Abstract
When companies agree on a standard, they agree to licence patents that are essential for that standard on “fair, reasonable and non-discriminatory” (FRAND) terms. This is an obligation under competition law, to ensure that the agreement is lawful. The obligation means that a patent owner must offer FRAND terms, and may not seek an injunction against a user that is willing to accept FRAND terms, if necessary as decided by the court or an arbitrator. The article discusses the obligations of both parties, and the procedures for dealing with them in the light of the Huawei judgment.
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Notes
See Commission decision of 29 April 2014, Samsung—Standard essential patents, OJ C 350/8 of 4 October 2010; Commission decision of 29 April 2014, Motorola—Standard essential patents, OJ C 344/6 of 2 October 2014, Case C 170/13 Huawei Technologies v. ZTE ECLI:EU:C:2015:477. Temple Lang [15]; Temple Lang [14]. Similar issues arose in the German Orange Book case, but in that case there was no agreement and no commitment to license on FRAND terms (Bundesgerichtshof KZR 39/06, May 6th, 2009 IIC 2010, 369, WuW (2009) vol. 7, 2013 so the issues were different; Temple Lang [19]; See also IGR Stereo Television/Salora, in: EC Eleventh Competition Policy Report [4], pp. 63–64.
See the Commission’s Communication Guidelines on the applicability of Article \(101\dots\) to horizontal cooperation agreements OJ C 11/1 of 14 January 2011, paragraphs 257–335: Guidelines on the application of Article \(101\dots\) to technology transfer agreements, OJ C 89/3 of 28 March 2014, paragraphs 244–273. Paragraph 280 of the Horizontal Guidelines says that if certain other conditions are met, and the rules of the standard setting organization “provide access to the standard on fair, reasonable and non-discriminatory terms”, the standardization agreement does not restrict competition. However, it is essential that licenses are in practice granted on FRAND terms, the rules “would need to ensure effective access to the standard” on FRAND terms (paragraph 283). Paragraphs 285–290 explain the practical consequences. Apart from the Samsung and Motorola decisions and its submission to the Court of Justice in the Huawei case, the Commission has not explained its views on the legal consequences if FRAND licenses are not granted. See also the Google/MMI merger decision, paragraphs 107, 126, referring to the possibility that the threat of an injunction may force the user to pay excessive royalties: Koninklijke Philips Electronics v. SK Cassetten, District Court, Den Haag, 17 March 2010, Joint Cases No. 316533/HA ZA 08-2522 and 316535/HA ZA 08-2524: Sony/LG II, Pres. D.C. 10 March 2011 (no injunction granted). Samsung Electronics v. Apple, District Court The Hague, 14 March 2012, case numbers 400367/HA ZA 11-2212, 400376/HA ZA 11-2213 and 400385/HA ZA 11-2215. The Dutch law allows an injunction except pending good faith negotiations or if the patent owner is not complying with FRAND requirements. In the UK, an injunction is not given if a FRAND commitment has been given and the dispute only concerns the amount of the royalty: Nokia v. IP Com, [2012] EWHC 1446 (Ch), May 18th, 2012: [2012] EWHC 225 (Pat.). See generally Larouche and Zingales [8]; Shapiro [12]; Lemley and Shapiro [10]; U.S. Federal Trade Commission [21].
The Commission in the Samsung and Motorola cases initially made a serious mistake and contradicted the Charter of Fundamental Rights by suggesting that merely applying to court for an injunction could be an abuse of a dominant position before it was clear that the user was not a willing licensee. Clearly patent owners have a right to go to court, guaranteed by the Charter. The Commission should not interfere with the jurisdiction of national courts. The correct view is that it is legitimate to seek an injunction until it becomes clear that the user is “willing” and creditworthy. If that becomes clear, the court should not allow the claim for an injunction to be pursued. The Commission should have intervened before the national court, or asked the court to refer the question to the Court of Justice. See Jacob [6];
Apple, Microsoft and Google have given assurances in similar but not identical terms that they will not seek injunctions on the basis of standard-essential patents. The Google assurance was given only on certain conditions, including reciprocity.
While Mr Almunia was Commissioner, the Commission made 22 decisions under Article 102, of which 17 were commitment decisions that did nothing to clarify the law.
