Unified Patents, LLC is a member organization dedicated to deterring the assertion of low-quality patents by non-practicing entities (“NPEs”), and by holders of self-declared standard essential patents (“SEPs”). Unified monitors ownership data, secondary-market patent sales, demand letters, post-grant procedures, and patent litigation to track NPE and SEP-holder activity, and often files post-grant proceedings challenging low-quality patents.
Unified writes to advocate for ways to make licensing of SEPs more transparent and efficient, to the benefit of patent holders and licensees, and both large and small and medium enterprises (“SMEs”). Unified appreciates the recognition of the importance of incentivizing greater collaboration in improving standardization efforts and bringing increased transparency and predictability to SEP licensing.
Standards development is critical. Computing technology, from personal computers and phones to the World Wide Web and cloud systems, operate based on thousands of standards. Most of these standards have been effectively adopted without major patent-related conflicts. Given this efficiency, the U.S. should be cautious about altering the governance of standard-setting organizations.
However, disputes have escalated recently, particularly around communication standards like 4G, LTE, and 5G.[1] Two main challenges arise: firstly, there is either contention regarding or insufficient resources to determine which patents are truly essential to these standards; secondly, disagreements abound regarding what constitutes a Fair, Reasonable, and Non-Discriminatory (FRAND) royalty rate. Given the anticipated proliferation of 5G, 6G, and subsequent technologies, it is important for policymakers to address these concerns.
Using 5G as an example, the overwhelming number of patents linked to the standard, totaling over 150,000, makes it daunting for newcomers and licensees to assess essentiality. Not all declared essential patents are genuinely essential. A 2019 study of over 6,000 such patents revealed that only 42% of patents from operating companies and a mere 21% from non-operating entities were essential.[2] More recent studies have found that as few as 10% of patents declared essential to the 5G standard are actually essential.[3] As underscored by former USPTO Commissioner, Robert Stoll, there are “increasing commercial, geo-political, and legal incentives for companies to declare [essential] as many patents as possible.”[4]
Even when patents are acknowledged as essential, there’s a broad disparity in FRAND royalty perceptions and a lack of validity review. U.S. court cases illustrate that patent owners often demand royalties considerably higher than the eventual adjudicated FRAND rate. For instance, in the TCL vs. Ericsson case concerning 4G patents, the initial royalty demand was 3%, but the court-approved FRAND rate was only 0.45%.[5] Such disparities are not uncommon.[6] With regard to validity, very little review or analysis is undertaken in SEP licensing. Large portfolios are largely unchecked. This is concerning, given that approximately 42% of U.S. patents that have been reviewed at the PTAB have found at least some claims to be invalid.[7]
A significant obstacle for many licensees, especially SMEs, is the lack of transparency regarding essentiality, FRAND rates, and validity. Due to the confidential nature of most license agreements, obtaining this crucial information becomes expensive, requiring legal assistance. In the absence of such transparency, many inventive entities, especially SMEs eyeing new products, face challenges in obtaining FRAND licenses for SEPs.
