When companies come together to set a standard – for universally adopted technologies like Bluetooth or WiFi – they are allowed to cooperate together as competitors and define a market. As a tradeoff, these rivals must each promise to license patents encompassing technology necessary to the standard, namely the notorious standard essential patents (SEPs), to all who wish to practice the standard. That promise to license may be for free, like Bluetooth, or under fair, reasonable and non-discriminatory (FRAND) conditions, like WiFi. Without such a promise, the monopoly power inherent in a patent encompassing a globally agreed-upon technology would enable unchecked monopoly power over the entire market for access to the standard. For example, an SEP owner leveraging such power could hinder competition by selectively excluding access to the standard, which raises antitrust concerns.

But what constitutes FRAND terms? Unfortunately, disputes over the answer to this question frequently arise between SEP licensors and licensees.

Currently, the European landscape for resolving SEP licensing disputes is shaped by the Huawei v ZTE decision. In the context of the Huawei v ZTE framework, the holder of an SEP is obliged to and must be willing to offer a license to the SEP under FRAND conditions, and the licensee of an SEP (i.e., the prospective user of a standard) must be willing to license the SEP under FRAND conditions or else face exclusion from the marketplace in the form of an injunction.

While in theory the FRAND commitment may seem self-explanatory, in practice, FRAND terms are often heavily debated. This results in a lack of transparency and a lack of predictability as to the true meaning of FRAND terms for both willing licensors and licensees. This FRAND uncertainty is “the gap” in the European SEP landscape, which gap U.S. courts have learned to fill over a century ago.

In this regard, the proposed EU Framework for SEP licensing harkens to SEP dispute resolution in the United States, in which a court would determine the FRAND conditions using methods of apportionment dating to the Garretson mop case of 1884. Such a FRAND determination would bridge the gap of European courts’ expertise, which instead focus on whether the SEP is valid and infringed (a sometimes mere formality given the standard essential nature of the patent).

A Better Way

The proposed EU Framework will fill this gap in the European SEP landscape and eliminate uncertainty by providing a FRAND determination of a fair rate (and conditions) for licensing SEPs. As a result, SEP holders and implementers in dispute over price and conditions will be provided with a clear, reasoned, and reliable FRAND terms proposal as starting point for SEP licensing negotiations – a proposal which will fill “the gap”.

If a patent is valid and infringed in Europe, especially in Germany, a licensee is required to license the SEP under the threat of market exclusion (the “automatic injunction”), with few exceptions. One of those exceptions to an automatic injunction is defined in the Huawei v ZTE framework and applies to SEP’s: if both parties are willing to negotiate towards a license under FRAND conditions, then no exclusionary injunction may issue. In other words, if the licensee does not accept a license offered under purported FRAND terms, then the SEP licensor may request the court to exclude the licensee’s product from the market. This makes perfect sense, as licensing negotiations conducted under the threat of an injunction necessarily imbalances the parties’ bargaining positions, so much so that a licensee under the threat of an injunction might be considered to have no bargaining position at all. But here “the gap” appears when determining those FRAND terms. While European courts have established procedures to determine infringement and validity of an SEP, an apportionment of damages as a method of determining the FRAND terms is neither required nor established as precedent.

The proposed EU Framework for SEPs in Europe would close “the gap” over parties’ disputes surrounding FRAND terms. An office would be provided at the European Union Intellectual Property Office (EUIPO) (a sort of EU pendant to the U.S. Patent and Trademark Office) tasked with determining FRAND terms for a particular licensor and licensee. Licensor and licensee would each have the opportunity to argue their positions before EUIPO experts.

A summary of the Huawei v. ZTE framework used in Europe as presented in the Amicus Curiae submission of the European Commission in the case VoiceAge v. HMD is reproduced here:

In the figure above, the Implementer is the user of a standard. The Antitrust defence is a protection against the automatic injuction in the presence of an allegation of infringement of an SEP: no injunction may issue if the antitrust defense applies – a consideration similar to the Ebay factors that weigh against an injunction. Of note is that there is no resolution between the parties at the end of the process – “the gap” problem remains, and there is no mechanism for a court in Europe to propose compromise terms suitable to both parties.

If a FRAND offer were to be available as the result of the FRAND determination process, then each party – licensor holder of an SEP and licensee user of a standard – could decide whether they are willing to accept that offer and bridge the gap in their positions.

Judges have explained that the FRAND determination as a dispute resolution mechanism would provide valuable information and inputs to courts. A court could evaluate whether a licensor or licensee is willing to offer or take a license under FRAND terms according to the Huawei v ZTE framework using inter alia results from the EUIPO determination process as one reference. Instead of the parties disputing the meaning of FRAND before a court, especially in instances that the court has no established procedure to entertain an in-depth and specialized discussion, the parties would first make their FRAND arguments before the experts of the EUIPO (see also here). The resulting FRAND determination would fill “the gap” between FRAND positions of the willing licensor and the willing licensee. The FRAND terms, as determined by the experts at the EUIPO, can then be introduced in court as evidence to help determine the willingness of a party to either offer or take a FRAND license – or evidence of unwillingness, as the case might be.

A comparison between the typical arguments before a United States court and a European court with the EU SEP Regulation might then be as follows. A U.S. court would work towards a solution acceptable to both parties, and evaluate infringement, validity (if questioned), and the economic value of the patent. The result would be the determination of an appropriate remedy, in particular the terms of a FRAND license. A court in Europe would evaluate infringement, validity (if questioned), and the willingness of parties to take or offer a license, using the FRAND conditions determined by the EUIPO as a relevant input to be considered by the court. The result would be a determination of whether an appropriate FRAND license has been offered, perhaps accompanied by an exclusionary order if the licensee does not accept that FRAND license. There are of course nuances and differences, but the principles and results are more closely harmonized: following the EUIPO and court hearings there will be FRAND terms on the table, and both licensor and licensee can either accept those FRAND terms or risk the consequences.

We Need to Close the Gap

The scenario described above would fix “the gap” as it exists today, namely that courts in Europe are asked to determine whether a licensor and licensee were willing to respectively offer and accept FRAND terms – without knowing what those FRAND terms are! The FRAND terms which would be determined by the EUIPO office have no legal consequence per se, but can serve to inform courts about reasoned FRAND terms between the parties. The result will be a coherent system in the EU, different from that of the United States, but with essentially the same key dispute resolution mechanisms and enforcement consequences. In particular, the system will ensure forums in which each party can make its case about validity, infringement, and fair license terms.

Such a system and procedure to bridge “the gap” that all too often occurs during SEP licensing negotiations in the EU will lead to increased transparency and – in the long run – more predictability.

Image Source: Deposit Photos
Author: lightsource
Image ID: 16964055