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© 2013 Cleary Gottlieb Steen & Hamilton LLP. All rights
reserved. Throughout this presentation, “Cleary Gottlieb” and the
“firm” refer to Cleary Gottlieb Steen & Hamilton LLP and its
affiliated entities in certain jurisdictions, and the term
“offices” includes offices of those affiliated entities.
Maurits Dolmans Institute for Prospective Technological Studies,
SEP Workshop Seville, Oct 27, 2014
Defining FRAND Royalties and FRAND Terms and Conditions
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T&C What is a FRAND royalty - patent pools as comparators?
What base (phone or chip) - the difference between
– MSFT case (2012 judgment) – goal is to restore competitive
market – FRAND in SSO context – goal is to find ex ante incremental
value – Excessive pricing – goals is to avoid exploitation (abuse
only if price is
substantially above value) - Can “pre-willingness” damages be
supra-FRAND?
Overview
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What is the economically efficient level of royalties overall
(in view of creating innovation, spreading technology)?
Should the societal benefits of standards be reflected in
permissible royalty rates? How?
Should FRAND royalties be based on end products (interest of
innovators) or on product components (interest of
implementers)?
Are there upper or lower bounds for FRAND licensing terms (2, 5,
10%)? Should royalty fixing also consider the other royalties (i.e.
the royalties
for patents that are not standard essential) to be paid by the
licensee or should the fee only be related to what the standard
essential patents had contributed?
Should royalties consider an ex ante benchmark? Could more
transparent and more harmonized rules on patent
'essentiality' and FRAND licensing terms mitigate the risk of
conflicts? How?
Questions
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1. Principles, Relevance of Competition Law and Recent EC Cases
(Motorola, Samsung)
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Principle: industry-wide successful standards must be available
to everyone to implement
- Horiz. Guidelines, para 268: “If a company is either
completely prevented from obtaining access to the result of the
standard, or is only granted access on prohibitive or
discriminatory terms, there is a risk of an anti-competitive
effect
- SEP holders, esp. PAEs, should not use injunctions to hold up
“willing licensees”
- Various ways to achieve this availability to willing
licensees:
– Contract law, patent law (equity principles), competition law:
Standard setting (restriction of inter-technology competition) only
allowed if no abuse under 102 TFEU, and if conditions of “rule or
reason” / 101(3) TFEU are met, including:
– Necessity (no less restrictive alternative)
– Fair share to consumers – that means FRAND licensing
– No elimination of all competition – this means no injunctions
that could foreclose competitors
Standard-setting and FRAND
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Para. 269: “a participant holding IPR essential for implementing
the standard, could, in the specific context of standard-setting,
also acquire control over the use of a standard. When the standard
constitutes a barrier to entry, the company could thereby control
the product or service market to which the standard relates. This
in turn could allow companies to behave in anti-competitive ways,
for example by ‘holding-up’ users after the adoption of the
standard either by refusing to license the necessary IPR or by
extracting excess rents by way of excessive royalty fees thereby
preventing effective access to the standard”
Para. 285: “In order to ensure effective access to the standard,
the IPR policy would need to require participants wishing to have
their IPR included in the standard to provide an irrevocable
commitment in writing to offer to license their essential IPR to
all third parties on fair, reasonable and non-discriminatory terms
”
Para. 286: “IPR policy would need to require good faith
disclosure, by participants, of their IPR that might be essential
for the implementation of the standard under development. This
would enable the industry to make an informed choice of technology
and thereby assist in achieving the goal of effective access to the
standard.”
Para. 287: “FRAND commitments can prevent IPR holders from
making the implementation of a standard difficult by refusing to
license or by requesting unfair or unreasonable fees (in other
words excessive fees) after the industry has been locked-in to the
standard or by charging discriminatory royalty fees. ”
FRAND promises and disclosure in Guidelines on Horizontal
Agreements
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EC adopted decision against Motorola for seeking and (briefly)
enforcing injunction against Apple based on FRAND encumbered
SEP
- seeking and enforcement of an injunction against Apple …
amounts to an abuse… [since] clear indication that Apple was not
unwilling to enter into a licence agreement on FRAND terms and
conditions” (Motorola, para. 280)
- Apple reserved right to challenge validity and infringement of
the licensed SEPs
Motorola v Apple (2014) -- background
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EC contradicted German court, which granted injunction because
Apple was not a “willing licensee” based on Orange Book case
law
Litigations took place against background of broader patent war
in the mobile industry waged by Apple, Microsoft, and others
against Android
- Steve Jobs: “I'm willing to go thermonuclear war on this”
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Motorola and Samsung: Apple’s huge portfolio = countervailing
power - Ability to punish or retaliate
EC ignored this (had to…, since otherwise precedent would fall
apart) - “countervailing buyer power is the buyer's ability (or
credible threat) to switch to
competing suppliers” (para. 243) – But there are other sources
of power, like ability to punish or retaliate
- “the Commission’s assessment of whether Motorola enjoys a
dominant position is based on the economic strength Motorola enjoys
as the holder of the Cudak GPRS SEP vis-à-vis the market as a
whole, and not on the basis of its negotiating position vis-à-vis
one or more customers such as Apple” (para. 241).
