CJEU ruling follow-up - other scenarios

In my previous post I commented on the Court of Justice of the European Union's (CJEU) opinion on when an injunction request by an SEP-holder would be non-abusive. The ruling is largely in line with those of other competition authorities, encouraging diligent and timely bi-lateral negotiations, including a path to timely third party adjudication.

The ruling describes a certain presumed scenario or "flow-chart" under which an injunction request from an SEP holder would not be considered abusive. However, there are in fact real-world situations that clearly fall outside the scope of the CJEU's flow-chart but for which injunction requests would also be perfectly appropriate. In this post I'll describe two examples of such.

One surprisingly common real scenario is the "no response" situation. Some infringing OEMs may simply choose not to respond at all to formal letters from an SEP-holder offering an SEP FRAND license and an invitation to a license discussion. SEP-holders may very well send multiple such letters - even hand-delivered by international courier - over a period of months or even years, without ever hearing a word back from the alleged infringer through any communication channel whatsoever.

Clearly, such behaviour clashes with the general principles of good faith, diligence and timeliness emphasized in the CJEU ruling, while preventing the SEP-holder from - no matter how much it wishes to do so - providing detailed infringement information to the OEM, i.e. the first step of the CJEU's flow-chart scenario. In such a situation, an injunction request by the SEP-holder can surely not be considered abusive.

Another scenario occasionally encountered nowadays is the "no NDA" situation. While patents and wireless standards are documents available in the public domain, patent claim interpretations are typically not, as they ultimately constitute the legal opinions of either party. For at least this reason, the established practice in the field since at least two decades is for the parties to sign a Non-Disclosure Agreement (NDA) before details of the infringement are presented to the alleged infringer and discussed between the parties. Such NDAs are normally fully reciprocal, time-limited and non-binding with respect to concluding any other agreement than the NDA itself. Hence the signing of such must be seen as virtually harmless to either party.

Nevertheless, some infringing OEMs argue that an NDA can not be a prerequisite for negotiating an SEP license and therefore simply refuse to sign one. This again prevents even the first step of the CJEU's flow-chart from being reached. So again we have a reduction of licensing efficiency through non-compliance with established practices in the field, delaying tactics, and lack of good faith. Accordingly, an injunction request can not be seen as abusive in this case either. 

These kinds of behaviours are often part of an overall reverse patent hold-up / patent hold-out strategy with a clear objective; to avoid or severely delay (to minimize past damages) obtaining necessary licenses for SEP portfolios. In fact, some OEMs even consciously exclude SEP license costs - and sometimes other IPR license costs - from their business cases from day one. All this points to a disregard for the substantial creative efforts and intellectual property rights of others which arguably - and somewhat ironically - provide the very foundation of these OEMs' business. Such infringing OEMs are clearly "unwilling licensees", and courts and competition authorities worldwide have repeatedly confirmed that injunction requests are perfectly appropriate in such instances. But actually, they shouldn't have to keep reminding market participants about that. It should be patently obvious.

Competition authorities and FRAND

Disputes arising in wireless SEP FRAND licensing are very rare. But when they do occur, parties normally turn to courts for settlement. In certain instances though, national or international government agencies in the form of competition regulators become involved in one way or another. Without getting into too much detail, I'll here briefly examine the net outcomes of some key rulings and settlements of competition agencies in recent years, relating to wireless SEPs and FRAND licensing. 

Starting in the US, in June 2012 the US Federal Trade Commission (FTC) launched an investigation into whether Google, through its then subsidiary Motorola Mobility, breached FRAND commitments by seeking exclusion orders for SEP infringement against "willing licensees". This investigation concluded on July 24, 2013 with a "consent order" where Google accepted certain restrictions on seeking exclusion orders for SEP infringement against US companies. The consent order set out detailed procedures for Google and willing licensees to timely conclude a global SEP-portfolio license. I won’t go into the details here as it’s a bit lengthy, but essentially there's a six month negotiation period followed by – in case of no agreement - a global FRAND determination by a court or a binding arbitration. See also my earlier post where I discuss this order.

Moving on to the EU, the European Commission (EC) on January 31, 2012 opened an investigation into whether Samsung, by seeking injunctive relief against SEP infringers within the EU, breached FRAND commitments and engaged in abuse of a dominant position. On April 29, 2014, the EC concluded its investigation by accepting certain commitments made by Samsung. For a period of five years Samsung committed not to seek injunctions within the EU on SEPs against infringers that agree to the following licensing framework:

· “a negotiation period of up to 12 months; and

· if no agreement is reached, a third party determination of FRAND terms by a court if either party chooses, or by an arbitrator if both parties agree on this.”

Over in China, in May 2013, the National Development and Reform Commission (NDRC) opened an investigation into InterDigital's SEP-licensing practices. The NDRC  suspended its investigation on May 22, 2014 after accepting InterDigital's commitment including:

“Prior to commencing any action against a Chinese Manufacturer in which InterDigital may seek exclusionary or injunctive relief for the infringement of any of its wireless standards-essential patents, InterDigital will offer such Chinese Manufacturer the option to enter into expedited binding arbitration under fair and reasonable procedures to resolve the royalty rate and other terms of a worldwide license under InterDigital's wireless standards-essential patents. If the Chinese Manufacturer accepts InterDigital's binding arbitration offer or otherwise enters into an agreement with InterDigital on a binding arbitration mechanism, InterDigital will, in accordance with the terms of the arbitration agreement and patent license agreement, refrain from seeking exclusionary or injunctive relief against such company.” 

