Paving The ‘FRAND’ Way Ahead For SEP Licensing

When the iPhone 7 was unveiled and Apple confirmed that the headphone jack, an undying invention since the 19^th century, wouldn’t be a feature anymore, the whole world went berserk. In the absence of a headphone jack, users were forced to use lightning or Bluetooth headphones which were 10x costlier than the traditional headphones which featured the 3.5mm connector. Apple then found a way around the headphone jack by introducing extensions that would fit onto the phone’s wired charger. However, it won’t be long before the need for standardization will catch up and topple Apple’s ‘exclusive accessories’ empire. In a recent Reuters report, the European Union regulators are all set to push for a common mobile phone charger; due to retarded progress on the companies’ front in achieving the same voluntarily, as was promised. In this context, the ‘USB-C’ or ‘C-type’ charger is emerging as a clear winner in the era of standardization for interoperability.

Standardized technologies are at the core of enabling the use of multiple devices at the same time and with each other. They provide interoperability and are developed and set by Standard development organizations (SDOs). Now, these technical standards which are set by the SDOs to maintain healthy competition and increase ease of use for the user, contain technical specifications which may be either patent protected or pending patent applications (which may either be held by the contributor company of the specification of third party companies). These patents, which are necessary to implement the decided standards are called ‘Standard Essential Patents’ (SEPs).

An SDO consists of contributors (who contribute specifications) and ‘implementers’ (market participants who implement those standards). It is necessary to create harmony amongst the two as they can’t be sharply divided and some countries might be both. Incorporating new technologies without fearing the abuse of lock-in effect by the patent holder for the same is also a challenge. To minimize these bottlenecks, the SDOs adopt patent licensing policies that help license SEPs through fair, reasonable, and non-discriminatory (FRAND) terms.

The post will categorically take the draft CEN CENELAC Workshop Agreement (CWA) on the ‘Core Principles and approaches for licensing of Standard Essential Patents (SEPs)’ by the European Committee for Standardization (CEN) and the European Committee for Electro-technical Standardization (CENELEC) into consideration to understand the present scenario in the context of FRAND terms for SEP licensing. The initial draft ‘Code of Conduct for licensing industry Standard Essential Patents (SEPs) for 5G/Internet of Things (IoT)’ was put forth on the 6^th of October 2017, during the first of the two workshops and the final draft‘Core Principles and approaches for licensing of Standard Essential Patents’ after the review of comments was put forth in the second workshop on 29^th January 2019.

In India, FRAND licensing practices are still at a stage where practices and procedures are being put in place as per trends and principles in the US and EU courts and the practices as streamlined by the European Committee for Standardization. The Competition Commission of India (‘CCI’) is actively taking part in judging SEP agreements through the FRAND terms lens and building on its precedent inventory to enable the passing of fair and in-discriminatory orders.

Best Practices as envisaged by the FRAND terms

The CWA puts forth certain best practices that are a must to be adopted under FRAND terms. The same is stated in the context of ‘Parties’, ‘Non-Disclosure Agreements (NDAs)’, ‘Fundamentals’, ‘Valuations’, ’Disputes’, ‘Injunctions’ etc.

Parties

Each party is bound by an obligation to act reasonably, as a willing licensor and a willing licensee.

The licensor and the licensee must act in a reasonable manner and be fair and forthright in its interactions with the licensee. Plain, simple, and unambiguous language is to be used, to avoid delay in negotiations; if such delay is caused, it shall be held against the licensor.

The CWA provides that it’s mandatory to negotiate on all the licenses owned by the licensor in case they’re necessary to implement a standard and the licensee requests for the same.

Also, the licensor cannot tie or condition the granting of a SEP with ‘non-SEPs’ or ‘SEPs of other standards that he holds, which are not requested by the licensee and, even if the non-SEPS are believed to be applicable to the licensee’s product.

If within a patent portfolio, certain patents are proven to be SEPs and certain patents are disputed, the licensee has a right to obtain a license against the proven SEPs and deny the rest, irrespective of the fact that it comes as a part of a patent portfolio.

