Patent monetisation during World War FRAND

Former National Basketball Association star Jalen Rose popularised the expression “You never get what you deserve, only what you have the leverage to negotiate” – a statement that holds particularly true in the context of modern patent licensing. Where a patent owner could once expect others to pay reasonable royalties for practising innovations resulting from its R&D investment, many firms today will decline to pay anything at all unless the risk of not paying is undeniable and significant. The challenge facing patent owners is convincing prospective licensees that infringement is not efficient – that is, that the risk of failing to take out a licence outweighs the benefits of continuing without one.

Further complicating matters is the effect that globalisation has had on patent portfolio management. For some time now, patent strategy has experienced a tug eastward, away from the United States. Once the undisputed world leader in patent protection, the jurisdiction has become less hospitable to patent rights, just as other countries have become more attractive. In addition, global development has given rise to a new segment of potentially attractive targets without significant US exposure.

For these reasons, various global firms have reoriented their patent portfolios around the European Union – particularly Germany – and China, as these forums may offer more attractive venues for enforcement. As the United States transitions from deciding the bulk of patent-related issues to sharing its policy-making authority, many firms are likely to find their hard-wrought strategies for allocating IP resources upended, just as their time-tested strategies for licensing implementers have been.

These trends are particularly pronounced in the field of SEPs. Justice Birss’s 2017 UK ruling in Unwired Planet v Huawei ((2017) EWHC 711(Pat) and 1304 (Pat)) brought to the fore simmering disagreements between and within countries as to the implications of the so-called ‘FRAND commitment’ – the common obligation of a participant in standard-setting to offer implementers licences on terms that are fair, reasonable and non-discriminatory.

Jurisdictions have differed significantly in their definition of this obligation, which is never spelled out in an agreement between a standard-setting organisation (SSO) and a participant. For several years, intransigent implementers have benefited from this inter-jurisdictional disagreement by forcing SEP owners to incur the high cost and risk of worldwide enforcement. Implementers are further emboldened by the belief that FRAND serves as a ‘get out of jail free’ card since a judicially imposed FRAND royalty rate will rarely exceed a rate agreed on without litigation.

Unwired Planet raised the prospect that the United Kingdom could decide international FRAND disputes by itself, setting worldwide FRAND rates and penalising implementers that refuse to take a worldwide licence. Recent rulings have demonstrated that major jurisdictions are unwilling to defer to the judgment of others when it comes to defining FRAND. Nevertheless, the United States, the European Union, the United Kingdom and China are each vying with one another to impose their view of this commitment on the rest of the world.

For the monetisation of significant portfolios, especially those containing SEPs, the foregoing trends call for a global perspective. The key to successful portfolio management is to maximise leverage against targets, given a finite budget. However, this is easier said than done, particularly given that single district enforcement against sophisticated targets is unlikely to yield sufficient leverage to deter efficient infringement.

At present, an enforcement strategy that focuses on the US International Trade Commission (ITC) and Germany – provided that both forums are available – remains the recommended approach for most portfolios against global targets. Coordinated enforcement in these two jurisdictions presents the most credible threat that a recalcitrant licensee’s infringing products will be excluded from significant markets. This in turn provides a compelling catalyst for the recalcitrant implementer to rethink its approach to taking a licence.

The ITC and Germany have also avoided many of the administrative and legal obstacles to enforcement that have arisen in recent years. However, this is subject to change as legal and market circumstances continue to evolve. Top patent strategists should monitor and predict developments worldwide, and allow these, as well as the nature of the portfolio and targets in question, to dictate strategy.

Global trends point east

For years, the United States has dominated the world market for patent investment, offering the most robust IP protection and enforcement mechanisms of any country.

However, recent years have seen the United States’ position as the world’s leading IP venue begin to erode. It has been widely noted that US legislative and judicial reform has made patents generally harder to enforce – at least in the district courts – and, therefore, less valuable. At the same time, jurisdictions such as Germany and China have become more attractive for investment. The number of Chinese-filed patent enforcement actions has skyrocketed over the past five years, while the number of US filings has stagnated.

Underlying these trends are the shifting strengths and weaknesses of the three major jurisdictions.

