Patentees owning patents used in an industry standard are generally obliged to license those patents on fair, reasonable and non-discriminatory (FRAND) terms. However, the question of what constitutes a FRAND rate has long been unclear, creating commercial uncertainty for licensors and licensees alike. In a judgment issued at the beginning of April 2017 the English High Court has set a FRAND royalty rate for the first time and given guidance about how such royalty rates should be calculated in future.
In order to make products that comply with an industry standard a company must obtain a licence under any patents used in the standard - referred to as ‘standard essential patents’ (SEPs), because they are essential to the working of the standard. SEPs bring with them a risk of ‘hold up’ whereby the SEP owner holds the licensee to ransom on licence fees, knowing that the licensee is obliged to take a licence if it wishes to use the standard. To avoid hold-up, standard-setting organisations often require patentees owning SEPs to give an undertaking to grant licences on fair, reasonable and non-discriminatory (FRAND) terms. Although in principle this should avoid hold up, the question of how to calculate a FRAND royalty rate has remained unclear, and this uncertainty has been at the root of a series of worldwide licensing disputes between major players in the mobile telecoms field recently. Companies large and small need to know how to assess whether a licence is FRAND in order to obtain commercial certainty in settling their licensing terms.
An answer on FRAND
At the beginning of April 2017, the English High Court (Birss J) gave the first, and long-awaited, English judgment focusing on how to determine a FRAND rate. The issue arose in a dispute between Unwired Planet, which owns a worldwide portfolio of patents including numerous SEPs relating to European Telecommunications Standards Institute (ETSI) standards, and Huawei, which needed a licence to use these patents in relation to its mobile devices.
The court is willing to set a FRAND rate
The decision demonstrates that the English Court is willing to set a FRAND rate itself rather than merely declaring whether a particular set of negotiated terms are FRAND. Birss J indicated that reference to comparable, freely negotiated licences will often be an important element in setting the FRAND rate where such comparable licences are available. Other methods of assessment such as a ‘top down’ method could also be used, although he thought this method might be more useful as a cross check. (A ‘top down’ method involves determining the patentee (licensor)’s share of the SEPs relevant to the standard and applying that to the total royalty to be charged for the standard as a whole.)
Smaller licensees should not be discriminated against
Birss indicates that one legitimate way to determine a FRAND rate would be to determine a benchmark rate based on the value of the patentee’s portfolio. The benchmark rate should be the same whether the licensee is a large, established company or a small, new entrant.
Worldwide portfolio licences can be FRAND
The judge confirmed that where comparable licences in the industry are worldwide portfolio licences, such a portfolio licence may be FRAND. This will be welcomed by licensors in relation to telecoms SEPs in particular where portfolio licences are commonly used, and a licensee’s insistence on taking a country-specific licence or a single patent licence could be disruptive. Birss comments that a licensor and licensee acting in this situation on a willing basis would regard country by country basis as ‘madness’.
FRAND extends to the negotiations
Another controversial question had been whether the patentee (licensor)’s FRAND obligation extends beyond merely offering a FRAND licence. Birss held that FRAND characterises the terms of a licence but also refers to the process by which a licence is negotiated. A licensee who wishes to take advantage of the patentee’s FRAND obligation, must itself negotiate in a FRAND manner. Just as the licensor should not indulge in ‘hold up’, a powerful licensee should not use its position to ‘hold out’ against agreeing a fair rate so delaying the process and achieving a lower rate. In such a situation the patentee (licensor) may be justified in applying for an injunction against the licensee for patent infringement, potentially obliging them to take their product off the market.
Implications of the decision
Given the high stakes involved in relation to mobile telecoms licensing the decision is likely to be appealed, so it is not clear that it represents the courts’ final answer. As it stands, the decision offers answers to some of the questions that have been creating uncertainty in relation to licensing negotiations, in particular the fact that insistence on a worldwide portfolio licence can be FRAND and the confirmation that comparable licences are an important point of reference. The points made about fair rates for smaller licensees were to be expected but will nevertheless be welcome to smaller businesses. The judgment leaves open the possibility of using other methods of assessing FRAND but it seems likely that companies will play safe and use the suggested approaches in most cases. Finally, commentators have suggested that Birss got his actual assessment of the FRAND rates in this particular case wrong by not fully reflecting the complexities of the industry: the take-away point here may simply be that an objective assessment of FRAND will always be fraught with difficulty and looking to the courts for such an assessment should always be a last resort.
Tom Lingard