Analyzing FRAND-Related Statements for Cellular Wireless SEPS (Part II)

This is the second in a series of articles analyzing statements made by various entities in the cellular industry regarding licensing Standard Essential Patents (SEPs) on a Fair, Reasonable and Non-Discriminatory (FRAND) basis. The first article focused on statements relating to transparency. This article looks at statements regarding unconditional offers to license on a FRAND basis, arbitration of FRAND terms and conditions, specific FRAND rates, the application of such rates, and portfolio licensing.

Unconditional FRAND Offers

Something that is near universal in the FRAND statements of SEP licensors is an unconditional commitment to license their SEPs on FRAND terms and conditions. The specific language varies, but the message is largely the same. For example, Nokia’s website says the following:

Patents that are essential for implementing a standard (known as standard essential patents, or SEPs) are customarily made available under fair, reasonable and non-discriminatory (FRAND) terms. We conclude patent license agreements on FRAND terms, in accordance with our obligations towards standard development organizations.

See also the FRAND statements of InterDigital, Ericsson, Avanci, Sisvel, Philips, Qualcomm and Apple.

The most likely reason for such statements was espoused by Judge Birss in Unwired Planet International Ltd -and- (1) Huawei Technologies Co. Ltd (2) Huawei Technologies (UK) Co. Ltd -and- Unwired Planet LLC, [2017] EWHC 2988 (Pat) (In The High Court of Justice Chancery Division Patents Court), when discussing the issue of a licensee’s willingness to accept FRAND terms. According to Judge Birss, that willingness needs to be unqualified, for “to insist on any particular term runs the risk that that term is not FRAND.” It is worth noting that insisting on terms that turned out not to be reasonable and non-discriminatory (RAND) was precisely the problem Motorola ran into when defending a claim brought by Microsoft that Motorola breach its obligation to offer RAND licenses. Specifically, Motorola had offered a rate of 2.25% of the price of the end product (Xbox) but Judge Robart found, and the 9th Circuit confirmed, that the RAND rates for Motorola’s H.264 and 802.11 portfolios were 0.555 cents and 3.71 cents per unit respectively, far less than what Motorola had asked for (see Microsoft Corp. v. Motorola, Inc. No. 14-35393 (9th Cir. July 30, 2015)).

Arbitration of FRAND Terms and Conditions

In addition to committing to license on FRAND terms and conditions, InterDigital goes a step further than most and expresses a willingness to arbitrate in the event the parties cannot reach an agreement through bilateral negotiations. InterDigital also sets forth its “Principles for Binding FRAND Arbitration” providing insight into the form of arbitration it envisions.

As one can see from InterDigital’s now settled case with u-blox, InterDigital’s willingness to arbitrate FRAND terms and conditions allows it to argue that there can be no FRAND or antitrust violations as a result of negotiating specific FRAND terms and conditions (See Defendants’ Answer and Counterclaims, and Memorandum of Points and Authorities in Support of Defendants’ Motion to Dismiss, u-blox AG, u-blox San Diego, Inc., and u-blox America, Inc. v. InterDigital Communications, Inc., InterDigital Technology Corporation, InterDigital Patent Holdings, Inc., InterDigital Holdings, Inc., and IPR Licensing, Inc., No.: 19-cv-00001-CAB-BLM (S.D. California). See also InterDigital’s Opening Brief in Support of its Motion to Dismiss, 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, June 22, 2020)). According to InterDigital, agreeing to arbitrate FRAND terms and conditions importantly ensures that it is not engaging in patent hold-up.

Though not necessarily required of all licensors, the need to make unconditional offers to license on FRAND terms and conditions, and to be willing to submit determination of the same to arbitration, before seeking injunctive relief, was part of an agreement to end a Federal Trade Commission (FTC) investigation into the licensing practices of Google and/or Motorola Mobility (In the Matter of MOTOROLA MOBILITY LLC, and GOOGLE INC., Docket No. C-4410 (Federal Trade Commission, July 23, 2013)). See also the European Commission settlement regarding Samsung’s licensing practices (Case AT.39939, Samsung, Comm’n Decision (April 29, 2014). Similar obligations and more were also reportedly required to obtain the consent of China’s Ministry of Commerce to Microsoft’s planned acquisition of Nokia’s design and services business.

Notwithstanding that offering to arbitrate FRAND terms and conditions is apparently not inconsistent with FRAND licensing, some entities have expressed their opposition to any negative implications being associated with a refusal to do so. For example, Apple’s FRAND statement says that “[p]arties have a fundamental right of access to national courts and a willing licensee does not become unwilling if it refuses arbitration, challenges the merits, or resorts to litigation because the SEP owner does not offer FRAND terms.” This sentiment is also reflected in the positions of the Fair Standards Alliance (FSA). The notion of having access to national courts will be discussed further in an upcoming article in this series regarding the FRAND process in general.

