C.A.G. Insights

SEPs, FRAND and Antitrust

Courts, patent owners, attorneys and policy makers are currently working through challenges associated with the large numbers of patents, especially in the cellular phone space and other related wireless communication, that read on portions of the industry standards necessary to implement the technology to function with products from multiple competing vendors.   Such patents are termed “standard essential” and patent owners that are members of  industry standards setting organizations are often under an obligation to license such “standard essential patents” or “SEPs” to the industry on terms that are “fair, reasonable and non-discriminatory” (“FRAND”).   Numerous issues have developed as to when a patent is properly considered an SEP, when a FRAND obligation arise, what is the appropriate FRAND royalty, and whether pooling SEPs among a group to wall off others from implementing the standard raises antitrust issues.

Judge Gilstrap in the Eastern District of Texas recently considered several SEP issues in an opinion as to French law in patent litigation over FRAND rates brought by HTC against Ericsson.  Judge Gilstrap found that Telefonaktiebolaget LM Ericsson and Ericsson, Inc. (collectively “Ericsson”) own patents that are essential to the 2G, 3G, 4G, and WLAN standards.  Ericsson has also made a commitment to the European Telecommunications Standards Institute (“ETSI”) to license its SEPs on FRAND terms to companies that practice the standards.  This commitment is embodied in ETSI’s Intellectual Property Rights (“IPR”) policy and forms a contract between Ericsson and ETSI, in which standards-implementers are third-party beneficiaries.[1] The ETSI IPR policy expressly provides that such contract is governed by French law.[2]

HTC argued that the FRAND royalty should be calculated based on the “smallest salable patent-practicing unit” (“SSPPU”) in the devices.  Ericsson disagreed that such calculation based on the SSPPU was required by the ETSI IPR Policy under the law of France.  Clause 6.1 of the ETSI IPR policy provides:

6 Availability of Licenses

6.1 When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL                        SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory (“FRAND”) terms and conditions under such IPR to at least the following extent:

— MANUFACTURE, including the right to make or have made customized components and sub-systems to the licensee’s own design for use in MANUFACTURE;

— sell, lease, or otherwise dispose of EQUIPMENT so MANUFACTURED;

— repair, use, or operate EQUIPMENT; and

— use METHODS.

The above undertaking may be made subject to the condition that those who seek licenses agree to reciprocate.

ETSI Rules of Procedure, Annex 6, Clause 6.1.   Ericsson argued that the ETSI IPR Policy does not mandate any specific calculation method for a FRAND royalty in a license agreement.  Judge Gilstrap agreed, and also found that clause 6.1 does not specify when or if a license must be granted on FRAND terms only as to “sub-systems.”

The parties then argued that industry practice was relevant to interpretation of the SEP FRAND obligation required by the ETSI IPR Policy as construed under French law.   Ericsson’s industry licensing expert opined:

that at the time the ETSI IPR policy was adopted, the general industry practice was to offer licenses based on the price of the end-user device, and not on the component-level. He explains that this “prevailing industry practice in 1994 (which remains in place today) is reflected in the language of the ETSI IPR Policy, and the ETSI IPR Policy was understood not to upset that practice.” In particular, he states that “licensing chip suppliers or using a component such as the chipset as a basis of reference for calculating FRAND royalties are not in line with industry practice in the mobile telecommunications industry” and that such a practice is not “contemplated, [] much less even mandated, by the ETSI IPR Policy or any other provision of the ETSI Directives.”  (Citations omitted.)

HTC’s expert opined conversely:

The ETSI IPR policy was adopted by a majority, and not unanimous, vote, and thus does not necessarily reflect a “common intent” shared by all of its members.  As such, he explains that a French court would interpret the FRAND commitment “based on what a reasonable person would understand in the context of the declaration at the time it was signed by the patent holder.” In his opinion, this would entail “an objective approach that focuses on how the contract can flourish in the present time that is reasonable and fits with the needs of the contract” and “in a way that would be compatible with EU competition law” given its “important role in the adoption of ETSI’s IPR Policy.” He explains that this would necessarily result in a finding that “the right to obtain a FRAND license includes a benefit for component-level—as well as end-device— manufacturers” and that “French law does not support an interpretation of Clause 6.1 of the ETSI IPR Policy to mean that an IPR owner need only grant licenses for end-user devices based on the price of those devices as opposed to the SSPPU component-level pricing.” (Citations omitted.)

