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Misleading-licensee surge spurs negotiation rethink for SEP licensors

Standard essential patent holders say the flood of unwilling licensees dragging out negotiations by pretending to be interested in a licence has compelled companies to more quickly identify these willing-licensee fakers

A surge of willing-licensee fakers is compelling companies to reassess their standard essential patent (SEP) negotiation tactics, according to in-house counsel.

Sources at global telecoms companies say that the number of unwilling licensees pretending to be willing who drag out negotiations with questions on fair, reasonable and non-discriminatory (FRAND) terms has increased significantly over the past decade.
They add that this wave has disrupted revenue forecasts by making it even more difficult to tell when a negotiation will be settled and when they can expect royalties. It has also made it more important for counsel to discern whether a willing implementer is actually planning to take a licence. 
“The work has become choppier,” says the senior counsel at an appliance manufacturer. “Forecasting licensing revenues becomes more difficult because deals are spread out by delays, and what should be a predictable royalty stream becomes difficult to project with any semblance of certainty.”
One way to get royalties from willing-licensee fakers faster is to get better at identifying them as unwilling parties, according to sources. Companies that know they are dealing with an unwilling licensee can more easily plan for inevitable litigation and more accurately determine when they will get royalties from that party.
Sources point out that the surge of willing-licensee fakers has been largely spurred in Europe by the 2015 Huawei v ZTE decision from the Court of Justice of the EU, which set out how an implementer must express a willingness to conclude a licensing agreement on FRAND terms.
This wave has added a layer of complexity to the already fraught SEP negotiations that centre on what should be considered FRAND. The head of IP litigation at a global telecoms company points out that discussions on SEP deals with genuine willing licensees are already drawn out because of different interpretations of the concept.
“Companies will often come to an agreement to take a licence and pay royalties, but it always takes time,” he says. “Whatever they offer is too low and whatever we offer they say is too high. In the end, the correct rate is normally found, but the time it takes is a problem for us.”
He adds that licensees can take advantage of lots of different FRAND queries in the process to drag out negotiations, such as whether it is right for a business to charge more for a licence for an end product with a higher price tag than for a less valuable item.
Some companies have experienced an enormous surge of litigation because of these negotiations.
One industry source says that around 80% of SEP discussions used to end in settlement and companies would only need to take one or two users to court. But the same number of negotiations now end in litigation because it makes financial sense for a licensee to sit tight through a lengthy negotiation and litigation process that will probably only end in a licence arrangement.
The head of litigation adds that telecoms companies are keen to see remedies introduced that will make a predictable timeframe for royalty revenue possible. The Unwired Planet v Huawei decision in the UK that global licences can be FRAND, he says, was a step in the right direction.
The appliance senior counsel points out that the threat of injunctions is what drives implementers to the table, and he would like to see courts in different jurisdictions making those remedies easier for licensors.  

He adds that the threat of injunction has largely waned in the US and that the courts should more readily consider wilful infringement, where if the licensor can prove that a party is not willing to take a licence for an SEP or is knowingly infringing, the judge can put injunctions back on the table.


Unmasking unwilling implementers

The appliance senior counsel says that unmasking an unwilling licensee comes down to a feeling on how willing they are to schedule appointments and whether a timeframe can be agreed.
He says that his company always tries to agree on a process for discussions with implementers.  The process enables the business to understand the licensee’s positions and gives it a chance to establish milestones and hear about how the other side wants to approach the matter.
“An unwilling licensee won’t want to come to an agreement on these points and will drag their feet,” he says. “They will be vague and unclear about what they want to know about FRAND terms and the deal in general.”
The telecoms head of IP litigation agrees that unresponsiveness is a clear indicator of an unwilling licensee.
The chief IP officer at a telecoms company says that some implementers have got very good at misleading licensors because they have attended seminars on how to prolong negotiations.
“Colleagues from a licensing company once told me about these events. They learn certain tricks, and we can start to identify unwilling licensees by looking out for them,” he says.
The CIPO adds that a common red flag is when an implementer responds to requests for a licence and states that it respects IP rights and is willing to pay royalties, but is then very difficult to get hold of – even once a deadline has passed.
Sources say that another sign is when the implementer keeps asking questions that are often aimed at unrelated patents or are simply irrelevant to the discussion. Companies will set out how they want a deal to progress, but an implementer will keep raising challenges to the proposal at every stage of the negotiation.
“At some point you have to turn around and tell them that there are limits to this game and that there is no way we can solve every challenge that they put to this idea,” says the telecoms CIPO. “They keep bleating questions and then when you insist on getting down to the matter, the unwilling licensee pulls off the mask.”
He adds that a less common trick is for businesses to send junior people with little authority to the negotiating table. He says that he once had a negotiation where he met two representatives in each round who could say nothing apart from what they were instructed on.

“They would come with a proposal and we would make a counter-proposal, and each time they would have to go back to their superiors, which dragged out the process.”


Remedy thoughts

Sources say that deciding whether to sue once an unwilling licensee has been identified has to be done on a case-by-case basis. One industry lawyer says that he would always wait at least 18 months before kicking off a court action.
“One cannot wait forever – but when the matter goes to court, it doesn't hurt the case to show that the business gave the implementer a long time to consider royalty proposals.” He adds that a negotiation may even go on as long as three to five years.
External counsel should be on hand to offer advice on when to pull the litigation trigger when it comes to willing-licensee fakers, to make the best case for the licensor. But the appliance senior counsel says businesses must be careful to ensure that private practice lawyers are not prolonging negotiations themselves to up their billable hours.
He points out that it is in law firms’ best interests to continue disputes – particularly if it leads to court actions that they can charge a lot for.
“Businesses should certainly have good lawyers, but in-house counsel should be wary of incentives diverging.”
A surge of licensees carrying a façade of willingness is dealing another blow to revenue projections in the FRAND debacle. Licensors must be wary and keep an eye out for the signs that a purported willing licensee is actually a faker looking to drag out negotiations forever.

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