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Podcast: IP(DC): 5G for the C-Suite: Patent Hold-Up or Hold-Out?

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Ropes & Gray’s podcast series, IP(DC), focuses on developments in intellectual property law from the vantage point of Ropes & Gray’s office on Pennsylvania Avenue in Washington, D.C.

In this episode of IP(DC), IP litigation partners Scott McKeown and Matt Rizzolo are joined by antitrust partner Chong Park to address Standard Essential Patents (SEPs) and their potential to complicate the roll-out of 5G-enabled products and infrastructure. The discussion explores risks for SEP licensors pending the FTC v. Qualcomm decision on Fair, Reasonable, and Non-discriminatory (FRAND) SEP licensing, refusal to deal, and compliance with Standard Setting Organization (SSO) obligations. On the implementer side, the discussion walks through patent hold-up and anti-competitive patent pooling practices. Matt and Scott also briefly preview 2020 legislative efforts in the patent space.


Scott McKeownScott McKeown: Welcome to the IP(DC) podcast, a podcast covering recent D.C.-based developments in intellectual property law and related commercial developments. I'm Scott McKeown, chair of Ropes and Gray's Patent Trial and Appeal Board practice. And I'm joined, as always, by my partner, Matt Rizzolo, an IP litigator in Ropes & Gray's IP litigation group, also based here in D.C. Our special guest today is our partner, Chong Park, also of the D.C. office, who specializes in antitrust, privacy and cybersecurity, consumer protection, and commercial litigation. We've invited Chong today to discuss a current C-suite hot topic, which is the roll-out of 5G cellular communication technologies and what that means for businesses hoping to leverage and license this emerging technology.

There is certainly a lot of excitement on the consumer side when you talk about a new communication technology promising 100x the performance and speed of existing 4G technologies, further fueling the networking of home, autonomous vehicle implementations and just about everything in between. But while this technology is standardized for the purpose of ensuring interoperability among the various devices, this technology is, of course, proprietary. Standard Setting Organizations (SSOs) that develop such cellular and Wi-Fi standards, cooperate with the technology innovators to select and adopt the best technology. These innovators protect their technology with patents, referred to as Standard Essential Patents (SEPs). So Chong, let me throw it over to you to start the conversation today. With such power in the hands of a small number of global corporate players, Standard Essential Patent (SEP) owners, how do we avoid abuses of such seeming monopoly power and licensing scenarios? And what have we learned from the roll-out of past standards?

Chong ParkChong Park: Well, that's an interesting question, Scott. What we have learned is that until recently, both of the federal antitrust agencies, the Federal Trade Commission (FTC) and the DOJ were primarily worried about just that, the accumulation of power in the hands of patent holders with Standard Essential Patents. And so they were worried about the concept of “hold-up,” that is that once a standard is adopted that companies are locked into that particular standard. And so a patent holder who had not disclosed their patent during a process might benefit from a hold-up, which is essentially sort of a hold-up in terms of the common cops and robbers sense when they point the gun, in this case, the figurative patent at a company and said, "Well, we have a patent. It's standard essential. You comply with a standard. Please pay up." Recently, however, there's been a shift at least with respect to the DOJ to a concept of the “hold-out,” which is a concern that really a party that might be disadvantaged would be the patent holder when individuals and companies fail to pay a reasonable license for their innovative technology. And so the DOJ recently has actually fallen more on the side of vindicating and championing the rights of patent holders versus the, what they call, “the implementers.”

Scott McKeown: So on the hold-up side, the victim is the implementer, and on the hold-out side, the victim would be the patent owner or the innovator?

Chong Park: That's correct. And in terms of the participation standard setting bodies, there is a concept called FRAND (Fair, Reasonable, and Non-discriminatory), which means that in connection with the actual participation, a lot of these standard setting bodies impose an obligation on the participants to make what's called a “FRAND assurance.” That is a promise that if their technology is adopted and incorporated into the standard being reviewed and developed, that those patent holders will then license their intellectual property on Fair, Reasonable, and Non-discriminatory terms. Now, the meaning of that and what constitutes FRAND is a subject of hot dispute, but historically, it was the case that the antitrust agencies would view a FRAND assurance or FRAND remedy as a panacea for potential abuses of intellectual property, at least with respect to antitrust violations.

