Rights holders need to keep faith in standard-essential patents

Despite uncertainty over the value of standard-essential patents, careful analysis of major patent markets around the world shows that they can still pay off for rights holders

Standard-essential patents (SEPs) and fair, reasonable and non-discriminatory (FRAND) licensing commitments are a hot topic of discussion in patent circles right now. As courts and policy makers around the world stake out their positions, there has been a tremendous amount of debate about whether there is still value in SEPs. Views vary globally, which is to be expected given that they reflect localised interests. Nonetheless, despite a general perception that there has been a global devaluation of SEPs, the reality is that government policy and case law from around the world are maintaining and even increasing the value of SEPs. However, it is critical that owners of SEPs follow the correct procedures when attempting to benefit from these value-creating policies and precedents.

This article provides an overview of policies and court decisions in three major global jurisdictions: the United States, the European Union and China. Each takes a different approach to enforcing and licensing SEPs. In the United States, the courts have promoted an environment where a quantitative analysis is necessary to determine the value of SEPs and injunctions are nearly impossible to obtain. In the European Union, a policy-driven process has developed whereby SEP owners must follow a specific flow of actions and responses in order to maintain their ability to enforce and license their SEPs. In contrast to the US system, injunctions are readily obtainable, provided that rights holders abide carefully by the process. Finally, as a net user of technology, China takes an almost diametric view of SEPs, with policy makers focusing on protecting the ability of the country’s significant manufacturing base to produce goods, rather than on SEP owners being paid licence fees.

Although it is inherently challenging to define a FRAND rate for an SEP and views may differ around the world, the US Federal Trade Commission (FTC) – citing the decision in Georgia-Pacific – believes that such a rate results from a hypothetical arm’s-length negotiation between a licensor and willing licensee before significant technological implementation by the licensee. According to the FTC, the other 14 Georgia-Pacific factors should be used merely as categories of information potentially relevant to predicting the outcome of such negotiation. RAND (ie, dropping the ‘f’ for ‘fair’) terms are also commonly used to describe licensing commitments for SEPs.

United States

Under the US system, pure policy makers on SEP issues have limited ability to control behaviour. It is primarily through investigations by the FTC, the Department of Justice (DOJ) or the International Trade Commission (ITC) that a particular administration can affect actions related to SEPs and FRAND terms. While the FTC has the power to levy substantial fines for what it determines to be violations, major FTC investigations remain rare. The ITC has the ability to impose exclusion orders and bar infringing goods from entering the United States – although in practice, the ITC functions more like a legal proceeding. Instead, particular administrations can take a position through the presidential veto power – exercised by the Office of the US Trade Representative (USTR) – by deciding whether exclusion orders are appropriate.

Despite somewhat limited influence, at least when compared to the judicial system, industry is still spending a significant amount on lobbying and trying to influence policy – as demonstrated by a recent letter from 15 technology and automotive companies to President Trump urging him to take action on SEPs, as well as numerous briefs filed in support of the FTC’s investigation into Qualcomm’s licensing practices. The FTC and the DOJ agree that SEPs have substantial value globally in facilitating product interoperability, reducing consumer and producer costs, and promoting innovation within and without a standard. As long as SEPs are licensed on FRAND terms and injunctive relief (eg, exclusion orders) is sought in limited circumstances only, US regulatory policy will likely continue to support standard setting and SEPs in general, despite the potential for abuse by SEP owners.

The availability of injunctive and exclusionary relief for SEPs has been a hotly debated issue in recent years. According to a joint policy statement published by the DOJ and the US Patent and Trademark Office (USPTO) in 2013, such relief may be appropriate in certain situations. For example, such relief is appropriate where an implementer of a standard is unable or unwilling to take a FRAND licence (eg, it refuses a court or arbitrator-determined FRAND rate or disregards negotiations). However, it is still questionable whether such relief is appropriate where there is disagreement over the reasonableness of licensing terms or where the implementer is allegedly attempting to hold out (ie, to delay payment).

