Last week, on July 28, the U.S. Department of Justice (DOJ) Antitrust Division issued a press release and business review letter (BRL) based on Avanci’s request for a BRL on Avanci’s proposed joint patent-licensing pool (the Platform) to license patent claims of 5G cellular wireless standard essential patents (SEPs) of several patent owners for use in automobile vehicles (vehicles) (to later be expanded to a pool for Internet of Things (IoT) devices) and then distribute royalties among those patent owners.  A BRL provides DOJs views on whether a business model raises any competition law concerns–e.g., is the business model pro-competitive or anti-competitive–so that the business may proceed with some assurance that its activities will not violate competition laws.  The focus of the BRL is competition law and does not endorse one way or another the merits or value of a business model.  DOJ concludes that “Avanci’s proposed 5G Platform is unlikely to harm competition” and DOJ “has no present intention to challenge the Platform.”  Below is a summary of Avanci’s request and DOJs BRL in response.

Avanci’s BRL Request

Avanci was founded in 2016 to create licensing platforms as a one-stop solution for IoT makes to license a portfolio pool of wireless SEPs owned by different patent owners, such as Avanci’s 2G/3G/4G licensing platform.  On November 21, 2019, Avanci sent a 19-page BRL request letter to DOJ seeking a review of Avani’s proposed 5G joint licensing platform to license SEPs on 5G cellular standards in vehicles and, later, IoT devices.  Avanci states that its proposed 5G Platform will “accelerat[e] the availability and adoption of 5G technology” by “reducing licensing complexisity and costs while reducing the intellectual property infringement risk associated with launching new products.”

Under the proposed licensing Platform, owners of relevant SEPs that have at least one of those patents evaluated by an independent expert to be essential to the standard may contribute their SEPs to the licensing pool.  Importantly, SEP owners who participate in the pool also may license their SEPs on an individual basis outside the pool on terms independent of the terms for the 5G Platform licensing.  So Avanci itself does not own any of the SEPs and is not authorized to litigate them, but is authorized to license the SEPs in the pool to implementers of 5G technology who prefer a one-stop shop alternative to get a license to SEPs owned by different patent owners, rather than an alternative path of negotiating individual licenses with each SEP owner separately.

Avanci highlighted four aspects of its SEP licensing platform:

• evaluating essentiality
• distributing royalties to SEP owners in the pool
• structuring royalty rates
• defining field of use

Technically Essential Patents

Avanci asserts that it will license only SEPs that “by definition are complementary and not competitive”–i.e., the SEPs cover technologies made to work together (complementary technology), rather than technologies that are mutually exclusive alternatives to each other (competitive technology).  In a footnote of the BRL discussed below, DOJ explains “complementary” and “substitute” patents as follows:

“Complementary” patents are “patents covering separate aspects of a given technology that do not compete with each other.”  “Substitute” patents are “patents covering technologies that compete with each other.”

Avanci follows the typical standard development organization (SDO) intellectual property rights (IPR) policy practice of referring to claims of a patent that are essential to the standard, and not the entire patent itself, based on ETSI’s IPR policy for mobile wireless technology.  People often use the term standard essential patent (SEP) as an imprecise shorthand, because essentiality is actually determined on a patent claim-by-claim basis; this is similar to the imprecise shorthand use of “declared SEPs” that implies that a patent owner declared that a patent is an SEP, but what usually occurs is that a patent owner declares its willingness to license a patent IF it is an SEP.  For SEPs, a single patent may have some broad claims that cover any way of implementing a standard (essential claims) and narrower claims that may cover only one of many different ways to implement a standard (non-essential claims).  Avanci states that its platform may provide (at no extra cost) a license to all claims in a patent that has at least one essential claim.  DOJ’s BRL explains essential patent claims as setforth in Avanci’s 5G Platform in a footnote as follows:

Essential patent claims are defined as “any and all Patent claims as to which it is not possible on technical grounds taking into account normal technical practice and the state of the art generally available at the time of the adoption or publication of the relevant Standard, to make, sell, offer for sale, lease or otherwise dispose of and import, repair, use or operate products, equipment, or methods that comply with the relevant Standard without infringing the patent claims.