– In past cases, EC resolved this by defining separate relevant
product market for different customer categories. See Guidelines on
Market Definition, para 43
- “In cross-licensing negotiations between Motorola and Apple,
Motorola … has consistently evaluated the strength of Apple's
patent portfolio to be below the strength of Motorola’s own
portfolio. As a result, and regardless of whether Apple agrees with
such an assessment, Apple's large patent portfolio comprising both
SEPs and non-SEPs does not exercise a constraint.” (para 252-3)
– In reality, Apple did the same, and litigated aggressively,
and got injunctions
1. When Are SEP Owners Dominant?
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“seeking and enforcement of an injunction against Apple …
amounts to an abuse… [since] … Apple was not unwilling to enter
into a licence agreement on FRAND terms and conditions” (Motorola,
para. 280)
– “and” means both are required in the circumstances of this
case where Apple was unwilling between 2007 and at least until 2d
Orange Book offer in 2011
– Commission makes a point of mentioning the (< one-day)
“enforcement”
If the Samsung or similar process is being followed, and the
user has agreed to submit rate setting and T&Cs to court
review, then “seeking” may already be an abuse.
– But to say that “seeking” alone is an abuse when use is
“unwilling”, or it is unclear whether user is “willing” is wrong
under ITT Promedia, and impractical.
– ITT Promedia: a company cannot be prevented from going to
court to ask a judge whether the other side is “unwilling” and
whether an injunction is justified, unless that litigation itself
is vexatious – i.e., when it is clear than user is “willing”
So, is there a “safe harbour for patentees? – Press release /
Q&As leave open what happens if a user does not submit. –
Patentee must be able to use if the user refuses to submit (as ZTE
did in Huawei).
2. What exactly is the abuse –seeking injunctions?
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The Ostrich-head-in-the-sand prize for para 420: – “This risk of
reverse hold-up by Apple, however, does not arise in this case.” –
Para 441 “Apple's alleged unwillingness between 2007 and 2010 is
irrelevant for
the purposes of this Decision as this cannot justify Motorola's
continued seeking and enforcement of an injunction against Apple in
Germany on the basis of the Cudak GPRS SEP after 4 October 2011,
the date of the Second Orange Book Offer.”
– So: unwilling users can redeem themselves, even after years of
obstruction, even after injunction is granted
See also fn 349: “Motorola’s allegation that internal Apple
e-mail correspondence suggests that, when making its Orange Book
Offers, Apple may also have been hoping to delay the litigation,
cannot alter the fact that, as of its Second Orange Book Offer,
Apple was willing to enter into a licensing agreement with full
judicial review and determination of the proposed FRAND royalties
with retroactive effect by a court “.
– Does that mean there is no incentive to take early license?
Some incentive left: – Para. 399: “The Second Orange Book Offer
added that "LICENSOR reserves the
right to assert higher damages for these acts in addition to
this one-time royalty payment." The decision does not object to
that. See also para. 404-405.
3. What is “willingness”? – no attention to Apple’s
shenanigans…(focal point in Huawei v ZTE)
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FRAND principles now followed in various jurisdictions: -EC –
Rambus, IPCom, Samsung, Motorola – Huawei v ZTE
– D -- Orange Book; NL – Samsung v Apple; UK – Nokia v IPCom -US
– Rambus, Broadcom v Qualcomm, Bosch, MSFT v Motorola
(Robart), Apple v Motorola (Posner), Innovatio (Holderman),
Ericsson v D-Link (Davis), Wi-LAN v Alcatel Lucent (Davis), CSIRO v
Cisco (Davis), Realtek v LSI (Whyte), GPNE v Apple (Koh), Golden
Bridge v Apple (Grewal)
-China – InterDigital, Qualcomm? Exceptions include: -Licensee
breach of contract -Licensee who cannot pay -Licensee who refuses
per-standard reciprocity -Licensee who brings SEP-based litigation
against SEP holder
(defensive suspension)
Convergence EU, US, PRC: No holdup based on SEPs
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Motorola establishes the precedent (although facts didn’t fit
theory): - No injunction against a user who is willing to take a
license on FRAND terms - Request to license can be made at any
time, even years after litigation starts - A licensee is “willing”
if it offers FRAND fee and/or agrees to have FRAND
royalty set by court or arbitral tribunal - A licensee may be
“willing” even if challenging validity, infringement,
essentiality
Samsung Commitment Decision explains one way how this can be
done - Offer to give/take FRAND license, followed by period of
negotiation, and if that
fails, royalty and any disputed term are set by court of
arbitral tribunal Judgments in US already set FRAND rates
(Motorola, Innovatio) - And arbitration proceedings are pending
Huawei v ZTE (preliminary ruling) - Advocate General opinion
expected November 20, 2014
4. How to implement? Samsung (2014) and Huawei/ZTE (2015?)
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Samsung Commitments – FRAND setting process
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Lengthy negotiation period
No obligation to pay into escrow
No release if user challenges validity and infringement
Can FRAND rate be set probabilistically?
If so, how does it fit with ability to challenge validity and
infringement?
Can patent owner require global license?
Basic principle: Offer resolution process to set FRAND terms
Final Commitments; Commission decision of April 29, 2014
http://ec.europa.eu/competition/antitrust/cases/dec_docs/39939/39939_1502_3.pdfhttp://ec.europa.eu/competition/antitrust/cases/dec_docs/39939/39939_1501_3.pdf
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2. What is a FRAND royalty?
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1. Revealed preference of vagueness? -Used to be the case when
telecom operators dominated ETSI, who did
not compete cross-border – Now everyone is unhappy
2. Joe Farrell economic analysis suggests: collective interest
to charge outsiders and set off claims between insiders -Requires
Symmetry of patent ownership and business size ?
3. Participation constraint / trade-off – clarifying rules
chases members away, who then are not constrained and can hold up
members (Rambus!) -But those who leave SSO lose influence and
knowledge, - lose value in getting technology accepted / advance
knowledge
4. Gridlock in ETSI: desire to maintain holdup and holdout
opportunity…
Why is FRAND so vague? Why don’t SSOs clarify?
