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Standard Essential Patents and the new challenges of 5G

<div class="pb-2 pt-1 row"> <div class="col-12"> <div class="container mt-4 text-center w-100"> <h1>Standard Essential Patents and the new challenges of 5G:</h1> </div> </div> </div> <p><img class="d-block img-blog img-fluid mx-auto" src="/assets/frontend/images/blog-5.jpeg" /></p> <div class="blog-content container pb-4 pt-4 text-justify"> <p>It is early morning; you wake up and reach for your phone. You scroll your emails, check the weather, read the news, and all the while using hundreds of standard essential patents. But what is a standard essential patent? How different is it from other patents? And why has 5G made these questions even more relevant?</p> <p>Let’s dive in! It will only take a few minutes.</p> <h4>What are Standard Essential Patents, Standard-Setting Organisations and Standards?</h4> <p>Standard Essential Patents are patents that have been declared essential to a given standard. This declaration is made by the patent owner to a Standard Setting Organisation such as the ETSI, IEEE, or CEN-CENELEC. These industry groups collaboratively decide on technical agreements, the standards, which allow for global connectivity, generate scale economies lowering costs and making new technologies affordable.</p> <p>Some SSOs have adopted their own definition of SEPs. For instance, for the ETSI<sup>1</sup> a patent should be considered a SEP when “it is not possible for technical reasons (but not for commercial reasons), considering the normal technical practice and the state of the art usually accessible at the time of standardization, to manufacture, sell, rent, dispose otherwise, repair, use, or to operate a product or methods that are in conformity with a norm without infringing this patent.<sup>2</sup>”.</p> <p>For the IEEE<sup>3</sup> Standards Association an essential patent claim is “any Patent Claim the practice of which was necessary to implement either a mandatory or optional portion of a normative clause of the IEEE Standard when, at the time of the IEEE Standard's approval, there was not commercially and technically feasible non-infringing alternative implementation method for such mandatory or optional portion of the normative clause.<sup>4</sup>”</p> <p>The CEN CENELEC<sup>5</sup> similarly defines a SEP as a “patent considered, for the purpose of making a patent declaration to CEN and CENELEC, by the patent holder as 'essential' when, in her/his own judgment, it is not possible on technical grounds, considering the state of the art at the time the standardisation-making process takes place, to make, sell, lease and otherwise dispose an equipment, product or method which comply with a deliverable without infringing her/his IPR on that Patent.<sup>6</sup>”</p> <h4>Standard Essential Patents and dominant market positions:</h4> <p>The essentiality of Standard Essential Patents gives considerable market power to SEP owners. As it is impossible to create compatible and interoperable products without implementing SEPs, implementers must request permission from SEP owners to use the patented technology. Thus, the adoption of a standard puts SEP owners in a dominant bargaining position.</p> <p>Difficulties may then arise out of the dominance of SEP owners. This is especially true in the telecommunication sector, as a standard may incorporate thousands of patented technologies held by as many SEP owners. This means that implementers must obtain licensing agreements for all those SEPs from all the different SEP owners. However, where a licensee must negotiate individual licenses for numerous patents and with numerous parties, it may lead to “royalty stacking”, a situation in which a single product may bear multiple royalty burdens that stack up to unreasonably excessive levels<sup>7</sup>. Given the intense price competition among industry participants in this industry, the high royalty costs may then lead to few implementers being able to survive the market. This may also lead to decreased competition and innovation, higher prices being passed on to consumers, and low consumer demand for standard-compliant products.</p> <p>Therefore, to alleviate patent hold-up and royalty stacking concerns many SSOs, require that SEP owners undertake to license their SEPs on Fair, Reasonable, And Non-Discriminatory (“FRAND”) terms to every company that implements standards. This was explained by Justice Arnold in the case opposing HTC v NOKIA in 2013<sup>8<sup>:</sup></sup></p> <p><span style="font-size:09.rem"><em>“66. The problem of “patent hold up” which has been much studied by economists generally arises either where there is no non-infringement alternative or where the cost of switching to the non-infringement alternative is prohibitive. The paradigm example of the former situation is the standard-essential patent. Because it is essential, there is no alternative for products that comply with the standard. That is why standards-setting organisations like ETSI (the European Telecommunications Standards Institute) require owners of standard-essential patents to undertake to grant licenses on FRAND (fair, reasonable, and non-discriminatory) terms. An example of the latter situation is where a manufacturer has invested a great deal of money in developing and marketing a complex product that infringes a patent, and by the time it discovers this it is too late to switch to a non-infringing alternative except at prohibitive cost.”