Avanci’s platform will license SEPs from patent owners that have one or more “Evaluated Essential Patents” in which independent patent experts make essentiality determinations based on objective criteria.  The patent experts must be conflict free (not affiliated with owner of patent to be evaluated), their identity is not disclosed to the patent owner and they are paid a fixed fee for each evaluated patent regardless of the outcome of the evaluation.  Not all potential SEPs being licensed will be evaluated for essentiality, but there is an incentive for a patent owner to have a number of “Evaluated Essential Patents” because that contributes to a point system (that has a maximum cap per pool member) used in distributing royalties to pool members.

Distributing Royalties to Patent Owners in the Pool

Avanci states that it does not do a mere patent counting calculation to distribute royalties, but uses objectively measured quantity and quality factors to determine royalty distribution.  It appears these criteria may include licensing revenue a patent owner obtained by separate bilateral negotiations and technological contributions made to a standard.

DOJ’s BRL, discussed below, provides more insight into Avanci’s distribution of royalties.  DOJ identifies four criteria of Avanci’s 5G Platform in which a patent owner receives “points” toward its share of the royalty distribution:

• Patent Owners Number of “Evaluated Essential Patents”.  Patent owners can earn up to 15o points.  The points encourage patent owners to have their patents evaluated, and the cap at 150 points encourages patent owners with smaller portfolios to participate by realizing a meaningful share of royalty that otherwise may be dwarfed by other patent holders with large portfolios.
• Other Licensing Revenue.  Points for average annual licensing revenue outside the pool for three calendar years for 2G/3G/4G/5G SEPs.  This serves as a proxy for how a particular patent owner’s SEP portfolio is valued through bilateral negotiations in the market place.
• Standards Contribution.  Points awarded based on Avanci-commissioned independent third-party study of patent owner technical contributions to relevant 3GPP working groups.
• Licensing or Enforcement Support.  Limited number of points to patent owners that enforce or are prepared to enforce their SEPs that result in Platform licenses.  Patent owners who sue for patent infringement may seek reimbursement of litigation costs if the litigation resulted in a Platform license (which thus benefits all members of the pool).

Royalty Rates

Avanci uses a flat rate royalty for each licensed product, with different flat royalty rates depending on how the patented technology is used.  The flat rate is easier to administer and is tied to actual units sold, rather than some prediction of future sales.  The rate does not change during the license period, even if more patents are added to the pool of licensed SEPs (it is not clear whether, under this approach, the rate also does not change as patents expire, though one might expect parity in treatment of adding/dropping patents).

The royalty rate is different for different end-product use scenarios given the different value wireless technology may bring to different uses of that technology.  For example, there is a lower rate for using only wireless emergency call functionality in a vehicle and a higher rate if using full connectivity in a vehicle (e.g., internet, voice calls, or data transmission).  Focusing on use at the end-product is intended to capture the value of the patented technology to the user of the product.

Avanci also will provide a discount on the royalty for those who seek a license before selling a licensed products.

Field of Use

Given the different ways patented technology can be used and the different value of the technology to such different uses, a field of use restriction is said to help ensure that the royalty rate for a particular use of patented technology is more closely aligned with the value of the technology for that particular use.  Initially, Avanci’s 5G licensing will be limited to vehicles (i.e., the end product) and not components of the vehicle.  Avanci states that this is more administratively efficient, because there are a small number of vehicle manufacturers, they are publicly known and more consistent over time.  In contrast, there are many component suppliers, their identities are not known, and they may vary based on the vehicle model and year for each vehicle manufacturer.  This approach also allows vehicle manufacturers to make design and component supply choices without regard to which component suppliers are licensed.

Other Platform Provisions

Some other interesting provisions of the licensing Platform include the following:

• Protect Competitively Sensitive Information.  Avanci is independent of the patent owners who are members of the pool and will not share competitively sensitive information among members or others.
• Patent Challenge.  Licensees are permitted to challenge the validity, enforceability or essentiality of patent.  This does not appear to impact the royalty rate either (though that’s not clear).  But a licensee will have a reduced royalty rate if they enter a license before selling a licensed product and they do not challenge the Avanci pooling agreement, licensing terms or offers made in litigation.
• Limited Membership in Other Pools.  Patent owners are prohibited from joining another patent pool that also licenses cellular SEPs for vehicles, but this does not include any such patent pools they participated in before joining the Avanci pool or pools dedicated to other fields of use, including closely related fields such as vehicle component partes (e.g., telematics units, which is typically the component in a wireless connected vehicle that exchanges data with a network).

