Standard Essential Patents II- National Jurisprudence and Current Developments in Civil Law Jurisdictions

Standard Essential Patent (“SEP”) Litigation

Technology implementers accuse SEP holders of charging excessive licensing fees based on weak patent portfolios and of using litigation threats. In response, SEP holders claim that technology implementers may 'free ride' on their innovations and consciously infringe intellectual property rights (“IPR”) without engaging in good faith licensing negotiations. Disputes and delays in negotiations between SEP implementers and holders may ultimately lead to a technology chilling-effect.[1] Therefore both parties have to come up with a common understanding of what fair licensing conditions and fair rates are, through good faith negotiations.

Currently, licensing is hampered by unclear and diverging interpretations of the meaning of Fair, Reasonable and Non-Discriminatory[2] (“FRAND”), valuation principles and the availability of injunctive relief. Such relief aims to protect SEP holders against infringers unwilling to conclude a license on FRAND terms. At the same time, safeguards are needed against the risk that good faith technology users threatened with an injunction may accept licensing terms that are not FRAND, or in the worst case, are unable to market their products by patent hold-up.[3] This threat of injunctive relief brings anti-competition into question, mainly under abuse of dominance within the relevant market by SEP holder.

FRAND Licensing and Valuation

FRAND license terms may not be universal. Instead the royalty rate and other license terms can differ from sector to sector, region to region, and over time. While FRAND license terms include “non-discrimination,” this applies to so-called “similarly-situated” licensees. Imposing FRAND terms on such entities and thus permitting deviations in FRAND terms among those not similarly situated, means that SEP holders and implementers can assess the unique circumstances of a particular potential licensee to differentiate it from other licensees. There are, therefore, opportunities to leverage unique circumstances and still arrive at FRAND license terms. Both parties must be willing to engage in good faith negotiations, with the view to establishing licensing conditions that are fair, reasonable and non-discriminatory. Parties to a SEP licensing agreement, negotiating in good faith, are in the best position to determine the FRAND terms most appropriate to their specific situation.

Of the many different approaches to determine an appropriate royalty rate, two frequently identified in different court decisions worldwide are: (i) determining the share of contribution of a particular SEP, by referencing, for example, existing comparable licenses (bottom-up approach); and (ii) calculating the share in the calculation base of the contribution of all SEPs for a given standard and then allotting a share to individual SEPs (top-down approach). These two approaches are not contradictory. Both approaches may be combined to calculate the rate so as to ensure a more reliable rate through comparison of the results.[4]

Turkey

There hasn’t been any cases or investigations brought to national IP courts or Turkish Competition Authority (“TCA”), regarding SEP litigation/injunctive relief and FRAND-encumbered licenses. However, the TCA and national IP courts comply with the EU legislations and most likely choose one of the approaches of EU jurisprudence for their decisions.

 The Yonga Levha[5] (2003) decision of the TCA is the most relevant example to the conflict between technical standardization and anti-competition law in Turkey. While cases like Bilsa[6] and Anadolu Cam[7] may also be relevant in within the abuse of dominance domain related to IPR or restrictive conduct; only Yonga Levha addresses the potential anti-competitive conduct between competitors by changing technical standards in the Particle Board/Chipboard sector. The TCA in its decision evaluated whether the collaboration between competitors to set new technical standards cause entry barriers to newcomers or discriminatory behavior.[8] Because the collaboration did not constitute discriminatory behavior, TCA did not fine the parties and allowed implementation of the new Chipboard standard.

The following case law from certain Civil law jurisdictions were novel verdicts at the time to solve ambiguities in SEP litigation, particularly for defining FRAND licensing terms and the role of competition law in IP litigation.  

European Union: Huawei v. ZTE[9] Framework

Injunctions are governed by each Member State that implements the European Union (“EU”) Directive on the Enforcement of Intellectual Property Rights. The Commission Guidelines on SEPs also referenced to the European Court of Justice (CJEU) Huawei v. ZTE decision. Suggesting that this decision is not the exclusive framework, the EU emphasized the need to conduct a proportionality assessment on a case-by-case basis, leaving substantial discretion to courts.[10]While patents are secured country by country and can only be enforced in the country in which granted, the EU views worldwide SEP licenses as efficient and compatible with FRAND. However, because patent law, damages doctrines, SEP portfolios and other considerations differ by country, it is not uncommon for a worldwide SEP license to set different rates by country or region. With regional differences, businesses can leverage lower regional rates and license (or cross license) terms that may be unique to their business model and market.[11]

In Huawei v. ZTE the CJEU was asked whether a user of a FRAND-committed SEP should be able to avoid an injunction merely by expressing its “willingness” to negotiate a FRAND license, or whether an injunction could be granted unless the user made a binding offer to the SEP holder on terms that the SEP holder could not refuse.[12]Some national courts, particularly those in Germany, followed the second approach.               

