STANDARD ESSENTIAL PATENTS FRAND AND PATENT HOLD-UPS
Author : Att. Önder Özden[1]
Standardisation is the voluntary process of developing technical specifications on a specific innovative technology based on consensus among the stakeholders. Standard setting takes place in the European and International Standardisation Organizations (ETSI, CEN, CENELEC, ITU, ISO, IEC) but also in other organizations and fora or consortia on national, European or international level. Many standards comprise technologies that are patent-protected. On the other hand standardisation and intellectual property rights, such as patents, are key contributors to industrial innovation and industrial competitiveness. Standards facilitate rapid diffusion of technologies and ensure interoperability (via “IoT”) and compatibility between products thus enabling innovation dissemination. Patents provide incentives for research and development and facilitate knowledge transfers.
Effective standard setting and the protection of intellectual property rights are thus crucial for promoting innovation and the development of new technology areas. Many standards comprise innovative technologies that are protected by patents. Where standards comprise patented technologies, efficient licensing is crucial for the success of the standard as well as for a fair return for innovators’ efforts. Respectively, public authorities and the standardisation community have developed rules and practices to ensure the efficient licensing of patents on technologies that are included in standards. These rules and practices aim to give patent holders a fair return on investment in innovation effort, including research and development, and at the same time to allow all users of the standard fair access at a reasonable cost on basis of FRAND terms.
It is quite hard to give Turkey-related specific information for that issue as there is no database that standard essential patents (“SEPs”) in Turkey can be accessed even though it is possible to access the current standardization processes in the web site of the Turkish Standards Institute (“TSE”), standards involving patented technologies are not separately listed in that database. However in any way as the standardization is global (or at least regional) rather than national and considering that the firms involved in global business activities lead that, it may not be wrong to state that the fields in which SEPs play increasingly important role in Turkey are not different than the ones in other countries.
Even though Turkey does not have a database in which we can see whether the trend towards standards involving patents increases or decreases in Turkey, in general and especially in European Union (“EU”), there is an increasing trend considering the fact that there is a growing number of patent declarations during standard development process before Standard Setting Organisations (“SSOs”). One of the practical consequences of that increasing trend is that the firms make more license agreements and it seems that there is increasing number of disputes raised from these agreements based on violation of FRAND terms, patent hold-ups and hold-outs. Furthermore, we think that this increasing trend also gives rise to concerns related to competition.
We observe that the aforesaid increasing trend inevitably changes the business model and sometimes enables misappropriation of the dominant positions of the patent holders whereas firms see SEPs as (direct/indirect) income source; (i) firms aim to have SEPs and get royalty fees from the others implemented that standard (direct income source) or (ii) firms aim to have SEPs related to their highly innovative technologies to have more players in growing/potential markets that they lead to create an additional income source (indirect income source) with or without being a part of a SOS. For instance, firms work on electric/hybrid car technologies try to get SEPs for these and assure the growth of the market that they lead to create an increasing income source currently.
As the technology develops, interoperability of the devices via IoT technology becomes more important and therefore the role of standardization increases in any relevant field. For instance, as it is being experienced in consumer electronics sector, it may be confidently indicated that the role of standardization increases in there. Considering the nature of standards, as the technology develops, they become more detailed and comprehensive. This heavily impacts the functioning of the standardisation system because the barrier to enter the standards arena successfully requires more time, personnel, and more R&D investments. Yet with proper regulation, detailed and transparent standards cold act to reverse these barriers.
Today, standards are now non-optional for implementers to adopt. It is well-known that alternative competing technologies are liable to disappear from the market. Where patented technology is essential to standards, this leads to the unusual economic situation of a dual-layer monopoly: the first layer being a commercial monopoly (to use the standard for itself) controlled by SSOs, and administered at an international level; and the second layer being an intellectual property monopoly (to use the patented technology), controlled by patentees and administered at a national level.
The result of this monopoly is that implementers have no option but to enter the market with a product in a prescribed format; and by doing so, they have a consequent obligation to adopt monopolistic technology. The possibility for anti-trust results such as patent hold-ups follows naturally. A sophisticated patent holder will reduce its disclosure to the minimum requirement, saving cost and improving its future position. There is a clear economic reason for this: Transparency creates information symmetry, and with-it negotiating balance between the parties.