Figure 1. Litigation filings by year

Strengths and weaknesses

United States

The United States has traditionally been the leader in patent enforcement, albeit one that seems tempted to relinquish its mantle. The predictability of the US system – which boasts the most developed body of case law in the world – helps firms to understand the nature of the US patent rights that they may acquire or license. Further, as the world’s largest economy, the United States is also the world’s largest damages base for many technologies. The mechanisms for enforcement in the United States expand the ranks of those who can enforce.

Unlike many other jurisdictions, the United States awards fees only in extraordinary circumstances. The rules of US civil proceedings also provide litigants with access to liberal discovery, enabling them to prove infringement by means other than inspection. Of course, US practice can be expensive, but in many cases patent owners can avoid bearing the full risk of enforcement. Attorneys commonly take engagements on a contingency or partial contingency basis, and the prodigious US investment sector makes litigation financing available for enforcement.

However, for all its institutional advantages as a forum, the United States has increasingly ceded ground. Paramount among the challenges to its position is the issue of enforceability. A compelling asset must run the gauntlet in many cases before it can be monetised. Since the America Invents Act 2011, district court enforcement will nearly always prompt petitions for inter partes review, which has proved to be effective for defendants and petitioners both as a means of challenging validity and as grounds for staying infringement cases.

Over the past several years, case law has provided additional grounds for invalidity and thereby significantly reduced the value of certain sectors (eg, software patents). Even patent owners that prevail on validity and infringement in district courts have experienced difficulty in collecting damages – the Supreme Court’s eBay decision essentially eliminated the leverage of an automatic injunction while a series of appellate opinions constrained damages awards and increased the quantum of proof needed to support an award.

As an administrative agency charged with, among other things, protecting US industry by directing Customs to exclude articles that infringe US patents, the ITC has become – at least since eBay – the US forum in which the enforcement of patent rights results in the most leverage. The availability of exclusionary relief, the speed of the remedy and insulation from inter partes reviews are all benefits that the ITC enjoys over the district courts.

Although efforts to reduce the ITC’s reach are ongoing, they have not yet diminished its utility. The ITC remains a compelling forum for the assertion of high-quality assets by firms with a well-thought-out execution strategy, first-rate execution and the necessary profile to meet the ITC’s unique jurisdictional requirements.

Germany

Germany is the established powerhouse of European patent enforcement, handling over 70% of all European patent infringement cases. Its success rests on the integrity of the German system and the economic strength of the country. On the structural side, the key advantages of the system are its efficiency, speed and competence – making German enforcement actions an affordable, robust and speedy option, with first-instance proceedings usually being terminated in under 12 months. Invalidity and infringement are handled by different courts, reducing the workload and costs of infringement actions. The court system is run by highly experienced panels of well-qualified judges – each panel handles approximately 120 cases per year. This not only improves the predictability of outcomes, but also generates a breadth of results that helps to shape expectations and practice throughout Europe and beyond. In addition, unlike US district courts, German courts have no discretion when issuing injunctions – patent infringement results in automated injunctions, excluding any balancing of interests.

German injunctions also carry weight beyond Germany’s borders due to the crucial importance of access to the German market. As such, German filings are a key tool for patent owners to motivate pan-European settlements.

The relative weaknesses of the German system are linked to its efficiency; means of discovery are contained, so that an infringer’s best defence is to prevent the leakage of technical information concerning the allegedly infringing product or service. In addition, damages awarded by German courts are modest compared to US standards; therefore, true monetary compensation typically happens outside court proceedings as part of a global or pan-European settlement, using the German injunction as a driving force.

China

China’s progress in the global patent landscape has also been impressive. Just 15 years ago, the effectiveness of its IP enforcement system was hindered by protectionism. Now, with the rise of innovative Chinese global players such as Huawei and Haier, this has all changed. The most recent system upgrade was the establishment of three specialised IP courts in Beijing, Shanghai and Guangzhou in 2014. Their introduction served as a test for a nationwide roll-out of similar courts in the near future and further boosted patent enforcement activity in China.

A few years ago, the German government took on the challenge of fortifying China’s patent system. Today, that investment has resulted in a Chinese enforcement regime that vaguely resembles that of Germany – discovery is limited, while the costs of litigation (although growing) and the average time to trial remain approximately the same as in Germany.

Further similarities between the regimes include that Chinese actions handle infringement and validity in separate proceedings, and Chinese injunctions issue automatically for valid, infringed patents, affording great leverage against the large manufacturing sector – at least in theory. These features, along with the optics that China has cultivated as a rising IP power, have cemented the jurisdiction as a key component in most global portfolios. It has also increased the profile of Chinese patent judges, who are now regularly tapped to share their expertise with global audiences at international IP conferences.

