Technical standards that ensure device interconnectivity and interoperability cover myriad products in the information and computer technology (ICT) space, from smartphones and tablets, to memory devices and cables. Standards are ubiquitous. Among other things, they allow the world’s more than 8 billion mobile devices to communicate with each other and ensure users can access and operate the world’s more than 2 billion computers.
Standard setting organizations, which promulgate technical standards, often require owners of patents covering portions of a standard, called standard essential patents (SEPs), to commit to license their patents on fair, reasonable and non-discriminatory (FRAND) terms.
This year presents fresh opportunities for implementers of standards-related technologies to potentially reduce the cost of entering into standards-related licenses, the burden of resolving SEP-related disputes, and, under certain circumstances, the risk of an injunction. New opportunities exist for SEP owners as well, as standards cover more and more technologies.
For over a decade, SEP owners and standards implementers, whether they are large or small businesses, have wrestled with various challenges relating to licensing SEPs. They have struggled with negotiating licenses, seeking (or avoiding) injunctions, determining FRAND royalties, avoiding discrimination, and seeking recoveries for a SEP owner’s breach of FRAND commitments or the refusal of an implementer to accept FRAND terms. And the landscape has become increasingly complex as standards-related technologies – ranging from wireless and wired communications to video and audio streaming; from block-chain or other security mechanisms to health-data sharing; and from artificial intelligence (AI) to robotics – expand beyond the Internet of Things (IoT) and into other areas. Recognizing this, government agencies around the world have been considering these issues and converging on approaches to SEP licenses and FRAND royalties by focusing on balance, transparency and reasonableness. This convergence sparks opportunities for securing licenses or cross licenses that reflect one’s unique circumstances. However, even with FRAND, not all licenses are created equal.
The United States Department of Justice (DOJ), the European Commission (EC), the High People’s Court of Guangdong, People’s Republic of China and the Japan Patent Office (JPO) have provided guidance on approaching questions relating to SEP licenses. While areas of divergence remain because law, policy, economic considerations and technological maturity differ by country, these regions are converging in many areas on approaches to SEP and FRAND issues.
This convergence, as well as knowledge of regional differences, presents skilled SEP negotiators with new opportunities. Business models, markets and market positions may matter more than ever in approaching SEP and FRAND issues, in part because those similarly situated will generally obtain similar rates and terms under FRAND. Therefore, businesses that can emphasize similarity or exploit differences are well-positioned to obtain more favorable royalty rates and license terms. The expected clarity, transparency and preference for alternative dispute resolution mechanisms, such as mediation or arbitration, also equip parties with additional tools to resolve SEP issues quickly and effectively.
New direction in the United States: balanced interests with fewer restrictions on injunctions
The United States DOJ recently discussed a new approach to SEPs and FRAND, particularly with respect to injunctions (whether to enjoin sales of standards-implementing products in the United States), which the DOJ’s 2013 statement disfavored. In December 2018, the Antitrust Division of the DOJ withdrew its 2013 statement, including its limitation on injunctions in the SEP context. While new guidance is reportedly being developed and is not yet available, on several occasions in 2018 the DOJ signaled its revised view that injunctions should be more available in the SEP context. The contours of this new approach remain to be seen, but the DOJ has emphasized balancing the interests of implementers and SEP owners. By withdrawing the previous guidance that injunctions should not be available in the FRAND context, however, the DOJ’s new narrative seems consistent with its increasing efforts to guard against unauthorized use of U.S. intellectual property rights. Making injunctions more available will likely empower SEP owners, forcing unwilling licensees (who “hold out” on SEP owners by refusing to accept a FRAND license offer) to choose between being excluded from the U.S. market and taking a license to continue selling.
While the new, not-yet-released statement from the DOJ may benefit SEP owners in lifting certain restrictions over injunctions, the DOJ also emphasized the need for clarity, predictability and balanced interests. Additionally, because standard-setting processes frequently involve joint efforts among large players in the same industry who often compete against each other, the DOJ also voiced its concerns over potential collusion among competitors through standard-setting activities. While increasing threats of injunctions would likely put pressure on implementers, an increasing focus on balance, clarity and predictability may also reduce transactional costs for implementers. Therefore, both standards-promoters and implementers must monitor closely the statement the DOJ will release soon and navigate carefully in this new era.
Efficiency drives European Commission’s SEP licensing principles, with new expert group to assist
The EC issued its latest approach to SEPs at the end of 2017 and created an expert group on the licensing and valuation of SEPs in the summer of 2018. The EC approach aims to foster an efficient, balanced, smooth and predictable framework, reflecting its goals to incentivize technological development and widespread use of technology standards.
To increase efficiency and facilitate negotiations, the EC called on standard-setting organizations to improve transparency, quality and accessibility of information relating to SEPs. The EC pointed out that SEP owners often over-declare (declaring patents as essential to a standard when they are not). Generally, such organizations do not assess whether patents are actually standard-essential. This lack of scrutiny can make such declarations unreliable. In addition, most standard-setting organizations provide no platform for searching SEPs or for providing license, royalty, litigation or other SEP-related information. As a result, there are hurdles to transparency in SEP license negotiations. Raising and elaborating these concerns, the EC seems to favor imposing new requirements on standard-setting organizations, which may be in the best position to remove or lower these hurdles.
