Intellectual property and antitrust law have had an uneasy relationship for decades, with antitrust scrutiny of IP owners’ commercial practices waxing and waning. Makan Delrahim’s recent speeches signal a possible return to evidenced-based policy making by antitrust authorities, which industry has not fully embraced. Recent antitrust regulation of licensing by IP owners in both the creative and innovation industries does not fully reflect such a policy. In the creative industries, the issues have centered on consent decrees that have governed songwriters' prices and licensing practices since the mid-20th century. The USDOJ has resisted attempts to ease the decrees despite dramatically changed business practices and technology -- in fact, they have sought to expand regulation of songwriters' business practices. In the innovation industries the FTC and other regulators have brought increased scrutiny to standard-setting, the voluntary process that enables cooperation and advances in mobile phones and other sectors, seeking to regulate the licensing and enforcement of standard-essential patents.
Mr. Alden Abbott, General Counsel, Federal Trade Commission
Prof. Jorge Contreras, University of Utah College of Law
Mr. David C. Kully, Partner, Holland & Knight
Ms. M. Brinkley Tappan, Counsel to the Assistan Attorney General, U.S. Department of Justice, Antitrust Division
Ms. Koren Wong-Ervin, Director of IP & Competition Policy, Qualcomm Inc.
Moderator: Mr. John P. Moran, Partner, Holland & Knight
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Operator: Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Intellectual Property Practice Group and Regulatory Transparency Project, was recorded on Tuesday, July 17, 2018 during a live teleforum conference call held exclusively for Federalist Society members.
Wesley Hodges: Welcome to The Federalist Society's teleforum conference call. This afternoon our topic is "Antitrust Regulation of the Use of Intellectual Property" and is hosted by our Intellectual Property Practice Group and the Regulatory Transparency Project here at The Federalist Society. My name is Wesley Hodges, and I'm the Associate Director of Practice Groups at The Federalist Society.
As always, please note that all expressions of opinion are those of the experts on today's call.
Today we are very fortunate to have with us an accomplished panel of experts and moderating them today is Mr. John P. Moran, who's a Partner at Holland & Knight. With us today is Mr. Alden Abbott, who's General Counsel of the Federal Trade Commission. Also with us is Prof. Jorge Contreras, who is at the University of Utah College of Law. With us is Mr. David C. Kully, who is an Antitrust Partner at Holland & Knight and also a former DOJ official in the Antitrust Division. With us is Ms. Brinkley Tappan, who is Counsel to the Assistant Attorney General at the U.S. Department of Justice, the Antitrust Division. And finally, with us is Ms. Koren Wong-Ervin, who is Director of IP & Competition Policy at Qualcomm and former Counsel for IP and International Antitrust at the Federal Trade Commission.
After our speakers give their remarks today, we will move to an audience Q&A. So please keep in mind what questions you have for this subject or for one of our speakers.
Thank you, again, for speaking with us. John, the floor is yours.
John P. Moran: Thank you, Wes. We have a lot of ground to cover today with our distinguished panel. Briefly, the structure of the teleforum will be divided into three parts. Each speaker will provide opening comments and remarks followed by questions to the individual panelist and then open the floor to questions from our listeners. Our panelists, as Wes briefly mentioned, include Alden Abbott, who will set the stage for the discussion by providing a general overview of intellectual property and antitrust with a view from the FTC. Brinkley Tappan will provide an overview of some current DOJ views on copyright and patent licensing and standard-essential patents, including a high level statement of those rights. David will provide some comments on ASCAP, BMI consent decrees, which are an unusual form of intellectual property regulation. Koren will discuss current economic and technological issues concerning standard-essential patents. And lastly but not least, will be for Professor Jorge Contreras, who will address the DOJ Antitrust Division's recently announced changes to its views regarding standardization and patents, what those changes are and how they may differ from both the position of the prior administration and the FTC.
With that brief background, I'll turn the floor over to Alden.
Alden Abbott: Thanks, John, very much. Before proceeding, I should state that, as I'm required to do, that the views expressed today are my own and do not necessarily represent the views of the Federal Trade Commission or of any Federal Trade Commissioner.
Now, intellectual property laws: primary laws are patents, trademarks, copyrights. There's also trade secrets, but they're really in the background because they're not typically statutory law that's been involved in antitrust. Historically, patent law from the mid-20th century through the 1970s intersected very poorly with antitrust law, which is aimed at protecting competition. The federal courts and indeed the Justice Department, which enforces the antitrust law, tended to view patents as statutory monopolies, and therefore an item of suspicion.
And because of that, because the Antitrust Division and the Federal Trade Commission for that matter thought of patents, and in same sense potentially copyrights and trademarks, as monopolies, and stated that they would impose great restrictions and generally oppose the licensing of intellectual property, in particular patents, the notion was that if any patent holder, for example, put restrictions on the territory or use of its intellectual property downstream, say a manufacturer in one country could not manufacturer in another country, any sort of so-called vertical license restriction was viewed as automatically illegal.
Now, this changed dramatically in the early 1980s under the Reagan administration, which the Antitrust Division leadership said, "No, we view patents as—and indeed, intellectual property in general, copyrights, trademarks—as property rights. And we recognize that licensing enables technology to be applied and to help promote the use of new products and services, and that allowing restrictions to be placed in the terms of the license, allows the intellectual property holder to get a greater return on its property. And generally speaking, unless it facilitates collusion with another producer of a competition technology or facilitates collusion or restrictions on competition among competing products, it should not be problematic."
