The area of standards, and licensing of Standard Essential Patents (“SEPs”) on “fair reasonable and non-discriminatory terms (“FRAND”) is alive as ever. There are developments in three jurisdictions:
- On December 6, 2021 the U.S. Patent & Trademark Office (USPTO), the National Institute of Standards and Technology (NIST), and the U.S. Department of Justice, Antitrust Division (DOJ) issued a Draft Policy Statement On Licensing Negotiations And Remedies For Standards-Essential Patents Subject To Voluntary F/Rand Commitments. The draft Statement reflects an attempt to move away from the pro-SEP owner views of the previous administration, and find a middle ground. They invite comments by February 4, 2022.
- The very next day, the UK Intellectual Property Office IPO issued a Call for Views on the same topic, with an associated press release. The UK deadline is March 1.
- DG Comp of the European Commission just finished its first round of consultations on standardization agreements in the context of the review of the Guidelines on application of EU competition law to agreements between competitors (the “Horizontal Guidelines”). The European Commission’s Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs (DG Grow), moreover, had a series of discussion rounds earlier this year and is expected to start further consultations about new rules for SEP regulation
- The Japanese Patent Office announced they will update its 2018 SEP licensing guidelines in 2022, as well.
Those familiar with standard-setting may skip this section, which provides a high-level introduction. Standards are important, especially in the technology area, including (but not only) to ensure interoperability in mobile telecommunications. In the last 30 years, debates have raged between SEP owners, who complain of not being paid enough for patented technology used for standards, and implementers, who argue that they are being “held up” and overcharged.
Competition law is one tool to resolve these disputes. Before adoption of the standard (“ex ante”), patented technology would normally compete with alternative technologies. This constrains royalties, normally to the incremental value that the patent portfolio adds to the implementer’s product over and above the value added by the next best alternative.
Standard setting agreements disrupt this inter-technology competition, while creating new opportunities. When specific solutions are picked for a standard, and the standard is successful, alternatives are excluded. As a result, owners of the chosen patents get a double dip advantage: the standard creates potentially huge new demand, and in addition may allow them the power to exclude rivals downstream, or charge supra-competitive royalties. By seeking an injunction, SEP owners can exclude rivals from downstream markets – threatening a potential total loss of revenues and market share downstream, even if the SEP is one amongst many complementary patents reading on one tiny component amongst many.
To address this problem, competition law allows standard setting agreements on the condition that SEP owners give “an irrevocable commitment in writing to offer to license their essential IPR to all third parties on [FRAND] terms”. Standards bodies adopt IPR Policies reflecting this principle.
But what if SEP owners and potential licensees do not agree what FRAND means? This is often the case, giving rise to high-profile litigation on various continents at the same time, such as the TCL/Ericsson case. It is not unusual that the same opponents litigate in Germany (sometimes in three different courts, and invoking both SEPs and non-SEPs), the UK, the US, and China, with an antitrust complaint or two and a US International Trade Commission complaint thrown in for good measure – to obtain injunctions, challenge validity and infringement, and/or to determine royalties. The process can be very costly. And the outcome is often a settlement reflecting not the FRAND value of the technology, but who has maneuvered most strategically to put the most pressure on the other, or exhaust them.
One approach is to curb injunctions under patent law, in cases where monetary damages and setting FRAND royalties are a more proportionate remedy. This is the approach taken in the eBay case in the US and in some common law jurisdictions, and in Article 3 of the EU IPR Enforcement Directive. It is the right thing to do for SEPs, since SEP owners have promised to license on FRAND terms, so long as the licensee is willing to pay FRAND rates.
Another approach is to assess whether the SEP owner and implementer are “willing” to enter into a FRAND license, and to render judgment in favour of that party. This is what the EU Court of Justice (CJEU) did in Huawei/ZTE, based on competition law. The SEP owner has to give adequate notice – alert the infringer and offer a FRAND license – and if it doesn’t, an injunction is denied. This gives the implementer the opportunity to show willingness. The implementer should respond by stating its readiness to accept FRAND terms, whatever they are – and if it doesn’t, an injunction can be granted. Both holdup and holdout are discouraged.
