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

Abstract

Competition agencies around the globe, including in India, Korea, and Taiwan, have recently initiated investigations involving a standard-essential patent (SEP) holder’s refusal to license patents at the component level. Other competition agencies, including in China and Japan, have recently issued revised final or draft guidelines that seem to increase scrutiny of such conduct. SEP holders usually commit 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, even if there is potential a failure to comply with a FRAND assurance, that 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. Some have alleged that, by refusing to license at the component level, the vertically integrated SEP holder allegedly bundles its component (the bundled product) with its SEP portfolio (the bundling product). While we disagree with this alleged theory of harm and characterization, we show that, even if the offer of the vertically integrated SEP holder could de facto be characterized as a bundle, its conduct 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. One of the primary reasons is the nature of the technology, for e.g., many SEPs related to 2G, 3G, and 4G wireless cellular standards do not relate to components, but to the systems and networks whose functions and efficiencies these inventions are designed to optimize. Other reasons include 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.