Photo: Mario Caruso on Unsplash
Policymakers across the political spectrum recognize the vital importance of maintaining the technological leadership of the United States and other liberal democracies in the semiconductor industry. Semiconductors are a mission-critical technology that supports a broad range of industries, including computing, communications, automotive, defense, and many more. In the wireless communications industry, the leadership position of liberal democracies in semiconductors depends on billions of dollars of investments in research and development by a small group of companies that specialize in wireless communications. As shown in a 2022 report by the U.S. Patent & Trademark Office (USPTO), the most active contributors to the development of 5G wireless communications are located in the U.S., Europe, and South Korea, with the exception of Huawei in China.
Many of those companies monetize innovation through a licensing-based business model that disseminates wireless technologies among device producers around the world, promoting the adoption of technology standards that support interoperability in digital markets. The licensing model is anchored in a patent portfolio that generates a royalty stream to fund continuous investment in innovation in advance of each new generation of wireless technology. This began with the launch of 2G technology in the early 1990s that enabled voice and text messaging and has progressed to the current deployment of 5G technologies that can transmit rich streams of information across user-to-user, business-to-user, and machine-to-machine connections in the emergent Internet of Things (IoT).
This licensing-based model for commercializing innovation has sustained the worldwide deployment of wireless technologies and, as I and other contributors explore in a recently published book on innovation and competition policy in the 5G wireless ecosystem, has the promise to do so again in the IoT.
The People’s Republic of China (PRC) has made extensive efforts to achieve technological parity and independence in wireless communications technology. Congressional reports and federal agencies have documented how PRC government entities and PRC-based companies have sought to close the technology gap in semiconductors and other strategic sectors through internal R&D, mandatory and quasi-mandatory technology transfer, patent infringement, or trade-secret theft and other forms of industrial espionage. Notwithstanding these efforts, it appears that PRC-based producers of mobile communications devices have remained at least partially dependent on the wireless technologies developed by leading chip-design firms based in the U.S. and Europe.
The recent article in the Berkeley Technology Law Journal documents and analyzes the strategies undertaken by the PRC to correct its negative “IP balance of trade” in wireless technology through the institutional apparatus of competition and patent law. The highest levels of PRC leadership have called on the country’s courts and regulators to deploy intellectual property law for purposes of securing geopolitical advantage in the global marketplace. Speaking in 2020 to Chinese Community Party leaders, President Xi Jinping reportedly stated: “Intellectual property is a core factor for competitiveness on the international stage, as well as a focal point of international dispute. We need to have the courage and the capacity to stand up for ourselves.”
PRC courts and regulators have taken actions consistent with these geopolitical objectives.
Unconstrained by separation-of-powers or rule-of-law principles, PRC courts and regulators have implemented policies that tend to depress the royalty rates owed by local device producers to foreign chip suppliers and other holders of wireless technologies. These legally determined royalty rates impact market-determined royalty rates negotiated in the shadow of potential judicial or regulatory intervention. Given the size of the China market, these actions can distort pricing in a global market representing billions of dollars annually in IP payment flows. This is mercantilism in the guise of competition law.
How A False Regulatory Narrative Inspired China’s Antitrust Mercantilism
In deploying IP and antitrust policy in the service of geopolitical objectives, PRC regulators and courts have applied concepts developed and promoted by U.S. and EU regulators.
Since approximately the mid-2000s, antitrust regulators and many scholars have argued that the owners of standard-essential patents (SEPs) in wireless communications have incentives and capacities to “hold up” device producers by inflating royalty rates once producers are locked into the standard. Relatedly, regulators and scholars have warned of a “royalty stack” that purportedly leads to high device prices for consumers, threatening to stall market growth and technology adoption. Except for the Department of Justice (DOJ) Antitrust Division during 2017-2020, U.S. and EU antitrust regulators have endorsed these concerns by adopting policies to limit the enforcement and licensing capacities of SEP owners which include the world’s leading innovators in wireless communications technology.
Yet there is one inconvenient fact that has been overlooked by the prevailing policy narrative.
