FRAND Licensing of IP Rights and Standard Setting Trevor Soames

1
FRAND Licensing of IP Rights and Standard Setting
Trevor Soames

• ABA Brown Bag Series EC Competition Law and IP
  Licensing in a Standard-Setting Context
• 22 June 2007
• Brussels

2
Importance of Standardisation

• Technology-driven world industry
  standardization, device interoperability and
  product compatibility critical to promoting
  innovation and competition
• Standards typically created by standard-setting
  organizations (SSOs) composed of participants
  from a given industry
• SSOs gained importance in technology-driven
  sectors
• More and more products have to work together
• Particular importance in IT/communications
  network interoperability

3
Standardisation and Competition policy

• IP laws grant exclusive rights to encourage
  innovation and risky investments
• IP rights should not be viewed as protecting
  owners from competition but as encouraging firms
  to engage in competition
• There is a role for antitrust enforcers in
  standard-setting but given potential importance
  of this area to dynamic efficiency, innovation
  and long-term consumer welfare, it is a role that
  should be played with great caution (DAAG Masoudi)

4
Standardisation under FRAND Regime

• Under traditional standards development
  procedures IPR owners
• Disclose patents they consider may be essential
  for standard
• Typically provide assurance or commitment that,
  if IPRs essential to standard, they are prepared
  to enter licence on fair, reasonable and
  non-discriminatory (FRAND) terms, with or without
  monetary compensation
• This is an important commitment as IPRs grant the
  right to exclude, i.e. not to provide a licence
  at all FRAND modifies that
• Licensing terms - typically negotiated on a
  bilateral basis outside the SSOs

5
Standardisation under FRAND Regime in Practice

• Voluntary ex ante disclosure and negotiation on
  bilateral basis entirely consistent with current
  FRAND regime. Potential licensees not prevented
  from asking potential licensors about planned
  licensing terms and conditions
• Not merely a theoretical possibility
• frequently done in practice
• potential licensors have every incentive to sign
  early deals i.e. before standard is adopted to
  gain support for their technology from SSO
  members
• In the unusual case where potential licensor
  refuses to provide this information, potential
  licensees can choose to take refusal into
  consideration when voting for adoption of given
  standard for which there are alternative
  technology solutions

6
Issue Contested Theory of Ex Post hold up

• The contested theory of ex post standardisation
  hold up has a number of controversial and
  unsubstantiated variants (which have been
  rebutted in a number of papers, see reading list)
  
• If SSO members select standard and only then
  discover that standard infringes IPR, patent
  owner is said to be in a position to hold up
  the standard patent owner may be able to demand
  a higher royalty than if the negotiation had been
  conducted before the standard was set
• This can inject inefficiency into the process in
  at least three ways
• Uncertainty
• Delay
• Under some conditions, an allegedly uneconomical
  royalty
• Proposals to deal with perceived concerns
• Upfront disclosure of potentially essential
  patents (which some even consider may in and of
  itself dispel any risk of hold-up)
• FRAND commitments
• Ex ante licensing

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Controversy

• Some argue that
• standard setting in the modern economy is crucial
  (true)
• and that there are serious problems that require
  intervention by antitrust/competition law and
  agencies (untrue)
• In particular, claims that FRAND does not work
  and needs fixing

8
Attempts to Extend Scope of FRAND Principle and
Competition Law in Absence of Non-disclosure
Issues

• Controversial theories
• Standardisation creates lock-in and market power
• Patent value greatly increases when essential for
  standard
• Power to demand excessive royalties unless
  restrained by Art 81 (allegedly requiring FRAND
  duty) and Art 82 (to constrain prices and
  applying only to certain companies but not to
  others similarly placed)
• Claims that FRAND means many things
• Based on faulty premises what the law should be,
  not what it is
• True motivation
• War of the business models
• Efforts to skew FRAND and competition law to
  favour licensees and unwind lawful, negotiated
  prior agreements buyers remorse

9
Different Business Models and Incentives

• Firms participating in SSOs with different
  business models have different incentives when it
  comes to IP licensing
• Innovators (upstream) Licensing revenues
  represent return on investment in innovation and
  are life blood of these companies
• Manufacturers/Implementers (downstream) Want to
  pay lower royalties to reduce costs
• Vertically-integrated firms (upstream and
  downstream) Low royalties or even a zero
  royalty may be acceptable. Alternatively, may
  want to raise rivals costs
• Buyers of equipment Also tend to believe that
  lower royalties would benefit them by reducing
  price of equipment

