Transparent Licencing of Standard Essential Patents
The IoT is built on standardised communication technology ensuring the efficient exchange of data between various devices. Since this standardised technology like WiFi, 4G or 5G is protected by multiple standard essential patents, the licensing of these patents is crucial for the success of IoT applications. While it is clear that these standard essential patents have to be licensed under fair, reasonable and non-discriminatory (FRAND) terms, the actual licencing process is still extremely inefficient and the subject of multiple legal disputes all over the world. Patent holders and implementers argue over the fair value of the technology and in many occasions the parties’ views on the fair price differ by orders of magnitude.
While it is often very hard to assess the intrinsic value of a standard essential patent, which may protect only a small and incremental technological advance, but enables important applications and profitable services, it is clear that all implementers should pay substantially the same price for the same use of the technology. It is of course debatable whether the use, for example of 5G data communication, should always come at an identical price, even if the economic value of the actual applications varies dramatically, e.g. between convenience applications in low price consumer goods and safety critical applications in aviation. Still, at least the price for identical applications of a technology within the same market segment should be comparable for all participants.
Ensuring non-discrimination and a level playing field for all market participants, however, is only possible, if the license terms offered by various patentees are transparent in the market. Currently this is clearly not the case, because license agreements for standard essential patents are regularly negotiated individually and subject to strict confidentiality clauses. An implementer interested in using standardised technology can never be sure whether the offered royalty rate is actually comparable to the rates paid by its competitors. Where royalty rates agreed with different licensees had to be disclosed by patentees in actual litigation, it turned out that these royalty rates varied significantly or deviated from publicly announced standard royalty rates. The lack of transparency in the licencing market creates therefore creates distrust and makes the entire process of negotiating licenses for IoT applications burdensome and prone to litigation.
The European Commission’s communication on the EU approach to standard essential patents published on 29 November 2017 acknowledges this lack of transparency in royalty rate setting as a problem, but does include any specific proposals to solve it. According to the European Commission non-discrimination means offering substantially identical royalty rates to implementers who are “similarly situated”, but does not require a “one size fits all” royalty rate for everyone. The European Commission’s communication also stresses that transaction costs for negotiating and concluding FRAND licenses should be kept to a minimum. However, when it comes to actual solutions to the problem, the European Commission limits itself to proposing an expert group “with the view to deepening expertise on industry licencing practices,…”. It is completely unclear how the report on general practices in the licensing market, which can be expected from this expert group will give an implementer assurance that a specific royalty rate offered by a patentee in a negotiation for a specific patent portfolio is actually not higher than the rate offered to a competitor for the same patent portfolio. The obvious solution to this problem would of course be the publication of all royalty rates offered for the same patent portfolio in previous license agreements with third parties. In this way every implementer of the standard could understand whether the currently offered royalty rate is actually non-discriminatory. Exchanging information on prices, however, also raises competition law issues. This may be one reason why the European Commission did not actively endorse the full disclosure of past royalty rates by patentees in its communication.
It appears that at least the Düsseldorf Court of Appeal is prepared to take a bolder approach to this issue in litigation over FRAND royalty rates. If licencing negotiations fail, patentees often sue implementers for infringement of the standard essential patent and apply for an injunction. Under the CJEU’s landmark decision Huawei v. ZTE, the injunction can only be granted, if the patentee made a license offer on FRAND terms to the defendant before bringing the action. Therefore the courts concerned with litigation over standard essential patents now have to review whether a license offered by the patentee prior to bringing litigation is actually FRAND. Since German procedural law does not allow for pre-trial discovery, the German courts are dependent on the disclosure of past royalty rates by the patentee. This disclosure is regularly refused by patentees who invoke their right to the confidentiality of business secrets. To resolve this issue, the Düsseldorf Court of Appeal has already established a procedure whereby the patentee’s prior license agreements have to be disclosed either to the defendant’s attorneys under a confidentiality order or also to the defendant, if the defendant is prepared to sign a confidentiality agreement. One reason to require an additional confidentiality agreement by the defendant was that due to confidentiality clauses the patentee is not entirely free to disclose prior license agreements. If the defendant refuses to sign a confidentiality agreement, the disclosure of prior license agreements can be restricted and the patentee’s burden of proof regarding the FRAND compliance of the royalty rate offered is lowered.
In a recent case, the Düsseldorf Court of Appeal has now provided some additional clarifications on the patentee’s right to keep royalty rates in third party licenses confidential (decision of 25 April 2018, file ref. I-2 W 8/18). The Court of Appeal reiterated that it is absolutely mandatory to give the defendant access to the actual license agreements concluded by the patentee. Only with access to these license agreements the defendant is able to assess whether the patentee’s royalty rates are actually non-discriminatory. Moreover defendants only have to accept strict confidentiality agreements in litigation, if the plaintiff can legitimately claim confidential treatment for information to be disclosed to the defendant. The Court then takes the view that royalty rates agreed for a patent, which by law has to be licensed under FRAND terms to everyone, are usually not a business secret entitled to special protection. These licence terms should generally be transparent to the market, because they should be the same for comparable licensees anyway. Consequently it is not immediately apparent in the Court of Appeal’s view why the patentee should have a legitimate interest in keeping license terms negotiated for standard essential patents under a FRAND undertaking secret. In this context the court also points to license pools like MPEG LA, which publish standard license terms on their website.
With this further clarification, it will become more difficult for the owners of standard essential patents litigating in Düsseldorf to keep royalty rates previously offered to third parties secret. This will potentially increase transparency in the licencing market for standard essential patents and can provide a meaningful contribution to ensuring more effective licensing of patents required for IoT applications.