Hence, the same is incorporated in the principles of FRAND licensing.

Core Principle 4: While in some cases parties may mutually and voluntarily agree to a portfolio license (even including some patents subject to disagreements), no party should withhold a FRAND license to patents that are agreed to be essential based on disagreements regarding other patents within a portfolio. This approach can allow parties to identify areas of agreement within a patent portfolio despite other areas of disagreement. For patents that are not agreed upon, no party should be forced to take a portfolio license, and if there is a dispute over some patents, a SEP holder must meet its burdens of proof on the merits (e.g., to establish that the alleged SEP is infringed and requires payment, and to establish the FRAND rate).

The CCI has been extremely vigilant in this regard. In the complaint filed by iBall against Ericson, Wherein, iBall accused Ericson of bundling ‘patents irrelevant to iBall’s products in the license agreement’, CCI considered the accusation meritorious and held the same to be in violation of FRAND terms and Section 4 of the Competition Act.

The CWA also provides that in case of infringement allegations, the licensor cannot base his argument, solely on the assertion that the target product meets the standards without using the licensor’s patent even though its patents are SEPs. The burden to prove that the patent is a SEP and indeed infringed, both lie on the licensor.

A. NDAs and transparency in SEP licensing

Transparency in a FRAND agreement provides for the very foundation on which its terms are based on. Base level information as envisaged in Annex B in the CWA document should be provided by the licensor without an NDA and the refusal of a licensee to not enter into one shall not be considered ‘unwilling’ in this context.

For example, where a product is put together using components where the components are supposed to meet the required standard the licensee must be able to either engage or connect its supply chain with the potential licensor and an NDA would prove to be a hurdle for the same. If the SEPs are already included in the supply chain, then the licensor should make this information known and not resort to multiple royalties (double-dipping). NDA may be entered into for sharing confidential information of the licensor with the licensee’s supply chain (only legitimate confidential information).

Hence, disclosure of the information is also mandatory to enable the licensee to evaluate if the licensor meets all of the FRAND obligations. Eg. Details regarding asserted patents, charts regarding the relevant portion of the standards, target products, historical information, etc. It also enables the licensee to make counteroffers. Requesting such information or questioning the claim of a SEP shall not make a licensee an unwilling one.

Intex Technologies in 2013 filed a complaint with the CCI against Ericson stating that Ericson’s SEP licensing terms were unfair and reeked of abuse as they enjoyed a dominant position in the Indian markets. Intex argued that Ericson demanded potential licensees to enter into strict NDAs and hence was restrictive and violative of Ericson’s FRAND obligations. The CCI concluded that Intex had established a prima facie case for all its allegations that were meritorious.

Best IT World or iBall’s complaint against Ericsson in 2015 before the CCI also included a number of the allegation which were admitted and considered meritorious by the CCI. According to iBall, Ericson violated a number of FRAND terms along with being in violation of section 4 of the Competition Act. It was alleged that Ericson wanted to execute a patent-licensing agreement with iBall, and an NDA to license GSM and WCDMA to make compliant products. iBall asserted that the NDA terms weren’t just strict and onerous but also restricted arbitration in Stockholm and covered iBallspast as well as future sales within the ambit of the licensing agreement. iBall also accused Ericson of bundling non-SEPs with SEPs in the agreement which were a blatant disregard of the FRAND terms. The CCI upheld the accusations and found Ericson guilty of the same.

The same is also incorporated in the principles of FRAND licensing.

Core Principle 5: Neither party to a FRAND negotiation should seek to force the other party into overbroad secrecy arrangements. Some information, such as patent lists, claim charts identifying relevant products, FRAND licensing terms, aspects of prior licensing history, and the like are important to the evaluation of potential FRAND terms, and public availability of those materials can support the public interest in consistent and fair application of FRAND. A patent holder should not seek to exploit its information advantage regarding the patents or prior licenses to interfere with the potential licensee’s ability to effectively negotiate.