Specific FRAND Rates

In addition to unconditionally committing to licensing SEPs on a FRAND basis, several entities publish specific rates they propose are FRAND. For a summary of these specific rate disclosures see Stasik, Eric. “Royalty Rates and Licensing Strategies For Essential Patents on LTE (4G) Telecommunication Standards”, les Nouvelles, September 2010, pages 114-119, and Stasik, Eric. And Cohen, David L. “Royalty Rates and Licensing Strategies For Essential Patents On 5G Telecommunication Standards: What To Expect”, les Nouvelles, September 2020, pages 176-180. Many of those entities publishing specific rates also provide some justification for the same. The following considers some of these statements but without delving into the specific rates themselves.

As a first example, Qualcomm refers to the value of its 3G and 4G SEPs being “established through bilateral, arms-length negotiations”. With respect to 5G, however, for which it does not have the same track-record, Qualcomm points to its 3G and 4G licensing history once again but notes other factors it took into consideration in deciding its 5G rates, including “Qualcomm’s understanding of the current 5G NR release 15 standards under development and its existing patent portfolio…”.

InterDigital similarly points to its history of licensing, litigation, and arbitration in support of its rates. Additionally, InterDigital refers to studies conducted by third-party analysts regarding its share of all 3G, 4G and 5G SEPs, which information could presumably be used for conducting “top-down” FRAND rates analyses.

Perhaps reflecting a lack of an established history for the specific SEPs it is licensing, Sisvel does not mention any licensing history, instead referring to the use of “customary and appropriate practices in the market” in support of its rates, with particular emphasis being placed on “other licensing programs in similar technology areas”.

Application of Specific FRAND Rates

Flexibility

Regarding how specific FRAND rates may be applied in the context of an actual license, several entities note a degree of flexibility.

For example, InterDigital’s Rate Disclosure page says that “additional discounts” may be available to “qualifying new handset licensees”. Further, in its Statement on FRAND Licensing, InterDigital takes the position that FRAND does not require that royalty rates, or the license structure, be the same for all licensees, but rather “can accommodate the needs and circumstances of individual licensees consistent with the licensor’s overall licensing program and FRAND commitments.” Qualcomm takes a similar position saying “FRAND embodies a flexible approach that allows individual licensors and licensees to negotiate the terms and conditions that are best suited to address their respective commercial objectives, and values standards essential patents through arms-length negotiations”. Motorola Solutions also supports a flexible view of FRAND, and specifically mentions the challenge of “[m]aintaining FRAND across many license agreements…”.

In contrast to the flexible approaches outlined above, an Avanci White Paper implies that it is not flexible on its per unit pricing or running royalty license structure by highlighting its unique approach of having all competitors pay “an identical royalty…” where “[f]lat rate royalties vary in direct relation to the actual number of units rather than being tied to unreliable and/or outdated projections”. According to Avanci “[t]ransactions costs are lowered” as a result of this approach “by avoiding the need to report sensitive revenue and product pricing information.”

Courts in Europe have also endorsed a flexible view of FRAND, rejecting a so called “hard-edged” non-discrimination obligation. See for example, Unwired Planet International Ltd and another (Respondents) v. Huawei Technologies (UK) Co Ltd and another (Appellants) Huawei Technologies Co Ltd and another (Appellants) v. Conversant Wireless Licensing SARL (Respondent) ZTE Corporation and another (Appellants) v. Conversant Wireless Licensing SARL (Respondent) [2020] UKSC 37 and Sisvel International S.A. vs. Haier Deutschland GmbH and Haier Europe Trading SRL, KZR 36/17 (German Federal Court of Justice, May 5, 2020). This is not to say that Avanci’s approach would not be FRAND, but rather that the ETSI FRAND commitment does not require all licensors to utilize such a one-size fits all approach.

Multi-Mode Considerations

Consistent with the approach taken by Judge Birss in Unwired Planet International Ltd -and- (1) Huawei Technologies Co. Ltd (2) Huawei Technologies (UK) Co. Ltd -and- Unwired Planet LLC, [2017] EWHC 2988 (Pat) (In The High Court of Justice Chancery Division Patents Court), and more recently by the Nanjing Court in Huawei Technologies Co., Ltd., Huawei Device Co.,  Ltd. And Huawei Software Technology Co., Ltd. V. Conversant Wireles S.ar.l., Civil Judgement No. 232,233,234 (First, Civil Division, 01, Jiangsu, of the Intermediate People’s Court of Nanjing, Jiangsu Province, PRC, 2018), several entities also explain how their posted rates apply to devices implementing more than one wireless technology (which is typical), in order to avoid royalty stacking problems. In short, less value is attributed to earlier generations of wireless technology when included in a device supporting a newer generation, in part to reflect the fact that the earlier technology is not used as often in such devices.

