Portfolio Licensing at the End-User Device Level: Analyzing Refusals to License FRAND-Assured Standard-Essential Patents at the Component Level

Posted by Social Science Research Network

Portfolio Licensing at the End-User Device Level: Analyzing Refusals to License FRAND-Assured Standard-Essential Patents at the Component Level

 
Koren W. Wong-Ervin (Global Antitrust Institute) & Jorge Padilla (Compass Lexecon)

Abstract:      Competition agencies around the globe have recently initiated investigations involving a standard-essential patent (SEP) holder’s refusal to license patents at the component level, such as the chipset, that it has committed to license on fair, reasonable, and nondiscriminatory (FRAND) terms.  While much has been written about FRAND-assured SEPs, the literature to date focuses largely on the appropriateness of seeking and obtaining injunctive relief on such patents or on the appropriate royalty rate and the meaning of “fair and reasonable” (FR), and has largely ignored the “nondiscriminatory” (ND) prong of FRAND.  This paper analyzes the common-industry practice of licensing on a portfolio basis at the end-user device level and whether a refusal to license at all levels of the production chain may constitute an antitrust violation, concluding that: (1) whether the “ND” prong of FRAND requires licensing at the component level is a fact-specific inquiry that depends upon the specific standard-development organization’s (SDO’s) Intellectual Property Rights (IPR) Policy at issue; and (2) regardless, evasion of a FRAND assurance alone does not constitute an antitrust violation.  In addition, while U.S. antitrust agency practice and law highly disfavor imposing antitrust liability for refusals to license, such liability (including in Europe and elsewhere) would at the very least require a showing of anticompetitive harm such as foreclosure.

Through a simple model, we show that due to the FRAND commitment and because most FRAND-assured SEP holders do not assert their patents at the component level, there is likely no foreclosure or exclusionary conduct or otherwise harm to competition. Our model features two SEP holders, one of which is vertically integrated with a component manufacturer, and a competing non-integrated component manufacturer. By refusing to license at the component level, the vertically integrated SEP holder de facto bundles its component (the bundled product) with its SEP portfolio (the bundling product). We show that this bundling strategy will not lead to the foreclosure of the component market if (i) the vertically integrated SEP holder does not assert its patents at the component level, and (ii) it licenses its SEP portfolio to end-devise manufacturers on FRAND terms irrespective of whether they source components from its own subsidiary or from the non-integrated rival. Intuitively, when (i) and (ii) hold, the bundle offered by the vertically integrated SEP holder can be replicated competitively by end-device manufacturers by mixing and matching the component sold by the non-integrated component supplier and the patent portfolio of the integrated SEP holder. Finally, we note that there are a number of legitimate business reasons for the common industry practice of licensing at the end-user device level, including avoiding patent exhaustion, reducing administrative costs, and ease of monitoring or verifying the number of units sold. These efficiency reasons motivate the decision of both vertically integrated and, tellingly, non-integrated SEP holders to license at the end-user device level only.