FRAND issues under consultation from different policy perspectives
Written By
Partner
Germany
As a partner in our Düsseldorf office, I lead our German competition law practice, specialising in IP-related competition law, competition law litigation and distribution-focused competition law.
Partner
Netherlands
I am a partner in our NL office, based in The Hague, where I was one of its founding lawyers in 2001.
Standardisation of technology generally requires holders of Standard Essential Patents (“SEPs”) to commit to granting licences for the use of their patents as part of the standard on Fair Reasonable and Non-Discriminatory (“FRAND”) conditions. In the “smartphones war” cases (Motorola and Samsung), the European Commission stressed that the refusal of the SEPs holder to grant a licence for the use of the patented standard technology to a competitor, who is willing to accept such FRAND conditions, does constitute an abuse under Article 102 TFEU. Recently, the Commission addressed FRAND issues in a number of consultations from different policy perspectives.
First, the Commission (DG GROW) is currently consulting on a new framework for SEPs. The concept of licencing and conducting business on FRAND terms is a core concept of many Intellectual Property (“IP”) licencing agreements, particularly in relation to standardised technology and standardisation discussions. However, the Commission reports that some users have found that the system for licensing SEPs is not transparent, predictable or efficient. The Commission is therefore consulting to develop a fair and balanced licensing framework and may combine legislative and non-legislative action.
In parallel, the Commission (DG COMP) has been working on revision of the horizontal block exemption regulations (HBERs) and guidelines on horizontal cooperation in the EU (Horizontal Guidelines). On March 1st 2022, the Commission published drafts for the revised HBERs and Horizontal Guidelines and invited comments in a consultation that is open until 26 April 2022. Chapters 7 and 8 of the draft revised Horizontal Guidelines focus on Standardisation Agreements and Standard Terms, which include horizontal cooperation relating Standard Setting, SSOs/SDOs, Standard Agreements and FRAND licensing.
A third interesting development in relation to FRAND licensing is the Commission’s proposal for the Data Act, in which FRAND principles are proposed to be applied to data access. We will briefly discuss each of these developments below.
SEP Framework consultation
Issues the Commission wishes to address include ‘hold-up’, ‘hold-out’ and ‘forum shopping’. Potential implementers may opt-out from using the standards altogether, or they may use the relevant standards without a licence, assuming any risks related to SEP infringement. These problems may slow the pace of innovation and hamper development in critical technologies.
The Commission would like to encourage greater collaboration and seek to use mediation or negotiation where possible, to improve efficiency and reduce costly and lengthy litigation. They would also like to develop guiding principles and/or processes for (i) clarifying the concept of FRAND; (ii) negotiating FRAND terms and conditions; and (iii) determining appropriate level(s) of licensing in a value chain.
Lack of transparency and predictability on FRAND licencing terms due to confidentiality involved in licencing and negotiating
The confidential nature of licence negotiations means that coherent and meaningful information on FRAND terms and conditions are usually not made public. Both SEP holders and SEP implementers tend to keep this information confidential, including FRAND royalties. This means that implementers, including start-ups and SMEs, may not be able to factor licensing costs into their business models. It also means that licensors may have a hard time forecasting and collecting revenue. For the SEP Holders, it can be burdensome and expensive enforcing their patents in multiple territories where there is infringement, given that patents create national rights.
True essentiality and ‘quality control’ of portfolios
The Commission is concerned that there is no ‘quality control’ by independent third parties, unless the patents in question are examined in litigation or by a person assigned by a patent pool. According to some experts, only about 25-40% of all declared SEPs are truly essential for a given standard.
Draft Revised Horizontal Guidelines
In the draft revised Horizontal Guidelines the Commission has made a number of changes in relation to standardisation of (IPR-protected) technology, with some of the more notable ones discussed below:
Disclosure
There is a preference for specific IPR disclosure as opposed to blanket disclosure. When patent-holders give specific disclosure, it is believed to give the industry the chance to make better and more informed choices on the standard.
FRAND Valuation
The valuation methods for FRAND have been adapted, with the aim of seeking to achieve consistent and reliable valuations. Some of the suggested methods for valuation include:
- compare the licensing fees before the industry has developed the standard (ex ante) with the value/royalty of the next best available alternative (ex-ante) or with the value/royalty charged after the industry has been locked in (ex post);
- independent expert assessment; referral to ex ante disclosures of licensing terms, including the individual or aggregate royalties for relevant IPR, in the context of a specific standard development process; or
- royalty rates charged for the same IPR in other comparable standards may also provide an indication for FRAND royalty rates.
However, the Guidelines ultimately bow to the parties’ ability to litigate/arbitrate FRAND rates if valuation cannot be achieved otherwise.
Maximum royalty stacking
Maximum royalty stacking is no longer considered restrictive by object. Ex ante unilateral disclosures of most restrictive licensing terms or maximum accumulated royalty rate would be one way to enable the parties involved in the development of a standard to take an informed decision based on the disadvantages and advantages of different alternative technologies.
The concept follows the approach that parties ought to be aware of the likely cost of a standard, considering this as part of being well-informed when choosing a standard. It was noted that the royalty rate in any event ought to be capped by FRAND commitments. The Commission viewed this approach as conceptually similar to patent pools.
Licensing negotiation groups (LNGs)
LNGs will be viewed and analysed from a new perspective - as joint purchasers or as part of a joint purchasing agreement.
Data Act proposal
The EU Data Act proposal was launched on 23 February 2022, with the intention of ensuring fairness in the digital environment, stimulating a competitive data market, opening opportunities for data-driven innovation and making data more accessible for all.
One way of encouraging fairness and accessibility in relation to data-access is seen by way of the application of FRAND obligations.
- Where they are obliged to make data available, data holders must do so at fair, reasonable and non-discriminatory (FRAND) terms and to enter into corresponding agreements with the entitled recipients. It falls upon the data holder to prove that the terms offered are non-discriminatory.
- For disputes in relation to the determination of FRAND terms or whether data has been made available transparently, member states are obliged to set up, in addition to the respective state court system, a dispute settlement system consisting of dispute settlement bodies to be certified by the respective member states in accordance with the requirements of the Data Act.
For more insight in the proposed Data Act, we also refer to the following articles published by our colleagues:
- "Why IP lawyers need to pay attention to the EU’s draft Data Act” by Toby Bond and Katherine Stephens
- “EU puts forward new rules to enhance access to data in the digital economy” by Francine Cunningham
Conclusions
The legal, economic and practical implications of standard-essential patents the EU Commission is referring to are far from being the result of recent developments. Since quite some time, we see the excessive use, in some cases misuse, of the exclusionary potential of SEPs by some patent owners on the one side and systematic hold-out strategies by some market participants on the other side. This conflict has been subject to countless court decisions in national patent infringement cases, has been dealt with by the EU Commission namely under Art. 102 TFEU and been subject to guidance provided by the ECJ. Transparency as well as “value” and “quality” of patents have long been discussed as important elements – a one fits all solution so far has not been developed. Already now are independent third parties evaluating particular SEPs – judges in court cases between the parties concerned – and are FRAND conditions being negotiated between licensors and licensees as the legitimate entities in our market economy to decide on the price tag of a given offering.
There are certainly a number of unsolved issues and it will be interesting to see the approach the Commission is suggesting to take. Will new concepts of FRAND-access to data be helpful in specifying SEP related solutions? One may doubt it – in any case, “gate-keepers” of all sorts are in the focus and one can only hope that the Commission will be cautious not to undermine existing structures, procedures and policies as far as they provide for well-balanced solutions in the market place.
Co-authored by Chloe Birkett.