That really culminated in 1995 guidelines slightly reviewed and revised in 2017, jointly issued by the Federal Trade Commission and the Justice Department Antitrust Division, which set forth four principles that the antitrust agencies would apply the same analysis to conduct involving intellectual property as to conduct involving other forms of property. Two, the analysis would not presume that intellectual property creates market power in the antitrust context. The idea is the monopoly creates market power; it allows the holder of the monopoly to raise price and restrict output. That's not necessarily the case, for example, with patents because often different patents compete to produce similar products. For example, different patent ways to produce competing equipment.
Third, the FTC and DOJ recognize that IP licensing is generally procompetitive. And fourth, the antitrust laws generally do not impose liability upon a firm for a unilateral refusal to assist its competitors. Also, I should note in 2007, the Antitrust Division and the Federal Trade Commission issued a report on the interface between antitrust and intellectual property that can, quote, concluded that "liability for mere unconditional, unilateral refusals to license will not play a meaningful part in the interface between patent rights and antitrust protections." As we'll see later today, things got a bit more complicated over the last decade or so because of an increasing focus on patents that are developed in the context of standards setting. But I think I will stop right now and turn it over -- turn the floor back to John to introduce the next speaker.
John P. Moran: Thank you, Alden, for that background. Now, our next speaker will be Brinkley Tappan. As I said, she'll be providing a brief overview of some current forms of views of the DOJ. Brinkley, I turn the floor over to you.
M. Brinkley Tappan: Thank you, John, and thanks to The Federalist Society for having me. As Alden did, I'll give the same disclaimer that although I work at the Department of Justice, the views I'm expressing today are my own.
So as Alden explained it, the antitrust agencies today view the intellectual property laws and the antitrust laws as sharing a common purpose of promoting and enhancing consumer welfare. The intellectual property laws provide the incentive for innovation and the dissemination and commercialization of that technology by establishing property rights. And the antitrust laws promote innovation and consumer welfare by prohibiting certain actions that might harm competition with respect to either existing or new ways of serving consumers.
So today's teleforum focuses on two different areas where these bodies of law intersect. One is music or copyright licensing by performance rights organizations, which I think we'll call PROs for short. And the second interface is the licensing of patents essential to technical standards like 4G cellular network technology.
So I'll give a brief overview of how the Antitrust Division is thinking about those two interfaces, and then I'll turn the line over to Dave Kully, who'll go into more detail on music licensing and then later to Koren Wong-Ervin and Jorge Contreras who can build up discussion of technical standards-setting.
So with respect to music licensing, as most of you know, songwriters create intellectual property that is protected by copyright law, and they have the ability to seek payment for performance of their works in exchange for part of that value. Producers and publishers commercialize those works. So to make commercialization of individual songs more efficient, the industry began a long time ago creating blanket licenses, which facilitate the licensing of multiple works in a single, efficient transaction. So these blanket licenses have been held by the Supreme Court to be procompetitive because they allow both licensors and licensees to avoid high transaction costs that would be associated with negotiating thousands of copyrights for millions of compositions.
In the 1930s, the Antitrust Division grew concerned about the competitive effects of exclusive blanket licenses and sued the PRO called ASCAP. So that lawsuit was settled and it led to a consent decree. And that consent decree in a similar one with another PRO called BMI is still in effect today. So in general these consent decrees set out terms that were designed to prevent the anticompetitive exercise of market power by the PROs while at the same time preserving the efficiency benefits of blanket licensing. They require the PROs to license all the works in their respective repertoires, and they establish rate courts to which either music users or the PROs can go if the sides are unable to agree on a price for a license.
The terms of the BMI consent decree recently became the subject of litigation in the Second Circuit, and that has occasioned renewed discussion about the meaning and continuing utility of these consent decrees. So the Antitrust Division recognizes that given how long these consent decrees have been in effect, the music industry has really grown up around these decrees. And the Antitrust Division is not going to take action regarding these decrees lightly or without serious diligence. That said, the Division is weighing how best to approach these decrees in light of our interest in promoting competition and innovation without undue regulation. So that's where we are on the ASCAP and BMI consent decrees and on music licensing generally. And let me now turn to where we are on standard-essential patents.
So that's the second interesting interface of antitrust and IP. And as I'm sure you all know, technical standard-setting is the process through which participants in a given industry, let's say cellular communications technology, come together to design a standard comprised of a set of specific patented technologies that everyone in the industry will implement so that the various products in that ecosystem are interoperable. So technical standards are what ensure that your cell phone communicates with your network and with the cell phones of your friends who may have different devices and use different networks.
So there is a very lively debate about how the antitrust laws should apply to the licensing of patents that have been incorporated into a technical standard, so-called standard-essential patents. Some academics and enforcers take the position that patent holders, who have their patents incorporated into standards in exchange for making commitments to license those patents on particular terms, should be subject to the antitrust laws if and when they fail to honor those commitments. The concern is that without antitrust law enforcement in that area a patent owner might be able to take advantage of the essential nature of its patent to delay licensing until its royalty demands are met.
