“[Future standards development organizations (SDO) policy updates] ‘should encourage good-faith bilateral licensing negotiation by both patent holders and implementers’ [as] ‘[h]old out can significantly undermine innovation incentives and deserves consideration in SDO licensing policies.’” – U.S. Department of Justice
This is the fifth and final article 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 fourth article focused on the obligations of SEP owners in the process of FRAND licensing. This article considers the obligations of implementers.
The FRAND Process: Implementer (Prospective Licensee) Obligations
The majority of FRAND related statements discussed so far in this series have focused on the obligations of SEP owners and were made for purposes of meeting the same. Some entities, however, also refer to the obligations of implementers.
Apple’s FRAND statement, for example, mentions certain SEP licensee obligations. Apparently, though, these obligations only arise after an SEP owner has met its obligations which, according to Apple, include providing proof that licenses are needed and that the terms and conditions being offered are in fact FRAND (see the fourth article in this series of articles):
After a SEP owner satisfies its disclosure obligations, SEP licensees should provide substantive responses to any bona fide offer, including an explanation and factual and legal support as to why the licensee believes the offer does not comply with the owner’s FRAND obligations, if applicable.
Similar to its views regarding transparency, Apple’s FRAND statement does not, however, make clear what it means for an SEP licensee to “provide substantive responses”. For example, does this require SEP licensees to prove their positions are correct, as Apple says SEP owners are required to do?
InterDigital’s FRAND statement, by way of comparison, espouses a view that obligations exist on both sides to a FRAND licensing negotiation, without any requirement that SEP owners meet their obligations first. For example, InterDigital says that “both parties have an obligation to negotiate in good faith” and that “both parties should work diligently and in good faith to reach a license agreement.” With respect to the obligations of prospective licensees specifically, InterDigital says that, if an SEP owner’s offer is not acceptable, “prospective licensees should provide an explanation of why it does not believe that the offer is FRAND and promptly make a good faith counteroffer”. Further, InterDigital expresses a view that injunctive relief should be available “to combat free-riding by unwilling licensees who engage in delay tactics and other hold-out behavior.”
Ericsson is also of the opinion that FRAND is a “two-way street” where, “not only the licensor but also the licensee has to act in good faith”. Further, Ericsson shares InterDigital’s view as to the appropriateness of injunctive relief to address unwilling licensees, stating that “recourse to injunctive relief is generally a legitimate remedy, as without it unwilling licensees have no or very little incentive to enter into licenses (instead being encouraged to force patent holders into starting litigation).”
InterDigital and Ericsson’s statements do not, however, provide much detail regarding what is required of implementers other than an obligation to negotiate in good faith. One reason may be because the obligations of prospective licensees in FRAND licensing have received far less attention than those of SEP owners to date.
Supporting Ericsson’s view that implementers also have obligations in the FRAND licensing process, Judge Rodney Gilstrap refused to dismiss Ericsson’s counterclaims that HTC breached its obligation as a licensee to negotiate in good faith and a for declaratory judgment that “HTC has rejected, repudiated, and/or forfeited any rights associated with Ericsson’s FRAND declarations and is an unwilling negotiating partner.” (Memorandum Opinion and Order HTC Corporation, HTC America Inc v. Telefonaktiebolaget LM Ericsson, Ericsson Inc, Case No: 6:18-CV-00243-JRG (E.D. Texas, December 17, 2018)). Notwithstanding a jury verdict which found HTC to have breached its duty to negotiate in good faith, HTC argued that judgment should be entered in its favor because “a third party beneficiary cannot breach a contract to which it is not a party.” Judge Gilstrap did not rule on this argument, however, because the doctrine of unclean hands barred Ericsson’s requested relief as Ericsson was also found to have breached its obligation to negotiate in good faith. And given these findings were a result of a jury verdict, and much of the pleadings are redacted, the reasons why HTC and Ericsson were found to have breached their respective obligations to negotiate in good faith are not entirely clear.
More recently, Apple was found to have willfully infringed PanOptis’ patents (Jury Verdict, Optis Wireless Technology, LLC, Optis Cellular Technology, LLC, Unwired Planet, LLC, Unwired Planet International Limited, and PanOptis Patent Management, LLC v. Apple Inc., Civil Action No. 2:19-cv-00066-JRG (E.D. Texas, August 11, 2020)), but without the jury knowing of any constraints imposed by FRAND licensing obligations. Rather, PanOptis’ claims for a declaration that it complied with its FRAND obligations, and a declaration that Apple has acted in bad faith and can no longer raise a FRAND defense are still being litigated, with both sides submitting competing “Proposed Findings of Fact and Conclusions of Law” in September of this year. As noted in the fourth article in this series of articles, Apple is of the view that entitlement to FRAND licenses cannot be lost.
