In the latest 5G fight, the US should support market-based patent fees

A global fight is being waged over technologies such as 5G. China, the European Union and the U.S. are competing to create a political process to value the underlying patents.

These efforts are misguided. Congress should instead support market-based pricing of licensing fees. 

Devices such as smartphones have to comply with numerous standards. In the case of 5G, for example, there are an estimated 100,000 “essential” patents. These are known as standard essential patents. Because device-makers can’t make 5G phones without using these patents, standard essential patents are licensed on the basis of what’s called “fair, reasonable and nondiscriminatory” (FRAND) royalty fees. Determining these FRAND rates is the main source of conflict in the China-EU-U.S. tech fight. 

Starting in 2020, China systematized a provocative approach to standard essential patents. While China’s courts handled infringement cases, they stopped patent holders from simultaneously enforcing their rights in foreign courts, issuing anti-suit injunctions. China also backs up its anti-suit injunctions by fining patent holders $156,845 per day if they fail to comply. Chinese courts tend to rule for below-market FRAND rates, so anti-suit injunctions have the effect of making undervalued standard essential patents a global focal point for foreign courts to follow. 

The EU wasn't having it and filed a dispute against China at the World Trade Organization. Brussels says the anti-suit injunctions constitute a “policy” that violates provisions of the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights, notably by keeping patent holders from enforcing their rights in a non-Chinese court. 

In opening arguments before the WTO, the EU explained that patent holders have the right to conclude licensing contracts on FRAND terms, free of “measures that restrict, or seek to restrict, the exercise of that right.” This argument is spot on but tinged with irony, since the EU is actually doing even more than China to impair these rights. 

Indeed, in parallel with its WTO case against China, the EU is implementing a standard essential patents regime that’s shockingly political. The plan, set out in a new regulation, is for the EU Intellectual Property Office to regulate most aspects of standard essential patents. Despite lacking expertise in patents, the EUIPO will issue non-binding valuations of FRAND rates, and determine the “essentiality” of each standard essential patent. It will also maintain a registry, the key being that only registered standard essential patents will be enforceable in Europe. 

Why is the EU doing this? Brussels insists that this new regime will help small and medium-sized enterprises more easily navigate the complexities of FRAND rates and avoid becoming entangled in costly litigation. This is nonsense. Of the six device-makers — Huawei and three other Chinese companies, plus Apple and Samsung — none are small-to-medium enterprises, and all are quite experienced at negotiating licenses.  

The EU’s real motivation is the same as China’s: to lower FRAND rates for end-users. The European Commission’s own impact study, for example, touts the benefits of a lower FRAND for auto manufacturers and internet-of-things producers, who have the political upper hand on innovators. 

Not to be left on the sidelines, Congress has mulled over a bill, titled the Standard Essential Royalties Act, that shares several things in common with Europe’s regime. It proposes a new federal court to decide FRAND rates where there are inconsistencies across domestic rulings, or where foreign courts hand down verdicts that disadvantage American patent holders. The bill is clearly written with China’s and Europe’s standard essential patents regimes in mind. 

Would the act help or hurt? Its emphasis on reasserting U.S. sovereignty taps the anti-China mood of Congress. But in truth, it plays into China’s (and the EU’s) hands, the message being that more bureaucracy is the answer to a problem that doesn’t exist. 

Neither China nor the EU offers a shred of evidence that FRAND rates are somehow above market. China’s anti-suit injunctions play well for Huawei and the country’s other three device makers. As for the EU, the European Commission’s own impact study never once shows that FRAND rates are amiss. Similarly, a group of former U.S. government officials did an assessment of the EU’s standard essential patents regime, and couldn’t put their finger on the problem that Brussels thinks it’s solving. Unless the Standard Essential Royalties Act’s proponents can fill in the blanks, Congress shouldn’t create a new court that only affirms China’s and the EU’s efforts to promote non-market licensing of standard essential patents. 

This isn’t to say that Washington should do nothing. The U.S. has reserved third-party rights in the EU’s WTO case against China, and will hopefully voice support for innovation. If the WTO rules for the EU, Beijing will have to change its standard essential patents regime going forward or find itself the target of anti-anti-suit injunctions issued by courts around the world. 

The U.S. could also file a WTO case against the EU. This would likely be a win, as the EU’s new regulation clearly restricts the enforcement of standard essential patents in Europe. Even if Brussels chose not to comply, it would face a domestic political backlash, since there’s already confusion about which directorate-general is calling the shots and strong European opposition to this new standard essential patents regime. 

More fundamentally, the U.S. needs to insist on market-based pricing of standard essential patents to incentivize innovation. Anything else would be a gift to Huawei and a substantial setback for the future of 6G.  

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University, and a global fellow at the Wilson Center’s Wahba Institute for Strategic Competition. Follow him on Twitter @marclbusch.