Those who adopt a hold-out strategy in SEP FRAND licensing should face the prospect of a market red card

The global pandemic has shown how critically important mobile connectivity is for our nations, societies, communities, companies and families. This technology, based on innovation contributed to open standards, has kept us connected though our virtual work environments despite the lockdowns and challenges for physical proximity.

The world of FRAND has always been fascinating, and one of the most fascinating features of it is that it is so global and cross-disciplinary in nature that it keeps developing dynamically and responding to challenges by creating new solutions – and enabling new industries. A variety of recent court rulings, counter-rulings - and, amazingly, on occasion, counter-counter-rulings! – from various parts of the world have left FRAND participants with heads spinning. So, I thought it would be useful to reflect on some of the evolution of FRAND, and drill down into the real reasons for some behaviours which hide behind a lot of the rhetoric used around FRAND and SEPs.

My real-life experience is that FRAND works when there is a balance between the interests of the SEP holders and the implementers – and when there is a level playing field requiring all to play by the same rules. It works only as long as there is also a willingness among the players to ultimately play by the FRAND rules and participate in the global marketplace by respecting the other market participants and the level playing field. But that level field is not there and the time has come for the world to truly address hold-out - the major issue distorting the market in FRAND licensing and disadvantaging those that are willing licensees and licensors in our global marketplace.

Hold-up? No. Hold-out? Yes!

Almost 20 years ago, we saw the first antitrust theories about the risk of patent hold-up emerge in the SEP space: the idea that patent protection could prevent technology and players from entering the market and getting innovation into the hands of business users and consumers. This was never more than a theory and widespread patent hold-up hasn’t been found. Multiple courts have since also clearly concluded there was no evidence of hold-up before them.  

In fact, if we want compelling evidence that hold-up doesn’t exist we can simply look at the top 10 list of mobile phone vendors for 2010 and recognise that by 2015 half of them had been replaced by entirely new names. Rather than keeping people out of the market, standardised technology opens the doors to new entrants, driving competition and value for consumers.

While evidence of hold-up is hard to find, there is ample evidence of hold-out in the market. I have sat at the negotiation tables along with my licensing teams observing the most sophisticated – and sometimes not so sophisticated – hold-out strategies.

Some of the silliest include sending in people with no negotiation mandate to waste your time or bringing in a new team every six months to backtrack any progress made or cancelling meetings when you have travelled to the destination on the other side of the world.

Some of the more sophisticated have included confusing the audience with theories like apportionment and SSPPU (the smallest saleable patent practicing unit), and demanding component level licensing to dilute the value of SEPs. More recently, individual companies engaging in systematic hold-out have taken advantage of the political tensions around trade between world powers and caused a race to court by requesting extraterritorial anti-suit injunctions. This is not a healthy development for our industries!

Patent rights – back to basics

Some 10 years ago we were discussing whether injunctions should be available for FRAND-encumbered patents and competition authorities in Europe were suggesting each SEP conferred on its holder a dominant market position. I recall making back to basics speeches about the essence of a patent right really only being the right to have a court issue an injunction and reminding people that SEPs are simply patents that must entitle their holder to what is the essence of patent protection, injunctive relief, because there is no other leverage to get to a FRAND licence.

The balance had tilted very much to favouring the views of implementers. The focus of competition authorities, regulators and courts was solely on antitrust concerns, risk of hold-up and the obligations of the SEP holders. The concept of a willing/unwilling licensee was developing and we had companies claiming to be willing licensees by agreeing to take a licence to a single national litigation patent, demanding patent-by-patent adjudication of large SEP portfolios and refusing to arbitrate. Portfolio licensing – the industry practice – was a concept not well understood by courts or competition authorities.

The Court of Justice of the European Union’s (CJEU) decision in Huawei v ZTE restored some of the balance and recognised clearly that it is a two-way street. That decision went a long way to establishing that willing licensees must, in fact, act as willing licensees and provide timely counter-offers that are FRAND – and that injunctions are available when a licensee does not respect its obligations. Since then, courts in Europe have continued to define details of those obligations and portfolio licensing has been accepted as the industry practice.

Indeed, Mr Justice Birss, in his decision in Unwired Planet, wrote that both a willing licensor and a willing licensee, when faced with a worldwide portfolio such as the one at hand, would "regard country by country licensing as madness". And yet, we continue to see hold-out.

The conversation shifted away from hold-up and towards imaginative conspiracy theories and antitrust arguments. Every SEP enforcement action is countered by an antitrust trolling playbook response with SEP holders forced to fight Sherman Act complaints in the US and to respond to DG Competition complaints in Europe which have been manufactured out of thin air. That’s not to mention the monitoring reports and pressurised tea sessions at what was the Chinese National Development Reform Commission (nowadays the State Administration for Market Regulation or SAMR).

The intention often appears to be to exhaust the resources of the SEP holder by raising every possible legal theory anywhere in the world to delay and avoid a commitment to take a licence.

