On Nov. 29, 2017, the European Commission published its long-awaited guidance (found here) on litigating and licensing standard-essential patents (SEPs). The commission is charged with enforcing the European Union’s competition laws. The communication is part of broader efforts in the EU to bolster European intellectual property rights, and follows a series of similar efforts in the related fields of trademarks and copyrights. In the patent context, readers may also recall the EU’s long push to establish the Unified Patent Court (UPC) — a centralized court for the enforcement of European patents — whose implementation is currently delayed pending ratification by the U.K. and the resolution of a constitutional challenge in Germany.
Driven by a desire to boost internet of things applications, which are predicted to deliver enormous economic gains to developed countries1, the commission set out to provide “a clear, balanced, and reasonable policy” for SEPs in the EU. However, SEP owners and implementers hoping to find in the communication a clear roadmap to fair, reasonable and nondiscriminatory (FRAND) rate determination will find it lacking in that regard. Nonetheless, the guidelines are notable for providing greater clarity on conduct that may insulate a SEP owner from abuse claims under competition law and, conversely, conduct that may increase exposure to such claims. In this respect, the EU stands in sharp contrast to the U.S., where, in January 2017, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice declined to adopt as part of their guidelines any views on anticompetitive behavior in the specific context of SEP licensing and enforcement. In this paper, we compare the U.S. and EU approaches to SEPs in view of recent trends and analyze the implications for rights holders and implementers alike.
Standard-essential patents protect patented technologies that are deemed essential to an industry standard, such as IEEE 802.11, 4G, LTE, 5G, etc. Generally, once the proprietary technology is mandated by the standard, an implementer of the standard cannot produce a standard-compliant device without use of the proprietary technology. Thus, if the standard becomes widely adopted, the SEP owner may achieve a dominant market power that, in many cases, would not exist but for the adoption of the patented technology by the standard. This may create an opportunity for the SEP owner to demand disproportionate licensing terms for, or refuse to license, the technology — a problem generally known as “hold up” — to the detriment of the public interest. In order to address this problem, standard-setting organizations (SSOs), that determine which patented technologies are adopted by these standards, generally require that SEP owners whose patents are mandatory to the standard agree to license the patents to implementers of the standard on FRAND terms.
SEPs that are subject to a FRAND commitment are deemed to be FRAND-encumbered. However, the legal ramifications of a FRAND commitment differ by SSOs (each of which may set the terms of its FRAND commitment) and jurisdiction (each of which interprets each FRAND commitment according to local rules of contract). The confusion is compounded by the fact that the parties seeking to enforce FRAND commitments are usually third parties (e.g., implementers of devices that use the standard) who were not themselves part of negotiating the FRAND agreements (which are between the SSO and the SEP owner). Therefore, the enforcement and licensing of SEPs often implicates global interests, and claims of abuse of market power are pervasive in the context of SEPs, as compared to non-SEPs.
By this communication, the commission aimed to “set out key principles that foster a balanced, smooth and predictable framework for SEPs.” According to the commission, these key principles, which we outline below, are intended to: (1) incentivize the development and inclusion of top technologies in standards, by preserving fair and adequate return for these contributions, and (2) ensure smooth and wide dissemination of standardized technologies based on fair access conditions.
Increasing transparency on SEP exposure. The commission recommends a number of structural and administrative changes aimed at improving the quality and accessibility of SEP information recorded in standard developing organization (SDO) databases, imposing fees and essentiality checks on SEP declarations, and implementing a program for certifying transparency compliance.
Principles for licensing of SEPs. In the licensing context, the commission acknowledges the divergent interests of SEP owners and standards implementers, especially as they relate to valuation of SEPs. To that end, the communication recommends the following SEP valuation principles:
- licensing terms must bear a clear relationship to the economic value of the patented technology (with such value deriving from the technology itself, not its inclusion in a technological standard) while allowing for alternative valuation in cases where the technology has little market value outside the standard or substantially contributes to the success of the standard;
- FRAND valuation should take into account the present value added of the patented technology, irrespective of the market success of the product which is unrelated to the patented technology; and
- to avoid royalty stacking, in defining a FRAND value, an individual SEP cannot be considered in isolation, but instead, must be considered taking into account a reasonable aggregate rate for the standard, assessing the overall added value of the technology.
The communication encourages measures for establishing patent pools and other licensing platforms, to offer stronger essentiality inquiries, clarity on aggregate licensing fees, and one-stop shop efficiencies. The commission notes that it will monitor licensing practices, particularly those relating to internet-of-things applications.
