Now is the time to act against holdout behavior and promote balance in SEP licensing
Throughout my career in patent licensing, one of my guiding principles has been to create a healthy balance that benefits the innovation ecosystem and a multitude of different business models, such as pure research and innovation as well as product manufacturing. Within a balanced system, innovators receive a fair return on their significant investments in R&D, and implementers can then satisfy consumer demand for ever more sophisticated devices. As the proliferation of connected devices in our daily lives shows, it has, for the most part, worked in mobile connectivity – but challenges still exist.
The licensing of standard essential patents in areas such as 4G and 5G cellular technologies, the latest video standards, and WiFi has enabled a succession of new devices to improve how we connect and consume media. Fair, reasonable and non-discriminatory (FRAND) licensing has enabled massively successful industries and will continue to do so provided we allow for this balanced ecosystem to not only exist but to thrive.
What is not well understood is just how delicate the balance is between innovators and implementers. This topic was the recent focus of an excellent paper from Professor David Teece and Kalyan Dasgupta from Berkeley Research Group titled, “Towards a solution for the hold-out problem: Restoring balance in the licensing of cellular SEPs.”
One of the areas that Teece and Dasgupta focus on is the FRAND commitment that innovators make to ETSI, the standards development organization that plays such an important role in the evolution of cellular standards such as 4G and 5G. They stress that there is a balance at the heart of this commitment that, in my opinion, is too often ignored by stakeholders in debates over SEP licensing.
In fact, ETSI’s IPR policy states that it “seeks a balance between the needs of standardization for public use in the field of telecommunications and the rights of the owners of IPRs.”
As Teece and Dasgupta stress, FRAND’s balance is vital to the healthy functioning of an innovation ecosystem. “The FRAND commitment does provide protection to the licensee, but it cannot be interpreted or implemented in such a way that the incentives of the upstream technology developers— the SEP holders or licensors---to participate in future standardization efforts are ignored,” they write.
Unfortunately, over the last 20 years or so, this seems to have been forgotten as a series of changes in case law, shifts in government policy, and commercial forces have fueled the rise of patent holdout whereby implementers drag their feet and refuse to take a license to patented innovation they use to generate profits. Chinese implementers, in particular, have engaged in constructive and non-constructive refusals to license on FRAND terms and are seeking to gain competitive advantage over their competitors elsewhere in the world.
This needs to end. We must maintain a level playing field that fosters the innovation ecosystem and encourages stakeholders to continue to invest in global standards for the benefit of consumers everywhere. The alternative is a fractured series of trading blocks and proprietary standards, which would not be beneficial to the global economy.
Our environment is challenging, and tensions exist. But there are encouraging developments both on a standard setting front and an enforcement front. First of all, it is worth stressing that licensing deals are done with some major implementers without the need to resort to enforcement. In terms of policy, the IEEE recently made a series of changes to its patent policy which has helped rebalance the IEEE’s position on licensing so that it is not as skewed towards implementer companies. While perhaps not entirely optimal, I view this change as a refreshing development in the right direction. On the enforcement front European courts are taking action to constrain holdout and are recognizing the asymmetry that exists between SEP licensors and licensees in FRAND negotiations. Win-win solutions can be achieved with the proper balance which is why we need to bring licensing into equilibrium.
Towards some solutions
So, what steps can we take to restore balance to SEP licensing? Well, there need to be very real penalties for companies that consistently holdout on taking a patent license. As some implementers have even publicly admitted, it can pay to drag out negotiations and even enter into litigation, knowing that they will ultimately have to pay no more than a FRAND rate. I question whether a company that holds out should be entitled to a FRAND license as a refusal to take a FRAND license does not allow for the right balance, and I would argue that anyone who does not commit to take a license should not be entitled to FRAND.
Quite simply, it cannot pay to holdout. As Teece and Dasgupta assert: “Critical to this endeavor of restoring balance is the recognition that infringement and holdout must not be profitable (and, in fact, ought to be penalized). In this context, (especially) recalcitrant licensees must not be put on the same footing as those who were (more) willing to sign up for licenses on FRAND terms.”
I have written in the past about how companies who are unwilling licensees should lose their FRAND defense and should face the prospect of either having to pay supra-FRAND royalties or lose the right to operate in that market. It would be the SEP FRAND equivalent of soccer’s red card.
Some of my arguments were echoed in a recent paper from former USPTO Director David Kappos and USC Professor Jonathan Barnett, who argued the case for enhanced damages in jurisdictions, such as the U.S., where it is particularly difficult to receive an injunction.
Unfortunately, Kappos and Barnett’s paper reflects another key driver of holdout – the lack of injunctive relief from U.S. district courts. For infringers with particularly deep pockets, damages awards are at times far more palatable than a sales ban. So, another way to add some balance to FRAND is through a much stronger injunctive relief regime, which carries real and meaningful consequences for the very worst holdout offenders.
The fact that some negotiations do breakdown into courtroom disputes is a direct result of the problems posed by holdout. One of the challenges of SEP FRAND licensing is that all of the major innovators in connected technologies, including InterDigital, license global portfolios but litigate within specific jurisdictions where courts decide on licensing terms related to patents granted in a particular jurisdiction.
The UK, through the Unwired Planet decision, has taken a lead in setting royalty rates for global portfolios, but I would argue that arbitration is often better suited to make global commercial determinations of this kind rather than national courts. Implementers are typically reluctant to agree to arbitration in large part because agreeing to arbitrate is in fact a commitment to take a FRAND license and litigating country by country allows them to holdout for longer and to add to an innovator’s costs.
But, if an implementer claims to be a willing licensee, then it would appear logical that they should also prefer the predictability and efficiency of arbitration – or they should simply engage in negotiation and settle the dispute.
I welcome efforts to encourage arbitration, such as an initiative from the World Intellectual Property Organization (WIPO) which has recently attracted the support of the U.S. Patent and Trademark Office (USPTO), but more needs to be done to encourage implementers to agree. Dispute resolution should always be efficient and not cost prohibitive so that only the innovators with the deepest pockets can defend their intellectual property.
And, to finish with something of a more personal plea, we need to shift the tone on licensing to one that celebrates a fair and efficient mechanism for disseminating advanced technologies into new devices and, ultimately, into consumers’ hands. Technological innovation brings about economic and societal growth. Standardization and licensing let a broad universe of innovators take part in the development of technology and, in turn, re-coup a fair return on their considerable investments in R&D.
On balance, that can only be a good thing for the future of technology in an increasingly connected world.