The Japan Patent Office (JPO) published a 56-page “Guide to Licensing Negotiations Involving Standard Essential Patents” (“Guide”) on June 5, 2018. The Guide provides an overview of licensing negotiation processes and royalty calculation methods based on the latest case law and legislative developments mainly in the United States, Europe, and Japan. Cases referred to include Microsoft v. Motorola (U.S.), In re Innovatio (U.S.), TCL v. Ericsson (U.S.), Huawei v. ZTE (E.C.J.), Unwired Planet v. Huawei (Eng.), Apple v. Samsung (Japan). Although this Guide is not legally binding, it could be a useful reference tool for practitioners who engage in the licensing of FRAND-encumbered, de jure standard essential patent (“SEP”).
The publication of the Guide was a part of the JPO’s efforts to provide a simple mechanism through which interested parties could swiftly resolve SEP disputes. The initial plan was to introduce an alternative dispute resolution mechanism. However, in light of the opinions of key industry organizations such as the Japan Business Federation (Keidanren), the JPO subsequently reshaped its plan into a scheme with two parts. The first is the expansion of the advisory opinion system under the Patent Act Article 71 to enable the JPO to render a non-legally binding advisory opinion (“hantei”) of the essentiality of an alleged SEP, and the second was the publication of guidelines on SEP licensing negotiations. The latter has materialized into the Guide, after being renamed from “guidelines” to a “guide” to emphasize its non-binding character, according to JPO Commissioner, Naoko Munakata. The Guide was aimed at supporting non-routine players in the SEP licensing market, such as companies from industries that were traditionally not implementing SEPs and small-and-medium-sized enterprises to become able and effective negotiators in the market.
The Guide reflects voices of relevant industries and experts. In formulating the Guide, the JPO twice called for public proposals and comments, once between September and November of 2017 and another between March and April this year. Around 50 companies, industry organizations, practitioners, and experts from all over the world sent comments to the JPO for each round, and the resulting Guide was finalized and published earlier this month.
Guide to Licensing Negotiations Involving Standard Essential Patents
To comply with the so-called FRAND conditions, a licensing agreement must be, procedurally and substantively, fair, reasonable, and non-discriminatory (“FRAND”). The first half of the Guide concerns the procedural aspect: it mainly introduces international legislative trends and case law regarding the behavior of both the SEP holders and implementers of the relevant standards during the licensing negotiation process. In many jurisdictions, implementers must act “in good faith” to avoid injunction; therefore, the critical question has become what acting in good faith means. To clarify the good faith standard, the Guide lays out key points on which foreign and domestic courts have focused when deciding the willingness of the parties to reach an agreement on FRAND terms. In addition to the discussion on good faith, the Guide provides tips to conduct efficient negotiations, including the use of pool licenses and the protection of confidential information, among others.
A noteworthy characteristic of this Guide is that it addresses SEP issues that are of particular relevance to Japanese companies. For example, the Guide dedicates a significant amount of pages to choosing the negotiation counterparty in the supply chain. The Guide points out the risk that end product manufacturers such as automobile companies could be forced to negotiate SEP licensing agreements against their wish to avoid taking part in the negotiations.
The second half focuses on the substantive aspect of the agreement and summarizes royalty calculation methods. It explains the common practices of calculating a reasonable and non-discriminatory royalty that would be considered FRAND-compliant, such as the bottom-up approach and the top-down approach. However, it did not lay down any rules on which calculation method should apply where competing methods exist.
- Quick Overview of Worldwide Cases: The Guide is a resource from which practitioners could learn recent global legislative, case law, and regulatory trends. It mainly refers to cases from Japan (e.g., Apple v. Samsung), the United States, (e.g., Microsoft v. Motorola, In re Innovatio, and TCL v. Ericsson), and Europe (e.g., Huawei v. ZTE (E.C.J.), Unwired Planet v. Huawei (U.K.)), but a Chinese case (Huawei v. Samsung) was added after the second round of public comments.
- Practical and To-be-updated: The Guide is accompanied by the 82-page long, detailed list of English public comments and English responses from the JPO thereto, as well as a 41-page long list of Japanese comments and Japanese responses thereto. The JPO plans to provide updates to maintain the currentness of its content.
- Neutral and Non-legally binding: The Guide aims at providing a neutral and non-legally binding overview of the rules on SEP licensing both at home and abroad for both prospective licensors and licensees. Prospective licensors and licensees should use this Guide as a supplement to the legal advice of competent experts.