Post-Huawei v ZTE: Are FRAND Negotiations Finally More Balanced In Europe? 13/07/2016 by Magda Voltolini for Intellectual Property Watch 1 Comment Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window)BARCELONA, Spain — The Huawei v ZTE Case C – 170/13, 21 July 2015 prescribed some guidelines for fair, reasonable and non-discriminatory (FRAND) licensing negotiations, for both standard-essential patent holders and users. A recent private-sector panel addressed European FRAND case law and the latest information and communications technology industry policy opinions, in particular concerning royalty assessment rate (end-user or technology), royalty stacking, patent pool approach and injunctions. The session entitled “FRAND Futures” was held during the IPBC Global Conference 2016 in Barcelona in June. FRAND Futures session at the IPBC conference Giustino de Sanctis, CEO, Vectis moderated the dialogue between Jako Eleveld, head of IP licensing, Royal Philips, Robert Pocknell, chair, Fair Standards Alliance (FSA), Iain Richardson, CEO, Vcodex Ltd, and Claudia Tapia, director, IP rights policy, Ericsson. Vectis’ de Sanctis opened the session by saying, “I launched Vectis in 2015 to assist innovators to licence their IP and users to acquire licences by creating value for all parties involved and to find the best market balance in the interest of the ecosystem.” He noted, however, that “patent owners face more challenges to licence their patents because of the difficulties to enforce rights, especially in the United States, which in turn contributed to significant assets devaluation.” “The patent system is under a lot of pressure as a reaction to the abuses of a few, with unintended, but harmful, consequence of hurting innovation,” de Sanctis explained. He then highlighted that “the patent system was introduced to foster and promote innovation. To innovate today is an expensive proposition and investors will continue to put valuable resources in innovation only if the patent system delivers on its promise to reward innovators.” Obviously, he concluded, the solution is all about finding the right balance between owners and users, and this is particularly true in SEP cases. Tapia discussed the EU case law background regarding FRAND defence against an injunction claim. She focused on the CJEU Huawei v ZTE Case C – 170/13, 21 July 2015 and said it is a “two-way street,” where patent holder and patentee “need to behave in a FRAND way.” The CJEU (Court of Justice of the EU) ruling provides, according to her, “sufficient guidelines for users and owners of standardised technology,” while at the same time “is flexible enough to allow courts to address the specific circumstances of each particular case.” To illustrate her argument, Tapia indicated the judgment in Saint Lawrence v Vodafone, District Court Düsseldorf 4a O 73/14, 31 March 2016, and highlighted as follows: “(1) portfolio licensing is for the ICT sector the commercial practice, having the patent holder ‘a legitimate interest” to request it’, (2) Comparable licensing agreements represent ‘an important indicator’ to determine FRAND, while patent pools’ significance is according to the court ‘limited’, (3) FRAND is generally ‘a range of values that will be fair, reasonable, and non-discriminatory not a single license fee’, (4) The reasonable time to declare willingness varies from case to case but the ‘more detailed notice of infringement’ is provided, the shorter will be the period of examination, (5) the court questioned ‘how much the threat of a claim for injunctive relief can (inadmissibly) affect license agreement negotiations’ after the Orange Book case law of the BGH (German Federal Court of Justice), the Motorola decision of the European Commission and the recent CJEU ruling” Pocknell gave his presentation on behalf of the Fair Standards Alliance (FSA). FSA was founded in October 2015 and is “seeking fair, balanced, and proportionate practices in the licensing of standards-essential patents (SEPs) to maintain a healthy innovation ecosystem.” Contrary to Tapia’s opinion, he pointed out that the post-Huawei reality for SEP users is more “aggressive”, in particular because: “Demands to take a license within 6 months of sending a letter, with threats of injunctions and legal fees” “Demands for non-refundable ‘entrance fees’ (20,000 euros plus) to enter into licensing negotiations” “Disruptive demands made against retailers without any contact made with the manufacturer” “Supply of lists of 100s of patents stated to be essential, and a refusal to provide any infringement claim charts” “Increased SEP licensing costs through royalty stacking and portfolio fragmentation” Pocknell also defined the role that standards, SEPs and industry implementers play in the innovation ecosystem. He said standards enable innovation by facilitating interoperability of