FTC Highlights SEP Antitrust Abuses

The recent remarks of FTC Commissioner Rebecca Kelly Slaughter on standards essential patents (“SEPs”) are commendable, as is her emphasis on the role antitrust law plays in curtailing anticompetitive abuses of them. The abuses Slaughter highlights mostly impact small- and medium-sized businesses, “the ‘little engines that could’ of our economy,” who lack the resources to navigate complex legal issues and are “more likely to cave to supra-FRAND rates out of fear of exclusion.” Patents do not grant companies a free pass to abuse their dominant market positions through anticompetitive means.

Commissioner Slaughter emphasized that patents are not—and cannot become—an absolute shield for anti-competitive conduct by SEP holders: “When patent holders obtain market power by virtue of being included in standards, the way they exercise that market power is not immunized from the antitrust laws merely because patents are involved.” Specifically, owners of SEPs are obligated to license their patents to willing licensees on fair, reasonable, and non-discriminatory (“FRAND”) terms, and U.S. antitrust policy plays an important role in policing those matters.

Clear antitrust policies are imperative to ensure sincere FRAND licensing practices. Without definite antitrust policies, SEPs can skirt FRAND requirements, leading to “holdup,” or the practice of prohibiting businesses from implementing technologies that implement standards unless they agree to higher royalties and more unfavorable licensing terms than the SEP owner could have obtained before the standard was set, when alternative technologies were available.

Commissioner Slaughter identified three examples of holdup evincing anticompetitive conduct: (1) refusing to license a SEP to any willing licensee in violation of a FRAND  commitment, (2) conditioning an SEP license on taking or giving a cross-license to non-essential patents or that are SEPs of unrelated standards (i.e., bundling), and (3) requiring a license to a portfolio where some or all of the patents are not even identified, let alone provided with the relevant information needed by a potential licensee to assess whether the patents under negotiation are valid, enforceable, and essential to the standard’s implementation, or offered on non-discriminatory terms.

This disproportionately affects small businesses, who lack the bargaining power to negotiate with SEP owners and the resources to defend against SEP assertions. Theoretically, federal judges occasionally enforce FRAND terms in patent cases, but as Commissioner Slaughter pointed out, that case needs to first get to court and continue on to a point to reach such a decision, and “if small and medium entities are agreeing to supra-FRAND terms because they are afraid of the threat of exclusion after litigation, there necessarily will not be a high volume of cases challenging licensing demands.”

Commissioner Slaughter also underscored the role that standards-developing organizations, or SDOs, have in setting policies that would facilitate licensing and prevent inefficient litigation. SDOs can institute policies that mitigate the harms of holdup by mandating commitments from participants to disclose and/or license standard-essential patents on FRAND terms. SDO policies can also clarify how a reasonable rate may be determined. For example, SDOs may specify a narrow set of circumstances in which injunctive or other exclusionary relief may be an appropriate remedy for “holdout,” i.e., when a potential licensee unilaterally refuses to take a license or unreasonably delays in  doing so.[1]

Commissioner Slaughter’s message that “antitrust laws have an important role to play in the standard-setting context, including conduct related to the use or abuse of SEPs” is laudable. The application of antitrust law in congruence with sound SDO policies to promote “widespread and efficient licensing” at “actual FRAND rates” can reward genuine innovation while also preventing abuses by SEP holders, including assertion of poor-quality, SEP-questionable patents.

---

[1] As Commissioner Slaughter pointed out, absent collusion, holdout does not pose the same concerns from an antitrust standpoint as holdup, which has the potential to exclude firms from implementing a standard and hurting customer choice among competitors. While competition and consumers are harmed indefinitely when market power is exploited to engage in holdup, there are remedies for holdout.

