Standards Essential Patents and FRAND licensingAidan Robson

Reddie & Grose LLP

APAA 2016 Okinawa

Outline

• Background to Standards Essential Patents

• Where does competition law fit in?

• EU competition law and examples of anticompetitive behaviour

• Remedies for infringement of SEPs

• Recent developments in EU law

• Recent UK developments

• International developments

• Summary

Background to SEPs

• According to the European Commission, more than 23,500 patents have been declared “standards essential” just for the GSM and 3G/UMTS standards alone, both of which are developed by the European Telecommunications Standards Institute (ETSI)

• European Commission: the number of SEPs roughly doubles every 5 years

• The ETSI website currently provides standards documentation for 15,910 standards (as at September 2015).

Background to SEPs

• SEPs are heavily litigated compared to other (“baseline”) patents

• Numbers of SEP and baseline patents which are litigated each year (data include EP and FR patents and applications, SEPs must have been declared “essential” in or before 2011):

https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCYQFjAAahUKEwiguLrRq5nIAhWEjXIKHURiCxY&url=http%3A%2F%2Fe

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Background to SEPs

• The litigation rate (i.e. the probability of litigation) over the lifetime of both SEP and non-essential (baseline) patents:

https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCYQFjAAahUKEwiguLrRq5nIAhWEjXIKHURiCxY&url=http%3A%2F%2Fe

c.europa.eu%2FDocsRoom%2Fdocuments%2F4843%2Fattachments%2F1%2Ftranslations%2Fen%2Frenditions%2Fpdf&usg=AFQjCNGE38LcmVEBqUvE9E57UQEt982tJw&sig2=D_Hj1O1ShBU2WqvmW_rZyQ

Where does competition law fit in?

Patent proprietor

A granted patent gives rights to exclude others

from working the invention

Licensees

Potential licensees must necessarily work the

invention if they are to comply with the standard

Not always compatible!

• SEP owners who enforce their patents could preclude all competition from the market, because competitors have no option but to comply with the standard if they are to compete effectively

• This is typically held to place SEP owners in a dominant market position

EU competition law: provisions

• Article 101 TFEU: relates to restrictive agreements between undertakings which are anti-competitive

• Article 102 TFEU: relates to the abuse of a dominant market position (can be by a single undertaking)

• Article 102 TFEU tends to be more relevant in the context of an SEP holder enforcing their patent

• The European Commission is responsible for enforcing these provisions across the EU

• Non-compliance can lead to very large fines – of the order of 10% of previous year’s turnover

How to avoid Art. 102 problems?

• Can a patent ever be of benefit to its proprietor without infringing the competition law provisions?

• Standard-setting organisations (e.g. ETSI) require SEP owners to commit to licensing their patents on FRAND terms (fair, reasonable, and non-discriminatory)

• Historically this has been seen not to be abuse of a dominant position, whilst still allowing the SEP owner to be fairly paid for exploitation of their IP

• What if the parties cannot conclude a FRAND deal?

• Essentially the law is still grappling with the question of what happens when such licensing deals are not agreed by the parties, and when consequently the SEP owner tries to sue for infringement of the SEP.

Anti-competitive behaviour

• “Patent ambush” – a patent essential to the standard is not declared as such, and the standard-setting organisation does not know about them. The owner, who has not had to make a commitment to FRAND licensing, then tries to enforce their rights after the standard has been set. This behaviour can be unintentional if the patent owner simply doesn’t know about the standard until it’s too late.

• “Hold-up” – a patent owner tries to negotiate a much higher licence fee, knowing that their patent is essential the standard, than it could have asked for before everyone using the standard was “locked-in” to using the technology.

• “Reverse hold-up” – SEP owners are forced to accept lower royalties than their contribution to the technology deserves. Licensees can threaten to bring litigation to challenge whether the proposed licence deal is actually FRAND. Can be used if the SEP owner is a small entity likely to be scared off by litigation.

Remedies for infringement of SEPs

Injunctive relief – Is it available under an SEP

Conduct of patentee

Conduct of infringer

Recent developments in EU law

2009• “Orange-Book-Standard”– before the German BGH (Federal Supreme Court).

The SEP, owned by Philips, related to CD-R technology. Philips sought injunctive relief.

• The decision established the “orange book defence” against a claim for an injunction, where the patent proprietor abuses a dominant position only if:

– the defendant offers to enter into a licensing agreement unconditionally;

– the patent proprietor cannot reject the offer without discriminating against the defendant; and

– the defendant pays for past use of the SEP (defendant behaves as if it were a licensee).

Recent developments in EU law

2009• In Rambus, information was withheld on the “essentiality” of Rambus’s SEPs

until after the relevant standard had already been developed (i.e. a “patent ambush” case). Rambus then surprised competitors manufacturing chips according to the standard with a sudden claim for royalties. Rambus had to agree to cap its royalties.

• In IPCom, it was established than FRAND commitments do not expire when the patent is sold (here, patents were sold from BOSCH to IPCom), and that the new patent owner must also honour the commitment to license the SEP on FRANDterms.

Recent developments in EU law

2013• Infringement proceedings in German national courts between Huawei and ZTE

stayed pending referral to CJEU. The referral asked under which circumstances the assertion of SEPs might constitute the abuse of a dominant position within the meaning of Art. 102 TFEU.

