Blogging break

Having commented on events and issues in the SEP FRAND licensing space for a while, I now intend to take a break from blogging. I would like to extend my gratitude to all the readers of this blog, and a wish that it has provided some interesting reading so far.

In several blog posts I have discussed the global emergence of the unwilling licensee engaging in patent hold-out (also called reverse patent hold-up). I have also touched upon some of the factors behind it as well as its consequences.

Thankfully though, courts and agencies worldwide have actually begun to be quite observant, if not vigilant, with respect to patent hold-out behaviour and I have indeed reported on such cases in this blog. Hopefully these and other authorities will continue on that path going forward so that a fair balance between innovators and implementers can be maintained.
 

Huawei vs. ZTE taking effect in Germany

The CJEU's Huwei vs. ZTE judgement came out in the midst of several SEP-related court proceedings in German courts, and indeed as a consequence of one of them. In all these cases, regional courts have typically been faced with requests for injunctive relief based on SEP infringement, and a FRAND defense raised by the infringers.  

In NTT DoCoMo vs. HTC, the Mannheim regional court denied the FRAND defense and allowed an injunction. This was largely based on the infringer's behaviour, including unacceptable delays and non-FRAND counter-offers. 

In Sisvel vs. Haier, the Dusseldorf regional court on very similar grounds also denied the FRAND defense and allowed an injunction. However, in this case the higher regional court of Dusseldorf stayed the injunction due to the lower court not having sufficiently analyzed whether the SEP-holders original offer was FRAND-compliant.

The appeal in Sisvel vs. Haier relates to the exact interpretation of the sequence of "steps" described by the CJEU, including whether the SEP-holder made a FRAND-compliant offer. It seems like the higher regional court of Dusseldorf may have a more strict interpretation than the lower court. But the injunction may very well still be implemented in the end; it depends on the ongoing analysis.

Another interesting case is Saint Lawrence Communications ("SLC") vs Deutsche Telekom where the regional court of Mannheim as in the cases above denied the FRAND defense and granted injunctive relief. However, in this case the infringer is a mobile network operator, which acts as a distributor of ready-to-use phones.  Deutsche Telekom appealed to the higher regional court of Karlsruhe, arguing that if the OEMs were willing to take FRAND licenses, then the downstream distributor can not be subject to an injunction. The appelate court stayed the injunction pending the resolution of that particular question.

There's also a more recent case of interest. In its March 31, 2016 decision in SLC vs. Vodafone, the Dusseldorf regional court again denied the FRAND defense and allowed an injunction against mobile network operator Vodafone and its intervening OEM partner HTC. The grounds were again similar as the other cases. What the CJEU found was the presence of "delay tactics", including late responses to first offers, late counter-offers, counter-offers that did not include a "determined nor determinable" royalty, and counter-offers that were limited to Germany in spite of global product sales and a global offer from the SEP-holder.

It appears as if the court has taken some cues from Sisvel vs. Haier with respect to whether the SEP-holder made a FRAND-compliant original offer.  The court clearly endorsed SLC's other existing license agreements with significant companies in the field as being highly relevant FRAND references illustrating FRAND-compliance. And on the CJEU's "manner of calculation" of royalties, the court stated that there's no requirement to provide a "mathematical derivation" of demanded royalties. It would suffice if the SEP-holder "names the material considerations which establish the FRAND conformity of the license fee being demanded." This could be interpreted as lending further weight to existing relevant agreements and how they can demonstrate royalty rates accepted by competent market participants. 

The fact that the OEM according to the court did not behave in line with the CJEU's requirements as an infringer could indicate that the appeal path used by Deutsche Telekom might be less obvious for Vodafone. And the fact that the court appears to have analyzed SLC's offer quite thoroughly in light of the same court having been corrected on this very point in the Sisvel vs. Haier case indicates that the same could be said about the appeal path used by Haier.

In Huawei vs. ZTE, the CJEU set a standard for what specific behaviour motivates a FRAND defense in the face of a request for injunctive relief for SEP-infringement. It can be seen as an attempt to strike a reasonable balance between SEP-owners and OEMs in light of increasing reverse patent hold-up behaviour by SEP-infringers. The current cases in Germany, and quite possibly the recent SLC vs. Vodafone ruling in particular, have begun to demonstrate the German courts' interpretation of CJEU to this effect, which in turn could also be relevant input for other courts in the EU.

 

Is India moving backwards on patents?

India's Controller General of Patents, Designs and Trademarks (CGPDTM) seems to has taken a U-turn on the patentability of Computer-Related Inventions (CRI). Its recently published guidelines for examination of CRIs appear remarkably restrictive.

Some examples:

"If these system/device/apparatus claims are worded in such a way that they merely and only comprise of a memory which stores instructions to execute the previously claimed method and a processor to execute these instructions,then this set of claims claiming a system/device /apparatus may be deemed as conventional and may not fulfil the eligibility criteria of patentability."

and

"If the contribution lies in the field of computer programme, check whether it is claimed in conjunction with a novel hardware and proceed to other steps to determine patentability with respect to the invention. The computer programme in itself is never patentable. If the contribution lies solely in the computer programme, deny the claim. If the contribution lies in both the computer programme as well as hardware, proceed to other steps of patentability."