One interesting viewpoint regarding FRAND obligations of both SEP owners and implementers is found in the Japanese Patent Office’s June 5, 2018 Guide to Licensing Negotiations Involving Standard Essential Patents (“JPO Guide”) which, amongst other things, proposes a mutual transparency obligation. With respect to prospective licensee (implementer) obligations, the JPO Guide says in Section II. Licensing Negotiation Methods, A. Good Faith, 2. Step 2: Expression from Implementer of Willingness to Obtain a License, that when challenging issues of infringement, validity, essentiality and enforceability, “it is useful for [implementers] to provide” the following information, if wanting to be seen as acting in good faith:
- Documents that provide the basis for the implementers’ refutation that they do not infringe the subject patents;
- Prior art that serves as grounds for invalidating the patents;
- Technical information that provides the basis for the argument that patents are not essential; and
- Documentation that provides the basis for the arguments that the patents are not enforceable.
Similarly, if disagreeing with any proposed FRAND terms, the JPO Guidelines indicate that implementers should provide a FRAND counteroffer along with an explanation of how the royalty is calculated, for example, by providing “a list of comparable licenses and their terms, if any (including royalties paid to, or received from, other companies for equivalent technologies, royalties by patent pool, etc….)” (see Section II. Licensing Negotiation Methods, A. Good Faith, 4. Step 4: Specific Counteroffer from Implementer on FRAND Terms).
One entity that apparently does not agree with the notion of mutual transparency obligations is HTC, which, despite accusing Ericsson of exploiting an asymmetry of information (see the first article in this series), unsuccessfully sought to block discovery into its transaction with Google in the same case (Motion for Protective Order, HTC Corporation, HTC America Inc v. Telefonaktiebolaget LM Ericsson, Ericsson Inc, Case No: 6:18-CV-00243-JRG (E.D. Texas, September 6, 2018)).
Recognizing that “it may be unrealistic for a court to determine the essentiality, validity and infringement of dozens, or potentially even hundreds, of SEPs” the JPO Guide also discusses Alternative Dispute Resolution as a possible means to settle FRAND disputes. The JPO Guide does so, however, without saying whether there is any obligation to do so, and without taking a position on the implications associated with refusing ADR. Instead, the JPO Guide simply notes that a difference of opinion exists in relation to these issues (see Section II. Licensing Negotiation Methods, A. Good Faith, 5. Step 5: Rejection by Rights Holder of Counteroffer/Settlement of Disputes in Courts or through ADR). The European Commission’s Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee: Setting out the EU approach to Standard Essential Patents also makes reference to ADR stating that “[t]he Commission takes the view that alternative dispute resolution (ADR) mechanisms such as mediation and arbitration can offer swifter and less costly dispute resolution” but, like the JPO Guide, does so without taking a position on the implications of refusing ADR or whether the obligation to negotiate in good faith requires agreeing to arbitration.
The Beijing High People’s Court’s Guidelines for Patent Infringement Determination (2017) (“Beijing Guidelines”) also reflect the view that both SEP owners and implementers have obligations in the FRAND licensing process, specifically noting that, when determining whether or not to enforce an injunction, courts should consider the respective faults of the parties in the negotiation. With respect to implementer obligations in particular the Beijing Guidelines note that, even where an SEP owner did not meet its obligations, an injunction may still be warranted when “the accused party has serious faults in the negotiation”, such as “failing to diligently respond” and “proposing a [sic] apparently unreasonable condition” (Section 153). The High People’s Court of Guangdong Province’s Working Guidelines on the Trial of Standard Essential Patent Disputes also recognize such a fault-based approach, with one example of a fault being an implementer unjustifiably refusing to sign a confidentiality agreement. Notably, one factor that led to Samsung being found to have been more at fault in its cross-licensing negotiations with Huawei was Samsung’s refusal to arbitrate (Huawei Technologies, Co., Ltd. et al. v. Samsung Electronics Co., Ltd. et al. (CN, Shenzhen Ct. 2018)). Coming back to the Beijing Guidelines, they also note that an injunction should be refused if neither party is at fault in the negotiation, and the accused party has provided a guarantee (Section 152), effectively requiring the implementer to put some skin in the game in order to avoid an injunction where both parties have otherwise met their FRAND obligations and infringement has been established. An implementer’s obligation to provide security after its counteroffer has been refused was also recognized in the CJEU’s decision in Huawei v. ZTE (Case C-170/13) EU:C:2015:477; 5 CMLR 14;  PRC 4. According to the JPO Guide this notion “is based on the idea that it would be contradictory and therefore unfair for the implementer to assert its willingness to pay the licensee fee but actually fail to do so even while using the product.”
