A Comprehensive Overview (and Sound Analysis) of the Law and Economics of FRAND Litigation, Here and Abroad

Alden Abbott —  15 June 2017 — 1 Comment

Too much ink has been spilled in an attempt to gin up antitrust controversies regarding efforts by holders of “standard essential patents” (SEPs, patents covering technologies that are adopted as part of technical standards relied upon by manufacturers) to obtain reasonable returns to their property. Antitrust theories typically revolve around claims that SEP owners engage in monopolistic “hold-up” when they threaten injunctions or seek “excessive” royalties (or other “improperly onerous” terms) from potential licensees in patent licensing negotiations, in violation of pledges (sometimes imposed by standard-setting organizations) to license on “fair, reasonable, and non-discriminatory” (FRAND) terms. As Professors Joshua Wright and Douglas Ginsburg, among others, have explained, contract law, tort law, and patent law are far better placed to handle “FRAND-related” SEP disputes than antitrust law. Adding antitrust to the litigation mix generates unnecessary costs and inefficiently devalues legitimate private property rights.

Concerns by antitrust mavens that other areas of law are insufficient to cope adequately with SEP-FRAND disputes are misplaced. A fascinating draft law review article by Koren Wrong-Ervin, Director of the Scalia Law School’s Global Antitrust Institute, and Anne Layne-Farrar, Vice President of Charles River Associates, does an admirable job of summarizing key decisions by U.S. and foreign courts involved in determining FRAND rates in SEP litigation, and in highlighting key economic concepts underlying these holdings. As explained in the article’s abstract:

In the last several years, courts around the world, including in China, the European Union, India, and the United States, have ruled on appropriate methodologies for calculating either a reasonable royalty rate or reasonable royalty damages on standard-essential patents (SEPs) upon which a patent holder has made an assurance to license on fair, reasonable and nondiscriminatory (FRAND) terms. Included in these decisions are determinations about patent holdup, licensee holdout, the seeking of injunctive relief, royalty stacking, the incremental value rule, reliance on comparable licenses, the appropriate revenue base for royalty calculations, and the use of worldwide portfolio licensing. This article provides an economic and comparative analysis of the case law to date, including the landmark 2013 FRAND-royalty determination issued by the Shenzhen Intermediate People’s Court (and affirmed by the Guangdong Province High People’s Court) in Huawei v. InterDigital; numerous U.S. district court decisions; recent seminal decisions from the United States Court of Appeals for the Federal Circuit in Ericsson v. D-Link and CISCO v. CSIRO; the six recent decisions involving Ericsson issued by the Delhi High Court; the European Court of Justice decision in Huawei v. ZTE; and numerous post- Huawei v. ZTE decisions by European Union member states. While this article focuses on court decisions, discussions of the various agency decisions from around the world are also included throughout.   

To whet the reader’s appetite, key economic policy and factual “takeaways” from the article, which are reflected implicitly in a variety of U.S. and foreign judicial holdings, are as follows:

  • Holdup of any form requires lock-in, i.e., standard-implementing companies with asset-specific investments locked in to the technologies defining the standard or SEP holders locked in to licensing in the context of a standard because of standard-specific research and development (R&D) leading to standard-specific patented technologies.
  • Lock-in is a necessary condition for holdup, but it is not sufficient. For holdup in any guise to actually occur, there also must be an exploitative action taken by the relevant party once lock-in has happened. As a result, the mere fact that a license agreement was signed after a patent was included in a standard is not enough to establish that the patent holder is practicing holdup—there must also be evidence that the SEP holder took advantage of the licensee’s lock-in, for example by charging supra-FRAND royalties that it could not otherwise have charged but for the lock-in.
  • Despite coming after a particular standard is published, the vast majority of SEP licenses are concluded in arm’s length, bilateral negotiations with no allegations of holdup or opportunistic behavior. This follows because market mechanisms impose a number of constraints that militate against acting on the opportunity for holdup.
  • In order to support holdup claims, an expert must establish that the terms and conditions in an SEP licensing agreement generate payments that exceed the value conveyed by the patented technology to the licensor that signed the agreement.
  • The threat of seeking injunctive relief, on its own, cannot lead to holdup unless that threat is both credible and actionable. Indeed, the in terrorem effect of filing for an injunction depends on the likelihood of its being granted. Empirical evidence shows a significant decline in the number of injunctions sought as well as in the actual rate of injunctions granted in the United States following the Supreme Court’s 2006 decision in eBay v. MercExchange LLC, which ended the prior nearly automatic granting of injunctions to patentees and instead required courts to apply a traditional four-part equitable test for granting injunctive relief.
  • The Federal Circuit has recognized that an SEP holder’s ability to seek injunctive relief is an important safeguard to help prevent potential licensee holdout, whereby an SEP infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect.
  • Related to the previous point, seeking an injunction against a licensee who is delaying or not negotiating in good faith need not actually result in an injunction. The fact that a court finds a licensee is holding out and/or not engaging in good faith licensing discussions can be enough to spur a license agreement as opposed to a permanent injunction.
  • FRAND rates should reflect the value of the SEPs at issue, so it makes no economic sense to estimate an aggregate rate for a standard by assuming that all SEP holders would charge the same rate as the one being challenged in the current lawsuit.
  • Moreover, as the U.S. Court of Appeals for the Federal Circuit has held, allegations of “royalty stacking” – the allegedly “excessive” aggregate burden of high licensing fees stemming from multiple patents that cover a single product – should be backed by case-specific evidence.
  • Most importantly, when a judicial FRAND assessment is focused on the value that the SEP portfolio at issue has contributed to the standard and products embodying the standard, the resulting rates and terms will necessarily avoid both patent holdup and royalty stacking.