</em></span></p> <h4>5G and the new challenges for SEPS:</h4> <p>New issues are arising with 5G. In fact, the technology environment is evolving with the fifth-generation technology standard for broadband cellular networks. It fundamentally changes our ability to share information with faster, more consistent data rates, lower latency, and cheaper cost-per-bit. This means that more information can be shared, through more devices and within less time, allowing for wider adoption of 5G by most industries such as automotive, home appliances, manufacturing, energy, and healthcare.</p> <p>Indeed, 5G allows for connected vehicles to share data to prevent accidents, medical professionals to diagnose patients remotely via connected sensors, customers to experience virtual shopping, and factories to control industrial robots. Moreover, with the emergence of parallel digital worlds, such as Facebook’s Metaverse, and artificial intelligence, the digitalization of industries and businesses may accelerate more than we can imagine today.</p> <p>However, 5G also comes with its challenges. It is subject to hundreds of thousands of SEPs that every 5G implementer is required to use to implement the standard. With 5G being integrated into most technology sectors, the number of products using SEPs is thus going to be higher than ever. In turn, this means that the number of companies requiring licensing rights for their products is reaching new highs. Licensors thus face the challenges of identifying multiple companies using their standard essential patents and negotiating licensing terms at an unprecedented scale. On the other hand, licensees will have to determine whose SEPs they use in their products and engage, sometimes for the first time, in FRAND negotiations.</p> <p>Furthermore, the nature of FRAND negotiations themselves brings another challenge for both licensors and licensees. Although the definition of Fair Reasonable and Non-Discriminatory licensing terms has been clarified by courts around the world, their interpretation is still contentious. Besides, while the negotiation of licenses for 4G and 5G is common in the smartphone world, the negotiation of FRAND licenses in industries such as the automotive, home appliances or healthcare sectors is still very new. 5G licensing negotiations will thus at times take place between proficient licensors and neophyte licensees, hence auguring longer and more costly negotiations.</p> <h4>How can FRANDAVENUE help?</h4> <p>It is these challenges, faced by both SEP owners and implementers, which have motivated the creation of FrandAvenue an innovative one-stop platform and marketplace for patent licensing.</p> <p>FrandAvenue was designed to help all market players navigate the complex SEP landscape and prepare for successful FRAND negotiations. It offers 5 toolkits:</p> <ul style="margin-left:40px"> <li>A data set room with the largest open and free SEP database with +575,000 patents, +90,000 implementation analyses, +66,000 SEP families, +2,000 market players, and +9000 technical specifications.</li> <li>Analytics tools to analyse your customized data and map the market.</li> <li>A negotiation room to determine your negotiation terms and interact with the other party.</li> <li>Management tools for your patents, portfolios, and licensing programs.</li> <li>A marketplace for patent analysis documentation.</li> </ul> <h4>FrandAvenue also offers services including:</h4> <ul style="margin-left:40px"> <li>Landscaping of portfolios</li> <li>Claim charts / Evidence of use</li> <li>Implementation analyses</li> <li>Build-up of your prospect list</li> <li>Support in each of your licensing steps</li> <li>FrandAvenue account set up</li> </ul> <p>For more information visit <a href="https://www.frandavenue.com/en/home">FrandAvenue</a> or <a href="mailto:contact@frandavenue.com"> contact@frandavenue.com</a></p> <hr /> <p><small><sup>1</sup>European Telecommunication Standard Institute</small></p> <p><small><sup>2</sup>ETSI Rules of Procedure 29th November 2017 – Annex 6. Article 15.6 “Definitions” </small></p> <p><small><sup>3</sup>Institute of Electrical and Electronics Engineering</small></p> <p><small><sup>4</sup> <a href="https://standards.ieee.org/about/policies/bylaws/sect6-7.html"> IEEE Policies and Procedure </a></small></p> <p><small><sup>5</sup>European Committee for Electrotechnical standardization</small></p> <p><small><sup>6</sup>CEN-CENELEC Guidelines for Implementation of the Common Policy on Patents</small></p> <p><small><sup>7</sup> <a href="https://www.essentialpatentblog.com/tag/royalty-stacking/ "> David Long “Jury awards Core Wireless $7.3 Million lump sum for Apple’s infringement of two SEPs (Core Wireless v. Apple)” accessed 30<sup>th</sup> July 2018</a> </small></p> <p><small><sup>8</sup>Arnold J in HTC Corporation v. Nokia Corporation, Patents Court, Case No. [2013] EWHC 3778 (Pat) at para.66</small></p> </div>

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FRAND Licenses: When patent hold-up and patent hold-out become olden days concepts

