Conference Report: Should you arbitrate FRAND rates?

The AmeriKat in standard essential form

At the last day of June, the First Joint Seminar on SEP/FRAND Mediation and Arbitration co-organised by Queen Mary University of London’s School of International Arbitration (SIA) and the WIPO Arbitration and Mediation Center was hosted at the London offices of Allen & Overy LLP.   For those who were unable to make it to Bishop's Square, some Kat friends who had less distance to travel - in the form of  Elettra Bietti and Taly Dvorkis (both of A&O) - report on the event:

"In light of the recent UK referendum vote to leave the EU and the potential impact on the Unified Patent Court, there is perhaps a potential increase in alternative dispute resolution (ADR) in the standard essential patents context.  While it remains to be seen exactly what impact the Brexit vote will have on the UPC, these considerations were in no doubt at the back of everyone's minds when the first panel speaker of the day, Christian Loyau, Legal Director of ETSI, kicked off.  

Loyau provided the background on standard-setting bodies and noted that ETSI, one of the most important telecommunications standard bodies in Europe, has produced over 30 thousand standards so far, including some of the most significant standards for GSM, 3G, and 4G. ETSI is currently working on setting the standard for 5G.

ETSI requires that a patentee whose patent is made part of the standard (and is thus a “standard-essential patent”) issues a declaration that the patent will be licensed on FRAND terms. Mr Loyau noted the possibility for mediation and arbitration in the SEP context. The advantages of arbitration are numerous: it better serves the needs of those with large portfolios of worldwide patents making the resolution of multi-jurisdictional disputes more efficient; arbitration awards can be enforced almost anywhere; and the proceedings can be confidential. It is also possible to assess the validity and essentiality of a patent in arbitration proceedings by involving experts. Mr Loyau also noted that ETSI has been involved in a number of quasi-mediations, often to offer expertise on the standard in question.

Maria Ioannidou 

The next speaker was Maria Ioannidou, lecturer in Competition Law at Queen Mary. She mentioned the ETSI IPR Policy as one that seeks to strike a balance between rights-holders and the public. She also mentioned the European Commission’s Case 39939 Samsung and Case 39985 Motorola decisions, in which the Commission applied the “exceptional circumstances doctrine” stating that the requirement of a FRAND declaration gives SEPs a special status and that, consequently, there is no “objective justification” for SEP holders to seek an injunction based on their patent alone. Lastly in C‑170/13 Huawei v ZTE [as reported by IPKAT here] (hereafter “Huawei”), the CJEU adopted a more balanced approach determining a procedural test that parties should follow before seeking an injunction.

Joachim Feldges, partner in A&O's Munich offices, was the third speaker. He discussed the German courts’ perspective on SEP and FRAND disputes post-Huawei, but noted that some decisions issued post-Huawei are interim decisions and many of them concern pre-Huawei disputes (eg. Higher Regional Court of Karlsruhe - 6 U 55/16- judgement of 31st May 2016, and Regional Court of Düsseldorf - 4a O 73/14 - judgement of 31st March 2016). Consequently the application of Huawei in Germany has not been fully fleshed out.

Joachim discussed the obligations on SEP holders and SEP users in the pre-litigation phase. It is not sufficient for an SEP holder to merely provide a list of patents alleged to be infringed, but rather they must provide claim charts for the most significant patents explaining the purported infringement. If the SEP holder references a standard in the claim charts, that reference has to be specific.

Joachim Feldges 

For SEP-users, there is an obligation to show willingness to take a FRAND license. A number of questions remain as to the substantive requirements needed to illustrate that willingness. For instance, if the patentee has made an offer, but the potential licensee has not received the necessary information to assess whether that offer is fair and reasonable, does the potential licensee have an obligation to request additional information? Before such information is delivered there should be no obligation to submit a counter-offer. In parallel, can an implementer still challenge the patent’s validity while an agreement is pending? Unlike the previous situation under Orange Book, the SEP user is free to challenge the validity of the patents under Huawei, but it remains to be seen whether users will continue to do so at later stages in the negotiations. 

Determining whether a license offer is fair and reasonable requires much scrutiny. German courts examine the markets to see if there are anti-competitive effects or if the amount is comparable to other royalties. Expert evidence on the meaning of FRAND is often used. In FRAND litigation preserving the confidentiality of what is disclosed to the court may be at issue, especially where parties have to submit proposed licenses to show that the terms were fair and not discriminatory, which might lead to a waiver of confidentiality over those terms.  Joachim concluded by emphasizing that this is an evolving area of law, and that more decisions are expected to be handed down soon.