Ultimately, Judge Gilstrap sided with Ericsson holding that as a matter of French law, the ETSI IPR policy did not require a FRAND license for an SEP patent be offered by Ericsson at the presumably lower rate based on the SSPPU as the royalty base.  This opinion illustrates the very fact-specific nature of the SEP FRAND debate, and the importance of the IPR policies implemented by the various standard setting organizations (“SSO’s”) necessarily involving global cross-border issues of law.  The opinion is civil action no. 6:18-cv-00243-JRG, in the E.D. of Tex. (Jan. 7, 2019).

The inherent tension between fairly rewarding innovation through patent protection while not inhibiting economically beneficial competition within the industry and within a given Standard Setting Organization is further illustrated by the speech (available here:  https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-19th-annual-berkeley-stanford) on December 7, 2018 at the Berkeley Advanced Patent Law Institute, where United States Assistant Attorney General for the Antitrust Division Makan Delrahim announced that the Department of Justice was withdrawing from its 2013 guidance on remedies for standard-essential patents subject to FRAND commitments.

Mr. Delrahim summarized the concerns regarding SSO’s and patent protection as follows:

With all these interests pulling the inventor in different directions, the question is whether we are doing everything we can to preserve the fundamentals that encouraged innovation in the first place.  I fear that at the intersection of patent and antitrust law, some have lost sight of that goal.

Today, I will discuss how standard-setting organizations have formed around innovators.  When they work well, they translate ingenuity into usable, commercialized technologies.  When they don’t, they can run the risk of stifling innovation.

He explained that even in the carefully balanced context of the Supreme Court opinion in eBay governing when an injunction may be issued in favor of a patent owner in the competitor context, he did not rule out that such injunctions may be appropriate even for an SEP to protect and foster innovation in the field.  He emphasized his view that a FRAND commitment entered into with an SSO by a patent owner/innovator should not create a compulsory licensing scheme.

He stated the change in policy as follows:

in the interest of clarity and predictability of the laws, and among the patent law community with whom we share the goal of incentivizing innovation: The Antitrust Division is hereby withdrawing its assent to the 2013 joint “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.”

The 2013 statement has not accurately conveyed our position about when and how patent holders should be able to exclude competitors from practicing their technologies.  We will be engaging with the U.S.P.T.O. to draft a new joint statement that better provides clarity and predictability with respect to the balance of interests at stake when an SEP-holder seeks an injunctive order.

The underlying concern is that the SSO’s have become so powerful with so many members resulting in what has effectively become a collective bargaining arrangement leading to a sub-optimal result for the owner of the SEP in licensing the innovation.   He characterized the negotiations over FRAND as less of a situation where the SEP owner is engaging in a “hold up” of the SSO, but rather that the SEP is “holding out” for a fairer deal.  He also recognized an antitrust concern presented by the situation where the SSO as a group may only agree to include an innovation that would be covered by an SEP in the SSO’s standard, if the patent owner, which has already incurred development costs, agrees to specific FRAND terms that would provide a significantly lower royalty than if the negotiation was at arm’s length.  Conversely, there is the opposite situation where a competitor group of patent owners may threaten to boycott an SSO offering FRAND licensing terms the group considers inadequate to their economic interests.  Such group action could also implicate the antitrust statutes.

This speech has proven controversial to many stakeholders.   There is undoubtedly further policy action forthcoming on the SEP and FRAND issues.

[1] See ETSI Rules of Procedure, Annex 6, Clause 6.1; Taffet, Richard & Harris, Phil, Standards and Intellectual Property Rights policies, in PATENTS AND STANDARDS PRACTICE, POLICY, AND ENFORCEMENT at 4-10 (Michael L. Drapkin et al. eds., Bloomberg Law Book Division, 2018).

[2] See ETSI Rules of Procedure, Annex 6, Clause 12.


By Ted Baroody