On the other hand, the DOJ and USPTO agree that injunctive and exclusionary relief is inappropriate if it is used as a tactic to pressure implementers into accepting onerous terms. Terms are onerous where they go beyond the scope of entitlement under a FRAND commitment or where an implementer has refused to negotiate, despite being able to.

Although, in theory, injunctive relief may be obtainable from a policy point of view in the United States, it can be impossible to obtain in practice. Recently, the USTR vetoed the ITC’s exclusionary order against Apple after a finding that it had infringed Samsung’s SEPs. The USTR was exercising its presidential veto right based on “substantial concern” about the appropriateness of such relief in the standard-setting context. Despite statements from the USTR, it is uncertain what specific policy it was basing the veto on. Perhaps it was driven by a policy which was pro-Silicon Valley as opposed to foreign competitors – a Korean company looking to enjoin a marquee US brand. It is also possible that the USTR was simply reflecting a policy that is consistent with case law: that injunctive relief is difficult to obtain where a monetary award will suffice.

In its 2012 article “Six ‘Small’ Proposals for SSOs Before Lunch”, the DOJ proposed a number of suggestions for standard-setting organisations in order to reduce FRAND ambiguities, promote competition and ultimately benefit consumers. These include:

  • clarifying that FRAND commitments run with a patent, regardless of future ownership;
  • prohibiting mandatory cross-licensing of non-essential patents to the standards;
  • developing clear limitations on the right to injunctive or exclusionary relief; and
  • reducing uncertainty as to whether patents are truly essential to a standard.

Case law

Case law is by far the most influential factor over SEP values in the United States. The US courts have made it nearly impossible for SEP owners to obtain injunctive relief following eBay v MercExchange in 2006. Most courts consider an SEP in suit which is subject to a RAND obligation strong evidence that a royalty is an adequate remedy. Further, the courts generally find that public interest favours a defendant in an SEP infringement suit obtaining an ongoing licence, given that the technology is essential to fully implement the standard.

Despite being against the grant of injunctive relief, US case law actually makes it a favourable forum for owners of SEPs to assert their patents. In its 2010 ruling in Fujitsu Ltd v Netgear Inc, the Federal Circuit greatly reduced the burden of proving infringement when it held that comparing claims to a standard, rather than directly to accused products, may be sufficient to show direct infringement of an SEP if the accused products are held to be complying with that standard. The burden for an SEP owner was further eased by Judge Robart’s decisions in Microsoft v Motorola, where he held that an SEP owner need not provide an initial offer which is consistent with RAND terms, provided that it is not “so blatantly unreasonable as to breach that duty of good faith”. However, the jury in that case determined that Motorola’s initial offer of between $3 and $5.13 per unit constituted bad faith when compared to Robart’s determined per-unit royalty range of between $0.0555 and $0.16389 for H.264 (video coding) SEPs, and $0.08 to $0.195 for 802.11 (wireless) SEPs.

The upside is that while injunctive relief is virtually impossible to obtain in the United States, damages are not. Many believe that in the absence of existing licences involving the SEP in suit (the first Georgia-Pacific factor) and economically comparable licences involving technologically comparable technology (the second Georgia-Pacific factor), Robarts in Microsoft undervalued the SEPs in suit by deriving the royalty rate from patent pools involving infringed technology. Post-Microsoft, courts have taken a more pragmatic view of the RAND value of SEP licences. Although damages ordinarily consist of a per-unit RAND royalty, in Core Wireless Licensing Sarl v LG Elecs, Inc the district court in the Eastern District of Texas also awarded enhanced damages of 20% for wilful infringement of an SEP.

Cases following Microsoft suggest that in the absence of existing or comparable licences, the Microsoft analysis becomes a less reasonable quantitative estimate of a RAND royalty rate. Instead, in In re Innovatio IP Ventures, the Illinois District Court in 2013 used the so-called ‘top-down’ approach, which obviated the need to use depressed royalty rates from patent pools as a benchmark, substantially increasing per-unit royalty. This is a trend which post-Innovatio cases suggest will continue.

