Fordham 25 (Report 9): FRAND, SEPs & PAE's

Following on from the Pharma, IP and Competition panel, we stick with competition law issues, but change focus to the tech industry for a session on the latest developments in the perennially controversial area (or as discussed below, perhaps now less so) of SEPs and, later, NPEs.  Laura Whiting reports on the sessions:  

"FRAND/Standard Essential Patents 

This is not FRAND (it is a frond)

The panel was again introduced by Prof Daryl Lim and Nicholas Banasevic started by saying that he was pleased that there was now general consensus that there was a role for competition to play in relation to injunctions based on SEPs where there was a FRAND declaration.  Milan Kristof followed up on this by saying that although the CJEU's Huawei/ZTE decision has been criticised for not providing enough guidance on what is required in order from parties to SEP negotiations, in fact he felt that the CJEU had provided as much guidance as could reasonably be expected from a tribunal of its nature.  He commented that the roll-out of 5G and IoT could only lead to further litigation and that to address this the Commission is working on a policy paper which is aimed at plugging (some of) the gaps in the Huawei decision. 

Dina Kallay agreed that there had been a lot of progress in relation to FRAND commitments but did not feel there had been as much convergence between the varying viewpoints as might have been anticipated.  However, she felt the increased level of guidance from the courts was welcomed by industry.    David Por also thought the suggestion of convergence was optimistic.  There was still divergence in European national courts' application of the Huawei process which ranged from a "box-ticking" or "ping pong" approach all the way to the (UK style) detailed and careful analysis of the patents and licences in question.  In addition, he feels there is still insufficient guidance on the valuation of royalties from the courts.

Dirk Weiler

On the topic of setting suitable royalty rates, Dirk Weiler commented that the aggregate royalty rates for smartphones had not changed significantly from the high single digit rates (based on unit price) proposed by several companies for LTE in the mid-2000s.  He said that the big patent holders were interested in fostering the market rather than destroying it and that required a dialogue between patent holders and implementers, especially in the IoT sphere.  He does not think that the solution is government regulation but accepted that it might come to that if the market players could not agree suitable rates between themselves.  David commented that if the early LTE royalties offered by various companies were aggregated, they exceeded the total level of aggregate royalties per product that most companies considered reasonable.  That suggested that a solution may not be achievable by companies acting alone, and intervention may be required.  Timothy Syrett emphasised that in setting rates, he felt it hugely important that a licensor explains the merits of the patents in its portfolio and further justifies the level of its licence demand, potentially by reference to aggregate royalty rates.

Sir Robin Jacob commented from the audience that the UK Unwired Planet decision that a FRAND declaration amounts to an enforceable contract was, in his view, a game changer since it meant that the courts can now deal with the question of the appropriate royalty rate without further regulatory intervention.  Nicholas commented that the Commission still considered there was a role for competition law in setting rates, but agreed that now the principles had been established, national courts could implement them and the Commission was happy for them to do so - this was a positive development.

Dirk returned to the topic of transparency and said the ETSI IPR Committee were now focusing on increasing transparency as regards patent holdings.  In his view, the ETSI requirements for patent holders were very specific; however disclosure requirements varied between organisations in the industry and ETSI was therefore working to enhance its own declaration requirements and to make the declarations database more transparent.

Dina mentioned that industry was working on a "one stop shop" patent pool for cellular patents for 5G IoT devices which she hoped would be successful.  Dirk commented that there was ongoing discussions relating to 5G between the automotive/wireless industry; he repeated that in his view it was preferable for the industries to agree amongst themselves than for solutions to be imposed externally.

Fred faces off with the UP judgment

The panel turned next to an analysis of the UK Unwired Planet judgement (with Mr Justice Birss pricking up his ears in the audience).  Nicholas said that it was a fair application of Huawei/ZTE and while the Commission would have liked to have seen an analysis of the value of the technology ex ante as well as ex post, the decision reflected the principles that the Commission believes should be applied.  Milan commented that it was interesting to see the first European judgment which considered FRAND in detail – and that he would have welcomed even more discussion on the interaction between competition and contract law.  He noted that the General Court had held in Microsoft that FRAND could be a range as well as a single number and speculated that this could perhaps be considered in future cases.  

