Patent licensing: 5G & the Internet of Things

The next telecommunications standard, 5G, and the nascent Internet of Things (IoT), promise a world of high-speed interconnectivity. We’re already accustomed to people talking to smart devices to ask them to play music, or to order a taxi or takeaway. The technology for truly smart homes and even smart cities is following closely (see here for examples of how the IoT is already being used).

Standardisation will be essential to maximising the benefits of both the IoT and 5G. After all, there’s no point in having a smart thermostat that can be adjusted remotely if you can’t connect to it whilst out of the house because your phone is made by a different manufacturer. Standardisation will ensure that 5G/IoT devices and systems can connect and work together.

There will be thousands of patents essential to the operation of the standards developed. As the IoT grows and 5G is rolled out, the issue of how these patents are licensed will become increasingly important. Standard essential patents (SEPs) have to be licensed on a FRAND basis, but determining a FRAND royalty rate is a challenging task.

The Commission’s Roadmap

Following two studies on SEPs published at the end of last year (see here), on 10 April 2017, the Commission released a Roadmap that sets out its plan to publish a ‘Communication on Standard Essential Patents for a European digitalised economy’ later this year, possibly as early as May or June. The Communication (which will not have the binding force of a Directive or Regulation) is intended to complement the Commission’s Digital Single Market project, and to help work towards the goal of having 5G rolled out across the EU by 2025. 

The Roadmap identifies three main issues that the Commission will seek to address in its Communication to ensure a balanced, flexible framework for SEP licensing:

  • Opaque information about SEP exposure: the lack of effective tools for potential licensees too identify which patents they need to take licences for in order to implement relevant standardised technologies.
  • Unclear valuation of patented technologies: the difficulties in assessing the value of new technology (for both licensors and licensees), including the lack of any widely accepted methodology.
  • Risks of uncertainty in enforcement: the general framework provided by the CJEU in Huawei v ZTE is a starting point for agreeing a FRAND royalty rate, but it does not provide complete guidance. There are many technical issues that aren’t addressed, such as how portfolio licensing, related damages claims, and ADR mechanisms should be dealt with. (NB: some of these issues have been recently addressed in the UK case Unwired Planet v Huawei, see our initial thoughts on that case here.)

It is unclear if the Communication will address other issues with standardisation and SEP licensing, such as over-declaration, hold-up, hold-out, the appropriate royalty base (a particularly difficult challenge in the diverse world of the IoT) or whether a total aggregate royalty burden is appropriate.

Use-based licensing?

The Roadmap does not offer any specific details as to how the Commission intends to solve the issues it identifies. However, according to MLex (here – subscription required), an outline of the Commission’s Communication seen in February suggested that the Commission was considering a licensing model that would enable licensors to offer licensees different royalty rates depending on how the relevant technology is used. This could extend to allowing licensors to refuse to offer a licence if the final use of the technology cannot be identified and tracked.

This suggestion has caused concern amongst a number of companies. ACT | The App Association, an organisation sponsored by Apple, Facebook, Microsoft, PayPal & others which represents more than 5,000 small technology firms, has written to the Commission claiming that such a licensing model poses a substantial threat to innovation. It argues that in order for suppliers to obtain licences under this model, they might be required to monitor their customers’ business practices and potentially to charge different customers different prices depending on how they use the technology. It also claims that this model could appropriate the value created by new innovators. If a company succeeds in developing a new use for a particular sensor by incorporating it into a health app for example, it might find itself being charged higher royalties for this new use of the sensor.   

We have reported before on how new licensing models may be required to make best use of the IoT. Qualcomm, Ericsson and Royal KPN (among others) have backed a new licensing platform called Avanci. This is designed to remove the need for lengthy bi-lateral licence negotiations by making flat rate FRAND licences available for particular patent portfolios. However, it is now over six months since Avanci launched and there have been no reports yet of it successfully concluding any licence agreements.

The proper royalty base for patent licences has been a controversial topic for a number of years now. There has been considerable debate over whether licences should be based upon the price of the smallest component in which the patent is implemented, or the final price of the end product. This issue has been addressed by the courts on occasion, particularly in the US (see our post on CSIRO v Cisco here for example).

The new Communication is intended to provide best practice guidance on SEP licensing. If the Commission does opt for a use-based licensing model, this would be a controversial choice. However, whatever the Commission decides, given the number of conflicting interests and amounts of money at state, it is unlikely to satisfy everyone. 

Unwired Planet v Huawei: Is FRAND now a competition law free zone? Not so fast…

It has been two weeks since Mr Justice Birss handed down his latest judgment in Unwired Planet v Huawei (see here for a summary), which is almost long enough to get to grips with the 150 or so pages. There has already been a huge amount of discussion as to what this judgment means in practice and we have even overheard some suggest that, when it comes to FRAND in the future, we can simply ignore competition law altogether. This week we were invited by our friends at the renowned IP law blog, IPKat, to have our say on this. You can check out our thoughts on the IPKat blog here.

