Adopters of wireless standard-compliant technology are generally willing to accept truly fair, reasonable and nondiscriminatory license terms for truly standard-essential patents.
This article outlines six challenges adopters often face negotiating FRAND rates for SEPs. Given the recent introduction of 5G connectivity, and the ongoing litigation between standards adopters and SEP owners unable to amicably agree on FRAND terms, a fair and transparent solution is needed. This article proposes a two-part solution familiar in the music industry for FRAND rate-setting.
SEP Designation Free-for-All
Patent owners declare their patents standard essential with an unverified statement. Standards bodies lack a mechanism to determine whether the patent claims in fact cover any portion of the standard. The standards bodies do not require a claim chart demonstrating SEP status, let alone a claim chart that demonstrates how a particular portion of a particular standard corresponds to each limitation of a patent claim, i.e., the basic showing necessary to demonstrate infringement.
As a result, SEP owners over-designate large volumes of patents as standard essential. The motivation is clear: If one SEP owner self-designates more patents as standard essential than another SEP owner, that one SEP owner can demand a larger share of the overall royalty for the standard.
Courts widely recognize over-declaration of non-SEPs. For example, the London Court of Appeals in Unwired Planet v. Huawei Technologies Co. affirmed that "[o]ver-declaration is a substantial problem as illustrated by the [lower] judge's assessment that up to 72% of declared SEPs are not truly essential" and that "very many more patents are declared to be essential than are truly essential and the fact that royalty rates are negotiated by counting patents creates an incentive to over-declare."
The U.S. District Court for the Central District of California in TCL Communication Technology Holdings LTD. v. Ericsson Inc. similarly held that "ETSI's process does not assess whether declared patents actually are essential. This leads to a substantial over-declaration of patents."
The problem is worse than many think. When an SEP owner (e.g., Nokia or TCL) selects its best patents to assert in litigation, several of them are deemed nonstandard essential. In Nokia Corp. v. Daimler AG, pending in Mannheim, Germany, for example, the court held on Feb. 11 that Nokia's asserted EP 2286629 patent is not standard essential for 4G. In TCL v. Ericsson, the district court determined "Ericsson's P08333 family and corresponding U.S. Pat. No. 5,991,330 ... are not essential to the 3G standard."
If an SEP owner's asserted patents are not all standard essential or valid, what does that say about its unasserted self-proclaimed SEPs? This reality makes it difficult for adopters to accept unverified SEP representations from SEP owners regarding their respective volume, and relative percentage, of SEPs.
SEP Owners Refuse to Negotiate at the Point Where the Patented Technology Enters the Supply Chain
The most appropriate point in the supply chain to negotiate a FRAND license is the point where the SEP-practicing device, i.e., the modem or the network access device, or NAD, is first sold. That is the point where the supplier is most familiar with the relevant technology and can make an educated determination as to whether the patents apply or do not apply.
That is also the point in the supply chain where the market has spoken as to the true value of the modem or NAD incorporating the patented technology. Negotiating a FRAND license at this level avoids assessing a royalty for downstream and unpatented technology that the SEP owner did not invent.
Unfortunately, SEP owners generally refuse to negotiate with modem or NAD manufacturers. Instead, they prefer to negotiate with downstream members of the supply chain who lack familiarity with the relevant technology. Making matters worse, the SEP owners generally base their royalty demands based on alleged value of downstream and unpatented features. These conditions make negotiating a truly FRAND license for truly standard essential patents very difficult.
This challenge is a focus of ongoing FRAND litigation. In Continental Automotive Systems Inc. v. Nokia, for example, Continental asserts that "Defendants collectively have agreed to refuse to directly license Continental and its suppliers as part of a concerted scheme to charge elevated royalties to OEMs."
Downstream Adopters Are Not Well Positioned to Make SEP and FRAND Determinations
Patent owners shoulder the burden to establish the necessity of a license, i.e., infringement. A patent owner's unverified representation that its patents are standard essential does not shift the burden to an adopter to prove noninfringement. For the reasons expressed above, downstream adopters lack the knowledge necessary to make an informed essentiality determination.
Many SEP owners refuse to provide listings of their alleged SEPs or claim charts explaining how they read on the standard or the at-issue products. In Federal Trade Commission v. Qualcomm Inc., for example, the U.S. District Court for the Northern District of California noted: "Qualcomm refuses to provide OEMs lists of Qualcomm's patents or patent claim charts during license negotiations." Some SEP owners provide claim charts correlating representative patent claims with the applicable standard. While this is a step in the right direction, the charts typically suffer from two material defects.
First, the charts compare the patent claims with the standard and not the particular modem implementation the adopter is using. Adopters operate on an assumption that all modems are implemented according to required aspects of the standard. This can be an incorrect assumption. Under U.S. law, patent claims are to be read on the manufactured product — not the paper standard.
Second, the charts often lump claim limitations together and correlate them with large swaths of the standard without any explanation. The charts often fail to establish infringement; they merely correlate sections of standards with groups of claim limitations. As such, they fail to assist unfamiliar adopters' understanding of whether, or not, the patents are truly standard essential.
Royalty Stack Exceeds the Total Price of the Modem Chipset
SEP owners demand royalties from adopters that, collectively, exceed the total cost of the modem chipset, i.e., more than a 100% royalty.
A 4G multimode cellular chipset enters the supply chain around $15. Yet, Avanci LLC alone demands a $15 for use of that $15 chipset in an automobile. That's a 100% royalty. And, because Avanci does not represent all the SEP owners for a 4G multimode modem, the overall royalty stack exceeds the chipset price.
Adopters are naturally unwilling to agree to pay a 100%+ royalty, especially for patents they are technologically unfamiliar with and that have not been independently verified as standard essential in the first place.