<div class="pb-2 pt-1 row"> <div class="col-12"> <div class="blogmargin container text-center w-100"> <h1 style="line-height: 40px !important;">Patent Hold-Up v Patent Hold-Out: How can they be both avoided <br> and how can FrandAvenue help you devise your strategy?</h1> </div> </div> </div> <p><img class="d-block img-blog img-fluid mx-auto" src="/assets/frontend/images/blog-4.jpeg" /></p> <div class="blog-content container pb-4 pt-4 text-justify"> <p>Patent hold-up and hold-out, two sides of the same coin? In the world of intellectual property rights, these concepts can create quite the drama as patent holders and potential licensees navigate the complex ground of negotiation and legal threats. From demands for exorbitant licensing fees to refusals to negotiate, the dance between patent hold-up & hold-out is delicate! Let’s dive into the world of patent law and see what makes these concepts so intriguing.</p> <p>The notions of patent hold-up and patent hold-out have long fuelled controversy between supporters of FRAND licensing practices that were supposed to be favourable either to the interests of essential patent holders or to those of implementers.</p> <p>These two phenomena, which some have gone so far as to deny their existence, are often perceived as the two limits between which the players in the FRAND license market compete. Examples of recourse to these two extremes abound, both being favored by a frantic forum shopping.</p> <p>However, market players have the means to effectively counter both the patent hold-up and the patent hold-out. We will limit our comments here to situations arising from a FRAND commitment to ETSI.</p> <p>After briefly recalling the concepts of patent hold-up and patent hold-out, we will examine the solutions available to all market players.</p> <h4>What is a Patent hold up?</h4> <p>The notion of patent hold-up describes the abusive use by patent holders of the power conferred to them by the market..</p> <p>In the case of SEPs, hold-up derives, on the one hand, from the essentiality of patents that protect inventions that must be implemented by any product compatible with a given technical standard, and thus obliges any implementer to take a license. On the other hand, from the fact that, through their investments, implementers are already locked into the standard when FRAND negotiations start. The fact that there is no alternative to the standard to which the patents have been declared essential also strengthens the SEP holders’ position. SEP holders would thus, if the FRAND obligation did not exist or if it were not construed properly, be able to negotiate royalty rates higher than the technology would have been worth if competing with other alternatives. </p> <p>Hold-up has thus important consequences for implementers who may find that they cannot adopt and invest in technologies implementing standards at fair, reasonable, and non-discriminatory conditions. This is the raison d'être of the FRAND undertaking.</p> <p>In recent years, the notion of hold-up has been extended to encompass the abusive use of injunctions. Indeed, although the seeking of injunctions before courts is a legitimate remedy for patent holders, the seeking of an injunction for SEPs may constitute a breach of the FRAND undertaking under applicable law and an abuse of a dominant position if a SEP holder does not comply with its obligations arising out of the FRAND undertaking, on the one hand, and of competition law, on the other hand.</p> <p>Since injunctions may involve a prohibition of the infringing product being sold, seeking SEP-based injunctions against willing licensees risks excluding products altogether from the market. Such threats can thus distort licensing negotiations and lead to licensees accepting anticompetitive licensing terms, which they would otherwise have rejected. Such behavior can be detrimental to innovation and consumers and can result in an abuse of dominant position if the conditions set forth by the Court of Justice of the European Union in Huawei v ZTE<sup>1</sup> are not fulfilled.</p> <p>Several competition authorities have also taken steps to curb SEP licensors’ bargaining power. In all these cases, injunctions were found to be abusive when implementers were truly willing to take a license on FRAND terms. </p> <h4>What is a Patent hold-out? </h4> <p>The broadening of the interpretation of hold-up has, in turn, raised concerns that the balance of interests may have been disturbed to the detriment of the licensors. This gave rise to the concept of "patent hold-out".</p> <p>Indeed, if SEP holders are bound by their FRAND undertaking to concede a licence and thus cannot easily threaten to refuse to grant such a licence, the worst possible outcome for an infringer is to be obligated by a court to pay the same FRAND rate that would have been charged for licensing in the first place. Some implementers may thus engage in “hold out” and deliberately choose not to seek a licence. The licensor will then lose time and money fighting in court for its due, while the licensee will benefit from a royalty grace period.</p> <p>Such behaviour from an implementer can quickly degenerate into abuse and exposes its author to legal remedies sanctioning the violation of its contractual commitments. It also allows the holder of the essential patents to regain its right to prohibit the use of its patents<sup>2</sup>.