SERA Smiles on Users, Frowns on Innovators

A fiendish scheme to advantage implementers over innovators is floating on K Street. The “Standard Essential Royalty Act” would give a facade of fairness and an illusion of impeccability to standard-essential patent royalty-setting.

SERA proposes a novel way of determining the royalty rates implementers pay inventors for use of their high-value SEPs. The gist of SERA is creation of a Standards Royalty Court. This court would be “the exclusive means for determining a royalty rate for” SEPs (subsection 336(a)).

That is, the Standards Royalty Court would be a compulsory licensing regime in the federal judiciary.

If you’re in the business of inventing cutting-edge technologies and participating in standards-development bodies—both activities requiring healthy investments of financial and human resources—then SERA compels you into a deal you cannot refuse. Your only option, if you want to get paid by those whose products need your standard-essential patented invention, is the SERA court.

You’d be compelled to accept the court-dictated royalty rate, no matter how much it undervalues your SEP below what market-based negotiations would value your invention.

SERA contains a couple of other gifts to denizens of the Infringers Lobby. The court would set an overall “reasonable royalty rate or rates” of a standard (subsection 334(b)(1)), then decide the proportion of that capped rate assigned to each SEP owner (subsection 334(b)(2)).

And within three years, the court would repeat the exercise and “adjust”—i.e., reduce—the initially determined royalty rates and allocations (section 335).

SERA falls far short of fair and is so peccable because it’s built on the same foundation of sand as the Infringers Lobby’s bogeyman the “patent troll,” its mythological “patent hold-up” and hypothetical royalty stacking.

Implementers and their minions have long touted evidence-free aspersions toward SEP innovators’ royalties and licensing practices. Analysts have subjected those fictitious claims to scrutiny.

“Vested interests . . . promote the notion that patent licensing fee rates are ‘perceived’ to be too high in mobile technologies; but without substantiation for such claims. Speculation that patent fees, largely for mobile SEPs, may total 30 percent of smartphone costs[, a] . . . grossly inflated figure[,] is based on theories of hold-up and royalty stacking that lack empirical support and it ignores marketplace realities including cross licensing and discounting rates for other reasons in patent-licensing agreement negotiations . . . .”

This expert observed that “aggregating figures in this way is seemingly precise but misleading and defective because it produces severely and nonsensically inflated totals that do not reflect the major factors which substantially reduce rates actually paid, if paid at all. . . .

“On the basis of economic and accounting principles, it is only net royalty payments actually paid, after cross licensing and other reductions, which should be included in cumulative royalty totals. [This more accurate approach shows] a cumulative royalty yield for licensors of around five percent on mobile handset revenues.” This out of $410 billion in 2014 total cellphone revenues.

In another published report, this expert noted how implementer “interested parties who would like to reduce their licensing costs advocate taking away much of the freedom that parties have to bilaterally negotiate the value of IP and applicable royalties.” This is precisely SERA’s goal.

He added, “Patent licensing agreement negotiations with terms determined bilaterally in a free market have provided widespread access to patented technology for manufacturers while fostering large and increasing R&D investments. Intervention to change the basis for charging royalties with the overt objective of reducing them will be a disincentive to ongoing investment, risk-taking, and SSO participation by technology developers (emphasis added).” Again, such interruption of private negotiation within SDO-contractual terms is SERA’s aim.

Granted, innovators involved in SDOs voluntarily yield some of full free-market dealings with potential patent licensees. They commit up front to license their SEPs on fair, reasonable and nondiscriminatory terms. But that’s not a pledge to license SEPs to all comers.

As the Ninth Circuit ruled in overturning the district court’s opinion if FTC v. Qualcomm, a FRAND commitment doesn’t create a duty to deal, a requirement to license one’s SEPs to any and all competitors. Nor is FRAND a promise to bargain-basement pricing of high-value patents.

Innovators’ competitors are trying yet again to saddle innovators, who took the greatest risks and are most directly responsible for creating foundational technology, to a raw deal. That’s exactly what SERA is and would guarantee.

IRA Sows Seeds of Socialistic Health Policy

“The [Inflation Reduction Act]’s false promises will eventually be proven hollow—and extremely costly,” a recent Locke’s Notebook blogpost warned.

That blog warned about the IRA’s government price-setting (which, if done by private entities, would be called “price-fixing,” a per se violation of antitrust laws) of pharmaceutical prices and its extortionate 95% tax on drug revenues above the inflation rate.

Well, at the risk of tooting CPR’s own horn, we were right.

Several instances of biopharma innovators cutting back or ending promising new drug projects have already occurred. A recent industry survey about the IRA’s adverse effects provides strong evidence that these aren’t merely a few anecdotal moves. The survey finds:

• “78% [of innovative drug firms] expect to cancel early-[stage] pipeline projects.

• “63% said they expect to shift R&D investment focus away from small molecule medicines.

• “95% said they expect to develop fewer new uses for medicines because of the limited time available before being subject to government price setting.

• “82% or more of companies with pipeline projects in cardiovascular, mental health, neurology, infectious disease, cancers and rare diseases expect ‘substantial impacts’ on R&D decisions in these areas.”

Let’s be clear: The climate-extremist, wokeness-advancing, socialist policy, massive wasteful spending package that every Democrat in the 117th Congress voted for and nearly every Senate and House Republican voted against enacted property rights-stomping price controls. Those policies are already causing cancellation of existing drug development, reduction of future R&D on drugs that are often taken orally, curtailment of identifying diseases that existing medicines would combat, and tough decisions on R&D for new drugs that would treat or cure a range of illnesses.

The severe consequences the IRA is inflicting on biopharmaceutical innovation (which relies on massive amounts of private investment capital) are only the toxic firstfruits.