In sum, the Wong-Ervin and Layne-Farrar article highlights economic insights that are reflected in the sounder judicial opinions dealing with the determination of FRAND royalties.  The article points the way toward methodologies that provide SEP holders sufficient returns on their intellectual property to reward innovation and maintain incentives to invest in technologies that enhance the value of standards.  Read it and learn.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

One response to A Comprehensive Overview (and Sound Analysis) of the Law and Economics of FRAND Litigation, Here and Abroad

  1. 

    Mr. Abbott, here you criticize the use of anti-trust laws and proclaim that contract law, tort law and patent law are better suited to resolving FRAND issues; yet previously, you have suggested it a violation of anti-trust for a standards organization to attempt to solidify (a priori) the contractual meaning of FRAND commitments.

    How do you reconcile those positions?

    In all the rest of the world, we don’t expect parties to buy pigs in pokes — and we certainly don’t argue that such is somehow economically beneficial to society.

    An IP holder who wishes to have their IP included in a standard should be able to decide, upfront, how much they need to be compensated to achieve a fair return — and so it should not be a burden for them to commit to an actual price (let alone commitments far short of an actual price), upfront. This approach would allow standards organizations to make rational decisions as to whether the offered IP provides sufficient value to justify the cost *before* deciding to include it in a standard.

    Of course, no IP holder is compelled to participate in any particular standard process — there are many competing standards organizations, and an easy ability for holders of critical IP to create their own standards organizations. Realistically, IP holders have greater freedom to decide to participate or not participate in a given standards process than do standards implementers, once standards have been adopted. So it’s puzzling how you could consider almost anything done by a standards organization — let alone merely trying to solidify the contractual meaning of FRAND commitments — to raise antitrust concerns, while simultaneously rejecting anti-trust as a tool for gauging FRAND commitments by SEP holders.

    If an IP holder has IP that would be critical to *any* standard in a particular domain, they effectively have complete control: they are under no obligation to license the technology at all, let alone under FRAND terms. Any would-be standard will be forced to include their IP without a FRAND commitment, and they can unilaterally decide which standards succeed or fail by their unilateral licensing decisions. (Still, if this is how they value their IP, they should be forced to show their hand upfront. Necessity is the mother of invention, and clearly taking such a position upfront could be the spark to find alternatives.)

    Everybody else is just hoping to have their otherwise-avoidable IP included the standard.

    The position you endorse is a status quo where FRAND commitments have effectively no teeth at all, resulting in a completely lopsided negotiation post-adoption, where SEP holders possess all of the leverage — often far, far more leverage than is justified by the actual value of their IP.

    A fair negotiation to license IP that could have been excluded from a standard can only occur before that IP is incorporated into the standard. As such, it should not only be recognized as legal, but as desirable and beneficial, for standards organizations to negotiate even full licensing terms, before incorporating IP into standards. In such a model, those who truly should have significant leverage (critical/unavoidable IP) will fully maintain that leverage, while those who shouldn’t (optional/avoidable IP) will be subject to the ordinary market forces (e.g., competition for selection) to which they ought to be subject.

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