SEPs, 5G and the IoT: where will the Commission land on use-based licensing?

In April this year we reported that the Commission had released a Roadmap towards a ‘Communication on Standard Essential Patents for a European digitalised economy’,  intended to address some of the uncertainties in SEP licensing left unresolved following Huawei v ZTE (see e.g. here), and to drive progress for the EU-wide adoption of 5G. Originally expected in May, the Communication is now said to be likely to be published before the end of the year. Part of the reason for the delay appears to be a dispute between several directorates within the Commission as to the appropriateness of use-based licensing for Internet of Things (IoT) enabled devices.

Recap: the IoT & 5G

The Internet of Things (IoT) will result in increasing inter-connectivity between devices. For example, smart kitchen appliances can already be turned on remotely. A new smart fridge might re-order milk automatically. On a grander scale, lighting systems in towns and cities might vary the level of illumination produced by streetlamps based on the time of day, season, or even weather conditions. 

Some of these new technologies will be very data hungry. They will all require the ability to connect to mobile networks and other devices. This is where standards come in. Standards like 3G and 4G enable fast mobile connectivity. 5G, currently in development, will enable even faster transfers of data. Each of these standards incorporates thousands of patents which have been declared essential to use of the standard (SEPs). The holder of an SEP must commit to license its SEPs on Fair, Reasonable and Non-Discriminatory (FRAND) terms. 

The negotiation of FRAND terms is often contentious (see for example our reports on the Unwired Planet case in the UK, here and here, Huawei v ZTE in the EU, and Ericsson v D-Link and CSIRO v Cisco in the US). Most FRAND litigation to date has focussed primarily on mobile phones or similar devices. As more types of product with connectivity are developed, licensing negotiations (and litigation following failed negotiations) risk becoming even more complicated. However, as there could be more than 29 billion IoT connected devices by 2020, with IoT systems creating an economic impact of more than $11 trillion per year by 2025 (source), the stakes are considerable.

The difficulties of drafting the Communication

A number of recent reports have indicated considerable debate within the Commission about the contents of the Communication. The centre of the dispute is use-based licensing: whether SEP holders should be able to charge different rates to different licensees depending on the nature of the final product that implements the technology. 

For example, it is argued that 5G is more valuable to a mobile phone, where connectivity is integral to its operation, than to a smart energy meter that might only connect once a day. It is therefore suggested that charging a higher royalty rate for a 5G enabled mobile phone than a 5G enabled meter is fair. This is the position supported by some big SEP holders such as Qualcomm, Nokia and Ericsson.

On the other hand, small developers claim that by focussing on the final product, SEP holders are trying to take a cut of the value created by other inventors who have come up with innovative new uses of a technology. Some vocal critics of current licensing practices take issue with the SEP holder practice of granting licences only to those who produce and sell the final product, such as Samsung, Apple or Huawei. Instead, they argue that SEP holders should be obliged to grant licences to all-comers, including companies higher up the supply chain, for example to those that produce the wireless chipsets incorporating the SEP technology. 

However, this option could also create its own challenges. If a number of companies in the supply chain have all taken licences to the same underlying SEPs, this could result in a form of ‘double-dipping’ – allowing SEP holders to recover higher royalties (depending on the extent to which the licence would otherwise ‘pass-through’ from the company highest in the chain to the end manufacturer). It could also result in an increase in the number and complexity of licensing negotiations. Those who support use based licensing argue that the simplest way of licensing SEPs of this sort is at the point where the final product incorporating the patented technology is complete, and that a single licence at that point is the neatest and most efficient licensing model. 

Underlying both positions is a concern about the price to be paid for standard essential technology. Those who develop that technology and contribute it to standards want to ensure a return on their investment and argue that good financial incentives are required to ensure continued innovation. Those who use the technology argue that they are happy to pay, but also need their incentives to continue bringing new data-dependent products to market not to be crimped by patentees charging royalties which exceed the value contributed by standardised technologies. Implicitly, both arguments assume that relying on royalties at an earlier point in the value chain will result in lower costs for product developers and lower returns for patentees.

