Academic spotlight (II): Borghetti, Nikolic and Petit on FRAND licensing levels

The second post in this academic spotlight miniseries [see here for part I on NPE activity] is on a study by Jean-Sébastien Borghetti, Igor Nikolic and Nicolas Petit, entitled 'FRAND licensing levels under EU law' [here]. This paper was discussed in a webinar hosted by 4IPCouncil called FRAND licensing levels under EU law: components or end device? [recording here].

Borghetti, Nikolic and Petit

Much ink has been spilled on the topic of this paper: are Standard Essential Patent [SEP] owners that committed to licence their patents on Fair, Reasonable and Non-Discriminatory [FRAND] terms obligated licence any entity in the supply chain, or may they opt to licence only end device manufacturers? For instance, if a SEP covers network technology used in a car, may the SEP holder choose to grant licenses only to the car manufacturer [= end device level], or must they also grant licenses to the car manufacturer's suppliers if they wish? The debate is summarized in a Katpost here.

The authors of the paper conclude that in the EU, there is no legal basis to impose an obligation to licence SEPs to any interested party, i.e. also to upstream suppliers. That makes for a fresh contribution to the literature, which generally supports a Licence-to-All obligation see [e.g. here, here and here, but also – for a concurring view – here].

The main findings of the paper

1 – General principles of EU law

The paper first looks at the general principles of legitimate expectations and non-discrimination in EU law. The authors find that the scope and content of the SEP holders’ obligation is determined by the FRAND commitment, so that the general principle of legitimate expectations cannot impose an unqualified duty to licence to all [at 10].

As to non-discrimination, the authors find that the text C-170/13 Huawei v ZTE, the landmark SEP case of the Court of Justice of the European Union (CJEU), only prohibits discrimination among the licencee and its competitors, and that it would be difficult to ensure horizontal non-discrimination while maintaining vertical non-discrimination [at 13].

2 – Patent law

Here, the authors suggest that the majority of SEP’s have claims that are only infringed at the end device level. This means end device level licensing is more efficient, because the end device manufacturer will almost always need a separate license to cover all patent claims [at 17].

3 – Contract law

Next, the authors find that the patentee's duty (or not) to licence at each level of the supply chain is first and foremost determined by the particulars of the specific FRAND commitment [at 19].

To illustrate this, the authors analyse the ETSI IPR Policy, which is governed by French law. They claim that it is most plausibly interpreted as an “engagement unilateral”, whereby one party – here, the SEP owner – “unilaterally undertakes to undertake a commitment towards the other party’ [at 21]. The authors believe that the text of this commitment does not resolve whether licences must be made available to component manufacturers, but argue that according under French canons of interpretation, there is reason to assume that the "engagement unilateral" excludes them [at 30-31].

4 – Competition law

As the last prong of their analysis, the authors reject the idea that competition law could form a basis to impose a LTA obligation.

They argue that a successful appeal to Article 102 Treaty on the Functioning of the EU would require an “extreme set of facts”, for instance where “an SEP holder refuses to licence all and any third party” [at 37]. According to the authors, appeals to this provision by proponents of ATA are misguided because they conflate “a refusal to grant a licence with a refusal of access to the standard” [at 36].

This is because exclusion from the market – a constitutive requirement under Art. 102 TFEU – only follows from an injunction. In other words, implementers can use the standard so long as the SEP holder does not file suit against them. And if the SEP holder doesn't, e.g. because they want to licence only at the level of OEM manufacturers, component manufacturers are not excluded from the market. Even if they do bring suit against component manufacturers, the authors state that such component manufacturers are protected by the Huawei framework [see also the webinar recording at 37:00].

Comment

The primacy of the FRAND commitment

It seems fair to Merpel that general principles of EU law, patent law and competition law, by themselves, do not impose an obligation to extend licences to any party requesting them. Patents function as property rights, and the patentee is in principle free to decide whom to licence subject to principles of exhaustion. The CJEU has long settled that competition law restricts that freedom only in exceptional circumstances.

However, the patent holder may choose to limit that freedom by extending a FRAND commitment, for instance according to the ETSI IPR Policy.

In Huawei, the CJEU held that SEP's are different from ordinary patents because (1) they are indispensable to practice a standard established by a standardization body [at 49]; and (2) they obtained SEP status only in return for an irrevocable undertaking on the part of the SEP holder that the patent would be licenced on FRAND terms [at 51].

