Lowered expectations for the Unified Patent Court

One patent expert explains it by saying, “Many SEP suits will first be filed at the German local divisions. We do not expect the judges there to rule differently to before.” And overall, they believe, the court is perhaps a little too German-dominated for its rulings to differ markedly from those of the German patent courts.

“Many SEP suits will first be filed at the German local divisions. We do not expect the judges there to rule differently to before.”

Nevertheless, the judges interviewed by JUVE Patent see a possibility for the new court to decide on a FRAND licence rate – and who can predict what new forces and motivations the new spirit of optimism will unleash among UPC judges from 2023?

New arbitration centre

The UPC will also offer the option of arbitration. An arbitration centre will be attached to the new court from the outset. But this has not met with much enthusiasm in the global patent community so far, to put it mildly. Few even know about the project.

The UPC will also offer the option of arbitration.

The UPC Patent Mediation and Arbitration Centre is based in Lisbon and Ljubljana. The UPC website states in a nutshell, “The UPC will have a dedicated Patent Mediation and Arbitration Centre, seated in Lisbon and Ljubljana. The Centre offers support in the settlement of disputes relating to ‘classic’ European patents and Unitary Patents. The Court may explore with the parties, the possibility to reach a settlement using the facilities of the Patent Mediation and Arbitration Centre.”

At any rate, the centre already has its own rules of procedure. But whether it will even be considered for disputes over licence rates will depend very much on which people act as arbitrators. It is precisely this question that has not yet been answered.

Mediation or arbitration?

While UPC arbitration still has a long way to go, proceedings before international courts of arbitration tribunals are already first choice. Patent holders tell JUVE Patent that their experience with arbitration has been positive. Nokia has arbitrated FRAND royalties with several smartphone vendors. “Nevertheless, many implementers are often very reluctant when it comes to arbitration,” says Clemens Heusch.

However, what patent holders like most about arbitration proceedings – the exclusion of the public – implementers see as a major disadvantage. “This secrecy is a problem. To be an effective instrument for dispute resolution, courts of arbitration need to offer more transparency, through publicly accessible rulings, among other things,” says Continental IP counsel Michael Schlögl. “The way arbitration tribunals currently act, proceedings held there contribute more to a lack of transparency.”

Another problem for many in-house representatives is that there is no appeal body.

Another problem for many in-house representatives is that there is no appeal body. Those in the market see mediation as a good alternative to arbitration. Bringing in a mediator early on can prevent deadlocked licensing negotiations from leading to costly litigation. As a go-between, an independent third party can view confidential licence agreements that the patent holder is not allowed to disclose to an implementer and can then propose a competitive rate.

New German way

Mediation and arbitration have the advantage that companies can first negotiate without the pressure of an injunction. To avoid this, German judges have for some time promoted the route via the right of third-party determination (in German, Drittbestimmungsrecht) under German law.

Peter Meier-Beck suggested in an interview with JUVE Patent back in 2021 that, “if the conditions for resolution are more favourable than they might be in a patent infringement lawsuit, you just enter into a licence agreement first. Parties can then resolve any remaining issues later.”

JUVE Patent has learned that no companies have, so far, taken this path. But it also opens up the possibility for German judges to set a licence rate. According to the unilateral right to determine performance  under the German Civil Code (BGB Section 315 to 319), implementers could ask the SEP holder to draw up a licence agreement and initially determine the licence rate as well. The implementer accepts the agreement and pays the licence rate set by the SEP holder. If this is too high, the implementer can have it reviewed by a court. In this case, the German court has to set the licence rate.

One variation would be for the implementer to initially pay only the licence rate it has in mind, so that both companies can enter this on their balance sheets. The difference between this and the rate set by the court is then later transferred.

SEP holders and implementers can specify in advance which court has jurisdiction. It is conceivable that they would agree for the global licence rate to be reviewed by one of the four German patent courts. It would even be conceivable for the parties to agree on the UPC. After all, the court also has competence in respect of actions for compensation for licences, according to Article 32 (h) of the UPC Agreement.

The advantage is that both sides avoid costly patent infringement lawsuits. This also eliminates the compulsory licence defence and the complex examination of whether an offer is FRAND or not. Implementers are no longer operating in the legal vacuum of patent infringement, as a German patent judge explains, because a licence agreement has already been concluded.

“What remains as an uncertainty for both parties is what licence rate the court will later set,” the patent judge said. But it is precisely this uncertainty that is just as difficult for implementers to accept as the fact that they cede control over the FRAND-rate setting to a third party, in this case a court. However, this uncertainty would also exist for the parties if, for example, a London High Court judge or an arbitration tribunal determined a licence rate.

“Try explaining to the CEO that it could be 100 or 300 million euros at the end. No management will go along with that.”

What is more, the uncertainty as to how high the licence rate would ultimately be is very difficult to sell internally to management. “Try explaining to the CEO that it could be 100 or 300 million euros at the end. No management will go along with that,” says a company representative. Large portfolios are said to be worth between half a billion and a billion euros annually.

In an interview with JUVE Patent, representatives of implementers did not seem very impressed by the German solution using the right of third-party determination.

Continental therefore advocates placing the question of injunction at the very end of the negotiation process and first resolving the FRAND rate matter. Willingness should be checked in the second step. Michael Schlögl says, “If it then turns out that an implementer is not willing to accept a FRAND rate set by a court, only then should an injunction follow.”

Such an approach tends to be met with scepticism among SEP holders. According to Clemens Heusch, Nokia always tries to facilitate mediation or arbitration before filing infringement suits with a civil court.

Every step forward helps

Even though it is in virtually all parties’ interest to reach an agreement, their positions are often too far apart. There is no solution in sight at the international level that will make everyone blissfully happy. The technologies and the global markets with their different interests are too complex for that. With the rise of the IoT, this state of affairs is intensifying year after year.

So, what is FRAND? This question will remain difficult to answer for years to come. However, that being said, SEP licences and FRAND have been an important economic factor for a long time now. It is therefore high time that the EU at least puts its own house in order. The EU Commission initiative could be a first step. This should at the very least provide more clarity when it comes to frameworks for the essentiality and determination of FRAND rates.

So, what is FRAND? This question will remain difficult to answer for years to come.

But even greater input from the state will not change the fact that licensing agreements will always fundamentally come down to one thing: the parties wanting to reach an agreement. The market already provides them with numerous mechanisms to achieve an outcome acceptable for everyone involved.

But if they fail to do so, the parties will once again fall back on current case law. The inconsistent interpretation in Europe and global competition between Chinese, European and US courts is a problem, and is likely to remain one, at least in the early years of the UPC. Here, judges from different member states will be called upon to establish a more uniform jurisprudence for Europe.

After all, the fact that most SEP holders are now ­located outside of Europe and are increasingly taking action against European users in the UPC member states makes uniform rules and uniform legal interpretation an economic ­imperative. In the complex world of mobile communication standards and their licences, any simplification is a small step forward. (Co-author: Mathieu Klos)

Read about current expectations of the industry on FRAND rate setting in Europe in Part one: “What is FRAND? The unsolved problem”

Read an overview of the current SEP and FRAND case law in Europe in part two: “Worlds apart in SEP litigation”