Most recently, in a September 10, 2020 letter to the IEEE, the U.S. Department of Justice supported a view of the FRAND licensing process whereby obligations exist on both sides, stating that future standards development organizations (SDO) policy updates “should encourage good-faith bilateral licensing negotiation by both patent holders and implementers”, noting that “[h]old out can significantly undermine innovation incentives and deserves consideration in SDO licensing policies.”
European CWA Agreements Illustrate the Divide
The divide that exists between those who are primarily owners / would-be licensors of SEPs, and those who are implementers / prospective licensees of SEPs, is possibly best reflected in the industry’s failure to generate a common European Committee for Standardization Workshop agreement (CWA) regarding the licensing of SEPs. Instead, two CWAs ended up being published in June 2019: CWA 17431 (“Principles and guidance for licensing Standard Essential Patents in 5G and the Internet of Things (IoT), including the Industrial Internet”) and CWA 95000 (“Core Principles and Approaches for Licensing of Standard Essential Patents”).
CWA 17431 is 17 pages long, lists Ericsson, InterDigital, Philips, Nokia and Qualcomm, among those who developed and approved the CWA, and sets forth several principles regarding obligations to act in good faith, the use of reasonable non-disclosure agreements, fair and reasonable compensation based upon the value of the technology to its users, and the use of third-party determination (including arbitration) to resolve disputes about FRAND terms and conditions.
CWA 95000, by comparison, is 51 pages long and lists Apple and the Fair Standards Alliance as among those that developed and approved the CWA, as well as 34 other entities who did not participate in the drafting but who nonetheless express their support for the CWA. This latter group includes some relatively newer voices to the FRAND conversation such as automotive industry giants Daimler, Ford and Toyota. Amongst other things, CWA 95000 supports FRAND rates being based on “the smallest component that directly or indirectly infringes the SEP” and the notion of there being disclosure obligations on SEP owners. CWA 95000 disagrees, however, with portfolio licensing and, despite saying that “[a] potential licensee should act in a reasonable manner and be fair and forthright in its interactions with the licensor”, makes no mention of any specific implementer obligations. Instead, in a section misleadingly titled “Willing licensees of FRAND encumbered SEPs”, CWA 95000 points to the obligations of SEP owners that should be met first:
Licensing Response: It would be difficult or impossible for a licensee to make a FRAND counter-offer unless and until the licensor has at least: (a) reasonably established the essentiality of its SEPs and reasonably established that the licensee has indeed infringed the licensor’s SEPs; (b) made a FRAND offer; (c) provided the licensee with sufficient information to evaluate the “FRAND-ness” of the licensor’s offer and how it was calculated; and (d) provided the licensee with sufficient time to evaluate and consider all of the above.
Further, in the same section, CWA 95000 says that “[c]hallenging the merits or enforceability of any claimed SEP, requesting reasonable supporting information regarding the FRAND licensing offer, and/or making a FRAND counter-offer should not render a party an unwilling licensee.” Finally, CWA 95000 states that “a potential licensee should not be compelled to participate in worldwide FRAND adjudication (i.e. a rate-setting exercise for a broad portfolio license), such as being threatened with an injunction if the licensee insists on exercising its right of access to the national courts” and, with respect to arbitration, that “seeking to compel a portfolio determination or to impose penalties if such a procedure is not agreed would be improper and counter to existing laws and rights.”
Time Will Tell
As can be seen from the FRAND statements of various entities, and the related legal pronouncements, FRAND means many different things to many different people. Only time will tell which of the competing viewpoints will prevail or whether standards development organizations and/or standards setting organizations will step in to break the stalemate.
You can read the full series of articles here.
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