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What is FRAND royalty? Article 102 TFEU
• Price must bear reasonable relationship to “value” (102,
Swedish Ports) • “Value” = rate that the IPR owner could have
obtained in ex ante inter-
technology auction (Shapiro/Baumol Principle). Two aspects: • 1.
“incremental value” rule
– Value of innovation of technology A = (i) profit that licensee
gains if it uses A instead of next best alternative B + (ii) price
of B
• (i) = opportunity cost of “not using A and instead using B” •
(ii) Price of next best alternative B is probably competed down to
zero: this
benefit accrues to the consumer
• 2. Ex ante rule: incremental value to be calculated before
lock-in – When there still is inter-technology competition
• Check that IP owner did not take anti-competitive action to
diminish ex ante inter-technology competition, e.g. by buying
patents in all alternatives
– Ex post valuation inappropriate since it would allow patentee
to appropriate not just value of the innovation but also value of
licensee’s investments in innovation and implementation
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Assume essential patent for product - Royalty = licensee’s
opportunity cost of not using the patent =
net value of the market created by the patent - In case of an
essential patent, this is the entire monopoly value. Is that
“fair
and reasonable”? This is like the Dictator game (proposal to
share, take it or leave it) or
Ultimatum game (proposal to share, responder can veto) -
Rational SPNE = proposer gets greater of (a) proposer’s opportunity
cost of
licensing, and (b) 99%; licensee gets 1%. - If both parties (or
neither party) have alternative or if this is a repeat game
(equal power): in that case, rational SPNE is 50/50 sharing Is
this the actual outcome of negotiations in real life? Experimental
outcomes suggest that in practical reality, the patentee in
negotiations should not demand the licensee’s entire incremental
value - In many cultures, or if responder and proposer know each
other, or in repeat games,
proposer offers 50/50 to avoid reputation of greed and
unfairness. - In one-shot game, proposer often offers 30%, and
responder refuses offers
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18 18
FRAND: Parties do not generally expect licensors to appropriate
the entire incremental value
30-50%
One-shot game SPNE
One-shot game
Experimental
outcome
Num
ber o
f bid
s ac
cept
ed
Number of coins offered to responder
Experimental outcome indicates what this audience regards as
fair and reasonable That also gives indication what licensors and
licensees expect from each other when negotiating The rationally
optimal outcome for a one-shot game is NOT the normal outcome
These outcomes appear even where players are not constrained by
a promise to license on fair and reasonable terms
Privileged and confidential
http://naturalcureinsomnia.com/img/Bell-Curve.gifhttp://naturalcureinsomnia.com/img/Bell-Curve.gifhttp://naturalcureinsomnia.com/img/Bell-Curve.gif
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2. Ex ante rule consistent with 2004 Microsoft Decision
• EC: Dominant firm deserves revenues attributable to its
invention, but not “strategic value” (revenues deriving from ex
post ability to exclude rivals from neighboring market). Microsoft
2004, para. 1008:
• “terms imposed by Microsoft [must] be reasonable and
non-discriminatory… in particular: …
(ii) … remuneration should not reflect the “strategic value”
stemming from Microsoft’s market power…;
(iii) …restrictions should not create disincentives to compete
with Microsoft, or unnecessarily restrain the ability of the
beneficiaries to innovate;
(iv) … implementing the specifications will …constitute a
significant investment, which … vendors will not incur if they have
no assurance that the terms under which they can make use of the
disclosed specifications will remain reasonably stable.”
• Confirmed on appeal in Case T-167/08 Microsoft v Commission •
Conclusion: Hold-up not allowed; ex ante value is correct
criterion
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Ex ante valuation: consistent with Horizontal Guidelines
• In context of a standardization agreement, but of general
relevance • 289: “it may be possible to compare the licensing fees
charged by
the company in question for the relevant patents in a
competitive environment before the industry has been locked into
the standard (ex ante) with those charged after the industry has
been locked in (ex post). This assumes that the comparison can be
made in a consistent and reliable manner “
• Calculation after lock-in allows patent-owner to appropriate
not only the value of his innovation, but also the value of the
defendant’s innovation and value of his investments in bringing
product to market, and his reward for taking risk. –
Overcompensation – The very knowledge that such hold-up may happen
discourages
investment
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Also consistent with US law FTC Report on The Evolving IP
Marketplace
• “the incremental value of the patented invention over the
next-best alternative establishes the maximum amount that a willing
licensee would pay in a hypothetical negotiation.
• A reasonable royalty damages award that is based on high
switching costs, rather than the ex ante value of the patented
technology compared to alternatives, overcompensates the patentee.
It improperly reflects the economic value of investments by the
infringer...
• set the hypothetical negotiation at an early stage of product
development, when the infringer is making design decisions.
• for a patent subject to a RAND commitment [, c]ourts should
cap the royalty at the incremental value of the patented technology
over alternatives available at the time the standard was
defined.”
• But: not easy to establish....
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Incremental value rule hard to implement
• Posner J in Apple v Motorola: – “[t]he proper methodology of
computing a FRAND royalty starts with
what the cost to the licensee would have been of obtaining, just
before the patented invention was declared essential to compliance
with the industry standard, a license for the function performed by
the patent. That cost would be a measure of the value of the patent
qua patent. ... The purpose of the FRAND requirements ... is to
confine the patentee’s royalty demand to the value conferred by the
patent itself as distinct from the additional value — the hold-up
value — conferred by the patent’s being designated as
standard-essential.”