Negotiation sequence pursuant to the Huawei/ZTE judgment
Although this judgment has helped, there is a multitude of open issues, some of which are covered by the upcoming consultations:
- Is Huawei/ZTE merely a safe harbour for a SEPT owner to determine whether an injunction is an appropriate remedy for SEP infringement? Can an injunction be issued without review of whether the SEP owner’s offer is FRAND, simply on the ground that an implementer’s initial offer is at first sight not FRAND (as was suggested in SISVEL/Haier), or should the process start with the SEP owner’s offer?
- Can a party be recognized as a “willing” licensor or licensee even if it has not made a specific offer, but declared a willingness to have the rate set by the Court or by an arbitral tribunal? Should that be a rate set worldwide, by an international arbitral tribunal? Should countries accept that a foreign court sets royalty rates for licenses in their territory paid by local licensees for local sales? Should anti-suit (and anti-anti-) injunctions from other courts be accepted to protect those courts’ ability to decide the dispute?
- Given the dispersion of SEP ownership, are their ways to improve transparency in the market? How to encourage efficient patent pools so as to lower transaction costs and the risk of prohibitive royalty stacking (the imposition of royalties by individual SEP owners regardless of royalties demanded by complementary SEP owners)?
- Are “joint licensee groups” allowed to negotiate together, to ensure a level playing field where they all get a license on non-discriminatory terms, and to lower transaction costs? If so, what conditions apply?
- What is a FRAND royalty? Should royalties be calculated based on a review of comparable licences, an incremental value analysis, or a top-down analysis (and if so, how is the reasonable royalty stack determined). Should the incremental value of the technology be determined at the level before the standard was set (“ex ante”), or should SEP owners share in the value created by the standard? Should royalties for the same technology be different depending on how (or in what end product) it is used?
- Should the royalty for a SEP that is substantially embodied in a component be based on the price of the end-product, or the price of the ‘smallest saleable patent practicing unit’?
- Are component manufacturers entitled to a FRAND license, or are SEP owners entitled to refuse such a license upstream so long as they license the maker of the end-product?
- Is a SEP owner entitled to charge different royalties to different licensees? Are justifications other than “fire sales” or “early bird discounts” acceptable under the non-discriminatory prong of FRAND? To what extent can a cross-license or reciprocal license be imposed, on royalty-bearing or royalty-free terms? Should license agreements be published, so as to create transparency to avoid discrimination and allow comparison of terms?
The US Consultation
The US consultation focuses on remedies. The US agencies last issued a Policy Statement on this subject in 2019, advocating the position that disputes on licensing should be resolved under patent law and contract law, rather than antitrust law, and that injunctions are the norm. In spite of the special situation of SEPs, it argued for “rejection of a special set of legal rules that limit remedies for infringement of standards-essential patents subject to a F/RAND commitment.”
This approach was reflected also in the judgment of a Ninth Circuit panel of August 11, 2020, reversing the District Court for the Northern District of California’s judgment in FTC v. Qualcomm, Inc. The panel held that Qualcomm’s conduct—(a) refusing to license its SEPs to rival chipset manufacturers; (b) refusing to supply chipsets to OEMs unless they first executed a license to its SEPs (“no license, no chips”); and (c) making exclusivity payments to Apple—was not anticompetitive. This was in spite of the District Court’s conclusions that Qualcomm had monopoly power in the markets for code division multiple access (CDMA) and premium long-term evolution (LTE) cellular modern chipsets.
The panel’s opinion remains controversial, given the tension between it and several precedents, including some that impact broader antitrust law, and given the messy history of the litigation, in which the District Court adopted an unusual theory different from the FTC’s, and the DOJ intervened to oppose the FTC.
The 2021 Draft Statement charts a new course, attempting to find a middle ground between the position of SEP owners and implementers. While the 2019 Policy Statement stressed injunctive relief to address infringement of SEPs subject to FRAND, the 2021 Draft Statement states that “monetary remedies will usually be adequate to fully compensate a SEP holder for infringement.”