Dina Kallay

Dina welcomed the assessment of royalties on a global basis.  She thought the basis of the assessment was broadly consistent with Google v MMI in the US.  David noted that the judgment was very pragmatic and accepted that setting a FRAND rate will always involve a degree of approximation.  He responded to Nicholas's comment on FRAND ranges by saying that ranges were inherently difficult to set  Tim raised concerns about setting a worldwide licence without engaging in an analysis of where portfolio patents are (or are not) in force or valid: he felt that this placed the onus on the licensee to take a licence whether or not all the patents were valid.  He also noted that whilst royalty rates had been addressed in detail, he would also have liked to see further discussion of the appropriate royalty base to which those rates should be applied.

Jane Mutimear asked the panel whether any further regulatory involvement was really necessary (whether in traditional wireless industries or others) in light of the recent cases.  Nicholas agreed that prescriptive regulatory guidance was not needed but thought that, given the likelihood for IoT participants to be relatively inexperienced, some level of clarification could be merited to facilitate implementation of the principles already set out.  David suggested that although the initial cases in this area would inevitably be heavy with legal arguments, subsequent cases should be streamlined once an initial body of jurisprudence has been developed.

Patent Assertion Entities

After an introduction by John Richards, Nikolaus Thumm presented on a recent report on PAEs in Europe.  He introduced the history of activity by PAEs in the telecoms sector and noted that increasing interoperability is likely to see increased PAE activity in the automotive and white goods sectors, but that the report had found no evidence of assertions against European SMEs.

Whilst some commentators have suggested that the introduction of the UPC will lead to increased assertions by PAEs, Nikolaus suggested that the structure of the system contained some specific features which would prevent this. 

The FTC

Suzanne Munck followed up by commenting on the results of an FTC report on PAEs and said that the FTC had worked together with the JRC on policy in this area.  The FTC report defined PAEs as entities which have acquired their patent portfolios and do not work them (as opposed to NPEs, which file their own patents).  The study covered 22 PAEs and >300 asserting affiliates over a 5 year period and the FTC had observed two main business models, described as litigation PAEs and portfolio PAEs.  The FTC found that the separation between the two was clearly defined, with litigation PAEs obtaining 93% of their licences after bringing proceedings.  The portfolio PAEs typically negotiated licences without resorting to litigation (albeit they did sometime litigate, and negotiated under the shadow of litigation) and generally held larger portfolios.  The study looked at >37,000 patents, of which 75% had software related claims and therefore the study concluded that the majority of these issues were focused on the tech sector.

Scott W Burt suggested that the majority of so-called "troll problems" originated from litigation PAEs rather than portfolio PAEs, which in his view behaved like the licensing arm of manufacturing companies.  In response to a question about how much Conversant invested in R&D, Scott commented that its current R&D spend is zero – with its patent portfolio being a combination of patents developed in house with those bought in.   

Myles Jelf

Approaching matters from a more philosophical point of view, Myles Jelf started from the contention that patents reflect a valuable item of property awarded to the patentee in return for their disclosure of the patented invention to the public.  In his view, any change in the rules regarding injunctions or assertions in order to disfavour one or other category of patentees based on their business model was not merited – he noted that this could potentially have unintended consequences (for example harming universities or lone inventors who may not be able to afford to commercialise their own invention).  However, there was possibly a case for special treatment based on the scenario in which a patent is asserted.  For example, the FRAND rules for SEPs are designed to compensate for the distorted value of patents included in standards so that those patents do not acquire a value disproportionate to their technological contribution. 

Steven Lieberman suggested that the boundary between litigation and portfolio PAEs was graduated.  He saw an increasing trend in the US courts for conscientious judges to speed up early case resolution (for example by granting summary motions), which was itself driving a trend for earlier settlement.  He also commented on the value of the IPR procedure for swiftly resolving patent assertions where the strength of the asserted patent is low."