Under paragraph 15.6 of the ETSI Intellectual Property Rights Policy, intellectual property rights are “essential” where it is not technically possible to make equipment that complies with a standard without infringing the intellectual property right. However, ETSI does not verify whether an IPR that is claimed to be technically essential is in fact either valid or essential.
The terms of FRAND promises required by standard setting organization are not all precisely the same, so they do not necessarily correspond precisely to the obligations under competition law. The important difference is that private parties may agree to interpret or to adapt a contractual obligation, but they cannot by agreement alter obligations under competition law.
Lemley, Shapiro [10].
It seems clear that the buyer of patents that are subject to a FRAND commitment would also be prevented from enforcing them in breach of the FRAND obligation, since this would also be contrary to Article 101(3), just as it would be if the infringement proceedings were brought improperly by the original patent owner. The ETSI Guide on Intellectual Property Rights, November 27th, 2008 says that new owners should be bound by the obligations of the owner which made the FRAND commitment, “to the maximum extent possible in each legal jurisdiction”. The buyer of patents that are subject to a FRAND commitment is bound by it because the buyer is benefiting from the inclusion of the patent in the standard, just as the seller benefited.
Advocate General Wathelet in Huawei said (paragraph 41) “According to the referring court, SEP-holders are in a powerful position when negotiating licenses because of their right to bring an action for a prohibitory injunction. Consequently it should be ensured that SEP-holders cannot, for example, impose excessive royalties in breach of their commitment to grant licenses on FRAND terms, thereby engaging in conduct which has become known as ‘patent hold-up’’’, Opinion of 20 November 2014, ECLI:EU:C:2014:2391. In exceptional situations, bringing a case before a court may be an abuse contrary to Article 102: Case T-111/96 ITT Promedia [1998] E.C.R. II-2937: Case T-119/09, Protégé International [2012] E.C.R. II-000, paragraphs 48–49. There is an abuse only if the claim cannot reasonably be regarded as asserting the claimant’s rights, but only harassment, and is part of a plan to eliminate competition.
In theory, an injunction based on the patent for a small component might block the sale of the entire end product.
The Commission’s Motorola decision says an injunction may be granted if “the potential licensee’s assets are located in jurisdictions that do not provide for adequate means of enforcement of damages.” The decision did not need to mention the situation in which the user of the patent being enforced refuses to cross-license patents that it claims are technically essential, but that clearly must entitle the first patent owner to get an injunction. The parties would then be compelled to negotiate licenses of their mutually blocking patents. The rules of standard setting organizations require reciprocity.
It is not clear whether reciprocity should be “per-standard” or “per product”.
An injunction may also be sought if a licensee has committed a serious breach of an existing license that cannot be remedied by an award of damages.
Of course, the patent owner may seek an injunction for infringement of a patent which it has no obligation to license under competition law or because of a FRAND commitment.
The patent owner is obliged to offer a license only for the purposes of a standard for which a FRAND promise has been given: the licensee cannot insist on getting a broader license.
The Intellectual Property Rights Enforcement Directive 2004/48/EC, OJ L 157/45 of 30 April 2004, Articles 3 and 12 provides that remedies should be proportionate and avoid creating barriers to legitimate trade, and says that Member States may provide that if an injunction would cause disproportionate harm, it should not be given if pecuniary compensation would be reasonably satisfactory. This provision is not limited to cases in which there are FRAND obligations.
See Rule 118, draft Rules of Procedure of the Unified Patent Court.
Advocate General Wathelet said the infringer’s conduct might be “purely tactical and/or dilatory and/or not serious” (paragraph 88).
See Advocate General Wathelet, paragraph 92. If the amount of the FRAND royalty is being determined on the basis of the ex ante value of the patents, the appropriate royalty rate per patent is not necessarily the same for the two sets of patents, even if both are to be used for the same products or the same standard.
Article 40 of the WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) allows States to prevent or regulate exclusive grant back forcing a licensee to grant the licensor a license of patents that the licensee may acquire, contract terms that prevent the validity of the patent being challenged, and arrangements binding the licensee to purchase goods or services from the licensor.
The right to property and the right to assert legal rights in court is guaranteed by the Charter of Fundamental Rights, Articles 17 and 47.