We at the Antitrust Division have concerns about using the antitrust laws in that context for a couple of reasons. The first is that patents, by definition, confer a right to exclude others from using the patented technology. That right to exclude is an important incentive to innovate, so important that it is specifically mentioned in our Constitution. So undermining that right risks undermining incentives to innovate. A second related concern is that antitrust law is a blunt instrument to use when other remedies are available on these facts. So licensing commitments made in the context of standard-setting are contractual in nature, and that means when a patent holder fails to honor a commitment, contract remedies are available.
So the Division's policy is that a contract action, which provides a court with the occasion to review the precise contours of the commitment that was made, is better suited than the antitrust laws to addressing licensing disputes that arise in this particular context. There're a lot of nuances to this debate, but I'm going to stop here for now, and you'll hear more on this topic from Koren and Jorge later in the program. But right now I'll turn the line over to Dave Kully to talk in more detail about antitrust and copyrights. Thank you.
David C. Kully: Thanks, Brinkley. And thanks for the overview of the ASCAP and BMI consent decrees. I'm going to sort of take a step back, quickly, and just put what Makan Delrahim said about potentially looking into the ASCAP and BMI decrees in a little more context.
So the Antitrust Division is embarked on a process of reviewing old perpetual consent decrees, of which ASCAP and BMI consent decrees are ones, and seeking to eliminate those that no longer serve their purposes and that might even prohibit conduct now recognized to be procompetitive. And certainly no one can claim a continued need for consent decree restraining the conduct of the Horseshoer's National Protective Association, which is one that Makan Delrahim has mentioned in a couple speeches as worthy, probably, of some consideration of whether it can be eliminated.
The current DOJ initiative expands on a similar initiative that began in 2014 in which the DOJ invited parties to bring to the Division's attention old consent decrees from which they hoped to get out from under and said that its legal position would be that pre-1980 perpetual decrees would be presumptively be no longer in the public interest, which would make it easier for parties to terminate them. At that time, the Division expressly excluded from the process old consent decrees that had established a regulatory structure around which industries had developed, a standard that appeared to apply only to the Paramount consent decrees that governed licenses for movie exhibitions and the ASCAP and BMI consent decrees relating to music licensing by those performing rights organizations.
As it turns out, enforcement of both of those consent decrees were among the responsibilities assigned to what was then called the Litigation III Section of the Antitrust Division—it's been renamed recently—where I worked for 18 years and I led as chief until I departed about two years ago. Those decrees are apparently, as Brinkley said, not off the table under the current initiative and Makan Delrahim suggested a few weeks ago in a public speech that the Division is evaluating whether the ASCAP and BMI consent decrees are still necessary. These decrees clearly constitute antitrust regulation of intellectual property—the topic of this program—and I wanted to defend the necessity of the regulation that these decrees impose at least until an alternative form of regulation arises. This is not an area where technological advances or market entry have altered the marketplace realities that necessitated a regulatory structure.
So let me just first expand a little bit on what ASCAP and BMI are beyond what Brinkley said. So there are two copyrights in each piece of recorded music. One is a copyright in the master recording, which is usually owned by the artist or his or her record company. ASCAP and BMI have nothing to do with those rights. The other copyright in the song is in the composition, and that right is held by the songwriter often along with his or her music publisher. One way in which the rights in the musical composition can be infringed is through the public performance of the song, which includes any time a song is played in a bar or restaurant or on TV or on the radio. So ASCAP and BMI arose to address the complexity of creating licenses between millions of songwriters on the one hand and all of the entities that want to publicly perform music on the other hand that are called 'music users' in the ASCAP and BMI context.
The Supreme Court in the BMI case quoted an article that illustrated the problem that ASCAP and BMI address by refereeing to, quote, a "disk-jockey's itchy fingers and the bandleader's restive baton" referring to the easily foreseeable circumstances in which a radio station, for instance, might inadvertently publicly perform a song and infringe the songwriter's copyright. Radio stations and bars and other potential infringers needed, again in the words of the Supreme Court, "unplanned, rapid, and indemnified access" to music and ASCAP and BMI found a way to supply that by pooling together the rights of thousands of songwriter members and offering blanket licenses to publicly perform those works.
This was a great innovation in that it addressed a real marketplace need, but, of course, ASCAP and BMI acquired a lot of market power by bringing together the rights of numerous otherwise competing songwriters. Any business that wants to have the radio on basically had no choice but to take a license. This, then, naturally resulted in antitrust lawsuits including ones brought by the Antitrust Division, which were settled in 1941 with a consent decree that with some amendments are still in place today.
The decrees basically do three things: they maintain the possibility of songwriter competition by prohibiting any exclusive licenses, thus allowing rights holders to license their songs directly to music users. They require ASCAP and BMI to provide a license to anyone who asks for one, and they establish a rate-setting mechanism in federal court in the Southern District of New York if the music user and ASCAP and BMI can't reach an agreement on the fee for the blanket license.
Now, this is, no question, a really, intrusive regulatory structure, probably just one small step away from confiscation of rights. It demands of songwriters as a condition of joining ASCAP and BMI that they relinquish their rights not to license to someone, and it blocks them from obtaining the highest price for a license they might otherwise command. And the rights-holder community obviously doesn't like this and argues legitimately that this regulatory structure displaces the free market.
