The Commission’s SEP Communication was designed to offer guidance on FRAND and SEP licensing. However, as we have noted before, it did not take a position on certain controversial issues such as use-based licences, or whether the FRAND obligation requires licences to be offered to any company that asks for one. These issues will become increasingly important as the Internet of Things (IoT) continues to develop and more companies at different levels of the supply and distribution chain enter the SEP licensing arena for the first time.
Earlier this year we reported on the establishment of two CEN-CENELEC workshops, one primarily backed by SEP holders, one primarily backed by implementers, that both seek to produce guidance on industry best practice for SEP licensing. We noted that each workshop was likely to take a different view on these kinds of issues.
The first workshop, backed by Nokia and IP Europe, has now produced a first draft of its Guidance for licensing SEPs in 5G and the IoT. The draft is available for public review and comments until 13 December 2018. It sets out six principles that should apply in SEP licensing:
1. Owners of patent rights which are essential for using standardised technologies (SEPs) should allow access to that patented technology for implementing and using the standard.
2. Both the SEP owner and the potential licensee should act in good faith with respect to each other with the aim of concluding a FRAND licence agreement in a timely and efficient manner.
3. Each party should provide to the other party, consistent with the protection of confidentiality, information that is reasonably necessary to enable the timely conclusion of a FRAND licence.
4. “Fair and reasonable” compensation should be based upon the value of the patented standardised technology to its users.
5. A SEP owner should not discriminate between similarly situated competitors.
6. If the parties are unable to conclude a FRAND licence agreement within a reasonable timeframe they should seek to agree to third party determination of a FRAND licence either by a court or through binding arbitration.
Taken at face value, these principles may sound uncontroversial. However, implementers may feel that the devil is in the detail. One point which is likely to provoke dissent is the question of who is entitled to benefit from SEP licences. The document observes that there is usually one point or level in the supply chain where a SEP owner will choose to license its technology for a given product or service. It is suggested that some consensus around this will simplify licensing, reduce costs for all parties and help maintain a level playing field between licensees. In other words, it indicates that ‘licensing to all’ is not required.
The basis on which royalties are to be calculated is also likely to prove controversial. In suggesting that compensation “should be based upon the value of the patented standardised technology to its users”, the document does not make clear whether this should include value attributable to the technology’s inclusion in a standard (the EC Communication and previous guidance in the Horizontal Guidelines suggests that such value should in principle not be included). Other indicators which the Guidelines suggest may be considered include consumer demand, measurable benefits of the patented standardised technology, and the price difference between substantially identical products with and without the standardised technology. This text suggests that there is indeed an intention to move away from the ‘incremental value’ rule, an issue which has recently been raised as part of the wider, significant debate about the role of antitrust in FRAND in the United States. (See for example, this letter by 77 former government enforcement officials and professors of law, economics, and business to Assistant Attorney General Delrahim, in which they criticise a number of speeches the AAG has made. They suggest that patent hold-up is a serious antitrust concern partly because “implementers are vulnerable to paying supra-competitive royalties based on the entire value of the product, not on the value of the patented technology”, the AAG’s response, supported by a number of other experts, is here.)
The second workshop is yet to publish the first draft of its alternative proposal. However, based on previous positions adopted by the Fair Standards Association (FSA) and ACT | The App Association, it seems likely that it will:
• Stipulate that a patent owner cannot seek to increase the value of its patents by focusing on value created by downstream innovators and devices.
• Call for an obligation on SEP holders to license only relevant patents – which may not necessarily be an SEP holder’s entire SEP portfolio.
• Require licensing to any and all that seek a license.
In short, it is likely to take the opposing view to the first workshop on the key unresolved issues in the interpretation of FRAND.
If the final products of each workshop are completely opposed to one another, they will not be particularly helpful as guidance to new potential licensees. It may require judicial or regulator intervention to resolve these issues before the full rollout of the IoT and 5G. It remains to be seen where the first real determination of these kinds of questions will take place. One possibility is the FTC v Qualcomm case in California (discussed here), where the FTC is seeking a declaration that Qualcomm must be prepared to license competing chipset manufacturers. That could provide a persuasive authority on whether FRAND requires licences to be offered to all, although other jurisdictions may of course take a different view.