innovative services and products and generating massive network effects. SEPs represent inventions that therefore contribute to innovations. For industry implementers, he noted, innovation combines “[i]ntegrating many patented and non-patented inventions,” in addition to “[d]esigning, improving, manufacturing, packaging, marketing and servicing products.” He said he sees that “a healthy innovation ecosystem [should be] a balance of incentives for all contributions to innovation.” Pocknell then named several challenges in maintaining a healthy ecosystem, taking into account royalty stacking prices and royalties valuation of non-SEPs combined with SEPs. He proposed some guidelines that patent holders could take into account on the licensing of SEPs, which are: “[R]oyalty claims should take into account the legitimate expectations of other innovators who contribute to the standards” “SEP holder entitlement to royalties should be reasonable in light of the proportional contribution of the SEP compared to the total SEPs contribution reading on the standard” “[W]hen negotiating royalty rates individual licensors [should] take into account the cumulative royalty levels payable by licensees” Lastly, Eleveld voiced his views on FRAND trends in relation to impacts and eyed some solutions. He explained that “open FRAND standards have been tremendously successful” by having brought mass volume digital devices and wireless networks that actually work to consumers. He however observed that rewards for technology contributors are very much under pressure. To illustrate, he highlighted the following: “Valuations [are] not always based on benefit to the end‐user, which they should be” “Value shifting from devices to services, but royalties not so much (yet)” “More difficult to enforce compliance and get paid, although with the Huawei/ZTE decision we are largely ‘back to normal’, at least in EU (unfortunately injunctions are necessary as a last resort against unwilling licensees)” Eleveld stated that he did “not recognise the post-Huawei reality sketched by Pocknell” and that some of the behaviour mentioned (e.g. demanding entrance fees for entering into licensing negotiations and refusing to send claim charts) would probably be violations of the Huawei-ZTE framework. He further noted that in new standards, there is an increasing “number and diversity of participants and more complexity,” causing “higher transactions costs,” in addition to the proliferation in the number of standard-essential patents per standard and the higher number of standards per product due to convergence. As a result, Eleveld indicated that with less or no incentive for technology providers to develop and contribute their best technology to open standards, “future standards will become suboptimal and incremental.” Additionally, more proprietary and closed standards for technology leaps will develop and consumers will benefit less since there will be fewer network effects and less interoperability. Moreover, transaction cost will be higher and there will be less benefits to consumers. As regarding solutions “to stimulating innovation and making the best standards,” Eleveld suggested therefore that “there needs to be a good incentive for technology providers to put their best technology in open FRAND standards,” specifically: “Rewards be based on the benefit to an end user” and that injunctions be available to enforce compliance with FRAND licensing Patent pools be stimulated to spread the adoption of standards at “significantly discounted royalty for everybody,” creating a level playing field, and providing low transaction costs. In the Q&A discussion, Tapia made several remarks in reference to the presentations of Pocknell and Eleveld. She took issue with points raised by Pocknell in his presentation concerning “[d]emands to take a license within 6 months of sending a letter, with threats of injunctions and legal fees,” and “demands for non-refundable ‘entrance fees’ (20,000 euros plus) to enter into licensing negotiations.” Tapia stated she is “not aware of such practice but recommended those companies victims of aggressive players to apply the Huawei v ZTE ruling, as Europe courts are bounded by the CJEU and alleged infringers only need to follow the steps described by the CJEU to avoid an injunctive relief.” She further quoted in Saint Lawrence v Vodafone, saying it supports her view “that it is questionable how much “threat of injunction” we have nowadays after the recent jurisprudence.” In response to Pocknell’s comment concerning “Increased SEP licensing costs through royalty stacking and portfolio fragmentation,” Tapia further said after the conference “that there is not proof of such statements and that Mallinson calculated a 5% cumulative royalty rate, which is far from being stacking.” Regarding FRAND determination, Tapia further concluded: “FRAND needs to reflect the value of the patented standardised technology for the end user and that one only needs to go through the day with its smartphone in flight modus to understand the value of connectivity. ‘What is the value of your camera if you cannot share the picture with your friends in Instagram, Whatsapp, Facebook, etc? What is the value of your maps app if you cannot open it?’