In some circumstances, competition law may require a license to be granted even if the patents are not technically essential to the standard. The concept of FRAND is not usually used when discussing compulsory licenses of rights which are not standard-essential, but similar issues arise as explained below. See the German Orange Book case, footnote 1.
The phrase “commercially essential patents” is not legally precise, but refers to patents that it would be too expensive, time-consuming or difficult to invent around, or that confer a benefit (e.g. higher speed or energy saving) that is a significant competitive advantage without being technically essential for the purposes of the standard in question. “Commercial essentiality” is therefore a question of degree, which might be different for different manufacturers.
See Advocate General Wathelet in Huawei, paragraphs 59 et seq. The Court in Huawei also spoke of the need to balance competition and patent owner’s rights.
Swanson and Baumol [13], p. 24 said “there is simply no excuse for a RAND commitment to amount to little more than an empty promise or a pious platitude”.
[2012] EWHC 1446 (Ch), May 18th, 2012.
Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights, OJ L 157/45 of 30 April 2004.
Opinion of Advocate General Wathelet, paragraph 70.
Huawei Judgment, paragraph 62.
Huawei Judgment, paragraphs 63–64.
Some of these issues are discussed in more detail in Temple Lang [14], pp. 132–152.
If there were a rule that all patents were treated as being of equal value, the rule could be evaded by subdividing patents. Only genuinely valid and essential patents would be counted. Patents due to expire soon would have less value. Patents issued only in a few countries would have less value. Some patents are essential only for unimportant or optional functions. Patents that need to be licensed only to ensure interoperability are less valuable than patents with substantive functions. Patents that are essential for functions regarded as important by consumers are more valuable than patents for functions that interest consumers less.
Neither the Commission or a standard setting organization have the power to decide whether a patent is valid or technically essential, and the Commission may not direct a standards organization to declare that a patent is essential: Temple Lang [17], p. 51.
If there are companies with countervailing power, they may be able to ensure that the royalty rate charged to them is not excessive, and then the non-discrimination obligation should ensure that the royalty rate so limited is charged to the licensees.
European Commission Expert Group [5], pp. 14–15 said that “unduly assertive” patent enforcement, in particular by non-practising entities that specialize in the acquisition of patents for the purpose of asserting them “generates additional costs and risks for companies that effectively develop and exploit innovations”.
Non-practicing entities and “privateers” are more likely to be dominant than practising entities, since they do not need cross licenses and they are not subject to countervailing market power from users.
In the EU, the IP Comm case, Commission Press Release MEMO/09/549 Commission welcomes IPCom’s public FRAND declaration, December 10th, 2009 “The Commission… considers that it is important that when patents essential to a standard are transferred from one owner to another, so should any relevant FRAND commitments… the pro-competitive effects of standard setting… could be eliminated if, as a result of a transfer of patents essential to a standard, the FRAND commitment would no longer apply”. For the ETSI rule, see footnote 5, above.
In the USA, Negotiated Data Solutions, No. 4234, 2008 FTC Lexis 120 (FTC Sept. 22, 2008).
It would clearly be illegal for a patent owner bound by a FRAND obligation to agree to share a royalty in excess of the FRAND rate if the transferee of the patent obtained such a royalty. But it is widely believed that such agreements are made with “privateers”.
See the Commission’s decision Rambus, OJ C 30/17 of 6 February 2010 (a commitment decision under Article 9 of Reg. 1/2003, and so a decision which did little to clarify the legal position). The Commission’s Horizontal Guidelines paragraph 286 require “good faith disclosure”, but unfortunately do not say what the consequences of failure to disclose should be. See also Qualcomm v. Broadcom, No. 05-CV-1958-B (BLM), S.D. Cal. Aug. 7, 2007 (intentional failure to disclose essential patents rendered them unenforceable in respect of standard compliant products).
See however Osram/Airam, EC Eleventh Report on Competition Policy [4], p. 66 (registration of a large number of trademarks including the syllable “RAM” did not entitle the dominant owner to prevent the Airam company from using its name).
