Restoring the promise of competition: ex ante pro-competitive regulation of FRAND access to SEPs

ABSTRACT

Overseeing digital gatekeepers through ex post competition law is too slow and too complicated to prevent serious exclusionary and exploitative harm. To provide greater contestability and fairness in digital markets, new European laws introduce complementary ex ante pro-competitive regulation. Differing forms of intellectual property innovation are crucial for the increasing digitization of markets, particularly involving the Internet of Things. When intellectual property “gatekeepers” thwart willing implementers’ access to standards by seeking injunctions, ex post competition law enforcement is too slow and complicated to prevent serious exclusionary and exploitative harm. Ex ante regulation could ensure re-instatement of the pro-competitive promise of FRAND access that ensures fair, contestable and innovative markets.

KEYWORDS: Competition, innovation, intellectual property, standard essential 

Interoperability matters – of open gates and tolls

If their procedures work properly, and participants take their obligations seriously, then Standard Setting Organisations (SSOs) can be pro-competitive. They replace what would be duplicative competition with the selection of a standard, to in turn foster widespread use of the standard and downstream innovations by implementers. It is important to note that despite being expert bodies, the selection process is not “competition for the market”. If it was, we might be more relaxed about the commitments SSOs require of participants, in particular to ensure their standards are accessible by all. Instead, we offer the collaboration among competitors through the SSO selection process only a “safe harbour” from competition law scrutiny for the greater good of more advanced competition and innovation, that comes with products and technologies being made more interoperable through standards. Key to this interoperability is access to the standard.

Access itself is not free nor may it be conditioned in such a way as to have an anti-competitive effect. Such effect could occur if a company is either completely prevented from obtaining access to the result of the standard, or is only granted access on prohibitive or discriminatory terms, e.g. by extracting excess rents by way of excessive royalty fees thereby preventing effective access to the standard. To prevent this, SSOs develop standards that may involve intellectual property rights, which would have to be declared by holders of those IPRs as essential to the given standard and FRAND licensing commitments for them to be accepted. As such, to foster the use of standards in a contestable and fair manner, SSOs determine that standards are open for all willing to license Standard Essential Patents (SEPs) on fair, reasonable and non-discriminatory terms (FRAND access). Such regimes prevent wasteful investment amongst patent holders and instead foster the rapid proliferation of innovations both by the SEP holder and those seeking to implement the standard. FRAND access to the standard is key to this continued cycle of innovation. It cannot be fettered by non-FRAND considerations. Providing access to the standard and the further innovation is the raison d’être of any SSO. That access should not be wrongfully limited through denial itself, or demands to pay supra-FRAND rates.

Unfortunately, despite the default being set to openness, in some situations and some jurisdictions, SEP holders have been able to prevent or limit this access, or exploit their gatekeeper status to extract supra-FRAND rates, which is itself a chilling check on access. Triggering judicial processes that have been set up to protect their legitimate IP rights, SEP holders become gatekeepers who can hold up implementers who are willing to pay the FRAND rate to use the standard and this in turn holds up the spread and diversity of innovation. The very act of seeking court-ordered injunctions chills use of the standard, and can exploit implementer’s economic dependence on the SEP holder to extract supra-competitive FRAND royalties.

A defenceless competition law defence

Competition authorities and some courts have sought to curtail the misuse of claims for injunctive relief by finding it to be an abuse of the SEP holder’s dominant position. This “competition defence” is quite limited, hard to prove, and arguably begins a process that has no real effect in practice in controlling the abuse. Part of this lack of effect is due to the slow speed of competition law enforcement, or to the various layers of economic analysis required to define the relevant market, find dominance and then find an anti-competitive abuse. The European Court has attempted to seek balance between the rights of SEP holders to have access to court to protect their legitimate intellectual property rights, and the interests of implementers to have the access promised to them as guaranteed by the FRAND commitment itself, and the competition law ramifications of its negation. In Huawei v ZTE, the Court set out a detailed procedural choreography to assess when such injunctive relief will not be an abuse. Some national patent courts have been left with sufficient room however to still follow their inherent tendency to uphold protection of the IP right even against willing licensees. As such, although injunctions are rare in most jurisdictions, they still remain a very real threat that can hold up the pro-competitive technological innovation supposedly fostered by standard setting process. In some national regimes injunctions are increasingly common. Not doing anything about this situation permits an individual gatekeeper to exert asymmetric control of the innovation rate of a market. Allowing this to continue – making markets incontestable and creating unfairness though a withdrawal of underlying rights of access – cannot be a responsible government response. Nor can continued judicial attempts at balancing the various interests and seeking some middle path. This attempts to please all but in fact satisfies none.