So why do I think that a really burdensome regulatory structure established in 1941 still has a place today? Because I think the underlying rationale and need to address the acquisition of significant market power through the aggregation of competing rights was sound then, and that nothing has happened since that has undercut that. Some point to the growth of competitors to ASCAP and BMI, primarily SESAC, which has been around for a long time but has grown recently, and GMR, a new service, and argue that they supply sufficient additional competition that we no longer need to worry about ASCAP and BMI.
But nothing about the presence of SESAC or GMR materially reduces the need for every bar, restaurant, or radio or TV station or other music users to take a license from ASCAP and BMI. Their blanket licenses are just as essential today as they were in 1941. The control by SESAC and GMR have a critical mass of songs might just mean that there are other entities with market power from which music users have no choice but to take a license. They have not diminished ASCAP or BMI's market power or reduced the need for the protections provided by the consent decrees.
It's also true that the ways in which we consume music have evolved over time with streaming, now largely replacing music downloading, which itself replaced CDs and so forth. But nothing about the technology for delivering music or consumer's listening habits has reduced the significant market power ASCAP and BMI have acquired through the aggregation of the rights of thousands of competing songwriters.
But I will acknowledge that it is odd that the market for public performance rights in music is fundamentally regulated by consent decrees that settled antitrust lawsuits brought by the government almost 80 years ago. And the DOJ fully recognizes this strange anomaly and has in the past expressly invited the adoption by Congress of an alternative regulatory structure. Congress so far as not accepted the DOJ's invitation and until then, I think there remains a need for the strange and burdensome regulatory structure that has existed since 1941.
So those are my thoughts, and I guess I'll pass it back to John.
John P. Moran: Thank you, David. At this point, we'll transition from the copyright general issues to the patent side, and Koren will, as I said earlier, address current economic and technological issues concerning standard-essential patents. Koren?
Koren Wong-Ervin: Great, thank you, John, and thank you to The Federalist Society for inviting me to speak today. So I'm going to focus on 5G and Internet of Things, or IOT, and I know we'll talk about some specific antitrust series of harm later in the program, but I'm going to sort step back now and sort of set the stage, right? And that stage for me is the importance of keeping in mind that the value chain when it comes to 5G and IoT is a complex, multilateral, vertical chain that consists of complementary layers of technology. These technologies include the core communication layers, so namely 5G technologies, which form the fundamental building blocks for the entire supply chain. There's also the data layers, application layers, and eventually process layers.
So given that the layers are complementary, there's a strong interdependency among them, such that the value generated by the entire IoT chain depends on the success of each individual layer. So Dr. Ori Pediaz [sp] talked about this and sort of set forth the conditions for success, if you will. First, all layers have to invest. They have to find it optimal to invest, and they have to have the ability and incentive to invest. Second, at each layer the most efficient technologies need to be selected. And third, the overall price, or the total cost of ownership, needs to be sufficiently modest that there's high market penetration.
So what are some of the obstacles to success? Well, first, there's some but not all layers are likely going to have significant market power due to a combination of factors, such as strong economies of scale and scope. So in those layers the result may be either a duopoly or a limited oligopoly or possibly even a situation in which the market tips and results in some monopoly power.
So what's the problem with significant market power multiple layers in a vertical supply chain? It's double marginalization, right? So you have several price markups building on top of one another, which could result in higher overall costs of ownership and decreased market penetration.
The second obstacle to success is fragmentation, right? So certain companies in different layers are going to want to fragment other layers in order to extract rent in the entire value chain. Some companies may even decide to vertically integrate if fragmentation's not possible.
The third obstacle that I see is regulatory gaming. So in other words, complaints to antitrust agencies and other attempts to change laws and policies. And these might be by companies in one layer in an attempt towards rent shifting or to extract more rents for themselves. I think it's critically important to keep in mind that these initiatives to shift rents from one layer to another can have far reaching implications beyond merely distributional effects, right? It's not just about distributing from one layer to the other, but instead they could have significant value effects which results in a shrunk pie for all. Again, these are complementary and interdependent.
So what's the solution? A couple things come to mind. So, first, enforcers in court should internalize the complexity of the value chain and understand the incentives that the various players have. So, for example, is there incentive just near rent shifting or are there motivations more in line with welfare benefits to end consumers? Second, enforcers and courts should also understand that high margins can be desirable because they incentivize and enable future research and development, which can lead to the next best innovation or even incremental innovations, which can benefit consumers significantly. And third, the focus of any antitrust or other enforcement scrutinies should be on the performance, right? So the amount of innovation and value created at each layer as opposed to structural indicators, such as whether there's high concentration or the existence of monopoly power.
So I think I'll stop there for now and I know we're going to talk about some specific theories of harm, like refusals to license, later in the program.
John P. Moran: Thank you, Koren. I'll turn the floor over to Professor Jorge Contreras who will address the DOJ's Antitrust Division's announced changes to its views. With that, I turn the floor over to you, Jorge.
Prof. Jorge Contreras: Great. Thank you very much. And I will try not to overlap with the information that Brinkley gave us, which is directly on point. I should also mention that in addition to being a law professor, I served for about 20 years as legal counsel to the Internet Engineering Task Force which is a standard-setting organization. And so, that's where a lot of my perspective comes from.
