For Experts, Questions Still Abound On IP And Standard-Setting

BRUSSELS – Intellectual property experts at the annual conference of the European Policy for Intellectual Property Association (EPIP) discussed a range of topics including IP rights and standard-setting. The conclusion? Many questions remain unanswered.

The 2014 EPIP annual conference took place in Brussels on 4-5 September. As in the previous year, a session on IP and standard-setting was included under the 2014 programme entitled, “Improving Innovation Systems”.

Dietmar Harhoff, director at the Max Planck Institute for Innovation and Competition, chaired the session. The presenters were: Joseph Farrell, an economics professor at the University of California; Maurits Dolmans, partner at Cleary Gottlieb; and Pierre Régibeau, vice-president at Charles Rivers Associates. The presentations tackled intellectual property rights and competition policy issues affecting giant tech firms.

The session explored the implications of vague “fair, reasonable and non-discriminatory” (FRAND) terms for licensing standard-essential patents (SEPs) vis-à-vis collective interests of standard-setting organisations’ members, as well as the outcomes of latest European Commission decisions.

SEPs are essential patents belonging to an industry standard crucial for its implementation, often licensed under FRAND terms.

Farrell evaluated whether standard-setting organisation (SSO) members are apt to formulate policies that address consumer interests. According to his findings, SSOs pursue interests of their members, and as such “it’s in [SSO] members’ collective interest to raise prices to (non-member) consumers.” His presentation showed that imprecise FRAND rules “allow more scope for hold-up [and] possibly also less scope for hold-out,” as well as higher SEP royalties, higher consumer prices and higher collective profits.

(Hold-up refers to the notion that SEP holders may gain additional bargaining power and request excessive royalties considering locked-in licensees after the standard is adopted. Hold-out refers the notion of reverse hold-up. The licensee ex post may impose excessively low royalty rates.)

Against this background, he declared that, “delegating rules against hold-up to the SSO will likely produce too-weak rules.” He also said that “consumer/public interest [will] not [be] fully internalized by SSO members collectively.”

Farrell explained that tighter FRAND rules are a balancing act to attract patent-holder participation and control royalty rates. Therefore, SSO members’ concerns on “controlling royalties and inducing membership” would not effectively protect consumer interests. He concluded that the “important role for pro-consumer competition policy [relies on] not delegating to SSOs.”

Dolmans presented latest European Commission decisions on SEPs, FRAND and standards, and raised several questions.

In his opinion, some SEP players abuse the system. Specifically, he said, “a growing number of ‘patent assertion entities’ buy patents and use them to spring litigation on unsuspecting manufacturers, without making anything themselves.” He also mentioned that some “use injunctions to hold-up willing licensees.”

At the same time, he noted that a few users engage in “hold-out”, where they “refuse to pay FRAND rates.” He added that “the European Commission solved this in some recent decisions, and the European Court will be looking at this in the Huawei v ZTE case.”

A case involving Motorola Mobility set a precedent for the “willing licensee” notion: the SEP holder cannot seek injunction against a licensee who is willing to negotiate and offers to have a court or arbitral tribunal set FRAND terms if no agreement is reached. The Commission decided such a licensee is “willing” even if it challenges validity, infringement and essentiality.

In the Samsung Electronics Commitment Decision, a FRAND resolution process was established. Samsung committed to not seek injunction against any potential licensee which is bound to negotiate FRAND terms under a specific licensing framework during a period of time, and which is subject to a court’s or an arbitrator’s determination in case of a negotiation failure.

To end his presentation, Dolmans called on the Unified Patent Court (UPC) to adopt the four-factor test of the US eBay case for preliminary and permanent injunctive relief and raised and briefly discussed the following questions, which he said could be fruitful fields for further research:

• Are SEP owners by definition dominant?
• What’s the abuse – Seek and enforce injunctions? Or seeking alone? Is there not a safe harbour for patentees?
• What’s “willingness” – Does history of refusal play a role? Refusal to pay in escrow?
• Who has the burden of proof of “willingness”?
• Is imposing reciprocity and defensive suspension FRAND?
• Are tying and portfolio licensing FRAND?
• How to avoid delays – Determine validity first or set the rate first?
• What lessons for the UPC? (Dolmans encouraged the UPC to adopt the eBay principles; and avoid injunctions on invalid patents)
• What is a FRAND rate – patent pools as comparators? What [is the royalty] base? (Should the rate be based on the system or on the component price; for instance, on the phone or on the chip?)
• Can “pre-willingness” damages be supra-FRAND?
• What are the rules for FRAND-covered non-SEPs (“FREPs”)?
• What lessons for privateers and trolls?

Dolmans concluded that he identified trolls and privateers as the greatest threats for innovation in the near future.

Régibeau, for his part, addressed the interface of patents, standardisation and competition policy in relation to research needed. As to litigation, he acknowledged major US and European players have reduced virulent patent wars, but that the disputes are expanding to China, and with increasing participation of non-practicing entities / patent-assertion entities and privateers.

As to the concerns of the European Commission, he provided to Intellectual Property Watch further comments about his presentation. He explained that complaints brought by SEP users led the European Commission to believe that the patent system needed reform: it resulted in investigation on patent thickets and probation of SSO policies, in particular the vague meaning of FRAND terms and the portability of its commitment. The European Commission also ended up reviewing the bifurcated German judicial process, the right to seek injunction and the inclusion of termination clauses in SEP contracts.

Régibeau provided an industrial outline showing the standardisation phases and the implications for R&D and disclosures, FRAND commitments, specific new research, as well as for standard adoption and implementation.

In reference to the adoption phase, he considered two problematic issues. To avoid royalty stacking, he said that “[i]n principle, this issue is best handled by letting SEP holders set their royalties jointly, for example, by forming a patent pool.” But he said based on the 2013 study of Lampe and Moser, which found pools divert innovation, differently influence royalties and aggravate competition, he questioned whether patent pools are the best framework to address lower total royalties, participation and innovation.

To control hold-up, as FRAND terms are vague, he highlighted the importance of court injunctions and the right to ascertain validity of SEPs. He said that more research is required on innovation, SSO participation, disclosures, specific R&D, SSO members’ biased interests, frequency and quality of updating standards, as well as on legal practices – bifurcation, portfolio litigation and termination clauses.

As to SSO policies, he inferred that there is a need to find evidence on the relationship between SSO rules and participation in those rules.

Coincidentally, the European Academy for Standardisation (EURAS) Annual Standardisation Conference of 8 – 10 September in Belgrade presented three papers exploring participation and standard-setting.

Magda Voltolini is an independent writer based in Paris. She holds an LLM in Intellectual Property Law from the University of Edinburgh, and a Law degree from Pontifical Catholic University of Rio de Janeiro.