Access Advance, Who is Checking Essentiality? -- An HEVC Case Study

Some patent holders and pools designate their patents as relevant or essential to a standard without proper scrutiny or analysis. As part of an ongoing series examining this dubious practice, we highlight U.S. Patent 9,838,714. The ‘714 patent is owned by the Electronics and Telecommunications Research Institute (ETRI), is purportedly essential to the H.265 (HEVC) standard as part of the Access Advance Patent Pool, and is part of a family of at least 29 applications globally. It should not be considered essential.   

The ‘714 patent is directed to the prediction phase of video coding, specifically, how to scan the decoded signals during intra-prediction. In this process, there is a specific order in which the values of a block (e.g., a 4x4 or 8x8 transform block) are processed. The ‘714 patent requires that the first row or column is scanned first, before any other column or row. See, e.g., claim 1 (“scanning entropy-decoded signals of a first row with priority so that all of the entropy-decoded signals of the first row are scanned prior to scanning entropy-decoded signals of any other row”). 

In contrast, the HEVC standard does the opposite. As illustrated below, the HEVC standard requires scanning in “reverse order,” meaning that the last row is scanned first (from right to left) or the last column is scanned first (from bottom to top). See HEVC, § 7.3.8.11. 

See T.Nguyen, “Transform coding techniques in HEVC,” IEEE Journal of Selected Topics in Signal Processing, vol. 7, no. 6, 978-989, Dec. 2013. The HEVC standard can scan in the diagonal (§ 6.5.3), horizontal (§ 6.5.4), or vertical (§ 6.5.5) directions for intra-mode prediction, but again, it does so in the “reverse order” direction, not the direction claimed by the ’714 patent.  

​​Thus, the ‘714 patent does not appear to be essential to the HEVC standard even though it has been declared essential and actively licensed as being so. The public would benefit from appropriate scrutiny of such large patent pools that allegedly cover critical technical standards.

Comprehensive Empirical Study on Multiple SSO IPR Policy Revisions Shows No Effect On Participation

In a new study by Boston University’s Timothy Simcoe and Qing Zhang from Charles River Associates (using support from Unified’s OPEN platform and Edge / Patent Quality Initiative), the pair researched the impact of changes to Standard Setting Organization (SSO) intellectual property rights (IPR) policies on participation, standardization, and innovation for two well-known IPR policy revisions: a 2003 World Wide Web Consortium (W3C) switch from Fair Reasonable and Non-Discriminatory (FRAND) to Royalty-Free licensing and a 2015 Institute of Electrical and Electronics Engineers (IEEE) IPR policy revision. The study found these changes resulted in little or no measurable decline in participation or innovation in patent-intensive parts of either SSO. The results held for both the W3C and IEEE across numerous measures and “treatment” vs “control” group comparisons. These quantitative findings appear to contradict the theory that revisions to licensing policy alter participation in any meaningful way.

To download the entire article, visit SSRN HERE.

HEVC Royalty Stacking and Uncertainty Threaten VVC Adoption

IPWatchdog today published an article on the independent economic study that Unified Patents conducted with Charles River Associates on the economic value of the newly released Versatile Video Coding standard. The study points out that “[f]or VVC to capture market share among cellular device manufacturers, [its] royalty rates will have to be very attractive compared to the rates for AVC and AV1.” VVC is entering a fragmented, multi-codec market and its adoption is uncertain in the face of competitive video solutions that are subject to lower or no royalties. Much of this is due to the excessive royalties and licensing uncertainties that continue to plague VVC’s predecessor, HEVC.

Click HERE to read the full article.