Figure 1. The increasing relevance of SEPs is exemplified by the number of citations over time to FRAND in global publications

European Union

As a union of independent nations, the European Union walks a delicate line when it comes to setting policy. The Treaty of the Functioning European Union is a key policy document which affects how EU members can deal with SEP and FRAND issues. Article 102 sets out when an entity with dominant market power is abusing this. The European Court of Justice (ECJ), which applies the policy set out by the European Union, has ruled that Article 102 is not an absolute bar on SEP owners seeking injunctive relief against alleged patent infringers. The SEP owner will not be held to have abused its dominant market position by bringing injunction proceedings, provided that it follows the guidelines set out in Huawei v ZTE.

The ECJ took up Huawei upon the Dusseldorf District Court’s request that it clarify whether, under Article 102, granting an injunction would conflict with earlier ECJ decisions holding that an SEP owner abused its dominant market position because it sought injunctive relief against an SEP implementer which had previously agreed to take a FRAND licence. Although the European Patent Convention establishes that European patent infringement cases are adjudicated under national law, the ECJ can resolve conflicts between national and EU law at the request of a national court.

The ECJ’s decision in Huawei effectively shifted SEP FRAND licensing negotiations from an SEP-owner biased landscape under the previous Orange Book Standard to a more equitable structure for facilitating licensing agreements before seeking injunctive relief. Before Huawei and under the Orange Book Standard, SEP implementers had to overcome a significant burden when it came to the presumption that an SEP owner seeking to enjoin them was not abusing its dominant market position. Although the post-Huawei landscape remains friendly to SEP owners, the process is more balanced. Huawei’s judgment, founded on antitrust concerns, has provided the EU SEP community with a FRAND licensing negotiation framework.

Case law

Figure 2. Hypothetical negotiation framework

In the European Union, virtually all SEP and FRAND disputes are resolved in national courts. The ECJ in Huawei did not define FRAND or articulate how parties should negotiate – that detailed analysis was left to national courts. Most post-Huawei litigation has taken place in Germany and the German courts have done a thorough job of setting out a detailed process which SEP owners should follow if they want to obtain injunctive relief. One of the first post-Huawei cases was the St Lawrence Comm v Vodaphone litigation in Germany in March 2016. In this, the Dusseldorf District Court enumerated the following steps that an SEP owner should follow if it wants to enforce its SEP patent:

  • The SEP owner should notify the accused SEP infringer before filing a complaint, specifying the claimed patent(s), declaring patent(s) which are essential to the relevant standard and stating the patent(s)’ allegedly infringing uses.
  • The accused SEP infringer must then issue a timely declaration of willingness to license.
  • A FRAND offer must then be made by the SEP owner.
  • A FRAND counteroffer must then be made by the SEP implementer.
  • The SEP owner must then reject the counteroffer.
  • The SEP infringer must then post security and a rendering of account.
  • If both parties agree, a third-party determination of the licensing terms can then be made.

Timeliness is key to this process. An accused SEP infringer can raise a FRAND defence only if its counteroffer is made without delay, considering the circumstances. Previously, German courts have held that a delay of just three months before issuing a declaration in the second step was a failure to demonstrate timely willingness to take a licence. Accused SEP infringers should thus engage as soon as possible.

What counts as FRAND remains an active question in the German courts. The Karlsruhe Appeal Court has held that an SEP owner’s initial offer should be on FRAND terms to be clarified by the trial courts. Different courts throughout Germany may take varying views of whether an offer is FRAND. The Mannheim and Dusseldorf District Courts generally require a FRAND-compliant counteroffer to a non-FRAND offer. However, the Dusseldorf District Court suggested in Sisvel v Haier that an SEP implementer could instead require a modified FRAND-compliant offer. The SEP owner may respond by simply specifying the adequate royalty rate and its objective calculation basis, so that the accused SEP infringer understands why the SEP owner believes that its offer is FRAND. The Dusseldorf Court of Appeal stayed SEP owner Sisvel’s injunction, arguing that the district court misunderstood Huawei, because without a FRAND-compliant offer the alleged-infringer had no further obligations. It later allowed SEP owner Sisvel to provide a FRAND-compliant offer (emphasising that the SEP implementer must swiftly accept or counteroffer).