Government-run health systems—complete with government price controls—in Europe have some of the same price controls in place as those in the IRA. European patients bear the consequences most directly and harshly. And European price controls have squeezed so much of the juice from the fruits of biopharma innovators’ labor that it’s driving drug firms away.

Eli Lilly and AbbVie can no longer sustain participation in a 2019 agreement with the UK, the Wall Street Journal notes. Bayer, Bristol Myers Squibb and Bluebird are also reducing their business in European countries. As Bayer put it, the German drug innovator is “deprioritising Europe to some degree.”

Again, the sick and infirm pay the price of these antiproperty-rights policies most acutely. While Americans enjoyed access to 85% of newly launched medicines from 2012 to 2021, Europeans’ government price controls and socialized medical systems dramatically constrained access to new drugs: just 59% of new medicines accessible in the UK, 62% in Germany, 52% in France.

And now, the European Union is loading more bullets into the cylinders of Europe’s Russian roulette pistol. “. . . European governments refuse to pay more to ensure their citizens have access to treatments. Bureaucrats in Brussels are therefore now considering legislation that would reduce intellectual property protection for drugs that don’t launch in nearly all European Union markets. Such a deal: Accept price controls, or Europe will hand IP to the Chinese.”

There’s something even more chilling than the EU’s heavy-handed threat here. It’s that the U.S. politicians who put together or voted for the IRA have sown the very seeds that could eventually kill the innovator goose that lays golden eggs of the treatment and cure variety.

Americans, beware: “Cheap” drugs (i.e., politically dictated, economically constrained private enterprise and property rights) come at a very expensive cost. Just ask the half of European patients whose government health system denies them access to the medicines they need.

O Omnibus Congressional Christmas Tree

A $1.7 trillion appropriations and policy rider package funds the federal government through the remainder of fiscal 2023 and boosts the morally bankrupt “woke” agenda. To call the bill a Christmas tree so close to Christmas is too easy, but apt.

One of the ornaments hanging on the Senate-negotiated FY 2023 omnibus appropriations bill, H.R. 2617, is a gift to antitrust extremists on both sides of the aisle whose broader legislative designs lost steam. The further they advanced, the closer the scrutiny. Those bills ultimately failed.

The expanded version of H.R. 3843's, the Merger Filing Fee Modernization Act, language constitutes Division GG of H.R. 2617. In addition to raising Hart-Scott-Rodino merger fees, the provision also extends access to state venues for federal antitrust lawsuits and requires disclosure of foreign subsidies of companies involved in mergers.

As the Alliance on Antitrust-led letter of this past fall noted, “the Biden administration's Federal Trade Commission and Department of Justice have weaponized merger reviews.” This isn’t the FTC’s first time straying from due process and the rule of law. The new legislative measure provides FTC Chairwoman Lina Khan significant new dollars to disrupt proposed business mergers or acquisitions and to reverse done deals.

Recently, for instance, the FTC has fought such M&A deals as Microsoft’s acquisition of video game developer Activision. This is a vertical merger, the sort that until now hasn’t been considered as having the anticompetitive potential as and being harmful to consumer welfare as horizontal mergers (i.e., gobbling up direct competitors) might be.

The FTC has also challenged DNA sequencer Illumina’s bid to reacquire its spinoff company Grail. Grail is developing a multicancer early detection test that requires DNA sequencing. The tie-up would advance the cancer test’s reaching commercial markets (and not unimportantly, saving lives, improving health and saving or reducing future medical care expenses).

These antitrust enforcement agencies have stepped up the number and scope of merger reviews. They’ve even moved to unwind completed transactions. Their aggressive posture instills greater uncertainty into M&A. Transaction costs rise. Economic and business efficiencies are diminished. And consumers’ interests suffer.

But, hey, what’s the problem with handing antitrust ideologues, already causing explosions in the antitrust space, more dynamite?

Also, H.R. 2617 allows state attorneys general the ability to haul parties into state courts for cases involving federal antitrust law. The state venue provision takes language from H.R. 3460, the State Antitrust Enforcement Venue Act.

As the AOA letter explains, this litigation expansion carries many risks. Instead of advancing unique state interests, it hands political actors opportunities to engage in politically motivated issues using antitrust hammers. “[W]here antitrust litigation involves political gamesmanship, headline-seeking, or exacting big-dollar payouts, increased and duplicative involvement by a larger number of state AGs adds little and can do broader damage.”

State AGs notoriously engage plaintiffs' lawyers, who garner profits at consumers’ and taxpayers’ expense. Judge Richard Posner elucidated the problems with contingency-fee attorneys in state-sponsored litigation, well before this expanded access to state courts. That so many ostensible congressional tort reformers went along with this measure is sobering.

The part requiring disclosure of foreign subsidies in mergers has merit, but could have been enacted as a free-standing bill. It’s the Foreign Merger Subsidy Disclosure Act, H.R. 5639. This legislation aims to shine sunlight on foreign government financial backing of state-owned enterprises or other foreign national champions involved in M&A in the United States.

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It’s worth mentioning what’s not in the omnibus appropriations bill: the Pride in Patent Ownership Act. PPOA became a shattered Christmas ornament on the Senate floor.

All corners of the propatent, proinvention community, including CPR, mounted a full-court press. We warned lawmakers of the harm this bill would have on important aspects of our innovation ecosystem, how PPOA’s process lacks transparency and, as a result, that the bill remains heavily tilted in favor of patent infringers and against inventors and patent owners.

In short, PPOA would have deprived patent owners of the means they have of enforcing their property rights, and it would punish innocent future owners of patents for the recordation shortcomings of past owners. Dodging that bullet is something of a Christmas gift to America’s innovators and owners of intellectual property assets.