Presumably a patent owner could not insist on receiving a lump sum payment, because running royalties are the normal way of paying for licenses, and insisting on a large lump sum payment would probably be considered a concealed refusal to license. Equally, a user has no right to insist on getting a fully paid up license in return for a lump sum. Large users that can afford to make lump sum payments sometimes prefer them because they do not need to report sales figures to the licensor, which may be a competitor, but they have no legal right to insist on doing so.
Rule 118 of the draft Rules allows the Court to award damages instead of permanent injunction in certain circumstances, if the defendant acted unintentionally and without negligence, if an injunction would cause disproportionate harm, and if damages would be “reasonably satisfactory”. The latest (17th) version of the draft Rules provide, in Rule 211, as follows:
“Rule 211—Order on the Application for provisional measures
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1.
The Court may in particular order the following provisional measures: (\(\mathrm{a}\)) injunctions against a defendant; (\(\mathrm{b}\)) the seizure or delivery up of the goods suspected of infringing a patent right so as to prevent their entry into or movement within the channels of commerce; (\(\mathrm{c}\)) if an applicant demonstrates circumstances likely to endanger the recovery of damages, a precautionary seizure of the movable and immovable property of the defendant, including the blocking of his bank accounts and other assets; (\(\mathrm{d}\)) an interim award of costs.
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2.
Intaking its decision the Court may require the applicant to provide reasonable evidence to satisfy the Court with a sufficient degree of certainty that the applicant is entitled to commence proceedings pursuant to Article 47, that the patent in question is valid and that his right is being infringed, or that such infringement is imminent.
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3.
In taking its decision the Court shall in the exercise of its discretion weigh up the interests of the parties and, in particular, take into account the potential harm for either of the parties resulting from the granting or the refusal of the injunction.
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The Court shall have regard to any unreasonable delay in seeking provisional measures.
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5.
The Court may order the applicant to provide adequate security for appropriate compensation for any injury likely to be caused to the defendant which the applicant may be liable to bear in the event that the Court revokes the order for provisional measures. The Court shall do so where interim measures are ordered without the defendant having been heard unless there are special circumstances not to do so. The Court shall decide whether it is appropriate to order the security by deposit or bank guarantee. The order shall be effective only after the security has been given to the defendant in accordance with the Court’s decision.
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The order on provisional measures shall indicate that an appeal may be brought in accordance with Article 73 of the Agreement and Rule 220.1.”
See also the Intellectual Property Rights Enforcement Directive 2004/48/EC, OJ L 157/45 of 30 April 2004, Articles 3 and 12.
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1.
Directive 2004/48/EC of 29 April 2004 on the enforcement of intellectual property rights, OJ L 157 of 30 April 2004, pp. 45–86.
Case C-457/10 P AstraZeneca, ECLI:EU:C:2012:770.
“The exclusive right of reproduction forms part of the author’s rights, so that refusal to grant a license, even if the act of an undertaking holdens a dominant position, cannot in itself constitute abuse of a dominant position”: Cases C-241/91 P and C-242/91 P RTE and ITP [1995] ECR I-743, paragraph 49: Case 238/87 Volvo [1988] ECR I-6211 paragraphs 7 and 8. See Drexl [3]; Kjølbye [7].
If dominant companies were not allowed to obtain patents for their own inventions, their dominance would gradually be taken from them. This would not be permitted by European law, since dominance in itself is legal.
Case C-7/97 Bronner [1998] E.C.R. I-7791.
Article 31 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) limits the conditions for imposing compulsory licensing.
It is not a defense to show that this particular dominant company has never granted access to the upstream product, if other similarly placed companies do so. But the mere possibility of splitting the dominant company’s production process is not enough, if no vertically integrated company has ever done it, and if it would not make economic sense. This is important because in IMS Health (Case C-418/01 IMS Health [2004] E.C.R. I-5039) the Advocate General said that a “potential” or “hypothetical” upstream market would be enough. It seems clear from the context (2004 E.C.R. I at pp. 5059–5060) that he meant that it was not a defense to show that the company in question had never treated its operations as separate activities. That is certainly correct. He was not implying that if its activities could be separated, they should be separated for legal purposes. In theory any intellectual property right could be licensed, but that does not mean that there is a separate market for licensing it.
