les Nouvelles November 2021 Article of the Month:
FRAND For All, Or Just Some?
Potter Clarkson LLP
UK (London and Nottingham)
Following the Supreme Court’s affirmation of the decision in the Court of Appeal in Unwired Planet v. Huawei,1 it is clear that where the UK Courts are seized with an action of this type, they have the discretion and the power to determine the terms of a global license that they consider to be “fair, reasonable and non-discriminatory” (FRAND). Debate continues as to the likely longer-term effects of the Unwired Planet decision and the effect it will have on both Standard Essential Patent (SEP) holders and those using technology covered by SEPs, particularly in relation to whether the balance of power has shifted in favor of SEP holders or users of such technology in light of this decision.
Although that debate is clearly pertinent for those operating in the telecommunications industry, this article concerns a broader assessment of FRAND licenses and their potential utility as a remedy. In particular, the Unwired Planet decision is a step towards greater autonomy for the English Courts, and appears to grant them with the power to provide applicants with global relief in the form of a FRAND license.
Much in the way that Arrow2 jurisprudence has been expanded beyond its original pharmaceutical beginnings, for example in Mexichem v. Honeywell,3 it is of legal interest to consider whether, in light of an increasingly globalized economy, the scope of FRAND be extended beyond the traditional telecoms sphere into other industries.
Before analyzing these propositions in more detail, a brief summary of the key concepts that are integral to the proposed evaluation is provided below.
Determining a “Standard Essential Patent”
The process for designating a patent as an SEP is rather unusual in that the patent holder generally proposes to a Standard Setting Organization (SSO) that its patent is essential in respect of a certain technological area. In most cases, this relates to telecommunications, where the relevant SSO is the European Telecommunications Standards Institute (ETSI), which is commonly referred to in cases such as Unwired Planet. Other SSOs include CEN (European Committee for Standardization) and Cenelec (European Committee for Electrotechnical Standardization). This “patentee-led” approach is enshrined in the ETSI standard (to which most FRAND cases relate), although it is not the exclusive method of establishing whether a patent is “Standard” and “Essential.” This has been a matter of dispute in cases such as Nokia v. Interdigital,4 where it was determined that the English Court can evaluate and confirm, by way of declaration, whether or not the performance of the required standards (e.g., the 3GPP standard in this case) would necessarily infringe the claims of the patents. As such, it was held to be within the jurisdiction of the English Court to decide whether or not the four patents in suit were, in fact, SEPs. In light of this, at least under the laws of England and Wales, a third party (i.e., neither the patentee nor the SSO) can seek determination of the “essentiality” of a patent in respect of a specific standard.
This framework has predominantly been applied to the telecommunications industry, with ETSI being the most developed SSO in determining and policing SEPs. However, to what extent does this ETSI-led system allow us to evaluate the feasibility of a broader FRAND system? For the purposes of a concise article, I do not propose to labor the points relating to the notification systems in place in order to avail oneself of the protection afforded by FRAND licenses (e.g., the steps set out in the Huawei v. ZTE CJEU decision).5 Instead, I will focus on the principles of essentiality (as currently defined by ETSI) and consider how this could be extrapolated into FRAND licenses that are available across a far wider range of industries.
Clause 15.6 of ETSI’s IPR Policy6 defines “essential” as:
taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate EQUIPMENT or METHODS which comply with a STANDARD without infringing that IPR. For the avoidance of doubt in exceptional cases where a STANDARD can only be implemented by technical solutions, all of which are infringements of IPRs, all such IPRs shall be considered ESSENTIAL.” (emphasis added).
As is clear from the above, the relationship between the technology itself and the definition of the standard is critical in determining essentiality. A “Standard” is defined in 15.11 of the ETSI IPR Policy and reads as follows:
“‘Standard’ shall mean any standard adopted by ETSI including options therein or amended versions and shall include European Standards (ENs), ETSI Standards (ESs), Common Technical Regulations (CTRs) which are taken from ENs and including drafts of any of the foregoing, and documents made under the previous nomenclature, including ETSs, I-ETSs, parts of NETs and TBRs, the technical specifications of which are available to all MEMBERS, but not including any standards, or parts thereof, not made by ETSI.”
Therefore, it is the role of the SSO to determine the scope of the standard, and essentiality will therefore be assessed on the following basis:
- What does the defined standard as set out by the SSO require the technology to do?
- On the basis of the state of the art at the time of standardization and using normal technical practice, can a third party make, sell, lease (etc.) equipment or methods which comply with the standard without falling within the scope of the claims?
