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[ASIA IP] SEP and the Cities : https://www.asiaiplaw.com/section/in-depth/sep-and-the-cities

In this ever-changing world, licensors and licensees must keep up with the global nature of the standard essential patent market, or their corporate decisions would be negatively affected. Johnny Chan reports.

 

Standard essential patent (SEP) holders are obliged to license under fair, reasonable and non-discriminatory (FRAND) terms. A royalty amount should therefore be fair and reasonable, but who draws the line? That line can be determined based on two factors: royalty base and rate.

“Royalty base may be the sales amount of either the end-product or the smallest saleable unit that incorporates the SEP. The appropriate choice is licensee-dependable. The end-product value approach would be appropriate in case the licensees are manufacturers of intermediate units or smallest saleable units,” says Ben Yuu, managing partner at NAM & NAM in Seoul. “On the other hand, the SSU value approach would be more appropriate in case the licensees are the manufacturers of the end products.”

Rate determination may be based on several approaches, including: ex ante, comparable license agreement, top-down and present value-added.

• Under ex ante, royalty is determined considering the additional value of the patents versus the value of the next best alternative prior to the standardization.
• Under comparable license agreement, royalty is determined considering the examples of royalties that were actually applied in other comparable licenses.
• Under top-down, royalty is determined by assessing the aggregate royalty for all relevant SEPs and then apportioning the aggregate royalty to each SEP. The aggregate royalty is determined based on the net profits of the SSU manufacturer.
• Under present value-added, royalty is determined considering the increase in the value of the licensed product that is specifically attributable to the SEPs.

“Each approach has pros and cons. The choice depends on the parties’ relative positions and the available information,” Yuu says. “Many suggest that an appropriate combination of the approaches is preferable.”

 

origin: ASIA IP (https://www.asiaiplaw.com/section/in-depth/sep-and-the-cities)

“Royalty rates are the most efficiently calculated by using one approach as a reference together with another approach as a cross-check,” he says. “More specifically, the royalty is first determined based on a reference approach and then appropriately adjust the determined royalty based on cross-check approach.”

“The comparable license agreement approach might be the best choice as a reference approach,” he adds. “It is the most convenient and fast approach. Once a set of licenses is selected as most closely comparable, a fair and reasonable range of royalty may be figured out, in which also the parties may negotiate royalty within that range. To choose comparable license agreements, some factors are considered such as technological complexities, the portfolio of the SEP, and the licensed products, etc.”

“As for a cross-check approach, I’d choose present value-added. Most of all, since this approach is a type of top down, it may be appropriate to avoid the royalty stacking issue,” he explains. “Royalty is a function of the future incremental value generated by implementing the technology covered by SEPs. Royalty should therefore reflect the pure contribution of the SEP to the value of the licensed product. The incremental value in the value chain for such as end products, intermediate products or SSUs are to be summed up without redundancy. The incremental value is generated from the additional customer demand for the licensed products, which includes end product manufacturers, intermediate products and SSUs. The additional customer demand comes from the consumer’s willingness to pay for the standardized products. The incremental value may also be calculated by doing market research on the actual price of the licensed products. Here, the incremental price is a function of the incremental value of the SEP technology, which will be in need of an economic model factoring in demand and competition valuables.”

 

Trust antitrust

Due to FRAND terms, there is no monopoly in SEP licensing.

According to Taiwan’s Patent Act, the patentee is entitled to license or enforce its patent, including any legal action against unauthorized use of the patent. Nonetheless, in order to determine or clarify whether it is improper licensing or non-licensing, which may involve antitrust issues, the Fair Trade Commission (the authority in charge of antitrust and unfair competition under the Fair Trade Act) has set Fair Trade Commission Disposal Directions (Guidelines) on Technology Licensing Arrangements to govern the licensing by which the Fair Trade Commission stipulated specific situations as FRAND, says Ruey-Sen Tsai, a partner at Lee and Li in Taipei. “Unless the licensing constitutes unfair competition in violation of the Fair Trade Act or violates any antitrust stipulations, it should be fine for the patentee to license or enforce its patent by taking any legal actions as allowed under the Patent Act.”

origin: ASIA IP (https://www.asiaiplaw.com/section/in-depth/sep-and-the-cities)

Once the patentee violates the Guidelines, the Fair Trade Commission will determine the antitrust issues and whether to impose punishments on the patentee at its discretion or upon the complaints from any third party, Tsai says. “Besides, once the FTC determines that the patentee has any unfair competition in licensing, the IP office may possibly grant compulsory licensing to the relevant enterprises.”

