What is FRAND? The unsolved problem

The rates paid by an implementer to an SEP holder should be fair, reasonable and non-discriminatory. But what exactly is fair and reasonable in each individual case? And who determines the licence rate? The opinions of SEP holders and implementers differ greatly. Things get particularly heated when it comes to litigation over patents essential for mobile communication standards.

The all-important question – what actually is FRAND? – is as relevant today as it was some 20 years ago, with the prevailing view being that the market should sort it out. “I firmly believe that, ultimately, it is up to the companies to find an answer,” said former presiding judge at the German Federal Court of Justice Peter Meier-Beck in an interview with JUVE Patent.

“The parties know best what FRAND is in each individual case. They just need to be willing to find it,” said another German judge.

But the world has not been getting any simpler since the first disputes over standard patents, with the digitalisation of society and business bringing growing complexity. And it is not only the technology that is becoming more complex. Mobile phone manufacturers were the first to use the standards, and carmakers are now following suit. More products and sectors will join them. For a long time, the main action was between US, European, South Korean, and Japanese companies, but now Chinese companies are entering the scene on a massive scale.

“The parties know best what FRAND is in each individual case. They just need to be willing to find it.”

Now NPEs as well as industrial companies are exploiting their SEPs in huge numbers. And, finally, the lines between SEP holders and implementers are becoming increasingly blurred. Traditional implementers like Huawei and Oppo are evolving into SEP holders with the 5G standard. Mobile communications standards are big business, and the stakeholder interests are becoming more and more diverse.

Under these circumstances, agreeing on a licence amount of several hundred million, in some cases billions, is a colossal challenge. The flaw in the system from the beginning was that there were no clear guidelines as to what a FRAND licence is actually worth, in monetary terms.

A matter of viewpoint

Some implementers therefore complain that there is no free market for SEPs whereby competition can regulate price. They accuse the patent holders of abusing their market power in many cases. “Standardisation has given holders of an SEP a strong monopoly, which goes far beyond the monopoly effect of a normal patent,” says Michael Schlögl, head of IP SEP at Continental Automotive, blaming first and foremost the injunction pressure that SEP holders can build.

“As long as the lever of automatic injunction hangs over every implementer, especially in Germany, fair licensing negotiations are impossible. It’s not easy to negotiate on a level playing field when you have a gun to your head,” says Schlögl. “This way users don’t have much choice. As long as a patent is essential and valid, you have to take a licence for it, no matter the price.”

Asian implementers are also currently experiencing a lot of pressure from injunctions, which they are threatened with in various countries when it comes to patent litigation – especially in Germany.

“As long as a patent is essential and valid, you have to take a licence for it, no matter the price.”

Litigation, however, is often preceded by years of bilateral negotiations. “Most patent holders negotiate with potential licensees for a very long time before they take legal action,” says Clemens Heusch, global head of dispute resolution at Nokia. According to Heusch, while out-of-court talks are ongoing, some users string along SEP holders for a long time. “Litigation is always Nokia’s last resort, when all other avenues to reach an agreement are exhausted.

The majority of Nokia’s patent licensing agreements are agreed amicably,” says Heusch. “To put this into context, since 2017 Nokia has concluded or extended over 150 licences and has only launched six litigation campaigns. Unfortunately, however, litigation is sometimes the only way to bring those who do not wish to play by the rules to the table to negotiate a FRAND licence in good faith.”

Thus, SEP holders and patent pools are keen to point out that most licence agreements are concluded without litigation.

And if you’re unwilling…

On the other hand, in many cases critics consider the requirements placed on licensee willingness too high and complain that judges often focus on this issue alone. They call for courts to put more emphasis on the amount in a FRAND rate. “Claimants often use the discussion about licensee willingness to avoid the FRAND rate issue and to push through an injunction,” says Michael Schlögl. Another demand from the industry is for courts to look more closely at patentee willingness than they previously have.

The existing global case law gives clear guidelines how to be a willing licensee.”

In fact, one might think that the question of what constitutes willingness in SEP disputes has already been answered umpteen times. “The existing global case law gives clear guidelines how to be a willing licensee. There are more than 40 cases in which courts have issued their views why a certain behaviour is FRAND or not,” says Emil Zhang, director of European IPR at Huawei.

Transparency versus NDAs

The majority of implementers are quite willing to take a licence. However, they complain of a lack of transparency in the negotiations, which they say makes it difficult to determine which rate is really FRAND in each individual case. “The commitment to licence SEPs on FRAND terms is much broader than the royalty rate and should encompass all aspects of a licensing agreement,” says Evelina Kurgonaite, secretary general of the industry association Fair Standards Alliance.

“Standardisation typically eliminates competition for a given technology. A hypothetical licensing negotiation, as if there were still competition – before the industry is locked into the standard (ex ante) – helps define what an SEP owner could charge, should the licensee have alternatives to choose from,” adds Kurgonaite.

It is therefore not uncommon for potential licensees to demand that patent holders disclose other licensing agreements that they have concluded for the standard with other market participants, to ensure they are not paying over the odds. If a licence agreement is then concluded, however, the implementers for their part seek non-disclosure agreements. This often makes negotiations a tightrope walk for patent holders in terms of what information they can disclose to other implementers to reach an outcome.

Some in the market advocate a disclosure of information within a confidentiality club. But much can already be researched using the information publicly available. “If you look closely at the patent landscape in the technological field and evaluate the publicly available information, you often get a good idea of what the FRAND rate might be,” says Emil Zhang.

Another problem is the question of what actually constitutes the essentiality of a patent – and who determines this. Up to now, it has been the patent holder that declares its IP right as standard essential with the ETSI or other standard-setting organisations (SSO). That creates a problem as it is very difficult to be, simultaneously, an interested party and a judge of essentiality.

“Of course, SEP holders do not want to risk missing out on a potentially essential patent. Therefore, we see a tendency to over declare,”

“Of course, SEP holders do not want to risk missing out on a potentially essential patent. Therefore, we see a tendency to over declare,” says Christian Loyau, director legal affairs and governance at ETSI. Some studies have shown that a significant number of SEPs submitted to ETSI are completely or partially invalid. (Co-author: Mathieu Klos)

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

Read in part three about the expectations of the industry whether arbitration or the UPC could solve problems in finding FRAND rates: “Lowered expectations for the UPC”