Given the anti-competitive practices and results thereof arising out of SEPs monopolistic nature, we would like to refer to Daimler vs. Nokia case concerning antitrust complaint filed with the EU Commission’s Directorate General for Competition. In this case, Daimler sought to build connected cars via IoT technology. To do this, the company needed technology protected by Nokia’s standard essential patents akin to IoT technology. Nokia wanted to charge high fees for the use of its patents for mobile phone standards 2G, 3G and LTE. And the emerging technology was not just affecting cars. From smart meters to industrial operations, the importance of the dispute for other sectors in which connected products play a role was obvious.
The afore mentioned dispute broke out in March 2019, following Nokia’s refusal to grant a licence to Daimler’s suppliers but insistence on granting such license solely to Daimler. Daimler claimed that this had constituted an abuse of a dominant position regarding patents for the mobile phone standards 3G and LTE. As a result, the company filed an antitrust complaint with the European Commission. Daimler wanted the Commission to clarify whether the patents are essential for connected cars at all.
Continental, Robert Bosch, Bury and Gemalto joined Daimler’s antitrust complaint shortly afterwards. All were suppliers of connectivity modules.
Nokia then filed a suit against Daimler at three German patent courts over ten standard essential patents (SEPs). Nokia belonged to the patent pool Avanci, which specialised in licensing SEPs for smart products, especially connected cars. By filing these suits, Nokia is trying to increase the pressure on Daimler. A single injunction for patent infringement could work as a great motivation for the car maker to come to a compromise. However, recently, Nokia has suspended legal action against German carmaker Daimler in the hope that mediation will resolve their dispute over technology licensing fees. Nevertheless, Daimler stated that the two companies had different legal opinions on the dispute which seemed hard to be mediated.
As can be noticed from the summary of the above case, the monopoly attained to SEP owners may result in patent hold-ups and abstention from granting licenses to SEP implementers which inevitably endangers all the investment made for the production of a product compatible with the relevant SEP.
Patent hold-ups are usually caused upon the intentional failure of the SEP owner’s to declare their SEPs to the relevant SSOs or even if the declaration was made on due time, SEP owner opts to non-comply with his FRAND undertaking. Consequently, SEP owner acquires a significant and inproportionate advantage vis a vis SEP implementer. As a matter of fact, by taking all these unfair practices into account in its Decree published in 29.11.2017, European Commission has underlined the fact that SEP owners should be liable to declare their potential SEPs in relation to the relevant standardisation and after such declaration, the process and sytems regarding SEPs recorded before the relevant SOSs should become more transparent especially with respect to assessment of FRAND terms[2].
Having said that both terms “fair” and “reasonable” should be interpreted very carefully when defining royalty rate for a SEP. First, conditions should be “fair” and “reasonable” only for SEPs. In practice, many unrelated and unnecessary patents are bundled with SEPs and being licensed out together. This changes the scale of “fair” and “reasonable” evaluation in comparison with SEP only conditions. For example, in a patent pool related to Digital TV sets, there are 20 patents whereas only 3 of them are standard essential. When you object to royalty rate, patent holder defends itself with the number of patents he offers. However, none of them may be useful for the licensee but the terms are still “fair” and “reasonable” for that pool of 20 patents. Accordingly, to reach the real “fair” and “reasonable” terms, SEPs should not be bundled with other patents.
Apart from this bundling problem, these terms should be interpreted together. In FRAND conditions, competitiveness of licensees should be kept unharmed while contributing parties should get some return from their contribution to the standard. This balance is very critical for defining fair and reasonable conditions. If licensees face financial difficulties because of the high royalty rates while licensors having excessive amount of profits from royalty income, then “fair” and “reasonable” conditions are not realized for that license program. On the contrary contributing parties to the standards which are licensor on latter stages, should not be losing any income because of contributing to the standard.
None of the abovementioned methods is enough to define FRAND conditions alone. All of them should be taken into account very carefully. Incremental value of the technologies adopted in the standard in comparison to alternative technologies that were rejected should be taken into account while the value should not be considered differently because the patent is standard essential anymore. Even it is difficult to calculate incremental value of some SEPs over consumer electronic products, in principal it is one of the best ways to determine the value of the patent. The value of a patent should be defined regardless of its essentialness to the standard. There should not be overrated royalties for comparably less important technologies because of the essentialness to the standard. On the other hand, market value of similar transactions outside of the standardization context could be a good guide for applying this principle.