I. Increased transparency, clarity, and strength in our patent system are essential to promote SME growth, as is protection from unwarranted injunction threats (Question 6)
There is no dispute that ambiguity, over-declaration, and monetization of invalid patents is a barrier to economic growth. Similarly, increased transparency, clarity, and healthy patents are non-negotiable facets to ensure an environment conducive for SME growth. One shining example of U.S. intellectual laws and policies that have successfully addressed a growth inhibitor, is the America Invents Act (“AIA”). According to a 2020 study by the Perryman Group, the AIA led to an increase in U.S. business activity of $2.95 billion in gross product and 13,500 job-years of employment.[8] The AIA established a fair, efficient, and cost-effective procedure for reviewing patent validity on the merits. It allows us to remove invalid SEPs from our system, without needing to resort to costly litigation. These invalid SEPs should not have been granted in the first place, much less be monetized. At the very least, AIA proceedings bring clarity to patent scope, which further aids in determining whether a SEP is actually essential to a given standard. There is simply no other efficient mechanism for error-correction. Such error-correction is a necessity, given the high number of invalid and non-essential patents being included in SEP licensing. Indeed, recent studies have indicated that as few as 20% of patents are actually valid.[9]
Recent proposals, such as the USPTO’s April 2023 Advance Notice of Proposed Rulemaking (“ANPRM”) and PREVAIL Act, would cripple the efficacy of the AIA and greatly inhibit SME growth. SMEs face the daunting challenge of navigating through a maze of over-declared and potentially invalid patents. This over-declaration, combined with the lack of transparency, not only stonewalls entry for SMEs but dramatically increases their operational costs. Any policies that would move us back towards a pre-AIA system or that would limit efficient access to validity review, will have a dramatic economic impact. As Senator Leahy made clear, this is particularly true for small innovative companies.[10]
The existence of invalid patents in the system has profound economic implications. Licensing and standardizing invalid patents generate considerable economic waste. When businesses, especially SMEs, are forced to license invalid patents, it effectively becomes a tax on innovation, diverting resources away from R&D, expansion, and hiring towards unnecessary licensing fees. A study by Bessen and Meurer (2009) highlighted that the costs of patent litigation far exceed the benefits of patents in terms of R&D incentives for public companies.[11]
To counteract these economic pitfalls, it’s imperative to increase transparency in licensing and the implementation of standards. Moreover, our IP system must not only champion strong patents but actively provide avenues to challenge and eliminate weak or invalid ones. This, in turn, will allow SMEs to focus on innovation and market competition rather than being embroiled in exhaustive legal battles.
Another important U.S. law that promotes SME growth and should be encouraged internationally is eBay.[12] Under the Supreme Court’s framework, the U.S. patent system correctly allows patentees to obtain a reasonable recovery on their creations, but not an excessive one that would stifle downstream innovation. This doctrine “provides ample strength and flexibility for addressing the unique aspect of FRAND committed patents and industry standards in general.”[13] Any alternative policy that increases injunctions or the threat of an injunction would subject manufacturers and producers to undue pressure. Such pressure would lead to licensing rates that are based on the threat of litigation and exclusion from the market, rather than the value of the patent itself. SMEs, who may lack either the resources or information necessary to withstand such pressure would be particularly vulnerable.
SEPs, in particular, have become a treacherous place for SMEs. Injunction threats tip the balance and cause undue pressure on implementers, often stifling innovation and growth. This can be seen in the context of ITC Section 337 Investigations. NPEs abuse this system designed to protect domestic industries even though they themselves have no domestic industry or business. NPEs asserting patents in the ITC undermine the very essence and foundational principles of the patent system and the ITC's mission. The ITC was designed as an instrument to combat unfair trade practices. However, in a stark departure from these foundational tenets, the appeal of an injunction has caused the ITC to fall victim to patent troll abuse, including with regard to SEPs. This is evident in the ITC's own statistics, revealing that nearly a third of Section 337 investigations last year were initiated by NPEs,[14] most of whom profit solely from patent litigation, rather than genuine innovation. This trend not only contradicts the original objectives of the patent system but also reflects the gaming of the U.S. legal system. This leads to litigation induced licensing agreements merely to fulfill the domestic industry requirement. To stay true to its mission of curtailing unfair trade practices and further strengthen our domestic and international patent system, it is important to discourage injunctions for NPEs, including through such efforts as the Advancing America’s Interests Act.
Internationally, we should make every effort to promote the advantages of eBay and the sound policy implications of reducing injunctions. While the U.S. navigates a balanced IP approach, certain jurisdictions have become attractive venues for SEP patent holders seeking to extract undue influence or outsized value from their patents by using injunctions as a threat. This is due to international jurisdictions’ proclivity to grant injunctions before determining FRAND royalties or patent validity.[15] For example, IP Bridge, a Japan-based NPE, obtained an injunction against Ford Motor Company on 4G SEPs before Ford even had a chance to obtain a FRAND rate.[16] These practices put undue pressure on U.S. companies, forcing strategic decisions based on legal strategy rather than genuine market considerations.
From a policy perspective, it’s worth reiterating that maintaining weak or invalid patents in the system is not only detrimental to SMEs but also the economy as a whole. These patents invariably create a system filled with legal landmines, which deter innovation and hamper genuine growth. As Feldman and Lemley (2016) aptly stated, the pharmaceutical industry, for instance, has seen a flood of weak or overbroad patents, leading to needless litigation and a “drag on innovation.”[17] We should not let the same happen to SEPs.