Faced with exertions of asymmetric power, a search for balance is not the right response. The only sensible and effective approach to a choke-hold is to remove it. Asymmetric regulation can help guarantee the continued pro-competitive interoperability of the standard. This calls for a return to the default of access, via an ex ante rule banning requests for injunctions against willing licensees of an SEP.

The true role of the FRAND pre-commitment

Standard Setting Organisations exist to help prevent duplicative investment among potential licensors, and allow them instead to determine collectively a standard that is interoperable and thus built-on through further innovations by implementers. The FRAND pre-commitment preserves and protects the benefits of ex ante competition between technologies vying for inclusion in the standard. It also precludes the claw back of market power by SEP holders after the standard is set. Only the guaranteed access to the standard makes the process net pro-competitive, thus speeding innovation, and competition.

What is essential for these goals is the pre-commitment by the patent holder to provide access to its SEP on FRAND terms This pre-commitment itself is the pro-competitive key for ensuring that after-markets can develop in a contestable and fair manner, without undue influence by the SEP holder. The FRAND pre-commitment is not some mere exception or encumbrance to the standard; without the FRAND pre-commitment, a patent holder usually cannot participate in the standard setting process. Without the ex ante FRAND commitment the standard would not be truly interoperable, and the access and contribution to innovation by all participants would be impossible. The pre-commitment itself is the core of the SEP’s value to both continued future innovation and competition. Without the FRAND pre-commitment, no standard essential patent should be determined.

FRAND first – a promise is a promise

This pro-competitive dynamic of interoperability and access is sometimes thwarted by unjustified requests for injunctive relief by the SEP holder. The mere request, let alone any final injunction, chills access to the standard, preventing the market in question from remaining contestable. While it may be tempting to view the FRAND commitment as a subsidiary competition law tool to mitigate the power of the collective designation of a standard, the commitment is not at all secondary. The dynamic of innovation, standard-setting and interoperability is not created by some competition law exception to general patent rights. It is the standard-setting itself that is an exception. The general patent law protection of exclusivity is given up by the prospective SEP holder in exchange for access to the standard-setting process. The patent holder’s commitment to provide FRAND access involves it trading its IP exclusivity for the greater benefit of much broader, more valuable and indeed often effectively-global licensing opportunities. The FRAND commitment is not a competition law after-thought as a check on power. As such, it is odd that authorities and courts have felt compelled to relegate competition law concerns about inappropriate use of injunctions to the status of “defences”. This view of competition law as an exception has actually served to limit timely and effective resolution of disputes relating to injunctions preventing FRAND access to SEPs.

Intellectual property rights come first – but competition policy isn’t second

Bringing competition law considerations into the mix seems appropriate, given the standard was created by collective action (not through competition for the market). It is easy to understand how the FRAND commitment can seem to be some mere competition law check on the standard holder’s newly acquired power. One of the problems with taking this view, however, is that competition concerns inevitably become viewed as less important than the underlying intellectual property right. Another problem is that this view fails to recognize that the IP right had already been conditioned by the promise of FRAND access before the standard-setting process started. And finally, using competition law as a defence to improper assertions of IP rights is destined to fail – not only in national patent courts, but also because competition law itself is slow and complicated to apply.

If a threat of or request for injunction alleges violation of the SEP holder’s intellectual property rights by a willing implementer and yet is met only with a competition law “defence” that the injunction request itself is an abuse of dominance, then the implementer is already on the back foot looking up a very steep legal and economic hill. Instead, what should be recognized is that the implementer is having to defend against an act – the request for an injunction – that should not be possible, given the promise to provide FRAND access. Worse, to raise its competition defence the challenged implementer would need to define a market, prove dominance of the SEP holder over and above any bargaining power of the implementer, and abuse – including likely effects – from the injunction request. All of this takes time, and time is a crucial asset when it comes to delays to the spread of innovation.

