Royalty-Setting For Standard Essential Patents Might Be Balanced By Prospect Of Injunction, Speakers Say

Threats of injunction in cases of infringement of essential standard patents, which have raised concerns in Europe and the United States as being leverage for patent holders to get higher royalties, might in fact be a way to maintain an equilibrium in royalty-setting, according to speakers at a World Intellectual Property Organization event.

Standards allow interoperability of products and are useful to producers and consumers. Those standards sometimes include a technology covered by one or several patents. In that case, the patent is described as a standard essential patent (SEP). According to WIPO, most standards-setting bodies (SSBs) have established their own patent policy, and many require that the parties involved in the standard-setting process disclose “information regarding relevant patents.”

Many SSBs require that the patent holder agree on specific licensing conditions, such as that the licence should be granted under fair, reasonable, and non-discriminatory (FRAND) terms. Parties interested in manufacturing a product requiring such a patent have to agree on FRAND terms with patent holders. This sometimes leads to disputes that might result in an injunction prohibiting the sale of products that make unauthorised use of SEPs.

WIPO’s seminar series on the economics of intellectual property, held on 26 March, focussed on patents and standard setting and was introduced by WIPO Chief Economist Carsten Fink. He noted that the points of views expressed by speakers in the WIPO economic seminars were their own, as WIPO takes no position on those issues.

Two researchers were invited to present their paper [pdf] on SEPs. The paper was authored by Damien Neven, Gregor Langus and Vilen Lipatov.

Neven, a professor of international economics at the Graduate Institute of International and Development Studies in Geneva and former European Commission chief competition economist, said a question becoming a concern in various institutions across the world is whether or not owners of SEPs should be able to seek injunctions.

Role of Injunction

Litigation on SEPs is increasing, according to the paper, in particular in the mobile device market. “Litigation has pitched manufacturers … such as Apple, Microsoft, Samsung and Motorola against each other, across multiple jurisdictions and before several courts,” it said.

The European Commission (EC) Directorate for Competition and the United States Federal Trade Commission (FTC) both have expressed concern that the threat of injunctions might increase the prospect for “hold-up,” Neven said. Hold-up refers to an attempt by SEP holders to seek royalties from licensees, which are considered excessive, he said.

It is generally considered that the threat of exclusion from the market will shift the bargaining position in favour of the patent holder during licensing negotiations, Neven said, adding that in the context of SEPs, patent holders have probably entered a FRAND agreement. The EC and the FTC both have said that FRAND terms are too vague and do not represent a real constraint, so they anticipate that the threat of injunction is enough to shift the bargaining position, he said.

However, according to Neven, if the patent holder had no injunction possibility, there probably would be concerns about “reverse hold-up” in which an implementer of the standard could delay negotiations with the patent holder “for a very long time,” or propose very low royalty rates knowing that the patent holder would have little choice but accept the offer.

Just focussing on the idea that there is hold-up is probably an excessively narrow focus on the issue, he said, adding that it is useful to consider the potential positive role that injunction could play in the case of reverse hold-up attempts.

The research that was undertaken, Neven said, was aimed at trying to understand the negotiations between patent holders and prospective licensees with respect to SEPs and trying to identify the role that injunction plays in the outcome of those negotiations. This outcome depends on how the procedure unfolds and on what the court system does, he said. The EC and the FTC may have “a naive view,” in that they assume that by simply asking for an injunction, “you get it,” he said.

Courts Grant Injunctions Only on Contingent Information

The researchers reviewed court procedures and cases laws concerning SEPs in Europe to describe the procedures taken by courts when they are faced with a claim for injunction, he said, adding that the study proposed a model of negotiations between patent holders and patent licensees.

The results of the research, Neven said, is that “one should not rush into the conclusion that there is a systemic problem” and that hold-up is a serious concern, as maybe, at least in Europe, “the system does not seem to be broken.”

The outcome of the empirical research showed that courts are not simply granting injunctions when they are requested to do so. Courts “can be described as providing injunction contingent on sufficient information,” in particular information that the prospective licensee is not putting forward offers that can be considered as FRAND and might be engaging in reverse hold-up. The research showed that many steps are taken before the courts may decide to grant an injunction, Neven said.

Langus, senior consultant for Charles River Associates who presented the model put forward by the study, said there are three variables for reaching equilibrium for royalty-setting: the strength of the patent, the cost of litigation, and the length of the litigation. The licensee can challenge the validity of the patent.

For example, if the litigation takes a long time, it might exceed the patent life and the injunction “would have absolutely no bite,” he said. A determinant factor in the acceptance or refusal of the rate put forward by a prospective licensee is the strength of the patent. The holder of a sufficiently weak patent will always end up accepting a rate below FRAND, he said, while if the patent is strong, the patent holder will always end up refusing a rate below FRAND and end up in litigation.

The conclusion of the research is that it is not clear that there is a systemic failure, and that the current approaches that the courts are taking are balancing hold-up and reverse hold-up. Injunctions, he said, are in fact only granted when reverse hold-up is a concern, adding that injunction may play an important role in preventing attempts of reverse hold-up.

UN Agencies Looking at Standards

Separately, on 21-22 March, five United Nations agencies launched the UN Forum on Sustainability Standards (UNFSS) to tackle what they consider to be the rising issue of private standards affecting developing countries’ exports by creating market entry hurdles (IPW, UN, 18 March 2013).

The five UN agencies are: the UN Food and Agriculture Organization (FAO), the International Trade Centre (ITC), the UN Conference on Trade and Development (UNCTAD), the UN Environment Programme (UNEP), and the UN Industrial Development Organization (UNIDO).

According to a summary soon to be posted on the UNFSS website, the launching conference attracted over 200 country delegates. “Most of the debate focused on the identification of priority subjects and activities for the first two years of UNFSS operation,” according to a source.

Delegates “singled out as key themes, the role of governments on voluntary sustainability standards related to public goods, legitimacy, competitiveness effects, transparency,” and the implications of those standards on the World Trade Organization rules.

The report of the meeting will be available shortly on the website, he said.