Our understanding is that within the Commission itself, some directorates largely support the views of the SEP holders. They cite concerns about the need to preserve SEP holders’ incentives to innovate and support the use based model, which would enable SEP holders to calibrate the royalties sought finely by reference to different uses. On the other hand, DG Competition continues to be concerned about the position of implementers. It notes that they may face significant difficulties in acquiring licences directly, as well as the potential for unjustified price discrimination between users if companies higher in the supply chain are not able to obtain, and pass on the benefits of, licences to all comers. Over recent years, DG Competition has also frequently focussed on incentives for follow-on innovation both in TMT and in other sectors, which again tends to favour the position of implementers. 

Whatever the final text of the Communication, the intensity of the debate surrounding it means that it is unlikely to be overly prescriptive. Discussion on these issues is likely to continue over the coming years across an array of industry forums and within bodies such as ETSI, not least because of the global nature of the debate. It’s also worth noting that representatives from a number of technology companies such as Nokia, Ericsson and Orange have formed a committee to establish an industry-wide code on best practices for SEP licensing (here – subscription required). It will be interesting to see if that code supports or conflicts with the Commission’s approach.

Apple’s battle with Qualcomm spreads to the UK

On 19 May 2017 Apple issued a major claim against Qualcomm in the English Court. This is part of a widely reported global dispute between the two giants. The English action includes an Article 102 abuse of dominance claim as well as a FRAND licensing claim and was issued just a month after the English Court’s first FRAND valuation in Unwired Planet v Huawei (Bristows’ blog post here and here). The particulars of the claim are now available and make fascinating reading. 

On the FRAND licensing front, Apple seeks a declaration that Qualcomm has breached its obligations to ETSI, by failing to offer a FRAND licence for Standard Essential Patents (SEPs), seeking excessive and non-FRAND royalties. 

As far as competition law and Article 102 is concerned, Apple makes a number of arguments. 

It claims that Qualcomm is abusing its dominant position in the markets for LTE, CDMA and UMTS chipsets by refusing to license its SEPs to competing chipmakers. This means that if a chipset is purchased from a company other than Qualcomm, the purchaser must then obtain a licence from Qualcomm for use of Qualcomm’s standard-essential IP. Apple asserts that Qualcomm’s practices exclude chipset competitors from the market, as well as being in breach of its contractual FRAND obligations.

Apple also complains about various aspects of agreements between itself and Qualcomm. These expired in 2015, and in 2016 Apple began to purchase chipsets from Intel. This has doubtless affected the nature and timing of the litigation.

As mentioned above, Apple contends that Qualcomm’s royalties are excessively high. It then argues that to reduce the effective royalty rate it had to pay, it had no commercial alternative other than to conclude rebate agreements which involved granting Qualcomm exclusivity over Apple’s chipset supply. Apple maintains that one consequence of this arrangement has been to limit the emergence of other chipset manufacturers, who have been precluded from competing for Apple’s custom. Because of Apple’s importance as a purchaser of chipsets this is argued to have foreclosed a significant part of the potential demand. Qualcomm’s practice of forcing customers to take a licence and to agree to exclusionary terms is said to further reinforce the exclusionary effects. 

A particular feature of the rebate agreement which is criticised by Apple is that it was conditional on Apple agreeing not to pursue litigation or governmental complaints that the royalties were ‘non-FRAND’. 

Apple explains that Qualcomm’s royalties are charged in addition to the price of the chipset itself, and are based on the price of the end device being sold by the licensee, rather than on the price of the chipset in which it is argued that all the patented technology is practised. Apple takes the position that in order to be acceptable the royalty should be calculated by reference to the smallest saleable patent practising unit (SSPPU) – in this instance the chipset, rather than the phone. This is said to guard against situations where two phones that use the same Qualcomm technology could incur significantly different royalty obligations for use of the same SEPs based only on their different end sales prices. Those sales prices which differ because of completely different aspects of the phones, such as design or additional functionalities. This issue was not considered by Birss J in Unwired Planet v Huawei. The argument was raised in Vringo v ZTE, but was dropped before trial. 

Apple makes several arguments which are in tension with the recent Unwired Planet v Huawei Judgment. These include: that licensees can be acting in a FRAND manner even though they refuse to take a licence of an entire patent portfolio of declared SEPs, irrespective of validity or essentiality; that the FRAND royalty for an SEP should reflect the intrinsic value of the patent; and that the standard (of which that technology is a part) constitutes value that Qualcomm has not created and which it should not seek to capture through its FRAND licensing. 