Time matters

It is the injunction request that is holding-up the developing market. As well, the injunction request may be a means – or have the ultimate effect – of holding-up the implementer and extracting supra-FRAND royalties on the way to restoration of the access already promised. It is also inappropriate to limit any challenge of those over-payments to situations where the implementer is able to prove that they amount to an excessive pricing abuse of dominance under competition law. Given how difficult excessive pricing cases are to run, using this aspect of competition law as a defence to such injunctions is also ineffective. No aspect of the competition defences would restore the pro-competitive dynamic that the FRAND commitment offered in the first place. That dynamic is withdrawn the second the injunction is requested.

What complicates any competition defence even more is that the holding of the SEP itself has to be assessed to identify whether it confers dominance as understood by competition law. All of this takes time, and misses the point. Indeed a proper analysis would show that a holder of a FRAND-encumbered SEP cannot ever be dominant, since the FRAND commitment guarantees the market remains contestable and fair. It is the threat of the injunction which suddenly creates vast power in the hands of the SEP holder, leveraging to its benefit the power of the courts. No amount of power or size or financial strength in the hands of the implementer can offset this. As such, the injunction threat confers dominance in all circumstances but that is – viewed correctly – not really the issue. The injunction request turns the SEP holder into a gatekeeper, barring access to what has already been promised. This gatekeeper power forces implementers into a position of economic dependence on the SEP holder, who becomes an unavoidable trading partner, which in turn is able to abuse its newly-acquired superior bargaining position to exclude implementers or exploit from them anti-competitive terms.

Controlling gatekeepers

I contend that the current narrow and ex post competition law oversight of anti-competitive activities of SEP holders shares similar failings with competition law control of digital gatekeepers. As such, this oversight would benefit from an ex ante rule re-set. Not through the creation of a new bureaucracy of rules, designations, and codes of conduct, as with the EU Digital Markets Act, but through a very specific focus on the fact that abuse of SEP holder gatekeeper power exploits economic dependence through the abuse of artificially superior bargaining power. The power is superior and artificial because it is leveraged from the judicial process itself.

Where SEP holders have made a pre-commitment to provide access to their eventual standard to willing licensees on FRAND terms the default is access, and the disputes should be primarily commercial, i.e. involving negotiation of the royalty rate. Where SEP holders seek injunctive relief against willing licensees, the “utilization” of the judicial process itself grants them the necessary added leverage to create the imbalance of power. It is the co-opting of judicial power which turns the SEP holder from a participant in a contestable market, limited by conditions of fairness in terms of payment, into a gatekeeper with far more power than was ever intended. Only with the threat of judicial sanction can the gatekeeper hold up further innovation by implementers – causing serious exclusionary harm – or hold up the implementer directly by extracting above-FRAND royalties – thus causing serious exploitative harm.

The judicial search for balance

The issues relating to FRAND access to SEPs have already involved extremely high stakes battles and litigation. Authorities and courts have worked hard to respond in a balanced manner, taking due account of the important interests of intellectual property law, competition law, and access to courts. Current developments related to the ecosystem of the Internet of Things make this area crucially important in terms of digital innovation. However, the current “balanced” approach is failing in some crucial ways. As more of commerce goes online, the importance of access to SEPs will increase, testing the carefully crafted balance even more.

Balancing asymmetric power ex post is impossible

At the heart of this problem, I contend, is an asymmetry of power that is not addressed by a careful symmetric balancing of interests, even at the procedural level. Far from it.

