With the aim of promoting innovation, standardizing technologies have often been implemented in the information and telecommunication technology (ICT) industry, for example, DVDs and smartphones. Standard essential patents (SEPs) are patents indispensable to realize certain functions and efficacies set in a standard specification. SEPs are bound to be used when a product adopted to a standard specification is manufactured. Under general SEP agreements, an implementer is allowed to use an SEP owned by a patent right holder participating in a same standard setting organization (SSO). Since the 2010's, there has been a growing number of SEP licensing cases between different types of business entities beyond the ICT industry. An SEP licensing between the ICT and automobile industries is one such example. Technical complexity and wide spread use of standard specifications help boost SEP utilization. According to a study by the Ministry of Economy, Technology, and Industry (METI), the number of SEP declarations in 5G mobile communications standards now reaches a ten-fold increase compared with that of 2G, reaching over 36,000 cases. More than one out of ten companies among the declaration list are Japanese enterprises. In addition, this recent trend has caused a new business model to emerge, which enables an SEP right holder to gain profit from SEP licensing fees. Without any doubt, SEP-related business is becoming robust beyond a single industry.

However, such circumstances have caused various challenges in SEP licensing negotiation. Implementers have likely no choice but to accept unfavorable licensing conditions compared with a regular patent licensing negotiation (so-called "hold-up" issue). On the other hand, SEP right holders are required to comply with reasonable and non-discriminatory conditions in SEP licensing negotiation. Therefore, their SEP enforcement is less likely to be admissible if the negotiation ends up failing to fulfill the conditions (so-called "hold-out" issue). On top of that, licensing fees for an SEP tend to be higher due to the nature that one standard contains numerous patents (so-called "royalty-stacking" issue). These issues have brought about potential risks of legal disputes between implementers and SEP right holders. This article will introduce practical points and challenges in the SEP licensing negotiation.

FRAND declaration

Generally, an SEP right holder participating in a certain SSO needs to deliberately declare their patent essential to a certain standard as an SEP to the organization, and they have to make clear that the SEP license should be carried out under "fair, reasonable and non-discriminatory" (FRAND) conditions in advance of the negotiations. Along with the FRAND declaration, the SEP right holder submits documents concerning licensing of essential claims, which describe the details of the patent in question, aligned with the Intellectual Property Rights (IPR) Policy formulated by the SSO. Under the FRAND declaration, an implementer who seeks for an SEP licensing is eligible to be given an SEP license.

Key considerations in SEP licensing negotiation

As mentioned above, implementers often have no choice but to use SEPs with high amounts of licensing fees when manufacturing their final products. In addition, they face the threat of injunction because the SEP right holder can easily accuse the implementer of allegedly infringing their patent (the issue of hold-up). On the other hand, SEP right holders may fail to retrieve the R&D expenses and any other financial cost for obtaining the certificate of the standard from the licensing profits if the implementer does not negotiate in good faith considering that the enforcement is less admissible. In this regard, the licensing negotiation can go through difficulties (the issue of hold-out).

Hence, please bear in mind the following considerations in the SEP licensing negotiation process.

  1. Faithful negotiation process (how both the SEP right holder and implementer deal with each licensing step)
  2. Subject of the negotiation (for example, would it be possible to choose a supply chain of the final product as a licensee?)
  3. How to calculate licensing fees
  4. Is it discriminatory if licensing rate and licensing fees are changed in accordance with its purpose?

Especially, in SEP licensing between different industries, an SEP right holder would like to conclude a licensing agreement with the final product manufacturer, whereas the manufacturer would like their supply chain to be involved in the negotiation as a licensee. Some experts suggest that the subject of the licensing should be determined upon whether critical features of the patented invention have been contributed to by assemblies of the product or the final product itself. Furthermore, it raises questions whether calculation of licensing fees should apply to a whole price of the product adapting the standard or a price of a certain assembly which may technically contribute to the product (SSPPU: Smallest Salable Patent Practicing Unit). In sum, there is no consolidated reasonable calculation method for SEP licensing fees at this moment.

How to determine that a patented invention is essential to standards (essentiality check for SEPs)

Determining essentiality of the patent often raises controversial between an implementer and an SEP right holder when they enter into licensing negotiation. Since the mean by which the SSO sets a calculation method for licensing fees may violate the Anti-Monopoly Act, the SSO does not conduct an essentiality check and leaves it to the both parties. However, if the parties end up getting involved in a dispute over determining whether the patented invention in question is essential to a patent of the standard, it would be difficult only for both parties to settle the dispute.

This situation urged the Japan Patent Office (JPO) to introduce the "Hantei" (advisory opinion) for essentiality checks of SEPs and to distribute the Manual to practitioners in 2018. "Hantei" is a system in which the JPO makes a public statement on a technical scope of the patented invention in question from its fair and neutral perspectives. The "Hantei" system does not have a legal binding force. Having said that, it makes it easier to settle a dispute at an early stage by swiftly ascertaining infringement or non-infringement with a reasonable cost. "Hantei" takes three months on average and it costs 40,000 JPY, as an official fee to the JPO (as of 2021). For your reference, 21 requests of "Hantei" to patent rights were filed to the JPO in 2019, and more than 20 cases are filed annually.