The PTAB’s Misplaced Reliance on Litigation Trial Dates in the NHK Spring/Fintiv Framework

As discussed in prior blog posts (for example, here and here), the Patent Trial and Appeal Board (PTAB) has increasingly exercised its discretion under 35 U.S.C. § 314 (a) to deny institution of post-grant proceedings when the challenged patent is involved in related litigation, using the framework outlined in NHK Spring and Fintiv. See NHK Spring Co. Ltd. v. Intri-Plex Techs., Inc., IPR2018-00752, Paper 8 (Precedential); Apple Inc. v. Fintiv, Inc., IPR2020-00019, Paper 11 (Precedential). A major consideration in the NHK Spring/Fintiv framework is whether trial in related litigation will occur before the PTAB’s one-year statutory deadline for issuing a final written decision after institution; if trial will occur before, the PTAB will likely exercise discretion to deny institution. The rationale is simple and seemingly cogent: due to the advanced state of related litigation, institution would be an inefficient use of PTAB resources and inconsistent with the America Invents Act’s goal of providing an “effective and efficient alternative to district court litigation.” NHK Spring, Paper 8, pp. 19-20. But determining when trial in related litigation will occur is not straightforward because litigation schedules often change. Over the past year, such changes have become more prevalent due to the COVID-19 pandemic. Thus, the PTAB may deny institution based on a litigation trial date that ultimately falls after the statutory deadline. We discuss instances where this occurred below. 

• Next Caller, Inc. v. TRUSTID, Inc – Institution is denied but the trial date relied on is delayed by a year. 

TRUSTID asserted U.S. Patent 9,001,985 against Next Caller in January 2018 and amended its complaint to additionally assert U.S. Patents 8,238,532, and 9,871,913 in April 2018. See TRUSTID, Inc. v. Next Caller, Inc., 1:18-cv-00172-MN (D. Del. 2018). Next Caller filed an IPR petition challenging validity of the ’985 patent in October 2018; this proceeding was instituted and resulted in a final written decision finding some claims unpatentable and others not. IPR2019-00039, Paper 1; id., Paper 77, p. 90.

In April 2019, Next Caller filed IPR petitions challenging validity of the ’532 and ’913 patents. See IPR2019-00961; IPR2019-00962; IPR2019-00963. The PTAB exercised discretion to deny institution of each petition under § 314 (a), relying on the related litigation’s anticipated trial date in July 2020 versus the PTAB’s statutory deadline in October 2020. IPR2019-00961 and IPR2019-00962, Paper 10, pp. 14-16; IPR2019-00963, Paper 8, pp. 13-14. But the trial date was pushed back to July 2021 due to the COVID-19 pandemic.

•  Apple, Inc. v. Fintiv, Inc. – The trial date relied on in Fintiv itself is delayed and scheduled to occur months after the PTAB’s statutory deadline.

 Fintiv asserted U.S. Patent 8,843,125 against Apple in December 2018. See Fintiv, Inc. v. Apple, Inc., 1:19-cv-01238-ADA (W.D. Tex. 2018). In October 2019, Apple filed an IPR petition challenging validity of the patent. IPR2020-00019, Paper 1. The PTAB exercised discretion to deny institution of the petition under § 314 (a), relying on the related litigation’s anticipated trial date in March 2021 versus the PTAB’s statutory deadline in May 2021. Id., Paper 15, pp. 12-13. But again, due to COVID-19, the trial date was pushed back – this time to October 2021.

• Ethicon, Inc. v. Board of Regents, The University of Texas System – Institution is denied based on an “expectation” of trial within a year but knowledge of delay; the trial date relied on is delayed over a year.

The University of Texas (“UT”) asserted U.S. Patents 6,596,296 and 7,033,603 against Ethicon in November 2017 (serving the complaint in December 2017). See Board of Regents, The University of Texas System et al. v. Ethicon, Inc. et al., 1:17-cv-01084-LY (W.D. Tex. 2017). In December 2018, Ethicon filed IPR petitions challenging validity of the patents. See IPR2019-00406; IPR2019-00407. The IPRs were suspended for about a year pending the Federal Circuit’s decision in Regents of the University of Minnesota v. LSI Corp., Case No. 2018-1559, addressing the applicability of sovereign immunity to IPRs. IPR2019-00406 and IPR2019-00407, Paper 11. After the suspension was lifted, UT filed a preliminary response in the 00406 proceeding without addressing the merits, arguing only that the Board should exercise discretion to deny institution under § 314 (a). IPR2019-00406, Paper 26. And the Board did just that, even though it was aware the related litigation’s June 2020 trial date had already been continued due to COVID-19, relying on the litigation court’s “emphasis that the parallel litigation should proceed as if still set for June 22, 2020,” “expectation of holding a bench trial within a year,” and expected final written decision issuance date of June 2021. Id., Paper 27, pp. 9-10. But trial did not occur and instead, a bench trial is scheduled for September 2021.