Matt RizzoloMatt Rizzolo: And I think part of the reason, right, is that a FRAND commitment is something that seeks to strike a balance between those competing concerns of hold-up and hold-out. You have patent holders who in exchange for making that FRAND commitment, their technology is implemented in the standard and it's, presumably, widely adopted. And then they get a reasonable return on their investment. But that royalty may not be as much as they might be able to get if it was implemented in only certain proprietary protocols, for example, by a limited number of entities.

Chong Park: And that's right. And since we're talking about 5G, harmonizing both of those competing concerns is in furtherance of innovation, technological improvement. And so underlying all of the concerns, regardless of which position the agencies may take at a given position in time, the overarching concern is to allow technological development to occur, to allow the progression of new inventions to prosper, but at the same time rewarding the innovators. But, Matt, as you're saying, at the same time, assuring that they can't take undue advantage of their intellectual property.

Scott McKeown: And while we're on the topic of undue advantage. So how do we police the hold-up and how do we police the hold-out? Maybe, Matt, you can speak to the hold-up side of things?

Matt Rizzolo: Sure. I mean, one of the things that certain government agencies, the DOJ and the PTO, for a long period of time they brought to this arena the idea that there's a bit of a heightened concern over, say, injunctive relief in the context of FRAND and covered patents. And this culminated in a policy statement in 2013 where the DOJ and the USPTO jointly put this statement out saying that in the context of a FRAND-encumbered Standard Essential Patent, there are significant concerns with a potential injunction, whether that's something that's issued by a district court or in the situation in 2013 there was a potential exclusion order being issued by the International Trade Commission. And the DOJ and the PTO said that it's not necessarily a complete bar against injunctive relief, but in effect, the default should not be injunctive relief. And that's because in those agencies' minds, at least at that time, the concerns over hold-up were really paramount. And now we've seen that shift, as Chong discussed earlier, at least with respect to the DOJ and then joined by the PTO and NIST (National Institute of Standards and Technology), in late-2019 where they essentially repealed that earlier policy statement and said that courts and other agencies, such as the ITC, are well-equipped to decide whether injunctive relief is appropriate in any given situation and you should treat Standard Essential Patents just like you would treat any other patent. And the existence of a FRAND commitment and the patent holders behavior as well as the potential licensees' behavior, those are all just factors that come into the mix.

Chong Park: And what's interesting is that the DOJ, under Makan Delrahim, has actually taken some actions to vindicate the rights of the patent holders and what they call the innovators. And essentially, the DOJ Antitrust Division has taken a stance that contract and patent law are sufficient to vindicate the rights of patent holders and patent licensees, and to regulate that dynamic as opposed to the imposition of antitrust law. And in fact, it's publicized, but the DOJ actually initiated a couple years ago an investigation of one standard setting body with respect to essentially a sort of secret meeting-type allegations to exclude certain technologies from being considered in order to advantage those companies’ IP positions.

Scott McKeown: And I want to get into that compliance end of it for those companies that are participating in the Standard Setting Organizations, but before we switch to that, Matt, what do you take from the changing position or at least the seeming-changing position of the government on this question? Is this just a matter of, perhaps, the Obama administration maybe being a bit more pro-consumer as opposed to pro-big tech, which some would argue that the current administration is leaning more in that direction? Or were they really correcting a mistake?

Matt Rizzolo: You know, I'm not sure I'd characterize it as necessarily correcting a mistake, but it is sort of a rebalancing of things. And Chong just mentioned that they take the view that patent law and contract law is sufficient. For a long time, that was sort of how things were viewed and then antitrust came into the mix over the last 10-20 years, and then it's sort of waning again and coming back to that, “Hey, this is really a matter of contracted patent law and that's sufficient in at least the vast majority of cases.” So I'm not sure that I would necessarily say it's correcting a mistake – more like I guess, regressing to the mean, so to speak. What's interesting is that this policy statement comes out as the ITC is actually weighing whether to issue an exclusion order in a case involving Standard Essential Patent issues, involving memory modules and the JEDEC standard. And that's something that the ITC is due to decide this spring, so it's particularly interesting that this joint statement repealing the prior statement came out now, especially given that that prior statement also came about as a result of an ITC case.