It seems clear that there can be a duty to give access only if access could be given by an arms’-length transaction that would enable the competitor to carry on downstream operations without close cooperation with the dominant company’s upstream operations. If close cooperation were needed, that would show that there were not really two separate markets, and it would make it impracticable for the court to see whether the duty to give access was being complied with.
Case T-201/04 Microsoft [2007] E.C.R. II-3601, paragraphs 643–648.
Cases C-241/91 and C-242/91 RTE and ITP (television programmes) [1995] E.C.R. I-743.
Communication, Guidance on the Commission’s enforcement priorities in applying Article \([102]\dots\) to abusive exclusionary conduct, OJ C 45/7 of 24 February 2009, paragraph 89.
In practice, this issue should not arise if there are two genuinely separate markets involved: Temple Lang [16].
Commission decision 89/113/EC Decca Navigator System, OJ L-43/27 of 15 February 1989: C.R. Bard v. M3 Systems, 157 F. 3d. 1340 (Fed. Cir. 1998).
See however paragraph 1008 of the 2004 Microsoft decision of the Commission, substantially confirmed in Case T-201/04, Microsoft v. Commission, [2007] E.C.R. II-3601. The Commission said that Microsoft’s terms should be “reasonable” and should not reflect the “strategic value” due to Microsoft’s market power. See also Georgia Pacific v. U.S. Plywood 318 F. Supp. 1116 (S.D.N.Y. 1970), 446 F. 2d. 295 (2d Cir. 1971).
This question is too big to be discussed here, but see the Commission’s Horizontal Guidelines paragraph 289: U.S. Federal Trade Commission [20]; Judge Posner in Apple v. Motorola, Case 1:11-cv 08540 (N. Ill. June 22, 2012): Judge Robart in Microsoft v. Motorola, Case No. C10-1823 JLR (WD Wash, April 25, 2013). Lemley, Shapiro [9]. These suggest the FRAND royalty should be based on the evidence of what would have been paid for a licence before the patent in question was included in the standard, unless that was influenced by anticompetitive conduct of the patent owner. This ex ante value is the incremental value of the patent over the alternatives available when the standard was defined. An alternative way of expressing what is essentially the ex ante value rule is the incremental value rule, according to which the value of a given technology is the profit made by a licensee if it uses that technology instead of the next best alternative, plus the cost of the latter. If that cannot be estimated, there is a variety of other kinds of evidence that can be used, if they are available. Comparisons can be made with what the patent owner charges in non-standardized competitive markets, or in competitive markets with competing standards. What other patent owners charge for similar technology or for other patents that are technically essential for the same standard is particularly likely to be useful. In all cases, comparisons should be avoided if royalty levels are likely to have been distorted by anticompetitive conduct of the patent owners, or if the owner holds patents applying to all the alternative technologies. Licenses including non-essential patents are not necessarily comparable with licenses of essential patents. Allowance must be made for cross-licenses. FRAND rates are based on evidence, and not on policy considerations. They are not necessarily the same for all standards, or for all products, or even for all patents that are essential for the same standard. One of the most important objectives should be to prevent the patent owner taking advantage of the fact that the user is likely to be locked in. Various other questions are not discussed here: when should injunctions be granted and how should royalties be determined for patents that are not subject to FRAND obligations? (Patent law issues). When is there a duty to licence such patents? (A competition law issue). Fundamental to all the issues mentioned here is the basic and unavoidable difficulty of valuing patents. Not all patents, even if they are technically essential, are equally valuable. In many cases it is unrealistic to fix a royalty for individual patents, and more realistic to consider the royalty appropriate for a licence of the owner’s portfolio, insofar as the licensee wants or needs it. When should parties to a standard setting agreement be allowed to discuss royalty rates to avoid excessive cumulative royalties? (patent pools are allowed to discuss royalty rates). See Temple Lang [18].
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This article is based on a presentation given at the ERA conference “Litigation and Settlements in Patent Disputes” which took place on 7–8 May 2015.
Cleary Gottlieb represents Huawei, and many other companies that may be interested in the issues discussed here.
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Temple Lang, J. Standard essential patents and court injunctions in the high tech sector under EU law after Huawei . ERA Forum 16, 585–608 (2015). https://doi.org/10.1007/s12027-015-0406-z
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DOI: https://doi.org/10.1007/s12027-015-0406-z