To be clear, the balanced “FRAND dance” created by the European Court of Justice in Huawei v ZTE is indeed helpful guidance to help devise a process by which FRAND rates can be identified and agreed. As part of a royalty negotiation it adds some clarity. However, the guidance is not fit for purpose in the actual assessment of the propriety of a request for an injunction against a willing licensee. The stakes are too high, and the gatekeeper power already creates pressure as time ticks on. Parties end up settling disputes by paying up – just to get back to the status quo ante of access. If the matter goes to some national courts, the European Court FRAND choreography is ignored or sorely tested. In cases where national patent courts grant automatic injunctions for FRAND-encumbered SEPs, the European judgement is clearly already irrelevant. The supposed balancing of the important protections of IPRs, access to courts, and competition law does not operate effectively with such requests for injunctive relief. A SEP holder gatekeeper, buoyed by judicial processes at patent courts, holds all the power. To address this asymmetry of bargaining power and its abuse, we need asymmetric regulation with respect to the very particular practice of SEP holders seeking injunctive relief against willing licensees.

Criticism of the practice of seeking such injunctive relief has already come from SEP implementer bodies, economic experts and competition authorities, citing exclusionary market hold-up and exploitative hold-up of implementers. Justifications of the practice include preventing implementer exploitation of IP rights and maintaining the holder’s right for access to the courts to do so. The way in which these genuine concerns were addressed by the European Court was to propose a middle path, or balance among them. In law and practice though the balance of such important interests has enshrined competition law’s status as an “exception” to the rule that patent rights are supreme. As such, an implementer can only seek the mentioned and ineffective “competition defence” against a SEP holder’s request for injunctive relief.

I come to these issues with a background in competition law. Nevertheless I accept that the concerns of competition policy have been assigned a subsidiary role in these areas by the judiciary. In some national patent proceedings they are ignored entirely. But even at the European Court level, competition policy arguments failed to have much impact in the creation of the delicate balance set up in Huawei. This was always likely if the issues are seen to be about competition law discipline of an abuse of intellectual property rights. What is really at issue, as I’ve argued, is attempted re-imposition of an intellectual property right already traded away in exchange for the standard. It can be difficult to find an abuse of IPRs in a SEPs context since the IP right to exclude willing licensees doesn’t exist. As such, using the threat of injunctive relief against willing licensees to deny access to the standard or to extract supra-FRAND rates is per se objectionable. There are no circumstances when it can be justified. It is thus ideal for ex ante rules prohibiting the practice.

Controlling asymmetric power

Competition law concerns about exclusionary or exploitative harm from SEPs injunctions are legitimate. Competition law enforcement, however, is not the correct route to restoring the relevant balance. Is the “balancing” judgment of the highest court in the land the final word? Perhaps not. If the correct framing of the issues is a competition among relatively similar interests, then a search for balance makes sense. When what is happening is the improper enforcement of IPRs themselves to attain vast superior bargaining power and gatekeeper status, then an asymmetric response is called for, not balance. Ex post oversight by competition law alone is too slow, and too complicated both procedurally and substantively, to prevent exclusionary or exploitative harm. Competition law concerns are likely to be given short shrift by patent or other courts anyway. What should be seen instead is that the SEP holder is trying to use the courts to assert an IP right it already traded away. Its power comes from the possibility the court process opens up. Even patent courts should be able to see this reality – using only IP considerations. The exercise of the IPR to request injunctive relief against a willing licensee is an invalid use of the patent. This could be found, even without resort to contract law considerations of promises and reasonable expectations.

Ex post oversight is not working then. Some of these important innovative markets are at crucial times neither contestable nor fair. A dynamic ecosystem cannot flourish under such conditions. The weed choking off the innovation is the withdrawal of the promise to license on FRAND terms. Thus, the pre-commitment to FRAND needs to be maintained and if necessary re-introduced. Given what is happening at present in some important national courts, this can only be done effectively through ex ante regulatory control at the European level. The recent European regulatory interest in keeping digital markets contestable and fair is important, and not going to go away. Do the two main principles opening digital markets resonate in the SEPs context? Given their shared focus on fostering (and protecting) innovation incentives, the twin principles of contestability and fairness should be relevant in the innovation context and thus to matters of IP law as well. As such, Europe’s focus in its future gatekeeper regulation on contestability and fairness seems particularly apt as a basis for further policy development. Can such concerns help guide us in restoring the FRAND pre-commitment and ensuring that it is not withdrawn from willing licensees? Of course injunctive relief can be maintained when the access is being abused, particularly to prevent urgent and likely irreparable harm. Other than such equitable relief, what guidelines or new regulation might we devise to re-set the balance?

