European Commission's formal SEP Regulation proposal addressed certain issues and is now criticized by both net licensors and net licensees of standard-essential patents

The European Commission yesterday announced--with only a one-day delay--its formal proposal (PDF) for a regulation on standard-essential patents. It's not a question of whether the glass is half-full or half-empty: while they fixed some of the issues that were highlighted in recent weeks (not only minor but also structural ones), other problems persist.

The most fundamental problem is that what the EC's internal market commissioner Thierry Breton presented yesterday is not really considered useful by anyone anymore:

• IP Europe, whose members are major net licensors, "[r]egrets the European Commission’s decision to propose a harmful and unbalanced [r]egulation."

• Its counterpart in Brussels, the Fair Standards Alliance (FSA), "regret[s] however that the proposal fails to live up to the objectives that earlier drafts sought to aspire to." The FSA represents the views of major net licensees like Apple and some automotive industry players. Apple additionally has ACT, which Bloomberg exposed as an Apple astroturfing operation. That Apple front "is deeply concerned with recent changes made by the Commission in its proposed regulation" and "troubled by" the removal of a passage that suggested a "license to all" policy.

Regrets, regrets, concerned, troubled. Everyone regrets or expresses concerns. No one is happy. According to commissioner Thierry Breton's logic, that would essentially make both camps "bad-faith actors"...

This reminds me of the doomed Directive on the Patentability of Computer-Implemented Inventions, which was jettisoned by the European Parliament in 2005 in a near-unanimous vote because neither camp wanted it anymore (an important difference being that in that case, the original Commission proposal was viewed very favorably by one camp).

Put another way, the current proposal amounts to a lot of bureaucracy and some uncertainty--but ultimately for nothing, even if one wanted to devalue SEPs and complicate their enforcement. It's useless, and I'm skeptical that the co-legislation process involving the EU Council and the European Parliament has the potential to change that. Whether through hundreds of amendments or a "trilogue" (backroom negotiations between EC, Council and EP), this approach is very likely to produce something unlawful or unworkable (or even both at the same time). They're just structurally on the wrong track, and they obviously weren't able to do a complete overhaul over the past month.

That said, I'm happy to see that some of the criticism has been validated by recent changes. I identified many issues myself and also pointed to other writings. For my previous commentary, see the most recent post, the one before, and the link list at the end of that one.

The way I read the current proposal, the de facto antisuit mechanism has been softened. Previously, a SEP holder starting a parallel proceeding in a non-EU jurisdiction (which they now refer to as a "third country") would have been deprived of the right to enforce in the EU because an implementer could have obtained a notice of termination of the FRAND determination proceeding based on the SEP holder's "failure to engage", but the SEP holder would not have received one. Now, both parties get a notice of termination in that scenario, and the SEP holder can then go ahead and enforce.

What they say now is that the EUIPO-led FRAND determination should set global rates unless the parties agree otherwise. While global portfolio licenses are indeed a commercial reality, DG GROW's insensitivity to the concept of international comity is still evidenced by the failure to consider scenarios in which parties may want to obtain valuations in other jurisdictions for the patents they hold or use there (for instance, China). Commissioner Breton is just doing too many things at the same time, which must be the reason why he gave an answer at yesterday's press conference that makes no sense: responding to the question of whether the EU would like other jurisdictions to create similar SEP licensing regimes, he declared himself in favor of others doing so, but the EU's approach--even without the radical antisuit mechanism they dropped--is simply designed to be incompatible with similar rules in other jurisdictions.

Instead of adopting Qualcomm's proposal of a Reciprocal FRAND Agreement, the proposed regulation does not require the parties to commit to be bound by a FRAND determination. The way it works is this:

• Whoever triggers the FRAND determination process (SEP holder or implementer) doesn't have to state initially whether the determination shall be binding.

• When responding, the other party will have to tell whether it wants the determination to be binding.

• But it won't be binding unless the party that started the process also says it accepts to be bound.

It's not even clear how binding a commitment "to comply with the outcome" is. The proposal doesn't clearly say that the parties have to enter into a license agreement on that basis. It envisions that the courts hearing SEP infringement cases between the parties will be informed of those commitments, but after a license agreement there would be no more basis for infringement action.

The term "enforcement", which I criticized as unclear, no longer appears in all contexts. At least Art. 34(1)(a) now says a SEP holder needs a FRAND determination "prior to any inititation of a SEP infringement claim" (emphasis added). That is clearer, though I'm still wondering whether SEP holders can save time by bringing declaratory judgment actions.

DG GROW tried--but in my view failed--to preserve the right to enforce SEPs during a FRAND determination. What the proposal now allows is to seek a "provisional injunction of a financial nature", which is not a sales ban but would merely require an implementer to make a deposit or post a bond to cover license fees. That's not going to discourage hold-out in the slightest. The way the proposal phrases it is also counterintuitive because they literally say that such an injunction should be sought in the courts of a Member States, but even when I asked around on LinkedIn, I got no indication that there is any jurisdiction in the EU (and possibly not beyond, other than interim payments ordered by Indian courts) that allows this. The way the proposal defines Member States courts, however, includes the Unified Patent Court (UPC). Is that a sufficient solution? No, it falls far short, not only because an obligation to make a deposit won't get any unwilling licensee to the negotiating table but also for the following reasons:

• Many patents have been, and will be, opted out of the UPC.

• Not even all EU Member States are UPC Contracting States.

• The UPC doesn't have jurisdiction over national patents.

In the original draft, the definition of "patent" included utility models. That is no longer the case and represents a loophole for right holders. It's actually pretty cheap, quick, and easy to get utility models in Germany. What limits their usefulness that they don't enjoy a presumption of validity, but if they mirror a patent that has been examined by a patent office, that shouldn't be a problem.

The Commission's edits were obviously done under time constraints. The proposal even has typos. It would have been so much better to engage in consultation, given that the people who drafted it clearly don't understand litigation and commercial realities. For instance, that whole idea of achieving through an awareness-raising effort by the EU's trademark office that car makers will let suppliers pass license fees down in the supply chain is nonsensical. In the end, there are market force in play, and the regulation won't move the needle. I'm not blaming public servants for not understanding how things work in the economy, but then they have to solicit feedback based on specific proposals. They refer to extensive consultations, but those were not about the type of proposal that is now on the table and at risk of going nowhere.

Now it's too late for proper consultation. The thing has been put out and now the legislative process must take place, though it could just result in a rejection of the proposal as I mentioned further above.

The SEP Register part of the proposal is still bad for patent pools and has been rightly criticized by the European Telecommunications Standards Institute (ETSI). I can't see any serious improvement there. The only significant change concerning the register is that SEP holders are now in a better position to get a peer review if they disagree with the initial essentiality check. But appeals to the courts of law are still not even an afterthought.

I'm going to take a closer look at the proposal, the impact assesment, and the studies the Commission is referring to. The proposal notes that "[t]he impact assessment relied primarily ... on two external studies." One of them was produced by Charles River Associates, which engages in SEP policy work for Apple and may additionally hope to be hired by parties (especially implementers) with a view to the FRAND conciliation proceedings. The other is co-authored by the founder of IPlytics, who has a vested interest in certain approaches to SEP licensing and litigation that generate more business for that company than others. I'll be sure to write many more posts throughout the legislative process.

This is going to be waste of time, energy, and resources. The chances of that proposal culminating in a useful piece of legislation are very slim.

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Qualcomm outlines Reciprocal FRAND Agreement as superior alternative to European Commission's "fatally-flawed proposal" of non-binding standard-essential patent valuations

The Policy and Regulatory Report (PaRR) has been told by the European Commission that a proposal for a regulation on standard-essential patents (SEPs) is still planned for next week. A draft proposal leaked late last month. On Friday, the European Telecommunications Standards Institute (ETSI) communicated its concerns to senior EC officials. Toward the end of the post I just linked to, you can find a list to my other writings about the topic.