Injunctive relief is rarely available. Quoting Apple Inc. v. Motorola, the 2021 Draft Policy states that in applying the eBay framework, “[a] patentee subject to FRAND commitments may have difficulty establishing irreparable harm” where it has agreed to widely license. The availability of monetary damages and the public’s interest “in ensuring SEPs are not overvalued” further weigh against injunction.
The 2021 Draft Statement counsels that injunction should be limited to situations where an implementer is unwilling or unable to enter a FRAND license. It proposes that a potential licensee should be deemed willing (and therefore not subject to injunctive relief) “if it agrees to be bound by an adjudicated rate determined by a neutral decision maker; if it reserves the right to challenge the validity, enforceability, or essentiality of the standards-essential patent in the context of an arbitration or F/RAND determination; or if it reserves the right to challenge the validity or essentiality of a patent after agreeing to a license.” It also counsels that the FRAND commitment be taken into account in awarding damages for patent infringement, limiting enhanced damages for willful infringement to “acts in bad faith.”
Promoting good-faith negotiations. The 2021 Draft Statement encourages SEP holders and potential SEP licensees to engage in “good-faith” negotiation to reach FRAND licensing terms, consistent with the Huawei/ZTE framework established by the European Court of Justice.
- The SEP holder should alert a potential licensee of specific SEPs being, or to be, infringed; explain how they are being, or will be, infringed; and make a good-faith FRAND offer. And while parties may choose to negotiate reciprocal cross-licenses covering SEPs and non-SEPS, negotiations “should be free of coercion, such as requiring the licensing of non-SEPs or withholding the sale of a party’s product.”
- The potential licensee should respond to such notice and offer within a commercially reasonable amount of time in a manner advancing negotiations. This may include (1) accepting the offer; (2) making a good-faith counter offer; (3) raising specific concerns with the offer’s terms, including the validity and infringement of the patents; (4) proposing that a neutral party resolve contested issues; or (5) requesting more specific information to evaluate the offer.
- The SEP holder should similarly respond to the potential licensee within a commercially reasonable amount of time in a manner advancing negotiations. This may include (1) accepting the counteroffer; (2) addressing concerns and making a new offer; (3) responding to a request for information; or (4) proposing a neutral party resolve contested issues.
Addressing the potential for SEP holders to extend market power. Finally, the 2021 Draft Statement seeks to address concerns about the potential for SEP holders to extend their market power beyond an appropriate scope, as raised in the July 9, 2021 Executive Order Promoting Competition in the American Economy, stating that a patent holder’s FRAND licensing commitment is a commitment “that it will not exercise any market power obtained through standardization.” In exchange, the SEP holder gains access to a potentially large market though its inclusion in a successful standard.
Comments on the Draft Statement are sought by February 4, 2022.
The UK consultation proceeds in collaboration with the EU and the US, but is much wider than the US consultation. It covers almost all aspects of SEP patent enforcement and licensing policy. The IPO asks a series of general questions to find out “what [Government legislative, regulatory, or enforcement] actions or interventions would make the greatest improvements for consumers in the UK?”
This UK consultation should be seen against the background of the UK Supreme Court’s (UKSC) judgment in Unwired Planet v Huawei. The UKSC held that (a) UK injunctions are normally a proportionate remedy for SEP infringement by licensees unwilling to take a worldwide license, even if the infringer is willing to take a UK license on FRAND terms, and (b) an English court can set the royalty rates and terms, for licenses worldwide. This put UK courts on the map, increased their attractiveness as a forum to resolve disputes, but also encouraged other jurisdictions such as China to follow suit. In the end, it complicated the landscape worldwide, with various jurisdictions now competing for a determinative role.
Unlike the US consultation, it is hard to discern a sense of direction from the IPO’s questions. The IPO emphasizes the role of patents driving innovation, while recognizing the possible restriction of competition from restrictive licensing practices hindering innovation, and even SEPs’ potential to serve as barriers to diversification in procurement of telecommunications equipment – largely developed and produced in the China, the US, and the EU. There is an implicit suggestion that excluding, say, leading Chinese firms from telecommunications procurement for security reasons, may make these firms more dependent on SEPs licensing revenues, and therefore more likely to use SEPs to extract higher royalties.
