Over and under-disclosure of Standard Essential Patents: an EU approach to its effects on innovation and competition

The research question tackled along this thesis is whether competition law should and can address the effects derived from deviations to the duty of disclosing SEPs. The answer is a partial yes in both cases. The findings in Chapter 3 illustrate that there are explanations beyond mere opportunistic behaviours that explain why over and under-disclosures occur. First, essentiality is a dynamic reality that depends on whether the scope of the patent claims and the scope of the standard specification overlap, and therefore it is frequent that such overlaps are only temporary. Until the patent is granted and the standard is released, the scope of both the patent claims and the specification may still change. In addition, the traditional understanding of what essentiality is, it is, at least, outdated, if not historically wrong. Nowadays, essentiality is split into two elements: standard essentiality or specification essentiality (patent claim = standard specification) and market or specific implementation essentiality (standard specification = technical solution implemented by the standard-compliant product). In other words, speaking of a truly essential patent requires a triple identity: patent claim = standard specification = technical solution. The causes of this change can be found, on the one hand, on the breach of the paradigm one standard – one product. Especially nowadays standards are implemented in products of a very different nature and the technical specifications required by a smartwatch and a car to achieve the same goal (connectivity) are likely to differ substantially. On the other hand, the technological evolution at market level can render some of the functionalities non-essential due to their obsolescence or to the creation of new technologies that allow to circumvent certain SEPs at a lower cost or with a higher performance. Technical committees are not necessarily aware of these changes – particularly those that take place at product level – neither take account of such changes in the context of standard updates. As a consequence, SEP holders still have better knowledge of standard essentiality, while implementers have a deeper understanding of market essentiality. This has important practical implications for the disclosure, licensing and litigation levels. At the disclosure level, this implies that the obligation of patent holders to disclosure cannot be extended beyond assessing whether their patents read on the standard specification. A second aspect that is relevant to explain why over and under-disclosure occur, is that disclosure practices depend substantially on the rules defined by SDOs in their IPR Policies. Such rules differ substantially as regards the scope, timing for disclosure or level of diligence required. Moreover, such rules tend to be rather vague and allow for different disclosure practices even inside the same SDO, which does not contribute to increase clarity. Third, and finally, the complexity of the standardisation process makes the identification and disclosure of SEPs particularly challenging, even for highly sophisticated SEP holders. The reasons are that essentiality is a multifaceted reality, with legal, technical and economic features and implications, which depends on a number of activities that are not necessarily connected and that sometimes take place simultaneously. As a result, information governance should become a key feature of standardisation, no less because perfect information is a structural element of competitive markets. On a principled note, it can be argued that the pre-market competitive process in SDO must mirror such structural element – or at least aim at it. Chapter 4 looks at SEP-related issues from the broader perspective of the intersection of intellectual property law and competition law, taking note in particular of refusal-to-license cases. The analysis shows that competition law intervenes in scenarios where there is a blockage of competition by imitation and competition by substitution. In such cases, the virtuous circle between the IP law and competition which is expected to incentivise innovation and its dissemination can potentially be affected. Yet there is a substantial difference between disclosure-related cases and the prior case-law: in SDO-based standardisation foreclosure of competition by substitution is not a result of the market success of a given product, but the result of a pre-market dynamic competition organised by SDOs and within SDOs. Not surprisingly, the priority of the Commission in SDO-based standardisation has substantially been focused in devising the standardisation process as a truly pre-market competitive process. The FRAND commitment, the need for unrestricted access or the duty to disclose are some of the safeguards put in place to protect this form of pre-market competition. Consequently, failure to fulfil such requirements should be evaluated not only against the harm that the behaviour might cause in subsequent markets, but also taking into account the impact on the competitive process which may lead to a foreclosure of competition by substitution. Chapter 5 analyses these specific effects resulting from under and over-disclosure in the light of Article 102 TFEU. Although under-disclosure does not always give rise to anti-competitive effects, there are certain cases that justify competition law intervention. Patent ambushes and the exclusion of superior technologies by means of under-disclosure are the most harmful under-disclosure cases. On the one hand, the effects of patent ambush are not limited to those resulting from mere claiming excessive royalties, since such claiming only becomes possible because of the previous manipulation of the pre-market competitive process. Hence, the anti-competitive effects go beyond mere excessive pricing, including harm to follow-on innovation (notably if the ambushing company holds-up the entire industry), misallocation of royalties in favour of the ambushing company, undue exclusion of other competing technologies in competition for the standard and harms to the trust in standardisation. All these harms were, to a certain extent, analysed by the Commission in Rambus and partially echoed by the CJEU in Huawei. As a consequence, patent ambushes cannot be deemed to be a mere exploitative pricing case, nor should the remedies be those typically applied for in cases of excessive pricing. On the other hand, the exclusion of a superior technology as a result of under-disclosure can also provoke severe harms to competition, which moreover, are difficult to remedy once the industry is locked into the standard. The frustration of the SDO pre-market competitive process, the lock-in of the entire industry into an inferior standard, the misallocation of royalties – under rewarding other companies’ innovative efforts and the harm to confidence in standardisation are some of them. The