Finally, in an attempt to demonstrate that Qualcomm’s royalty is not FRAND, Apple states that Qualcomm holds a quarter of the declared SEPs for the LTE standard and compares Qualcomm’s royalty with the (presumably lower) licence fee it pays other SEP holders, who combined hold one third of the relevant SEPs.

Ultimately, Apple claims that Qualcomm’s undertaking to ETSI is ineffective to constrain its dominance as an SEP owner. This may be a direct response to comments by Birss J in Unwired Planet v Huawei that an SEP holder may not always hold a dominant position, for example, because of the FRAND obligation and the risk that implementers may engage in patent hold-out. 

Conclusion

Developments in this case will be interesting when set against the recent judgment in Unwired Planet v Huawei, in which Birss J considered many of the issues raised by Apple. But Apple also makes arguments that go well beyond the issues considered in that case. For example, Apple’s arguments about exclusionary rebates may be affected by the Intel judgment, due to be handed down by the EU’s Court of Justice on 6 September 2017.  It also sits alongside parallel antitrust litigation in the US, including retaliatory actions by Qualcomm designed to exclude Apple’s handsets from import to the US. How this case, and the global dispute, evolves will be fascinating to follow – and not only for those with an interest in SEP and FRAND issues.

A FRAND torpedo? An update on Vodafone v Intellectual Ventures

Patentees commonly litigate in Germany. The validity of a patent is considered separately from (generally after) any infringement claims. Infringement proceedings, including injunctive relief, are not typically stayed pending a validity challenge. The availability of a relatively quick infringement decision and potential injunction against a licensee who has not complied with the Huawei v ZTE framework seem to make it an attractive option. 

To avoid the risks of an injunction in Germany, implementers actually or potentially subject to infringement proceedings there might think about asking a court in another jurisdiction to consider any FRAND dispute. This could enable them to argue that issues relevant to an injunction, such as whether the implementer is a ‘willing licensee’, are already subject to the jurisdiction of another Court, making it more difficult for the patentee to get an injunction. 

This is exactly what happened in Vodafone v Intellectual Ventures. As this blog reported here, when faced with infringement proceedings in Germany, Vodafone launched a FRAND countersuit in Ireland (with an ex parte application for permission to serve out of the jurisdiction). Earlier this year (unreported judgment [2017] IEHC 160), Intellectual Ventures responded by making an application to the Irish Court on the basis of Articles 29 and 30 of the Recast Brussels Regulation. It claimed that the German Court had been ‘first seised’ and so the Irish Court was required (or alternatively that it should exercise its discretion) to decline jurisdiction, or at least stay the proceedings. 

Despite identifying a number of overlaps relating to FRAND between the Irish and German proceedings, the Irish Court did not agree that Article 29 applied. The Irish proceedings did not involve the same cause of action or even the same parties (because of the involvement of an Intellectual Ventures subsidiary in the Irish case). However, given the degree of overlap between the two sets of proceedings, the Court considered that some form of discretionary relief under Article 30 was appropriate. It decided not to decline jurisdiction under Article 30, but agreed to stay the proceedings pending the final judgment of the Düsseldorf Court, expected in September, at which point, the various issues discussed might become clearer, e.g. the extent to which the German Court would cover FRAND.

The success of Vodafone’s tactic is therefore yet to be fully determined. It will be very interesting to see to what extent the German Court takes into account the Irish proceedings when issuing its infringement decision, and in deciding whether to grant an injunction. In the meantime, it seems that implementers wishing to secure a favourable FRAND jurisdiction would ideally act pre-emptively, before patent infringement proceedings are issued.

A final point worth noting arises from Unwired Planet v Huawei (see this blog’s posts here and here).  In that case the English High Court decided that it could settle the terms of a FRAND licence (dealing with incidental FRAND disputes along the way) and that a FRAND licence between companies operating on a world-wide basis would be global in scope. 

There are many issues relevant to determining jurisdiction and the operation of the Recast Brussels Regulation. However, with the English Court clearly prepared to determine FRAND licence terms and having held that a FRAND licence will be global, there is perhaps more potential now to argue successfully that if FRAND proceedings have been issued in one jurisdiction, a Court in another should be cautious about granting an injunction or coming to any other conclusion that might conflict with any FRAND findings of the first Court. Indeed, if the implementer has made it clear that it will accept the terms settled by a Court, it may be difficult to argue convincingly that it should be regarded as “unwilling” or dilatory.