B. Fundamentals of a FRAND licensing agreement

The fundamentals of FRAND licensing aim to reduce complexity in SEP licensing. Due to its nature, SEPs are unavoidable and puts holders of the same on pedestals. Representation by the licensor must be honest and capable of being verified. The patent portfolio should be open to royalty and value reductions through an ‘adjustment clause’ due to expiration, re-examination proceedings, etc. The SEP licensing negotiations cannot be conditioned to an administrative fee and both parties must bear their own costs.

C. SEP Valuation Methods

The CWA aims for the utilization of royalty methods as per Section 5.3 of the CWA or as mutually decided as per the parties. As per general principles discernable from relevant authorities, FRAND royalties are only expected to reflect the value of the patented invention.

Smallest-saleable patent principle (USA). Calculation of royalties must be based on the proportionate value the claimed patented invention brings to the smallest component entering the stream of commerce that substantially implements the relevant part of the standard. Once established, that value should remain constant regardless of the complexity of the end product (e.g., due to the addition of others’ additional inventions and technologies in the end product) – because the patent holder is not entitled to the value created by the inventions or technologies of others.

In a complaint filed by Micromax Informatics Limited against Ericsson which was specifically in the context of royalty rates set as per the percentage of the sale prices relating to the licensed, downstream product (typically, a mobile phone handset) instead of the value of its chipset technology independently; was held to be in violation of the Competition Act in India. The court used the mechanism to evaluate royalties and held that they were in line with recent judicial trends and sound economic reasoning. In spite of the judgment, The Delhi High Court took a different stance during Ericson’s suit against Micromax.

Core principle number 3 incorporates the same very succinctly.

Core Principle 3: SEPs should be valued based on their own technical merits and scope, not based on downstream values or uses. In many cases, this will involve focusing on the smallest component that directly or indirectly infringes the SEP, not the end product incorporating additional technologies. As noted by the European Commission, SEP valuations “should not include any element resulting from the decision to include the technology in the standard.” Moreover, “in defining a FRAND value, parties need to take account of a reasonable aggregate rate for the standard.”

In India’s case, the Delhi High Court decided to incorporate the value of the downstream product as a royalty base and relied heavily on the method of comparing licenses to derive FRAND royalty rates in order to be consistent with economic principles, judicial orders, and industry trends.

However, initially, the CCI was in favor of the smallest salable patent principle as had taken form in the US; as the royalty base for determining a FRAND royalty. This goes to show Indian courts and commissions, owing to cases related to SEPs today, are taking bold steps to device methods of valuations on its own and customize the same for the market conditions in India.

D. Non-discriminatory behavior

Maintaining a level playing field is a key feature of FRAND and hence discriminatory royalties or refusing a license is inconsistent. Agreement behavior may change from licensee to licensee, however, the same should not be discriminatory in nature. Licensors with SEPs in a given standard ecosystem cannot collude or refuse license wherein it is promised by them. SEP owners are also not entitled to special legal privileges different than what is afforded to other patent owners not subject to a FRAND obligation.

Being able to pick and choose licensees and be in control of who runs and who operates in a market is not acceptable. Hence the European Commission notes:

In order to ensure effective access to the standard, the IPR policy would need to require participants wishing to have their IPR included in the standard to provide an irrevocable commitment in writing to offer to license their essential IPR to all third parties on fair, reasonable, and non-discriminatory terms. […] FRAND commitments can prevent IPR holders from making the implementation of a standard difficult by refusing to license … after the industry has been locked-in to the standard […] (EC Horizontal Guidelines, ¶ 285)

 

Core Principle 2: A FRAND license should be made available to anybody that wants one to implement the relevant standard. Refusing to license some implementers is the antithesis of the FRAND promise. In many cases, upstream licensing can create significant efficiencies that benefit the patent holder, the licensee, and the industry.

Hence, the same is incorporated in the principles of FRAND licensing

E. Injunctions

FRAND is designed with the sole aim to avoid market exclusion of competitor companies by dominant ones. Hence, it restricts the availability and appropriateness of injunctive relief.

Threats of injunctions on a FRAND-encumbered SEPs are violative, except in exceptional circumstances, such as (a) when the implementer is in bankruptcy or is (b) beyond the jurisdiction of the court or (c) an unwilling licensee has caused monetary harm to the licensor are against FRAND terms.

