INTRODUCTION
Patent is a monopoly right conferred by the Patent
Office on an inventor to exploit his invention for a limited period of time.
Patents are predominantly used to protect an
invention from being abused by competitors.
WHAT
IS ‘PATENT LICENSING’?
A patent licence is an agreement that transfers less
than ownership rights in a patent or, which grants certain rights to the
licensee. A patent licence can be exclusive or non-exclusive, for a specific
field of use or for a specific geographical area. It is common for companies
engaged in complex technical fields to enter into dozens of licence agreements
associated with the production of a single product. There are four types of
patent licenses- compulsory licence, cross-licensing, defensive patent licence
and reasonable and nondiscriminatory (FRAND).
WHAT
IS FRAND?
FRAND stands for Fair, Reasonable and Non-
Discriminatory. It is also known as Reasonable and Non-discriminatory terms
(RAND). It is a licensing obligation that is frequently required by
standardsetting organizations for members that participate in the
standard-setting process. The term FRAND has not been defined. The individual
terms are defined as under:
Fair
primarily relates to the underlying licensing terms. The term ‘Fair’ means
terms which are not anti-competitive and that would not be considered unlawful
if imposed by a dominant firm in their relative market.
Reasonable
refers mainly to the licensing rates. According to some people, a reasonable
licensing rate is a rate charged on licenses which would not result in an
unreasonable aggregate rate if all licenses were charged a similar rate.
Non-discriminatory
relates to both the terms and the rates included in licensing agreements. As
the name suggests this commitment requires that the licensor treats each
individual licensee in a similar fashion. This allegiance is included in order
to maintain fairness in the competitive market with respect to existing
competitors and to ensure potential new entrants are free to enter the market
on the same basis.
FRAND requires that holders of essential patent do
not discriminate, and do not restrict competition downstream. Licensors must
avoid discriminating:
1. Against
and between other technology providers (e.g., by requesting unremunerated
grant-backs, discriminating against IP-rich licensees and diminishing
innovation incentives and technology competition);
2. Against
and between rival firms in downstream markets (e.g., by refusing to provide
reciprocal licenses to rival manufacturers of standardized components or
products);
3. Against
and between licensees in downstream markets (e.g., by offering royalty rebates
and incentives, particularly when such discrimination is linked to exclusive or
preferential supplies - resulting in “primary line” antitrust injury).
FRAND (fair, reasonable and non-discriminatory)
licenses allow companies to develop open standards for systems such as 3G
mobile networks by sharing information and technology. Standards bodies
typically require that companies participating in the development of a standard
agree to licence any relevant patents they hold on FRAND terms if their
technology is essential to the standard.
STANDARD
ORGANIZATIONS
Standard Setting Organizations set common standards
for a particular industry in order to ensure compatibility and interoperability
of devices manufactured by different companies.
They have rules that govern ownership of patent
rights that apply to the standards the organization has adopted. One of the
most common rule is that a patent that applies to the standard must be adopted
on “ reasonable and non-discriminatory terms” (RAND) or on “fair, reasonable,
and nondiscriminatory terms” (FRAND).
The two terms are interchangeable.
The term FRAND is mostly preferred in European
countries and the term RAND is preferred in the United States of America. The
rules framed by this organization are intended to prevent its members from
engaging in licensing abuse based on the monopolistic advantage generated as a
result of having their intellectual property rights included in the industry
standards. The members of this organization are required to offer FRAND licence
to anyone, not necessarily members of the organization.
WHAT
IS FRAND DECLARATION?
A FRAND declaration is one of the ways in which the
interests are balanced between the patentees of a standards-essential patent
and users of technical standards. Standardisation organisations request members
which are the patentees of standards-essential patents to ensure that any
entity using the technical standard can license the standards-essential patents
on fair, reasonable and non-discriminatory (FRAND) terms.
WHAT
IS THE LEGAL NATURE OF A FRAND DECLARATION?