Now the chief licensing lawyer of the world's largest SEP licensing program--Qualcomm's Fabian Gonell, whose live testimony in an FTC case I watched in San Jose four years ago--has published a thoughtful LinkedIn article to explain how "[t]he European Commission can achieve its goals without putting European participation in future standards at risk."

At the end of its first paragraph, Mr. Gonell's article predicts that the envisioned regulation would be unhelpful:

"Put simply, the leaked draft Regulation would upend patent rights in Europe and have a host of unintended consequences. Worst of all, it would be for nothing because the Regulation as written is not going to meet the Commission’s goals."

The Commission's original objective is described in the article as "increasing transparency about patents used in standards – specifically, which patents are actually essential." Qualcomm made a proposal "at the last meeting of the ETSI IPR Special Committee that would have directly addressed this issue for cellular standards." I have to protect my sources, but I can say that this was already known to me. I have to protect that source, but the source is not affiliated with Qualcomm in any way and says the proposal was good, but it takes time to reach an agreement on such initiatives.

Somehow the Commission staff that drafted the regulation became more ambitious and in a "dramatic turn" (as Mr. Gonell describes it) expanded the scope of the measure by also "establish[ing] radical new rules to set royalty rates and make FRAND determinations." Just like commentators (including yours truly), Mr. Gonell notes "[t]he incongruous language in the new provisions, and drafting errors." He makes an interesting comparison between the essentiality-check process ("well-thought out, detailed") and "the lack of structure, due process and procedural safeguards in the FRAND determination and aggregate royalty provisions to reach that conclusion."

In that context, Mr. Gonell's article raises an issue I haven't previously discussed: the draft regulation does not provide procedural safeguards along the lines of a "motion to quash or limit" in U.S. discovery. Parties could request information, but the FRAND conciliators could not act as gatekeepers who would make sure that overreaching requests are modified or thrown out.

Another new issue to add to what was already a rather long list is that the draft version of the regulation, apart from failing to determine essentiality claim by claim (as I had also noticed), does not explicitly relate "only to assertions against standards-compliant products." That is an issue because such patents could be used for purposes other than implementing the standard to which they were contributed. And Qualcomm would deem it helpful to make it clear that "the relevant FRAND commitment" will be referenced and applied in those FRAND determinations.

While the Commission says it wants to streamline the licensing process, the only thing certain is that enforcement against unwilling licensees would be delayed. As I've recently discussed, the meaning of the term "enforcement" is not even perfectly clear, so litigants might be able to seek declaratory judgment in parallel to a FRAND determination. But the real issue is that anything designed to delay enforcement encourages hold-out behavior.

The following sentence is not only--but also--about Apple (without naming it):

"Court case after court case has featured implementers refusing to be bound or arguing that they should be able to refuse to be bound by even court-decisions on FRAND terms."

A refusal to be bound was an issue in an Ericsson v. Apple FRAND case in the Eastern District of Texas last year, and in a dispute with Optis in the UK, Apple also said that even after a court determination of FRAND terms it might decline to take a license on such terms.

Apple is extremely active in lobbying for the current version of the draft regulation. Even Apple appears to be aware of the need to correct errors, but it wants the political signal that implementers should have even more time before they face the threat of an injunction.

Mr. Gonell notes that "[a]s courts have repeatedly recognized, delay facilitates hold-out and favors implementers." In my observation, delays--during which a licensee will not make any payments--are a key factor that forces SEP holders to settle for much less than they would actually be entitled to, especially if the implementer engaging in hold-out accounts for a very significant percentage of the SEP owner's licensing income.

The article goes on to explain that the process won't become less costly because after a non-binding FRAND determination, litigation would still be necessary, and points out that the Commission is accusing (at the WTO level) China of violating the TRIPS agreement while also seeking to deprive SEP holders of access to courts for the duration of a FRAND determination proceeding.

Then Qualcomm proposes a"better way – a way that actually does provide a faster and more cost efficient resolution, is fair, and is not inconsistent with the Commission’s WTO complaint":

"The Commission should replace the EUIPO-run FRAND determination scheme with a requirement that an SEP holder offer the implementer an agreement in which the patent holder agrees to forego patent infringement remedies and the implementer agrees to enter into a license on FRAND terms if one is offered. This agreement (a “Reciprocal FRAND Agreement”), modeled on the FRAND Injunction decisions of the courts of the United Kingdom and Wales, would give the implementer the power to be completely free of the threat of an injunction by agreeing to enter into a license on FRAND terms as confirmed by a court or agreed-to neutral third party. This fully addresses any concerns about the German courts’ application of the Huawei/ZTE framework resulting in injunctions against unwilling licensees without sufficient inquiry into whether the patent holder made a FRAND offer. With an obligation to offer a reciprocal FRAND Agreement, a failure to agree on licensing terms would be addressed in a contract action in a national court over FRAND terms, and not in a patent infringement proceeding."

No implementer would have to take such a license until actually having been held to infringe one of the licensor's SEPs. But when that happens, the window of opportunity to enter into the reciprocal FRAND agreement will close within 30 days. Just like in the UK, an implementer could decide to just let a sales ban enter into force instead of entering into that agreement. It would be optional for the implementer.

The article contains a colored table that shows what problems are solved or created by the two alternative approaches (FRAND determination under auspices of EUIPO vs. the Reciprocal FRAND Agreement proposed by Qualcomm):

I wish to comment particularly on two cells of that table:

• "Fair? No - enables hold-out":

  Unfortunately it appears that some people in the Commission's Directorate-General for the Internal Market (DG GROW) have been lobbied so hard by Apple and certain automotive industry stakeholders that they now believe hold-out equals fairness. The ultimate decision makers, however, hopefuly won't buy that. A solution is fair only if it tackles hold-out and hold-up at the same time.

• "Addresses German court issue? Only if courts respect non-binding judgment":

  It's clear to me that the Commission initiative was triggered by decisions made by German courts--not their French, Dutch, or other counterparts. And the Commission knows that some of the same judges will have greater powers as they serve on the UPC (full-time or part-time). Whether the conciliators will set the low royalty rates that companies like Apple would like to see is anything but certain. I actually think the conciliators will have an incentive to arrive at relatively high rates. But those who welcome the proposal simply want to slow the whole process down, increase its costs, and generally make it more onerous on SEP holders, hoping that this will give them leverage when they make lowball offers shortly before or after the expiration of license agreements.

  The "if" in "[o]nly if courts respect non-binding judgment" is a big IF. I've previously discussed that courts, including but not limited to the ones in Germany, won't necessarily give much weight to advisory opinions. They could still identify Sisvel v. Haier reasons to enjoin; they could still require implementers to take global portfolio licenses to huge patent pools even if they are held to infringe only one patent. Damages awards could get costly. Patentees might prioritize non-SEPs in EU-based courts. There would likely be more assignments to licensing firms. But even if German courts including Germany-based UPC Local Divisions became unattractive venues for enforcement, SEP holders could sue elsewhere (the regulation would not result in a global license or a global portfolio valuation--only the EU parts would be affected).

An interesting if not intriguing effect of the Reciprocal FRAND Agreement proposed by Qualcomm would be that FRAND would become a matter of contract rather than antitrust law.

Whether or not one agrees with the particular approach outlined by Mr. Gonell on LinkedIn (in my opinion, it is clearly more balanced and effective than the FRAND determinations--including those for entire standards--envisioned by the Commission), at minimum it shows that the Commission should have engaged in consultation not only on potential and actual problems, but also on alternative solutions.

The last sentence of Mr. Gonell's article says the Commission would "put[] European participation in standardization at risk by sending the Parliament and Council a fatally-flawed proposal." That is not just Qualcomm's opinion. It's what ETSI itself has told the Commission. Does the Commission really want to take a legislative initiative with shortcomings (some of them structural) that the experts in the Council and in the Parliament--the two institutions that will be the co-legislators--will easily identify? An original proposal that requires numerous amendments even if one merely wanted to fix errors (regardless of one's objective) is not necessarily the fast track to new legislation. Qualcomm's idea of a Reciprocal FRAND Agreement wouldn't need the 24-month ramp-up period that the Commission's draft proposal needs just to get the EUIPO--a trademark (not patent) office--up to speed, so it could bring about change even more rapidly.