10
What FRAND Really Means (1)

• Patent holder agrees to make licences available
  for those patents covered by FRAND commitment
  gives up right to outright refuse to licence and
  instead keep patented technology for own sole use
• Patent holder agrees it is prepared to make
  licences available under fair and reasonable
  ... terms and conditions including
• financial terms (e.g. up-front fees and/or
  running royalties) and
• other non-financial terms and conditions (e.g.
  cross-licences)
• Patent holder agrees to make licences available
  to all interested parties gives up right (often
  exercised) to grant exclusive licences or pick
  and choose who to license
• Patent holder agrees to make licences available
  on terms and conditions that are
  non-discriminatory

11
What FRAND Really Means (2)

• FRAND means licensor is prepared to negotiate in
  good faith to determine licensing terms provided
  that counterparty also demonstrates good faith
• It takes two to make a licence agreement all a
  patent owner can do is make genuine bona fide
  licensing offer
• Terms and conditions of any licence subject to
  FRAND result from normal commercial negotiations
  between licensor and licensee
• FRAND does not mandate specific royalty level
  what is FRAND to one may not be FRAND to another
• Important elements of consideration other than
  royalties

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Myth 1 Standardisation Market Power (1)

• Claim incorporation of proprietary technology
  into standards creates market power beyond
  power conferred by patent itself
• Reality it may in certain circumstances create
  market power
• Standardization only grants additional market
  power when patented technology can be easily
  designed around. If no alternative (peerless
  technology), ability of essential patent holder
  legitimately to seek significant royalties exists
  ex ante adoption of standard
• Necessary condition for creation of market power
  technologically comparable alternatives at time
  of standardisation
• If such alternatives are available, SSO
  endorsement of proprietary technology may result
  in reduction in short term competition.
• But if no economic or technical substitutes, then
  standard selection process will have no effect on
  ex post market power, as technology already had
  its importance ex ante

13
Myth 1 Standardisation Market Power (2)

• Availability of alternative technologies
  necessary but not sufficient for standardisation
  to create market power
• Holders of essential IP face significant
  competitive constraints even after IP included in
  standard
• Horizontal constraints prices commanded by
  complementary patents within standard and by
  competing standards within same field
• Vertical constraints patent holders without any
  downstream operations constrained by elasticity
  of consumer demand for product
• Vertically integrated licensor has stronger
  bargaining position because it has alternative of
  capturing profits through own product sales
• Vertically integrated firms have incentives to
  raise rival downstream firms prices through
  licensing terms (e.g. GSM club), whilst remaining
  open to cross licensing agreements with other
  integrated companies
• Dynamic constraints formal standard setting
  process is a repeat game and essential IP holder
  committing abuses could be punished in
  negotiations leading to subsequent standards or
  iterations

14
Myth 2 FRAND Means Waiver of Injunctive Relief
(1)

• Claim by giving FRAND commitment, IP holder is
  contractually prevented from or has implicitly
  waived right to seek injunctive relief against
  infringer
• Reality waiver of rights cannot be presumed,
  must be explicit
• FRAND commitment not a licence but enforceable
  obligation to negotiate in good faith
• Owners of intangible IP need to be able to rely
  on the legal system to protect their interests to
  a greater degree than the owners of tangible
  (physical) property
• Risk of expensive serial litigation ability to
  obtain injunction may be only practical leverage
  that patent holder has to force infringer to the
  bargaining table
• Absent that ability, patent holder's only
  recourse may be to repeatedly litigate and
  collect damages on a recurring basis, to the
  extent that infringer's products continue to
  infringe patent

15
Myth 2 FRAND Means Waiver of Injunctive Relief
(2)

• Suggestion that so long as suitable mechanisms
  put into place to ensure that patent holder will
  be able to collect the reasonable royalties
  ultimately due, patent holder does not need an
  injunction to protect its legitimate commercial
  interests ignores
• Critical role in many patent licence negotiations
  of cross-licences, which courts generally cannot
  award or compel an infringer to grant
• Role that availability of injunctive relief may
  play in inducing companies to enter into
  cross-licences
• No single tribunal capable of resolving such
  disputes
• Judicial resolution (especially of
  multi-jurisdictional disputes over infringement,
  validity, and damages) takes a significant amount
  of time
• Delay in payment benefits infringer and harms
  patent holder
• Interestingly, some leading proponents of this
  approach do not seem to consider that a FRAND
  declaration and undertaking amount to a waiver of
  right to seek injunctive relief (cf Nokia v
  Vitelcom, Spain)