In March 2013, Ericson filed a suit for a permanent injunction against Micromax for infringement of 8 Ericson SEPs. The court decided on an interim arrangement for royalty in way of compensation but did not pass an order for a permanent injunction. Hence, the universal acceptability of the non-exclusion principle is portrayed impeccably in the said case.
The suit filed by Ericson against Intex in 2014, however, did not meet the same fate.

As the Commission stated in Motorola, “The essence of the commitment to license on FRAND terms and conditions is a recognition by a SEP holder that, given the purpose of the standardization process, its essential patents will be licensed in return for FRAND remuneration.” This essence and purpose are generally undermined by market exclusion. The charges of patent infringement (of 8 SEPs) was similar to the Micromax allegations in 2013; however,

• European courts have not yet developed extensive case law addressing the situations where the use of injunctions might violate the FRAND licensing promise qua promise. Instead, much of the European law on this issue has focused on situations where the use of injunctions might violate European competition laws.
• In the United States, the availability of injunctions is addressed under the U.S. Supreme Court’s eBay standard, which requires the weighing of four equitable factors before an injunction can be available. In considering the availability of injunctions for FRAND-encumbered SEPs, the U.S. courts have ruled that, while injunctions are not prohibited in all SEP cases, the FRAND promise to license entails that the eBay factors, such as whether legal remedies (e.g., the availability of monetary damages or similar compensation to the patent holder), are unlikely to support an injunction for SEP matters

This further entails that the value of royalties should take into account an overall royalty for the standard, and then evaluate the patent holder’s contribution as a portion thereof.

Hence zeroing down on the first and foremost principle that;

Core Principle 1: A FRAND SEP holder must not threaten, seek or enforce an injunction (or similar de facto exclusion processes) except in exceptional circumstances and only where FRAND compensation cannot be addressed via adjudication, e.g. lack of jurisdiction or bankruptcy. Parties should seek to negotiate FRAND terms without any unfair “hold up” leverage associated with injunctions or other de facto market exclusion processes.

F. Licensing through patent pools

Both licensors and licensees retain the freedom to decide whether to license through a patent pool or through bilateral negotiations. According to the CWA offering FRAND licenses by a SEP holder through a patent pool, shall only be an additional option to a bilateral FRAND license. Where a patent pool administrator is acting as a sub-licensor or licensing agent for multiple SEP licensors, the pool administrator and the pool’s SEP licensors should work with the putative pool licensee to determine what licenses may already exist with the putative pool licensee’s direct or indirect suppliers and its customers and then adjust the royalty obligation accordingly to avoid double-dipping. Patent pools are encouraged to publish all of their license terms, including royalty rates and other terms and conditions.

G. Patent Transfer and Disaggregation

If a FRAND-encumbered SEP is transferred, the initial transferee and all subsequent transferees must remain bound by the FRAND commitment.

Patent owners might fragment their portfolios. Where SEP portfolios are broken up, the total royalties sought for the broken-up parts (and the remaining part of the portfolio) should not exceed the royalties that would have been found to be FRAND had the portfolio been retained by a single owner, or that were charged by the original owner. A FRAND promise should therefore extend to a transferee if the SEP is sold. If a FRAND-encumbered SEP is transferred, the initial transferee and all subsequent transferees must remain bound by the FRAND commitment.

Hence, the same is incorporated in the principles of FRAND licensing.

Core Principle 6: FRAND obligations remain undisturbed despite patent transfers, and patent sales transactions should include express language to that effect. Patent transfers likewise should not alter value sought or obtained for particular patents. Where SEP portfolios are broken up, the total royalties charged for the broken-up parts (and the remaining part of the portfolio) should not exceed the royalties that would have been found to be FRAND had the portfolio been retained by a single owner, or that were charged by the original owner. And patent transfers should not be used to defeat a potential licensee’s royalty “offset” or similar reciprocity rights.

A. Context, Competition-Law Aspect, and Public-Interest Function of the FRAND Obligation

The interests of standards developers in the success of their work products.