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European Commission's take on patent pools has turned negative: draft impact assessment makes up and distorts facts, relies on conflicted "researcher"

The European Commission's U-turn on standard-essential patent (SEP) pools is remarkable and apparently attributable to lobbying by certain parties, facilitated by DG GROW's mistake of relying on an adviser whose business benefits from complex licensing processes entailing many bilateral negotiations (and disputes).

1. From "promotion" (2014) to skepticism (2021)

2. Article 11 of the leaked draft regulation

3. Distortions and unsupported assertions in draft impact assessment

4. IPlytics' obvious conflict of interest

1. From "promotion" (2014) to skepticism (2021)

In 2014, a study on Patents and Standards ("prepared for the European Commission Directorate-General for Enterprise and Industry") stated the following about patent pools (click on the image to enlarge or read the text below the image):

Promotion of patent pools

Patent pools provide a one-stop solution for licensing a bundle of standard essential patents owned by different entities, thereby aiming to mitigate transaction costs, avoid royalty stacking and create a level playing field. Given these benefits the study has examined the following aspects:

• Strengthening the relation between SSOs and pools;

• Providing incentives to SEP holders to participate in patent pools;

• Encouraging entities such as universities and SMEs to participate in patent pools.

That was not the last time the Commission recognized the benefits of patent pools, which also happened in connection with the horizontal cooperation guidelines.

Two years ago, DG GROW started to question the benefits of pools, asking a lot of questions in the description of a webinar. But at least it listened to both sides, and invited people with different perspectives, among them the president of the only major European patent pool administrator--Sisvel--as well as a Europe-based executive of Avanci.

2. Article 11 of the leaked draft regulation

The leaked draft of an EU SEP regulation (see my previous post on that one for a link list) imposes new transparency requirements on patent pools:

Article 11

Information to be provided by patent pools

Patent pools or any entity representing a collaborative licensing group shall publish on their websites at least the following information:

(a) standards [...]; (b) the administrative entity’s shareholders or ownership structure; (c) process for evaluating SEPs; (d) list of evaluators having residence in the Union; (e) list of evaluated SEPs and list of SEPs being licensed; (f) [sample claim charts]; (g) list of products [...]; (h) royalties and discount policy [...]; (i) standard licence agreement [...]; (j) list of licensors [...]; (k) list of licensees [...].

That article is an example--one of many in that draft regulation--of what happens when there is no proper consultation process on specific regulatory ideas. Whoever drafted or contributed to that article must live in an ivory tower.

Item (b) is misplaced because the disclosure of shareholders and ownership structure is a subject of corporate--not patent--law, and determined by national laws.

It is unclear what a pool should say about the "process for evaluating SEPs": when would a pool run afoul of that part of the regulation?

Item (d) is a typical example of regulatory zealots (almost a euphemism) wanting the EU to cut its nose to spite its face: it actually creates an incentive for pools to work with evaluators based outside the EU, and for such evaluators to move out of the EU, especially since their work is not location-dependent and they can find lower taxes and better weather elsewhere. It's also not clear why the disclosure of shareholders would affect entities (be it the pool administrator firms or their shareholders) based outside the EU while the part concerning evaluators is limited to the EU. Apart from that, it is a bad idea because patent pools have good reasons to shield their evaluators from attempts to exert pressure or otherwise influence their views.

To the extent that item (e) wants pools to publish a list of their patents, there are pools that do so already, but as long as the names of the licensors are known, licensees can find out anyway. The bigger issue is that a publication of the "list of evaluated SEPs" will invite validity challenges (and possibly also actions for declaratory judgment of non-essentiality) targeting those patents in particular. Again, whoever came up with or supported that idea is clueless.

Item (f) about claim charts should be left to the way the courts apply Huawei v. ZTE.

Pools tend to be quite transparent about their standard royalties. The term "discount policy" in item (h) is again unclear. Does it include duplicative-royalty policies?

Some pools publish their standard license (item (i)), but why should everyone have to do that? When implementers inquire, they'll get an offer.

While disclosing licensors (item (j)) is non-controversial, item (k) even goes against the interests of licensees: in practice, it is typically the licensees who don't want to be named. Anyone who followed automotive SEP licensing in recent years knows that Avanci has for some time had more licensees than the brands listed on its website. A pool that is successful would like to name all licensees, but some licensees insist on confidentiality.

Article 11 is deeply flawed, but what the draft impact assessment says about patent pools is even worse.

3. Distortions and unsupported assertions in draft impact assessment

In my previous posts and in the first part of this post I've mostly focused on what the draft regulation itself says. But the draft impact assessment, which leaked at the same time and will accompany the legislative proposal, makes laughably off-base claims regarding patent pools.

Before I point out some nonsensical details, let me start with a more fundamental question. Why take issue with the licensing terms (including, but not limited to, royalty rates) of patent pools in the first place? As long as bilateral licensing options exist, pools have to compete with those bilateral alternatives. None of the pools mentioned in the draft impact assessment bars patentees from entering into bilateral deals. Much to the contrary, I could immediately think of multiple examples for pools managed by those firms where such deals have indeed been struck (such as Huawei's agreements with Sharp and Conversant well after those companies had joined Avanci).

A pool's raison d'être is all about transactional efficiencies. If the pool rate or its other terms are too onerous, bilateral licensing will prevail, the pool will be marginalized unless it adapts, and the market--not the Commission--will have solved the problem.

The pools are not the problem, and it's not the pool administrators' fault that some German courts effectively require licensees to take an entire pool license without requiring the patent holder to make a bilateral portfolio offer (satisfying FRAND criteria) as another option. If an implementer is found to infringe a valid and essential patent, and there's a pool license on the table that costs very little and covers maybe a few dozen patent families, a court may reasonably interpret Huawei v. ZTE to the effect that a pool license is what a willing licensee would normally take--and can then determine whether the pool offer is FRAND. Admittedly, if a license fee is high and/or there are huge numbers of patent families in the pool, the market dynamics I described (pool competing with bilateral offers) are lost due to a "license or die" judgment.

If that is what the Commission is concerned about, its draft regulation is unable to solve the problem: there is nothing in there that would prevent the infringement courts from obligating an implementer to take a pool license while not requiring the patentee to make a bilateral offer. There would be a FRAND determination by the EU's trademark office, which the infringement courts can just ignore. There would also be an aggregate royalty determination for the entire standard, which the infringement courts can likewise ignore because they--not the Commission--decide whether to apply a top-down approach to valuation, and because they can disagree with the findings anyway.

The decision makers in the EU institutions must figure out one plain and simple truth: if an implementer takes a pool license, it's normally just because it's more efficient than taking numerous bilateral licenses.

The draft impact assessment is trying to understate Avanci's success. Avanci covers far more than the 60% of (up to) 4G cellular SEPs that the draft impact assessment states on page 9 (PDF page 13). The only explanation for the missing 40% is footnote 54:

"Companies missing from Avanci include among others Huawei, Samsung, Apple, Google, ETRI. Source of % IPlytics."

I'll talk about IPlytics further below. There's no substance there, the number doesn't make sense, and at any rate those five companies do not explain the missing 40% by far and away. In particular, Apple and Google--who acquired virtually of their SEPs--are not known to engage in outbound SEP licensing (they only cross-license), and that generally applies to Samsung with the sole exception of its participation in video codec patent pools. In other words, if a car maker takes an Avanci license, there is only a residual risk of litigation left.

On the same page, there is a Figure 4 that way understates the number of vehicles licensed by Avanci, and it does so by setting an arbitrary, capricious, and either incompetent or disingenuous cutoff date: August 4, 2022. Major car makers, especially from Asia, signed shortly after that date. The text above the charteven mentions Avanci's September 2022 announcement, so why didn't they update their chart accordingly? A picture is worth a thousand words, and that picture is grossly misleading.

