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Response from ACT – The App Association to the consultation on the Intellectual Property Enforcement Guidelines

December 31, 2018

Submitted via the Competition Bureau Canada's consultation on the draft version of its revised Intellectual Property Enforcement Guidelines

Competition Promotion Branch
Competition Bureau
50 Victoria Street
Gatineau, Quebec
K1A 0C9
Canada

Table of Contents

ACT | The App Association (the App Association) writes in response to the Canadian Competition Bureau’s (CCB) request for input on its November 1, 2018-released draft revised Intellectual Property Enforcement Guidelines (IPEGs).Footnote 1 The App Association represents more than 5,000 small business app development and high-tech companies in Canada and around the world. Our association is committed to preserving and promoting innovation while developing robust standards and a balanced intellectual property (IP) system to accelerate the growth of technology markets. We applaud CCB for undertaking a public consultation on this important matter. We believe that the proposed CCB’s IPEGs, as drafted, will increase competition by reducing IP abuse and deterring unnecessary and burdensome litigation, supporting ingenuity in the Canadian market, and will further provide global leadership in the intersection of standards, competition, and innovation.

The App Association strongly supports CCB’s efforts to provide clarity on how it approaches the interface between competition policy and IP rights in updated IPEGs. The rise of the internet of things (IoT) is poised to expose new markets and verticals to standard-essential patent (SEP) licensing, and we strongly urge the CCB to build upon existing, global-consensus guidance on the abuse of fair, reasonable, and non- discriminatory (FRAND) commitments and the effects of their abuse on competition and innovation.

A variety of market regulators have provided significant guidance regarding SEPs and FRAND licensing commitments; we urge the CCB to align with and build upon their guidance to support Canadian innovation and competition in the global market. Further, leading standard setting organizations (SSOs) like the Institute of Electrical and Electronics Engineers Standards Association have, after much effort, successfully revised their intellectual property rights (IPR) policies to clarify technology contributors’ FRAND commitments in ways that are consistent with such guidance. Building on these important developments, we believe the CCB’s IPEGs, with respect to SEPs, can – and as drafted, will – increase competition by reducing IP abuse and deterring unnecessary and burdensome litigation, while supporting ingenuity in the Canadian market.

Specifically, the App Association believes clarifications to the meaning of FRAND commitments are extremely beneficial to SEP holders and standard implementers as well as the consumers of technology. The negative effects of abusive licensing of SEPs can be particularly harmful to the App Association’s members, which include thousands of small and medium-sized enterprises (SMEs) that are both SEP holders and standards implementers. These SMEs, which include many companies in Canada, often do not have the resources to deal with larger enterprises holding numerous SEPs. As a result, they must face financially debilitating litigation with no predictable outcome or are forced to accept excessive royalty demands made by the SEP holders. In the worst case, the SME may be forced to change their product, or abandon their business plan altogether, if they cannot afford the litigation or the expensive SEP licenses. Patent licensing abuses pose a major threat to any industry that relies on standards in its innovation cycle. We believe the CCB’s guidance will be essential to deter these abuses for innovators.

The convergence of computing and communication technologies will continue as a diverse array of industries come together to build the internet of things. IoT’s seamless interconnectivity will be made possible by technological standards like Wi-Fi, LTE, and Bluetooth, which bring immense value to consumers by promoting interoperability while enabling healthy competition between innovators. Unfortunately, a number of FRAND- committed SEP owners are flagrantly abusing their unique opportunity and reneging on their commitment to license in a fair, reasonable, and non-discriminatory manner. These practices threaten healthy competition and jeopardize the potential of nascent markets like IoT. In this way, the CCB’s IPEGs (as well as patent policies developed by standard development organizations [SDOs] that will be influenced by the CCB’s IPEGs) will affect the way Canadian citizens work, live, and play for decades to come.

We also note that a number of SDO IPR policies require SDO participants to disclose patents or patent applications that are, or may be, essential to a standard under development. Reasonable disclosure policies can help SDO participants evaluate whether technologies being considered for standardization are covered by patents. Disclosure policies should not, however, require participants to search their patent portfolios. These requirements can be overly burdensome and expensive, effectively deterring participation in an SDO. In addition, FRAND policies that do not require disclosure, but specify requirements for licensing commitments for contributed technology, can accomplish many, if not all, of the disclosure requirements.