• But see Robart J in Microsoft v Motorola: – “Calculating
incremental value for multipatent standards ‘gets very
complicated, because when you take one patent out of a standard
and put another one in you may make other changes, the performance
of the tandard is multidimensional, different people value
different aspects”
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This works if there were substitute technologies before
technology was chosen, and data were available on price and
relative quality
• as complainants argued in Rambus
If direct data are unavailable: make a “consistent” comparison
with prices of similar products (United Brands, SACEM, Rambus)
• Price charged by Licensor in non-standardized competitive
markets • Price charged by Licensor to its own downstream business
(be careful to
adjust for intra-enterprise profit allocation ...) • Price
charged by other licensors for similar technology (Bodson) or
for
complementary essential patents for the same standard • Price
charged by Licensor or other patentees in competitive markets
with
inter-standard competition (unless the IP owner took
anti-competitive action to diminish ex ante inter-technology
competition, or owns patents in all alternatives)
3. Practice: Use actual information or proxies (ex ante)
23 Privileged and confidential
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If no internal proof of infringer’s estimate of projected excess
profit 15 factors in total to determine what a “willing licensor
and willing
licensee” would have agreed. Key criteria (affecting esp.
royalty rate) • Incremental value to licensee • What parties said
ex ante what they might have paid / charged • What patentee charged
others or what licensee paid others • What third parties pay or
charge
GP provides adjustment factors (affecting esp. royalty base),
such as • T&Cs of license: exclusive? customer/territorial
limit? field of use? • Life of patent and duration of license •
Established policy not to grant licenses [lost profit a better
factor, then] • Horizontal or vertical relationship [if the latter,
interests are aligned] • Incremental profits in neighbouring
markets? • established profitability • Importance of invention for
downstream product (entire market?)
Use the Georgia-Pacific factors, applied ex ante
24 Privileged and confidential
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Georgia-Pacific Corp. v United States Plywood Corp – 318 F.
Supp. 1116 (S.D.N.Y. 1970), mod. and aff’d, 446 F.2d 295 (2d Cir.
1971), cert. den, 404 U.S. 870 (1971)
Attempts to set royalty rate to be multiplied by revenues from
infringing sales (hypothetical negotiations between willing
licensor/licensee)
1. royalties received by the patent owner for licensing the
patent in suit, in FRAND circumstances [what patentee charged
others]
2. rates paid by the licensee for the use of other patents
comparable to the patent in suit , in FRAND circumstances [assessed
strictly]
3. nature and scope of the license, as exclusive or
non-exclusive, or as restricted or non-restricted in terms of
territory or with respect to whom the manufactured product may be
sold [adjustment factor for rate or royalty base]
4. licensor’s established policy of not licensing others
[irrelevant for FRAND]
5. commercial relationship between the licensor and the
licensee, such as whether they are competitors in the same
territory in the same line of business, or whether they are
inventor and promoter [irrelevant for FRAND]
Georgia-Pacific factors (2)
25 Privileged and confidential
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6. effect of selling the patented specialty in promoting sales
of other products of the licensee; existing value of the invention
to the licensor as a generator of sales of its non-patented items
[adjustment factor, to be adjusted to ex ante]
7. duration of the patent and the term of the license [affects
royalty base]
8. established profitability of the product made under the
patent; its commercial success; and its current popularity [to be
adjusted to ex ante]
9. utility and advantages of the patent property over the old
modes or devices, if any, that had been used for working out
similar results [incremental value]
10.nature of the patented invention; the character of the
commercial embodiment of it as owned and produced by the licensor;
and the benefits to those who have used the invention [incremental
value, to be adjusted to ex ante]
11.extent to which the infringer has made use of the invention,
and any evidence probative of the value of that use [incl. ex post
findings of incremental value, to be adjusted to ex ante]
Georgia-Pacific (3)
26 Privileged and confidential
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12.portion of the profit or of the selling price that may be
customary in the particular business or in comparable businesses to
allow for the use of the invention or analogous inventions [what 3d
parties charge/pay; Goldscheider’s 25% of gross profit? IBM’s 5% of
revenues? Nokia’s “single digit” rule?]
13.portion of the realizable profit that should be credited to
the invention as distinguished from non-patented elements, the
manufacturing process, business risks, or significant features or
improvements added by the infringer
14.opinion testimony of qualified experts [subject to Daubert
standard]
15.amount that a licensor (such as patent owner) and a licensee
(such as infringer) would have agreed upon (at the time the
infringement began) if both had been reasonably and voluntarily
trying to reach an agreement
Georgia-Pacific (4)
27 Privileged and confidential
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Posner J: “how many additional factors may be lurking
somewhere?” Can “a judge or a jury really balance 15 or more
factors and come up with anything resembling an objective
assessment?”
When relying on comparators: Consistency = key (same product;
same T&Cs?) - ECJ in United Brands; Fed Cir in ResQNet v Lansa
: need to adjust comparisons - Expert testimony must be ”not only
relevant, but reliable” (Daubert);
Important to adjust to ex ante only, since the outcome is
usually higher than real-world negotiated royalties (even more so
since ex post calculation)
- Assumes patent is valid and infringed (while in real-world
licensing negotiation, patents often discounted to reflect risk of
invalidity and finding of non-infringement)
- Fed. Circuit reluctant to consider ex post events to reduce
damages (e.g. infringer’s low profit margins on infringing
product/process not considered,) Hanson v Alpine Valley Ski Area,
Inc., 718 F.2d 1075,1081 (Fed. Cir. 1983))
- For example: 15% royalty when patent had been licensed for 1%
! Deere & Co. v International Harvester Co., 710 F.2d 1551,
1554-58 (Fed. Cir. 1983)
Georgia-Pacific -- Comments
28 Privileged and confidential
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We now have an example: Robart J. in Microsoft v Motorola
(25/4/2013) • Microsoft sued Motorola over ActiveSync (de facto
standard) patents,
seeking US ITC exclusion order • Motorola responded asking 2.25%
royalty for 802.11 (WLAN) and
H.264 (video) standards – Standard rate Motorola had asked since
1990s (ex ante)
• Microsoft filed breach of contract claim in its home court
(Washington) saying Motorola’s request violated RAND promise
• Motorola sought injunction against Microsoft in Germany •
Robart J decided RAND commitments are enforceable contracts and
users can enforce them contracts as a third-party beneficiary,
and issued order prohibiting Motorola from enforcing German
injunction (!)