The Commission doesn't appear to credit Avanci for the fact that it maintained a consistent pool rate over many years despite adding tremendous value--and it doesn't take that fact (the addition of licensors after the formation of a pool is announced) into consideration when discussing Sisvel. From an industrial policy perspective, it strikes me as odd that the Commission goes not only against Avanci but also against Sisvel, the only major European pool administrator. Other world economies appear to be more interested in the trade effects of intellectual property rights while the Commission would rather have EU companies send their royalty checks abroad.

The draft impact assessment lumps Sisvel--a major pool administrator--together with "specialized patent assertion entities" and incorrectly categorizes it as a former operating company:

"This includes state-owned entities (such as Japanese IPBridge or FranceBrevets), ‘privateering’ spinoffs from large operating companies (e.g. Unwired Planet from Ericsson, Panoptis from Panasonic etc), former operating companies who have ceased other activities to concentrate on patent licensing (e.g. Sisvel), and private companies acquiring patents from a variety of predecessors (e.g. IPcom, Uniloc, etc.). PAEs contribute to further fragmentation of the SEP owners market." (emphasis added)

Give me a break. Sisvel has been a patent licensing firm from the get-go. It never had an operating business.

It's also unclear to me on what factual basis (I believe there is none) the Commission distinguishes between Unwired Planet and IPCom. Why is one a "spinoff" from Ericsson and the other "acquir[ed]" patents from Bosch? But that's just another implausibility that shows some people at DG GROW don't know what they're talking about (and want the Commission as a whole to damage its reputation by proposing to put out such crap).

On page 25 (page 29 of the PDF), the Commission again does Sisvel injustice. It claims--without any factual basis whatsoever--that in the IoT SEP licensing space, "[t]he FRAND royalty expectations are likely to be higher than the market would suggest" and then points to footnote 139:

"For example, Sisvel launched a new IoT pool with 20 licensors who claim to represent about 30% of all SEPs. The price for a smart meter is announced at USD 2, so the total aggregate royalty would be around USD 7 (EUR 6.7 on 15 February 2023). The value of a consumer smart meter is reported to be around EUR 65."

No source is given. They're not even just saying "IPlytics" (which wouldn't be a sufficient answer anyway). There's no evidence of Sisvel "claim[ing]" that the respective pool represents 30% of all SEPs, while it is clear that Sisvel will try to attract more and more licensors to the pool (as I mentioned before in connection with Avanci), so there will be greater value to licensees for the same price.

How can the Commission claim to know what is FRAND?

I would argue that the extremely poor quality of DG GROW's draft regulation and of the impact assessment reflect anything but a good understanding of FRAND.

The alleged value of a consumer smart meter ("around EUR 65") is a sandbagged figure. It's more like twice that amount. But even if we assumed that EUR 65 was correct, and if we furthermore believed the Commission's unsubstantiated royalty-stacking analysis, I can't even see why an aggregate royalty rate of roughly 10% would necessarily be supra-FRAND given that smart meters are very simple devices:

• They measure something, and

• they send the data somewhere.

Cellular technology is a large part of what those devices are about. It's obvious that a cellular SEP royalty rate is, percentage-wise, lower on a connected vehicle than a baseband chipset, as the latter does nothing but implement cellular standards.

In any event, that Sisvel pool--like all of its other pools--competes with the alternative of implementers taking a multiplicity of bilateral licenses.

What is the Commission's agenda? To harm specific (even EU-based) companies? To encourage hold-out? The latter would be an interesting strategy as it would result in more litigation, which the Commission would then point to in order to argue that its proposal must be adopted as quickly as possible...

4. IPlytics' obvious conflict of interest

There is more than one factor that has led to the current mess. The solution is for the Commission to refrain from putting out a premature and ill-conceived proposal in favor of serious discussions of specific proposals with competent people.

In a recent post I quoted the draft impact assessment's footnote 283, which casts serious doubt on the quality of a DG GROW-commissioned study co-authored by IPlytics founder Tim Pohlmann.

It's possible that the Commission has listened to him too much, especially in connection with patent pools. He has a conflict of interest with respect to Avanci and other pools (regardless of whether pool firms are his customers, as some--though not all--are) for a simple reason: because successful pools greatly simplify patent licensing, they reduce the need for IPlytics' services. IPlytics thrives when there's complexity, confusion, and especially a huge number of negotiations and a lot of litigation. That is when parties on both sides of the negotiating table will look for material to underpin their positions.

Earlier this month, Mustafa Cakir ("Çakır" in Turkish) published a YouTube interview with Tim Pohlmann. Around minute 34, the discussion of automotive SEP licensing starts, and Mr. Pohlmann tries hard to downplay Avanci's success and the benefits it delivers. He even expresses, between the lines, unsubstantiated doubts about its royalty rate (a rate accepted by the vast majority of licensees) and about Avanci's ability to put together a 5G pool.

Where he discusses the situation faced by automakers, he focuses a lot on the modus operandi of those companies' patent departments prior to the widespread adoption of vehicle connectivity. Can car makers expect SEP licensors to change their business model only because they otherwise have to learn about cellular SEPs? Automakers incorporated those technologies into their cars, and they've also been able to have existing employees learn about cellular SEPs. In some cases, they've poached IP professionals from companies like Siemens.

IPlytics has only one problem with Avanci: that Avanci streamlines the cellular SEP licensing process for the automotive industry. As I mentioned further above, those who don't join Avanci are largely the ones who don't engage in outbound licensing anyway. Mr. Pohlmann's business would obviously benefit from an environment in which 50+ licensors have to approach approximately 100 car makers to work out bilateral licenses. Every infringement notice and every start of a negotiation process is potentially money in IPlytics' pockets--and every time a car maker takes an Avanci license, that opportunity is diminished.

Avanci is just an example. IPlytics has the same problem with any pool that is--or likely will--be successful. Then there were monks who copied books in a type of room called scriptorium and didn't welcome the arrival of the printing press. It's just that the decision makers didn't really listen to them, and DG GROW didn't exist at that time.

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Apple contributes to eurozone inflation through 20% price increase that app developers can't control due to abuse of App Store monopoly

We're way past the point at which Apple's abuse of its market power is merely a problem affecting "competitors" or a few consumers. The effects of the problem have reached a scale that we must take a macro-economic perspective, as did venture investor Alex Gurevich a few months ago when he discussed the plausible hypothesis of Apple's App Tracking Transparency (ATT) program contributing to a recession.

Late on Monday--the very day that Apple's astroturfing through ACT | The App(le) Association was exposed by Bloomberg--Apple announced "upcoming prioce and tax changes for app and in-app purchases." At least Apple's announcement is forthright enough to say that "[a]s early as October 5, 2022, prices of apps and in-app purchases (excluding auto-renewable subscriptions) on the App Store will increase in [various countries on different continents], and all territories that use the euro currency."

As 9to5Mac's Filipe Espósito and others have already noted, the lowest price tier (tier 1) increases from €0.99 to €1.19, and as far as I can see, that 20% increase of in-app payment and app download prices in the eurozone is consistent all the way up to the maximum tier, which--as MacRumors' Joe Rossignol mentioned--goes up from €999 to €1,199.

There is an exception for auto-renewable subscriptions, but that's just a limited part of App Store revenues as those higher prices will affect new subscriptions. By and large, Apple now wants 20% more.

This is also an antitrust issue because Apple doesn't allow app developers to control their prices in local currencies. As an app developer (I've personally configured IAP items on multiple occasions), you only get to selec a tier--and Apple then performs the conversion. Now, an app developer with most of its customers in the eurozone would presumably think very hard before increasing the entry-level price from €0.99 to €1.19, given that it's psychologically very advantageous to stay below €1. That is, of course, why Apple has waited for a while, and now goes substantially beyond €1: once you go over that threshold, whether you charge €1.09 or €1.19 doesn't really make much of a difference for demand. But again, many app developers might actually prefer to just keep their euro prices below those psychologically critical numbers.

