FRAND – latest developments in US and Europe

Washington District Court establishes list of "Economic Guideposts" for determining FRAND royalty fees for SEP licenses

In Microsoft Corporation v Motorola Inc. the Washington District Court recently issued its findings (25 April 2013) setting out a list of "Economic Guideposts" for determining FRAND (Fair, Reasonable and Non-Discriminatory) terms in relation to royalties paid under licenses issued by Standard-Essential Patent (SEP) holders. This is the first time that a US court has made a determination of FRAND licensing terms for an SEP portfolio license between two parties.

The case concerns a number of Motorola patents that are claimed to be essential either to the IEEE 802.11 wireless networking standard or to the ITU-T H.264 video coding standard. The judge based much of his reasoning on the decision in Georgia-Pacific Corp. v United States Plywood Corp. 318F Supp. 1116 (S.D.N.Y. 1970), which established 15 factors for consideration in determining a reasonable royalty fee in the context of damages in a patent infringement suit. The "Economic Guideposts" are as follows:

  1. Courts should base their assessment of FRAND royalties on a simulated hypothetical bilateral negotiation between the parties (taking the Georgia-Pacific factors into account) as opposed to an ex ante multilateral negotiation at the time of the standard's adoption;
  2. The level of a FRAND royalty should promote widespread adoption of the standard;
  3. The methodology for determining FRAND terms should recognise and mitigate both the risk of "patent hold-up" (where SEP holders demand more than the value of their patented technologies in an attempt to exploit the value of the standard itself) and "royalty stacking" (where multiple SEP holders charge SEP royalties in relation to the same standard);
  4. Consideration should be made of the importance of the patented technology to the standard relative to other patented technologies that are used by the standard;
  5. FRAND royalties should guarantee the patent-holder a reasonable return on its IP-related investment as calculated on the basis of the economic value of the patented technology itself, and not on the incremental value achieved as a result of incorporation of the SEP into the standard;
  6. A comparison of the patented technology to the alternatives that the Standard Setting Organization (SSO) could have written into the standard is a relevant consideration.

The rates ultimately ordered by the court (3.471 cents per unit for Motorola's 802.11 SEP portfolio and 0.555 cents per unit for its H.264 SEP portfolio, totalling roughly $1.8m/year) are much lower than the 2.25% rates offered by Motorola in its initial licensing letters (allegedly totalling over $4bn/year). Judge Robart relied to a large extent on the licence rates offered by patent pools in setting these rates.

European Commission reasons that seeking or enforcing SEP-related injunctions against an alleged infringer can constitute an abuse of dominant position where the alleged infringer is willing to enter into a FRAND licence

The European Commission has sent a statement of objections to Motorola Mobility informing it of its preliminary view that Motorola Mobility's seeking and enforcing of an injunction against Apple in Germany on the basis of its mobile phone standard-essential patents ("SEPs") amounts to an abuse of a dominant position prohibited by Article 102 TFEU.

Motorola Mobility had previously sought an injunction in the German courts against Apple based on alleged infringements of Motorola Mobility's patented technology used in the GPRS standard, despite Apple having agreed to accept and comply with an independent determination of FRAND royalties by the German court.

The Commission has taken the preliminary view that in circumstances where the patent holder has committed to license SEPs on FRAND terms and the alleged infringer has shown itself to be a willing licensee (insofar as it has agreed to accept a binding determination of FRAND terms by an independent adjudicator in the event that negotiations between the parties break down), it could be an abuse of dominant position for the patent holder to then continue to seek injunctive relief against the alleged infringer.

Furthermore, the fact that the alleged infringer intends to challenge the infringement claim (e.g. on the basis of validity or essentiality) should not, in the Commission's preliminary opinion, make it unwilling where it otherwise agrees to be bound by the determination of FRAND terms by a third party. The Commission's preliminary view is that it is in the public interest that licensees should be able to challenge the validity, essentiality or infringement of SEPs, which suggests that contractual terms in licenses prohibiting such challenges may well be abusive.

The Commission is not, however, generally questioning the use of injunctions by patent-holders. The commission emphasises that its preliminary opinion that seeking and enforcing an injunction can constitute an abuse of dominant position is limited to the particular circumstances where the patents concerned are SEPs (where a commitment has been given to license the patents on FRAND terms) and the company against which the injunction is sought is willing to enter into a FRAND licence.

The statement of objections is not final and Motorola Mobility will have the chance to file a response and request an oral hearing, if appropriate, before the Commission come to a final decision on these issues.

Update on the progress of the Unitary Patent and Unified Patent System

The European Unitary Patent (UP) and Unified Patent Court (UPC) are now much closer to reality, although the original proposed start date of early 2014 is now recognised as unachievable. There is a great deal of practical work to be done to establish the court, even once sufficient signatories have ratified the UPC Agreement, which so far they have shown a general reticence to do.

The two Regulations governing the UP – the first establishing the UP via the enhanced cooperation procedure (used due to Spain and Italy's objections to the UP) and the second setting out the translation arrangements – were passed by the European Parliament on 11 December 2012. The UP Regulations are now in force but cannot come into effect until the UPC Agreement has come into force.

The international agreement to establish the UPC, the UPC Agreement, was agreed on 11 January 2013. The UPC Agreement has now been signed by 25 of the 27 Member States (save Spain and Poland) but the Agreement does not come into force until there is ratification by 13 states (including France, Germany and the UK). To date, no signatories have ratified the Agreement. Ireland plans to include the question of ratification in a national referendum. Amends to the Brussels Regulation will also be required before the measures could come into force

The latest UP/UPC developments are

We do not, therefore, expect the UPC/UP system to be functional until 2015 at the earliest.

Having promised to do so in the Queen's Speech at the Opening of Parliament on 8 May, the UK Government has now published an Intellectual Property Bill which will make provision for the implementation of the Unified Patent Court Agreement including the conferring of jurisdiction on any court, or the varying or removal of jurisdiction as required in order to do this. Part of the central division of the Unified Patent Court will be established in London. The London seat of the central division will have jurisdiction over all chemical, life science and pharmaceutical patent disputes.