• And proceeded to set RAND rate, using Georgia-Pacific factors
(1-3, 6, 8-15) applied on an ex ante basis
– And that was then used to determine that MML was in breach
(!)
• See also Holderman J in Innovatio (percentage of chip price)
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Robart’s RAND Royalty Rate
• Initial offer need not be RAND so long as a RAND terms issue
eventually • Criterion : willing licensor and licensee
(Georgia-Pacific)
– Applied ex ante, "before [licensor] gets the extra boost in
value by the standard becoming final and everyone has to practice
the patent "
– Adjusted for: • (1) importance of the SEPs to the standard and
• (2) importance of these SEPs to the overall product • (3)
“unresolved disagreements” on infringement and validity
– Using comparators from industry contracts as proxies /
guidance • Including patent pool royalties (not comparable) • But
ignored a history of 20 years of MML licensing (!)
• Result: very low royalty rate (total abt $1,5 million): •
H.264: $ 0.0555 to $ 0.16389 per unit (fixed at 0.555) • 802.11: $
0.08 to $ 0.195 per unit (fixed at 3.471) • but at least recognized
that 3G/4G patents were very valuable…
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Robart J.’s judgment is now subject to appeal - Robart J.
ignored patent war context and MSFT refusal to license ActiveSync -
Court set rate for individual patents, rejected Motorola licenses
as comparators -
they were portfolio settlements including valuable telecom
patents • Judgment ignores how portfolio licenses are negotiated in
the market
-Motorola patent "only constitutes a sliver of the overall
technology“ • But that does NOT mean it was not important or
valuable ex ante
- If all 92 patentees charged 2.25%, that leads to royalty
stacking? • But that assumes all other patents are equally
valuable.
- Court used patent pool as a comparator • Ignored that pools
generally have lower rates, because licensees and
practicing licensors want standard to succeed so they can make
profits downstream • although pool dominated by NPEs may set rate
too high – see Cournot problem
Reviewing Robart’s RAND Royalty Rate
31 Privileged and confidential
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Use portfolios licenses as proxies - Adjust for size, strength,
product scope, territorial range, life left, etc - Adjustments can
be done based on “sampling” / “proud list” approach –
patents are probablistic – E.g.: Vringo v ZTE [2013] EWHC 1591
(Pat), Birss J: if both sides
accept, have portfolio-wide royalty set before patent
validity/infringement found, “the cheapest and most cost effective
way, of resolving the whole global case overall, would be if a
single court were to do what was done in Microsoft v Motorola. …if
both sides were willing to be bound by the outcome, there is no
reason why the English court could not do it. … it would at a
stroke resolve the case in a time and cost efficient manner because
then there would be no patent trials at all.” (para 54)
Samsung suggests parties may agree to such a “pragmatic”
approach If arbitrator allows a lowering of the royalty for a
portfolio licence after a finding
of invalidity or non-infringement for one or more individual
patents, then it should also allow licensor to request an increase
if a patent is found validity and infringed (reflecting the
elimination of risk/uncertainty after such finding).
Valuing Portfolios
32
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Cournot complements problem: each patentee sets rate without
regard for rate set by other owners of complementary patents,
leading to supra-monopoly royalty stack, and inefficient outcome.
Everyone loses. Royalty cap avoids this.
Robart J: “court must determine a reasonably royalty rate for …
SEPs based on the principles underlying the RAND commitment, one of
which is the concern of royalty stacking.” (Motorola) - Patentee
can avoid that by showing “evidence that it considered royalty
stacking issues
when it established its royalty rates.” (Ericsson v D-Link,
Davis J) - License can try to show roylaty cap was agreed ex ante
(was argued in WCDMA case)
Simply multiplying number of patents and requested royalty rate
is not enough - May underestimate royalty stack, e.g. when ignoring
royalties for non-SEPs - May overestimate royalty stack, e.g., when
SEP ex ante more valuable than other SEPs - But two stage process
and reversal of burden of proof may solve this:
– 1. licensee shows royalty leads to prohibitive stack if all
SEP owners charge the same – 2. patentee rebuts by showing that its
patents were more valuable ex ante – 3. licensee may show that
patentee royalty + actual royalties paid to others + royalties
realistically expected leads to prohibitive stack – 4. patentee
may show that third-party royalties are too high
4. Royalty Stacking and Royalty Caps
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Goldscheider’s 25% Cap -- Uniloc v Microsoft
34
Goldscheider‘s rule - based on experience from 1959 in
negotiating/litigating
Often misused as end point, while it should only be starting
point for negotiations
- Key: what allocation of risk between licensee and licensor?
Licensee often takes major R&D, bring-to-market, marketing and
production risk, esp. where high fixed costs
- Adjusted upwards if IP owner bears more of the overall risk
than usual
- Adjusted downwards if IP owner bears less of the overall risk
than usual
- If multiple patents apply, 25% rule applies to entire
stack
“a fundamentally flawed tool for determining a baseline royalty
rate in a hypothetical negotiation” and “fails to tie a reasonable
royalty base to the facts of the case at issue.“ (Uniloc US v.