FRAND licensing-related guidance and government actions, including the CCB’s IPEGs, should ensure consistency with include the following (noted alphabetically by jurisdiction name):

China

European Union

Republic of Korea

The KFTC also indicated that a FRAND commitment obligates SEP holders to negotiate in good faith with willing licensees and listed various factors to help the agency make that determination.

United States

Although different jurisdictions’ guidance varies in detail, they do exhibit common licensing principles for FRAND-committed SEPs. In particular, one commonly shared guidance indicates that the following conduct can be a breach of the FRAND commitment, or even an abuse of competition law: refusing to license SEPs to standard implementers; coercing the licensee to accept a license of a non-SEP as a condition for the licensing of a SEP; requesting discriminatory terms for a SEP license; imposing an unreasonable level of royalties or other non-FRAND conditions; seeking or using injunctive relief against willing licensees that are able to pay a reasonable royalty; or imposing licensing conditions that unreasonably restrict the licensee’s exercise of related patents it owns. This guidance does not, however, prescribe specific royalty rates for SEPs because of the highly fact-specific nature of SEP licensing. We strongly support the CCB’s IPEGs to ensure consistency with this global norm.

In summary, we recommend that CCB’s IPEGs establish fundamental principles to guide standardization activities, help ensure SEP licensing on FRAND terms, prevent and effectively resolve disputes over the meaning of FRAND, and encourage the enforcement of FRAND commitments. With such principles, private parties and SSOs will still have plenty of room to negotiate the specifics of FRAND licensing terms.

Finally, regarding SEP licensing pricing, as representatives of small business innovators that rely on FRAND access to SEPs, we seek to avoid two well-established, and deleterious effects:Footnote 19 royalty stacking, when the cumulative demands for the patent threaten to make it economically unviable to offer, and patent holdup. As we have noted, guidance on the general meaning of FRAND commitments can be beneficial. The App Association recommends that CCB issue guidelines to fill in the details left unaddressed by the existing Canadian legal framework. This guidance would provide SSOs, courts, SEP holders, and implementers with more clarity on how Canadian law will be applied. We note that the guidelines offered by other key market regulators do not establish royalty rates specific to FRAND commitments. Instead, they establish general principles to determine whether a proposed royalty or other licensing term is reasonable. There is no need to proscribe royalty methodologies or establish an independent expert body to determine the details of FRAND licensing terms. The Canadian courts have jurisdiction to adjudicate infringement, validity, and enforceability of patents. CCB can help courts understand the difference between legitimate exercises of patent rights in the standardization context and contractual breaches of FRAND commitments, including instances where the breaches constitute abuses of unearned market power and harm to competition.

We urge CCB to avoid exclusive mandates regarding calculation of a royalty base, but we note that “smallest saleable unit” (SSU) approach and others have emerged as a reliable basis for calculation.Footnote 20 We believe it may be helpful for CCB to support the SSU pricing methodology as one – but not the only – approach to determining reasonable royalty base.

Should CCB address royalty calculations, the App Association strongly urges CCB to clarify in its guidance that a reasonable rate for a valid, infringed, and enforceable FRAND-encumbered SEP should be based on a variety of holistic factors, including the value of the actual patented invention, apart from its inclusion in the standard. This value cannot be assessed in a vacuum that ignores the portion in which the SEP is substantially practiced, or royalty rates from other SEPs to implement the standard. Such factors may include royalty rates of patent pools or other licenses, relative values of SEPs under negotiation to other SEPs, cumulative royalty rates, total numbers of SEPs, patent portfolio strength, research and development costs, and negotiation histories.

In conclusion, the App Association believes that the proposed CCB’s IPEGs, as drafted, will increase competition by reducing IP abuse and deterring unnecessary and burdensome litigation and supporting ingenuity in the Canadian market, and will further provide global leadership in the intersection of standards, competition, and innovation.

We look forward to assisting CCB on this critical effort. Please do not hesitate to contact us with any questions.

Sincerely,

Brian Scarpelli
Senior Global Policy Counsel
ACT | The App Association

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