- If the answer to (2) above is no, then the IPR is essential.
Importantly it is not commercial constraints that matter (e.g., the cost of the technical alternative), but whether or not there is a technical alternative. However, the determination of whether such an alternative exists crystallizes at the time of the standard being set, rather than being assessed “from time to time.” As such, the creation of a “standard” will fix those patents that cover that technology at that time, but this does not mean that further innovation is not possible in order to achieve improvements to the technology that still meet the above base requirements. In this way, SSOs can provide for standards that will determine SEPs without suppressing innovation.
Rationale for an Expanded FRAND System
We are living in a world where a constant tension exists between globalized companies who are technologically dominant in areas that are seen as requiring change (e.g., fossil fuels) and the promotion of new goals in consumerism such as sustainability, reduction in pollution and protection of the natural world. On both sides of the fence, protection of intellectual property remains vital to provide an incentive for innovation, but there may be a way of opening up certain critical innovations to a wider group of licensees, where these innovations subsist in areas of technology with standards that require compliance in order to trade. This would also cater to scenarios such as nationalized services and the opportunity for a greater level of regulation in areas where there is likely to be substantial environmental impact. For example, standardized methods of humane farming, fishing, etcetera, could be imposed and regulated by government standards (even if the techniques themselves are patented), but third-party trading could be preserved, subject to SEP and FRAND systems.
The expansion of the FRAND licensing system could also create a platform for greater standardization in areas traditionally dominated by patent thickets, in the knowledge that FRAND licenses would be available to those who wished to trade using the standardized technology. This, in turn, would potentially provide an incentive for large, globalized companies to develop technologies with broad utility in the knowledge that licenses would need to be concluded on a FRAND basis. As has been reinforced in Unwired Planet, where a third party begins to trade without seeking a license from the SEP holder (or making it clear that it is willing to engage in a license on FRAND terms), remedies such as injunctions are still available to the patentee.
A further benefit of a wider doctrine of FRAND licensing is that it may allow third parties to be responsive to statutory changes without the need to conduct detailed freedom to operate searches (FTO) in order to develop a solution that falls outside the scope of existing patents. For example, this is relevant to emission levels for cars, environmental restrictions or food standards. One can imagine a scenario where a combination of legislation and SAE standards require a specific method of filtration of petrol fumes by all automotive manufacturers. Rather than needing to develop a system that falls outside the scope of what would be considered an SEP in that area, the manufacturer could simply instigate the process of seeking a FRAND license in accordance with the steps set out in the Huawei v. ZTE CJEU decision.7
Infrastructure Needed for FRAND
As discussed above, SSOs are currently required in order to determine whether patents should be designated SEPs or not. Although the court (as confirmed in Nokia)8 can do this in principle, it makes little sense to increase the workload of an already stretched IP judiciary. This being the case, it would be logical to designate regulatory bodies or perhaps even Non-Governmental Organizations (NGOs) as the “SSO” for particular areas of commerce or technology. Additional bodies may need to be established, but in the UK (for example) it is reasonable to suggest that the Financial Conduct Authority may be the appropriate body to operate as the SSO for fin-tech patents, such as those covering blockchain technology and online banking. Technology is advancing at a substantial rate, and it is likely that technology such as blockchain could form the basis for secure transactions both nationally and internationally. It would be logical for banking authorities to prescribe a uniform blockchain technology such that both new entrants and existing bodies are able to trade using a universal and secure system.
It may be that, for global industries, a sole international SSO is advisable, or even required, such that there are no national variations between which patents are SEPs and subject to FRAND. However, given the system of national patent designations, even within the European Patent Convention countries, it may be that a European Patent accepted as a SEP may not be in force in a specific territory. This being the case, although a single SSO may be administratively more efficient, it would be no more complicated for a third party to establish which technologies are subject to SEPs, and which are not, on a country-by-country basis rather than conducting a standard FTO.
In order to ensure that SEPs are assessed and declared consistently, each SSO will need to agree to implement a policy similar to that of ETSI and ensure that this is enforced. Alternatively, national legislatures, or even pan-national organizations such as the EU, may elect to prescribe basic criteria for the consideration and declaration of SEPs in legislation.
Finally, SSOs may elect (in a manner similar to the construction industry’s “JCT” contracts) to provide a standardized license arrangement for FRAND arrangements in their respective industry. If this were to be the case, this could open new workstreams for licensing specialists in the intellectual property industry, both in drafting these licenses and advising on policy for each of the SSOs.