Nonetheless, it is too early to determine whether China will evolve into a globally prioritised or dominant enforcement venue. It must first demonstrate that its enforcement mechanisms are available to all and against all. What is clear is that moving forward, China should be part of a patent owner’s enforcement strategy and, under certain conditions, may be crucial to a multi-jurisdictional execution strategy. However, Chinese patent owners should be aware that injunctions are often the only compelling leverage available to them. Typically, damages awarded by the courts will barely cover the legal fees invested, and speed and efficiency come at the cost of access to discovery. Therefore, opportunities to prove infringement are limited, especially considering that all evidence must be produced in notarised form (as well as legalised form, if coming from abroad). These limits affect the kinds of assets that can realistically be asserted.

In addition, planning an enforcement programme that provides adequate leverage against a target requires careful attention to the nature of the portfolio. Some classes of assets (eg, software patents) tend to fare better in certain jurisdictions. The need to obtain evidence of use to prove infringement can also suggest an approach that does not involve enforcement in some jurisdictions or that delays enforcement until after the assets have been enforced in a jurisdiction with more robust discovery.

FRAND: competing definitions

Most SSOs – particularly those with global reach – require their members to identify essential patents (ie, patents necessarily infringed on implementation of a standard) and offer implementers a licence on FRAND terms. However, what this requirement entails is never made explicit. The underlying economic rationale is that the patent owner and the implementer will mutually benefit from the licensing mechanism; therefore, they will be commercially motivated to negotiate efficiently and in good faith. However, that dynamic has been displaced.

Moreover, because SSOs often bring together SEPs with differing views on the monetary value of their intellectual property, they can rarely offer constructive guidance on the nature of the encumbrance. In the absence of a definition of ‘FRAND’, the courts and administrative bodies have considered the twin policy objectives of the term: ensuring that licensing royalties do not impede the adoption of a standard, while also ensuring fair recompense and continued participation in standard-setting by owners of essential patents. The United States, Germany and China have each struck a different balance.

In the United States, interpretation of the encumbrance has lurched from concern over the fair apportionment of profits due to the technology being incorporated to concern over the potentially market-distortive effects. Early cases such as Microsoft v Motorola and Innovatio focused on the former and took stock of other licences or pool rates in the context of a modified Georgia-Pacific analysis, in order to adduce a reasonable rate given the FRAND context.

In contrast, the recent TCL v Ericsson ruling (which is currently on appeal) considered existing, comparable licences as probative of the non-discriminatory prong of the encumbrance, as well as the fair and reasonable prong. Under traditional Georgia-Pacific analysis, a licence is probative of a reasonable royalty insofar as it demonstrates the value that parties in an actual negotiation placed on the rights to be granted. Thus, the inquiry is the valuation placed on the rights at the time of the previous negotiation. In TCL the court deviated from this reasoning, holding that whether a rate was non-discriminatory depended on the de facto effective rate of existing, comparable licences, as borne out post hoc by actual sales data. Under the TCL formulation, an SEP owner that asks licensors for lump-sum payments bears the risk that sales of affected products will exceed expectations and drive down subsequent FRAND rates. Consideration of market-distortive effects in the derivation of a FRAND rate would bring the United States closer to the prevailing law in China and other Asian jurisdictions.

The ITC has approached the issue of FRAND encumbrances as a matter of institutional competence and contract law. A series of investigations beginning with Certain 3G Mobile Handsets determined that, because a FRAND encumbrance arose as a result of a contract (the agreement specifying the terms of the patent owner’s membership in the relevant SSO), the FRAND defence was another form of contract defence – placing the burden of proof on the party claiming a breach of FRAND obligations. Setting a rate was outside the purview of the ITC; therefore, as far as the ITC was concerned, a respondent’s FRAND defence will fail where the record shows that the complainant bargained in good faith.

The ITC’s approach resembles the German courts’ focus on the mechanical elements of a FRAND negotiation. In Germany, the courts have determined the steps that parties seeking an injunction on FRAND-encumbered assets must take prior to enforcement. These steps include articulating to prospective licensees the patent owner’s basis for concluding that a given offer is consistent with FRAND – particularly, the basis for concluding that the offer is reasonable.