Recent developments in EU law

2014: Motorola• Motorola had committed to license its SEPs under FRAND terms.

• Motorola sought injunctions against Apple in Germany, in an attempt to enforce its SEPs. Apple made an unconditional licensing offer on FRAND terms, which Motorola rejected.

• Apple made subsequent offers with further concessions. Eventually, Motorola insisted that Apple give up its rights to challenge the validity of Motorola’s SEPs.

• Motorola’s behaviour was held to be abuse of a dominant position under Art. 102 TFEU.

Recent developments in EU law

2014: Motorola• This decision created a safe harbour: where the SEP holder has committed to

license on FRAND terms, a potential licensee is safe from injunctions provided it has shown its willingness to enter into a licence on FRAND terms.

• So the key question to be asked is: “is there a willing licensee?”

– this is something that depends of the facts of the case. In Motorola, Apple demonstrated willingness by allowing the courts to settle disputes about fair and reasonable royalties.

Recent developments in EU law

2014: Samsung• Samsung owned several SEPs relating to the UTMS standard, which it had

committed to license on FRAND terms (to Apple).

• Samsung committed to a specific licensing framework and promised not to seek injunctions against those licensees conforming to it. Under the framework, disagreements over what exactly constitutes FRAND terms were to be resolved by the courts or arbitration.

Recent developments in EU law

November 2014: Huawei v ZTE• The Advocate General’s opinion issued in the Huawei v ZTE case.

• The AG concluded that, prior to seeking an injunction, the infringer must be alerted to the infringement and a written offer of a licence on FRAND terms must be made.

Recent developments in EU law

July 2015: Huawei v ZTE• CJEU ruling in Huawei v ZTE

• In summary, there is no abuse if the proprietor:

– has given an irrevocable undertaking to grant a FRAND licence to third parties;

– brings an action for infringement seeking an injunction or recall of products;

• … provided the proprietor has:

– alerted the alleged infringer, by “designating that patent and specifying the way in which it has been infringed”

– presented the infringer with a specific, written offer for a FRAND licence

• ...and provided that the alleged infringer has not responded in good faith.

Recent developments in EU law

July 2015: Huawei v ZTE

• Further, Art. 102 TFEU does not prohibit a dominant undertaking from seeking an account of profits or damages.

• “Good faith” – requires the alleged infringer to respond in a reasonable time, without using delaying tactics.

Recent UK developments

Unwired Planet v Samsung & Huawei

• Unwired Planet allege infringement of their SEPs by Samsung and Huawei

• The patents were originally owned by Ericsson, later transferred to Unwired Planet

• The Samsung / Huawei pleaded that:

1. There was no complete, proper, and effective transfer of an enforceable FRAND obligation when the patents were transferred from Ericsson;

2. Ericsson, in dividing its portfolio, caused higher royalties to be earned, thereby restricting competition; and

3. The agreement transferring the patents to Unwired Planet allows Ericsson to be paid a minimum percentage of the sales made by any licensee, irrespective of the royalty paid by the licensee to Unwired Planet. This is equivalent to a fixing of prices, so infringes Art. 101 TFEU.

Recent UK developments1. There was no complete, proper, and effective transfer of an enforceable

FRAND obligation when the patents were transferred.

– dismissed by the judge: the FRAND commitments were properly transferred and are enforceable by a third party (Unwired Planet), and Unwired Planet are not bound by Ericsson’s terms

2. Ericsson, in dividing its portfolio, caused higher royalties to be earned, thereby restricting competition.

– the judge sided with Ericsson / Unwired Planet: all that the law requires is a commitment on both the transferor and transferee to license on FRANDterms

3. The agreement transferring the patents to Unwired Planet is equivalent to a fixing of prices, so infringes Art. 101 TFEU.

– the judge could see that this was arguable, and refused to strike out this defence

We await a possible appeal from Samsung in respect of the above

Recent UK developments

Vringo v ZTE: What constitutes a FRAND rate?

• Vringo’s SEP was held, in November 2014, to be valid and infringed by ZTE.

• Proceedings are currently ongoing, but should provide guidance as to how a FRAND royalty rate is to be determined.

• According to the parties:

• The court will need to consider which (if any) of these approaches is ‘fair and reasonable’.

• What does ‘saleable’ mean in this context? Including spare parts? Within the UK only?

Vringo: the ‘going rate’ for 3G / 4Gpatents is approx. 2% of revenues obtained from any infringing infrastructure.

ZTE: determine royalties based on the ‘smallest saleable compliant part’ (SSCP) of the ZTE product falling within the scope of the claims, so 0.002% of the revenues.

Summary

• Although some clarity has been provided as to how SEPs are dealt with under European competition law, there are still many questions to be answered.

• Many have criticised the CJEU for providing no guidance on what an offer of a FRAND licence actually constitutes – it appears this may have to be decided in each individual case.

• The key message from Huawei: enforcing an injunction is only allowable if significant efforts are made by the SEP owner to set up a FRAND licence deal, and the infringing activity continues despite these efforts.

Aidan Robson

Reddie & Grose LLP

Aidan.Robson@Reddie.co.uk