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.

Unwired Planet v Huawei: a new FRAND injunction

Mr Justice Birss has once again broken new legal ground by granting what he has termed a ‘FRAND injunction in Unwired Planet v Huawei.

As a reminder, in April Mr Justice Birss handed down the first UK court decision determining a FRAND royalty rate (see here). A post-judgment hearing took place in May to establish whether or not Huawei should be subject to an injunction in the UK and the issue of permission to appeal.

The FRAND injunction

At the post-judgment hearing, Huawei had argued that the judge should not grant an injunction. As Huawei intended to appeal the decision, it said that it could not enter into the FRAND licence agreement at this stage, in case the Court of Appeal determined that different FRAND terms were appropriate. Huawei claimed that to grant an injunction now would effectively be punishing it for exercising its right to appeal. It also noted that if an injunction was granted, it would last until 2028 (when the patent found valid and infringed in the first patent trial expired), despite the FRAND licence agreement expiring in 2020. Therefore, Huawei would be forced to negotiate a new licence from an extremely weak position – it would automatically be injuncted if terms could not be agreed. 

Huawei requested that the judge accept undertakings in lieu of granting an injunction, offering to: (a) enter into the licence following its appeal, and (b) to comply with the terms of the licence as if it was in effect (including paying royalties) until its appeal was finished.

Mr Justice Birss essentially took the view that the offer of undertakings now was too little, too late. He decided that an injunction should be granted. However, he recognised the risk that this might affect negotiations or disputes about the terms of the licence in later years. To resolve this, he granted a new kind of injunction, which he called a “FRAND injunction”. This would be like a normal injunction, but with the following extra features:

  • A proviso that it would cease to have effect when the defendant enters into a FRAND licence; and
  • Express liberty to return to court to decide whether the injunction should take effect again at the end of the FRAND licence (if it ends before the relevant patents expire, or ceases to have effect for any other reason).
The injunction is to be stayed pending the result of the appeal, on terms that provide for appropriate royalty payments from Huawei to Unwired Planet in the meantime.

Permission to appeal 

Mr Justice Birss granted Huawei permission to appeal on three main issues:

  1. The global licence: including: (i) whether more than one set of terms can be FRAND, (ii) whether a UK only licence was FRAND, (iii) whether the court is able to determine FRAND terms, including rates, for territories other than the UK, and (iv) whether it is appropriate to grant an injunction excluding Huawei from the UK market unless it took a global licence.
  2. Hard-edged non-discrimination: Huawei have permission to appeal the finding that a distortion of competition is required for the non-discrimination aspect of FRAND to apply, but not whether or not there was a distortion of competition in this case.
  3. Huawei v ZTE (Article 102 TFEU): regarding the judge’s findings on abuse of dominance and injunctive relief.
This permits a fairly wide-ranging appeal, especially as regards the competition law elements of the latter two issues. The trial judgment appeared to downplay the importance of competition law in FRAND issues (see here for more information); the appeal may enable a renewed focus on it.

The FRAND licence 

In his main trial judgment, Mr Justice Birss settled the terms of the FRAND licence to be entered into by Unwired Planet and Huawei. This latest judgment annexes a copy of the final form of that licence. Given the shroud of secrecy that usually surrounds such patent licence agreements, this is a unique insight, reflective of the judge’s desire throughout the case to ensure as much transparency as possible.

Transparency is likely to be helpful as the law in this area continues to develop. With the advent of new technologies developed for 5G and the Internet of Things, new companies may need to enter the FRAND licensing field for the first time. Without being able to draw upon any previous experience of negotiating licences in this area, they will be at a disadvantage in negotiations. 

If other judgments follow Mr Justice Birss’ lead and annex copies of any FRAND agreement determined by the court, these would provide useful points of reference for negotiating parties. It might also reduce the requirements for third party disclosure (a costly, time-consuming exercise) in any subsequent litigation. Otherwise, such disclosure will be essential in FRAND cases involving relatively new entrants to the market – they are unlikely to have many licence agreements that can be used by the judge as comparables as part of the process for determining a FRAND rate.

Conclusion

Yet again, Mr Justice Birss provides plenty of food for thought. Assuming that Huawei does go ahead with its appeal, it will be fascinating to see how the Court of Appeal responds to these issues.

Pat Treacy and Matt Hunt



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.

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.  

Compulsory Licencing: the Brave New World for (non-personal) data in Europe?

The Commission has published its Data Economy Package for non-personal data*, which is the final building block of its Digital Single Market (DSM) strategy – see our previous posts on the DSM here, here; and here.

With its new package, the Commission aims to: 

  • review the rules and regulations impeding the free flow of non-personal data and present options to remove unjustified or disproportionate data location restrictions; and
  • outline legal issues regarding access to and transfer of data, data portability and liability of non-personal, machine-generated digital data.
The package includes a Consultation on Building the European Data Economy, a Communication and Staff Working Paper.

Why is the Commission acting on data?

The economic rationale is that the EU data economy was worth €272 billion in 2015, and is experiencing close to 6% growth a year.  It is estimated that it could be worth up to €643 billion by 2020, if appropriate policy and legal measures are taken. Data also forms the basis for many new technologies, such as the Internet of Things and robotics.  The Commission’s ambition is for the EU to have a single market for non-personal data, which the EU is a long way from achieving.  The Commission refers to the issues in terms of – the “free movement of data”, suggesting something akin to a fifth EU fundamental freedom. 

What action is the Commission proposing to take? 

The Consultation sets out options for addressing the legal barriers to the free flow of non-personal data, in particular in relation to:

  • data access and transfer;
  • unjustified localisation of data centres;
  • liability related to data-based products and services; and
  • data portability.
Some of the more eye-catching (and interventionist) options set out by the Commission are the introduction of:

  • legislation to define a set of non-mandatory contract rules for B2B contracts when allocating rights to access, use and re-use data;
  • creation of a sui generis data producer right for non-personal machine-generated data, with the aim of enhancing tradability; an obligation to license data generated by machines, tools or devices on fair, reasonable and non-discriminatory (FRAND) terms; and
  • technical standards to facilitate the exchange of data between different platforms.
The Consultation is also seeking evidence on whether anti-competitive practices are restricting access to data.  In particular, the Consultation refers to: the use of unfair business practices; the exploitation of bargaining power when negotiating licences; and abuses of a dominant position.  Interestingly, it also asks whether current competition law and its enforcement mechanisms sufficiently address the potentially anti-competitive behaviour of companies holding or using data.

So where are we headed?

To date, competition law has mandated the compulsory licensing of IP rights only in exceptional circumstances, where the owner has a dominant position and there are no alternatives to the technology.  The Commission is now considering a range of regulatory options, of which the most interventionist could require access to be granted to non-personal data in a far wider range of contexts (albeit without any proposal to amend the existing database right and the new Trade Secrets Directive). These issues are likely to be of considerable concern for any company holding large amounts of non-personal data.  The Consultation runs until 26 April 2017. 


* Non-personal data includes personal data, where it has been anonymised

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.