Interestingly, the same Board panel instituted the 00407 proceeding on the same day the 00406 denial issued. IPR2019-00407, Paper 29. The 00407 decision did not address Fintiv, but UT did not file a preliminary response in that proceeding. Id. UT disclaimed all challenged claims of the patent at issue after institution and the Board entered adverse judgement in June 2021. Id., Paper 33.

• Cisco Systems, Inc. v. Ramot at Tel Aviv University Ltd. – Institution is denied based on trial date that is now uncertain, but litigation is stayed pending Ex Parte Reexaminations filed after the denial.

Ramot sued Cisco, asserting U.S. Patents 10,270,535 and 10,033,465 in June 2019, and adding U.S. Patent 10,461,866 in an amended complaint in December 2019. See Ramot at Tel Aviv University Ltd. v. Cisco Systems, Inc., 2:19-cv-00225-JRG (E.D. Tex. 2019). Cisco filed IPR petitions challenging the ’535 and ’465 patents in November 2019, and another petition challenging the ’866 patent in January 2020. IPR2020-00122; IPR2020-00123; IPR2020-00484. The PTAB exercised discretion to deny institution of each petition under § 314 (a), relying on the related litigation’s anticipated trial date in December 2020 versus the PTAB’s statutory deadlines in May 2021 and August 2021. IPR2020-00122, Paper 15, pp. 7-8; IPR2020-00123, Paper 14, pp. 7-8; IPR2020-00484, Paper 10, pp. 7-8. But after denial, Cisco filed Ex Parte Reexaminations at the U.S. Patent and Trademark Office (USPTO) challenging validity of the patents in suit, and after reexamination was ordered, office actions issued rejecting all asserted claims.  Ramot, Dkt. 235, pp. 1-3. Thus, the litigation court granted a stay pending resolution of the reexaminations in January 2021. Id. When the stay issued, trial had been delayed from December 2020 to March 2021. The case is currently still stayed, with the trial date uncertain.

According to the U.S. Patent and Trademark Office, the average reexamination pendency from filing to certificate is just under 26 months. See https://www.uspto.gov/sites/default/files/documents/ex_parte_historical_stats_roll_up_21Q1.pdf. Here, Cisco filed its reexaminations in June 2020 and November 2020 for each patent.  Ramot, Dkt. 235. Thus, the reexaminations are estimated to conclude in August 2022 and January 2023. These dates are over a year past what would have been the PTAB’s statutory deadlines in May 2021 and August 2021, had the IPRs been instituted. IPR2020-00122, Paper 15, pp. 7-8; IPR2020-00123, Paper 14, pp. 7-8; IPR2020-00484, Paper 10, pp. 7-8.

Conclusion

Due to the likelihood that litigation trial dates change, the PTAB’s reliance on such dates to deny institution of post-grant proceedings under the NHK Spring/Fintiv framework has had unintended consequences, denying petitions (and an examination of the merits) when trial ends up occurring months after when a final written decision would have issued. The PTAB’s analysis of litigation trial dates under the NHK Spring/Fintiv framework should therefore not take litigation schedules at face value; instead, a more nuanced approach is needed that considers circumstances such as the current stage of litigation, issues that remain in litigation, and whether (and to what extent) extensions to deadlines and/or changes to the trial date have been requested and granted.