For several decades, real-world markets have failed to conform to these theoretical assertions of market failure. Empirical researchers have found repeatedly that aggregate patent royalty rates in wireless communications markets have held approximately constant throughout the life of the industry, representing a modest single-digit percentage of the device price. These findings should not be surprising given the high adoption rates since the inception of the mobile communications industry. In turn, widespread deployment of wireless technologies has spawned new business models in a wide range of industries, lowering transaction costs and expanding product choices.
Notwithstanding the discrepancy between theory and evidence, U.S. and EU regulators have largely adhered to the patent holdup theory and sought to constrain the enforcement and licensing capacities of patent owners in wireless communications.
In this policy climate, courts in the U.S. and EU have rarely granted injunctions to SEP owners against even adjudicated infringers. Concurrently, regulators have sought to reengineer long-standing SEP licensing practices that efficiently locate licensing at the device level of the supply chain. The constrained property-rights environment in which SEP owners operate shifts bargaining leverage from technology innovators to technology implementers, which often have abundant cash resources and therefore few incentives to enter into a license agreement absent a protracted litigation process. As shown in a recently published paper coauthored with former U.S. Patent and Trademark Office (USPTO) director David Kappos, this regulatory campaign to cure patent holdup has generated conditions hospitable to patent holdout by some of the world’s largest device producers, as illustrated by extended legal disputes in the U.S., UK, EU, and other jurisdictions.
How China Deploys IP and Antitrust Policy in the Wireless Marketplace
The infringer-friendly approach promoted by U.S. and EU regulators has been embraced by PRC regulators and courts when acting against foreign SEP owners in wireless communications markets, which are alleged to have taken “anticompetitive” actions toward local device producers.
During 2013-2015, PRC competition regulators pursued an enforcement action against Qualcomm—a pioneer of the CDMA technology that drove the shift from 2G to 3G and 4G/LTE wireless communications—for “excessive pricing” and other purportedly anticompetitive practices, culminating in a $975 million fine and an agreement to lower royalty rates by adjusting the “base” to 65 percent of the device sale price.
From 2020 to early 2021, PRC courts repeatedly issued “anti-suit” injunctions against foreign SEP owners, which precluded those entities from proceeding with existing infringement litigations in foreign courts against local device producers. Typically, the anti-suit injunctions were issued in response to a petition brought by the local device producer after having been sued for infringement by the SEP owner in a foreign court. In response to this practice—which has ceased for the time being—the EU filed a complaint against the PRC at the World Trade Organization in 2022; a complaint which is still pending. Remarkably, the Office of the U.S. Trade Representative (USTR) filed a submission in this proceeding that largely endorses the PRC’s position that the EU’s complaint addresses matters that fall outside the WTO panel’s scope of authority.
More generally, PRC policymakers have modified and deployed legal doctrines from U.S. antitrust and EU competition law in a manner that favors local device producers over foreign innovators in the licensing of wireless technologies. These policies shift value away from the firms and economies that have sustained innovation in the global wireless marketplace. Three strategies can be observed in China’s strategic deployment of competition and patent law in the wireless communications device industry since the mid-2010s.
First, as illustrated by the action against Qualcomm, PRC regulators have adopted the “excessive pricing” cause of action recognized—but rarely applied—under EU competition law and expanded its scope of application considerably.
Second, PRC courts have adopted methodologies for determining “reasonable” royalties in SEP infringement litigations that tend to result in rates that are substantially lower than the rates set by U.S. and EU courts in SEP infringement litigation. A December 2023 ruling involving Nokia—an SEP owner—and Oppo—a PRC-based device producer— was the world’s first decision on royalties for 5G smartphone technology, and demonstrated that PRC courts often hold that these lower rates apply globally, even when litigation on similar issues is pending in other jurisdictions.
Third, PRC courts and regulators have adopted and expanded the “essential facility” and “duty to deal” doctrines under U.S. and EU competition law. In a 2021 decision, a PRC court applied the essential facility doctrine in an infringement suit brought by the Japanese firm, Hitachi, to enforce patents relating to a rare-earth magnet alloy used in automobiles and other products, effectively imposing a compulsory license over a strategic IP asset to the advantage of domestic producers.