Those higher euro prices are not justified by consumers' purchasing power either. The average U.S. per capita GDP is a lot higher than that in Europe (even substantially higher than that of Germany, which is a relatively wealthy one among large European countries).

Apple has its own formula: it knows that in the U.S. the iPhone is a lot more affordable than in various other major markets, and in the U.S., also as a result of Google's fauxpenness not really working, Apple now has market leadership even by volume. Compare Dial's iPhone 14 Index is instructive: it's a table that shows what percentage of an average annual salary a person has to pay to afford an iPhone 14 in local currency. In Nigeria, that figure is 69.12%, with other not-so-rich countries like Kenya and Bangladesh following. By contrast, the figure is only 1.84% in the USA. In Europe, it's from about 1.6% in places like Switzerland and Luxembourg (small but super-affluent populations) to 26% in Turkey, 29% in Albania, and 46% in Armenia. In Germany and the UK, the number is close to 3%; in France it's above 3.5%; and in Italy and Spain it's between 4% and 5%. In other words, the average-earning Italian or Spaniard has to work 2 to 3 weeks to afford an iPhone 14.

Only a limited part of the difference can be explained away with different Value Added Tax or sales tax regimes.

It's simply that Apple has a strategy of appealing only to the parts of certain countries' populations that earn substantially more than the average person in that country. Disparity as a driver of profits. Classism--which is also the primary reason Apple refuses to make its messenger more interoperable with Google's Android messenger. Forget interoperability, just "buy your mom an iPhone," as Tim Cook recently put it.

There's no denying that the U.S. dollar is fundamentally stronger than the euro. I'm not against the EU, but I have always been against the euro because it puts the cart before the horse (common currency before common economic and fiscal policies). European integration culminating in a common currency could and probably would have worked, but not the other way round. If there's one EU institution that I despise, it's the European Central Bank. If Apple wants to raise its own prices in the eurozone, that's one thing. But it's unacceptable for Apple to deprive app developers of the opportunity to decide what's best for their products in the eurozone.

Apple is the dictator that rules everything.

This issue of Apple deciding on currency conversion even came up in the Epic Games v. Apple litigation in the Northern District of California, the antitrust case that will be heard by the United States Court of Appeals for the Ninth Circuit in one month from tomorrow, with the Department of Justice supporting Epic. Judge Yvonne Gonzalez-Rogers, who got a whole lot wrong, understood the problem at least in part:

• In footnote 199 of her Rule 52 Order, the incorrectly says that "[t]he tiers generally require the same price across all countries."

• But two footnotes later, she doesn't buy Apple's claim that currency conversion is a benefit of Apple's IAP regime:

  "To the extent this true, Apple has not explained why it cannot afford more flexibility in unique circumstances. Mr. Gray testified that Apple selected 99 cent tiers based on its prior experience without apparently consulting developers."

• Footnote 554:

  "In its proposed findings of fact, Apple claims that IAP helps developers with currency conversion and tax collection, but its record citations do not support that claim."

The issue is becoming more serious than ever as we live in a difficult macro-economic environment.

I'd also remind everyone of my May 1, 2021 blog post on how Apple decided to deal with some countries' digital taxes at app developers' expense: Apple raised its effective App Store commission rate in certain geographic markets to (respectively) 31.4%, 32.1%, and 35.25% in September

It will take time before the EU's Digital Markets Act opens up the iOS app distribution market, but once it happens, we'll be sure to see entry-level IAP offerings below the €1 mark. I'm quite sure an iOS version of the Epic Games Store would make it possible, as would other app stores as well as developers electing to distribute directly ("sideloading").

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Key EU politician tells FOSS Patents: maps should fall under Digital Markets Act just like other search engines, license terms must be FRAND

This is a brief (but important) follow-up to the previous post (on car makers being oblivious to the relevance of the Digital Markets Act to their industry). After my podcast with a major automotive publication I reached out to Andreas Schwab MEP, the European Parliament's rapporteur on the DMA, to find out whether digital map services would fall under the groundbreaking legislation. Mr. Schwab found the podcast interesting and is proactively seeing to it that maps will fall squarely within the scope of the DMA:

[German original] "Es ist wichtig, darauf hinzuweisen, dass auch die Kartendienste der großen Digitalfirmen auf der Basis des DMA als Suchmaschinen gelten. Damit wird Art. 6(12) und die dort niedergelegten FRAND-Prinzipien auch für Karten gelten."

[my translation] "It is key to make it clear that the map services of the major digital companies will be deemed search engines under the DMA. As a result, Art. 6(12) and the FRAND principles set forth therein will also apply to maps."

There's no need to define FRAND on this blog: the term comes up all the time, not only but also in connection with standard-essential patents. Here's the language of Art. 6(12):

The gatekeeper shall apply fair, reasonable, and non-discriminatory general conditions of access for business users to its software application stores, online search engines and online social networking services listed in the designation decision pursuant to Article 3(9).

For that purpose, the gatekeeper shall publish general conditions of access, including an alternative dispute settlement mechanism.

The Commission shall assess whether the published general conditions of access comply with this paragraph.

While no politician played a more important role in this legislative process than Mr. Schwab, even he cannot single-handedly determine how the law will be interpreted. However, with the backing of a solid majority of the Parliament he is in a strong position to discuss these matters with the European Commission as it is working on its implementation guidelines and platform designations.

I agree that digital map services are essentially online search engines. From the outset, Google Maps was positioned as a natural and seamlessly-integrated extension of Google's search engine. For searches such as "nearby restaurants" one can simply switch between traditional search engine results pages and points of interest highlighted on a map.

It also makes sense in light of the DMA's objective, which is to ensure contestable digital markets. More so than other search engines, digital maps involve network effects, particularly with respect to real-time traffic data. A new map service would not have enough users to be able to quickly identify new congestions or to say whether a store is presently busy or empty. As a result, it would be deemed much less useful and would likely never reach the point at which it could compete with a service like Google Maps. That is the opposite of contestability.

Maps are not the only aspect of the DMA that is relevant to car makers, but they are one of the most relevant parts. For instance, if Apple and Google effectively took control over connected vehicles, they would send users to gas or charging station and collect a commission on the transaction they enable. In a worst-case scenario for car makers, they wouldn't get anything--or Apple and Google would collect an unreasonably high (supra-FRAND) share of the transaction value.

The previous post has been read by many people in recent days. I can only hope that the automotive industry will take the warning seriously, given how much is at stake not only for them but also for the wider economy and for consumers. It is time for car makers to engage. If they had been more foresightful, automakers would have been one of the most vocal groups in the legislative process on the DMA. The legislative process is over, but now is the time to ensure that this historic bill will be applied effectively and forcefully. And if all else fails, it would always be possible for the EU to update it. It may very well end up a work in progress given the fast-changing environment and gatekeepers' resourceful resilience. In order to treat maps as search engines it should not be necessary to amend the statute, however.

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To turn Android's decline around, Google should negotiate with Epic Games and the EU--and generally treat app developers as strategic allies, not adversaries: the failure of fauxpenness

If smartphones could vote instead of the people using them--a prospect I joked about in light of a "human rights" motion Apple brought in Colombia--Tim Cook would become the 47th President of the United States. In recent months, Apple overtook the aggregate of all Android devices in terms of active U.S. smartphone usage, as Counterpoint Research report (as reported by the Financial Times and Barrons).

Almost ten years have passed now since a Wall Street Journal article that asked in its headline: Has Apple Lost Its Cool to Samsung?

There hasn't been a landslide lately: for several years in a row, iOS has gained U.S. market share at Android's expense.

The bold, visionary, and entpreneurial Google of 15 or 20 years ago wouldn't have let that happen, at least not without a fight. Today's Google is a shadow of its former self in some respects. To revitalize Android, Google must stop being just Apple's junior partner in the "Goopple" duopoly and think different--different than Apple, but much more like the amazing Google that it used to be.

