It is a commonly accepted norm that holders of essential patents should not exploit the additional power gained as a result of their patents being included in a standard. Owners of standard-essential patents are therefore frequently bound to adhere to fair, reasonable and non-discriminatory (FRAND) terms that are somewhat vague and subject to fact-specific interpretation. In a bid to strengthen FRAND terms in standard-setting, Chief Economists from the US Federal Trade Commission, the US Department of Justice and the EU Directorate General for Competition, agreed recently on a set of four, non-binding suggestions that should—if followed by standard-setting organisations (SSOs)—increase the level of protection afforded to consumers and promote innovation.
Standard-essential patents are crucial in many industries, notably in the field of IT. SSOs therefore invariably require that access to such patents be given on FRAND terms. In practice, however, SSO FRAND requirements have not prevented significant disputes from arising in connection with the licensing of standard-essential patents. These disputes have included actions by patent holders seeking injunctive relief that could change competitive market outcomes. Examples include the EU cases opened recently that involve some of the largest IT companies in the world that at the forefront of technological innovation. It is therefore important to identify what are the implications of FRAND and how FRAND negotiations should be conducted.
SSO FRAND Policy Suggestions
It is in the context of the current IT patent wars that EU and US antitrust enforcers have identified and suggested four changes to be made to the patent policies of SSOs. These suggestions are aimed at ensuring that disputes in relation to patent royalties do not hamper competition. They are not aimed at formulating guidelines as to the actual level of FRAND royalties, which will continue to be an area of tension. The policy suggestions advocated by the Chief Economists are as follows:
- FRAND commitments made to an SSO should be binding upon subsequent purchasers as well as the current patent holder. This would arguably have the effect of preventing FRAND commitments from becoming weaker or more diluted upon subsequent sales of intellectual property.
- SSOs should be required to set out procedures on how to resolve future disputes, such as by specifying whether disagreements should be settled through arbitration or other alternative methods of dispute resolution. Being able to adjudicate disputes over FRAND swiftly would not only render markets more accessible to smaller businesses, but would also have the accompanying effect of increasing the clarity of the commitments themselves.
- Licensees should have the option of licensing FRAND-encumbered patents on the basis of a cash consideration. In other words, licensors should be obliged to set a cash price instead of relying on cross-licensing arrangements between patent holders. This cash option is expected to introduce more transparency to the process, thereby making the evaluation of the proposed licensing terms easier for third parties.
- Limitations should be placed on patent holders that seek to exclude licensees from the market though injunctions once a FRAND commitment has been made. Injunctions could only be sought, for example, where a company implementing the standards is unwilling to have a third-party determine the appropriate licensing terms, or is unwilling to accept licensing terms approved by such a third party.
Two international SSOs—the European Telecommunications Standards Institute and the International Telecommunication Union—have already responded by suggesting a pragmatic solution to resolving inconclusive licensing negotiations. Specifically, they propose that stalemated licensing negotiations over standard essential patents ought to be resolved by a judge or a mediator. It would then be up to the independent adjudicator to determine, ex ante, whether the licence agreement in question proposes terms that are FRAND-compliant. Importantly, this model would ensure that no injunctions could be sought until there is a finding that the relevant party has failed to negotiate in good faith and under FRAND terms.
The Chief Economists have stressed that the four rules are merely suggestions rather than official policy lines. It is recognised that—if adopted—these recommendations would nevertheless have the potential to clarify substantially the intellectual property policies of SSOs, which in turn might not only result in reducing future disputes over patent royalties, but also help important markets for standardised products to work more efficiently, thus benefiting innovation directly, as well as stimulating competition.