Depending on the viewpoint, a FRAND declaration is
merely a one sided manifestation of intent with the standardisation
organisation; thus, there is debate over the legal relationship between the
standards-essential patentee and users of the patent (ie, how to restrict the
enforcement of standards-essential patent rights). One school of thought is
that a FRAND declaration constitutes acceptance of a third-party beneficiary
contract between the standards essential patentee and the standardisation
organisation, so that when a user of a technical standard indicates its intention
to request the right to use the standards-essential patent under FRAND terms, a
licence agreement is automatically concluded between the user and the patentee.
In the United States, a 2012 judgment held that a FRAND declaration constituted
a third-party beneficiary contract (Microsoft Corp v Motorola Inc, 864 F Supp
2d 1023 (WD Washington 2012)). Another opinion is that a FRAND declaration is
only a manifestation of the intention of the standards-essential patentee, and
no contract between the user and the patentee is concluded unless some other
form of agreement is executed between them. Under this opinion, a restriction
on the enforcement of the standards-essential patent would be based on the
general principles of the Civil Code of Japan, such as the prohibition of the
abuse of rights.
RECENT
JUDGMENTS ON FRAND PATENT LICENSES
In June 2012, the Federal Trade Commission (FTC)
asked the US International Trade Commission (ITC) to carefully reconsider
banning products like the Xbox 360 that allegedly infringe upon patents that
are required to be fairly licensed as part of standards agreements. FTC has
issued a statement to the ITC in both the Apple vs. Motorola and Motorola
vs.Microsoft cases now pending, saying
that it’s concerned a company might make a promise to license a
standard-related patent under fair, reasonable, and non-discriminatory (FRAND)
terms, and then fight to ban products using those patents as a way to negotiate
higher, unfair rates. That’s exactly what Apple and Microsoft claim Motorola is
trying to do, but so far they haven’t been successful — Moto won ITC rulings
saying the Xbox 360 infringed several FRAND patents on H.264 video encoding and
that the iPhone and iPad infringe a FRAND patent on wireless communications.
It has become a serious international issue as
companies like Motorola and Samsung rely heavily on their standards-related
patents in various lawsuits.
The most talked about lawsuit was the APPLE v.
SAMSUNG (2011).
The biggest lawsuit had two smartphones giants, on
one side world’s most valuable company Apple Inc. which changed mobile users
experience with its iPhone and iPad and on the other the world’s largest mobile
phone manufacturer Samsung Electronics.
On April 15, 2011, Apple sued its component supplier
Samsung in the United States District Court for the Northern District of
California, alleging that several of Samsung’s Android phones and tablets,
including the Nexus S, Epic 4G, Galaxy S 4G, and the Samsung Galaxy Tab,
infringed on Apple’s intellectual property: its patents, trademarks, user
interface and style. Apple’s complaint included specific federal claims for
patent infringement, false designation of origin, unfair competition, and
trademark infringement, as well as state-level claims for unfair competition,
common law trademark infringement, and unjust enrichment. Further, Apple also
stated that Samsung had breached its FRAND commitments made on December 14,
1998 and specific FRAND commitments for the two asserted declared essential
patents on May 16, 2006 and August 07, 2007, respectively. Also Samsung seeks
to enjoin Apple from selling products that support the UMTS standard and by
refusing to offer Apple a license to declared-essential patents on FRAND terms.
Samsung challenged the validity of Apple’s patent.
But, it failed to prove the same. The nine member jury sided with Apple,
deciding that not a single Apple patent was invalid. The jury has ruled that
Samsung willfully infringed a number of Apple patents in creating a number of
devices. Justice Lucy H. Koh ordered Samsung Electronics Co. Ltd. to pay Apple
$1.05 billion in damages.
After winning a battle on the home pitch, Apple is
targeting other major Android players like HTC and Google (Motorola). Foss
Patent’s recent publication reveals that Apple has made an offer to license
certain FRAND, or standard essential, patents in the region, which Motorola is
forced to accept in order to avoid breaking antitrust laws. In fact, Google is
already investigated by the EU for FRAND patent abuse in the region, which means
that it can’t keep refusing a patent license to Apple in hopes of using those
FRAND patents as leverage to squeeze out a better settlement with the iPhone
maker in the future.