16
Myth 3 FRAND as a Requirement for Compliance
with Articles 81 and 82 EC

• Claim standardisation agreements necessarily
  infringe Article 81(1) FRAND licensing is a
  condition for exemption under Article 81(3) a
  refusal to license on FRAND terms is caught by
  Article 81
• Reality
• The existence of a restriction of competition in
  standardisation agreements depends upon the
  extent to which the parties remain free to
  develop alternative standards or products that do
  not comply with the agreed standard.
  Standardisation agreements may restrict
  competition where they prevent the parties from
  either developing alternative standards or
  commercialising products that do not comply with
  the standard. Com. Guidelines on Horiz. Coop.,
  167
• Refusal to license on FRAND terms is unilateral
  action and outside scope of Article 81
• Claim FRAND and Article 82 impose similar if not
  identical obligations, and breach of the former
  by a dominant company necessarily implies
  infringement of latter
• Reality
• If FRAND commitment mirrors obligations to which
  a dominant firm is in any event subject under
  Article 82, there is no need to have recourse to
  it
• If, on the other hand, FRAND commitment goes
  beyond the requirements imposed by Article 82, it
  has no role to play in the application of this
  provision

17
Myth 4 FRAND Means Numerical Proportionality (1)

• Claim reasonable royalties are those determined
  through numerical proportionality
• proportion of all essential patents contributed
  to standard owned by patentee
• multiplied by an arbitrarily set royalty cap
• Reality
• FRAND does not require a patent holder to license
  its essential patents according to a particular
  methodology (particularly one dictated by a
  potential licensee)
• ETSI explicitly rejected proposal by Nokia,
  Ericsson, Motorola (MCOI) to redefine FRAND by
  incorporating numerical proportionality

18
Myth 4 FRAND means numerical proportionality (2)

• Numerical proportionality is untenable
• Relies on patent counting assumes that all
  patents are of equal value
• Ignores patent value, economic circumstances or
  market conditions
• Unsupported by economic or legal theory
• Contradicts principles of efficiency and fairness
• Would deprive a patent owner of ability to be
  rewarded for its innovative contributions
• Would stifle innovation, distort resource
  allocation
• Unworkable in practice
• Would tend to benefit vertically-integrated IP
  holders who care little about royalties
• Fundamentally at odds with positions actually
  practised by industry players, including the
  proponents of such methodologies (cf Nokia v
  Vitelcom, Spain)

19
Myth 5 Royalty Stacking

• Claim Royalty stacking - Cumulative royalty
  rates paid by users may be too high when standard
  involves multiple essential patents held by
  multiple firms
• Reality Most of the literature claiming the
  existence of royalty stacking is theoretical in
  nature or based on inaccurate case studies
• Little empirical evidence of royalty stacking in
  general and in 3G industry in particular
• Geradin, Layne-Farrar and Padilla (2006) have
  demonstrated that theory of royalty stacking is
  not robust

20
Myth 6 Hold-up in 3G

• Much talk of problems in 3G telecoms industry.
  But no evidence of hold up
• Need to compare royalty and non-royalty terms
  charged by owners of technologies selected to
  WCDMA standard before and after adoption of
  standard and time at which equipment
  manufacturers and operators had committed
  significant standard-specific investments
• Need to show that licensing terms ex post were
  materially worse for users than those applied ex
  ante

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FRAND Works

• FRAND regime has allowed successful development
  of innovative technologies (e.g., mobile
  telephony, Internet, WIFI, DSL, etc.) fostered
  competition
• Abuses of FRAND are rare
• very little case-law
• involve intentional failures to disclose patents
  (patent ambush), not licensing terms
• Criticisms made against the FRAND regime fail to
  convince and efforts to move away from FRAND or
  to reinterpret notion are essentially motivated
  by consumer welfare reducing desire to reduce
  prices paid for patented technology

22
True purpose of the attack onthe FRAND regime

• As criticisms of FRAND regime are
  unsubstantiated, less well intentioned
  explanations must be considered
• Buyers remorse disgruntled licensees seeking to
  fabricate competition cases to try and reopen
  previously agreed and negotiated arrangements, to
  reduce costs
• A range of industry players would find it
  attractive to shift whatever bargaining power
  they can away from the IP holders to the more
  numerous (and often larger) standard implementers
• This is nothing less than a general assault on
  the vitality of an innovation producing patent
  system