</p> <h4>Implementing FRAND Obligations: The Key to Resolving Patent Disputes? </h4> <p>The solutions to resolving SEP disputes are within the reach of patent holders and implementers. Indeed, now that the contractual nature of the ETSI FRAND undertaking, under applicable law<sup>3</sup>, is well settled globally<sup>4</sup>, they must draw the consequences of the FRAND undertaking, comply with their respective obligations and use the tools at their disposal. In short, act in good faith<sup>5</sup>, keep evidence of one's actions, and take preventive measures. </p> <h4>How to counter patent hold-ups?</h4> <p>To protect themselves from prohibitory injunctions against their products, implementers must give tangible signs of their desire to quickly reach a patent license agreement. They must therefore take the initiative in discussions when this is reasonably feasible and, failing that, respond quickly to licensing offers. This, therefore, means preparing for these negotiations as far in advance as possible and keeping proof of all the exchanges and all the steps taken. </p> <p>This presupposes an in-depth study of the ETSI database to identify the licensors, the consistency of their patent portfolios, and, where applicable, the terms of their licenses. A review of the alleged essentiality of the declared SEPs and a comparison of the existing portfolios for the technologies at stake is also necessary. </p> <p>All this data is available on <a href="https://www.frandavenue.com/en/">FrandAvenue</a></p> <p>Ideally, implementers must prepare the conditions under which they can consider taking out a license and above all be ready to share them with license providers. Because time will be of the essence, they must be able to display their position, take initiative and not just return the ball limply.</p> <p>Even if implementers believe it is up to their communication module suppliers to negotiate an essential patent license agreement, they still have to be ready to assert their position with their suppliers, before a judge if necessary.</p> <p>Finally, a solution must be provided if they cannot, in good faith, reach an agreement with the licensor. This solution can consist, at the very least, of mediation, but it will be much more robust if they agree in advance to submit their dispute to a court or an arbitration tribunal with the mission of evaluating the licensed portfolio and/or setting the licensing conditions.</p> <p>As an implementer, you may not agree with the licensor on the competent jurisdiction but by displaying a plurality of reasonable choices rather than a single court in your preferred jurisdiction, you will put the odds in your favour! </p> <p>All such tools exist on the <a href="https://www.frandavenue.com/en/">FrandAvenue</a>. <a href="https://www.frandavenue.com/en/">FrandAvenue</a> unique negotiation deck allows market players to set forth their negotiation framework and dispute resolution process, and communicate their licensing terms. On FrandAvenue, implementers have access to all the tools they need from due diligence throughout all the steps of negotiation.</p> <h4>How to prevent and counter patent hold-out?</h4> <p>First, licensors should try to prevent patent hold-ups. <a href="https://www.frandavenue.com/en/">FrandAvenue</a> can help. Indeed, it is designed to support all parties to comply with their obligations and speed up patent licensing negotiations. </p> <p> <a href="https://www.frandavenue.com/en/">FrandAvenue</a>’s unique negotiation deck allows licensors to share, on their terms, their licensing conditions, as well as the technical and economic information of the licensing programs and portfolios at stake. This allows licensors to gain efficiency as well as abide by their obligations, as defined by the CJEU and the FRAND undertaking. <a href="https://www.frandavenue.com/en/">FrandAvenue</a> has also developed a powerful tool that identifies potential licensees and allows licensors to negotiate in no time and at a fraction of the costs they usually spend chasing implementers. Licensors can thus stay ahead of the patent licensing market and develop their upstream licensing approach most efficiently. </p> <p>Licensors should then have a clear strategy in place to counter patent hold-ups. <a href="https://www.frandavenue.com/en/">FrandAvenue</a> can help here too. FrandAvenue negotiation deck allows licensors to display their negotiation framework, i.e., their preferred negotiation steps: e.g., NDA, ATN, due diligence, exchange of technical information on the patent portfolio at stake, discussion on the financial conditions, etc. Each of these key negotiation steps is then matched with deadlines. This sets a clear and enforceable negotiation process. It considerably speeds up negotiations and allows for the accountability of all parties. Indeed, if the other party does not commit to reasonable deadlines or a dispute resolution process in the event of a disagreement, then licensors regain all their freedom to act before the court of their choice. And with the help of their negotiation deck on FrandAvenue, licensors will be able to demonstrate that they have fulfilled their obligations while the other party is an unwilling licensee. </p> <p>Patent