So as most people on this call probably know in November of last year, Makan Delrahim, the Assistant Attorney General in charge of the Antitrust Division, delivered a speech at the University of Southern California that related to the application of antitrust law to standard-setting, particularly to patents in standard-setting. And the speech was interesting because he questioned prior Department of Justice emphasis on the notion of holdup in standard-setting. And holdup is a theory that a patent holder can potentially extract rent in excessive value of its patented technology due to leverage that it obtains in one of a number of ways: through the threat of injunction issued by a court, through the incorporation of that technology in a standard and so forth.
In the speech, Mr. Delrahim expressed the view that under antitrust law a patent holder's refusal to grant a license to an implementer of standard should be per se legal. And he challenged the use of the antitrust laws as opposed to, as Brinkley mentioned, contract law or other forms of law to police these contractual arrangements among standards-development participants. The real problem, he indicated, in standard-setting isn't unilateral holdup behavior by patent holders but what's been termed 'holdout' by standard implementers, companies who might seek to avoid paying their fair share of royalties for technology that they use, which is in standards. And so speaking from [inaudible 30.38] standpoint it follows that holdout risk is the most serious when it might involve collusion among STO members who intentionally seek to limit the rights of patent holders for their own commercial gain.
So this speech announces an important shift in emphasis of the Antitrust Division's enforcement focus in the area of standard-setting—a shift away from scrutiny of unilateral behavior by patent holders, something that would be prosecuted under Section 2 of the Sherman Act, to concerted activity among STO participants, something that would fall under Section 1 of the Sherman Act. So it's an interesting shift.
And what does it mean practically speaking? There are really two big and emblematic examples of unilateral and concerted0 activity that are currently being debated in the standardization community, and they are the types of activity that would be implicated by this shift. On the unilateral conduct side, we have an example of the FTC's current lawsuit against Qualcomm, which was brought in early 2017, very shortly before the change of administrations in Washington, alleging a variety of anticompetitive practices involving the sale of baseband chips and the licensing of patents on wireless telecomm standards.
On the concerted activity side, we have the 2015 amendment to the IEEE's patent policy. These amendments did a number of things, including placing some limitations on a patent holder's ability to seek injunctive relief against what are called 'willing licensees' and encouraging parties to consider the smallest salable patent-practicing unit in their royalty calculations, and a number of other things. These amendments back in 2015 were reviewed by the Department of Justice and received a favorable business review letter.
And so, the question a lot of people in the industry are asking is how the shift in the DOJ's policy approach might affect either of these matters. So on the unilateral conduct side, the Qualcomm case—I mean, of course this is an FTC case, not a Department of Justice case—and something that has proven to be a little bit confusing certainly to observers outside of the U.S. is that, as we've seen through this call, we have two antitrust enforcement agencies in the United States. In the area of standards, in the 1980s the Department of Justice brought some of the foundational cases establishing due process requirements for standards organizations, the Hydrolevel case, the Allied Tube case, and so forth.
But since the 1990s, the Department of Justice has really relied primarily on the issuance of written guidelines, some of which we've already heard about, and the business review letter process to shape private conduct in a lot of very productive ways. And we can point to the patent pooling letters for MPEG, DVD, 3G, PP, and the like to show how influential these business review letters can be.
On the other hand, the Federal Trade Commission since the 1990s has really been the primary agency pursuing the litigation in the area of IP and standards, and there's a long string of FTC cases including those against Dell, N-Data, Unocal, Rambus, Bosch, Google, Motorola, and last Qualcomm in which the FTC has done this. And so, many people ask, well, why is this? Why is it the FTC rather than DOJ that has taken the lead in this enforcement litigation activity? There are many possibilities, and I don't purport to have any inside information about the rationales of the agencies. One difference between the agencies is that the FTC is chartered under the FTC Act, and Section 5 of the FTC Act covers all unfair methods of competition, which covers not only all Sherman Act violations but, at least according to a 2015 FTC statement, all other actions that contravene the spirit of the antitrust laws. So this is a broader mandate at the FTC than at the DOJ.
Now, clearly, in a formal sense the DOJ policy shift will have no legal effect on the FTC. They're independent agencies. And prior to her resignation earlier this year, FTC commissioner Terrell McSweeny published a statement that reaffirmed the need of the agencies to police holdup and referred to 15 years of bipartisan support for that position.
That being said, the composition of the FTC has changed nearly 100 percent since the previous administration. Four of the five commissioners are newly appointed and the fifth has announced her resignation pending, confirmation elsewhere. So we don’t know what's going to happen in that area. As far as concerted activity and the IEEE amendments, clearly, Mr. Delrahim's comments encompassed the IEEE activity. The 2015 business review letter, can it be revoked? Well, technically, yes. As Dave indicated the Department of Justice and the Trump administration will gladly have been revisiting and striking off the books large numbers of older guidance and interpretive documents across the board. So it's certainly possible that this could happen.
But when asked in an interview just last month by Judge Douglas Ginsburg, Mr. Delrahim was a bit uncertain about the future of the IEEE consent decree. He said the DOJ might consider enforcement if further evidence of collusion behavior came to light. But that's all. So whatever the fate of the IEEE policy changes, it is clear, at least, that the DOJ's announced policy shift has other STOs on the alert. For better or for worse, I think they are definitely going to think carefully about any policy amendments that could be perceived as harming the interests of patent holders. And so, I'll wrap up there and would be happy to talk about more of these issues in the Q&A.
