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Five FRAND questions - but what are the answers?

A conference on the thorny issue of standard-essential patents and RAND raised some difficult questions, some of them with potentially worrying consequences

I was lucky enough to attend a fascinating conference on SEPs, FRAND and injunctions at UCL-IBIL last week. The problems that arise from standard-essential patents are among the most challenging in IP today, and the lawyers, judges and regulators attending the meeting pretty much agreed that they find them daunting.

The issue has come to a head this year, particularly in the telecoms industry. Standard-essential patents (SEPs) have enabled interoperability and rapid technological development in mobile telecoms. In the old days (roughly, the 1990s) the biggest manufacturers were also among the big patent owners and there was a comfortable environment of cross-licensing. Today, with new entrants (such as Apple and Samsung, neither of whom were visible at the conference) and some significant patent owners who don't manufacture (IPCom, InterDigital) this balance has been upset.

The problem is that patent owners in standard-setting organisations commit to licensing their SEPs on (fair), reasonable and non-discriminatory (RAND or FRAND) terms, but nobody knows what (F)RAND means. So far this year, two judges in the US – Judge Robart (who spoke in London) and Judge Holderman – have had to set a RAND rate in the face of widely divergent figures presented by the patent owner and manufacturer. A court in China has also set a RAND rate, though its reasoning has not been published.

Meanwhile, in Europe a number of disputes concerning SEPs and RAND licensing are working their way through the courts (such as Vringo v ZTE). There has been some guidance from the German Orange Book decision, although the relevance of that is disputed (not least because it didn’t involve a FRAND promise). Another German case, involving Huawei and ZTE, has been referred to the CJEU. Meanwhile, as we reported recently, Samsung has addressed European Commission competition concerns regarding SEP licensing, and intriguingly suggests a role for the UK High Court and, longer term, the planned Unified Patent Court.

Even after two full days of discussion in London, there were few answers to the problems. But it did feel like everyone agreed that some of the key questions had been defined. Bearing in mind much of the discussion was held under Chatham House Rules (no names, no quotes), we’ve picked out five of the questions that were raised, and welcome comments from readers.

1. Who determines RAND? Judges (with juries, in the US) will do so, but reluctantly. Many of them spoke at the conference about the difficulty of determining RAND royalty rates, especially given the lack of comparable figures. An elegant concept, but difficult to decide in practice and with hindsight, said one (Robart’s decision in Motorola v Microsoft involved more than 700 findings of fact). In any case, companies may not want to be bound by the court’s determination. And when determining rates should patent owners be rewarded for past or present investment, and for failed as well as successful research?

Unfortunately, the SSOs themselves are equally reluctant to resolve the issue (there is a Grand Tour of locations where working groups have tried and failed). Should there be some sort of arbitration body to decide, similar to what exists in some places for copyright licensing? If so who would be on it and how would it work?

2. Should injunctions be available in SEP cases? Patent owners understandably want to retain the threat of an injunction, if a manufacturer refuses to license a SEP on RAND terms. But that risks busting the standard, and could lead to networks being shut down. Post eBay, injunctions are off the table in the US (except in the ITC, which is another story). They may be in Europe too (the Huawei case may shed light on this), though it would be a brave judge who places an injunction a network-critical technology. At the very least, judges have to weigh up the good faith of the parties and the reasonableness of offers being made: is challenging the validity of some patents a sign that you’re not a willing licensee?

With injunctions still in principle being available for non-standard patents, that presents the paradox that non-SEPs may be more valuable than SEPs. Or, as one participant put it: If you have some spare cash to invest in telecoms research, should you put it in (non-standardised) features such as Apple’s rubber-band rather than (standard) network infrastucture?

3. What’s the royalty when the price is zero? Royalties are normally set at a percentage of the purchase price, but many growth businesses are built on a free model, from Android phones to services such as twitter and Instagram; hardware prices are also coming down. That means percentage royalty rates become irrelevant. Alternatively, you could set a cash amount per sale, but this raises its own problems of calculation and fairness. New businesses would say: we’re not making money from sales, so why should we pay third-party patent owners? The patent owners would respond: your business is built on our infrastructure, and you should pay for it.

4. Is portfolio licensing a problem? One of the practices that has until now made SEPs work is that licensees will pay a royalty for a portfolio of SEPs. Everyone knows that many (some say most) of these patents are either invalid or non-essential, but in most cases it’s more efficient for licensees to take a broad licence than go to the expense of challenging dozens of patents (though Nokia’s epic fight against IPCom is an exception). Commercially, that makes sense, but from the point of view of a purist (or, plausibly, an economist) it suggests the industry is conniving to maintain invalid patents, which could be said to be against the public interest.

5. Is there an innovation crisis? The final panel at the conference consisted of representatives of the telecoms network operators. These are the companies that rely most heavily on the SEP system functioning well, and have most to lose if it breaks down (for example, if there is an injunction on a key technology). They also rely on equipment manufacturers to ensure products are not infringing.

In short, there were some doom-laden voices. One noted that if the issues are not resolved, technological advance will slow, interoperability will break up and we will all go back to needing a different phone in every country or state we visit. That would be bad news all round, except perhaps for manufacturers of paper and pens.

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