The problem with LNGs

Licensing views
April 4, 2024

There are increasing calls for the creation of licensing negotiation groups to facilitate the dissemination of world class technology. However, the reality is they would do no such thing. A better way forward is to look at other syndicated options already delivering positive results

By Mattia Fogliacco

At Sisvel we know a lot about how standard essential patent (SEP) licensing negotiations are done. We have been involved in them since the mid-1990s and during that time have concluded several thousand deals.

This has enabled us to return billions of euros in royalties to the SEP owners that contribute to our pools, while also facilitating the adoption of important technologies whose dissemination would otherwise have been impeded by a need to negotiate and execute many patent licences, not just one.

What’s more, much of the revenue we distribute to patent owners is then used to fund further R&D, leading to more innovation and more world-class technology. What we call the Inventive Loop is a self-sustaining process from which everyone – SEP owner, technology implementer and consumer – benefits.

Underpinning all successful pools is not only buy-in from patent holders but also from those who want to access the rights they own. Both sides must see transactional benefits for any project to work. To ensure we get it right, we spend a great deal of time speaking to all parts of the market when we develop a new programme. This dialogue continues as we then roll out and manage it.

All this can be a complex and challenging process, but there is no other way. We must ensure that our pools offer SEP holders and implementers alike an attractive proposition in terms of pricing, transparency and accessibility.

Collusion concerns

This is why I am concerned that what are termed licensing negotiation groups (LNGs) are beginning to be spoken about as vehicles through which companies can gain access to SEP holders’ rights.

For example, despite not being mentioned in the original draft of the EU’s proposed SEP regulation, the Commission was mandated to explore LNGs as an option in an amendment to the legislation approved at first reading by the European Parliament in February.

There are several issues with LNGs that make me sceptical about whether they are a viable route to quicker, more equitable transactions. These are rooted in concerns about their intrinsically anti-competitive nature and their potential to drive a power imbalance that would harm technology innovators.

Broadly speaking, an LNG is a group of competitor companies deploying an SEP-protected technology that come together under the auspices of a facilitator to decide the terms and conditions they will accept from individual SEP holders, or from pool administrators, for this use.

In other words - and crucially - LNGs are formed by implementers of a product, who compete in a defined market, so that they can coordinate on the royalty rate they will agree to accept for a technology they already use.

This is a fundamental problem. Coordination between buyers that have already developed products or services and are only asked for royalties after they have done so cannot foster any behaviour other than collusion towards offering unreasonably low payment. After all, the buyers have obtained the goods or services already, so there is no business logic in coordinating to make any other kind of offer.

No one would advocate this kind of behaviour by buyers of tangible property; neither would it be tolerated by government agencies. Why then do we consider it for buyers of intangible property?

Even in cases where there is no deliberate attempt to create a cartel, the natural dynamic inherent in an LNG is that no member will want to pay more than any of its competitors and will normally seek to pay less. Why would they do otherwise?

Furthermore, if the role of the facilitator is to coordinate the group not to accept licence terms and conditions different to those coordinated within the LNG, group members have reasonable certainty that holding-out will be the dominant strategy.

In such circumstances, SEP holders or pools will be left with no other option but to submit to a price that does not reflect the value of the IP or to engage in expensive and time-consuming legal action to enforce their rights.

Innovators and consumers lose out

Who benefits from this? Not the SEP holder that has allocated substantial time and money in developing the technology the implementers are deploying. Instead, it faces high litigation costs, long delays in securing an equitable return and may well be disincentivised to invest in future R&D efforts and/or take part in standards setting programmes.

As a result, consumers also lose out. Meanwhile, there is no guarantee that implementers will lower their prices to reflect the cost savings that hold-out delivers. Indeed, the business logic is that they would not. So, consumers lose again. That leaves the implementers themselves and the facilitator as the sole winners. The Inventive Loop is broken.

Proponents of LNGs often justify them as being the flip side of pool patent aggregation, but the two are not in any way equivalent or even comparable.

Pools bring together owners of complementary IP assets necessary to accomplish a defined endeavour: the implementation of a technology using SEPs. This activity creates efficiencies, under careful regulatory guidance, which allow rights to be obtained in a single transaction as opposed to multiple ones.

In this way, standard pool terms level the playing field and increase competition among those entering the market. The LNG accomplishes none of this.

While any buyers’ cartel might be justified by claiming multiple transactions may be collapsed into one, it is those multiple transactions on the licensee side that preserve competition and fair value in intangible property – the only property that can be taken and used without consent with the owner only having recourse to the courts.

The way forward

However, Sisvel is always committed to seeking the most efficient, cost-effective ways to get deals done and ensure technology adoption. We believe that there are circumstances under which SEP holders or pools can negotiate syndicated deals with a facilitator to ensure that groups of implementers secure patent licences. It’s just that for it to happen, certain conditions must be met.

Crucially, the implementers should not communicate, let alone co-ordinate, with each other. In fact, ideally, they should not know who else is in the group. Instead, each of them should decide independently how much they are willing to pay for a licence with no knowledge of what any other group member has said and with no steer from the facilitator. This way, each group member focuses on its own requirements and acceptable price point.

It then becomes the facilitator’s role to negotiate the syndicated deal with the SEP holder or pool. If it is acceptable, the terms of the deal are then agreed; if it is not, the facilitator goes back to the individual members of the group to finesse the offering.

Importantly, at all stages of this process any member of such a group negotiating bilaterally with the SEP holder or pool should continue to do so in good faith, until the syndicated deal is completed or fails. In other words, participation in an attempt to conclude a syndicated deal cannot release the implementer from the obligation to engage directly in good faith discussion about a licence.

For its part, the facilitator should only get its fee once the syndicated transaction closes. This way, the incentives to facilitate hold-out disappear.

Under such an approach, everybody wins. The SEP holders get a fair price, the implementers enjoy the benefits of substantial transactional efficiencies, the facilitator gets its cut and consumers enjoy the benefits of the fully functioning Inventive Loop.

Variations of this nimble, flexible base structure have already proved successful in various markets. Indeed, Sisvel itself has been involved in some of them. They work because they are created with the needs of all parties in a transaction set firmly front and centre.

It’s this kind of dealmaking that ensures ongoing investments in R&D, continuing participation in standards setting and the fastest possible dissemination of world class technology that benefits us all. Win-win, not win-lose; that should be the future.

We stand ready to discuss this further with any interested parties, including the Commission and other European institutions. We are absolutely committed to dialogue and the development of equitable SEP licensing solutions.

Mattia Fogliacco is President of Sisvel

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