Crucially, the abuse under art. 102 TFEU is linked to the breach of that commitment by the SEP holder, which violates implementers' legitimate expectations that they would be granted a licence on FRAND terms [at 53 and 59]. That commitment is only honored if the SEP holder complies with its obligations under the Huawei framework, and the implementer is only protected by that undertaking to the extent it is in fact a willing licencee, i.e. that it also complies with its obligations under this framework.

The issue, then, is to determine the nominal addressees of the FRAND commitment [in the case of ETSI: of the "engagement unilateral" given in the IPR Policy]. Merpel agrees with the authors that this is essentially a question of contract interpretation. There are then two possible scenarios.

Scenario 1: component manufacturers are not nominal addressees of the FRAND commitment

If proper construction of the FRAND commitment reveals that it is only addressed to end device manufacturers and not to component manufacturers, a component manufacturer seeking a licence cannot derive a right to a FRAND licence from this commitment. In the paper, the authors argue that this may be the case for the ETSI IPR Policy, though during the webinar they seemed to concede that reasonable minds may disagree on this point.

At 10, the authors state that third parties which are not nominal addressees of the FRAND commitment may still "benefit from the Huawei v ZTE negotiation framework". That is remarkable, because Huawei's negotiation framework is triggered by an implementer's legitimate expectations of obtaining a FRAND licence, but those legitimate expectations can only arise among addressees of the FRAND commitment.

Conversely, if the FRAND commitment is not addressed to a certain class of implementers [such as component manufacturers], that class of implementers may not harbor legitimate expectations of obtaining a FRAND licence. It would seem that, consequently, the Huawei framework does not apply to them. If Merpel is right on this, excluding component manufacturers from the FRAND commitment would be more consequential than the authors suggest.

To be sure, such implementers may still rely on competition law cases like C-241/91 Magill to obtain a licence. After all, the CJEU held in Huawei that every SEP is "indispensable" to competitors which envisage manufacturing products that comply with the standard to which it is linked [at 49].

Still, as a matter of policy, the situation seems undesirable because the rights of, and legal protection for, implementers would differ between standards, depending on the standard body's IPR policy. Indeed, one of the authors stated that this situation would involve "a lot of complexity" [webinar, 1:10], and such fragmentation threatens to undermine the very purpose of the FRAND commitment. Presumably, standard-setting organizations will want to avoid this outcome, which may be a relevant consideration when applying canons of interpretation to the commitment.

Scenario 2: component manufacturers are nominal addressees of the FRAND commitment

To the extent that the FRAND commitment is addressed not just to end device manufacturers, but also to component manufacturers, those component manufacturers will have legitimate expectations of obtaining a licence on FRAND terms [Huawei at 51, 53].

The authors devote attention to the nature of these legitimate expectations in the paper, tracing their origins to EU administrative law [at 6]. But perhaps it is more plausible to assume they arise from contract law, since one of the authors stated that even before the conclusion of a licence, the SEP holder and the implementer are in a contractual relationship [webinar, 52:30]. Indeed, in many jurisdictions, legitimate expectations can give rise to precontractual liability. Under Huawei, breaching those expectations is a violation of Art. 102 TFEU. The relevance of applications of the legitimate expectations principle in administrative law is not immediately clear to Merpel.

The big question is whether these legitimate expectations entitle any nominal addressee of the FRAND-commitment to pro-actively bring suit against the patentee to request a licence on FRAND terms [see here for an example of a case where this was tried].

The authors seem to believe that no such entitlement exists. In theory, the argument could be made for a limited expectation that implementers will not be exposed to a threat of an injunction without receiving a licence offer first. In this narrow reading, implementers are only shielded from the threat of injunctions and may harbour no expectations of obtaining a licence independently of enforcement by the patentee.

Merpel would oppose that reading for two reasons.

First, it sits uneasily with the actual text of the CJEU's decision in Huawei and, in most cases, the text of the FRAND commitment. In para 53, the CJEU speaks of legitimate expectations "that the proprietor of the SEP will in fact grant licences on [FRAND] terms". Thus, the CJEU does not link the expected grant of a licence to enforcement in any way. Likewise, par. 6.1 of the ETSI IPR policy does not limit the commitment to "grant irrevocable licences" to an enforcement context.

Second, it would expose implementers to great uncertainty over if and when the patentee may decide to enforce their patent against them. True, at the moment of enforcement the patentee must offer the implementer a FRAND licence. But the financial impact of even a FRAND-licence can be substantial, particularly if retrospective royalties are due. Most businesses will want to have the opportunity to plan for such a liability and/or adjust their prices to it. Thus, in a real-world context, component manufacturers are unlikely to derive sufficient assurance from an SEP-holder's practice of licensing only at the end device level [cf. webinar, 51:00].