Scott McKeown: And as the U.S. has been evolving between these at least seemingly differing government positions, it seems as though stakeholders had sought out jurisdictions in other countries to, perhaps, get better treatment, whether it be for an injunction or more favorable FRAND rate. And what can either of you tell me about this trend to have these disputes being global, and one nation or one jurisdiction sort of trying to take ownership over it to the exclusion of another?

Matt Rizzolo: That's an excellent question and it's something that sort of ping-pongs back-and-forth almost by the week at this point. I mean, over the last decade we've seen a lot of back-and-forth over whether it's appropriate to seek injunctive relief on Standard Essential Patents in the United States, Germany, China, the UK, France, what have you. And often you've seen anti-suit injunctions brought where someone will say that you've improperly sought an injunction on an SEP in Germany, but there's this U.S. court that has jurisdiction over a larger FRAND dispute, and the U.S. should enjoin the party from enforcing the injunction in Germany. You've seen disputes over what is the appropriate jurisdiction, if any, to set the terms of a FRAND license. Even setting aside question of injunctive relief, what if the parties simply come to a court and say, "Hey, figure this out for us and let us know what is a FRAND license between us?" The UK, famously in the last couple of years has seemingly taken the mantle of that, and that's an issue that's before the high court over there. But even just in the last couple of weeks, Paris, the high court in France said, "Paris is the logical jurisdiction because ETSI is a French entity and we're interpreting all these agreements under French law anyway, so you might as well do it in France." So there's a lot of warring still going on in that aspect of things.

Scott McKeown: And what if you're an implementer, your idea of FRAND is much different from the innovator's idea of FRAND, and there's a refusal to deal? This was something that seemed to come up in the Qualcomm dispute, and Chong, what's your take on where we are with refusal to deal?

Chong Park: Well, that's interesting. And that's actually something that's at dispute, as you mentioned, Scott, in the FTC v. Qualcomm case, where under U.S. antitrust law it used to be very black letter that no company has a duty to deal with a competitor. So a refusal to deal case can be brought under specific circumstances. Here, in the FTC v. Qualcomm case, it'll be interesting how the Ninth Circuit decides because it'll be sort of a ground-breaking decision with respect to the inner action of a refusal to deal in a particular SEP FRAND case. And to go back to what Matt mentioned, especially since we're talking about 5G and the global standards, this is going to be something that companies are going to have to consider on a global scale because just as they're sort of jurisdiction shopping and questions about interpretations of the applicability of, say, French law to Etsy contracts, etc., the antitrust and competition authorities across the world take different views. While there has been an increased trend into cooperation, again, companies in the 5G world are going to have to carefully analyze how their operations are going to be viewed globally vis-a-vis the agencies in particular jurisdictions.

Scott McKeown: So in addition to understanding the various dynamics and which way the political winds are blowing and what's happening in the courts, I want to spend a little bit of time on compliance because whether you're an innovator or implementer, you may be participating or on the fringes of one of these Standard Setting Organizations. And Chong, what can you tell us about ensuring that your people are playing according to the rules and the risks there?

Chong Park: Thanks, Scott. In fact, this is something that where we've had actual boots on the ground experience in terms of training company personnel with respect to appropriate behavior at standard setting body meetings. As companies understand, they can't control their participants at standard setting meetings, but it is important to have training and have guardrails and safeguards that individual participants understand. For example, let's talk on very practical terms with respect to certain guidelines that we train participants on. Not having a secret meeting with rivals where they talk about competitively sensitive information including, but not limited to, pricing of products or their intellectual property portfolio – all things, which without disclosing any confidential information, I can tell you happens. A lot of these meetings are in locations where there's plenty of opportunities for after-hours meetings, and sometimes the discussion of technical proposals and other issues take place after hours. From a practical perspective, there are rules that govern these standard setting bodies and individual participants should be trained to follow all applicable rules. Parties should not have side meetings where they in a group decide that they will exclude one or more other groups from participating and/or presenting their technical proposals. And parties should also not “pack the votes.” One of the seminal antitrust cases in standard setting is a Supreme Court case called Allied Tube, and in that case, the standard setting body was “packed” with individuals voting on a particular proposal that included secretaries and non-technical personnel. So there are additional steps we could talk about it, but when the rubber meets the road, I think it's very prudent for companies to actually have training of individuals that participate in standard setting bodies.

