“A common thread among many FRAND-related statements is a reference to ‘transparency’. Most do so, however, without fully explaining what that entails.”
Over the years, several entities have published statements related to licensing 4G/5G cellular wireless Standard Essential Patents (SEPs) on a Fair, Reasonable and Non-Discriminatory (FRAND) basis. These include entities that are primarily licensors of SEPs, entities who sell network equipment products or components and who are also significant licensors of SEPs, entities who sell end user products and who are significant licensees of SEPs, an association focused on FRAND policy development and a patent pool. An analysis of these statements reveals several common themes, but also a wide range of opinions on such issues. Below is the first in a series of articles that will review these statements with a view to highlighting some of these differing viewpoints, and provides context for these statements by way of reference to the policies of standards setting organizations and related legal pronouncements.
A common thread among many FRAND-related statements is a reference to “transparency”. Most do so, however, without fully explaining what that entails. For example, one of InterDigital’s FRAND-related statements indicates that it “…believes in a balanced and pragmatic approach to FRAND licensing, one that focuses on increased transparency…”. Similarly, Apple’s FRAND statement says “[b]oth SEP licensors and licensees should negotiate transparently and willingly based on an exchange of relevant information.” Notwithstanding the common terminology, a more in-depth review of these statements reveals several areas of disagreement on this issue.
One such area of disagreement is with respect to the use of confidentiality arrangements. For example, InterDitigal is of the view that “[l]icensing, like any business negotiation and agreement, involves some measure of confidentiality”. A position paper of The Fair Standards Alliance (FSA), of which Apple, Google and Microsoft are listed as a members, however, opposes the use of confidentiality agreements on the basis that they “prevent companies from discussing the proposed or existing financial terms of the licenses (such as upfront payments or royalty rates) with any other companies”. The FSA, therefore, is apparently of the view that should there not only be transparency between the SEP owner and a prospective licensee, but also with respect to all other prospective licensees. In contrast to the views of the FSA, Motorola Solutions’ FRAND statement notes that “[a]lthough it may be feared that confidentiality provisions in standard essential agreements (or separate confidentiality agreements) may be used to mask non-FRAND terms, confidentiality agreements actually enable the transparency needed for FRAND by protecting the information exchanged during negotiations.” For example, a pre-license agreement regarding maintaining confidentiality can result in more transparency between the licensor and prospective licensee if third party licenses can only be disclosed subject to such an agreement.
Although the commitment to license on FRAND terms and conditions pursuant to Section 6 of the ETSI IPR Policy makes no explicit mention of “transparency”, Section 4.4 of the ETSI Guide on Intellectual Property Rights (IPRs) does recognizes the use of non-disclosure agreements in licensing negotiations, adding that “this general practice is not challenged”. Perhaps reflecting that the use of confidentiality arrangements is an established industry practice, it is also worth noting that many of the leading cases in the FRAND space consider confidential license agreements as part of unpacking analyses performed therein without any mention of FRAND violations resulting therefrom. See for example, Unwired Planet International Ltd -and- (1) Huawei Technologies Co. Ltd (2) Huawei Technologies (UK) Co. Ltd -and- Unwired Planet LLC,  EWHC 2988 (Pat) (In The High Court of Justice Chancery Division Patents Court), and Findings of Fact and Conclusions of Law, Microsoft Corporation v. Motorola, Inc. , et al. , and Motorola Mobility, Inc. , et al. , v. Microsoft Corporation, Case No: C10-1823JLR (W. D. Washington, April 25, 2013).
The potential antitrust implications of confidentiality agreements, particularly in the context of FRAND licensing, were explored in an article by Mark R. Patterson titled “Confidentiality in Patent Dispute Resolution: Antitrust Implications”, Washington Law Review, Volume 93, Page 827 (2018). Amongst other things, the author notes that the use of confidentiality agreements in resolving patents disputes is unlikely to be a per se antitrust violation:
Despite the summary condemnations in the cases just discussed, though, it seems likely that if a court were to consider these agreements under antitrust law, it likely would apply the rule of reason. The rule of reason requires an assessment and balancing of anticompetitive and procompetitive effects, and usually (though not always) also involves an assessment of market power.
Patterson further recognizes that a commitment to license on FRAND terms and conditions is not itself a commitment to being transparent, and that the former could be met despite a lack of full disclosure:
To be sure, even a commitment to FRAND licensing is not (now) expressly a commitment to transparent licensing. It would be possible for a patentee to license all its licensees on FRAND terms without revealing to any licensees the licensing terms applied to others, just as it would still be conceivable that all licensees would negotiate the same (or non-discriminatory) terms without those terms being publicly available.
Another area of disagreement related to the issue of transparency, and the use of confidentiality agreements, involves the information to be provided by licensors to prospective licensees, as well as when such information is to be provided. The FSA, for example, is of the view that prospective licensees should be entitled to not only “existing” terms of licenses but “proposed” terms as well. Further, in the same position paper, the FSA states that “during negotiations of licenses, SEP holders represent to potential licensees that other companies have accepted the financial terms of the proposed license” but “[b]ecause of the confidentiality restrictions imposed on the prospective licensee (and other licensees) the prospective licensee is unable to verify if what the SEP holder has represented is true” seemingly implying that prospective licensees should be entitled to such information at a negotiation stage.