 

Patpool

Patent pools are not a new concept, but they seem to be enjoying something of a renaissance in areas such as high-efficiency video coding, automotive and the internet of things. A lawyer explains how pools are a sensible approach when licensing SEPs: “Like any other solution that attempts to balance the interests of the parties in a licensing discussion, patent pools have their advantages (and disadvantages), and can be used as a sensible alternative to bilateral licensing discussions. Patent pools can be particularly beneficial for smaller players in a standards ecosystem, where the smaller player may not have the resources in undertaking a lengthy process for deciding royalty rate,” says Pankaj Soni, a partner at Remfry & Sagar in Gurugram.

“Pools can also work well in instances where cross-licensing is not an option and therefore, the potential licensee may not have much to gain from a bilateral discussion. Moreover, in cases where the major players in a standards ecosystem are aligned and agree on the framework of a common pool platform, the system can be rewarding because pools potentially reduce transaction costs, offer some sense of transparency about the proposed licensing terms, distribute risks among the players and, should mitigate hold-up and hold-out problems. In many instances, essentiality checks by licensees can be optimized since such checks don’t have to be repeated. Last but not least, even in situations where the licensors are unable to align their business interests to create a single pool, different pools can be created to take advantage of the above points.”

“Nevertheless, patent pools are not the panacea for SEP licensing problems and must be looked at in specific context to decide the fruitfulness of engaging in a pool versus entering a direct licensing discussion with the SEP holder,” says Soni.

 

Caution!

As the growth of IoTs leads to a soaring demand in connected devices that read on SEPs across a range of sectors, another expert provides some tips for the implementers in these sectors to reduce their litigation risk.

origin: ASIA IP (https://www.asiaiplaw.com/section/in-depth/sep-and-the-cities)

As SEPs differ from usual patents, owners of SEP are required to disclose related information and commit to license to implementers and claim royalty under FRAND declaration. “Such declaration is purposed to bind the SEP owners and guide parties to make negotiations and reach license agreements,” says Zunxia Li, a partner at IP March in Beijing. “Therefore, it is general rather than specific, and related details of license are left to further negotiation between parties.”

“Because of the generality of such declaration and balance of respective interests of both parties that patent hold-up and hold-out occur frequently, SEP-related litigation increases year by year,” Li says. “In the judicial practice, SEP-related lawsuits mainly focus on dispute for infringement, royalty and abuse of dominant market position, wherein, dispute for infringement is mainly about grant of injunction relief, and dispute for royalty is mainly in determining the rate and the calculation process, these two kinds of dispute are closely related to implementers, and the third kind of dispute is usually initiated as countermeasure by implementers against accusations from SEP owners. In dealing with these, understanding of the legal nature of FRAND and compliance of parties to FRAND often has a crucial impact on the resolution of the disputes.”

“From a global perspective, due to differences in civil and contract law systems across countries, judicial practice makes different understanding of the legal nature of FRAND,” she says. “In the US, the courts deem a FRAND declaration establishes a contractual relationship between the SEP owner and the standard setting organization, and implementer as third-party beneficiary of the contract. In the EU, the majority of courts hold that a FRAND declaration is only an invitation to offer to implementer. In China, the courts deem that a FRAND declaration should not be regarded as establishment of a licensing contract relationship between parties, but should be as a criterion to be followed by parties in the license negotiation, and as basis to determine fault of parties in the negotiation.”