The net outcomes of these cases are in fact quite similar. They provide a "safe haven" for SEP holders to avoid competition concerns and for infringers to timely obtain SEP licenses without the risk of exclusion orders. SEP holders can avoid competition scrutiny by offering infringers the option of “formally” becoming willing licensees by accepting a process that typically includes timely FRAND determination or arbitration of the global patent portfolio value. Importantly, infringers who choose not to accept such processes continue to be susceptible to exclusion orders. 

We can see that an important common concern of these US, EU and Chinese competition authorities has been the availability of exclusion orders for SEP infringement without proper FRAND scrutiny by a court or arbitration panel. However, it's good to note that the authorities have clearly also considered the risk of so-called reverse patent hold-up. Such behaviour, also known as patent hold-out, is nowadays a common problem in SEP portfolio licensing, leading to reduced R&D investment incentives and increased SEP transfers. Importantly, the net outcomes of these cases emphasize timely resolution of global SEP portfolio licenses and keeping exclusion orders on the table for those who decline the process. These are measures that can help mitigate reverse patent hold-up.

What's also clear is the deferral of the FRAND determination issue to courts and arbitration panels. In other words, the competition authorities acknowledge that they are themselves not suited to handle patent and price-setting issues in SEP FRAND matters. This makes perfect sense in my opinion since courts and arbitration panels are arguably more transparent, independent and experienced with such matters.

An interesting scenario in the light of these net outcomes is the case of an SEP holder who seeks an exclusion order for SEP infringement where the infringer refuses to accept the court's FRAND determination for a SEP portfolio. Given that the competition authorities' concern is related to exclusion orders without proper FRAND review, this type of situation would follow the precedent set by the authorities.

Finally, on July 16, 2015, the Court of Justice of the European Union (CJEU) also offered its guidance on under what circumstances a SEP-holder may or may not abuse a dominant position by seeking exclusion orders. It did this by responding to five specific questions put to it by a German court in the matter of Huawei vs. ZTE. On the face of it, the CJEU's decision seems to be consistent with the above-mentioned agency net rulings. But the ruling deserves some scrutiny in terms of real-world licensing, which I will save for a separate post.

Who needs a license to standard essential patents?

Having recently discussed some specific court cases and hot topics, I thought it might be time for a more generic post on licensing concepts and principles. Specifically, I'd like to talk about what I call the "licensing point" for patents in general and Standard Essential Patents (SEP) in particular. Simply put, I'll try to answer the question; "Who needs an SEP license"?

By "licensing point" I mean "the entity among several entities in a product value-chain that obtains a patent license for making or selling products". We know that in the case of mobile phones, the Original Equipment Manufacturer (OEM) - the entity that puts a ready-to-use end-product on the market with a brand name belonging or licensed to it - is the SEP licensing point. In this post I'll discuss why this so, and also whether it's likely to stay that way going forward. 

Generally speaking, the licensing point is ultimately selectable by the patent holder, and could be virtually any entity in the value chain whose product encompasses the inventions covered by the licensed patents. It could be the end-product OEM, a component manufacturer or an entity in-between those. It could even be a point downstream from the OEM, like a whole-seller or a high-street- or Internet retailer. The royalty parameters just need to be properly adjusted in every case to reflect the ultimate license value to the end-product. For sure there can be practical complications in implementing some of these licensing points, but they should be perfectly permissible per se.

But that's more of a theoretical observation, now let's look at specifics. As stated, the OEM happens to be the cellular SEP licensing point. But why is that exactly? As it turns out, there are several reasons. 

We can start with a simple historical reason. Up until the end of the 1990's, the only OEMs that existed on the mobile device market were all vertical OEMs. So in fact there was only one possible licensing point.

So that was easy. But as we know today, this market structure changed a lot since then, so an interesting question is why the licensing point did not change with it. 

Indeed, the mobile device industry went through a structural change during the first decade of this century. From consisting of only a handful of vertical OEMs, it became more diverse, including a value-chain of specialized entities. This change was initially led by Qualcomm on the chipset level and further downstream by Taiwanese "notebook ODMs". 

  

However, in spite of increased specialization, some vertical or near-vertical OEMs still remained and new ones even emerged. Today there are pure mobile device vertical OEMs (Samsung, LG), pure infrastructure vertical OEMs (Alcatel-Lucent, Ericsson, Nokia) and combined mobile device and infrastructure vertical OEMs (Huawei), all doing pretty well in the marketplace. These companies have substantial in-house knowledge and control of the chain from components or chip-sets all the way down to the manufactured finalized product. So to maintain that position there's a need for these OEMs to invest rather heavily in R&D and standardization, which in turn will also generate SEP portfolios.

