Month: May 2009

A group of public interest and consumer groups — Public Knowledge, Consumers Union, Free Press, Media Access Project, and New America Foundation — have filed reply comments in the CUT FATT proceeding on digital TV licensing practices at the US Federal Communications Commission, asserting that the Commission should:

• “investigate allegations that existing licenses for patents essential to the DTV standard are unreasonable or discriminatory”, and
• “require disclosure of essential patents, the grounds by which the patents are essential, and the terms under which they are licensed.”

The groups argue that such disclosure of licensing terms is within the Commission’s jurisdiction and in the public interest:

“The public interest requires that the scope and cost of any mandatory standards be clear to those who would adhere to them.  When patent royalties can be openly investigated and compared against known benchmarks, manufacturers and consumers can be assured that licenses, and the costs that go with them, are reasonable and nondiscriminatory.  Not only does disclosure prevent cost-raising abuses, but ensuring that essential patents are known and disclosed will prevent users of the DTV standard from being drawn into disputes over patent scope and validity.  The time, uncertainty, and cost involved in navigating unanticipated patent disputes would also be minimized by further transparency and disclosure.” (emphasis added)

Reply comments here also make the case that “It is Unreasonable and Potentially Discriminatory to Shield DTV Licensing Terms Behind Claims of Private Business Confidentiality”.

Patent holders are resisting public disclosure of patent licensing terms, arguing for example:

“The FCC also cannot order the public disclosure of confidential commercial business agreements, as the Petition requests….Private licensing agreements, especially the financial terms of such agreements, are confidential and proprietary information.”

The CUT FATT coalition itself has claimed in its most recent filing that “patent holders are demanding more than $24 per set – although confidentiality requirements prevent manufacturers from disclosing each demand” and similarly argues that

“confidentiality is inconsistent with a regime requiring nondiscrimination. Indeed, simply banning confidentiality requirements is likely to curtail some of the most egregious demands.”

For more information and advocacy on the CUT FATT proceeding, see here.

I have filed reply comments in the CUT FATT proceeding (09-23).  Excerpt from the executive summary:

“The Commission’s request for comments has brought mostly highly critical opposing comments from patent holders, and mostly mild or ambivalent comments from standards groups and other interested parties. Only one commenter, Harris Corporation, themselves an acknowledged recipient of the sort of licensing practices for which the CUT FATT petition seeks redress, takes a direct stance in favor of the spirit of the petition. Perhaps more comments will surface.

There is more to this topic, however, and a different perspective ought to be aired and considered. Public standards require public accountability. America pays more for less in DTV standards. Current DTV licensing practices are not working. The FCC should engage more, not less, in standards.

These reply comments, generally supportive of the CUT FATT petition but in some ways encouraging of an even broader consideration, endeavor to provide information and reasoning that highlight concerns raised by the CUT FATT petition and request that the Commission look more, and more deeply, into these matters. Perhaps one beneficial outcome of the CUT FATT petition, beyond worthy immediate redress, might be to reawaken competitive juices and inspire a needed serious look to the future of digital TV and broadband in the network age.”

Table of contents is below, the full filing is available here, all filed comments are available at the FCC site here (enter 09-23 as the proceeding).

EXECUTIVE SUMMARY
BACKGROUND
A. DTV Licensing Practices Have Undermined American Competitiveness
B. Petition Proposals are Modest; Commission Should Consider Doing More
C. Commission Should Become More, Not Less, Engaged in Standards
DISCUSSION
I. PUBLIC STANDARDS REQUIRE PUBLIC ACCOUNTABILITY
A. Guidelines and Antitrust Waivers Developed for Private, Voluntary Activities Are Not Sufficient to Protect Public Standards
B. Petition Proposals are Modest Compared to Global Best Practices
C. It is Unreasonable and Potentially Discriminatory to Shield DTV Licensing Terms Behind Claims of Private Business Confidentiality
II. AMERICA PAYS MORE FOR LESS IN DTV STANDARDS
A. Patent Overcharging Has Made US DTV Globally Uncompetitive
B. DTV Licensing Practices Have Put America in “Perpetual Catch-up”
C. Commission Should Look Beyond Suspect Appeals to American Pride to a Level Global Playing Field
III. CURRENT DTV LICENSING PRACTICES ARE NOT WORKING
A. Eleven Years is an Unreasonable Amount of Time to Establish the ATSC Patent Pool, and the Surrounding Circumstances Raise Concern
B. DTV Licensing Practices Have Caused Policy Concern Around the World, and Governments Have Stepped In
C. “Multi-Dipping” and Other DTV Licensing Gambits are Unreasonable and Discriminatory
D. DTV Licensing Practices Have Stifled Access to Public Domain and Free Technology
E. DTV Licensing Practices Are Unnecessarily Prolonging Pool Lifespans Through Questionable Tactics
IV. FCC SHOULD ENGAGE MORE, NOT LESS, IN STANDARDS
A. Commenters Propose No Specific Innovation Or Other Compelling Need To Justify Continuing Current DTV Licensing Practices
B. DTV Licensing Practices Threaten to Undermine Broadband Policy
C. Our Network Age Needs Greater Policy Engagement in Standards
D. Commission Has, and Should Improve, Standards Competency
E. Commission Should Consider Going Beyond Petition Proposals
F. Commission Should Promote Transparency, A Level Global Playing Field, Open Value Chains, Ex Ante Disclosure, Proactive IP Analysis and a Preference for Royalty-Free
CONCLUSION