Microsoft (2011)
- Query whether systematic research in specific industry
segments could nonetheless reveal a similar cap…?
salesnet expectedprofits expected25 salesnet on rateroyalty ×=
%
Privileged and confidential
-
Patentee can obtain royalty on entire market value of infringing
product incorporating the infringing part/feedstock, not merely the
value of the infringing component itself
Interest for patentee to go after the most downstream
manufacturer to increase net sales base
Applies in situations where the component is key for a
downstream product. requires showing that (Cornell v. HP ):
- the infringing components must be the basis for customer
demand for the entire machine including the parts beyond the
claimed invention (Cornell v HP);
- the individual infringing and non-infringing components must
be sold together so that they constitute a functional unit or are
parts of a complete machine or single assembly of parts, (Paper
Converting Machine v. Magna-Graphics); and must be analogous to a
single functioning unit, (Kalman v. Berlyn).
It is not enough that the infringing and non-infringing parts
are sold together for mere business advantage. See Rite-Hite, 56
F.3d at 1549-50.”
Proof that component is essential is not proof that it is basis
for customer demand!
5. What Royalty Base? “Entire Market Value” or the “Smallest
Saleable Patent Practicing Component”?
35 Privileged and confidential
-
Cornell Univ. v. Hewlett-Packard (2009): patented invention =
small component of HP’s products (patented invention > processor
> CPU > CPU brick > cell board > server)
- royalty base reduced to include only HP’s earnings attributed
to the infringing technology (= smallest salable patent-practicing
unit i.e. processors):
“The logical and readily available alternative was the smallest
salable infringing unit with close relation to the claimed
invention-namely the processor itself.”
- Using estimated revenues permissible when no market for
infringing product : “Reliance on hypothetical sales or estimated
revenues is entirely permissible in connection with a reasonable
royalty analysis.”
Lucent v Gateway (2009): - no proof that infringing feature was
“the basis – or even a substantial basis – of the consumer demand
for Outlook” - using “entire market value” acceptable where
infringing component or feature is not sold separately, so long as
royalty is adjusted downwards
Entire Market Value – limiting case law
36 Privileged and confidential
-
IP Innovation v RedHat (2010): sound economic basis needed
“In invoking the entire market value rule, Mr. Gemini included
100% of Red Hat’s and Novell’s total revenues from sales of
subscriptions to the accused operating systems in his proposed
royalty base. Mr. Gemini’s methodology however does not show a
sound economic connection between the claimed invention and this
broad proffered royalty base. The claimed invention is but one
relatively small component of the accused operating systems.”
Uniloc v. Microsoft (2011): CAFC reaffirms limitation of entire
market value, but using a
low royalty rate is no excuse for using the “entire market
value” for minor features:
“Uniloc argues that the entire market value of the products may
appropriately be admitted if the royalty rate is low enough,
relying on the following statement in Lucent Technologies. […] The
Supreme Court and this court’s precedents do not allow
consideration of the entire market value of accused products for
minor patent improvements simply by asserting a low enough royalty
rate.”
See also FTC Report 2011
Entire Market Value – limiting case law
37 Privileged and confidential
-
“P]roof that consumers would not want a laptop computer without
such features is not tantamount to proof that any one of those
features alone drives the market for laptop computers. … says
nothing as to whether the presence of that functionality is what
motivates consumers to buy a laptop computer in the first place. It
is this latter and higher degree of proof that must exist to
support an entire market value rule theory.” LaserDynamics v Quanta
(Fed. Cir. 2012)
“[t]he law requires patentees to apportion the royalty down to a
reasonable estimate of the value of its claimed technology, or else
establish that its patented technology drove demand for the entire
product.” VirnetX, Inc. v. Cisco (Fed. Cir. Sept. 16, 2014)
Does not mean that royalty going forward must be expressed as a
percentage of the smallest component. What matters is technology
value, not royalty base - Davis J (CSIRO v Cisco): “It is simply
illogical to attempt to value the contributions of
the [CSIRO patent] based on wireless chip prices that were
artificially deflated because of pervasive infringement. Basing a
royalty solely on chip price is like valuing a copyrighted book
based only on the costs of the binding, paper, and ink needed to
actually produce the physical product. While such a calculation
captures the cost of the physical product, it provides no
indication of its actual value.”
Don’t confuse damage calculation based on Smallest Saleable
Patent Practicing Component with royalty formula
38
-
39
3. FRAND Terms and Conditions
-
Illegal tying –vs- permissible portfolio license
Illegal forced countertrade –vs- reasonable cross-license
Illegal no-challenge clauses –vs- permissible settlements and
avoiding delays
Field of use restrictions (generally permissible)
What are the rules for FRAND-covered non-SEPs (“FREPs”),
essential portfolios
2 – What T&Cs for compulsory licensing?
40
-
No tying of essential IPR and non-essential IPRs allowed But :
“portfolio licensing can be efficient in some cases” (EC Speaking
Points
at ETSI IPR #16 on 9/9/2013 and EC Speaking Points at ITU on
12/9/2013) – Allows bundling on “per-standard” basis. – Allows
voluntary full-portfolio licensing
See also - Article 9 commitments in Samsung: licensing framework
for bundle of
“Samsung Electronics’ Mobile SEPs” - Google FTC Consent Order,
provides procedure to determine terms for
bundle of “patents that are Essential to the Covered Standards”
Criticism: Tying should be allowed for all essential IPRs needed
per product”. - Efficient and practical solution: a willing
licensee needs all of them anyway
and should accept bundle (subject to right to challenge
validity, infringement). - Otherwise, patent holder might be forced
to litigate SEP for every single
standard in the product, which would be costly and inefficient
in practice.
Illegal tying vs legal portfolio licensing
41
-
Motorola Decision, para 456: “SEP holders are in principle
entitled to request reciprocity in line with the rules of
SSOs.”