Figure 3. US policy structure

While Germany has had the most cases regarding SEPs, it certainly is not the only active EU forum. In April 2017 the UK High Court assessed whether an offer was FRAND and then set FRAND rates for a worldwide licence for the first time in Unwired Planet International Ltd v Huawei Technologies Co Ltd. Despite the parties’ St Lawrence process arguments, the court relied on Huawei alone in finding that neither party offered FRAND rates. It held that a UK-only portfolio licence is not FRAND, and that a FRAND licence between Unwired and Huawei must be worldwide. The court also recognised its limited jurisdiction, but reserved an injunction (and appropriate damages) if Huawei refused to licence. It further rejected Huawei’s premature litigation defence and found that Unwired’s willingness to discuss alternatives and to unbundle an “indivisible worldwide arrangement”, albeit 15 months later, overcame impermissibly bundled SEPs and non-SEPs, and did not constitute an abuse of market dominance.

Figure 5 shows the royalty rates awarded against Huawei by the UK court. These appear to be extremely low percentage royalties.

Based on the court’s decision, it appears that injunctions against SEP infringers are obtainable in the United Kingdom only when an SEP implementer refuses to license. This is a narrower view than that in Germany, where refusal is not required.

A post-Huawei FRAND SEP-related decision also issued from the Netherlands in February 2017. In Archos v Philips the court rejected a FRAND defence raised by Archos in a declaratory judgment action against SEP owner Philips. Archos had argued that Philips had failed to make a FRAND offer, as required by Huawei. The court held that FRAND is a range, and that while offers and counteroffers must be FRAND, they need not be for exactly the same amount. Another factor in the case was that negotiations had started pre-Huawei, when the burden was on the SEP implementer to make a FRAND offer.

Germany remains the primary forum in Europe for litigating SEP patents. It has set out a thorough process with which parties need to comply to know what rights they can assert. While the United Kingdom seems to be on a path towards imposing specific royalties, with the threat of injunction should the parties fail to resolve their differences, Germany takes the approach that it will grant an injunction as a remedy – this will then drive a business resolution with which the parties agree. Patent owners should select Germany if possible, while accused SEP infringers should do their best to have their cases heard in the United Kingdom.

Figure 4. Illustrating that injunctions are readily available to SEP owners throughout Europe post-Huawei

China

As a mass manufacturer of low-margin products, China is a net user of intellectual property. Manufacturers typically reject even FRAND rates which impinge on their narrow margins. Unlike in the West, in China policy is the primary driver for IP matters, rather than the courts. China’s government actively influences SEP licensing policies in order to protect the country’s manufacturing interests. It is thus unsurprising that China’s general position is that international technology standards create barriers to entry, because they can require substantial royalty payments to non-Chinese entities.

With the goal of avoiding royalty thickets associated with paying foreign SEP FRAND rates in mind, China is adopting China-only standards. However, this strategy may prove short sighted, creating a new set of issues which could turn out to be even more expensive. China-only standards may themselves infringe upon international standards, therefore subjecting adopters to infringement charges without the benefits of FRAND obligations and protection that international standard-setting organisations require. Further, China-only standards do not address the issue of having to pay for products which are manufactured in China complying with international standards for sales outside China.

In China, IP licensing rates are governed by the Anti-monopoly Law. Article 15 of this establishes that monopoly issues around patent licensing may be exempted for the purposes of standardising product specifications such as SEPs. This exemption is permissive, not mandatory. Consequently, there is some uncertainty as to whether the law will apply to FRAND rates for SEPs. This uncertainty is also influenced by Article 17 of the law, which states that agencies will not require rights holders to license out their rights. The confusion has been exacerbated by the State Administration of Industry and Commerce (SAIC), which in 2012 released a draft enforcement guide on behalf of all Chinese anti-monopoly agencies on how to construe IP licensing antitrust issues.