II. The Department of Commerce should support efforts by the European Commission to improve transparency and efficiency in SEP licensing (Questions 7 and 9)
The European Commission’s commitment to addressing challenges and pitfalls in the realm of SEP licensing is encouraging. The ramifications of unfair SEP licensing practices are far-reaching, negatively impacting innovation, the competitive landscape, and market dynamics, particularly in Europe.
In the context of this effort, several concerns should be addressed. For example, certain SEP holders wield their essential patents to demand unreasonably high license fees, coupled with threats of injunctions that could potentially bar standards-supporting products from entering the market. The Commission’s detailed Impact Assessment Report underscores the need to instill predictability, transparency, and, crucially, fairness in SEP licensing. Achieving these objectives can pave the way for stimulating growth and innovation in Europe, curbing unfair SEP licensing behaviors, and advancing technological and economic goals.
Over-declaration is another concern. Many courts have observed that patent holders have an incentive to declare more of their patents to be essential than is, in fact, the case. For example, in Unwired Planet, the court noted that “[o]ver-declaration is a substantial problem as illustrated by the [lower court] judge’s assessment that up to 72% of declared SEPs are not truly essential.”[18] One scholar observed that “[o]verdeclaration of SEPs is rampant. Studies by . . . an intellectual-property consulting firm[] evaluated the essentiality of patents declared essential to major wireless-communication standards and found that less than half of the declared SEPs were actually essential or ‘probably essential.’”[19] Such “overdeclaration artificially inflates royalty rates in license negotiations and skews courts’ reasonable-royalty analyses.”[20] Indeed, in one study, Cooper, Dwyer, and Haimovich reported the results from an analysis of a sample of 200 SEPs drawn from a census of ETSI 5G disclosures. They reported that only about 8% were found to be “likely essential.”[21]
Even if unintentional, by over-declaring patents, patent owners increase the number of claims they can bring in litigation while also increasing the costs to an implementer of defending against these claims, irrespective of whether the patents at issue are valid and enforceable. Second, by declaring inessential patents as standard-essential, an implementer is at risk that a court will erroneously find the inessential patents to be true SEPs, creating a presumption of infringement. This exposes implementers to damages claims and possible injunctions or exclusion orders. Regardless, the potential costs from even the prospect of litigation increases the patent owner’s bargaining leverage. Implementers, particularly SMEs, are left with little choice but to pay higher royalties than are otherwise warranted.[22]
The Commission’s proposed Regulation includes three key features that, if properly developed and implemented, should improve the fairness of SEP licensing:
a central register identifying declared SEPs, providing transparency and allowing portfolios to be analyzed for essentiality;
the publication of aggregate royalty rates, promoting clarity in understanding the universe of patents that govern a particular standard; and
a pre-litigation process for determining FRAND terms, reducing the number of expensive disputes and avoiding the extreme, anticompetitive threat of injunction.
However, more can be done to encourage standards adoption and alleviate issues with SEP licensing. Bilateral FRAND determinations prior to litigation would mitigate hold-up risk. This would reduce the cost of negotiations and the frequency of litigation, to the benefit of licensors and licensees alike (particularly SMEs).
The disparity in SEP licensing disproportionately affects SMEs. The notion that SMEs are not affected by SEP abuse because they are not involved in SEP litigation is incorrect. Most SMEs cannot afford the high costs associated with SEP negotiation, let alone litigation.[23] Indeed, 82% of the SMEs who responded to a recent European Commission survey reported that they “did not have [the] resources to negotiate with SEP holder[s]/engage in court proceedings.”[24] As a result, SMEs are often coerced into unfair licenses and silently bear the burden of excessive royalties rather than risk costly legal battles.