It's not that Google isn't aware of the problem it has: its #GetTheMessage campaign is transparently self-serving and in the public interest at the same time. It is a sign of desperation over Android's endlessly dwindling U.S. market share.

But what Google doesn't seem to have realized is that

• faced with the choice between overtly closed (Apple prides itself on its heavy-handedness and walled garden) and fauxpen (pretending to be open), users in the U.S. and some other markets clearly prefer the former over the latter; and, therefore,

• the answer is not to be more fauxpen, but to make bold moves in order to depart from a failing strategy.

By "fauxpen" I don't mean to say Android isn't more open than iOS: but it's only marginally more open. For me, that gradual difference was enough of a reason to remigrate to Android last year. But the market at large doesn't seem to decide on that basis.

If Google wants to regain momentum for Android, it needs to solve a hardware problem and seize an opportunity on the software side: to become developers' friend again.

First, the part that I--perhaps subjectively--consider most important: app developers.

Google is still acting too much like Apple. Just yesterday, Google announced the extension of its third-party billing system pilot to India, Australia, Indonesia, and Japan. I've criticized that kind of fauxpenness on other occasions: in connection with a European announcement (that still doesn't seem to dissuade DG COMP from its preliminary--and soon probably formal--investigations), the Korean situation, and Google's recent public reaction to a Match Group lawsuit (by the way, Google's counterclaims against the Tinder company have not been dismissed at this early stage because Match Group made arguments that went beyond the content of Google's pleadings).

I do understand that Google needs to make money with Android, but there are--and could be--other ways than the app tax. The problem with the app tax is not just the cost to developers, but that it forces Google to rule its ecosystem with an iron fist, almost like Apple.

Google should change its Android business model, focus more on direct revenues from device makers (and on selling its own devices), and above all, create a situation in which the app developer community will have a strong incentive to promote and strengthen Android against iOS.

While there are more apps on Android than on iOS, the fact that the billion iPhone users worldwide are essentially the world's richest billion people means that app developers with commercial ambitions need to be on both platforms. Cross-platform development tools like Unity and Xamarin are ever more popular.

Google couldn't dissuade anyone from developing for iOS, or persuade anyone to make the Android version of a given app functionally superior over the iOS version.

But Google could open up--which should even include allowing an Android version of the Epic Games Store, for instance--and greatly improve revenues opportunities. Apple destroyed the iOS ad business with App Tracking Transparency, and Android got affected because of budgets shifting. For many types of apps, ad revenues are still an interesting revenue opportunity, and Android could also reduce user acquisition costs. In fact, having alternative app stores like an Epic Games Store compete with each other could create opportunities for developers and improve app discoverability.

With Google eliminating the app tax on Android--I really think it should be no problem to just make that money through license fees collected from OEMs--app developers would be able to offer substantially lower IAP prices on Android while still having better margins there. As a result, app developers would be interested in motivating end users to use the Android rather than iOS versions of their (functionally identical) apps. While I don't think highly of the anti-anti-steering consolation prize that the district court handed Epic in its fundamentally flawed decision, it's a fact that Apple couldn't easily prevent app developers and Google--especially if they did it together--from promoting lower IAP prices to consumers--possibly even within iOS apps.

As things stand today, Apple benefits from App Tracking Transparency in multiple ways. It totally overstates the consumer benefits (in reality, consumers are harmed because of money being sucked out of the app developer ecosystem) and consumers buy it; it harmed other Big Tech players, particularly Meta/Facebook; it forced iOS app developers to focus more on the revenues that Apple can tax; and now Apple basically owns the fastest-growing large advertising business itself.

It's Google's turn to make a bold move. To come up with a game changer. Originally, developers were interested in Android because of Google's openness at the time. Google was cool, geeky, nerdy. Today's Google isn't like that. But the company could go in that direction. The #GetTheMessage campaign raises a valid concern, but is not going to solve the more fundamental problem that Google has in the U.S. market even if Apple adopted an open standard (which appears unlikely right now, except maybe in jurisdictions that force it to do so through legislative measures, but then they could still block access via any open protocol in the U.S.).

At the moment, developers are caught between a rock and a hard place when looking at how Apple and Google are treating them. Android should become developers' sweet spot.

Would it take quite some courage for Google to be the anti-Apple, to be truly open again, and to be developers' ally rather than adversary? To charge device makers rather than app developers? Absolutely. Would it make Google uncomfortable that promoting openness could make it harder to maintain the search engine monopoly? Yes, but Google itself always says competition is just one click away, and with every percent of market share that Apple gains at Android's expense, Apple can significantly increase the amount it demands from Google for being the default search engine on iOS.

Android was a moonshot. Opening up would be a bold move, but not a long shot. If done right, it would definitely work.

Imagine what it would mean if Google settled with Epic Games, with Match Group, and with others. The collective power of the developer ecosystem is huge:

Fauxpen Google < Closed Apple

Open Google + Developer Allies >> Evil Apple

Now, the hardware problem, which is in no small part a geopolitical one. Simply put, Chinese companies are nowhere to be seen in the U.S. and the only major non-Chinese Android smartphone maker left is Samsung. I still have great respect for the quality of Samsung's products, but that one company is not enough to stop the erosion of Android's market share in the U.S. and some other places. Other than Samsung, there's just Google with its Pixel brand (which I really like a lot). Things are going to get worse with the Biden Administration now even contemplating an executive order against U.S. investment in China.

I don't want to take a strong and definitive position on the hardware aspect of this, as I'm naturally more interested in what all of this means for app developers. So, without having thought this through, I believe Google should consider one or more of the following options:

• Put even more muscle behind the Pixel. Make it a much better product than the iPhone in more people's eyes.

• Talk to the European Commission (yes, the same Commission on whose Google Android antitrust decision the EU General Court will pass judgment this month). The EU is now very much concerned with digital sovereignty, but none of the world's leading smartphone makers is based there anymore. Maybe HMD (the licensee to Nokia's brand, and a company in which Google--like Qualcomm--made a defensive investment) is a good starting point.

• The most important company in terms of U.S. wireless innovation is Qualcomm. But it's not so much of a consumer brand, and it would obviously be a very difficult decision for Qualcomm to compete with its own customers. Maybe some solution could still be found to harness the strength of Qualcomm's innovation pedigree and undisputed Americanness as an alternative to Apple. The "Intel inside" of wireless devices.

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Whether Amazon instigates or draws antitrust scrutiny, it's always about avoiding price competition: abstract parallel between cloud software licensing and most-favored nation clauses

This is the promised follow-up to yesterday's post, New Microsoft software licensing terms to take effect on October 1: revisions designed to strengthen smaller cloud solution providers--and to address Amazon-orchestrated EU antitrust complaint.

There has been a steady trend in recent years for this blog to look at more and more tech industry antitrust issues. In the end, they always involve intellectual property in one form or another. At some point I stumbled upon Professor Frédéric Jenny's "analysis of potentially anti-competitive practices" with respect to cloud infrastructure services, a study commissioned by CISPE. In the previous post I commented on CISPE: it's striking that an organization seeking to promote European cloud sovereignty is primarily backed by Amazon.

Without a doubt, Professor Jenny--an economist--is a prominent figure in the French antitrust community. However, that report he authored for CISPE last year is just a piece of rather unscientific advocacy. What one would normally expect from a competition economist is a clear causal chain and, especially, numbers. Instead, the "evidence" adduced in that paper is just anecdotal. It's like "one customer said" and "oh wait, another customer also said."

That reminded me of a passage from Qualcomm's reply brief in support of its Ninth Circuit appeal of the district court's FTC decision:

"See United States v. AT&T Inc., 310 F. Supp. 3d 161, 211 (D.D.C. 2018) (in weighing evidence of competitive harm, 'competition authorities and courts . . . refus[e] to take the views expressed by customers at face value and insist[] that customer testimony be combined with economic evidence providing objective support for those views'), aff’d, 916 F.3d 1029 (D.C. Cir. 2019)."