John P. Moran: Thank you, Jorge. Before we go to the individual follow-up questions, I'll just take a brief moment to see if any of the speakers would like to respond each other.
Koren Wong-Ervin: Yeah, this is Koren. Not surprisingly, I respectfully disagree with a lot what Jorge has said. You know, a couple points. One, on the bipartisan decades-long support or consensus, if you look back at those cases with the exception of Commissioner Tom Rosch, the bipartisan support is really for ex ante deception in the standard-development process that resulted in an unlawful acquisition or maintenance of monopoly power through excluding alternative technologies. It's not about ex post contractual optimism or breach of a good faith FRAND commitment.
The other thing is that I wouldn’t characterize AAG Delrahim's speeches as a radical shift, but instead, as Judge Douglas Ginsburg and I have written in an article, we see it as a return to economically sound effects-based approach as set forth in the DOJ/FTC IP guidelines from 1995 and recently updated. In other words, a truly effects-based test and not special rules or heightened intervention for standard-essential patents.
And the last point I'll just make is that with respect to Makan's points that 'holdout' by implementers is a more serious concern, I think it's important to remember that it can be a really attractive strategy for implementers, right? And given the time value of money and the fact that the worse penalty a SEP infringer is likely to face after adjudication is merely paying the FRAND royalties that it should've agreed to pay in the first place, then it's easy to understand why implementers are taking 8, 10 years to enter licenses, and then, basically saying, "Go ahead. Sue me," patent by patent around the world.
Prof. Jorge Contreras: So, John, if I might just quickly respond, and I don’t intend to embark on a bit of all of these substantive points, but the point about the 15 years of bipartisan support those aren't my words. I was quoting Commissioner McSweeny who wrote those words. I thought I had made that clear, but I apologize if not.
As far as the shift in policy, yes, any shift can be characterized as a return to sort of the good ole' days. But I think that even Mr. Delrahim has characterized this as a change in policy over the previous administration's Antitrust Division and has clearly contrasted his view with that of the prior acting assistant attorney general in that respect. So I'm not trying to mischaracterize what people are saying here, but those really are their words.
John P. Moran: Thank you, Jorge. I'll turn to Brinkley, you explained earlier or explained that the Antitrust Division has some concerns about antitrust being use to police FRAND commitments made in standard-settings organizations. Do you have any views on whether that means that the antitrust has no role to play in FRAND? Or alternatively, do you to think there are situations in which the antitrust laws do apply to standard-settings activities?
M. Brinkley Tappan: Sure. So there are certainly situations that can arise in the context of standard-setting that might appropriately attract antitrust scrutiny. As Jorge and Koren both referred to, technical standard-setting is a collective activity that is often undertaken by firms that compete either in technology markets or in downstream product markets or both. And when there's evidence that standard-setting participants are engaged in collusive conduct that's undertaken for the purpose of fixing prices or excluding a particular competitor or product, then an antitrust investigation might be appropriate.
There're Supreme Court cases like Radiant Burners, Hydrolevel, and Allied Tube that demonstrate that anticompetitive harm can occur when participants in standard-setting corrupt that process. So that decisions are not made by a balanced group, or where competitors reach anticompetitive agreements outside the scope of legitimate standard-setting. So, for example, if we were to see evidence that a group of downstream product manufacturers had engaged in concerted efforts to exclude a particular patent holder from meaningful participation in standard-setting, unless that patent holder agreed to offer particular licensing terms dictated by the downstream product manufacturers, those facts might raise antitrust concerns. And likewise, if we had three patent holders who were to agree to exclude, from consideration for inclusion in a standard, substitute technology owned by a fourth patent holder, for the purpose of harming that patent holder rather than as a result of good faith efforts to include the most effective technology, then we might have concerns there.
We certainly don’t want to inhibit the lawful exercise of patent rights, but the antitrust laws are an entirely appropriate tool to use where there's evidence of collusive efforts to corrupt the standard-setting process.
John P. Moran: Thank you, Brinkley. David, on the copyright side of things, the DOJ recently lost the case relating to property rights organizations, that's PROs, in the Second Circuit. What, if anything, do you think the outcome of that case has to say about the continued need for regulation of PROs?
David C. Kully: Yes, thanks, John. So the case kind of raises one further complexity in the world of music licensing, which is that many songs have multiple co-writers and that those co-writers might be members of different performing rights organizations. So the Second Circuit case addresses a question of whether, when a radio station or other music user takes a blanket license from BMI, that license must cover and thus allow the public performance of songs if co-writers of the song are in different PROs or not members of BMI. The Second Circuit agreed with Judge Stanton from the Southern District of New York, who's the judge that currently oversees the enforcement of the BMI decree, that the BMI consent decree did not address this question.
So BMI takes the position that its licenses do not confer rights to play songs in which it holds just a fractional interest, and that radio stations and other music users have to go find and obtain licenses from other songwriters in order to be free from potential infringement liability. The decision does nothing to undercut the market power held by BMI but suggests that other smaller prosecutors, that hold other parts of a sufficient number of important songs, might themselves have a lot of market power.