Scott McKeown: Thanks for the insight on compliance. But I want to get back to 5G and look at the roll-out of this technology and is this roll-out of 5G really driving the agency viewpoints here?

Matt Rizzolo: Yes, I think that it is in some respects. One of the interesting things with 5G is as opposed to prior 2G, 3G, 4G standards where you did have some foreign involvement, particularly companies such as Ericsson and Nokia, in 5G you see a lot more foreign company involvement as far as patent holdings and potentially essential patents are declared “essential patents.” So this is something that has to be in the mind of the agencies and seemingly is as they enforce certain policies against patent holders.

Chong Park: And, in fact, there are actually two specific examples which are current in which the DOJ has used the impending roll-out of 5G and the need to encourage that roll-out as justifications for its position in legal cases. The first one being a case that was just argued in the Ninth Circuit, the FTC v. Qualcomm case, in which the FTC won at the district court level in terms of challenging Qualcomm's licensing practices as anti-competitive. What is interesting is while the FTC brought the case and at least won at the district court level, the DOJ sought to intervene and has taken a contrary position in part based upon its view that the judge’s ruling would impede the ability of 5G to be rolled out and Qualcomm as a major player in chipsets to foster that development of 5G. Interestingly enough as well, in its approval of the Sprint/T-Mobile merger, the DOJ, again, referred back to the need to encourage the 5G roll-out and gave credit to the merging parties’ justification that merging Sprint and T-Mobile would be the interest of a more efficient and expeditious 5G roll-out. And of course, the states disagreed and they brought suit in New York, and as we know recently, the district court judge rejected the states’ arguments and ruled in favor of Sprint and T-Mobile. And again, in that case, one of the justifications that the parties put forward was, again, the expeditious and efficient roll-out of 5G.

Scott McKeown: Okay, I think we've covered the landscape here on 5G – we’ll anxiously await that Qualcomm decision. But before we leave, Matt, I know we like to talk about IP legislation that's pending and developments, and maybe throw it over to you for some updates on some happenings on Capitol Hill?

Matt Rizzolo: Sure. So as we know, we've been waiting for quite some time for a bill to get introduced on patentable subject matter, under Section 101. As we've talked about before on the podcast, it was allegedly coming soon after July 4, 2019, and we still haven't seen it. We've had some comments from Senator Tillis implying that, at least in his view, progress was unlikely in 2020, particularly given that it's an election year and Congress is busy with a whole bunch of other matters. But we had other comments from Rep Hank Johnson of Georgia who is also involved in this process, and he noted that they are still working on this issue and that work has not ceased. I guess time will tell and maybe we'll cover that in a future addition of the podcast. And I know that also Rep Johnson noted that there is Congressional fix in the works for the Arthrex issue, the appointments clause issue involving the PTAB judges, so that is also something to look to forward to, to see if and when that gets rolled out.

Scott McKeown: In my two cents, given some of the comments made by Senator Tillis, is that they're still listening but they're still hearing a lot of the same things that they heard before, which initially led to the legislation dying. So their ears are still open, but I would not expect to see anything given the election's coming up of Tillis and Coons, which essentially were driving that effort. I'd like to thank our special guest today, Chong Park, for joining us. Encourage listeners to check for additional episodes of IP(DC) as there are a number of important and exciting IP developments on the horizon for 2020. And of course, if we can help you navigate any of the topics we discussed, please don't hesitate to get in touch. You can also subscribe and listen to the series wherever you regularly listen to podcasts including Apple, Google and Spotify. Thank you for listening.

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