Benefit and Burden of a Broader FRAND
In light of greater concerns internationally in relation to the environment, universal healthcare systems (e.g., to overcome pandemics) and food production, broadening the scope of SEPs and FRAND could be an important step in rewarding innovation without creating a “closed market” in key areas. For example, one could see benefit for both patentee and society as a whole if technologies were accepted as the standard and consequently adopted nationally or internationally. The FRAND system would allow competition between the patentee and the licensees, although the existence of a “fair” royalty rate should still allow a patentee to maintain a lower price point for its products. In addition, these systems could encourage the growth of a greater proportion of pure innovation companies in areas which have been traditionally dominated by large manufacturers with R&D functions. An innovation company would be able to develop technology that could be adopted as an SEP without the need or ability to manufacture the products themselves in order to secure revenue.
Moreover, a broader FRAND system could be vital for preserving innovation in nationalized industries, without subjecting the national body to monopolies of single enterprises. For example, were rail to be nationalized, the ability to declare specific technology such as improvements to electrification, rails, motorization and so on as a SEP would facilitate uniformity of technology across an entire rail network, while allowing third-party manufacturers (other than the patentee) to effectively tender for the production of this technology under a FRAND license.
However, as has been seen from the most recent Unwired Planet decision,9 FRAND does not mean that there cannot be any variation in the contractual terms upon which licenses are granted to willing licensees. In this particular case, Samsung was able to negotiate a settlement license on terms that were more favorable than those finally awarded as between Unwired Planet and Huawei. Despite Huawei arguing that it should not be disadvantaged compared to Samsung by the license awarded, the Supreme Court held that “Non-discriminatory” did not mean “uniform.” This being the case, freedom of contract would not necessarily be stymied by the imposition of a FRAND system, as there is still room for negotiation of key terms.
Perhaps the greatest burden in the proliferation of the FRAND system is establishing the SSOs who will manage this system. As discussed above, this may require legislative change, as many bodies are unlikely to take proactive steps to move towards this system independently. Consultation with these bodies would be required, as would consultation with representatives from the relevant industry to establish whether such systems are practical.
Finally, national SSOs selecting SEPs, pursuant to a prescriptive standard, could be regarded as distorting competition within the European market. For example, if entrants to a particular market in the UK were required to take a FRAND license in order to meet national standards, and therefore trade with a specific body (e.g., the NHS or a nationalized rail authority), this may be deemed a form of protectionism. Further insight from competition experts would be needed to determine this. Such risks may mean a pan-European form of standard setting would be preferable to the implementation of national systems.
Recent case law has demonstrated that the UK Courts are taking greater control over FRAND licensing in the telecoms industry and are willing to impose global license terms where they are appropriately seized with jurisdiction, in order to resolve matters in dispute. It remains to be seen whether this jurisprudence will have a greater impact on the telecoms industry as a whole, including whether we will see more applications to the UK Courts for determination of global license terms between parties in conflict.
Nevertheless, the FRAND system and SEPs appear to provide an opportunity in certain sectors to balance standardization and regulation with the promotion of innovation. In a global economy, where international protocols are putting governments under greater pressure to reduce their emissions and provide healthcare solutions for their entire population, and popular pressure is driving food security and welfare standards forward, FRAND and SEPs may be part of the solution beyond just the telecoms industry.
It may be that, on balance, the administrative burden of putting FRAND licensing systems in place is simply too great to be effective, or that industries do not welcome an additional layer of complexity to an already complicated system of patent protection. Of course, consideration will also need to be given to any “gaps” that may exist to allow third parties to exploit such a system or any unintended consequences, such as diminution of value in patent portfolios as a result of FRAND licenses being available for SEPs. Nevertheless, it seems that Samsung and Huawei (among others) continue to thrive in the telecommunications market, and it may well be the case that FRAND could indeed be suitable for all, or at least, more. ■
Available at Social Science Research Network (SSRN): https://ssrn.com/abstract=3773037.
-  UKSC 37.
- Arrow v. Merck  EWHC 1900 (Pat).
- Mexichem UK Limited v. Honeywell International Inc.  EWHC 3377 (Pat).
- Nokia Corporation v. InterDigital Technology Corporation  EWHC 3077 (Pat).
- C-170/13—Huawei Technologies.
- C-170/13—Huawei Technologies.
- Nokia Corporation v. InterDigital Technology Corporation  EWHC 3077 (Pat).
-  UKSC 37 at para 126.