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. 

Patent licensing and antitrust – Qualcomm in the firing line

Ten years after the European Commission opened an investigation into Qualcomm's royalties for 3G essential patents, and 8 years after it closed that investigation without any finding of infringement, the US FTC last week week (January 2017) brought a new complaint against the chipset manufacturer's patent licensing practices.

In the meantime, Qualcomm has not been long out of the competition authorities' sights, with statements of objections in the EU on exclusivity payments and predatory pricing, an infringement decision and $853m fine by the Korean FTC (the second imposed on the company by that agency) just after Christmas last year, and a settlement worth over $900m with the Chinese antitrust authorities in 2015.  It has also attracted private actions, as we reported here (Icera’s 2016 claim in the English courts) and as has been further reported in recent days (Apple’s new lawsuit in California, alleging overcharging for chips and failure to pay rebates due).

The FTC complaint focusses on three main areas*:

  • Requiring customers for its baseband processors (in which Qualcomm is said to have a dominant position for both CDMA (3G) and LTE (4G)) to take a patent licence, thus achieving elevated royalties;
  • Refusing to license its essential patents to competitors (such as Intel), contrary to Qualcomm’s FRAND commitments;
  • Exclusive dealing, notably with Apple, to cement its position in the 4G smartphone market

In combination, this conduct is said to impose a “tax” on mobile phone manufacturers, even when using non-Qualcomm processors.   The complaint also notes that licensees are passing up the opportunity to challenge whether Qualcomm’s rates are FRAND.  The FTC lists a number of reasons why Qualcomm’s licences might not be FRAND, such as the maintenance of Qualcomm’s royalty rates at a significant level despite its reduced patent share; the charging of royalties on the selling price of the whole handset, even though this includes many features not subject to Qualcomm’s patent claims; and the extraction of onerous cross-licensing terms.

But why is this occurring? – why is it that licensees do not litigate Qualcomm’s royalty demands, as they do with other significant SEP holders?  The answer lies – according to the FTC – in the cost to licensees of litigation with Qualcomm.  It argues that rational licensees will be willing to litigate if the cost of doing so appears likely to be outweighed by the prospect of reduced royalties.  In this instance, however, it is said that the cost of litigation for prospective Qualcomm licensees is usually too great: as Qualcomm’s licensees are also customers of Qualcomm’s chipsets (for which there are few – if any – substitutes), they not only have to bear the cost of the litigation itself, but also, potentially of significantly impeded market access, arising from difficulties in obtaining Qualcomm chips. 

Patent licensing, once regarded as a largely benign or even pro-competitive business model, is now at the forefront of the antitrust authorities' attention around the world.  The fact that Qualcomm’s conduct is perceived to have effects on a market as valuable and crucial to the economy as the smartphone market have served to make it a particularly attractive target for the antitrust authorities.  This is not without controversy, however: US DOJ officials have previously expressed concerns about investigations seeking to  curb royalties would be liable to affect innovation, and – as Qualcomm has emphasised – the present FTC Complaint was launched on the basis of only 2-1 agreement by the FTC commissioners, in the face of opposition from Maureen Ohlhausen.  Whatever the divergence of views, it appears inevitable that Qualcomm will continue to appear in the antitrust headlines for some time to come.

* One further area has been identified by the FTC, but is subject to protective order.  

European Commission publishes two new studies on the interplay between patents and standards

In December 2016, the European Commission published two new studies on standard essential patents (SEPs).  As regular readers of this blog will know, SEPs protect technologies that are essential to standards such as 4G (LTE) and Wi-Fi, which rely on hundreds of patented technologies to function effectively.  For the same reason, SEPs will be crucial to 5G and the nascent “Internet of Things”.

The two studies form part of the Commission’s project to improve the existing IPR framework and to ensure easy and fair access to SEPs.  The specific aims of the Commission’s project were outlined in its April 2016 Communication “ICT Standardisation: Priorities for the Digital Single Market”, which we commented on here.