To understand the broader context and purpose of the FRAND commitment, each of the following aspects needs to be considered:

Competition Law and Policy Constraints.

The development of standards involves market players who may be competitors. Hence, the standards which are picked from a pool of recommendations may give rise to antitrust law issues. However, pro-competitive and positive economic effects through enabling improved supply conditions or innovations in technology are widely accepted of standardization and hence promoted by policymakers. It should be made sure that the results however are not abused.

Guidelines to ensure that leverage is not gained from the elimination of technology alternatives through a standard are put forth by competition law agencies. The challenge is to guard against potential abuse of the inability to design around patented technology selected for standardization (or ‘lock-in’).

Public Policy and Consumer Interest.

The lock-in effect was a glaring technique used by Ericson as per Micromax’s allegations in the 2013 complaint. Ericson was aware that there were no alternatives to the standards implemented by the 2G and 3g wireless telecommunications standards and hence the licensee (Micromax) was bound to use the SEP provided by Erikson. This enabled them to charge royalties arbitrarily according to the down streamed product and not the individual chipset technology; hence charging exorbitant amounts. The CCI recognized that Ericson was the largest holder of SEPs in the Indian market and thus clearly enjoyed a dominant position in therein. It decided that FRAND licenses had a primary purpose; which was to prevent ‘patent holdup and stacking’ as it undermined the ‘competitive process of choosing from other technologies’ as well as compromising the integrity of standard-setting’

Policymakers frequently describe FRAND as a balance between the interests of SEP holders in obtaining fair compensation for the use of their patents, and the interests of standards implementers in obtaining fair licensing terms for patented features that are used in standards. Policymakers also promote a common understanding of SEPs and their implications.

In its Communication on SEPs of November 2017, the European Commission has, for example, “set out key principles that foster a balanced, smooth and predictable framework for SEPs”, addressing 1) increased transparency on SEP exposure, 2) general principles for FRAND licensing terms for SEPs, and 3) a predictable enforcement environment for SEPs. The Communication also calls for “stakeholders to engage in dialogue with each other […] with the view to achieving further clarification and developing best practices”. The present CWA is, in part, an industry-led response to that call. (EC SEP Communication, supra note 17, at Sec. 2.)

B. Consideration of SME interests.

Unfair licensing demands relating to SEPs covering standards needed to participate in the market ecosystem can uniquely impact and harm SME market participation.

A number of factors create risks within the SEP licensing environment for SMEs

• Asymmetries resources: Against entities asserting SEPs.
• Asymmetries in commercial information: Limited capacity to dedicate legal resources to check SEP environments.
• Asymmetries in technical information: Many SMEs do not have the technical expertise in the technology and the standards to verify whether the alleged SEP is valid.
• Asymmetries of market position: SMEs are often inexperienced in determining FRAND royalty rates in different positions along the same value chain or in other IoT verticals.

For example, when Patent assertions Entities target SMEs through “forum-shopping” and “campaigning” to extract royalty payments on patents that may or may not be essential to a standard, which often requires years of expensive legal fees and litigation.

Conclusion

Nesting the world’s second-largest telecommunications network makes India an extremely lucrative place for telecommunication participants. Hence, due to the constant give and take associated with the industry, especially in light of the newly emerging technologies, there is no alternative to framing and maintain regulations. The CCI and the Delhi high are constantly making a significant effort to catch up with trends in patent licensing jurisprudence. Even though the Delhi High court went against the tide in the complaint filed by Ericson against Micromax, it is clear that the authorities in India are applying their own mind to logic to valuating royalties and deciding upon the fate of these companies. Though the authorities seem to be reacting rather well to jurisprudential trends and regulations, they fail to derive precedents properly from their own judgments. Wherein CCI referred to its orders in the Intex and iBall cases, it failed to recognize the orders laid down at the High Court following the CCIs orders. Hence, there should be more harmony between the way the CCI and the High Court work on forming their principles and judgments.

Author: Ms. Niharika Sanadhya, Intern at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at [email protected].