Lack of Transparency From SEP Owners
SEP owners universally require, as the first step in the FRAND negotiation process, that an adopter execute a nondisclosure agreement. They contend the NDA is necessary to enable a mutual exchange of confidential information. But after the NDA is executed, the SEP owners often refuse to provide highly relevant information.
For example, the SEP owners often refuse to provide all prior license agreements for the at-issue patents. This prevents the adopter from verifying whether it is paying the same, more or less than others have previously paid. The SEP owners say that they cannot turn over the prior license agreements due to their obligations of confidentiality to prior licensees, ironically, due to an earlier NDA. This circular conundrum ultimately leaves the adopter in the dark.
Other agreements exist that are directly relevant to the FRAND determination. Qualcomm, for example, is the world's largest supplier of cellular modem chipsets. Nokia holds one of the largest portfolios of patents declared essential to practicing the cellular modem standards, such as 3G and 4G LTE.
In July 2008, to settle their respective cross-claims for patent infringement, Nokia and Qualcomm entered into a subscriber equipment and infrastructure equipment license agreement. In the License Agreement, Nokia agreed it would not sue Qualcomm for patent infringement based on Qualcomm's manufacture and sale of Qualcomm products.
The following day, Qualcomm published on its website a press release stating "Nokia has agreed not to use any of its patents directly against Qualcomm, enabling Qualcomm to integrate Nokia's technology into Qualcomm's chipsets." Under a pair of U.S. Supreme Court decisions, Nokia exhausted its right to demand royalties from downstream purchasers of Qualcomm modems sold or imported into the U.S.
Proper Venue for Resolving the FRAND Disputes
SEP owners often assert their patents outside the U.S., in Germany and the U.K., where the courts are not bound by the U.S. Court of Appeal for the Federal Circuit's smallest salable patent practicing unit standard or apportionment jurisprudence, which generally lowers royalty rates. Courts outside the U.S. tend to rely more on prior license agreements. And, in Germany, courts will generally not determine a truly FRAND rate, only whether an offer or counteroffer was FRAND. Some believe it is also easier to obtain an injunction in Germany than in the U.S.
Adopters, in contrast, prefer to litigate in the U.S. First, U.S. courts are bound by the Federal Circuit's case law requiring (1) that the royalty determination be based on the SSPPU, and (2) that royalties be determined, at least in part, by the scope of the claimed invention(s). These requirements generally prevent a patentee from being compensated for technology that he or she did not invent, reducing the overall royalty rate.
SEP litigation in the U.S. has demonstrated that judicially determined FRAND rates are generally lower than the SEP owner's demand, sometimes significantly lower. Second, an injunction seems less likely in the U.S. so long as the adopter made a genuine but unsuccessful attempt to negotiate a FRAND license and so long as the adopter pays what the U.S. court ultimately determines is a FRAND rate.
SEP litigation is expensive and distracting, and it presents risk for both parties. In addition, SEP owners typically maintain patents in multiple countries, which they can assert parallel litigation to leverage a higher license fee from adopters who must control run-away litigation costs and injunction risk in multiple forums. This reality often results in settlements at higher than truly FRAND rates for patents that are not truly standard essential.
Two-Part Solution: Implement Familiar Rate-Setting Procedures
Congress can legislate two procedures — familiar procedures already implemented in related contexts — to resolve both the essentiality and FRAND disputes.
First, Congress can authorize FRAND rate setting similar to how music royalties are set today. In the Copyright Act of 1909, Congress implemented what is now Title 17 of U.S. Code Section 115 "to balance the exclusive rights of owners of copyrighted musical works with the public's interest in access to the protected works." At that time, the public was grappling with access to piano rolls encoding copyrighted music and "another burgeoning invention, phonorecords."
In 1976, Congress created the Copyright Royalty Tribunal to conduct periodic proceedings to adjust the royalty rate for the license. The CRT judges commence a proceeding to determine royalty rates and terms for the licenses every fifth year. The statute favors negotiated settlements among interested parties, but in absence of a settlement, the CRT judges must determine reasonable rates and terms of royalty payments.
While these provisions of the 1909 Copyright Act were introduced to address the innovation of the piano roll and phonorecord, the policy applies equally to the present-day dispute over wireless telecommunications: "to balance the exclusive rights of owners of [patented inventions] with the public's interest in access to the protected [inventions]."
Congress could implement, in the current Patent Act, legislation similar to Section 15 and Sections 801-805 of the Copyright Act to enable an independent tribunal to set truly FRAND royalty rates for patent claims deemed standard essential by the U.S. Patent and Trademark Office. The royalty rates would be set according to controlling Federal Circuit and Supreme Court case law including concepts of the SSPPU and apportionment discussed above.
With such an approach, SEP owners and adopters have the option of participating in a familiar and transparent rate-setting process that has worked well for decades in the copyright context. While this process will not resolve foreign SEP/FRAND litigation, it will set an important and objective benchmark for the parties and for other courts in other countries.
Second, Congress can authorize the USPTO to render a preliminary determination, at the patent owner's expense, whether particular claims of an issued patent (or allowed claims of a patent application) read on a particular standard. The USPTO would record its analysis in the patent's publicly accessible file history. If favorable, the USPTO's analysis would create a rebuttable presumption that the patent claims are in fact standard essential.
In litigation, this presumption would shift the burden of proof to the adopter to prove that the patent is not standard essential and/or that the claims — whether deemed standard essential or not — fail to read on the adopter's technology. This USPTO review and presumption procedure would be very similar to the USPTO's current review of prior art, creating a rebuttable presumption of validity under Title 35 of U.S. Code Section 282.
Together, these initiatives will ensure a transparent and fair rate-setting process for truly standard essential patents.