PATENT LICENSING: FRAND DECLARATION

 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