Now, for all such SEP-holding OEMs, an interesting question arises; would it be appropriate for the mobile device SEP licensing point to move upstream from the OEM level to e.g. the chipset manufacturer level?

While such a move might seem plausible at first glance, it could lead to complications. To understand this, let's first look at a hypothetical example scenario, but using real-world entities for ease of explanation. Take a SEP-holding mobile device OEM like Samsung. Assume that Samsung would license its SEP portfolio at a point upstream from the OEM level, let's say to chipset maker Mediatek.
Now as long as another SEP-holding OEM, for example Huawei, located downstream from Mediatek would not assert its SEP portfolio against Samsung, this would be just fine. But if it would - and it likely would because Huawei would have a FRAND commitment as an SEP holder - then Samsung might have reasons for concern. In the example scenario, while Samsung needs an SEP license from Huawei, things are not as obvious regarding Huawei's need of an SEP license from Samsung. In many jurisdictions, Samsung's license to Mediatek can be seen as inherently providing certain rights to Huawei under Samsung's patents, for products that include Mediatek's chipsets. So in effect, Samsung's license to Mediatek could limit its own defenses against an SEP portfolio assertion by Huawei against Samsung's products.

However, if Samsung would instead continue to consistently license the last point in the chain -  in this example Huawei - then no such issue would occur. Then Samsung could procure a maximally efficient SEP portfolio cross-license with Huawei because it's 100% clear that Huawei needs a full license from Samsung, regardless of what chipsets happen to reside in its products. This so-called "grant-back" issue is one reason why the cellular SEP licensing point prevails at the OEM level also in today's more specialized world.

Now those particular companies were used only as examples, and I don't know the real licensing situations among them. But the example illustrates that at least as long as there remain SEP-holding mobile and/or infrastructure OEMs - which tend to be verticals - generally healthy and successful in the global marketplace, this will be a continuing factor that tends to keep the SEP licensing point for mobile devices at the OEM level.

But there are also other reasons for the OEM being the licensing point. Like the issue of "patent value apportionment". A license to an SEP portfolio needs to be priced based on the value the technical inventions therein bring to the end-product. In US law this has been made clear in e.g. the well-known CSIRO vs. Cisco and Ericsson vs. D-Link et. al. cases. And the easiest point to observe the value the inventions bring to the end-product is - not surprisingly - at the end-product level, i.e. the OEM level.

We can look at the illustrating example of the iPod Touch vs. the iPhone. These products are very much alike, with the difference largely being that one has cellular connectivity and the other one doesn't. The products have similar specs and both carry the "brand magic" of the OEM, Apple. Yet today's price difference between the two is around $250. 

As I mentioned in another post, the price difference not only illustrates the tremendous value of adding standardized cellular technology to an otherwise similar device. It also indicates the value of a license to the SEP portfolios covering it. Due to the way standards are created, the SEP portfolios covering a standard include those innovative technologies that won the competitive race to allow that particular standard to fulfil its specific requirements. Therefore the accumulation of SEP portfolios for a standard do in fact drive the value of the standard itself.

The market has established the accumulated SEP portfolio license value for a mobile device to be somewhere close to 10% of the OEM selling price of the end-product. This is a fraction of the value the standard itself brings to the end-product, but also more than the cost of a chipset. Clearly, when component suppliers don't account for SEP license costs, the component prices don't reflect the value of SEP portfolio licenses to the end-product at all. Another way of viewing this is that if the licensing point would hypothetically move to the chipset level, the chipset cost would have to increase many-fold. That may seem odd at first, but remember that this is accounting for the value to the end-product.

There are some recent and quite loud voices in the industry that - notably without rational or legal support - advocate that basing wireless SEP license royalties on end-product price is "non-FRAND", and that such royalties "must" be based on the chipset value. Actually, such calls are not always explicitly about moving the licensing point to the chipset level per se. Indeed, licensing point and royalty base are separate things. With the licensing point kept at the OEM level, a chipset value royalty base could still be possible in principle, by setting the royalty rate to some hundreds of percent. Ultimately, the royalty base is just a parameter in a certain calculation model, and what matters in the end is the value to the end-product. 

Another related factor driving the OEM licensing point is that the value of the standard may be different for different end-products. Since the value of licenses to the accumulation of SEP portfolios is proportional - but not equal - to the value of the standard, the license value can also vary between different end-products. For a mobile phone the value is very obviously large, but there are end-products for which the value might be considered smaller. For a vending machine or utility meter for example, the standardized cellular connectivity - and a license to all patented inventions therein - might for various reasons not necessarily be considered as tremendously valuable as for a mobile phone. Now if the licensing point would be moved to the chipset level, there'd be an issue with chipset tracability, or rather the lack of it. In fact, chipset manufacturers don't always know what type of end-product their chipsets ultimately end up in. Consequently it can be hard to determine the appropriate end-product license value at the chipset level. 

In this post, I've outlined some rational reasons for why SEP-holding OEMs conclude SEP portfolio licenses at the end-product OEM level. While it's certainly possible that this might change in the future, my guess is that some factors that make it rational to keep the licensing point at the OEM level will prevail for some time to come.