The new recommendations appear to be out of touch with reality. In the year 2016, every reasonably advanced new product has a similar and rather generic hardware system architecture. A mechanical structure, a processor, a memory, an I/O-device allowing the processor to control internal electro-mechanical functions and connect with the outside world through sensors, communication means or various interfaces. This is true for virtually any imaginable product; a refrigerator, a camera, a vehicle, an industrial device, a baby's toy etc.

In fact, for all such products, through human thought processes, ideas that solve various real-world problems and improve the utility of the product as a whole are regularly developed and implemented in the processor. As a result of such innovation, new products can be created with new or improved capabilities that make them attractive in the marketplace. Why should such innovation suddenly not deserve the right to be legally protected in India?

If the CGPDTM has it's way, the incentive for technological product innovation will likely be broadly curtailed, except perhaps in relation to very low-tech electro-mechanical products, purely mechanical products and pharmaceuticals. The Indian prime minster's goal of a prosperous India built on Indian hi-tech entrepreneurship could be made unreachable. Sadly, the GGPTDM appears to be on a path to move India backwards.

In the EU and the US, software code per se is indeed non-patentable, and is generally protected by copyright. But devices including technical solutions implemented in software that are novel, non-obvious and have industrial applicability are rightly patentable without stringent hardware restrictions. The US has been only slightly more restrictive but has been steadily aligning itself with the EU position.

Indeed, only last year also the CGPDTM held a CRI position similar to that of the EU. But apparently something happened very recently to change its mind. Some newspapers have reported on some lobbying. If true, it would be very sad indeed as such lobbyists clearly wouldn't have India's future interests at heart.

The SEP and the hypothetical negotiation

When trying to assess reasonable royalty damages for patent infringement, US courts often apply the concept of a "hypothetical negotiation between a willing licensor and willing licensee on the eve of the infringement", where a "next best non-infringing alternative" is available to the willing licensee. This principle can be traced back to the the US Supreme Court's Georgia-Pacific vs. United States Plywood Corp decision from 1970.

The hypothetical negotiation construct has faced some criticism over the years for not always being that realistic. But since it's being used after all, it would still be interesting to see how it applies to the special subset of patents known as wireless Standards Essential Patents (SEP).

Let's first make the following assumptions, relating to the wireless SEP context:

a) In the hypothetical negotiation scenario, a willing licensee intends to sell standards-compliant products and only for this reason enters into a negotiation with an SEP-holder for an SEP license just before the sale of such products would start.

b) A Standards Setting Organization (SSO) selects each solution, whether patented or not and whether big or small, to be incorporated into the standard based only on the best technical merit among all competing proposals on the table for that particular problem.

Regarding b), note that an SSO's mandate is to be "ideal" in this respect, which is therefore a reasonable approximation of reality, although perhaps potentially less so for the IEEE for unique reasons discussed in an earlier post. 

When it comes to how standards and SEPs come about it's also important to realize that standard and SEPs are developed together. Virtually all SEPs include solutions to specific problems that were encountered during the SSO effort to develop a standard, given the specific requirements placed on the standard. In other words, the vast majority of SEPs are filed during the SSO work and not prior to it.

So let's begin by putting the "eve of the infringement" into a time-perspective. The willing licensee intends to sell standards-compliant products, and such can only be created after the relevant standard version has been frozen. Also, due to normal patent prosecution timelines, the SEP-holder's patent will typically only have been granted some time after freezing of the standard version. The earliest possible "eve of the infringement" will thus be the latter of the standards version freeze date and the patent grant date.

Now let's examine the "next best non-infringing alternative" available at the hypothetical negotiation at that time-point. Consider the following: 

1) The next-best alternative solution to the one represented by the SEP-holder's patent was not selected by the SSO to be a standardized solution for the specific problem at hand. And since SSO problems tend to be highly specific, the next best alternative solution is almost certainly not standards-compliant and hence would then not constitute a "non-infringing alternative" at the time of the hypothetical negotiation.

2) The SSO could not have selected the second-best solution instead of the solution represented by the SEP-holder's patent because it selects the solution with the best technical merit. Therefore - given the alternatives that were actually at the table at the time of selection - the solution represented by the SEP-holder's patent was "destined" to be selected.

3) It's not relevant to look at the hypothetical situation where the solution represented by the SEP-holder's patent was never on the SSO's table at all, and therefore the actually second-best solution became a hypothetical best alternative for the SSO. If the solution represented by the SEP-holder's patent would not have been on the SSO's selection table, then it would almost certainly never even have come into existence, and hence a choice between the two would not be available at the hypothetical negotiation. 

Based on the above, we can see that - besides the alternative of not entering into the business at all - there would most likely be no "next best non-infringing alternative" at a hypothetical negotiation taking place on the "eve of the infringement". So the hypothetical negotiation construct is typically non-applicable for SEPs. 