China and various other Asian jurisdictions agree that an offer must provide the basis for the FRAND position; however, until recently, they focused more on the non-discriminatory element of the encumbrance. Multiple antitrust enforcement proceedings against Qualcomm (China in 2015, and Taiwan and Korea in 2017) illustrated that the chief inquiry in deciding a FRAND rate is the impact on the relevant market (ie, that the rate does not advantage one market-participant licensee over another).

More recently, Chinese courts have fleshed out the mechanics of a FRAND negotiation. In a ruling affirmed on appeal with little discussion in April 2017, the Beijing IP Court issued an injunction against Sony for, among other things, failing to negotiate reasonably with SEP owner IWNCOMM. Similarly, in January 2018 the Shenzhen Intermediate People’s Court issued an injunction against implementer Samsung for repeated, unreasonable delays in its FRAND negotiations with SEP owner Huawei.

The global race

The differing interpretations of FRAND advanced by the various countries generally benefit their constituent industries. For instance, China’s renowned and powerful manufacturing sector boasts high volumes but, in many cases, low margins. It follows that the country would orient its understanding of the FRAND commitment on market distortion, as any discrepancy in royalty rates to Chinese competitors is magnified by the sector’s high volumes and could materially affect the low margins. Given each country’s interest in protecting its constituent industries, it is unsurprising that so many countries are jockeying to impose their definition of the term on the rest of the world.

Birss’s ruling in Unwired Planet demonstrates this competition. The FRAND injunction that he created, combined with the prospect of worldwide adjudication in a single jurisdiction, has already begun to attract SEP enforcement to the United Kingdom. In April 2018 the UK court in Conversant Wireless Licensing SARL v Huawei Technologies Co Ltd (16 April 2018 [2017] EWHC 0000 (Pat)) held that the United Kingdom had jurisdiction to determine a global FRAND rate. With this developing line of cases, the United Kingdom is gradually emerging as a key venue for settling FRAND disputes.

China’s efforts to steer the discussion have relied primarily on available remedies and market influence. The National Development and Reform Commission has stepped in multiple times to negotiate FRAND terms on behalf of Chinese industries such as handsets. Chinese courts have also issued two injunctions against implementers that refused to take FRAND licences – given the extent of manufacturing in China and the allure of the Chinese market, the threat of such an injunction carries real risk. As a result, SEP owners have begun to take note and incorporate Chinese enforcement into their strategies.

The United States remains vocal in defining FRAND thanks to the historic reliability of the US legal system. Through Microsoft, Innovatio, TCL and others, US district courts have developed a body of law that adds a measure of predictability to FRAND enforcement proceedings, particularly for SEPs relating to telecommunications standards.

US courts have also asserted their position by staying foreign FRAND actions with overlapping parties and issues. The Shenzhen Intermediate People’s Court injunction against Samsung came amid ongoing US proceedings involving Huawei and Samsung. In April 2018 the US District Court for the Northern District of California – hearing the US matters between the parties – stayed the foreign counterparts, including the injunction issued three months previously. Similarly, the US District Court for the Central District of California stayed worldwide proceedings between TCL and Ericsson while it determined FRAND rates for Ericsson’s SEP portfolios.

For years, US courts have been able to ignore comity and the global nature of SEP enforcement thanks to the jurisdiction’s market clout. While the US market for SEPs remains so significant, the courts can continue to stay foreign FRAND proceedings knowing that their decisions will be respected and followed, despite conflicting with orders being issued by foreign courts with competent jurisdiction. However, it stands to reason that other forums will likely return the favour should the United States ever lose its market position.

Uncertainty begets efficient infringement

The patchwork of approaches to FRAND has complicated efforts to account for the encumbrance; implementers – particularly those based in China – have taken full advantage of this. The dispute between TCL and Ericsson began over half a decade ago and included complaints around the world. Had TCL struck a licence in 2014, when its last SEP licence with Ericsson lapsed, the rates likely would have been in line with those realised in other Ericsson licences. So far, TCL has paid no apparent price for forcing Ericsson to engage in four years of litigation. Indeed, Judge Selna expressly did not derive the FRAND royalty rates that he determined for Ericsson’s portfolio from any of the company’s existing licences (which, for the most part, exceeded the rate that he imposed by a considerable margin). In any event, there is no indication that Ericsson’s significant investment of resources in pursuing TCL will result in a licence (see box-out: Ericsson v TCL).