Is it possible for ex ante pro-competitive rules to return us to the ex ante commitment made by the SEP holder in the first place? This commitment was to provide FRAND access to objectively willing licensees as a pre-condition to being able to participate and have its patent in the running to be determined as standard essential in the first place. That pre-commitment should be returned as the default – and it should not be able to be thwarted through abusive use of judicial processes for injunctions. The default for access – guaranteeing a contestable and fair ecosystem – should not be overturned lightly, and should be limited to the extreme cases where injunctive relief is needed to prevent licensees unwilling to pay the FRAND rate from exploiting the SEP holder’s innovation thus causing irreparable harm. As such, when a FRAND access commitment has been made, and there is an objectively willing licensee, there should be an outright ban on injunctions. Automatic injunctions should never be allowed in situations with a willing licensee. Such could be a “blacklist” practice, and made an object offence under a new ex ante regulatory regime. Courts deciding on SEP injunction requests should not be permitted to award injunctions as the default remedy, or after only purporting to evaluate a licensee’s willingness to accept FRAND terms. Courts must engage in genuine analysis to evaluate a licensees’ willingness, and should also examine whether the licensor is offering terms that are not even remotely FRAND or is seeking to extract excessive royalty fees thereby preventing effective access to the standard. Only then can contestability and true fairness be ensured.

Conclusion

Can a proposal be both radical and sensible? In an increasingly polarized world, we increasingly need balanced responses. At the same time, isn’t an extraordinary response to an extraordinary situation truly balanced? When existing responses are ineffective, is it not our duty to consider new approaches that are effective?

Current debate in this area remans polarized. You’re either an intellectual property judge or a competition official, and never the twain shall agree. Improper requests for injunctive relief create an imbalance of power – and effectively, a gatekeeper over technology that was originally promised to be open. Some key national courts are worsening this imbalance through automatically granting injunctions. The FRAND balancing by the European Court is not effective in the most serious situations. The need for an ex ante asymmetric regulation becomes obvious. Ex post competition law itself is too slow and its main arguments likely to be ignored by national patent courts. Delay or dissatisfaction is inevitable, denying the market the pro-competitive innovations the SSO process was supposed to provide. As such, a competition law approach or “defence” is too slow to matter. What is needed instead is ex ante asymmetric regulation.

There is a movement growing around the world to introduce ex ante asymmetric regulation to the digital giants considered to be gatekeepers. This is based on a range of concerns that resonate to some extent with the SEPs debate. Concerns include the structural nature of digital markets where innovation can appear to be progressing well, but at the expense of tipping markets towards a winner who takes it all or determines the rules or rates of the game. This creates or exacerbates the economic dependence that other firms or consumers have on the SEP holder, which in turn might limit the technological ecosystem’s diversity, such that we all become dependent on only a few firms. Other concerns include the lagging of competition law and the lateness of responses to address such issues through behavioural remedies. Thus, many governments are accepting that structural problems need structural solutions, and great imbalances in power require a reassignment of responsibilities. Governments are thus accepting that their intervention may need to be ex ante, rather than ex post, or the game is lost in the first place.

In some key jurisdictions, there is a trumping of competition law concerns by patent judges, who obviously want to err on the side of upholding valid intellectual property rights, as well as to clear their dockets. Until it is generally acknowledged in these courts that a request for injunctive relief against a willing licensee is not a validly enforceable IPR, then something else needs to be done to signal the way. It is my contention that a stronger re-balancing needs to be done. Ex ante asymmetric regulation should be developed which firmly bans the seeking of injunctions against willing licensees of FRAND-encumbered SEPs.

This will not solve all issues, of course. Much of the existing arguments today, – and likely for decades to come- involve the assessment of whether an implementer is truly willing, and the determination of a FRAND rate. These difficult knots will not be unravelled by the suggested asymmetric legislation. What will be cut through though is the blockage by the gatekeeper of access to technology, thus ensuring the continued fair and contestable development of innovative markets.