The Department of Justice Affirms End Device Licensing – The Avanci 5G Licensing Business Review Letter

This week the Department of Justice issued a business review letter (BRL) relating to Avanci’s proposed 5G licensing platform for patents declared as potentially essential owned by its globally diverse thirty eight licensors.   In direct contrast to creative claims attempted by Continental, Robert Bosch, Bury, Gemalto and Daimler in their antitrust complaint to the European Commission’s Directorate General for Competition (DG COMP) European Commission, the US Department of Justice undertook vigorous traditional antitrust analysis of end device licensing and affirmed Avanci’s licensing model after recognizing its numerous procompetitive benefits. In today’s inter-connected antitrust environment, this analysis helps guide the DG COMP analysis of this matter as well as a potential review by the European Court of Justice.

Below are a number of preliminary observations about the Avanci BRL (I may add to them after I have more time to digest the letter).  First, it is very practical in nature, and fulfills the “business” aspect of the “business review letter”.  It will facilitate licensing negotiations and improve the functioning of licensing markets because it appears to accept that there are certain practical compromises and approximations that are necessary in any business negotiation.  The BRL generally avoids the temptation of a purist approach that prevents the market from functioning, despite advocacy from strategic infringers who wanted it to do just that. (This is a very real problem – I recall very well when a non-US “antitrust” authority suggested with a straight face that my client offer a dynamic royalty rate that would change whenever a patent was invalidated by a licensee or a third party.  Deaf to my concerns about legal certainty and practicality, I put an end to this royalty-rate-of-day silliness by noting that the rate should also be allowed to increase whenever my client was issued or purchased new SEPs.)

Second, the BRL seems well balanced. It speaks about both hold-up and hold-out; it makes a reference to the theoretical problem of royalty stacking; and weighs the interests of both licensors and licensees.  For example, it notes the high value of aggregation of SEP (into pools) to vehicle manufacturers (p9) and at the same time notes the benefits of a “one stop shop” to both licensee and licensors (p18).

Third, the BRL, in a sign of its realistic approach to licensing practice, recognize the impracticality of Avanci commissioning essentiality checks on all patents that are part of the program which amount to more than 30,000 patents. (p15)

Fourth, the BRL affirms Avanci’s approach to royalty distribution which is premised on the (capped) total number of evaluated essential patents; other licensing revenue (READ: comparable licenses); a third party evaluation of standards contributions to relevant 3GPP working groups by the patent owners; and the willingness and ability of licensors to enforce their patents.   (p6,10).

Fifth, following from prior point, the BRL correctly explains that market-based evidence of prior licenses, i.e. comparable licenses, are one of the most effective ways to measure the value of patents. Indeed, that is why under U.S. patent law comparable licenses are the first Georgia Pacific factor.  Thus, footnote 71 states that “Market-based evidence of prior licenses to the patent ‘may be the most effective method of estimating the asserted patent’s value.’” This is a particularly noteworthy statement when considered in light of the IEEE’s 2015 rule changes.  The IEEE prohibits consideration of comparable licenses “obtained under the explicit or implicit threat of a Prohibitive Order.”  As an aside, the IEEE’s rule change is on its face ridiculous: ALL patent licenses are obtained under at least an implicit threat of a prohibitive order.  I do not think a legal regime exists in any jurisdiction in the world where the courts do not have at least an inherent power to enjoin a putative licensee who absolutely refuses to deal with a willing licensor that owns valid and infringed patents. This travesty is probably one of the reasons for the collapse of the IEEE’s open RAND regime, of which I’ve written last year. It will be interesting to see how RAND-less Wi-Fi litigation unfolds in the coming years.

Sixth, the BRL does not mandate end-device nor component level licensing but leaves it up to the parties and their respective commercial interests.   As noted on page 17, “It will be up to individual licensors to decide whether they will bilaterally license automotive manufacturers or component suppliers outside the Platform.”  This is eminently reasonable, especially when the goal is increasing competition rather than restricting it.

Seventh, referring back to the 3G Platform Patent Partnership business review letter, the BRL clarifies that end device licensing is a long time industry practice (pages 17, 19-20) that has been cleared by the DOJ in the 1990s.  Moreover, the BRL notes the many procompetitive benefits of end device license (page 20). That data also demonstrates the consistency of the current Antitrust Division’s jurisprudence with decades of Antitrust Division jurisprudence.

Eighth, the BRL make no explicit mention of Smallest Saleable Patent Practicing Unit (SSPPU) “doctrine” – if you want to dignify it with such a term – which, as I have documented elsewhere, was originally a way to simplify damages calculations for lay US juries, but now is mostly as a cudgel utilized by (efficient) infringers to minimize or eliminate patent royalties.  Typically the SSPPU fairy tale is twinned with the myth of dangerously high royalty stack and combined with the theory that SEP owners must license all comers, and ideally to component manufacturers. Yet despite a 10+ year long, well-funded campaign of academics, lobbyists and faux-advocacy associations funded by dominant platform money of Google, Apple and others, to change SDO policies to favor implementers, increase the transaction costs for SEP owners, shift the licensing burden to implementor’s suppliers, and, more often than not, benefit Chinese manufacturers, the BRL relegates SSPPU to the footnotes where it fits (129 and 136) citing well respected critics of the doctrine in the SEP context.

Ninth, the statement on page 19 that “’Have Made’ rights give component suppliers freedom to supply a licensee” (page 19) is valuable and correct.  Additionally, footnote 131 explains a very important point in licensing relationships: “Even without explicit ‘have made’ clauses, courts are unlikely to allow an injunction against upstream component makers supplying licensed entities.”

Tenth, there is important acknowledgement of patent exhaustion realities in footnote 136.  The BRL, citing several economists notes that “patent holders cannot “extract ‘the value’ of being able to use its patented technology at multiple different levels in the value chain” due to patent exhaustion, and thus, the “second-best approach (in terms of capturing a significant fraction of the overall value of being able to use its technology for the patent holder) is to look as far ‘down’ the value chain as possible” (citations omitted).

There is one semantic nit to pick with the BRL and which it would be good to clarify.  5G patents are not “declared essential,” they are declared potentially essential.  While the BRL discusses how patents are “declared essential” for 5G (see page 1, 3, 8, 11, 13), this is not how it works. The ETSI IPR Information Statement & Licensing Declaration form states: “Declarant…hereby informs ETSI that it is the Declarant’s…present belief that the IPR(s) disclosed in the attached IPR Information Statement Annex may be or may become ESSENTIAL”.  This is the very reason why as the BRL note prior, favorable BRLs have all had essentiality review procedures (page 14).  It is important to understand the difference between “declared essential” and “potentially essential” is not merely one of semantics. As I have discussed extensively, eliding the fact that declared essential are not in fact essential is one of the reasons why the  Huawei-funded IPLytics and GreyB reports referenced on page 3 of the BRL is misleading.  While noting the number and proportions of patents declared essential is interesting, far more relevant for licensing discussion is the number and proportions of patents that are in fact (or at least, likely to become) essential.

The above nit, notwithstanding, the competitive licensing environment sees much to like about the BRL and it will be very interesting to see how it impacts the various litigations impacting Avanci.