Additionally, the licensing terms are highly dependent on individual circumstances. A well-declared and transparent pool of patents for a standard may cover up to 90-95% of the technology required for standards implementation and that pool may demand an agreeable amount. That amount may, however, only be in the region of 50% of the royalties required for full compliance, because patentees outside the pool may demand almost an equivalent amount, even if they own considerably fewer patents. This may simply be because it has freedom to operate outside the pool, or because it is aware of the commercial pressure that it is able to exert. FRAND is a notion arising from contractual terms: it is customary but has been defined by lawyers and not by lawmakers. Therefore, it is particularly unclear, especially the notion of what is “fair” and what is “reasonable”. We consider that competition guidelines should be issued for FRAND valuations accordingly and such guidelines may cover concepts such as calculation of licenses.
Coming to Turkey there is no guidance on FRAND definition provided by any authority in Turkey currently. Besides SSOs may provide guidance on F/RAND rate and again Microsoft v. Motorola case where the Judge, James L. Robart tries to answer the question of “What is a “fair and reasonable rate?”[3]. As far as we know neither de facto definition nor satisfactory guidance for FRAND currently and generally is determined according to the terms of first transaction. Moreover, considering the fact that the lack of guidance on FRAND (as a result wide variety of licensing base) is one of the reasons causing patent hold-ups, it seems that there is a need for additional guidance.
We think that it will be better if SSOs provide such guidance rather than the regulators (considering that government interventions may upset the balances) and without waiting courts’ precedents (as that may take some time and the hold-up is currently a problem). For that purpose, maybe the SSOs which are active in the same field can come together to work on a project to provide a guidance for FRAND. Moreover, a cap on per product royalty and the option, whether SSOs can collect and distribute royalties may also be considered when a guidance on FRAND is provided.
Last but not least, it seems that larger role for unilateral ex-ante disclosure of licensing terms are seen as a tool to preserve competition and thereby to avoid unreasonable patent licensing terms and to avoid disputes over licensing terms in the countries where there are many SSOs and firms participated standard development process. However we think that when imposing such an obligation on patent holders, (i) the neutral role of SSOs (ii) the fact that the more extensive and effective policies may lead unwillingness of patent holders to attend standard development and (iii) the possibility that the standardisation process may be longer and becomes more complex shall be considered.
We are of opinion that most restrictive licensing terms disclosure rules will be the most efficient way to introduce unilateral ex-ante disclosure and for that purpose SSOs shall amend their IPR policies. However, if legally binding rules/decisions require SSOs’ to amend their policies provide certainty and uniformity in that respect. Furthermore, we think that it is better to have mandatory disclosure obligation considering the abovementioned concerns.
We think there are two things really important for the concept of FRAND and to provide trust among the implementers in that respect; (i) royalties shall be determined according to the real value of the technology and (ii) the licensing terms shall be foreseeable before a patent is incorporated into a standard. By this way both the interests of patent holders and implementers may be protected and a mutual trust environment may be created.
In the light of above, as SEP system is evolving gradually around the globe while constantly being open to debate in terms of reaching to a best-practice in assessment of FRAND licensing conditions, SEP declarations, resolution of licensing disputes based upon patent hold-ups and hold-outs which in fact lead to misappropriation of the competition, we suggest SSOs providing such guidance rather than the regulators and without waiting courts’ precedents (though in some countries like Germany, Regional Court Munich published new guidelines for infringement cases concerning standard essential patents[4]), especially by preparing a SEP guideline which shall foster SEP licensing, give patent holders a fair return on investment in innovation effort, including research and development, and at the same time to allow all implementers of the standard fair access at a reasonable cost on basis of FRAND terms.
[1] Co-founder of Ozden & Guclu Legal, Specialized in IP Law, www.ozdenguclulegal.com.
[2] PhDc N Cansın Karga Giritli, “Legal Introduction to Standards and SEPs”, page 8 (see European Commission, ¨Setting out the EU Approach to Standard Essential Patents¨ COM(2017) 712 final, (Online) https://www.google.com.tr/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0ahUKEwjMq_Pry_fXAhVGOBoKHc4lBigQFggvMAE&url=https%3A%2F%2Fec.europa.eu%2Fdocsroom%2Fdocuments%2F26583%2Fattachments%2F1%2Ftranslations%2Fen%2Frenditions%2Fpdf&usg=AOvVaw2wMlz0MZD-MMaUIN3DUSgH)
[3] Rebecca Haw Allensworth Casting a FRAND Shadow: The Importance of Legally Defining “Fair and Reasonable” and How Microsoft v. Motorola Missed the Mark Texas Intellectual Property Law Journal 235, 2014
[4] http://www.ipdr-forum.org/guidelines/