– Motorola requested reciprocity in the Second Orange Book Offer
– EC (rightly) did not list that as an element of the abuse
Samsung Commitment, para. 79 and 89: – “Samsung cannot condition
the licensing of its Mobile SEPs on the
crosslicensing of a potential licensee’s non-SEPs or SEPs not
covered by the reciprocity rules of SSOs.” . – Interpreted as
per-standard reciprocity – should have been per-product ?
– Also, defensive suspension: Samsung may seek and enforce
injunction if (1) Potential Licensee files claim for injunctive
relief in the EEA against Samsung or a customer of Samsung for
Mobile Device/components for infringement of any Potential
Licensee’s Mobile SEPs, and (2) Samsung offers to be bound by
Licensing Framework
– Samsung should have been allowed to defend itself in the EEA
against injunctions elsewhere, considering that this was a
worldwide war
Implied: cross-license must be FRAND (license cannot demand free
cross-license)
Illegal forced countertrade vs legal cross-license?
42
-
Motorola, Samsung: no-challenge and “termination” clauses not
allowed – But how to avoid perpetual litigation after a license is
signed? – EC: “a reasonable time frame for resolution is of the
essence”. – Ban on termination clauses should be allowed in
legitimate settlement:
– Technology Transfer guidelines para 235 - 236: “Settlement
agreements in the context of technology disputes are, as in many
other areas of commercial disputes, in principle a legitimate way
to find a mutually acceptable compromise to a bona fide legal
disagreement. …
– Para. 242-243: “In the context of a settlement agreement,
non-challenge clauses are generally considered to fall outside
Article 101(1) of the Treaty. It is inherent in such agreements
that the parties agree not to challenge ex post the intellectual
property rights which were the centre of the dispute. … a
non-challenge clause may infringe Article 101(1) where an
intellectual property right was granted following the provision of
incorrect or misleading information. Scrutiny of such clauses may
also be necessary if the licensor .. induces, financially or
otherwise, the licensee to agree not to challenge the validity of
the technology rights or if the technology rights are a necessary
input for the licensee's production”
Solution: “sampling” / “proud list” approach (See portfolio
valuation slide)
Illegal no-challenge clauses vs permissible settlements and
avoiding delays
43
-
EC emphasizes the SEP and standards context, Motorola and
Samsung give no explicit guidance about FRAND-covered non-
SEPs like ActiveSync or FAT, or enforcement of unavoidable
portfolio enforcement
On the other hand, – (278) “…The exercise of an exclusive right
by its owner may, however, in
exceptional circumstances and absent any objective justification
involve abusive conduct. The list of exceptional circumstances is
not exhaustive.“
– Note also the nod to the “legitimate expectations” argument in
para 294, which may apply to refusal to license non-SEPs subject to
a FRAND promise
– Decision and the press release emphasize that Orange Book
applies more broadly to non-SEPs and is not inconsistent with the
EC decision,
– Microsoft continues to apply (that case concerned non-SEPs) –
And cutting off licenses to essential portfolios can be abuse
(Commercial
Solvents, etc) – FRAND licensing also required for technology
pools (see TT Guidelines)
What rules for non-SEPs?
44
-
45
4. Conclusions
-
What is a FRAND promise?
46
A license or promise to license: - No refusal or termination of
a license, no injunctive relief, no suit for treble damages, if
defendant is willing and able to pay, but disagrees on T&Cs.
Exception: Defensive suspension, material (actual or anticipatory)
breach
- No constructive refusal to license (e.g., excessive fees,
delays, etc.) Fair and reasonable – equitable, balancing all
interests (proportionality) - Same criterion as 102(a) EC: “not
excessive” = share benefits of standards with licensees and
consumers (required by 101(3) anyway) - rate that the IPR owner
could have obtained in ex ante inter-technology competition,
unless
the IP owner took anti-competitive action to diminish ex ante
inter-technology competition - No monopoly rent, moderate, allowing
IP owner innovation incentive, but not allowing IP owner
to appropriate entire value of standard. Avoid Cournot stack
Non-discriminatory – equal treatment of all customers, including
the IPR-owner’s own
downstream business. - Same criterion as 102 EC(b) and 102(c)
and 101(3)(b): “not exclusionary, not discriminatory” - No
restriction of downstream competition on the merits (no
price-squeeze, no T&Cs that have
the object or effect of restricting downstream competition, etc)
- E.g., no differential treatment based on whether licensee
purchases the licensor's downstream
product - No restriction of upstream technology competition (no
free NAP/pass-thru)
-
Standardization can generate efficiencies and promote innovation
and competitiveness, and is shielded from Article 101 TFEU,
provided that certain conditions are met, including access to the
standard on FRAND terms. - “in order for a standard-setting
agreement to fall outside Article 101(1) TFEU, the
SSOs IPR policy should ensure that each entity which contributes
technology to a standard must limit their freedom to exercise their
"ownership" of a piece of that standard by committing to license
the relevant technology to anyone wishing to use the standard on
FRAND terms.”
– Case No COMP/M.6381 - Google/ Motorola Mobility, para. 57. -
“Where participation in standard-setting is unrestricted and the
procedure for adopting
the standard in question is transparent, standardisation
agreements which contain no obligation to comply with the standard
and provide access to the standard on fair, reasonable and
non-discriminatory terms will normally not restrict competition
within the meaning of Article 101(1).”).
