When technology becomes standard, the owner of that technology is put in a strong position in which it has guaranteed queues of licensees at its door. So it is right that any such owner should not be permitted to abuse that position. On the other hand, the owner may be forced to grant licences that do not reflect its effort and investment in the technology. So, spare a thought for the owner, which may rightly deserve reward for its efforts.

You may have heard about the battles between telecoms giants over the use of technology that is standard in the mobile phone industry. Instead of reviewing the recent examples of such cases in detail, we have answered some key questions below.

How does technology become standard?

In their efforts to harmonise technical aspects of industries, standard setting organisations (SSOs) may specify that compliance with a standard requires the use of certain technology. If that technology is claimed in any patent or patent application, and it is not possible to comply with the standard without it, then that patent will be a standard essential patent (SEP).

Who are these SSOs?

In order to ensure that purchasers around the world are protected from unsafe products and can expect a certain quality in the goods and services they purchase, and for a variety of other sensible reasons (such as maximising operational efficiency), standardisation is an important part of technology dissemination. As such, we look to organisations whose specific purpose is to review industrial practices and develop standards. SSOs fill this role. Looking at a few examples:

  • The European Telecommunications Standards Institute (ETSI) describes itself as ‘a not-for-profit organisation with more than 800 member organisations worldwide, drawn from 64 countries and five continents. Members include the world’s leading companies and innovative R&D organisations’. ETSI is recognised as an official European Standardisation Organisation (ESO) under Regulation 1025/2012 – others include CEN and Cenelec. In its role as an ESO, ETSI produces standards to support regulatory compliance obligations under European legislation. To make life easier for manufacturers and goods/service providers, complying with a particular standard can allow them to benefit from a ‘presumption of conformity’ and the right to use the European CE mark (where applicable).

  • The British Standards Institute (BSI) is the UK’s National Standard Body. It was incorporated by Royal Charter, has a memorandum of understanding with the British Government, and is partly funded by BIS. It acts as the UK member of a number of international and European SSOs, including the ETSI.

Where does FRAND fit in?

Taking the ETSI as an example, it has an IP policy that requires members to disclose IP that is essential to any standard in development and then provide an undertaking that they will grant irrevocable licences on fair, reasonable and non-discriminatory (FRAND) terms. The point of the FRAND obligation is to avoid SEP owners imposing unreasonable terms (eg excessive royalties) on implementers of standards.

The ETSI’s policy excludes any requirement on its members to undertake IP searches, so the identification of essential IP relating to a standard depends on: (a) the SSO’s own due diligence; and (b) IP owners, without any particular searches, knowing whether their technology is referred to in a standard and being members of the SSO. There is scope for essential IP not being identified in the standard development process, which may cause disputes when it comes to implementing the standard.

If an SEP owner agrees a FRAND undertaking with an SSO, who can force the owner to comply?

The only obvious contractual relationship is between the SSO member and the SSO. There is a slight possibility of third party rights in relation to FRAND undertakings (as they are intended to benefit the SSO’s members and the implementers of the standards). However, such an argument probably would have succeeded by now if it was a robust argument. Therefore, it is generally up to SSOs to enforce these undertakings.

In the ETSI’s policy, there is a detailed procedure for dealing with situations in which members or third parties refuse to grant licences under their SEPs. The most significant ramification is that, following various escalations, the SSO could withdraw or amend the standard to find a route around the SEP. While this could be a significant detriment to the SEP owner, if it is not possible (or sensible) then the willing licensee is left without contractual recourse.

It is not clear whether SSOs ever actually try to enforce these undertakings against their members. We expect this is rare since the SSOs depend on input (and funding) from their industry members.

So if it can’t be enforced by anyone other than an SSO, what’s all the fuss about?

Despite a lack of contractual recourse, Article 102 of the Treaty on the Functioning of the EU prohibits undertakings in a dominant position from abusing that position where they have sufficient market power to distort competition. SEP owners can (either deliberately or not) find themselves in a powerful position with respect to a large pool of licensees.

If a person who needs to implement a standard requires a licence under an SEP, there may be no choice but to accept terms put forward by the SEP owner. But if an SEP owner fails to offer terms that a court agrees meets the FRAND requirement, then the owner may be found to have abused its dominant position (assuming it has the requisite market power).

If an SEP owner is not a member of an SSO and did not agree to a FRAND undertaking, it is still possible to breach the prohibition in Article 102 (particularly where the existence of an SEP has been concealed).

How would an SEP owner stop infringement while avoiding being seen as abusing its dominant position?

The recent case of Huawei v ZTE (C-130/13) has provided some clarity on a structure for lawfully negotiating FRAND terms and applying for injunctions where they can’t be agreed. The key steps to note in cases where a FRAND undertaking was made are:

  • SEP owner to notify infringer of the infringement;

  • infringer expresses a willingness to agree a FRAND licence;

  • SEP owner to make a written offer of FRAND terms, specifying royalty rate and calculation); and

  • infringer to respond to offer in good faith, in accordance with commercial practices and without utilising delaying tactics.

If the SEP owner takes its steps and the infringer fails to do so, then the SEP owner will not breach Article 102 by applying for an injunction.

As regards FRAND, the terms ‘fair’ and ‘reasonable’ point towards an objective assessment based on: (a) the normally understood meanings of those words and the purposes for which they are used in this context; and (b) all the relevant facts. However, ‘non-discriminatory’ presents some difficulties since a transparent look at an SEP owner’s pricing may be very difficult to achieve. Certain terms such as a prohibition on validity challenges are easier than others to identify as unfair or unreasonable, but the main difficulty will be determining a FRAND royalty rate.

Looking at the European Commission’s FAQs published after the Motorola v Samsung case in 2014 (case 39985), it is clear that the Commission thinks that courts (other than CJEU) and arbitrators are well placed to set appropriate FRAND royalty rates. Also, the Commission recognises that a ‘safe harbour’ exists for infringers who are willing to be bound by royalty rates determined by a national court or agreed arbitrator.