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.
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.
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.
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.
After briefly recalling the concepts of patent hold-up and patent hold-out, we will examine the solutions available to all market players.
What is a Patent hold up?
The notion of patent hold-up describes the abusive use by patent holders of the power conferred to them by the market..
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.
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.
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.
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 ZTE1 are not fulfilled.
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.
What is a Patent hold-out?
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".
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.
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 patents2.
Implementing FRAND Obligations: The Key to Resolving Patent Disputes?
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 law3, is well settled globally4, 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 faith5, keep evidence of one's actions, and take preventive measures.
How to counter patent hold-ups?
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.
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.
All this data is available on FrandAvenue
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.
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.
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.
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!
All such tools exist on the FrandAvenue. FrandAvenue 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.
How to prevent and counter patent hold-out?
First, licensors should try to prevent patent hold-outs. FrandAvenue can help. Indeed, it is designed to support all parties to comply with their obligations and speed up patent licensing negotiations.
FrandAvenue’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. FrandAvenue 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.
Licensors should then have a clear strategy in place to counter patent hold-outs. FrandAvenue 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.
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.
FrandAvenue 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: firstname.lastname@example.org or https://www.frandavenue.com/en/
1Huawei Technologies v ZTE (C-170/13) EU:C:2015:477;  C.M.L.R. 14
2(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.
3ETSI Rules of Procedure, Annex 6, IPR Policy, art. 6.1, art 12 and Appendix A: French law governs the FRAND undertaking
4All major jurisdictions, including USA, China, India, UK, France… with the only exception of Germany, as of 9 May 2022
5In accordance with art. 1112 civ. code