rational: Rewards the risk-taking and entrepreneurial behavior that lead to innovation and economic growth High or even unfair prices do not restrict or eliminate competition Charging monopoly prices attracts new entry, which tends to increase, not decrease competition, which drives market prices down over time

5 5 Excessive Pricing Issues Raised Particularly difficult to assess fairness of IPR prices no marginal cost to which the price may be compared IPRs are highly differentiated products making price comparisons difficult, if not impossible Requires agency to calculate a reasonable royalty range as a baseline.

6 6 Royalty Base and the SSPPU In Ericsson v. D-Link, the U.S. Court of Appeals for the Federal Circuit explained that the SSPPU approach was created as an evidentiary rule to help our jury system reliably implement the substantive statutory requirement of apportionment (i.e., separating the value of the patented feature(s) from the unpatented features). Concern is misleading juries by placing an undue emphasis on the value of the entire product. Mathematically irrelevant relationship between rate and base that matters 1% rate applied to a $100 end product yields the same royalty payment as a 10% rate applied to a $10 component of that product.

7 7 SSPPU cont. Does not prohibit private parties from using the end-user device as the royalty base in arms-length negotiations Never intended to form the basis of an antitrust violation

8 8 Royalty Stacking Based on the Cournot complements problem, i.e., input suppliers will set their price without regard to the price of other necessary inputs. Key question: how to determine whether a particular aggregate royalty is excessive? The aggregate royalty should be considered, if at all, only when there is evidence that it would have a severely adverse effect upon the product market, or at a minimum substantially restrict output. Testable implications

9 9 Royalty Stacking cont. Recent empirical evidence shows that, contrary to the predictions of the royalty stacking theory, between 1994 and 2013: the non-quality adjusted average selling price of a mobile device fell 8.1% per year on average; the number of devices sold each year rose 62 times or 20.1% per year on average; the number of device manufactures grew from one in 1994 to 43 in 2003; and since 2001, concentration fell consistently and the average gross margin of SEP holders remained constant. --Galetovic & Gupta, 2015

10 10 Royalty Stacking cont. 1. Distinguish between an aggregate royalty burden that accurately reflects the cumulative value of the various SEPs included in a given standard from an aggregate royalty burden that includes at least some supra-frand rates (individual hold-ups). The former is simply the cost of making products that benefit from valuable IP, analogous to any other cost of doing business. E.g., automakers

11 11 Royalty Stacking cont. 2. Proper apportionment can eliminate the risks of either hold-up or royalty stacking. As long as the inputs for multi-component products are priced according to the value of the patented contribution to the end product, no SEP holder can be faulted for either hold up or stacking. Proper apportionment is a reasonable means to accomplish this goal.

12 12 Royalty Stacking cont. 3. We need to keep in mind the difference between the number of SEPs and the number of SEP holders. Given the prevalence of portfolio licensing, it is the latter number that we care about. Even if a license to 1,000 SEPs were required to implement a given standard, if all of those SEPs were held by a single entity who licensed on a portfolio basis, there would be no stack at all.

13 13 Royalty Stacking cont. 4. Not all SEP holders seek any license payments. As the U.S. Court of Appeals for the Federal Circuit in Ericsson v. D-Link stated, [t]he mere fact that thousands of patents are declared to be essential to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder.

14 14 Royalty Stacking cont. 5. There is no reason to assume that the Cournot complements problem will necessarily be the case in standard-setting contexts. SEPs may have limited or no applications outside of the standard, in contrast to the zinc and copper inputs Cournot had in mind for brass production. The SEP holders will be cooperating with one another and all other SDO members in the development of the standard, and are thus likely to know what patents are expected to be asserted and by whom.

15 15 II. Non-Disclosure Agreements (NDAs)

16 16 Non-Disclosure Agreements The purpose of antitrust law is to protect the competitive process and not individual competitors. Accordingly, no U.S. court has held that including an NDA in a patent license constitutes an antitrust violation. NDAs provide several economic benefits: Protecting confidential business information of both parties Facilitating negotiations without fear that information will be revealed to non-parties In Ericsson v. Intex, the Delhi High Court held that NDAs are a sine qua non in every licensing deal... which entails exchange of various confidential business and technical information between the parties.

17 Non-Disclosure Agreements cont. To the extent the antitrust theory of harm relating to NDAs is that their inclusion undermines the ND prong of FRAND, an antitrust remedy is inappropriate and unnecessary. The FRAND commitment is a contract and failure to perform that contract warrants contract remedies. There is no reason to impose an antitrust sanction for the inclusion of one contract term in order to facilitate performance with another. That would be tantamount to imposing an antitrust duty to risk disclosing to rivals one s confidential and sensitive business information. GLOBAL ANTITRUST INSTITUTE 17

18 18 Non-Disclosure Agreements cont. The ND prong of FRAND does not require licensing terms, including price, to be the same for each licensee. Instead, depending upon the specific SDO s IPR Policy at issue, the ND prong is typically about access to essential patents, not the specific terms of a license.

19 19 Non-Disclosure Agreements cont. Whether discriminatory licensing is anticompetitive should be determined by an effects-based analysis that recognizes: 1. discriminatory licensing can serve legitimate, procompetitive ends and enhance consumer welfare; and 2. price discrimination helps a firm with fixed costs to recovery its outlays and is sometimes essential if the firm is to recovery those outlays. The innovation process typically involves large upfront investments in R&D yet very low marginal costs for implementation. Economists have observed that price discrimination can be an important mechanism for recovering fixed costs under these circumstances.

20 Contact Information Koren W. Wong-Ervin Adjunct Professor and Director Global Antitrust Institute Antonin Scalia Law School George Mason University Phone: Website: gai.gmu.edu GLOBAL ANTITRUST INSTITUTE 20