John P. Moran: Thank you, David. Koren, moving from the copyright side to the patent side, certain foreign competition authorities have imposed large fines or otherwise condemn practices of licensing wireless cellular standard-essential patents at the end-device level, that is refusing to license at the component or chipset level. What are your views of the theories of harm and possible welfare effects of these decisions?
Koren Wong-Ervin: Sure. Thank you. So as Alden mentioned in his opening remarks, the DOJ, FTC in their, 2007…
Alden Abbott: 2007, I believe.
Koren Wong-Ervin: Yes, the IP report said that they're generally not going to punish unilateral unconditional refusals to license as antitrust violations. But what we've seen is some foreign agencies doing just that, especially when it comes to a vertically integrated company like mine, a company that both sells SEPS or patents in the upstream market and sells the component, such as a chipset, in the downstream market. And one theory I've heard is that refusal to license at the component level by a vertically integrated SEP holder amounts to de facto bundling of the components such as a chipset with its essential patents in order to monopolize the component market.
So Dr. Padilla and I in a 2017 paper show through the help of a stylized model that this so-called bundling strategy cannot lead to the required anticompetitive foreclosure if two things hold. First, if the SEP holder licenses at the end-user device level but doesn't assert its patent at the component level. Second, if it licenses its standard-essential patents to end-user device manufacturers on FRAND terms irrespective of where they source their components. So there's no discrimination, there's no cheaper royalty if you source Qualcomm's chips. And intuitively when one and two hold these two conditions, the bundle offered by the vertically integrated SEP holder can be replicated competitively by an end-device manufacturer by mixing and matching the component sold by a nonintegrated component supplier with the patent portfolio of the integrated SEP holder.
So in other words, the bundle is effectively constrained by the unbundled products and vice versa, and hence it causes no distortion of the competitive process.
So very quickly, I'll just touch on what are some efficiency justifications. So there's a nice paper by Putman and Williams that sort of rebuffs the idea that wireless cellular SEPs are confined to the chip. And in this study, they examined a representative sample of a large SEP portfolio from Ericsson and found that over 80 percent of the SEPs recited on the cellular network or the device as opposed to the component level. So in other words, these are system-level technologies not chip level.
Of course, licensing at the end-user device as opposed to different components can reduce administrative costs and lend to ease of monitoring or verifying the number of units sold. And lastly, and most importantly to me, is the consumer welfare effects. So Llobet and Padilla in 2014 did a nice paper and Padilla followed it up with a specific analysis to Qualcomm, and found that conservative estimates involving just Qualcomm shows that if you were to force compulsory, per unit component-level licensing—so if you did away with the current industry practice of licensing at the end-user device level—it would result in a reduction in consumer welfare worldwide of 2.54 billion per year. So we're talking higher prices.
And why is this? In short, it's because of double marginalization. You have markups at both the chip component levels and the end-user and also increased incentives to pass through. So right now the end-user device manufacturers pay a percentage of the device. So, of course, they pass on some of the royalties, but they're incentivized not to pass on too much because that would make their overall royalties higher since the percentage of the price of the phone. In contrast, if it was a per unit royalty at the component level, then it would act as a fixed cost to the end-user device level manufacturer, and they would have increased incentives to pass on more to end consumers. So with that, I'll stop there.
John P. Moran: Thank you, Koren. Professor Contreras, you mentioned earlier that the attorney general or the associate attorney general for the Antitrust Division has recently indicated that the Division will look carefully at concerted conduct by standards-development organization members that could disadvantage patent holders. What impact, if any, do you think such increased antitrust scrutiny would have on the ability of the standards-development organizations to implement royalty-free licensing requirements for standards such as today's existing technology in Bluetooth or USB or XML?
Prof. Jorge Contreras: Yeah, thanks very much for that. So I do not at all disagree with Brinkley that collusive behavior in violation of the antitrust laws should be prosecuted, and in the bad ole' days of Allied Tube and Hydrolevel, we saw that kind of activity happening in standards organizations, and it was not only appropriate but necessary that enforcement action be brought to curtail it. And that has led to the standards-development environment that we know today.
The thing that is worrisome about the most recent statements, though, around STO activity is that there seems to be a great emphasis scrutinizing any sort of policy change within an STO that might disadvantage patent holders. No matter how few patent holders there are, no matter how much or little those patent holders actually contributed to the relevant technical standard, it's being viewed as a property matter and disadvantaging someone in terms of their ability to utilize their property.
And as you mentioned in the question that there're a number of important standards that we use every day that are royalty-free, right? That means nobody has to pay patent royalties for these standards, and this has been a voluntary choice by the standards organizations that develop them to have standards that are freely implementable by everyone. And, again, Bluetooth, USB, pretty much everything as it relates to the internet, the World Wide Web, and many other standards have no royalties associated with them. And those standards work extremely well. They are pervasive, and I would submit that they're pretty necessary to our technological infrastructure.
But let's look back a few years and think about what would’ve happened if this approach that's being proposed now were in place back in 2003 and 2004. For example, when the World Wide Web consortium, which is a principle standards body for the World Wide Web layer of the internet, they changed their policy to effectively become a royalty-free organization. Now, that change was vehemently protested by patent holders in the organization. There were patent holders who objected; they voted against it; they even withdrew from W3C. But there was not antitrust enforcement against W3C. This episode was allowed to play out as a market experiment, and it did.