The first new study, titled “Transparency, Predictability and Efficiency of SSO-based Standardization and SEP Licensing”, and prepared by economics consultancy Charles River Associates (CRA), examines a number of issues relating to the standardisation process and SEP licensing.  Building on a previous 2014 report on patents and standards, and on the responses to a 2015 public consultation, the authors outline what they see as the main “problems which have real significance and impact ‘on the ground’”.  They then go on to consider a number of specific policy options which might help alleviate those problems.  Particular focus is placed on “practical and readily implementable solutions” which would, according to the authors, enhance the transparency of the standardisation process and reduce the transaction costs of SEP licensing.

One of the CRA study’s most notable – and doubtless controversial – proposals is the imposition of a ceiling on the aggregate royalty for a given standard.  The authors suggest that a commitment by SEP holders to observe a maximum total royalty burden would go a long way to tackling the problems of patent hold-up and royalty-stacking*.  While the study recognises that there would be a number of difficulties in implementing such an approach, it arguably underestimates the challenges.  The first problem would be determination of the aggregate royalty level.  Assuming that can be overcome, allocation of total royalties between SEP holders would be a formidable challenge, even for a ‘static’ standard.  The landscape here is far from static, however.  Not only do SEPs change hands regularly (as the second report by IPlytics emphasises), but telecoms standards themselves evolve, through the addition of new releases which improve on or supplement existing technologies.  When you throw into the mix the lack of public information about licence fees charged across the industry (something which the authors also have in their sights**), and the multiplicity of methods for comparing the relative values of SEP portfolios, it is difficult to see how such a system would work in practice – except, perhaps, as very general guidance.

The CRA study goes on to emphasise the importance of preserving flexibility on issues such as the appropriate royalty base and the level of the value chain at which SEP licensing should occur.  In the authors’ opinion, economic analysis of these issues suggests there is no appropriate one-size-fits-all solution.  This stands in contrast to the conclusion on royalty-stacking, where greater control is advocated.

The second new report, prepared by the Berlin-based data analytics company IPlytics, uses a dataset of over 200,000 SEPs to paint a more quantitative portrait of the SEP landscape.  It provides detailed empirical evidence on a number of issues, including:

  • Technology trends – The report shows that most declared SEPs relate to communication technologies, followed by audio-visual and computer technologies.  More than 70% of all SEPs are declared as essential to ETSI.
  • Regional trends – The proportion of SEPs filed at the Korean and Chinese patent offices has increased in recent years (particularly in the telecommunications sector), reflecting the growing importance of Asian markets in the global economy.
  • SEP transfers – More than 12% of all SEPs have been transferred at least once.  The study reveals that the top sellers of SEPs are Motorola, Nokia, Ericsson, InterDigital and Panasonic.  The most active buyers include Qualcomm, Intel and – perhaps surprisingly, given its recent suit alleging that Nokia evaded FRAND by transferring patents to two PAEs – Apple.  
  • Comparison with non-SEPs – A comparison with a control group of patents which have not been declared as standard essential suggests that SEPs are more frequently transferred, litigated, renewed and cited as prior art than non-SEPs.  This implies that SEPs are generally more valuable than non-SEPs, but the study refrains from considering whether the technology protected by SEPs is intrinsically more valuable than that protected by non-SEPs, or whether the higher value of SEPs is merely a product of their incorporation into a standard.

One striking feature of both studies is their attempt to grapple with the thorny issue of ‘over-declaration’.  The authors of the CRA study point to research showing that, when tested rigorously, only between 10 and 50 per cent of declared SEPs turn out to be actually essential.  Both studies propose some form of independent essentiality testing to address the problem.  The CRA study claims that random testing of a sample of each SEP holder’s portfolio would provide useful information about how royalty payments should be allocated between SEP holders; and that the benefits of such testing would be especially pronounced when combined with the imposition of an appropriate ceiling on the total royalty stack.  According to the IPlytics report, patent offices have the requisite technical competence and industry recognition to perform essentiality testing at a reasonable cost.

To conclude, the two studies provide a reminder – if any were needed – that issues relating to the standardisation process and SEP licensing remain high on the Commission’s agenda.  The Commission says it intends to draw fully on the studies’ findings when assessing the interplay between patents and standards in the EU Single Market.  However, whether the Commission will embrace any of the practical solutions proposed by the studies remains to be seen.

* As mentioned in this December 2015 blog post, royalty-stacking refers to the situation where the royalties independently demanded by multiple SEP holders do not account for the presence of other SEPs, potentially resulting in excessively high total royalty burdens for implementers.