The SAIC guide states that IP abuses fall under the Anti-monopoly Law’s general prohibitions on monopolistic activities. It establishes that dominant market position and the abusive use of IP rights may violate Article 16, while Articles 13 and 14 establish that licensing rates are subject to the scrutiny of horizontal and vertical monopoly provisions. It remains unclear how easy it is to predict whether Chinese agencies will regard an SEP as an antitrust violation. Further, it is not unlikely that this view may change depending on whether the SEP owner is Chinese or foreign.

These guidance documents do not help to settle uncertainty as to how courts will determine whether a foreign FRAND rate violates the Anti-monopoly Law. Understanding the law is critical to maintaining leverage when it comes to negotiating a FRAND licence. However, the actual and potential uncertainties in interpretations will affect approaches in negotiations of FRAND rates. Further insight can be gained from the most recent court cases discussed below.

Despite China’s current policy positions, its position as a net user of standardised technology will almost certainly change over time. Major technology companies, such as Huawei, are investing significant sums into innovation as China shifts from being a net user of to becoming a net contributor to intellectual property. As that shift advances, China will be forced to reassess its policy positions regarding SEPs. However, at least for the foreseeable future, Chinese political policy will be the overriding rule that Chinese courts and agencies will follow.

Table 1Royalties awarded in Unwired Planet v Huawei

 

Major markets

China and other markets

 

Handsets

Infrastructure

Handsets

Infrastructure

2G/GSM

0.064%

0.064%

0.016%

0.032%

3G/UMTS

0.032%

0.016%

0.016%

0.004%

4G/LTE

0.052%

0.016%

0.026%

0.026%

Case law

Although policy issues leave many uncertainties, the Chinese courts have been proactive in setting out the rules on when an SEP can and cannot be enforced.

Interpretation II by the Supreme People’s Court on Some Issues Concerning the Application of Laws to the Trial of Patent Infringement Disputes, which was issued in March 2016, established regulations for the civil liability of SEP infringement. Article 24 requires that an injunction not be issued when an agreement cannot be reached in negotiation due to the patentee’s intentional violation of its FRAND commitment and when the alleged SEP infringer is not grossly negligent. Article 24 also sets out factors which must be considered when terms cannot be reached and the issue comes before a court.

Unfortunately, Interpretation II does not establish when an injunction may be issued or any formula for licensing rates, although one could conclude that an injunction is possible where an SEP owner complies with its FRAND commitment or the SEP infringer is grossly negligent.

In 2013, before the publication of Interpretation II, Huawei sued InterDigital (IDC) for violation of its FRAND commitment and the Guangdong High Court to provide a licence rate determination. The court considered a number of factors, including the total amount of control, anti-hold up and anti-royalty stacking. However, it failed to take account of these considerations against the actual facts of the case and instead based its decision on a statistical report and a previous licensing agreement of 0.0187% per unit between IDC and Apple. The court set this royalty rate because the previous agreement with Apple was reached through fair and voluntary negotiation and the transactional conditions were basically the same.

Reliance on prior licence agreements was also applied by the Supreme People’s Court in another SEP-related case where five licence agreements were provided by the patentee. In neither case did the courts elaborate on why they held the transactional conditions to be basically the same.

Despite the uncertainties in both Interpretation II and the Anti-monopoly Law, the Beijing IP Court not only awarded an injunction in an SEP case – IWNCOMM v Sony, issued earlier this year – but also established when an injunction may be issued in an SEP case. As a domestic company, IWNCOMM sued Sony for infringing an SEP and requested an injunction as well as treble damages. In expanding the application of Interpretation II, the court stated that during negotiation, if neither party is at fault or the patentee only is at fault, an injunction will be denied. However, if the patent implementer is at fault and the patentee is not, an injunction shall be granted.

When both parties are at fault, courts shall balance the interests of both sides to determine whether an injunction is proper. In its decision to grant the injunction, the court decided that Sony had acted in bad faith by requesting a claim chart without a non-disclosure agreement during negotiations.

The lesson from IWNCOMM is that parties to an SEP negotiation must take special care to act in good faith; otherwise, a patent owner risks losing the ability to seek an injunction and an accused infringer risks having an injunction awarded against it. That said, other than the specific facts of this case regarding a claim chart demand, the decision of what is and is not bad faith still appears to be completely subjective.