There is much contention in the CUT FATT filings as to how much royalties are claimed on the US and other DTV systems, and what significance the differences may have in the framework of “RAND” (Reasonable and Nondiscriminatory) standards policies and government oversight.

The debated amount for royalties on the US DTV system is $23 dollars, with some debated lower amount for other systems (actually, many components are available royalty-free, see here, for example about how Japan courted Brazil to the ISDB system:  “A memorandum on the digital standard signed earlier this year between the Brazil and Japan called for Japanese firms to train local staff and allow Brazilian companies to use the technology without paying royalties”).

So hold this thought:  $23 dollars as the contented royalties per set top for the US DTV system versus a Japanese government official’s assertion last month that ISDB set tops would be available for $30 in the Philippines.

Some context. The advent of modern patent pools after a century of policy skepticism is often traced to the 1997 US Department of Justice business review letter that indicated the DOJ would not prosecute on Antitrust grounds a pool license for the MPEG-2 video codec and associated transport stream.

In subsequent years, selective readings of terms of that 1997 letter have become common sport in patent pooling circles.  Can a contractor paid to determine essentiality of a patent really be independent from their employer?  No increase of royalties by more than 25%, “most-favored-nation” clause for licensees?  Does making the list of patents available require posting the list to a web site?  What about the potential for hold-up after a standard becomes popular?

Now a particularly interesting assertion is made in the filing by Mitsubishi Electric (emphasis added):

“patent policies cannot become retroactively anticompetitive because of changes in market conditions, such as the prices charged by comparable technology standards.”
…
Department of Justice takes the position that the patent policies of a standards development organization (“SDO”) are to be analyzed ex ante for potential anticompetitive effects.
…
In other words, the DOJ’s antitrust analysis focuses on the state of the world when the SDO’s patent policies are established.

To paraphrase, it appears that Mitsubishi Electric reasons something like that patent pools can charge whatever they think is fair, because there is no objective way to determine what is unfair.  What an interesting interpretation of the policy underpinnings of the Department of Justice authorization of ex ante procedures in standards organizations, and one that RAND-based organizations will want to take a note of.

What a far distance this is from the original DOJ business review letter authorizing the MPEG patent pool in 1997 on specific, narrow terms, which contemplated that because royalty rates would be “a tiny fraction” of product prices, collusion or downstream price coordination was highly unlikely:

“Further, since the contemplated royalty rates are likely to constitute a tiny fraction of MPEG-2 products’ prices, at least in the near term, it appears highly unlikely that the royalty rate could be used during that period as a device to coordinate the prices of downstream products. “

http://www.usdoj.gov/atr/public/busreview/215742.htm

So there you have it:  in just 12 years from a proscriptive assumption of royalties being a “tiny fraction” to assure no downstream collusion to a claim of “cannot become retroactively anticompetitive” even if royalties are over fifty percent of total product price.  Attorneys for Moore’s law should take note.

References

“Even if one were to assume the accuracy of this unsubstantiated report and the unstated methodology underlying it….[t]his falls far short of showing a systemic breakdown in licensing essential DTV patents…there are legitimate reasons for differences in royalty rates between U.S. and foreign pools” (Philips / Qualcomm)

“For purposes of these Comments, it can be assumed that the royalty rates alleged in the petition are accurate. However, it is noted that the petition errantly describes the royalty for ISDB as 100 yen per unit, even though the actual royalty for ISDB is 200 yen per unit. See <http://www.uldage.com/en/indexe.html>. ” (Mitsubishi Electric)

“misleading at best … categorically false … not credible …differences in the patent acquisition and enforcement systems around the world and the fact that the ATSC standard is different from those used for DTV elsewhere in the world … “NAFTA Digital Television” patent license … very reasonable royalty terms”  (Thomson)

Mitsubishi Electric, a patent holder in the ATSC patent pool, in commenting in the CUT FATT DTV patent consideration, makes the statement (emphasis added):

“Neither Congress nor a U.S. government agency has ever compelled patent holders to form a licensing pool defined by government-mandated royalties.  In essence, this would be a grant of a compulsory license for what the licensee wants to pay. Such ex post regulation of prices runs contrary to the patent system’s goal of encouraging innovation and, quite frankly, to the American free market system. … Since World War I, we are unaware of any situation where the government has either regulated royalty rates or compelled pooling.”