Unwired Planet v Huawei: UK High Court determines FRAND licence rate

Mr Justice Birss has just handed down the first decision by a UK court on the ever controversial topic of what constitutes a FRAND royalty rate.  At well over 150 pages, the judgment covers a lot of ground: a lot of ink is likely to be spilled about it over the coming weeks and months.  From what we’ve seen so far, the judge has not been afraid to make findings that will have a considerable impact on licensing negotiations in the TMT sector. 

We’ve summarised the headline conclusions below, but also keep an eye out for future posts in which we’ll analyse some of the judge’s findings and reasoning in more detail.

Background

In March 2014, Unwired Planet (“UP”) sued Huawei, Samsung and Google for the infringement of 6 of its UK patents.  Five of these were standard essential patents (“SEPs”) that UP had acquired from Ericsson.  They related to various telecommunications standards (2G GSM, 3G UMTS, and 4G LTE) for mobile phone technology. 

Five technical trials, numbered A-E, were listed on the validity and infringement of the patents at issue.  These were to be followed by a non-technical trial on competition law and FRAND issues.  UP’s patents were found valid and infringed in both trial A and trial C, but two were held invalid for obviousness in trial B. Trials D and E were then stayed, and as Google and Samsung had settled with UP during the proceedings, this just left Huawei and UP involved in the 7 week non-technical trial, for which judgment has just been given. 

Judgment

There’s a lot to unpack in this judgment, but here is a short list of what we think are the most important findings:

General principles:
  • There is only one set of FRAND terms in a given set of circumstances.  Note the contrast between this and the comments of the Hague District Court in the Netherlands in Archos v Philips (here, in Dutch) which seem to interpret the CJEU decision in Huawei v ZTE as meaning that there can be a range of FRAND rates.
  • Injunctive relief is available if an implementer refuses to take a FRAND licence determined by the court. Mr Justice Birss indicated that an injunction would be granted against Huawei at a post-judgment hearing in a few weeks’ time (although presumably Huawei can avoid this by now taking a licence on the terms set by the Judge).
  • UP is entitled to damages dating back to 1 January 2013 at the determined major markets FRAND rate applied to UK sales. 
  • What constitutes a FRAND rate does not vary depending on the size of the licensee.
  • For a portfolio like UP’s and for an implementer like Huawei, a FRAND licence is worldwide.
  • It’s still legitimate to make offers higher or lower than FRAND if they do not disrupt or prejudice negotiations.
Abuse of dominance:
  • UP did not abuse its dominant position by issuing proceedings for an injunction prematurely (it began the litigation without complying with the Huawei v ZTE framework).
Calculating the FRAND rate:
  • A FRAND royalty rate can be determined by making appropriate adjustments to a ‘benchmark rate’ primarily based upon the SEP holder’s portfolio. 
  • In the alternative, if a UK-only portfolio licence was appropriate, an uplift of 100% on the benchmark rates would be required.
  • Counting patents is the only practical approach for assessing the value of sizeable patent portfolios, although it may be possible to identify a patent as an exceptional ‘keystone’ invention.
  • Comparable, freely negotiated licences can be used as to determine a FRAND rate.
The FRAND rates as determined:


Other FRAND terms:
  • The Judge goes into some details as to the terms which will be FRAND in the licence between Unwired Planet and Huawei – much of which will be worth reading for licensors and licensees in this field.  Of particular note is the royalty base for infrastructure (excluding services). 
Other remedies:
  • Damages are compensatory and are pegged to the FRAND rate.
Comment

There have been near continual disputes between the major players in the TMT field over the last decade or so.  The meaning of FRAND has been strategically important in a large number of cases.  However, many of these companies are very effective negotiators.  In the vast majority of cases, they are able to agree licences without resorting to litigation.  Where proceedings are initiated, the parties are usually able to settle long before a judgment is reached, particularly given the time and expense required to take a FRAND case all the way to trial.  (Such expense is, however, usually dwarfed by the value of the licence – many licences in this field are valued in $billions.) 

The scarcity of judicial opinion in this area means this is a rare opportunity to see how a respected UK judge has approached a number of the unresolved questions regarding FRAND. 

A number of significant questions remain unanswered however, and we will be exploring these in future blog posts.  There’s also the matter of the upcoming post-judgment hearing in a few weeks’ time, which will establish whether or not Huawei will actually be subject to an injunction in the UK, and of course the chance that either party might wish to appeal.  All in all, there’s plenty of interest to talk about, plenty of advice to be given to clients, and the FRAND debate will undoubtedly continue on.