In other words, it's old news that customers prefer to get more and pay less. For the avoidance of doubt, the relevant passage is found in a court ruling, but is a quote from a treatise: Ken Heyer, Predicting the Competitive Effects of Mergers by Listening to Customers.

Professor Jenny did the very opposite of what that passage proposes: he took--presumably selective--customer quotes at face value and did not provide any objective support.

The objective of that study isn't totally clear. In no small part it's actually legislative advocacy, suggesting that the EU's Digital Markets Act should also treat software companies like Microsoft, Oracle, and SAP as "gatekeepers." The DMA is huge, but it can't be all things to all people. The reason why some companies must be subjected to special gatekeper rules is their control over platforms, not their ownership of software copyrights. An open letter that CISPE--together with other organizations--addressed to EU competition chief Magrethe Vestager in February urged at a late stage of the legislative process (as the letter even concedes) a "clarification" that would result in the designation of Microsoft, Oracle, and SAP as "monopoly software gatekeepers":

"We cannot wait for a revision of the DMA in five years, nor for a pyrrhic victory in antitrust litigations in 10 years or more when the competitiveness of the market will not be recoverable.

That's what they wrote in February, but by now what they want is a formal antitrust investigation of those companies, initially Microsoft. After yesterday's announcement of new licensing terms that pay heed to the valid ones of the concerns raised by European cloud service providers, regulatory intervention doesn't appear necessary, much less does it seem urgent.

There are major issues to be addressed with respect to mobile app ecosystems: the app tax; the app review tyranny; App Tracking Transparency; access to NFC functionality (for payment systems and other important applications). There's Google's search monopoly and (apart from iOS) superdominant market position in browsers. And Amazon's own conduct.

Amazon would benefit in two ways if CISPE's antitrust initiative resulted in full-blown investigations: by harming a competitor and by defocusing the Commission from other issues that include what Amazon itself has been doing.

The most well-known issue surrounding Amazon's business is a most-favored nation clause: third-party sellers using Amazon's platform are prohibited from "[s]etting a price on a product or service that is significantly higher than recent prices offered on or off Amazon." This is called a "most-favored nation" (MFN) clause and means that vendors cannot offer lower prices elsewhere, be it through direct distribution or on other platforms. The District of Columbia filed an antitrust lawsuit (PDF) over this in May 2021. In 2017, the European Commission accepted commmitments from Amazon on e-books that also involved the MFN topic. As the Commission noted, "[t]he clauses may have led to less choice, less innovation and higher prices for consumers due to less overall competition [...] in e-book distribution" (emphasis added).

Interestingly, Professor Jenny's study discusses the potential competitive effect of cloud service providers who also make software, such as Microsoft, offering customers particularly attractive terms if they buy cloud services as well as software licenses. As I wrote further above, there aren't really hard facts and numbers in that study. But let's assume--just for the sake of the argument--that this is right. It means a company like Amazon with its AWS cloud service could compete, but it would have to charge less for its own services so the total cost of ownership (TCO) for the customer won't be too high.

If a competition authority actually barred Microsoft and others from offering attractive prices for the combination of cloud services and software licenses, the net effect would be that AWS gets to charge customers more than otherwise.

With Microsoft having fleshed out the implementation of its European cloud principles, all of CISPE's members but one--Amazon--have nothing left to complain about that could reasonably give rise to antitrust investigations. The customers of small European cloud service providers will be just fine with the licenses they already have secured from Microsoft (or with new ones that they can optionally obtain through those CSPs). Amazon is obviously free to file an EU antitrust complaint of its own. But to do that, Amazon would have to argue that it can't compete, which is simply not credible based on market share.

As things stand, regulatory intervention doesn't appear imminent. But presumably Amazon won't give up anytime soon. It has the resources to keep on trying.

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New Microsoft software licensing terms to take effect on October 1: revisions designed to strengthen smaller cloud solution providers--and to address Amazon-orchestrated EU antitrust complaint

This is only the second time in more than ten years for this blog to comment on enterprise software licensing. The first instance was about two years ago when I expressed skepticism regarding EU antitrust complaints by certain SAP customers. Now I have seen an announcement by Microsoft that deserves a closer look. Microsoft's policy team (Microsoft On the Issues, @MSFTIssues, a Twitter account that I follow and vice versa) retweeted the following:

Today, we’re sharing changes to our licensing terms that will benefit cloud providers and their customers. To learn more about the changes, why we’re making them, and what hosters and customers can expect, check out our partner blog https://t.co/MCG4Rsv6Y9

— Judson Althoff (@judsonalthoff) August 29, 2022

Today's announcement by Microsoft's Chief Partner Officer Nicole Dezen is a follow-up to a May 18, 2022 blog post by Microsoft President Brad Smith, Microsoft responds to European Cloud Provider feedback with new programs and principles. I will look at the specific licensing changes in more detail and comment on them tomorrow. For now, I'd just like share a few thoughts and observations:

• The backdrop is that a group named Cloud Infrastructure Services Providers in Europe (CISPE) has been alleging for a while that Microsoft engages in an "anti-competitive tying of productivity suites with cloud infrastructure services." What they essentially claim is that smaller European cloud service providers can't compete on a level playing field with Microsoft's Azure cloud because many enterprise customers rely on Microsoft software (such as Windows, Office, and SQL Server) and can't bring their existing Microsoft licenses to third-party cloud services as easily as CISPE believes should be the case.

• CISPE is largely funded by Amazon, whose AWS is the world's largest cloud service (I used it for the backend of two mobile games). The other members are smaller European cloud hosters. It is undoubtedly a challenge for anyone to compete with the behemoths in a business characterized by major economies of scale, but some of CISPE's members--and various significant European cloud service providers who are not CISPE members--prove that there are opportunities for innovative, creative, and flexible players. The part that I struggle to understand is that those smaller European companies view Amazon--the biggest bully on the block--as a political ally. Let's face it: if you're in the cloud business, particularly in the Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) segments, your top three competitive challenges are

  1. AWS,

  2. AWS, and don't forget:

  3. AWS.

• CISPE is complaining not only about Microsoft, but also about Oracle and SAP. And in at least one of the papers they also voice concerns over Google. In other words, they're against everyone except themselves and... AWS.

• Microsoft hasn't acknowledged an antitrust violation per se. The message in May was that there is enough substance to some of the concerns that Microsoft deems it appropriate to amend its software licensing terms with a view to outsourcing and hosting.

• The European Commission hasn't launched full-blown investigations of a formal complaint filed by OVHcloud, a French company, in March. And it may never have to if Microsoft's new licensing terms satisfactorily address the issues. The measure of a competition authority's effectiveness is not how many investigations it launches or the fines it levies: it's all about safeguarding the competitive process. In some other antitrust contexts, particularly those involving Apple and Google, voluntary changes fell far short of what was needed, so DG COMP had no choice but to launch formal investigations. But Microsoft has a fundamentally different attitude than the two companies I just mentioned. After the antitrust cases they dealt with 20 years ago, they've been careful to avoid regulatory scrutiny.

• Here's a quick first look at the "three primary goals" Microsoft (re)stated today:

  1. "Make it easier for customers to bring their software to the partner’s cloud."

     An example of what was criticized is that license fees in a multitenant environment (one server, multiple customers) were based on physical CPU cores, while cloud services are all about virtual machines. Microsoft says "[e]xpanded use rights [now] allow customers to run their software, including Windows 11, on hosters’ multitenant servers and more easily license virtual machines for Windows Server."

  2. "Ensure partners have access to the products necessary to sell cost-effective solutions that customers want"

     The blog post describes this as creating "more opportunities for partners to work with more customers, to sell the solutions they need, and to run them where they prefer."

  3. "Empower partners to build hosted solutions with speed and scale"

     Microsoft's partners will be better enabled to "build hosted desktop and server solutions to help directly fulfill customers’ hosting needs." The new program, is called "Cloud Solution Provider -- Hoster" (CSP-Hoster) and enables both license-included hosting (the CSP sells a service to its customer along with the prerequisite software licenses) and BYOL ("bring your own license") solutions.

