the licensing of standard essential patents (“SEPs”) on fair, reasonable, and non-discriminatory (“FRAND”) terms. The Brussels-based Fair Standards Alliance (“FSA”) was launched in mid-November, and the diversity of the member companies is striking. Members include multinationals such as Cisco, Dell, HP, Intel, Lenovo, Sierra Wireless, BMW and Volkswagen, as well as a number of SMEs. According to the FSA, the aggregate turnover of the member companies is more than €430 billion.
The Alliance states that its aim is to make SEP licensing more transparent and predictable, arguing that FRAND must have a clearer meaning if standards are to foster innovation, economic growth, competition, and consumer choice. In an introductory position paper, the FSA makes clear that “[a]buses of commitments to license [SEPs] on[FRAND] terms are [its] primary concern”. It claims that unfair and unreasonable SEP licensing practices “pose a significant risk to the innovation eco-system, create barriers to entry for new market players, threaten to stifle the full potential for economic growth across major industry sectors, and ultimately harm consumer choice”.
The FSA’s position paper sets out a number of ‘key principles’ relating to the licensing of SEPs, and suggests that FRAND should, at a minimum, mean the following:
• A SEP holder should make licences available at any point in the value chain where the standard is implemented, and the key terms of those licences should be transparent to other companies implementing the same standards,
• A FRAND royalty should reflect the value of the invention, and should also take into account the overall royalty that could be reasonably charged for all patents that are essential to that standard,
• Injunctions and similar legal threats should be a last resort,
• A FRAND commitment made in respect of a SEP should not fall away simply because the SEP is transferred to another company.
The Alliance emphasises the importance of an appropriate royalty base, suggesting that in most cases a FRAND royalty should be based on the ‘smallest saleable unit’ that implements the SEPs in question – and that it “should reflect only the value of the SEP, not the additional value conferred on it by its inclusion in the standard”. In what is perhaps a sign of the times, the FSA also intends to address the prevalence of portfolio fragmentation. It argues that the diffusion of SEP portfolios over “more and more independent owners can exacerbate the problem of royalty stacking” (that is, the phenomenon whereby the royalties independently demanded by multiple SEP holders do not account for the presence of other SEPs and thereby lead to an inappropriately high overall royalty burden for implementers). In addition, the Alliance urges standard-setting organisations and regulators to remain vigilant in ensuring that the initial transferee and all subsequent transferees remain bound by the FRAND commitment in situations where FRAND-encumbered SEPs are transferred.
The foundation of the FSA reflects a trend toward clarifying – or at least attempting to clarify – the meaning of FRAND. As we commentedhere, earlier this year the IEEE (the US standards body which developed the wi-fi standard) made a series of changes to its IP policy, placing limits on the ability of SEP owners to obtain injunctive relief and stipulating that SEP royalties should be based on the ‘smallest saleable unit’. Some see these changes as striking at the heart of many SEP holders’ business models.
At an IBC Legal conference that took place in London last week, representatives of Ericsson and Qualcomm warned that some SEP holders may become more reluctant to license their technologies if the recent changes to the IEEE’s IP policy are adopted more widely. Speaking in her personal capacity, Claudia Tapia, a director at Ericsson, said: “If we are going to have extreme policies, like IEEE, where you favor one business model over another … I can imagine that technology leaders won’t have the incentive to continue to share the best technology in standardisation.” Dan Hermele, a senior director at Qualcomm, also expressing his personal views, said that the IEEE had“made ‘FRAND’ stand for ‘fragmentation, devaluation and delay’.” Dirk Weiler, the chairman of the board of ETSI, agreed with Tapia that some companies might become more reluctant to share their technology. “If the FRAND concept gets developed in a way like IEEE has now implemented it, on a larger scale, […] every contributor of technology will be very careful … [and will be] unwilling to accept rules which do not allow you any more to monetise your technology,” he said.
The FSA’s definition of FRAND is very similar to the one that the IEEE adopted earlier this year. In pushing for more transparent – and lower – licensing royalty rates, the FSA has put itself on a collision course with some industry players who seek high financial rewards for the standard essential technologies that they have developed. There has been a mismatch in the standardisation world between the expectations of SEP holders and manufacturers of products that implement SEPs for a number of years now, but the rift now seems to be deepening, rather than narrowing. This is perhaps unsurprising: the stakes are high, particularly at a time when more and more devices depend on connectivity / interoperability. (It is noteworthy that the FSA’s members include not just IT and mobile telecommunications companies, but also two big players in the automotive sector.) And it seems likely that the debate over what FRAND means will only intensify as the market for the ‘Internet of Things’ grows and various appliances become connected to the internet for the first time.