The judgment confirms that EU competition law indeed has a part to play in controlling the enforcement of SEPs; but not as “extensively or intrusively” as the Commission had proposed. Broadly the position is that competition law merely bolsters existing FRAND commitments and compels owners of SEPs to offer to grant licenses on such terms.  The emphasis is away from enforcement action by competition authorities and towards the national courts: “The practical effect is that provided a patentee has acted reasonably in making what he reasonably believes to be a FRAND offer to an implementer he is unlikely to be subject to enforcement proceedings by the competition authorities only because his offer turns out not to be FRAND.  The emphasis is on a FRAND defense before a national court, not enforcement by competition authorities.”[13] 

If a patentee has made what he reasonably considers a FRAND offer and the implementer disputes that the offer is FRAND, the patentee will be able to enforce its SEPs including by way of injunction against that implementer unless the implementer engages in good faith with the patentee.  In particular if the patentee offers to have the question of whether his offer is FRAND arbitrated and the implementer refuses that offer, much the stronger view is that the patentee may obtain an injunction.[14]  The implementer can be compelled to make interim payments into a safeguarded bank account or provide a bank guarantee whilst the FRAND dispute is resolved.  So-called “hold-out” is no longer possible, at least to any great degree.

A major problem arising post-Huawei case law[15] is the portfolio transfer of larger SEP patent holders to patent assertion entities (popularly referred as “patent trolls”) which then sue standard implementers. Courts frequently have to assess whether the new SEP owners are bound by the original SEP owners’ FRAND declarations and whether the licensing conditions they request are FRAND in particular if they coincide with licensing requests made by original owner for other, non-transferred parts of their portfolios.”[16] Secondly, the valuation of FRAND royalties are often left for parties to decide on (where in Unwired v. Huawei the Court’s calculation lead to controversy of interference to licensing negotiation), but the question of concrete valuation remains an open one within EU jurisprudence.

China: A Fault-based approach

Chinese telecommunication firms have become the spotlight of the current SEP litigation. As a legal system, that largely based its IPR regime on Continental European counterpart, the case law from China has to be taken into consideration.

China’s High People’s Court of Guangdong issued Guidelines from the international practices on litigation and “fault-based” approach from its former SEP litigations: Huawei v. Samsung and Iwncomm v. Sony .According to the Guidelines, when requested to decide whether to grant injunctive relief to an SEP holder, a court should evaluate the “fault” in the SEP holder and implementer’s conduct during licensing negotiations.[17] The Guidelines include determining FRAND royalty rates when certain conduct violates China’s anti-monopoly law. Like the EU’s approach, China’s Guidelines emphasize the balance of interests among SEP holders, licensees and the public, based on the market value of SEPs in dispute and the licensing conditions, while  largely favoring  the top-down approach for royalty calculations.

The Guidelines, however, largely disfavor injunctions. Under the Guidelines, courts should grant injunctions only when the implementer is clearly at fault and the SEP holder is not (or is relatively less at fault). It is suggested that only infringer’s apparent bad faith, or at least some indication of bad faith, must be present to justify an injunction.[18]

In SEP cases, injunctive relief may often be sought as a form of leverage to incentivize the SEP implementer agree to a SEP license, one reason why the Guidelines are important for companies doing business in or with China. Injunctive relief may often be sought as a form of leverage to incentivize the SEP implementer agree to a SEP license, one reason why the Guidelines are important for companies doing business in or with China.[19]

Conclusion

For SEPs, FRAND-encumbered licensing negotiations are currently the most favored method of preventing potential litigation or injunctive relief that may cause further complications to innovation and competition. While different industries may not be able to directly apply the experience taken form the abovementioned examples; the case-by case approach of the FRAND dispute settlement can perhaps allow courts to reevaluate licensing agreements more flexible than a strict set of bylaws and precedents. On the other hand, not having harmonized rules –for the time being- in international legislation brings challenges for national judiciary when dealing with multinational disputes. Tensions between tendencies towards harmonization in technical standard-setting against techno-nationalistic agendas to protect national industry is one of the main challenge national SSOs deal with.[20] Nevertheless, as “standard takers” of developing economies become “standard makers” and compete with industrial leaders of developed economies (with large patent portfolios); we can expect the negative tendency towards harmonization to more robust approaches to standardization and standard-essential IPR.[21]

Author: Sinan Erkan