DOJ’s BRL

On July 28, 2020, about 8 months after Avanci’s request, DOJ issues its 22-page BRL.  DOJs review included “soliciting input from a range of stakeholders in the automotive and telecommunications industries, including potential licensors and licensees, conducting an independent reivew, and considering prior guidance and reviews of other patent pools.”  DOJ concludes that “Avanci’s proposed 5G Platform is unlikely to harm competition” and DOJ “has no present intention to challenge the Platform.”

DOJ observes that patent pools have long been recognized as procompetitive “by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation.”  Pools may be particularly useful for IoT to facilitate licensing and reduce royalty stacking as compared to individual patent licensing.  DOJ thus reviews patent pools “under the rule of reason” because pools “reduce transaction costs for both licensors and licensee” and “lead to the more efficient exploitation of the intellectual property.”

Potential Procompetitive Benefits

DOJ found several procompetitive benefits of the proposed patent pool.  With Avanci being a “centralized licensing agent” for a large percentage of 5G SEPs, vehicle manufacturers who “are new to licensing in the cellular space” may more easily integrate 5G into vehicles “faster, with less risk and less cost.”  The pool may reduce licensing disputes and “hold up” concerns that may exist with individual licensors.

The pool helps reduce SEP owner’s costs in finding and negotiating with “individual licensees in a fragmented and opaque industry.”  There also are economies of scale associated with licensing by Avanci, which will do the administrative tasks of monitoring compliance and collecting royalties.

The Platform’s royalty distribution method has factors that encourage large and small patent owners to join the Platform.  Increasing the number of patent owners participating in the pool increases the pool’s efficiency.

The Platform’s awarding points for asserting SEPs and reimbursing patent owner litigation costs in some circumstances “are intended to discourage hold out by licensees and assist with enforcement” that benefits large and small licensors.

The licensing support and reimbursement provisions reward licensors when their enforcement efforts result in a Standard PLA that benefits all contributors to the Platform.  These provisions are designed to address the collective action problem that licensors may be individually unwilling to bear the substantial risks or costs of litigation against an infringer when the benefits are shared by all licensors.  They also limit the reward of royalty points to prevent over-enforcement.

DOJ found the risk of over-enforcement causing non-infringing manufacturers to nonetheless settle and take a license was low “given the large number of SEPs that may be licensed …, the safeguards in place to check essentiality, and the correspondingly high probability of infringement (even if some Licensed Patents are later determined to be invalid).

As long as these enforcement incentives do not deter Avanci’s or licensors’ good faith negotiations and they continue to engage in meaningful negotiations with potential licensees before resorting to litigation, the incentives may create efficiencies.  Accordingly, we do not view the shared compensation of litigation costs as likely to harm competition in this case.

Potential Anticompetitive Effects and Safeguards

DOJ acknowledged that pooling “has the potential to harm competition in a number of ways, for example, by facilitating price-fixing, market division, or creating unlawful tying arrangements.”  But DOJ identified safeguards to minimize those risks:

• Excluding substitute patents from the pool (which could lead to fixing the price of competitive technology).  This may be done by ensuring only essential patents are in the pool so that “the Platform will not foreclose competition between a pool patent and an alternative technology.”  Avanci’s Platform is aided by independent patent expert review for essentiality, which can prevent substitute patents from being included in the pool.  Having an incentive to determine essentiality may be sufficient given the “commercially impractical” task of doing an extensive analysis of all potential SEPs.  Licensees also are allowed to challenge essentiality.
• Permitting independent licensing outside the pool.  This allows pool members to compete with the pool itself.  Avanci’s platform prevents double dipping by requiring patent owners to identify and account for patents in the pool that they independently licensed to a particular licensee.  “Competitive concerns could arise if pool licensors collectively agreed not to license outside the pool,” but DOJ is not aware of any such agreement and some licensors already do independently license in the automotive space.
• Making the license agreement available to all interested licensees in the field of use (nondiscrimination).  Restricting field of use to vehicles (end product) rather than components has considerable efficiencies that outweigh potential competitive harm.  It can “simplify[] scope, pricing, and royalty collection.”  Further, Avanci asserts that vehicle manufactures are “more visible, smaller in number, and more consistent over time.”  In contrast, the automotive component supply chain “is complex” and opaque.  This is a similar reason why “many cellular SEP holders choose to license at the end-device level,” so they may be encouraged to join the platform and broad participation benefits the licensees.  The license also grants “Have Made” rights that would cover component suppliers to licensed vehicle manufacturers, which gives component suppliers new access to patented technology.
• Providing clear notice of the contents of the license (transparency).  The Avanci Platform flat rate per vehicle will be publicly available and will not change if patents are added, which streamlines negotiations and reduces transaction costs.  DOJ noted in a footnote that Avanci’s current patent pool (i.e., not the 5G Pool at issue here)  has a rate of “$9 per vehicle for 3G and $15 per vehicle for 4G”.
• Limiting access to competitively sensitive information, such as pricing, marketing, or R&D information through the pool.  Avanci is a licensing administrator that does not own patents and does not participate in the automotive industry, so it “has little incentive to coordinate on price or output downstream.”  Limiting access to competitive information shared with Avanci “lowers the risk of coordination in final product markets and other markets where licensors or licensees may compete.”  Thus “Avanci has sufficient protections in place to prevent the sharing of information that might result in unlawful coordination.”

End-Product Licensing

DOJ also discussed benefits of SEP licensing based on the end product as one of many ways one may structure an SEP license:

Another benefit of end-device licensing through the proposed 5G Platform is that it may help to ensure licensors are appropriately compensated for their innovation.  Because the pool sets flat per unit rates based upon the value of the technology to vehicle manufactures that choose E-Call or full connectivity for their vehicles, licensors may be able to recoup more of the value of the intellectual property they created.

There are a variety of ways parties might value patented technology, including setting royalties based on end-product revenue.  The essential cellular SEPs licensed here are subject to FRAND commitments.  Avanci represents that its current rates for the 4G Platform are FRAND and reflect input from both licensors and licensees, and that Avanci intends its 5G rates also to be FRAND.  There is no single correct way to calculate a reasonable royalty in the FRAND context.  Each standards-essential patent holder will have to decide whether the Avanci Platform comports with its own FRAND commitments.  Standards implementors can enforce the commitments in contract proceedings if there are disputes.  The Department believes parties should be given flexibility to license in a manner, consistent with these commitments, that best rewards and encourages innovation.

Given the limited scope of business review letters (focused on impact on competition) DOJ considered only the potential impact on competition and was not taking a position on whether end product or component licensing was better than one or the other in any a particular context, explaining:

The Department understands, based on our investigation, that vehicle manufacturers are often indemnified by their suppliers for intellectual property infringement and that suppliers in the automotive industry typically take a license to any intellectual property necessary to produce a particular component.  The proposed 5G Platform takes a different approach.  To be clear, the Department makes no assessment of whether end-device licensing will be successful in the automotive industry or whether it is the correct approach to licensing in this space.  We also do not assess whether licensors could be held liable for breaching their individual FRAND commitments if they choose not to license outside the proposed Platform to suppliers.  We simply opine, based on Avanci’s representations and our review, that Avanci’s approach, which as the potential to aggregate a significant number of cellular SEPs in the marketplace and streamline licensing, is unlikely to harm competition.  Therefore, the Department has no present intention to challenge it.

Limits on BRL

As discussed, the BRL concerns an analysis of any competitive concerns with the business model investigated and does not take a position whether a business model is good or bad generally.  The BRL also reflects DOJ’s current intentions based on the information provided or obtained during its investigation:

For these reasons, the Department is not presently inclined to initiate an antitrust enforcement action against the proposed 5G Platform.  This letter, however, expresses the Department’s current enforcement intention.  In accordance with our normal practices, the Department reserves the right to bring an enforcement action ion the future if the actual operation of the proposed conduct proves to be anticompetitive in purpose or effect.