hold-up and patent hold-out are thus not yet concepts of the past, but with the right tools, such as FrandAvenue, both implementers and licensors can manage their risks and develop smart licensing policies. </p> <p><a href="https://www.frandavenue.com/en/">FrandAvenue</a> offers 5 toolkits (Dataset room, Analysis room, Negotiation room, Management tools, Marketplace) and more than 15 exclusive tools designed specifically for patent licensing negotiations. For more information about FrandAvenue, its five levels of subscriptions and on-demand services: <a href="https://www.frandavenue.com/en/contact/new">contact@frandavenue.com </a>or<a href="https://www.frandavenue.com/en/"> https://www.frandavenue.com/en/</a></p> <hr> <div class="small"> <p><sup>1</sup>Huawei Technologies v ZTE (C-170/13) EU:C:2015:477; [2015] C.M.L.R. 14</p> <p><sup>2</sup>(case ID: 200.221.250) Philips v. ASUS : the Court of Appeal of the Hague found that Philips had discharged its burden under Huawei v. ZTE and that Asus had failed to demonstrate its willingness to seek a FRAND licence under the Huawei criteria. The court considered that Asus had engaged in a strategy to effectively avoid having to react to Philips’ terms or enter substantial discussions on licensing conditions. Asus had thus not participated constructively to the discussions with Philips and Philips was therefore entitled to seek an injunction.</p> <p><sup>3</sup>ETSI Rules of Procedure, Annex 6, IPR Policy, art. 6.1, art 12 and Appendix A: French law governs the FRAND undertaking</p> <p><sup>4</sup>All major jurisdictions, including USA, China, India, UK, France… with the only exception of Germany, as of 9 May 2022</p> <p><sup>5</sup>In accordance with art. 1112 civ. code</p> </div> </div>

Blog

How to determine the FRAND royalty base?

<div class="pb-2 pt-2 row"> <div class="col-12"> <div class="container mt-4 text-center w-100"> <h1>How to determine the FRAND royalty base?</h1> </div> </div> </div> <p><img class="d-block img-blog img-fluid mx-auto" src="/assets/frontend/images/blog-3.jpeg" /></p> <div class="blog-content container pb-4 pt-4 text-justify"> <p>The royalty base is an important factor in the negotiation of a royalty rate. There are two widely accepted methods for the determination of the FRAND royalty base: the Entire Market Value rule (EMV) and the Smallest Saleable Patent-Practicing Unit base (SSPPU).</p> <h3>What is the Entire Market Value royalty determination method?</h3> <p>The Entire Market Value rule apportions the royalty rate according to the market value of the infringing product, infringing and non-infringing features alike, provided that the patent-related feature is the basis for customer demand.</p> <p>Therefore, where the patented feature drives customer demand for the entire product, the entire revenue from the infringing product becomes the appropriate royalty base.</p> <h3>What is the Smallest Saleable Patent-Practicing Unit royalty determination method?</h3> <p>The Smallest Saleable Patent-Practicing Unit is a royalty base which has been apportioned to the smallest saleable patent practicing unit tied to the patent-at-issue. It restricts the economic base from which the royalty is calculated to the smallest unit embodying the claims of the patent. The economic assumption underlying the SSPPU royalty base is that the financial worth of the invention is fully captured by the price of the component that embodies it.</p> <p>The SSPPU doctrine was introduced by the US Federal Circuit Court in Cornell University v Hewlett-Packard Co1, and developed notably in LaserDynamics v Quanta 2and In re Innovatio3.</p> <h3>How come there are different methods to determine the royalty base?</h3> <p>Since the late 90s the mobile telecommunications market has drastically changed. Indeed, while the companies that contributed to the development of the first generations of the standards were also those producing telecommunication equipment, the new players who entered the booming mobile phone market had a different business model. At the same time, large portfolios of SEP were assigned to non-practising entities.</p> <p>This led to a shift in the SEP licensing market and in the royalty determination methods.</p> <h3>What factors can be used in a negotiation about the royalty base?</h3> <p>The scope of the licensed claims is a key element that the parties must take into account when they negotiate a FRAND agreement. The extent to which a given portfolio covers specific use cases depends upon the scope of protection of the inventions claimed by the licensed patents in that portfolio. This is a key negotiation point when discussing the royalty base because the latter very much depends upon what is the claimed in the patent. Some patents are drafted in such a way that the use case is covered, thus potentially allowing an EMV discussion, while others will be limited to a narrower embodiment, for which the SSPPU method may seem more accurate. This is why the parties need to understand how the portfolio at stake ‘reads’ on the standard and at which technical level it is or may be implemented by the licensed products. Check the implementation analysis tools on <a href="http://www.frandavenue.com">www.frandavenue.com</a></p> </div>

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