One entity whose licensing practices indicate it may not agree with such a broad transparency obligation is Ericsson, as evidenced by HTC’s 2017 complaint (First Amended Complaint paragraph 59, HTC Corporation and HTC America, Inc. v. Telefonaktiebolaget LM Ericsson and Ericsson Inc., Case No.: 2:17-cv-00534-MJP (W.D. Washington, April 6, 2017)) alleging that Ericsson breached its FRAND commitment to HTC by not providing sufficient pre-litigation disclosures:
Ericsson also unfairly exploits its superior information concerning the license rates paid by other companies. Ericsson has perfect information concerning the license rates paid by others. Potential licensees, however, have little or no information concerning “comparable sales.” Ericsson ensures its ability to engage in discriminatory pricing by conducting licensing negotiations in secret, taking advantage of this asymmetry of information. Ericsson requires that potential licensees enter into adhesive non-disclosure agreements for all negotiations and licenses. As a consequence, only Ericsson knows the terms and rates paid by other licensees. Armed with this one-sided knowledge, Ericsson then leverages this asymmetry of information in order to extract discriminatory terms from its licensees.
While Ericsson was found to have breached its duty of good faith in carrying out its contractual obligation to negotiate with HTC for a license to Ericsson’s cellular SEPs, it is not possible to know whether or not the jury’s decision turned on any lack of pre-suit transparency given that finding resulted from a jury verdict (Verdict Form, HTC Corporation, HTC America Inc, v. Telefonaktiebolaget LM Ericsson, Ericsson Inc, Case No: 6-18-CV-00243-JRG (E.D. Texas, February 15, 2019)).
From a compliance with FRAND perspective, some European courts in non-discovery jurisdictions have required SEP owners seeking injunctions to disclose prior licenses to establish that their offers are non-discriminatory. See for example Unwired Planet v. Huawei, Case I-2 U 31/16 (OLG Düsseldorf, Mar. 22, 2019). The authors of this article are unaware, however, of any court decisions extending such an obligation to pre-suit negotiations. Other European courts have not even required such information be provided during litigation (see Koninlijke Philips N. V. vs. Asustek Computers Inc., Case number 200. 221. 250/01 (Court of Appeal of the Hague, May 7, 2019), pages 57-75). The Guidelines on the handling of the antitrust compulsory license objection according to Huawei v. ZTE within the Munich Procedure of Handling Patent Infringement Cases (non-literal translation provided by the Work Group on Patent Judicature in Germany state, however, that “Insofar as the patent user concludes an appropriate confidentiality agreement, the patent proprietor must – as far as he is formally allowed to do so within the framework of the confidentiality obligations already entered into – also provide further confidential details on contracts already concluded”, albeit in the context of “the handling of compulsory license objections under antitrust law in patent disputes”.
Listing Licensed SEPs
Regarding information to be provided by licensors, Apple’s FRAND statement specifically indicates that “SEP owners should identify each SEP to be licensed…”. Of the FRAND-related statements analyzed, only Sisvel makes lists of specific SEP assets being licensed available on its website. One reason that such information is not being made readily available may be due to the living nature of the portfolios being licensed by others, which makes keeping an up-to-date list challenging. The fact that such information is not available on an entity’s website does not, however, mean that it is not being provided on a bilateral basis. Another reason may be that these licensors have already disclosed to ETSI and other standard bodies their potentially essential patents and may not believe they are obligated to provide more. See for example, Lenovo’s recent response to a Statement of Interest filed by the Antitrust Division of the Department of Justice (Plaintiffs’ Statement In Response to the United States of America’s Statement of Interest page 7, Lenovo (United States) Inc. and Motorola Mobility LLC v. InterDigital Technology Corporation, IPR Licensing, Inc. , InterDigital Communications, Inc. , InterDigital Holdings, Incl, InterDigital Patent Holdings, Inc. and InterDigital, Inc. , C. A. No. 209-493 (LPS) (Delaware, August 5, 2020)), in the former’s anti-trust case against InterDigital, alleging that InterDigital does not provide a list of SEPs separate from those that declared as potentially essential:
Instead, Lenovo has alleged that IDC implemented a multi-pronged anticompetitive scheme of (1) making false promises that it would license any patents essential to the standards on FRAND terms, and (2) declaring thousands of patents as potentially essential to the standards without regard to their actual essentiality and thereafter refusing to identify with particularity which of the patents it declared as potentially essential it contends are actually essential.
As will be discussed in an upcoming article, InterDigital’s position may be reflective of its views on who bears the burden of proof in FRAND licensing.
A Different Approach for Avanci
Finally, Avanci’s approach to transparency is worth noting in that it seeks to address the issue in a different way, namely, by requiring all licensees pay identical per unit rates for the same types of devices:
Avanci’s transparent pricing model will include published royalty rates on its website, making them available to all in the industry. In doing so, Avanci offers all competitors an identical price for a license to an aggregated portfolio of patents from the leading patent owners.
This consistent and transparent approach will help to lower IoT companies’ transaction costs and ultimately simplify their license agreement process. Instead of building a team of lawyers and technologists to secure standard-essential wireless patents on the most favorable terms possible, companies in the IoT space can focus on what they do best—developing innovative new products and applications built on a strong foundation of wireless technology.
Presumably, if Avanci rigidly adheres to such pricing, there is less of a need for prior licenses to be made available to prospective licensees, though non-financial terms could still vary.
In the next article, we will analyze various FRAND-related statements with a view to unconditional FRAND offers, arbitrating FRAND terms and conditions, specific FRAND rates and their justification, how such specific rates may be applied, and portfolio licensing.
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