Due to the differences in understanding the legal nature of FRAND worldwide, specific content of FRAND and degree of fault of parties in the licensing negotiation are usually the key of examination for different jurisdictions, especially the courts of China. “Based on the examination, the responsibility of parties would be determined, especially when determining whether to grant injunctive relief to the SEP owner in the dispute. Specifically, when determining whether injunction is granted, it is important to consider whether parties have obvious fault in violation of the principle of good faith in the license negotiation. If the parties involved have no fault, or the SEP owner has fault but implementer has none, the injunction usually will not be granted, through which the abuse of patent will be avoided. If the SEP owner has no fault but the implementer has, the SEP owner usually is supported and an injunction is granted, through which the ‘hold-out’ of implementer will be avoided. In the case that both parties are at fault, whether the injunction is granted will depend on the overall balance of degree of fault of both parties and interests of both,” she adds. “For example, in Huawei v. Samsung for patent infringement, the Chinese court concluded through trial that Samsung had obvious fault in the licensing negotiation, while Huawei had none, and thereby supported Huawei by granting injunctive relief. From this aspect, it can be conveyed that grant of injunction is closely related to the fault of implementer, and is usually premised on the existence of fault of implementer. As to dispute of royalty, the premise for the court to accept such cases usually requires the SEP owner to prove that it has fully negotiated with the implementer on the license conditions, but failed to reach agreement.”

origin: ASIA IP (https://www.asiaiplaw.com/section/in-depth/sep-and-the-cities)

In view of corresponding legal provisions and judicial practices worldwide, though, there are some differences in identifying fault of parties in the licensing negotiation, the implementer and SEP owner may be identified as having fault at least in the following circumstances, she says:

For the implementer:

• Refusing to receive the negotiation notice from the SEP owner, or failing to give a clear reply within a reasonable timeframe, or make substantive reply to the patent information (i.e., a list of sample patents and claim chart, etc.) provided by the SEP owner;
• Failing to actively reply whether to accept or not within a reasonable period after receiving written license conditions from the SEP owner, or failing to propose new license conditions when refusing to accept the license conditions raised by the SEP owner;
• Obstructing or delaying to undertake the license negotiation without justified reasons;
• Claiming obviously unreasonable conditions in the process of negotiating and implementing license conditions, resulting in the failure to reach the license; or Refusing to sign a confidentiality agreement without justified reasons, resulting in the inability to continue negotiation.

“In countries such as Japan, where the implementer requires the SEP owner to provide corresponding proof of necessity and validity of the patent, and otherwise will refuse the license negotiation, or where the implementer fails to explain the calculation basis of the royalty proposed in the license negotiation, or fails to explain that the counteroffer is based on a FRAND declaration, the implementer may also be deemed faulty,” says Li.

For the SEP owner:

• Failing to inform implementer in writing of infringement, and not specifying the scope;
• Failing to issue a negotiation notice to implementer, or though a negotiation notice is issued, not specifying the scope of patent involved in accordance with business practice and trading habits though a negotiation notice is issued;
• After the implementer expresses his intention for license negotiation, then failing to provide the implementer with related information (i.e. patent list and claim chart) according to the business practice and trading habit; or
• Failing to put forward specific license conditions and calculation basis of royalty to implementer, or the proposed license conditions are obviously unreasonable, resulting in failure to reach agreement.

“Based on the above, the implementer is advised to pay attention to the following instructions when licensing SEPs in order to reduce potential litigation risk,” says Li.

1. Once it is determined a license is needed, take the initiative to express the intention of negotiation to the SEP owner;2. After receiving written notice of negotiation from the SEP owner, do not ignore the notice but analyze whether the notice is clear (are the patent list, claim chart and specific conditions provided?), and respond within the specified time. Meanwhile, process the content to determine whether terms are reasonable. If not, propose new ones and if possible, give calculation basis of the proposed royalty;3. In the absence of legitimate reasons, try to avoid delays; and4. Secure evidence relating to the fault of the SEP owner conducted in license negotiation.

 

Changes

There are several facets of SEP licensing that can – and probably should – be reformed. However, the challenge is to balance the competing interests of patent holders and implementers to create a platform that will be largely non-litigious, manage the expectations of the parties and keep consumer interests at the fore. “There is not a one-size-fits-all approach to SEP licensing as each area of technology, business environment, size of player, antitrust implications, etc, create unique requirements (and limitations) which will dictate the kinds of reforms that are needed,” Soni says. “Nonetheless, three broad based themes for reforms could be (i) transparency with respect to the rates and terms of the license; (ii) a predictable framework for establishing essentiality of SEP and; (iii) parameters on what constitutes FRAND.”