** See pages 71 and 85 of the CRA study.

The vexed question of the appropriate ‘royalty base’ for FRAND-based damages – the US Supreme Court declines to answer

Apple and Samsung have been engaged in litigation in the USA since 2011 over the issue of whether various Samsung smartphones infringed a number of Apple’s design patents. Last year, the US Federal Circuit affirmed a jury award of $399 million of damages in favour of Apple, comprising Samsung’s entire profit on the sale of those smartphones. On 6 December 2016, the US Supreme Court intervened in the latest chapter in this long-running saga to reverse the Federal Circuit’s decision and remand it back to that court for further consideration.

Notably, this was the first occasion in which the Supreme Court had looked at a design patent case in over a century. However, it had also seemed to be a rare opportunity for judicial clarity on a controversial issue – for infringements involving multi-component products, should damages be calculated based on the value of the whole end product sold to consumers, or on the basis of only a particular component of that product?

This is an issue regularly arising in disputes regarding what constitutes a FRAND royalty for standard essential patents, an area in which there is still little judicial guidance in the US or Europe. The Supreme Court’s judgment offers little new insight. Instead, it focuses almost entirely on the meaning of the wording “article of manufacture” in the relevant statute (35 USC §289).  The Federal Circuit had previously held that only the entire smartphone could be an article of manufacture, as its components were not sold separately to ordinary consumers.  The Supreme Court reversed this, holding that “article of manufacture” encompasses both a product as sold to a consumer and a component incorporated into that product, even though not sold direct to consumers. 

The Supreme Court declined to comment on whether the relevant articles of manufacture at issue in the case were the entire smartphones or the particular smartphone components, remanding this question to the Federal Circuit. For (F)RAND royalty calculations, a US Court of Appeal has previously suggested that different cases may require different methodologies for damages models (see here). If the Supreme Court had provided a more wide-ranging decision, it might have included useful guidance as to when it’s appropriate to base damages on the value of an entire product, and when the value of a component alone is more suitable.

As things stand, we will have to continue to wait to see what the Federal Circuit decides on remand.  Alternatively, the judgment of the UK High Court in the FRAND case Unwired Planet v Huawei, due to be handed down in early 2017, may offer us more to get stuck into. 

We need to talk…about Pharmaceuticals and Standard Essential Patents

At the end of last month, Commissioner Vestager gave a speech at the Chillin’ Competition Conference. The focus: how competition law can protect consumers from anti-competitive behaviours. The Commissioner gave examples of situations in which intervention could be justified, two of which are of particular interest in the competition/IP sphere - pharmaceutical goods and Standard Essential Patents (‘SEPs’)

Pharmaceutical goods

Commissioner Vestager noted that people’s health often relies on a drug sold by only one company. This can be because the company has a patent, but may also simply be because no other companies are interested in coming to the market due to low levels of demand. This isn’t a problem in itself if prices stay at a reasonable level but if prices go up, the Commission suggested it may warrant action by the competition authorities.

This could not be more topical – just today the Competition and Markets Authority’s (‘CMA’) has taken a decision in the Pfizer/Flynn case, which relates to excessive pricing of an anti-epilepsy drug previously branded as Epanutin (we reported previously on this investigation here). We’ll be providing a more detailed update on the CMA’s decision soon but in the meantime, our readers will be interested to know that both Pfizer and Flynn Pharma have already announced that they intend to appeal. 

The Pfizer/Flynn case follows the CMA’s recently launched investigation into excessive pricing in the pharmaceutical sector in the UK. Concordia International announced that it was in talks with the CMA about this. However, the investigation is still at the information gathering stage, with a decision on whether or not to proceed expected in February of next year.  

An article published in the Times last week suggested that certain generics drugs continue to be subject to significant price increases – the only manufacturer of lithium carbonate tablets is reported to have raised the price of its product by £39 in the last month, and from £3.22 to £87 over the last year. 

Similarly, the Italian Competition Authority recently investigated Aspen, a supplier of cancer drugs to the Italian Medicines Agency, and in October 2016 fined it over €5 million for increasing the price of its cancer drugs by up to 1500% (see here for our report on this).  

Pharmaceutical investigations continue outside of the EU as well. Last month Bloomberg reported that the first charges in the US DOJ’s antitrust investigation into collusion over generic price increases investigation (spanning over two dozen companies) are expected by the end of the year.