Regulatory Myopia: U.S. and EU Policies on SEP-Protected Wireless Technologies
With some merit, PRC regulators could argue that their SEP-unfriendly policies in the wireless communications industry track the policies pursued by U.S. and EU regulators.
In 2017, the Federal Trade Commission (FTC) brought an antitrust litigation against Qualcomm, resulting in a district court order that purported to apply globally. If implemented, it would have threatened the economic viability of Qualcomm’s licensing-based business model or compelled a sale of the company to a vertically integrated entity that could monetize innovation through a “walled garden” strategy. The lower court’s order was rejected in all respects on appeal.
In 2021, the Biden administration issued an executive order directing agencies to “consider…whether to revise” a policy statement issued in 2019 by the DOJ, the USPTO, and the National Institute for Standards and Technology (NIST), which had recognized the weak evidentiary basis for patent holdup concerns. In 2022, those agencies withdrew the 2019 statement and largely reverted to the previous regulatory position focused on patent holdup risk. While the 2022 statement was withdrawn following criticism from—among others—three past directors of the USPTO, two former heads of the DOJ Antitrust Division, and three former directors of NIST, it nonetheless sent a signal concerning the “weak IP” policy favored by the U.S. administration.
In 2023, the European Commission proposed establishing a government-administered royalty determination process for SEP-protected technologies in communications, automotive, and other industries encompassed by the IoT. If implemented, this proposal risks devaluing the wireless technologies developed by U.S. and EU-based companies that lead in chip design. Moreover, this proposal overlooks the market’s demonstrated capacity to develop licensing-based solutions in IP-intensive markets, as reflected by extensive cross-licensing arrangements that have operated for decades in the electronics industry (as I have documented) and the Avanci platform for SEP licensing in the automotive market.
USTR has expressed no view on the EU proposal and—as noted previously—has effectively opposed the EU’s challenge to PRC courts’ use of anti-suit injunctions in SEP litigation. Without initiative by U.S. agencies to advance a more balanced policy trajectory, the EU proposal could give rise to a “Brussels effect” in which European regulators set a de facto global standard for regulating SEP licensing in wireless markets. In September 2023, the USPTO, NIST, and International Trade Administration issued a Request for Comments on U.S. firms’ participation in standard-setting processes. In submitted comments, the Information Technology & Innovation Foundation observed that the EU proposal may provide a template for PRC regulators to establish a similar mechanism, which could then be used to influence SEP royalty rates for protectionist purposes.
The Geopolitical Consequences of Antitrust Overreach
Policymakers have paid insufficient attention to the geopolitical consequences of antitrust overreach. Most infamously, the breakup of AT&T in the early 1980s—an otherwise laudable intervention—failed to address how to preserve Bell Labs, resulting in the effective dismantling of a crown jewel of the U.S. technology ecosystem. Currently, the geopolitical effects of antitrust policy are especially salient as the U.S. and its liberal democratic allies seek to preserve leadership in foundational technologies that underlie strategically important industries. Policies developed and promoted by U.S. and EU regulators have provided a template for PRC courts and regulators to deploy competition law for mercantilist objectives that distort wireless technology markets. These policies lack a sound empirical basis, shift economic value from innovators to implementers, and over the longer term, endanger the licensing-based infrastructure that underlies the wireless-enabled tech ecosystem.
Jonathan M. Barnett is the Torrey H. Webb Professor of Law at the University of Southern California, Gould School of Law. This contribution is based on his article, “Antitrust Mercantilism: The Strategic Devaluation of Intellectual Property Rights in Wireless Markets,” in the Berkeley Technology Law Journal (2023). He is the author of Innovators, Firms, and Markets: The Organizational Logic of Intellectual Property (Oxford 2020) and the co-editor (with Sean O’Connor) of 5G and Beyond: Intellectual Property and Competition Policy in the Internet of Things (Cambridge 2023).