FRAND license terms may not be universal. Instead the royalty rate and other license terms can differ from sector to sector, region to region, and over time. In fact, FRAND terms may differ from company to company. While FRAND license terms include “non-discrimination,” this applies to so-called “similarly-situated” licensees. Imposing FRAND terms on such entities and thus permitting deviations in FRAND terms among those not similarly-situated, means that SEP holders and implementers can assess the unique circumstances of a particular potential licensee to differentiate it from other licensees. There are, therefore, opportunities to leverage unique circumstances and still arrive at FRAND license terms.
The world is considering, and in many ways, converging on, how to negotiate SEP licenses with FRAND royalties… However, even with FRAND, not all licenses are created equal.
The EC pronounced that FRAND should be determined based on considerations such as efficiency, reasonable expectations of SEP owners and implementers and widespread use of standards. Acknowledging that FRAND terms are frequently disputed, the EC encourages using alternative dispute resolution mechanisms, such as mediation and arbitration, to reduce transaction costs. The EC formed a 15-member SEP expert group in July 2018. That group aims to further assist the EC’s development of SEP license practices, facilitate FRAND determinations and develop additional policies.
Noting that injunctions are governed by each Member State that implements the European Union Directive on the Enforcement of Intellectual Property Rights (IPRED), the EC did not specify any particular test, but suggested that injunctive relief should be effective, proportionate and dissuasive. It also referenced the framework announced by the European Court of Justice (CJEU) in its 2016 Huawei v. ZTE decision. Suggesting that this decision is not the exclusive framework, the EC emphasized the need to conduct a proportionality assessment on a case-by-case basis, leaving substantial discretion to courts.
While patents are secured country by country and can only be enforced in the country in which granted, the EC views worldwide SEP licenses as efficient and compatible with FRAND. However, because patent law, damages doctrines, SEP portfolios and other considerations differ by country, it is not uncommon for a worldwide SEP license to set different rates by country or region. With regional differences, businesses can leverage lower regional rates and license (or cross license) terms that may be unique to their business model and market.
SEP owners and standards implementers have long wrestled with challenges relating to licensing of SEPs. Recognizing that standards-related technologies are expanding beyond the Internet of Things and into other areas, government agencies around the world are considering these issues by focusing on balance, transparency and reasonableness (Photo: AndreyPopov / iStock / Getty Images Plus).
Fault-based approach in China’s 2018 SEP guidelines
China’s High People’s Court of Guangdong also recently issued SEP guidelines. They detail how local courts resolve SEP-related disputes, including how they determine FRAND royalty rates when certain conduct violates China’s anti-monopoly law, and, importantly, the circumstances that will result in an injunction. Like the EU’s approach, China’s guidelines emphasize the balance of interests among SEP holders, licensees and the public in making these determinations.
The China guidelines, however, largely disfavor injunctions. Under the guidelines, courts should grant injunctions only when the implementer is clearly at fault and the SEP holder is not (or is relatively less at fault). Using several example scenarios to illustrate when injunctions are/are not available, the China guidelines offer some clarity on this important issue. These examples suggest that an infringer’s apparent bad faith, or at least some indication of bad faith, must be present to justify an injunction.
To determine royalties, the China guidelines favor a top-down approach by which royalties are computed on the basis of the number of SEP patents an owner has relative to the total number of SEP patents, adjusted by comparable licenses. While the guidelines leave it open for courts to use other methods, the prescribed approach will likely dominate.
New guide from the Japan Patent Office provides neutral, detailed, practical guidance
In June 2018, the JPO issued its guide on SEP and FRAND issues. Addressing SEP negotiations, the guide provides practical guidance for license negotiations, as well as a comprehensive analysis of SEP and FRAND issues and how courts around the world have addressed them. Benefiting from a convergence of decisions and policies around the world on key issues, the guide provides both SEP owners and implementers with a structured framework and an action plan for negotiating SEP licenses. The detailed step-by-step action plans and the JPO’s discussion of the reasoning behind resolving FRAND disputes can be particularly insightful for businesses new to SEPs. While non-binding on Japanese courts, it offers a practical, measured approach for those seeking to understand SEPs, negotiate FRAND and make informed and balanced decisions.
FRAND for one is not FRAND for all
While recent action by government agencies around the world on SEPs and FRAND differ, they also converge on some key areas. Most make FRAND a balanced determination, approach SEPs with an aim for clarity and transparency and seek to help businesses achieve certainty. However, FRAND remains a no-one-size-fits-all or fixed number. As FRAND (“fair, reasonable, and non-discriminatory”) implies, skilled negotiators can creatively leverage their own business, market and product uniqueness. SEPs, FRAND, injunctions and license terms are not just legal issues; they involve well-informed business strategies and competitive decisions. Decision makers familiar with these developments, both the converged views and continued divergence, may be able to reduce transaction costs and come to mutually-agreeable FRAND terms based on their own unique circumstances. Practicality, flexibility and business reality remain critical considerations for pursuing unique, beneficial and smart licenses. FRAND for one is not FRAND for all – at least not anymore.