The prevalence of investigations relating to pricing regulation in the pharmaceutical sector represents a major change in policy from the days when competition authorities were wary of acting as price regulators. Perhaps, as is evidenced by Vestager’s recent speech, this is largely due to a renewed focus on consumer interests.  But it is far from clear that it is sensible policy for the competition authorities to have to intervene in cases which arguably result from regulatory failures.

SEPs

In her speech, Commissioner Vestager also suggested that in some situations, phone makers may be forced to accept whatever terms they are presented with, regardless of whether these are actually FRAND (fair, reasonable and non-discriminatory).  This is particularly problematic where this takes place under threat of an injunction, and can mean that they end up paying unjustified royalties, with customers also paying more as a result. While FRAND disputes have been around for many years, the Commissioner emphasised that this remains a topical issue – with 5G and the Internet of Things, more and more products will be connected with each other; innovation is increasingly important and restrictive practices could stifle development.  

The issue of whether offers are FRAND has a reflection closer to home in the UK at the moment.  This week marks the closing submissions in the Unwired Planet v Huawei FRAND trial, which looks set to become the first EU case to determine what a FRAND offer is. A judgment in this case is likely to be handed down in the first few months of 2017… 

Patent Licensing and the Internet of Things – a Solution?

The Internet of Things (IoT) – a term used to describe the interconnectivity of electronic devices via the internet or wi-fi – is no longer an entirely new phenomenon.  Smart fridges, meters, watches and countless other connectable gadgets which have the ability to store and exchange data have been at the forefront of discussions by tech experts over the last few years.  The next wave of additions to the the IoT includes driverless cars and smart cities – and more as yet unimaginable changes may follow.

Issues such as security and safety, data protection and regulation have added a dash of reality to the otherwise positive picture of the IoT.  Nevertheless, an increasing number of companies are incorporating some form of connectivity into their business plans.  The most recent Ericsson Mobility Report for example, forecasts that there will be approximately 28 billion connected devices by 2021, of which 16 billion will be related to the IoT. 

However, one area that may pose a significant barrier to companies wishing to break into the emerging market of the IoT is in the arrangements to be put in place for the licensing of relevant patents and software.  The market for connected devices could be at risk of being ‘held up’ by IP disputes.  One question that has not yet been comprehensively answered is how makers of connected devices can acquire the licences necessary for their IoT products in a simple and efficient way.  

A possible solution has recently been introduced by a new licensing platform called Avanci.  Backed by Ericsson, Qualcomm and Royal KPN (among others), Avanci builds on the traditional idea of the patent pool. It aims to offer flat rate licences on FRAND terms for a collection of standard essential wireless patents, with the aim of removing the need to negotiate multiple bilateral licences.  If it works, this could speed up the expansion and uptake of the IoT.

The uptake of this initiative is yet to be seen. Its success is likely to depend upon a number of factors including:

  • Whether the licensors are able to find a mutually agreeable pricing structure;
  • Whether the price offered is acceptable to device manufacturers; 
  • The number of patent holders offering their backing to the initiative; and
  • The willingness of manufacturers to take a licence without forcing the patentees to resort to litigation and potentially costly FRAND disputes;
  • How the platform deals with the relationship between its prices and those applicable in any pre-existing bilateral deals.
It is already evident that some aspects of Avanci’s pricing may be controversial – for example, royalty rates will remain fixed regardless of how many patents are added to the platform.  This may sound like good value for licensees, but will it offer sufficient incentives for new licensors to join and make the platform a genuinely one-stop shop?  Or does it suggest that the early prices are likely to be rather high, to allow headroom for further patents to be added.  The use of fixed prices per device rather than percentage rates could also be contested by manufacturers of lower value devices, in particular if they are staring down the barrel of a patent infringement suit.

We will be continuing to monitor this fascinating space…

Vodafone v Intellectual Ventures – Is a new front about to open in the FRAND wars?

When Intellectual Ventures (IV), the world’s largest non-practising entity, sued Vodafone GmbH for infringement of a batch of its standard essential patents (SEPs) in Germany last September, it probably wasn’t expecting the communications services provider to launch a FRAND counterattack in Ireland.  But that’s exactly what has happened.