• While it appears that Europe is the only jurisdiction in which a formal complaint had been brought, today's blog post says "[t]hese changes will be applicable worldwide." The timing of the announcement (after European business hours) underscored that this is not just about Europe--and globally consistent terms are another notable difference between Microsoft and the likes of Apple and Google, who favor piecemeal resolution and make commitments only jurisdiction by jurisdiction.

• The new licensing options are available to all cloud service providers except a set of Listed Providers. That is no surprise as it is consistent with what Microsoft said in May. A footnote again clarifies today that "Listed Providers include Alibaba, Amazon Web Services, Google, and Microsoft, and any outsourcer using a Listed Provider as part of the applicable outsourcing service. Customers that want to use a Listed Provider for outsourcing can acquire licenses directly from the Listed Provider."

  In other words, all of CISPE's members except for the driving force behind those complaints--Amazon--get the benefit of the terms announced today. This ups the ante for CISPE to credibly claim that the organization is all about better enabling small European cloud service providers to compete...

  I also interpret this as a denial of there being any anticompetitive harm when it comes to AWS, Google, and Alibaba: there is no indication that those major players can't compete with Microsoft.

Tomorrow I'll do a follow-up to this post and comment in more detail on the licensing terms Microsoft unveiled today, and on CISPE's grievances, such as a "study" by a French competition law professor.

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European Commission launches public consultation on standard-essential patents and potential SEP legislation: feedback requested until May 9

The European Commission has updated the web page for its new policy initiative relating to standard-essential patents (SEPs). A few months later than originally planned (which is not unusual), the Commission is now accepting feedback until May 9, 2022.

[Update] The questionnaire can be accessed via this webpage. [/Update]

The web page still keeps all options open with respect to whether there will be a legislative initiative such as an EU directive, a set of mere recommendations, or both. But a five-page PDF document is available for download. That document describes the "likely type of initiative" as a "[l]egislative initiative, combed with non-legislative actions." And the section on the political context indicates an inclination to expand the scope of the "acquis": the fields of law addressed by the EU:

"EU patent law is fairly limited and fragmented. EU patent law therefore needs to be recalibrated to boost the resilience of our patent system and support the EU’s twin transition (digital and green). The imminent launch of the unitary patent system also makes this the perfect time to enhance EU patent law and facilitate access to critical technologies. The Commission will therefore develop a coherent and balanced package comprising three patent-related proposals. These proposals, announced in the IP action plan, will cover supplementary protection certificates, compulsory licensing and standard-essential patents (‘SEPs’)."

Interestingly, compulsory licensing and SEPs are closely related fields of policy-making. As for the unitary patent system, with the Unified Patent Court commencing its operation soon, the UPC judges will not be bound by a mere policy paper, but would have to respect an EU directive. Given the UPC's narrow focus on patent law (as opposed to courts that normally have jurisdiction over all fields of law, including contract and competition law), it's possible that certain SEP-related defense strategies would not even work in the UPC. The Commission doesn't voice that concern in the "Call for Evidence" document, but that doesn't mean the Commission isn't aware of a potential vacuum concerning SEP enforcement and other cases involving a compulsory-licensing defense.

A lot of what the "Call of Evidence" document says is incontrovertible, such as the fact that "[t]he numbe rof declared SEPs continues to increase." I just struggle with one sentence:

"Since infringement claims are typically met with counterclaims that argue the patent is not valid, SEP holders often enforce their patents separately in each territory – a burdensome and costly exercise, especially for start-ups and SMEs."

First, the enforcement of SEPs on a country-by-country basis will be much less of a problem once the UPC is in operation. Second--and this is an even more important point: how many "start-ups and SEMs" do you really find at the standard-setting table?

The Commission invites a wide variety of parties to state their views: "SEP holders, SEP implementers, patent attorneys, legal practitioners, academics, patent-pool administrators, industry associations, start-ups, SMEs, SDOs, consultants, policy makers, and any other stakeholders that have experience with SEPs."

I am not going to participate in that consultation, but I will follow the process with great interest and comment on what others communicate to the Commission.

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Biden Administration publishes draft policy statement on standard-essential patents that strikes reasonable balance between patentees' and implementers' interests and bears resemblance to Huawei v. ZTE

Yesterday three U.S. government agencies--the Antitrust Division (ATR) of the United States Department of Justice (DOJ), the United States Patent & Trademark Office (USPTO), and the National Institute of Standards and Technology (NIST)--invited stakeholders to submit comments by early January on a new draft policy statement on standard-essential patents (SEPs).

I applaud the Biden Administration for taking--at least this stage--a very centrist position. Rather than go from one extreme (the Trump Administration's take on SEPs) to another, the three agencies have put forward a statement that reflects a good-faith effort to strike a very reasonable balance. The draft statement warns against the risks to innovation and standards from both the overleveraging of SEPs by their owners and what others simply call hold-out tactics by unwiling licensees. As a litigation watcher, I'm well aware of the existence of either problem.

My favorite part is in footnote 8, which says that "[p]roviding additional information with the licensing offer . . . may be particularly helpful to small entities that do not have the expertise or resources to fully address SEP issues and may lack access to information from which to draw assurance that proposed terms are F/RAND."

The step-by-step negotiation process proposed by the draft statement bears a strong resemblance to EU case law. It's pretty much how the European Court of Justice intended Huawei v. ZTE to be applied, though the post-Sisvel v. Haier I & II reality in Germany looks rather different (and even the relatively FRANDly Dusseldorf Regional Court is not going to challenge Sisvel v. Haier).

In practice, however, SEP injunctions are harder to obtain in the U.S. than in Europe due to eBay v. MercExchange, a decision the draft policy statement obviously mentions.

The draft policy statement is just that--a draft--and even the final vesion is not going to be anything more than persuasive authority in litigation. And how persuasive it will be remains to be seen, as it's obviously difficult for judges to attach much importance to policy positions that depend on which party is in power. At the beginning of this year I was pretty certain that Democrats would stay in power for several terms now, but with what has gone wrong in certain respects (with America now facing a second epidemic: crime), it's possible that Republicans will take back the White House next time. The judiciary will take note of what the executive branch has to say, but has to focus on its own case law. Even the U.S. International Trade Commission (ITC), which is a government agency, is unlikely to modify its stance on the availability of limited exclusion orders (U.S. import bans) over SEPs.

Even if Congress enacted legislation on SEPs (which is not on the horizon at this stage), it wouldn't practically change much for net implementers who do business in jurisdictions such as the UK and Germany. They'd be forced into global portfolio licenses under the threat of sales bans. The effect would then only be indirect, with net implementers possibly hoping that policy makers in Europe might be influenced by the Biden Administration--which I just don't expect to happen.

The draft statement does not touch on the question of whether an implementer who declines to take a global portfolio license should be enjoined the way it is done in the UK and Germany--nor does it say anything about the recent proliferation of antisuit (and anti-antisuit, anti-anti-antisuit, and anti-anti-anti-antisuit injunctions) in that context. Antisuit injunctions are available under U.S. law. But if foreign courts bar an implementer from seeking a U. S. antisuit injunctions by means of a (often even pre-emptive) anti-antisuit injunction, there is little that U.S. courts can do for implementers asking them for help.

While the Trump Administration's policy statement stressed that antitrust law is not above patent law, and effectively suggest that SEP issues should be dealt with under patent and contract rather than competition law, the Biden Administration's draft policy statement makes a few references to antitrust law in footnotes. For example, the statement says patents should be treated like any other property, and that "[c]onditions on licensing may also raise antitrust concerns."

There is nothing in the draft statement on the question of the proper royalty base or on suppliers' access to component-level exhaustive SEP licenses.

Different stakeholders and their lobbying fronts are going to make all sorts of demands now. From my perspective, there's no reason either side could claim that the sky is falling. Neither is anything in that draft statement ourageously unfavorable to one camp nor is the statement going to make huge impact (for the reasons I explained above). But whatever the three government agencies put forward after the current round of feedback could be more controversial.

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