If there is one theme that can be derived from the IPO’s questions, it is a worry that the market for SEPs is inefficient, with great uncertainty, and high transaction and litigation costs. The IPO seeks comments about ways to make markets and transaction more efficient, for instance by patent pooling, or improving transparency in ownership, validity, and essentiality of SEPs. The consultation asks about examples of over- and under-declaration of SEPs, whether this is a problem, and if it is, whether it could be reduced by essentiality checks. The IPO has concerns about lack of transparency of pricing and asymmetry in information. Licensing terms tend to be confidential, which means that SEP owners are advantaged in negotiations, comparisons are difficult, and discrimination could ensue. In light of these concerns, the IPO asks whether competition law is effective in curbing market power in practice, or whether additional measures should be adopted.
A series of questions on “frameworks” makes detailed inquiries about effectiveness of litigation and remedies for patent infringement, including FRAND injunctions, examples of holdup and holdout and royalty stacking, the territorial scope of remedies, and whether courts should establish global portfolio licensing rates. In that context, questions also arise regarding the impact of anti-suit injunctions by implementers, and anti-anti-suit injunctions by SEP owners. The IPO asks respondents to consider whether emerging technologies like the Internet of Things warrants a revision and redesign of the FRAND licensing ecosystem, whether it may be more efficient to set royalties higher in the value chain (on components rather than end-products), and whether there are alternative ways to address disputes on pricing mechanisms. For instance, should the Government more forcefully encourage Alternative Dispute Resolution, including arbitration and mediation?
Answers to the Call for Views are sought by March 1, 2022.
We should expect intense debate and a range of strongly held views in the parallel consultations in the US and UK, and the forthcoming further consultations in the EU. It remains to be seen whether meaningful improvements will be made in the UK and EU. Based on thirty years of participation in strategizing, litigation, complaints, negotiations, and debates on SEPs and FRAND, we think the best solution may be twofold:
First, to apply meaningful proportionality principles to injunctive relief in SEP cases, in the US in accordance with the eBay case law, and in the EU in accordance with Article 3 of the IP Enforcement Directive. This requires effective change, in particular in Germany, where patent law was amended to reflect proportionality principles, but so far only lip service is paid to it.
Second, to give both parties a real incentive to come to the table and negotiate. Parties are more likely to do that, if they know that absent agreement, the terms are set by a court or tribunal. The rules should therefore reward parties who offer this, and who refrain from protracted litigation and strategic positioning. Such a reward could be that an irrevocable offer to have the rate and key terms set by an independent tribunal, court or expert in accordance with a reasonable procedure creates a rebuttable presumption that the party is a “willing licensee or licensor” for purposes of whether an injunction can be granted on the basis of a SEP, provided that the party does not refuse to disclose relevant past agreements. As explained in more detail here, such a system could help solve the endless FRAND disputes, and end both hold-up and hold-out.
 Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (“Horizontal Guidelines”), OJ C 11, 14.1.2011, para. 3. See, also, U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (2007), 38 (“A holder of IP incorporated into a standard can exploit its position if it is costly for users of the standard to switch to a different technology after the standard is set.)
 See M. Dolmans, Standards For Standards, Fordham International Law Journal 26 (2002) 163-208, 191-192, https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=1867&context=ilj.
 Horizontal Guidelines, para 283.
 Horizontal Guidelines, para 287. See, also, UKSC 37, at 10 (the ETSI IPR Policy “clearly reveals a policy of preventing the owner of an Essential IPR from “holding up” the implementation of the standard.”).
 757 F.3d 1286, 1332 (Fed. Cir. 2014), overruled on other grounds by Williamson v. Citrix Online, LLC, 792 F.3d 1339 (Fed. Cir. 2015) (en banc).
 Unwired Planet v Huawei,  UKSC 37, 26 August 2020, on appeal from:  EWCA Civ 2344 and  EWCA Civ 38.