Last month, the Irish High Court gave an indication that Ireland was the appropriate jurisdiction for hearing Vodafone’s allegations that two companies in the IV group – IV International (based in Ireland) and IV LLC (based in Delaware, USA) – had breached their obligations to license their SEPs on FRAND terms.  As far as we’re aware, this is the first Irish case on issues relating to FRAND and SEP licensing.  As the Irish High Court noted in its judgment, the patent and competition law issues raised by Vodafone’s application made it “something of a first in the Irish courts”.

According to the judgment, IV first approached Vodafone to discuss the terms of a licence to various IV patent portfolios in 2012.  No agreement was reached, however; and IV LLC filed two sets of patent infringement proceedings against Vodafone GmbH in Germany in September 2015 and January 2016.  The patents in question relate to DSL technology, a type of broadband technology which connects a user to a high-speed internet connection across a telephone network.  DSL services operate in accordance with so-called ‘xDSL standards’, which are set by the International Telecommunications Union (commonly known as the ITU).  Like other standard-setting organisations, the ITU has developed policies relating to IP rights which require SEP holders to license their patents on FRAND terms.  Vodafone has alleged that IV abused its dominant position on the markets for the licensing of the relevant patents by making a licence offer to Vodafone on non-FRAND terms and failing adequately to explain how the patents in question are said to be infringed.  In making these allegations, Vodafone has expressly relied on the CJEU’s July 2015 judgment in Huawei v ZTE (which we commented on here and here).

At this early stage, two aspects of the case are interesting:

1. Vodafone’s attempt to sue IV for breach of its FRAND obligations in Ireland

Vodafone’s ‘Irish torpedo’ strategy is noteworthy.  We are not involved in the case and so can only speculate, but it is plausible that Vodafone’s aim in bringing FRAND proceedings in Ireland may be to seek to limit the prospect of IV obtaining swift injunctive relief in Germany (in the event that any of its patents are found to be infringed).  Whether this will work is unclear.  Immediately, it’s important to bear in mind that the Irish Court’s judgment is based on Vodafone’s ex parte application for permission to serve a defendant (IV LLC) out of the jurisdiction.  IV has not yet had the chance to make any points about jurisdiction or the nature of its dispute with Vodafone.  The Irish Court states that it has been “advised” that “none of the eleven sets of proceedings [which IV has commenced against Vodafone in Germany] involves or is related to issues of FRAND licensing”.  This leads the Irish Court to take the view that it may have jurisdiction because the issues before it do not involve the same subject matter or cause of action as the issues already before the German Court.  But if IV can show that FRAND / SEP licensing issues are in fact relevant to the German proceedings, this puts the Irish Court’s jurisdiction in issue.  It remains to be seen whether IV will bring a jurisdiction challenge.

2. The types of declaratory relief sought 

Vodafone has asked for a number of declarations (some in the alternative).  In particular, the Irish Court’s judgment makes clear that Vodafone wants the Court to determine that: (i) the terms of the written licence offer made by IV in March 2016 were not FRAND; and (ii) the terms of the licence counter-offer made by Vodafone in June 2016 were FRAND.  In addition, and perhaps more interestingly, if neither IV’s offer nor Vodafone’s counter-offer is deemed to be FRAND, Vodafone wants the Irish Court to determine the terms and conditions of a licence “of the relevant patents for use in Germany” which would be FRAND.  It is not entirely clear from the judgment whether Vodafone is asking the Irish Court to identify FRAND terms and conditions just for the individual patents on which IV has sued in Germany, or whether it would instead like the Court to deal with some kind of wider IV patent portfolio.  If it’s the latter, it would be interesting to see whether the Irish Court takes a similar approach to that taken by Mr Justice Birss in Vringo v ZTE ([2013] EWHC 1591 (Pat) and [2015 EWHC 214 (Pat)).  In that case, the English High Court judge held that the court should only be able to set the terms of a portfolio licence if both parties agree to be bound by such a determination.

The question of FRAND rates and “what is FRAND” has been of great interest in the TMT sector for some time (as we have discussed previously, for example here and here).  A couple of cases have grappled with it, but guidance remains sparse.  It will be very interesting to see whether the Irish Court is willing and able to grasp the thorny issue, and we will be watching closely the next move from IV in the litigation and whether it resists Vodafone’s FRAND manoeuvre.