The next discussion was led by David Perkins, a mediator and arbitrator for WIPO. He explained some of the mechanisms adopted in mediations on FRAND disputes and argued that mediation is the preferred starting point before going to arbitration. The industry wants certainty and, in the FRAND context, there is much uncertainty as to the value of the licenses and the nature of the amount in dispute between the parties. Mediations will not necessarily be “friendly” but they serve to narrow down the issues before a costly arbitration is commenced.

Next up was Garreth Wong, partner at Bird & Bird, who gave a presentation on arbitrating FRAND disputes and calculating royalties. While there is not yet significant jurisprudence on assessing large SEP portfolios, there are a variety of approaches courts have considered in how to make FRAND valuations. 

How much is the royalty?!?!

Royalties can be considered from the standpoint of a hypothetical negotiation guided by the 15 factors listed in Georgia-Pacific Corp v US Plywood Corp, 318 F Supp 1116, 1120 (SDNY 1970). Under Georgia-Pacific, the royalty rate is the amount that would have been agreed upon in hypothetical negotiations between the patentee and licensee before the incorporation of the patent into the standard, ie the focus is on the value of the innovation, not of the value of the standard itself. A more recent decision on FRAND royalty calculation is Ericsson Inc v D-Link Sys., Inc 773 F. 3d 1201 (Fed. Cir. 2014), in which the Federal Circuit Court of Appeals cautioned lower courts away from relying on every one of the 15 Georgia Pacific factors and instead focusing only on those factors that are relevant in a FRAND context. In that case the court also upheld the notion that a royalties calculation should take into account the approximate value of the technological contribution by the SEPs, not the value of widespread adoption due to standardization.

Another possible approach for determining a royalty rate is the “pure” ex ante analysis, which starts with the cost to the licensee of obtaining a license for the function performed by the patent, just before the patented invention is declared essential to an industry standard. 

A third approach to assessing royalties is the incremental value approach, whereby royalties are set based on the incremental value of the patented technology over the next-best alternative. This approach would establish the maximum amount that a willing licensee would pay in a hypothetical negotiation; however, it is often difficult to assess what incremental value a patent provides.  

 The fourth approach was adopted by a district court in the In re Innovatio IP Ventures, LLC Patent Litigation, No.11-C-9308, 2013 WL 5593609 (ND Ill., 3 October 2013). This “top-down” evaluation requires calculating the profit of the appropriate unit, then multiplying by a fraction calculated as a number of the SEPs at issue, divided by the total number of SEPs in the standard.

Finally, the comparable licences approach consists of computing royalties based on a set of identified comparable licences. This approach entails a number of unknowns, including the definition of a comparable licence in any given context.

Garreth also discussed a number of procedural questions that arise in FRAND arbitrations, such as what law would apply and the complexities that arise from the need to calculate FRAND royalties for large patent portfolios. Oftentimes parties need to pick only a defined number of patents to be representative of the overall portfolio. However, in those situations, the patent holder will always select the best patents, and the implementer will always select the weakest patents. The essentiality and validity of patents in a portfolio will vary and this will need to be taken into account when assessing overall royalties. In relation to comparable licences, Garreth noted that it is easy in theory to adopt a comparable licences approach, but not easy to identify licences that are comparable in practice. For instance when cross-licences are involved their relative strength becomes important and it becomes difficult to compare them with other licences.

Mark Bezant

The final speaker was Mark Bezant from FTI consulting. He mentioned that he is amongst the FRAND experts in the pending UK case of Unwired Planet v Samsung and Huawei [last reported by IPKat here]. He noted the two key issues in FRAND disputes: (a) the obligations placed on the SEP holders, and (b) the appropriate level of royalty rates. After reminding the audience of some of the methods discussed by Garreth Wong, he mentioned particular issues that arise in practice, such as having to rely on outdated licences or inherently complicated agreements. With respect to the incremental method of calculating royalties, he noted the difficulty in understanding the exact value a single patent has added to a standard. The most common approach, he explained, is looking at established comparable rates and matching them to the situation at hand. Mr Bezant concluded that one must establish a number of factors before assessing whether a licence is FRAND, such as the validity of the patents, the number of declared essential patents, the number of essential patents confirmed by a court, and the qualitative assessment performed by experts on the patents.

Sir Robin Jacob gave the closing remarks to end the session. He noted that while many issues had been discussed at the seminar, overall, standardization in the FRAND context works. The disputes we hear about are the isolated incidents, while out there in the world there are many companies negotiating licenses for many different technologies – we hold the evidence in our hands each time we use a smart phone. Standard setting bodies are working to create the best standard for consumers to use – their goal is not to embed particular patents in a standard, but to develop the best standard possible."

And so the age old question remains. What is the best forum for resolving patent and FRAND/SEP disputes?  It depends on who you ask...