Two recent FRAND decisions in the United Kingdom provide evidence of SMEs being pressured into non-FRAND licenses by large SEP licensors. In litigation between InterDigital and Lenovo, the court concluded that InterDigital’s purported “program rates” for licensing its SEPs were in fact “paid only by the smallest and least sophisticated licensees.”[25] The court concluded that a FRAND rate for InterDigital’s SEP portfolio was less than half of the amount sought.[26] Likewise, in litigation brought against Apple by Optis Cellular Technology, the court noted that “Optis was able to exert significant pressure” against small companies “to get the sort of deal it wanted.”[27] While the per-unit royalties that Optis charged to SMEs significantly exceeded what Optis charged larger companies, the SMEs’ low sales volumes meant that the transaction costs likely exceeded the total royalties.[28] The court thus concluded that Optis entered these deals not “because of their economic significance, but because they provided Optis with comparables that Optis wanted to deploy.”[29] As such, much work still needs to be done in order to protect SMEs from these tactics.
III. Increased transparency is the most effective way to facilitate the resolution of FRAND licensing disputes (Question 9)
At the heart of every robust, fair, and effective system lies transparency. It is the linchpin of balance and equity. In the context of SEPs and the intricacies of FRAND commitments, the value of transparency cannot be overstated. It serves a dual purpose: ensuring balance and promoting fairness. First, a transparent system minimizes the information asymmetry between patent holders and technology implementers. This ensures that both parties are on an equal footing during negotiations, fostering a conducive environment for balanced and equitable deals while also reducing transaction costs and waste. Second, transparency promotes fairness. Clarity in the rules and processes ensures that neither party can take undue advantage of ambiguities, thus promoting fairness and reducing the risk of conflicts.
A lack of clarity and transparency invariably leads to disputes, often manifesting in the form of costly litigation. Litigation not only saps the resources of the involved entities but, more crucially, diverts attention and resources from genuine innovation, impeding technological progress. The empirical evidence underscores the dire consequences of ambiguity in FRAND licensing and in asymmetrical information between parties attempting to reach a compromise. A study from 2021 presents a stark picture: cellular standards, governed by ambiguous FRAND policies, were found to account for a staggering 75% of all SEP litigation.[30] In contrast, IEEE standards, which emphasize greater transparency, accounted for a mere 2%.[31] This disparity not only highlights the pitfalls of ambiguity but underscores the efficacy of transparent frameworks in preventing disputes.
Given the above, increased transparency of information, including certain of the objectives sought by the proposed EU regulation discussed above are laudable. Policies that would increase transparency, include:
Encouraging disclosure of licensing terms, including royalty rates and calculation methodologies. This would provide the parties clear expectations, reducing surprises or disagreements.
Establishing repository or database for declaring SEPs, where all holders can declare their patents and associated licensing terms. This can serve as an important reference for technology implementers, streamlining the licensing process. Currently, there is no standardized or straightforward method for implementers to ascertain the universe of patents that are essential to any given standard.
Collaborating with standard-setting organizations to develop more explicit guidelines defining what constitutes a FRAND commitment. This would reduce ambiguities that give rise to disputes.
Promoting efficient mechanisms for validity and essentiality review of declared SEPs. This will decrease the current propensity for over-declaration whereby SEPs that are not SEPs and invalid patents are used to inflate licensing terms.
Engaging with counterparts in other jurisdictions to harmonize SEP and FRAND policies. This would ensure consistency and reduce the risk of international disputes.
In essence, transparency is not merely a tool; it is the foundation upon which a just, efficient, and effective SEP and FRAND ecosystem can be built.
IV. Conclusion and Recommendations
In conclusion, fostering an environment where SMEs can thrive is vital for economic progress. Addressing the challenges posed by our current IP landscape is paramount in this quest. Increasing transparency and patent quality is the only way to promote innovation and participation in standards, without handicapping SMEs, many of which lack the resources to fight legal battles or conduct prohibitively intensive SEP analyses. Specific recommendations to this effect consist of:
Advocate for increased transparency in licensing negotiations for SEPs, ensuring a level playing field for SMEs.
Reevaluate initiatives that could potentially weaken the PTAB to maintain its indispensable role in the IP landscape and, similarly, advocate for more efficient and cost-effective protocols internationally for validity and essentiality review.
Reconsider the use of SEP injunctions as a remedy both in the courts and, as it relates to NPEs, the ITC.
We appreciate the opportunity to provide insights on this matter and hope they contribute to a more transparent, efficient, and fair IP system.