Essentiality checks for SEPs are judged by a panel of three JPO Appeal examiners with the following points:

Procedure: After a demandant files a request for advisory opinions to the JPO, the demandee replies to the demandant's request, and then, the panel proceeds with the essentiality check. The result of the advisory opinions is publicized.

Judgment criteria: Whether the virtual object product compliant with the standard falls within the technical scope of the patented invention.

Eligibility for filing the request: 1) there is a dispute over essentiality of the patented invention between the parties (demandant/demandee). 2) the virtual object can be identified in a standard documentation compiled by the SSO. Please be aware that virtual objects claimed by multiple SSOs are not acceptable. 3) The virtual object is filed as a request for part of technical coverage of the patented invention.

SEP licensing dispute in Japan

As stated previously, more potential risks of legal disputes have grown out of the complexity and obstacles of SEP licensing negotiation. The following court case illustrates such complexity of SEP negotiation in Japan.

Case number: 2013(Wa)21383

Plaintiff: Imation Corporation (US) (SEP right holder)

Defendant: One-Blue Japan (Japan) (SEP implementer)

Note: SEP right holder made FRAND Declaration.

Judgement Date: February 18, 2015 (Tokyo District Court)

Relevant law: Unfair Competition Prevention Law

[Background]

The Right holder sent notification to three retail sellers which sold the Implementer's products, claiming that the Right holder had the right to seek injunction on the sales and alleging that their sales infringed the SEP in that the Implementer did not conclude the SEP licensing agreement with the Right holder. In response to the Right holder's claim, the Implementer filed a request for injunction of the Right holder's act and requested for compensation to the Tokyo District Court, claiming that the act violated the Unfair Competition Prevention Law and the Anti-Monopoly Law. As a result, the Court admitted the Implementer's claim and handed down its decision that the Right holder had to withdraw their act of notification regarding the patent infringement.

[Grounds]

The Tokyo District Court judged that the Implementer had been willing to receive the SEP license, considering the fact that correspondence between them showed that the Right holder refused the amount of licensing fees proposed by the Implementer and suggested an alternative amount of the fees to the Implementer, and the proposed licensing fees from the Right holder did not fall under "fair and reasonable licensing fees" despite the Implementer explicitly intending to pay the fees. In other words, the Court admitted that Right holder had been in SEP licensing negotiation with the Implementer under the FRAND conditions. Therefore, it is not permissible for the Right holder to execute their injunction right to the Implementer who had been willing to receive the licensing under the FRAND conditions, because it is deemed as abuse of rights. The act as if the Right holder had an injunction right is considered to be notification of falsification of the truth (Unfair Competition Prevention Law Article 2-1-14).

With regard to compensation for damage, at the timing when the Right holder sent notification to the Implementer, there was no definitive legal perspective that construed the SEP right holder's act as abuse of rights. The Court concluded that the Right holder did not have liability and did not need to pay the compensation for damage.

In reference to the above court case, the Japan Fair Trade Commission (JFTC) found that the Right holder was violating the Anti-Monopoly Act, Article 19. However, as the Implementer had withdrawn their Blu-ray Disc sales business in and around December 2015, the JFTC closed its investigation without issuing the Exclusion Order.

International trends on SEP licensing disputes

In Europe and the U.S., a large number of SEP licensing disputes have facilitated fixing the legal framework regarding negotiation in good faith and licensing calculation ratios. In Japan's case, as there are few SEP litigation cases, the JPO reviews the Guidelines accordingly. The IP High Court case between "Apple" and "Samsung" in 2014 is a landmark case giving direction to the following court cases. Since then, the Court has regarded execution of injunction right to the party willing to receive the SEP licensing under the FRAND conditions as abuse of rights. In addition, the JFTC exemplified the cases where SEP enforcement could fall into violation of Anti-Monopoly Act.

Summary

When doing SEP licensing negotiation in Japan, an implementer and an SEP right holder should prudently proceed with negotiation, considering essentiality checks for an SEP patent, who would be the subject for the licensing, and what good faith negotiations would be. It is highly expected that the JPO will revise the Guidelines with more detailed explanations from time to time in order to enhance transparency and predictability of SEP licensing negotiations.

Reference

Materials publicized by the study group of SEP Licensing, METI in March 2021

https://www.meti.go.jp/shingikai/economy/patent_license/pdf/001_04_00.pdf

GUIDE TO LICENSING NEGOTIATIONS INVOLVING STANDARD ESSENTIAL PATENTS published in June 2018 https://www.jpo.go.jp/support/general/sep_portal/document/index/guide-seps-en.pdf

"Manual of'Hantei' (Advisory Opinion) for Essentiality Check" revised in June 2019

https://www.jpo.go.jp/e/system/trial_appeal/document/hantei_hyojun/manual-of-hantei.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.