– Guidelines on the applicability of Article 101 of the Treaty
on the Functioning of the European Union to horizontal co-operation
agreements, OJ C 11, 14.1.2010, para. 280
Risk of SSO violation Art 101 if no proper arrangements
Implications for SSO IPR Policies
47
-
IPR Policy must (interpret FRAND to): Ban injunctions against
willing licensee unless exceptions met - including defensive
suspension and reasonable reciprocity
Ban no-challenge clauses except in legitimate settlements Ban
tying SEPs to non-SEPS -But allow portfolio licensing if agreed
voluntarily
Ban forced cross-licensing -Except that licensee cannot refuse
to cross-license its SEPs reading
on same standard (or same product) on FRAND terms -Cross-license
allowed if voluntary and on FRAND terms
Need to provide rules for FRAND calculation? -For time being
process is enough
Will SSOs agree? - If not, risk of enforcement in court or
EC
Implications for SSOs
48
-
Patent Related Concerns Should Be Resolved Holistically
49
SEPs
De facto Standards
Trolls
Large Portfolios
Privateers
-
The next problem: Trolls and Privateers (1)
• There are growing opportunities for trolls and privateers,
because of the increasing complexity of products, and growth of
patents
• No need to define what a troll is. – It’s not who they are,
but what they do.
• The essence of “troll” behaviour is – Creating expectations
(FRAND promise, license promise), or allowing
expectations of patent-free environment/non-assertion to arise,
awaiting lock-in, and then exploiting lock-in by “hold-up” – often
using injunction
– They then extract high royalties (tying/block booking),
cross-license, or other terms the cost of which is greater than the
innovative value of the IP (ex ante), and instead reflects
switching costs and opportunity costs of not taking a license
• Privateers engage in similar conduct – But in cooperation
with, or to benefit, a practicing entity – Portfolio disaggregation
creates Cournot complements problem
50
-
• “hold-up” is a growing problem, and is increasing also in EU •
“Hold-up” is not limited to SEPs. It also occurs with
commercially
essential patents, and even unavoidable patent portfolios. • And
even practicing entities can engage in “hold-up” conduct.
– Practicing entities may have to worry about counterclaims. –
But the smaller their practicing business is, the less vulnerable
they
are. NPEs are invulnerable to counterclaims • Strategic use of
privateers creates even greater danger:
– Patent disaggregation leading to royalty stacking (multiple
monopoly rents); raising rivals’ costs (Mosaid)
– Avoiding cross-license dynamics (Spinco) – Evading FRAND
promises (Rockstar)
51
The next problem: Trolls and Privateers (2)
-
• Deny injunctions against willing licensees (eBay principles)
unless • 1) plaintiff suffers irreparable injury; • 2) remedies
available at law (such as damage award) inadequate to
compensate for the injury; • 3) a remedy in equity is warranted
in light of the balance of hardships between
plaintiff and defendant; and • 4) the public interest would not
be disserved by a permanent injunction.
• No valid reason to treat SEPs and other FRAND-covered Patents
differently: same theory of harm ( “legitimate expectations”, see
Motorola, para 294)
• No valid reason to differentiate between NPEs and practicing
entities, except that NPEs are more easily found dominant (no
countervailing power)
• Ensure that the EPC does not become a troll tool (potential
for misuse of bifurcation + preliminary injunction): apply eBay
principles
• Apply Article 102(a) in cases of clearly excessive demands; •
Apply Article 101 to privateers • Apply national or EU merger
control to avoid creation of asymmetries that
allow buyer to leverage acquired patents
The next problem: Trolls and Privateers (3)
-
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�Defining FRAND Royalties�and FRAND Terms and
Conditions�OverviewQuestionsSlide Number 4Standard-setting and
FRANDFRAND promises and disclosure in �Guidelines on Horizontal
AgreementsMotorola v Apple (2014) -- background1. When Are SEP
Owners Dominant?2. What exactly is the abuse –seeking
injunctions?3. What is “willingness”? – no attention to Apple’s
shenanigans…(focal point in Huawei v ZTE)Convergence EU, US, PRC:
No holdup based on SEPs4. How to implement?�Samsung (2014) and
Huawei/ZTE (2015?)Samsung Commitments – FRAND setting process Slide
Number 14Why is FRAND so vague? Why don’t SSOs clarify? �What is
FRAND royalty? Article 102 TFEU1. Game theory insight: FRAND =
Sharing incremental value between patentee/licenseeSlide Number
18�2. Ex ante rule consistent with 2004 Microsoft Decision�Ex ante
valuation: consistent with Horizontal GuidelinesAlso consistent
with US law�FTC Report on The Evolving IP Marketplace�Incremental
value rule hard to implement3. Practice: Use actual information or
proxies (ex ante)Use the Georgia-Pacific factors, applied ex
anteGeorgia-Pacific factors (2)Georgia-Pacific (3)Georgia-Pacific
(4)Georgia-Pacific -- CommentsWe now have an example:�Robart J. in
Microsoft v Motorola (25/4/2013)�Robart’s RAND Royalty
RateReviewing Robart’s RAND Royalty RateValuing Portfolios4.
Royalty Stacking and Royalty CapsGoldscheider’s 25% Cap -- Uniloc v
Microsoft5. What Royalty Base? “Entire Market Value” or the
“Smallest Saleable Patent Practicing Component”? Entire Market
Value – limiting case lawEntire Market Value – limiting case
lawDon’t confuse damage calculation based on Smallest Saleable
Patent Practicing Component with royalty formulaSlide Number 392 –
What T&Cs for compulsory licensing?Illegal tying vs legal
portfolio licensingIllegal forced countertrade vs legal
cross-license?Illegal no-challenge clauses vs permissible
settlements and avoiding delaysWhat rules for non-SEPs?Slide Number
45What is a FRAND promise?Implications for SSO IPR
PoliciesImplications for SSOsPatent Related Concerns Should Be
Resolved Holistically�The next problem: Trolls and Privateers
(1)�The next problem: Trolls and Privateers (2)�The next problem:
Trolls and Privateers (3)Slide Number 53