. In other words, she said, “connectivity puts the phone in the iPhone.” On patent pools, Tapia agreed with Eleveld and Pocknell, as follows: “Patent pools can be very helpful in order to provide more transparency and easier access to the technology but she drew attention to the fact that there is ‘no one size fits all’ approach for FRAND as FRAND is very complex and pools do not solve all scenarios. For instance, Tapia said ‘patent pools do not guarantee cross-licenses with the standards outside the pool, and the distribution does not reflect all business models’ interests’. For IoT, however, since cross-licenses will not be needed for products which primary goal is not connectivity, such a car, a platform (similar to a pool) will be created. The platform will offer a fix price for the standardized technology which will be FRAND.” Pocknell, in response, commented that the industry is looking forward to seeing the terms of the proposed patent platform/pool for IoT that Ericsson is proposing, and he added that there are many different licensing models which should be considered for IoT. From a technical expert perspective, lastly, Richardson CEO at Vcodex, expert in video compression coding, who provides patent analysis, expert witness and support in patent transactions in this domain, explained the technological evolution of the MPEG standards that enable video broadcasting and streaming technologies developed by ISO/IEC and ITU-T committees since the early 1990s. “A smartphone uses video compression to store or transmit video captured from the camera and uses video decompression to decode and play video streams,” he said. From a patent perspective, Richardson elucidated to Intellectual Property Watch that each standard defines a decoder but not an encoder. That is to say, “that methods of decoding/decompressing and playing back video may be covered by standards essential patents (SEPs) but methods of encoding/compressing video may not be covered by SEPs.” For instance: “The owner of a SEP has the potential to license the patent to implementers of a standard such as H.264/AVC (Advanced Video Coding) or H.265/HEVC (High Efficiency Video Coding). Many SEP owners choose to do this through licensing pools such as those managed by MPEG-LA or HEVC Advance. Licensing a SEP (typically a decoding patent) has to be done under FRAND obligations. A patent that covers encoding technology or a patent describes a specific implementation method, might not be standards essential. For example, a standard such as H.264/AVC does not define an encoder and so manufacturers are at liberty to design the encoder any way they wish, as long as it produces a standards-compatible output. However, if an encoding patent describes a particularly useful method of encoding, it may be widely used in products and may therefore have a large number of potential licensees. If it’s not a SEP, then FRAND restrictions don’t apply and the patent owner has much more freedom in the way it might pursue a licensing programme.” Richardson said that SEPs and non-essential patents may each have their advantages and disadvantages: “SEPs have a potentially very large number of licensees, who can be identified simply by their practice of the standard. However, it is expected that SEPs are licensed on FRAND terms. Non-SEPs may have a smaller number of potential licensees and it is often harder to identify usage of the patented technology. However, there is potentially much more flexibility in the way the patent is licensed.”  Claudia TAPIA, “FRAND Case-Law in Europe” IPBC 2016 (6 June 2016) [The author states “The quotations on the St Lawrence case are taken from the translation offered by the Arnold Ruess law firm”]  Robert POCKNELL, “Global Patent Conference 2016: SEP‘s and Innovation” IBPC 2016 (6 June 2016)  Jako ELEVELD, “FRAND Futures presentation” IBPC 2016 (6 June 2016)  See http://www.wiseharbor.com/pdfs/Mallinson%20on%20cumulative%20mobile%20SEP%20royalties%20for%20IP%20Finance%202015Aug19.pdf  See at https://www.ericsson.com/news/150910-ericsson-invites-industry-players-to-join-its-licensing-effort-for-internet-of-things_244069645_c Image Credits: IPBC Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window) Related Magda Voltolini may be reached at firstname.lastname@example.org."Post-Huawei v ZTE: Are FRAND Negotiations Finally More Balanced In Europe?" by Intellectual Property Watch is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.