This is largely due to the "winner-takes-it-all" aspect that operates on the individual problem/solution level of wireless standardization, while not on the standard as a whole; wireless SSO work is  competitive on the micro-level but collaborative on the macro-level. Arguably, it's precisely this combination that promotes successful and future-proof global standards. 

But it's perhaps not only the hypothetical negotiation and SEPs that are incompatible. Theoretical ideas about patent valuation in general also tend to be suitable for one or a few patents, but could be impractical for portfolios of patents. 

However, the vast majority of SEP valuation exercises actually take place outside the courtroom. And the wireless cellular industry has established a workable, portfolio-based SEP valuation metric that's generally considered fair. License values of different individual portfolios of truly essential and valid SEPs typically adhere to a proportionality principle, while consideration is given to maintaining a reasonable aggregate license value, i.e. the license value of all the SEP-portfolios in accumulation for the standard and product in question.

Fair Standards Alliance and the licensing point

A grouping that calls itself Fair Standards Alliance (FSA) appears to want to give FRAND a "clearer meaning in order for standards to promote innovation, economic growth, competition, and consumer choice."

FSA has published a position paper outlining some principles to this effect. Several of them seem reasonable and generally in line with the law, competition authority investigation outcomes and established SEP FRAND licensing practices. Others are more dubious, such as an unhealthy emphasis on a chipset royalty base. 

However, a key message from FSA relates to the so-called "licensing point" that I've written about earlier and defined as "the entity among several entities in a product value-chain that obtains a patent license for making or selling products". FSA essentially conveys the message that:

a) an SEP license should be available at any licensing point, and

b) the same royalty should apply regardless of licensing point. 

Now, while a) and b) certainly don't sound unreasonable per se, the irony in this message from FSA should not be missed. It's well-known that there are only a few upstream entities harbouring an expressed desire to become a wireless SEP licensing point in the first place. And this wish typically comes along with the caveat that the SEP royalty must be discounted by something like 99%.

Looking past the irony though, FSA's wish to move the wireless SEP licensing point upstream is worth discussing, including some practical considerations. 

I have previously described how the issue of so-called "grant-back" tends to prevent the licensing point for at least mobile phones from moving upstream, as long as there are SEP-holding mobile phone and/or infrastructure OEMs around. I won't elaborate on that issue further here as it's a bit intricate, so interested readers may check the earlier post for details.

Furthermore, FSA's promotion of an upstream licensing point relies on an implicit assumption. Namely that the SEP-portfolio license value to the end-product is the same regardless of end-product-type. But as I also touched upon in the earlier post, that's not necessarily true. For mobile phones, the cellular SEP-portfolio FRAND license value is well-established by markets and courts. But in principle, there could exist other types of end-products for which this license value could be lower than for mobile phones. This could e.g. be due to significant aspects of the standard, along with their patented features, being less valuable to those end-products.

Take a refrigerator for example, an end-product actually mentioned in the FSA position paper. Many advanced patented innovations for cellular standards relate to ways of being able to communicate effectively in presence of challenging and dynamic radio conditions or with limited available power.  But the fridge isn't going anywhere in particular and it's connected to the power grid day and night. So for the fridge, the value of the cellular standard in itself - and hence of a license to all its associated SEP portfolios - may perhaps be considered lower than for a mobile phone.

In such a case, one could argue that it ought to be possible for SEP-holders to "promote" the standard in question towards such a product-segment by offering a discounted royalty from that of mobile phones. Provided of course that such an offer would still be considered FRAND. As long as it's a sufficiently differentiated end-product category and the same discounted offer would be provided to all providers of such end-products, this would most likely be the case. 

But if the chipset vendor would be the SEP licensing point, such a promotion might become challenging, since chipset vendors typically don't know what end-products their chipsets will end up in. While this could in principle be solved by advanced logistics management and proper contractual follow-up, it may still turn out to be difficult in practice.

On the other hand, the chipset vendor is not the only potential upstream SEP licensing point. For example, module vendors or solution providers within the vehicular or telemetry industries could also be licensing points. In such a scenario, traceability may become less of an issue since there would be stronger end-product control. 

Summarizing all of this, there's actually nothing per se that prevents the SEP licensing point from moving upstream from the end-product OEM. There are certainly practical obstacles that can be identified as I've expressed here and previously, but at the end of the day they're probably not insurmountable. 

Therefore, the biggest reason for the cellular SEP licensing point staying at the end-product OEM level may well be the refusal by upstream entities to accept the FRAND royalty levels established by markets and courts.

For mobile phones, established royalty levels consider the value brought to the end-product and end-user. Thus the royalty can ultimately be seen as a cost distribution issue between the end-product OEM and the end-user. By contrast, upstream intermediate products such as chipsets do not take into account this end-product SEP value at all, which is clearly reflected in their prices. But if - as seemingly desired by FSA - the cellular SEP licensing point is to generally move upstream, relevant FRAND royalty levels would certainly have to be made visible upstream too.