And I think we, in hindsight, can see that innovation wasn't reduced. Some in the area of the web, the World Wide Web, is pervasive today. Most consumers don’t even know that there is an internet beyond or beneath the layer of the World Wide Web. Most of the companies that withdrew from W3C came back very quickly. And innovation I can't say, again, as in all these examples, we don't have any counterfactuals of any appreciable merit. But innovation wasn't particularly reduced as far as I can see. If a group like the W3C tried to do this today in this environment and with these statements on record regarding policy changes that might impact patent holders, I would be nervous if I were advising them. And I think that that's not a good thing for innovation or for the economy or technical advancement.
[CROSSTALK Koren and Brinkley]
Koren Wong-Ervin: I mean --
M. Brinkley Tappan: This is Brinkley. John, may I respond to that?
John P. Moran: Yeah, sure. Go right ahead.
M. Brinkley Tappan: Okay. So I certainly appreciate what Jorge is saying about the benefits that we all obtain from some of the standards that he's mentioned that operate on RAND-Z terms. And I don't think that what Makan has said should be interpreted to say that -- or to mean that the Division would always apply antitrust scrutiny to situations in which there are RAND-Z licensing terms.
I think whether a zero royalty would concern us is very fact dependent. If there were a group of downstream product manufacturers that had market power in that product market, and they were able to use that market power to exclude a patent holder from participating in standards development unless that patent holder were willing to offer RAND-Z license, that might be an issue. But where there is a group of vertically integrated companies who are participating in a consortium and the purpose is to give all the participants freedom to operate and commercialize, and all want to make a FRAND-Z commitment to the group in furtherance of those goals, you know, that could very well be procompetitive and raise no concerns.
So I wouldn’t want our policies to be viewed as black and white. As with all antitrust questions, this is a very fact-dependent situation.
Koren Wong-Ervin: So I just want to push back a little bit. I'm not sure, maybe I misunderstood, Jorge, but the idea that sort of royalty-free or open-source licensing has resulted in all kinds of innovation, and patent holders and sort of wireless cellular would object to that, I think the two are very complementary kind of licensing models that serve very different products and needs and radically different revenue models, right? So when you have the incredibly risky and costly research and development required for interoperable, next-best-generation cellular wireless technologies, and they make return on investment based on licensing the patents, versus things like Bluetooth where the money comes from the products, and they want widespread adoptions so the technology is free.
John P. Moran: Any other comments before we move to potentially listener questions? Hearing none, Wes, open the floor to questions from the listeners.
Wesley Hodges: Thank you very much, John, and thank you to all our speakers for an excellent exchange. Looks like we do have one question from the audience. Let's go ahead and turn to that first caller.
Martin Peck: Hi. My name's Martin Peck. I'm a general practitioner in a rural area so my experience with intellectual property is limited, and my experience in antitrust is more or less nonexistent. I have seen a letter from BMI to a small town fair at which the music was going to by publicly performed. BMI was going to renew the license but only without a fee amount on the ground that BMI was reviewing their pricing generally. So the town fair was in the position of signing the agreement or cancelling the music. And when the bill comes, the localities apparent options, to me at any rate, are going to be either to pay the fee that's on the bill or head to the rate court in the Southern District at a cost that's almost certain to exceed whatever number shows up on the bill. And I'm wondering if any of the panelists are aware of the practice of license agreements that exclude a price term for small entities on the performing side, and whether that kind of licensing raises any anticompetitive issues to any of the panelists?
David C. Kully: So I guess -- this is Dave. I'll take that as the PRO spokesperson on the call. So if I understand you correctly, BMI said you have to pay but didn't tell the festival what it was going to charge for the music, for the right to publicly play the music?
Martin Peck: That's correct. They've had a license for several years. But it's just been renewed this year at a price term.
David C. Kully: Yeah, I'm not familiar with that practice. I mean, I think it illustrates the extent to which BMI has music users, to some degree, over a barrel and the need for continued regulation. And it typically is the case that the disputes that have gone to a rate court tend to be with respect to large companies, you know, groups of radio stations and not individual music users. But to the extent that there's disputes over the rates, I guess that's available there as the existing protections under the consent decree allowed. But you're right, the cost of a rate court proceeding is prohibitive.
Wesley Hodges: Thank you very much for your question, caller. Seeing that there are no immediate questions, John, I turn the mic back to you. Are there any comments you'd like to make or any questions you'd like to ask before we finish the call today?
John P. Moran: No. I'd just like to thank our panelists, Alden, Brinkley, David, Koren, and Jorge, for participating in a lively discussion. Thank you.
Wesley Hodges: Excellent. Well, thank you to John. I'd like to let everyone know that this has been recorded and will be turned into a podcast, and you'll be able to check it out on iTunes, Google Play, and the FedSoc website. You'll also be able to see all of our calls that we've recorded there. We encourage you to check that out.
So on behalf of The Federalist Society, I'd like to thank our experts for the benefit of their valuable time and expertise today. We welcome all listener feedback by email at email@example.com. Thank you all for joining us. This call is now adjourned.
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