Again, saner minds have largely prevailed and we have seen developments addressing hold-out in the US and Europe. The US has taken steps to restrain nuisance antitrust actions and clarified that FRAND is a matter of contract, not antitrust law. The UK Supreme Court, in Unwired Planet, upheld lower courts' decisions that UK courts have jurisdiction to grant an injunction on a valid and infringed UK SEP patent; or, as an alternative, for a licensee to agree to a UK court determining a global FRAND rate for a portfolio of SEPs in order to avoid such an injunction. It is important to note that the cause of action for a UK court to engage in a global rate determination is the infringement of a UK patent and the UK does not purport to become a rate setting jurisdiction per se. Meanwhile, German courts have continued to define the criteria for willing licensees, issued injunctions against unwilling ones and taken a position on licensing level consistent with patent law.

With that in mind I find the Dusseldorf Regional Court's recent referral of questions around the licensing level and willingness to license to the CJEU rather curious, as the law on those issues in Germany does not appear unclear and the German Federal Court of Justice has ruled on those questions. The matter appears to have become more political in nature and it will be interesting to see how it develops.

Legal and trade tensions provide an opening for China

Of course, despite all the nuanced legal arguments, the only goal of hold-out is to reduce cost for licensees and create a competitive advantage over those who play by the rules and take a licence. Today, depending a bit on what criteria one uses, seven or eight of the top 10 handset vendors are Chinese and, as trade political tensions increase, we have seen a new development causing more confusion in this space.

Potentially prompted by the UK Unwired Planet ruling, Chinese courts have recently granted extraterritorial anti-suit injunctions to block enforcement of foreign court decisions against Chinese companies – and to secure jurisdiction over rate setting for a global portfolio of a foreign company by enjoining litigation against Chinese companies anywhere else in the world. These anti-suit injunctions have come with extortionate daily fines totalling more than $50 million annually and, at times, with a stunning disrespect for comity and the rule of law.

What appears to be playing out is pure leverage of power politics to control pricing of cellular technologies globally. In many cases, the beneficiaries of these anti-suit injunctions are companies that did not even exist when the standards they’re implementing were developed, companies that did not contribute their innovation to open standards and companies that receive massive subsidies from their government, which aims to become the dominant technology power in the world.

Towards a solution – penalties for hold-out

The heading of this article promises solutions, so I will explore some elements that I think can help to deliver. I have noted with satisfaction that the newly published IP Action Plan of the European Commission refers to ensuring a level playing field globally – this gives me hope! So, what can be done?

First of all, one thing is absolutely clear: as long as there is no penalty for companies that refuse to negotiate in good faith and in a timely manner, hold-out is rewarded and will continue. At InterDigital, and previously at Nokia, I have experienced negotiations that have lasted longer than a decade. That’s not acceptable.

What kind of penalty are we talking about? Drawing an example from football, eventually the penalty for a player not playing by the rules is that they’re shown a red card and excluded from the game. Similarly, a company that refuses over a prolonged period to follow the rules of FRAND should lose their right to a FRAND defence and either have to pay supra-FRAND royalties or lose the right to operate in that market.

This sounds very harsh, but bear in mind, I’m not advocating harsher penalties to seek undue leverage for the licensor. This is not about getting more money. This is about getting to FRAND – not less than FRAND and not more.

Much hope has been put on greater transparency and at InterDigital we support that.  But I do wish to note that transparency only helps when there is also a willingness to take a licence. It’s now been almost a year since we published our handset programme rates and relevant portfolio information.  But we haven’t seen any change in the behaviour of hold-out companies. Transparency does not help unless there is a penalty for hold-out.

We have the tools, we just need to use them

Naturally, standard setting organisations could do much more to provide solutions – but they are often paralysed by a requirement for consensus in their decision-making and would probably need a more compelling push. Hence, I will focus on the most important element of a solution – addressing conflict and conflict resolution. National courts – even in places where there’s a high degree of judicial independence – have shown their limitations in being able to address what are global conflicts. We do not wish to have a race to court.

At InterDigital we are working for a long-term future for the industry and advocating for arbitration as a solution. Patents are territorial rights in nature and a fight between national courts over jurisdiction to rule on global FRAND rates does not make sense. To trust a national court with such a global commercial matter we need to have a strong record of judicial independence and credibility to establish objectively fair rates internationally.

Given that both President Xi and the Chief Justice of the Supreme People’s Court have stated that judicial independence does not and should not exist in China, and given what is playing out currently, I doubt we will see that day of objective and credible global rate setting soon from the Chinese courts.

Arbitration provides a well-defined path to access agreements that form the basis for a fair economic analysis. It can bring experts to the table who are already educated on the issues. Fee-shifting or accelerated proceedings can be put in place to protect the rights of smaller companies. The New York Convention ensures enforceability.

Unwillingness manifests itself in holding-out and not committing to agree to a licence or to agree to have an independent and neutral adjudication to determine rates. Willing licensees and licensors are suffering damage. All the tools exist– we just need to put them to use and call out hold-out when we see it, including in a refusal to arbitrate.

I’ll conclude with two points:

• First, we’re overdue for some discipline in resolving these issues – we’ve seen two decades of rulings in these matters and none has been strict enough to force a solution.
• Second, whatever we do, it must reward and incentivise innovation and standards. If innovation can’t be incentivised financially it will become the exclusive domain of those who have other reasons for wanting to dominate technology.