Consider, however, the case of RCA, originally structured in 1921 as the patent pool for radio patents.  After government proceedings in 1924 (FTC  and “packaged licensing”) and 1930 (Department of Justice consent decree separating RCA from its owners), RCA entered into a consent decree in 1958 concerning color TV patents (for which RCA was then the key owner), described in Time magazine:

“In a sweeping civil consent decree in one of the biggest Eisenhower Administration Sherman Act suits to date, RCA agreed to 1) put some 100 color TV patents into a royalty-free pool, 2) make available to all comers on a royalty-free basis at least 12,000 other existing radio-TV patents, 3) license all new patents during ‘the next ten years at a “reasonable” royalty rate.”

Some interesting commentary on the context and consequences are described in “Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Industries”, a 2001 tome by Alfred D. Chandler Jr, often cited as the “dean of American business historians”:

“The 1958 consent decree [with RCA] was part of a drive by the Justice Department’s Antitrust division to open the new electronics-based industries to competition by making the patents of IBM, AT&T, and RCA available to all… [The consent decree] made licenses available to domestic companies without charge… Foreign buyers would continue to pay full freight. … RCA Labs, in order to maintain licensing income after the consent decree, began to concentrate on licensing to Europe’s Philips and Japan’s leading consumer electronics makers.”

References

“Republican Attorney General William Rogers’ decision to go after RCA with a criminal indictment was undoubtedly encouraged by RCA’s $10 million out-of-court settlement with Zenith, when it got a look at the facts Zenith had collected to support its charges of monopoly.”

“RCA Under Fire”, Time Magazine, March 3, 1958, http://www.time.com/time/magazine/article/0,9171,893902,00.html

“In March 1921, Westinghouse and AT&T joined GE to use GE’s newly formed Radio Corporation of America as a patent pool.  One of RCA’s initial purposes was to hold and allocate radio-related patents”  Chandler, p.15

“Owen Young [GE’s general counsel and vice president] believed that the growing number of legal battles over patents could only slow the continuing development of radio technologies.  His solution was for RCA, which already held GE’s patents and those of the navy, to obtain those of GE’s competititors in exchange for obtaining shares of stock in RCA and having representatives on its board.” Chandler, p. 16

FCC Docket 09-23, Petition For Rulemaking And Request For Declaratory Ruling Filed By The Coalition United To Terminate Financial Abuses Of The Television Transition, has drawn filings from Mitsubishi, Valley View, Philips/LG Electronics, Funai, Thomson, ATSC, Harris, Zenith, MPEG LA, Philips/Qualcomm, and Retire Safe.

A starting point in reviewing this material is the joint filing by Philips Electronics North America Corporation and LG Electronics USA, Inc., which makes five arguments, excerpted below (emphasis added).

1) “Vibrant market” for DTV receiver models

“The success of Vizio and Westinghouse Digital Electronics strongly indicates that royalty costs are not preventing the production and sale of inexpensive DTV sets…. [They] have been quite successful in offering DTV receivers priced among the lowest in the industry despite the fact that neither holds a single patent essential to practicing the DTV ATSC standard.”

2: “[P]rivate pools and privately negotiated licensing agreements are working well”

“[P]rivately-administered DTV patent pools, including the MPEG LA MPEG-2 and ATSC portfolios, offer patent licenses to hundreds of essential DTV patents on reasonable and nondiscriminatory terms. These pools provide timely and cost-effective access to scores of manufacturers that have delivered millions of affordable DTV sets to U.S. consumers. The Petition provides no real evidence to the contrary.”

3: FCC has “limited experience and expertise in the intricacies of patent law and the determination of patent royalty rates”

“[C]omplex and closely intertwined issues of patent validity, claim construction and the setting of reasonable patent royalty rates require careful deliberation for just a single patent”

4: “[C]onsistency in decisions involving patent law”

“[T]he federal courts and other federal expert agencies, such as the International Trade Commission and the United States Patent and Trademark Office, understand fully the complexities of the patent laws. In order to ensure consistency in decisions involving patent law, the federal courts and these other agencies – not the FCC – should address the concerns raised by the Petitioner.”

5: “[D]iscourage continued development of DTV technology”

“Commission action to lower patent royalties associated with DTV technology would have long-term detrimental effects because it would discourage continued development of DTV technology.  Petitioner’s proposals thus would be harmful to U.S. consumers because they would chill the innovation that engendered American consumers’ embrace of the new digital broadcast technology” technology over the past decade.