Chinese MIIT identifies basis for a FRAND royalty rate


An intervention from a little further afield than the recent US and EU rumblings on FRAND licensing and competition law has come in the form of a paper published by a research centre associated with China’s Ministry of Industry and Information Technology (China’s telecoms regulator) (see here). The paper, published for comment, proposes a template for an intellectual property rights policy for standards setting organisations. Perhaps more controversially, the paper includes a list of factors to consider when calculating a reasonable royalty rate for a standard essential patent.

The MIIT publication has sparked consternation: on the one hand because of apparent governmental intervention in what some argue should be an issue for individual standard-setting organisations, and on the other because of its arguably overly prescriptive approach.

In contrast, only a month ago, the OECD reproduced a paper summarising the United States’ approach to standard setting: this notes that the DOJ antitrust division and the FTC (“the agencies”) do not require SSOs to adopt specific intellectual property policies, instead using a flexible rule of reason approach to review standard setting.

That said, while the agencies may take an apparently ‘hands off’ approach in relation to standards setting organisations, recent US Court Judgments (see for example: re Innovatio IP Ventures and Microsoft Corp v Motorola, Apple v Motorola, CSIRO v Cisco Sys Inc) have begun to suggest how to calculate a FRAND (or as the Americans call it “RAND”) royalty in specific circumstances. Indeed the Chinese courts themselves have had occasion to tackle the issue – determining a FRAND rate head on in Inter Digital Corporation v. Huawei Technologies Co., Ltd (Guangdong High Court Civil Judgment (2013) Yue Gao Fa Min San Zhong Zi No. 36).

Unfortunately and perhaps unsurprisingly, the approaches taken by different countries do not match up (indeed there have been some significant differences in the approaches taken within the US). For a commentary on the availability of injunctive relief for standard essential patents in the United States and in the EU see our blog here and for a summary of the German and EU position on FRAND licensing see our blog here. Certainly, the Chinese MIIT does not concord with the latest judgment by the US Federal Court of Appeal, Ericsson v DLink, (summarised here) which sought to give guidance to US Federal Courts. In contrast with the more laissez-faire approach in Ericsson v DLink, the MIIT paper suggests that any RAND calculation should be based on the “smallest salable patent practising unit” and should account for royalty stacking by taking into account the total aggregate royalties that may apply if other owners of intellectual property demand similar terms. Koren Wong-Ervin, Counsel for Intellectual Property and International Antitrust at the United States FTC has voiced particular concerns about this approach which, she considers, risks over or under-valuing the IPR.

To add to the melee of ‘helpful pointers’ on FRAND is the EU approach, the latest development of which is the Opinion of Advocate General Wathelet in Huawei v ZTE which this blog commented on previously here. This opinion focuses more on the procedural obligations of those engaged in negotiations for FRAND licences. As such, it sits well with the US and MIIT approach (see Article X MIIT Template for IP Policies in Industry Standards Organisations) as well as the approach taken by the Korean FTC in its recent guidance, all of which acknowledge that the licensee must be willing to take a license on FRAND terms in order to prevent an injunction being available to the patentee. However, the EU opinion doesn’t engage with the ‘nuts and bolts’ of how a reasonable royalty rate for a FRAND licence should be calculated, preferring to defer such issues to a court or arbitration tribunal on the facts of the case. It remains to be seen whether the Court of Justice will follow the Advocate General’s opinion and keep out of the FRAND debate or if it will wade in whole heartedly (although we think this unlikely!).

So, what next for the MIIT proposal? It is, as described, only a proposal at this stage and no doubt key industry players will take the opportunity to voice their concerns. Whether a less prescriptive version will emerge as a result remains to be seen.