Principles for litigating SEPs. With the stated objective of fostering a predictable enforcement environment for SEPs, the communication focused on the availability of injunctive relief for SEP owners, a hotly debated issue. On injunctive relief, the commission endorses the CJEU’s Huawei v. ZTE decision. Acknowledging that “the possibility to enforce is one of the key aspects of intellectual property rights,” the commission affirms that injunctive relief is available to SEP owners, including nonpracticing entities (NPEs), against a party that refuses to take up a license on FRAND terms. The right to an injunction remains subject to principles of proportionality, an often-used European doctrine of fairness. The communication also lays out several informational and timing requirements for making licensing offers and counter-offers, including that counter-offers must be concrete and specific, and should not merely reject the offer terms as non-FRAND. The commission also notes that a willingness to submit to a third party’s FRAND determination is indicative of FRAND behavior that (presumably) may affect whether an injunction is granted. While the commission endorses the practice of licensing entire patent portfolios, it notes that rights holders cannot require a licensee to accept non-SEPs in order to license SEPs.
While the communication is not legally binding, it is a key pillar in the SEP framework in the EU. Viewed broadly, the guidelines appear to converge, at least on paper, with the consensus in the U.S. regarding the treatment of SEPs, but there are some differences.
First, for SEP owners, the communication adopts safe harbors or defenses that will reduce the antitrust specter over their licensing and enforcement actions, which may ultimately reduce the role of competition law in future SEP cases in the EU. Conversely, for implementers, the communication offers a defense to an injunction if, for example, it can be shown that the licensee is willing to enter into a FRAND license based on terms set by a third party and hasn’t engaged in delays for a tactical advantage. In contrast, the refusal by the key U.S. competition agencies to specifically address SEPs in patent licensing guidelines released just days before the FTC sued Qualcomm2 for anticompetitive conduct based on its SEP licensing practices, raises the stakes for SEP owners and adds fuel to the cacophony created by circuit splits, International Trade Commission (ITC) cases, DOJ and FTC enforcement actions, statements and various business review letters of the agencies.
Second, the EU appears to allow more flexibility in FRAND valuation methodologies than U.S. courts. The communication stresses that “there is no one-size-fit-all solution to what FRAND is,” and that “what can be considered fair and reasonable differs from sector to sector and over time.” While noting that the economic value of the patented technology must focus “primarily … on the technology itself and in principle should not include any element resulting from the decision to include the technology in the standard”, the Commission acknowledges that in some cases, “the relative importance of the technology in the standard compared to other contributions in the standard, should be considered.” This would permit a valuation methodology that attributes to the value of the patented technology some portion of the success of the standard if it can be established that the SSOs picked the technology for inclusion in the standard precisely because of its superiority over alternatives, and that the technology substantially contributed to the success of the standard. The approach taken by the Federal Circuit in its 2014 decision in Ericsson Inc. v. D-Link Sys. Inc., where the court expressly states that “the patentee’s royalty must be premised on the value of the patented feature, not on any value added by the standard’s adoption of the patented technology,” would seem to preclude any such accounting.
Finally, and crucially, the communication makes it clear that a SEP owner, including a nonpracticing entity, does not run afoul of competition laws by seeking an injunction against an unwilling licensee of a FRAND-encumbered patent. Following Huawei, it outlines specific conduct that would provide such insulation effects, with obligations on both the SEP owner (e.g., to provide a concrete detailed offer having specified features) and the implementer (e.g., to provide detailed counteroffer without using delay tactics). On paper, U.S. case law permits a SEP owner to seek an injunction against an unwilling licensee. But the realities are quite different. The chances that a SEP owner would actually be granted such an injunction against an unwilling licensee are much lower in the U.S. than under national laws in the EU. In most U.S. courts’ interpretation, the SEP owner’s FRAND commitment, or even the mere classification of the patent as a SEP, tends to undercut several of the Ebay factors that are considered by U.S. courts in determining whether to grant an injunction. The net effect is that while European national courts may be able to use conduct-driven rules and the threat of an injunction to force good faith negotiations, U.S. judges focus more closely on coming up with the methodology to generate a FRAND royalty and licensing terms as the end goal of the dispute. In view of comments3 made in November 2017 by the DOJ’s antitrust head, in which he highlighted the problems of hold-out and criticized the inability of SEP owners to get injunctions, it remains to be seen whether the tide in the U.S. turns.
Overall, SEP owners and implementers on both sides of the Atlantic agree that the tremendous promises of the digital economy will not come to fruition without enormous investment in reseach and wide adoption of standards that incorporate the best available technology. To achieve that end, it is crucial that the terms are fair and reasonable to both sides. And while SEP owners and implementers may have conflicting views on what qualifies as FRAND, they agree that this is an area that is badly in need of clarity.
1 According to a 2005 McKinsey report cited by the communication, the estimated economic potential of IoT applications in devices will be up to EUR 9 Trillion ($10.6 Trillion) per year in developed countries by 2025
Originally published by Law360 on December 21, 2017.
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