For example, InterDigital says the following on its rate disclosure webpage:

Cellular rates are not cumulative – the cellular royalty rate that would apply would be that related to the most advanced technology present on the device. So, if it is a 4G phone (with 3G backwards capability), the royalty rate that applies is the 4G rate.

Qualcomm makes similar statements in its 4G related FRAND statement:

As previously communicated to the industry, with respect to multi-mode LTE/3G CDMA devices and WiMax/3G CDMA devices, Qualcomm expects that it will not charge a royalty rate on such multi-mode devices for use of both Qualcomm’s standards essential LTE and/or WiMax patents and standards essential 3G CDMA patents that is greater than Qualcomm’s standard 3G CDMA royalty rate, subject to certain standard terms and conditions

With respect to 5G, Qualcomm further addresses this issue by providing a rate for single-mode 5G handsets in addition to a 3G/4G/5G multimode handset rate. Avanci’s advertised pricing also addresses this issue by noting that a 4G license includes a 2G/3G license, and a 3G license includes a 2G license.

Apple, too, mentions royalty stacking in its FRAND statement saying “[a]n objective reasonable royalty rate protects against SEP licensors being unjustly enriched through excessive royalties (royalty stacking)” . Apple does not make clear, however, if it is referring to the multi-mode issue, the appropriate FRAND royalty base, or something else. The issue of the appropriate FRAND royalty base will be addressed in the next article in this series.

Portfolio Licensing

Also related to the issue of how per unit rates are to be applied, several entities make statements about portfolio licensing, as opposed to country by country, or patent by patent, licensing. Most, however, merely imply that portfolio-wide licensing is consistent with FRAND by virtue of how they express their rates, without addressing the issue head on. See for example the FRAND statements of Ericsson (“Ericsson is prepared to grant licenses to its port­folio of essential cellular patents…”), Qualcomm (“Under Qualcomm’s licensing program for cellular essential patents, the following royalty terms will apply on a worldwide basis…”) and Nokia (“Nokia expects that for mobile phones which implement the 5G New Radio standard, the licensing rate for the Nokia 5G SEP portfolio…”).

InterDigital, however, goes a step further once again, expressly stating that portfolio licensing is consistent with FRAND and “efficient for both licensors and licensees” while “patent-by-patent licensing, or country-by-country licensing is inefficient and not required by FRAND commitments.” InterDigital adds that requests to license on such bases “are often an indicator of an unwilling licensee engaged in improper “hold-out” behavior.”

Despite its support for portfolio licensing, InterDigital is careful to note on its Rate Disclosure webpage that obtaining a license to one SEP portfolio does not require a license to any of its other portfolios. Qualcomm also addresses potential tying problems in its 5G related FRAND statement  by setting forth an SEP-only rate in addition to a rate for its entire 5G related portfolio (i.e. including non-essential / implementation patents).

Apple, by way of comparison, is not only opposed to tying, but to portfolio licensing as well, saying the following in a FRAND related webpage:

No licensor of any type of patent, including SEPs, has a special legal right to collect royalties for only a portfolio-wide license; SEP licensees should not be forced to take bundled or portfolio licenses.

In terms of legal pronouncements on the issue of portfolios licensing, UK courts have found a UK only license was not FRAND but a worldwide license was (see Unwired Planet International Ltd -and- (1) Huawei Technologies Co. Ltd (2) Huawei Technologies (UK) Co. Ltd -and- Unwired Planet LLC, [2017] EWHC 2988 (Pat) (In The High Court of Justice Chancery Division Patents Court)), the German Federal Court of Justice recognized worldwide portfolio licensing as being common practice (Sisvel International S.A. v. Haier Deutschland GmbH and Haier Europe Trading SRL, KZR 36/17 (German Federal Court of Justice, May 5, 2020)), and Ericsson was found by a Texas jury to not  have breached is contractual obligation to offer HTC a license on FRAND terms (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)), despite Ericsson typically licensing on a worldwide basis, as is apparent from the unpacking analyses in Unwired Planet International Ltd -and- (1) Huawei Technologies Co. Ltd (2) Huawei Technologies (UK) Co. Ltd -and- Unwired Planet LLC, [2017] EWHC 2988 (Pat) (In The High Court of Justice Chancery Division Patents Court) see paragraph 534.

In the next article of this series we will analyze various FRAND related statements relating to the royalty base to be used in FRAND licensing.

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