China remains a venue where case precedents, including Interpretation II, are in place, but they remain mostly subjective when it comes to application. As further case law develops, China should start to provide a more objective basis for assessing whether a party can obtain an injunction or be subject to one in an SEP case. WiLAN recently sued Sony for SEP infringement in the Nanjing Intermediate People’s Court. It is the first time that a non-practising entity has brought an SEP lawsuit in China. How the court will rule on any injunction and damages will be interesting, particularly because the case involves two foreign companies.

Table 2Recent China FRAND damage awards

China FRAND damages examples

Cases

Damage calculation result

Huawei v InterDigital

0.019% of end product.

The Agency Sanction Decision Qualcomm

Sanctioned Qualcom from basing royalty on the full price of the end product.

IWNCOMM v Sony

Treble damages based on reasonable royalty rate of end product from previous unrelated licensing agreements (Rmb1 per unit).

Global value of SEPs

Despite the legal and policy differences between the United States, the European Union and China regarding SEPs and FRAND compliant licensing agreements, SEPs are still extremely valuable globally.

Policy has by far the most influence in China, where there is less separation between the legislative and judicial arms. Currently, Chinese policy is designed to protect the domestic net technology user industrial complex. In the United States, by contrast, policy has limited influence, because the judicial branch operates independently from executive policy makers – although one could interpret the USTR’s veto of the injunction against Apple as a protectionist policy action. The lack of national interests makes the European Union by far the friendliest jurisdiction to SEP owners.

On the legal front, the United States, the European Union and China have different approaches and even different methods for determining what is considered a FRAND rate (see Table 3).

Table 3Global FRAND methods

Comparative FRAND methods for different regions

Regions

Method

United States

FRAND based on smallest saleable patent practising unit.

European Union

No specific FRAND rate calculation. However, there are negotiation mechanisms for encouraging FRAND settlement.

China

FRAND rates are based on end product. However, Qualcomm sanctioned FRAND the rate based on the end product.

While injunctions remain rare in the United States, recent court decisions – including Microsoft and Innovatio – have created a legal climate which is favourable to SEP owners seeking monetary damages alone. The burden of proof for SEP infringement has been eased under Fujitsu. Further, SEP owners do not lose their rights or risk penalties for making an initial offer to an implementer which is not considered FRAND, provided that this is not blatantly unreasonable.

The European Union’s rigid management of the relationship between SEP owners and implementers has created a legal climate which is extremely favourable to SEP owners. The European Union utilises a heavily process-driven analysis. If European SEP owners adhere to their specified role, as outlined by the Dusseldorf District Court, they have a powerful arsenal for enforcing their SEPs. Injunctions are readily available to European SEP owners, which in turn drive economic resolutions.

Even China has now strengthened the protection offered to SEP owners and the tools available to them to enforce their rights. Although the future of the Chinese legal climate with regard to SEPs is unclear, recent court cases and publications from the Supreme People’s Court indicate that China is beginning to recognise the value in protecting and enforcing SEP rights. While the application of facts to law in China involves significant subjectivity, an SEP owner could do worse than follow the process established by the European Union.

Action plan

There are significant differences over the treatment of standard-essential patents (SEPs) between the United States, the European Union and China; but while conditions may vary, the dismal view of SEP values is misplaced. In all three major markets, rights holders have more and more paths to follow as they look to derive value from their patents:

  • Provided that SEP owners proceed in good faith and follow enumerated processes, substantial value can be obtained from their SEP assets.
  • A best practice recommendation would be to follow the specific process established by the Dusseldorf District Court.
  • If an SEP owner follows that process, it should be in a good position to enforce its SEP rights in any forum.
Jaime Siegel is CEO of Cerebral Assets, global director of licensing of the Open Invention Network and adjunct professor at UC Irvine Law School, Irvine, United States
Monica Arnold, Aaron Johnson, Mo LiSara Pennebaker, Maysam Pessian, Brian Tamsut, Alexander Zeng and Jiaxiao Zhang are all law students at UC Irvine Law School, Irvine, United States

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