In 2011, the European Commission issued a framework
for analyzing FRAND issues. The guidelines issued by the EC explain that FRAND
licensing prevents patent-holders from “making the implementation of a standard
difficult” by refusing to license, requesting “excessive” fees, or imposing
“discriminatory” royalties. Where there are disputes (which are not atypical in
determining the reasonableness of royalties), analysis of whether fees are
“unfair or unreasonable” is to be based on whether the fees “bear a reasonable
relationship” to the patent’s economic value.
TOKYO DISTRICT COURT DECISION RE: SAMSUNG V. APPLE
In this case, Samsung made a FRAND declaration
regarding its standards-essential patent for the UMTS standard with the
European Telecommunications Standards Institute (ETSI), one of the
standardisation organisations that formed the 3G Partnership Project.
Specifically, according to the ETSI IP rights policy, Samsung declared that it
held patents that were or would be standards essential patents for the UMTS
standard, and that it was ready to license irrevocably such standards-essential
patent to other parties under FRAND terms. Therefore, in this case it was
disputed whether Samsung’s enforcement of standards-essential patent rights
should be restricted.
The Tokyo District Court stated that part of the
products fell under the scope of Samsung’s patent and adjudicated the disputed
point as follows:
In this case, according to the Act on General Rules
for the Application of Laws in Japan, the court had to determine whether
Samsung had the right to claim damages against Apple under Japanese law,
including the Civil Code.
According to the FRAND declaration, Samsung owed an
obligation to negotiate in good faith with each entity (whether or not the
entity was an ETSI member) that requested a licence for Samsung’s
standards-essential patent under FRAND terms. Thus, when Apple sent the letter
to Samsung requesting a licence agreement for the three patents on March 4
2012, Samsung and Apple were at the preliminary stage of concluding a licence
agreement and were obliged to negotiate In good faith.
In the process of negotiating the licence agreement
for Samsung’s standards essential patents, on July 25 2011 Samsung proposed a
global non-exclusive licence of its standards-essential patents in accordance
with FRAND terms. However, Samsung did not inform Apple of the basis for
calculating the licence terms in the proposal. Despite Apple’s repeated
requests, Samsung did not provide the necessary information, including the
licensing terms that it had agreed with other companies that held licences for
the standards-essential patents in question, by which Apple could assess
whether the offered terms conformed to FRAND terms. Furthermore, Samsung did
not suggest alternative terms and conditions to Apple’s proposal, in which
Apple’s basic position and calculation standard for the licence fee were set
forth. These facts constituted Samsung’s violation of its obligation to
negotiate in good faith with Apple.
Moreover, Samsung maintained its petition for a
provisional injunctive order against Apple in order to prohibit the production,
import and assignment of the products, and Samsung’s disclosure of its
standards essential patent was taken two years after ETSI had adopted Samsung’s
patent for the UMTS standard.
Considering the facts mentioned above and the other
circumstances of the negotiations between Samsung and Apple, the enforcement of
rights to claim for damages by Samsung constituted an abuse of rights, which is
prohibited under the Civil Code.
In conclusion, the Tokyo District Court upheld
Apple’s claim and rejected Samsung’s right to claim damages from Apple for
infringement of Samsung’s standards essential patents. Samsung’s petition for a
provisional injunctive order was dismissed for the same reason on the same day
as this judgment was issued.
CONCLUSION
Technical standardisation is an important IP
strategy. A company that develops new technologies should consider carefully
whether to pursue standardisation. In this regard, there are always questions
to be answered, such as “What are FRAND terms?” and “What if the owner of a
standards-essential patent cannot reach agreement with companies that ask to be
granted a licence to the patent?”
Accordingly, there is a possibility that disputes
regarding the interpretation of FRAND terms will arise between a
standards-essential patentee and users of the technical standard.
The lack of transparency in the patent licensing
procedure and the application of FRAND has made it essential for the courts to
come out with a harmonized interpretation of FRAND. FRAND obligation places
both contractual and anti-trust related limits on the ability of the patent
holder to exercise its patent in licensing negotiations, but the actual scope
of those constraints is still unclear.
Yinka
Olaiya