Nokia and Interdigital have also embarked on worldwide SEP enforcement programmes. Their victories have been somewhat pyrrhic – coming at the cost of significant delays in transacting, tremendous expense and a risk to their portfolios.

Even patent pools have had to account for the international disparities in FRAND approaches. VIA Licensing’s advanced audio coding patent pool successfully licensed nearly the entire addressable market. However, in order to license Chinese firm Xiaomi, in 2017 VIA began to offer an alternative rate structure with discounted rates royalties for sales in China and other emerging markets. Although this achieved good results, the outcome rewarded the implementers’ intransigence.

A global enforcement strategy

Although the global practice of patent monetisation is evolving, it has not yet been upended. Single jurisdiction enforcement is no longer a sufficient response to efficient infringement and the impact of patent reform in the United States. Many firms will find that the best course of action remains a balanced approach, with the ITC and Germany providing natural forums for parallel enforcement proceedings and China offering a possible venue in the future.

The speed of ITC or German proceedings mitigates the risk of invalidity proceedings such as inter partes reviews or nullity actions. Further, the prospect of exclusionary relief can bring an implementer to the table to discuss international sales. For SEP owners, the fact that these forums focus on formalistic requirements for FRAND negotiations, rather than determining a FRAND rate, restricts the opportunity for implementers to quibble over math.

Patent owners should explore how best to exert leverage in parallel proceedings. In many cases, the obvious strategy will be concurrent filings in the ITC and Germany. Coordinating timing, arguments and consistency of execution across jurisdictions is key to success. With the rigidity of the ITC’s schedule and the speed of German court proceedings, cases can be staged to maximum effect and minimal cost.

A well-orchestrated filing schedule that prioritises US litigation – with Unified Patent Court, German and possibly even Chinese filings hitting the scene at the approximate time of the Markman hearing – places almost all worldwide revenue for the disputed articles in jeopardy. It would optimise leverage for reaching global settlement solutions, while allowing litigation costs to ramp up as additional leverage is brought to bear.

To facilitate the coordination of worldwide enforcement campaigns, patent owners around the globe have coalesced on two camps. Under the first approach, the enforcing firm has offices – and therefore expertise – in all major European jurisdictions (mainly Germany, the United Kingdom, France and the Netherlands), as well as optional offices in the United States and China. Under the second approach, the enforcing firm belongs to a confederation of firms in their respective jurisdictions – that is, a well-established, non-exclusive network of equally reputable foreign firms. Under both approaches, technical expertise is essential, as cases will likely require a seamless interaction between lawyers and litigators on the one hand and technical experts and patent attorneys on the other.

The most effective venues

Efficient infringement is central to any modern patent strategy. In a decreasingly US-centric patent landscape, firms should distribute their IP budgets between the United States, Germany and, in some cases, China – despite the discrepancies between these forums.

For the majority of assets, the United States continues to offer the most enforcement advantages.

Following in its wake, China offers an attractive base and a government that is increasingly promoting strong IP rights – although Chinese courts are still perceived as favouring Chinese firms over foreign nationals. Nonetheless, recent decisions such as the Shenzhen injunction against Samsung demonstrate that, in certain circumstances and against the right party, China can be a potent forum – particularly as part of a larger coordinated approach. In these circumstances, China may even provide the most appropriate venue for a first salvo in enforcement.

Finally, Germany offers an attractive addressable market – albeit one that trails the United States and China – and a sophisticated enforcement regime willing to grant injunctions in cases of infringement. However, limited discovery affects the types of case that can prevail there.

Coverage in the three major jurisdictions is preferable, given that the upheaval in the worldwide market has yet to resolve.

During this period of transition, successful monetisation against global firms will require an international approach and a steady hand. Firms should be aware of the various options for enforcement worldwide and their benefits. Top monetisation teams must be skilled at staging and coordinating enforcement in multiple jurisdictions simultaneously and must have global perspective and experience.

Ultimately, the ITC and Germany remain the preferred venues against leading global implementers, despite – or perhaps because of – ongoing changes in patent enforcement. The simplicity of and leverage from the injunctive remedies available in both jurisdictions can drive a licensing discussion on worldwide sales, and neither venue is as susceptible as, for example, US courts to developments that reduce the leverage of patent owners.