EU Study Recommends FRAND Clarification, More Coordination On 5G

The rapid development of information and communication technologies, and the need for greater interconnectivity driven by the Internet of Things has created a variety of standard-essential patent (SEP) owners and implementers with different business models, and for more diverse licensing practices, the European Commission Joint Research Centre says in a new study. This has made it harder to agree on an interpretation of FRAND licensing principles, something European policymakers must clarify in order to meet key digital single market and other goals, it says.

The Joint Research Centre (JRC) study, “Licensing Terms of Standard Essential Patents: A Comprehensive Analysis of Cases,” is available here.

It aims to “provide a consistent framework for both the interpretation of FRAND [fair, reasonable and non-discriminatory] commitments and the definition of FRAND royalties” based on the analysis of landmark and significant decisions by courts and competition authorities in Europe and globally. The authors surveyed how FRAND licensing terms have been defined in evolving case law, and tested the economic soundness of the concepts and methodologies used by courts and antitrust agencies.

The recent growth of patent litigation in the smartphone industry has “sparked controversy with regards to the implication of FRAND commitments, although SEPs actually account for only a small share of litigated patents,” wrote Chryssoula Pentheroudakis and Justus A. Baron. That tension has been further fuelled by several economic arguments that question whether FRAND commitments can ensure that royalties for SEPs are in fact “reasonable,” they said.

Specifically, the fact that licensing takes place after a standard is set raises concerns that FRAND commitments are too loose to stop SEP owners from unduly leveraging market power once the standard is implemented (the “hold-up” argument) or, conversely, that they enable implementers to avoid seeking licences for SEPs (the “hold-out” argument).

Another argument, “royalty stacking,” contends that the fragmentation of SEP ownership leads to an excessively high royalty stack, the study said. (It defined royalty stacking as “market failure that may result when owners of complementary patents do not coordinate the royalties that they request for the use of their patents.” If this happens, the sum of individual payments sought by the different patent owners is higher than the payment that a single firm would have requested if it owned all the complementary patents).

This “polarized debate around the meaning of FRAND” is mainly based on theoretical arguments that lack solid, empirical evidence on the prevalence of any of the problems, the report said.

Global FRAND Similarities and Differences

The comparative case study analysis showed, among other things, that complexities in the technologies and licensing practices of SEPs have led courts to question the real-world applicability of well-established methodologies and doctrines used in the general context of patent infringement, and to modify the rules in the specific context of FRAND, the report said.

The analysis also showed that most policymakers worldwide want to define FRAND in a way that balances the need to make standards available while fairly compensating SEPs, the authors wrote.

On royalty rates, US courts of “methodologically sophisticated” in approaching FRAND royalty rates, while European courts are more reluctant to define single rates and focus more on the parties’ conduct during negotiations to determine whether it complies with specific FRAND commitments made prior to awarding injunctions, the study found.

Another finding was that FRAND doesn’t describe a single rate but a range of rates, the authors wrote. Further, the analysis showed that acceptable mechanisms for calculating FRAND royalty rates used two sources of available data – the prices of comparable licences and a royalty base (prices of either the infringing product or a component of this product that practices the patented technology). The royalty-based method “lies at the heart of an ongoing controversy in the US” over the “smallest saleable patent practicing unit,” the authors said.

Policy Recommendations

“The various approaches and divergent outcomes of FRAND disputes across national jurisdictions worldwide – due not so much to fundamental disparities on what constitutes FRAND as to differences in litigation profiles, competition dynamics and political priorities – have a significant impact on the incentives to innovate, implement and participate in standard setting,” the report said.

It urged policymakers to consider several recommendations.

• Set a balanced framework for negotiations between right holders and implementers of SEPs in the context of the EU digital single market. SEPs are increasingly important for standardisation in the digital economy and a key element of the business model for many industries eager to monetise their research and innovation investments. FRAND must reflect the current market diversity and dynamics within an enlarged circle of stakeholders.
• FRAND can potentially control opportunistic behaviours, boost competition and evaluate licensing agreements under a “reasonable framework.” European policy should encourage more clarity and flexibility in defining FRAND, such as by adopting a common set of criteria and practice guidelines, but should not try to calculate a single royalty.
• Clarifying the FRAND obligation is important for assisting negotiations on SEP licensing terms, but “the complex issues at the interface of IPR and standardization and a proper balance between the interests of the manifold parties involved cannot be achieved through a single instrument.”

More Harmonised Standard-Setting Needed for 5G

Another key question is who should clarify FRAND, the report said. Courts and antitrust authorities have done so, and some large manufacturers have made unilateral promises for FRAND licensing in order to promote transparency and reduce legal uncertainty. In recent years, commercial entities and standard development organisations (SDOs) have also begun alternative patent licensing methods such as ex ante royalty caps or royalty-free arrangements, it said.

SDOs should increase efforts to find a common framework for FRAND licensing through more clarity and predictability, the authors recommended. A new IEEE policy offers a more specific interpretation of FRAND and assess specific methodologies for calculating a FRAND rate. This has significant impact on the governance of standardisation event despite the fact that major European SDOs such as ETSI have decided to leave it up to the parties to determine FRAND rates, it said.

5G development and deployment means that SDOs will have to have more coordinated policies in general and more closely-knit IPR policies in particular, the report said. A JRC study on critical issues around SDO governance will be published in 2018, it said.

“Balanced” Study

The study recommendation to focus on the behaviour of negotiating parties rather than on specific methods of royalty rate calculation is one with which many market players would generally agree, Taylor Wessing (London) patent attorney Chris Thornham said in an interview. Unreasonable behaviour, whether by a patent holder or a licensee, should be censured, he said.

The focus on behaviour is “more productive,” said Thornham: Businesses don’t want to litigate, they want to conclude licensing deals. The European approach “seeks to ensure parties adopt reasonable business negotiating practices, instead of going to litigation,” he said.

The study also recommended global advocacy between EU policymakers and their counterparts in the US, China and elsewhere in order to stave off potentially distorting domestic policies by finding common ground and best practices. This is important because many of these issues are transnational, Thornham said. The study is “balanced” and a “useful resource,” he said.