problem in these cases is that in most cases, the company is not dominant at the time of engaging in the under-disclosure nor is there any subsequent abusive behaviour, as is the case in patent ambush scenarios, that follows the acquisition of market dominance of the under-disclosing patent holder. In both cases, moreover, it is sometimes difficult to obtain evidence of the anticompetitive behaviour and its harmful effects. Over-disclosure, on the other hand, presents also potential anticompetitive harms beyond prototypical excessive pricing cases. Over-disclosure does not primarily affect the SDO-based pre-market competition – ie the selection of the technologies that compose the standard - and its effects are mostly constrained to the licensing level. This, however, does not rule out that over-disclosure can discourage other SEP holders from participating in future standardisation efforts, negatively affecting their innovative performance in the long run, for example in cases of systemic royalty stacking caused by concurring over-disclosures. In addition, over-disclosure has a viral effect – over-disclosure by one patent holder incentivises other patent holders to engage in over-disclosure and thereby contributes to royalty stacking. Moreover, the fact that over-disclosure affects more severely those companies that are exposed to information asymmetries – remaining neutral for implementers and SEP holders which have a better knowledge of the technological relevance of portfolios – argues in favour of closer scrutiny under competition law. Nevertheless, it is very difficult to address over-disclosure under Article 101 or 102 TFEU apart from the most flagrant ones since – in practice - is difficult to characterise any disclosure which is done in accordance to current disclosure rules as an over-disclosure. Moreover, it is also challenging to prove that over-disclosure has resulted in a price increase. In particular, Article 102 TFEU’s scope is very limited to face the challenges of deviations from disclosure rules, and notably under-disclosure, and therefore it is appropriate to consider amendments to the wording of Article 102 TFEU to capture cases where the patent holder acquires market power for reasons other than competition on the merits – in the same fashion Section 2 of Sherman Act does. Yet one also has to be aware that such amendment has deeper implications beyond the SEP world, and moreover, it implies changing EU competition law on a philosophical level which transcends the object of this thesis. However, the new typologies of cases that the EU is facing and will face – notably those related to multisided platforms and closely dependent markets –also point to that direction. In addition, as discussed in Chapter 6, current SDO disclosure can be improved to better fulfil the goals they aim to achieve: primarily, to prevent the blockage of the standardised technology and ensuring access to it, and secondarily, to contribute to improve the transparency in licensing by, on the one hand, contributing to bridge the asymmetries of information and, on the other, preventing the artificial creation of such asymmetries. Overall, the system might be improved without a substantial increase of costs. In this regard, it is worthwhile to step away from the mainstream discourses, which are substantially influenced by the agenda of vested interests, and rather pay due attention to the incentives for the stakeholders involved and try to address the real obstacles that disclosure rules face in view of achieve the abovementioned goals. In this regard, the thesis proposes a system consisting of an early blanket disclosure – to prevent eventual ambushes – which is complemented by a mandatory specific disclosure once the standard has been released and the patent has been granted – to ensure that the transfer of information from the SEP holders to the market takes place in the moment where the former have a higher level of knowledge of their portfolio’s relevance. This system can be improved, depending on the circumstances, for instance, by providing for the possibility of doing a negative disclosure right after the blanket declaration to exclude those key patents that the SEP holder wants to subtract from the FRAND commitment, exempting companies that do not monetise their portfolios by charging royalties from the specific disclosure requirement; and allowing for provisional disclosures in the interest of some SEP holders that want to signal their portfolio’s technological strength. This system would have the effect of reducing the number of disclosures, which at the same time will be more accurate, overall giving more certainty to all parties without imposing excessive burdens on them. Moreover, it will provide judges and competition agencies with a better-defined framework to evaluate whether a company has engaged in under or over-disclosure. Nevertheless, this proposal cannot be deemed to provide a universal solution, and while it might be too demanding for certain SDOs, it can also be insufficient for others. Therefore, its suitability must be assessed in the light of the business and technological dynamics surrounding each sector and SDO, which is something for which both the SDOs and competition agencies are well positioned. While modifications of SDO disclosure rules are primarily a matter for the SDOs themselves, under certain circumstances, the Commission might intervene on the basis of Article 101 TFEU and impose or push for the adoption of more suitable disclosure rules. Here a distinction between three scenarios depending on whether the SDO disclosure rules allow or promote the prevention of competition can be made. Disclosure rules can, on the one hand, potentially result in a restriction of competition without benefits in terms of innovation or, on the other hand, rather lenient (vague) or inadequate (but concrete) disclosure rules. While in the first of the cases intervention would be justified, intervention in the other two situation should remain the exception. However, the ex post intervention of the Commission is particularly problematic in technologies governed by network effects. An ex ante clearance is better suited and prevents many anti-competitive effects of ex post intervention. The approval of Standardisation Guidelines can provide further guidance and clarifications. In any event, it is essential that Commission’s intervention is limited to the extent needed to protect competition. It should seek to pursue other, yet legitimate goals that would need be addressed by other instruments. In addition any intervention must be consistent and not discriminatory, in particular by not applying a more demanding threshold to EU-based SDOs as compared to non-EU-based SDOs.

Author

• Zafrilla Díaz-Marta, Vicente

• SEP
• FRAND
• Competition Law
• Patents
• Standard Essential Patents
• Innovation policy
• Disclosure
• Declaration
• Intellectual property

Identifier

hdl:10045/164067

OAI identifier oai:identifier

oai:rua.ua.es:10045/164067