12 February 2012

The Fraught Issue of FRAND I: A FRAND Primer

FraughtThis is the first of a three part series of articles.  Part II looks at recent political manoeuvrings of various interested parties, in particular Google, Apple and Microsoft.  Part III covers antitrust issues and how the current disputes over standards-essential patents might be resolved.

Readers who have been following the various mobile device patent disputes over the last few weeks will almost certainly have encountered the term FRAND (‘Fair, Reasonable and Non-Discriminatory’) in relation to patent licensing, and the rights of patent-holders – such as Samsung and Motorola – to sue competitors – such as Apple – for injunctions barring sales of competing products.

However, those not involved in patent licensing might never have heard of FRAND until recently.  A few time-limited Google searches for the term ‘FRAND licensing’ reveals 345,000 results for the past year, with 160,000 for the past month.  Going back, however, there are 104,000 results for the previous 12 months, and only 74,000 for the 12 months prior to that.  Additionally, while the older results are largely legal texts, academic commentary and policy documents, recent results come primarily from the media, including traditional mainstream outlets, as well as online sources such as industry, trade and technology news sites and blogs.

Thanks to some highly-publicised actions by some high-profile entities, FRAND is now pretty much mainstream, at least within the technology media.

The tenor of much recent online commentary is to the effect that the use of FRAND, or ‘standards essential’, patents as weapons in the patent ‘wars’ is at least unethical, probably unconscionable, and possibly illegal.

But before you pick sides in the debate over FRAND, we think there are a few matters you need to mull over, which are not getting the airing they deserve.  And the first, and most important, of these is that most of the current fuss over FRAND is political, not legal, and its media profile is largely the result of carefully-executed PR work by the main players, including Apple, Google, Microsoft, and even the European Commission.

In this series of three articles we are going to talk FRAND.  While the issues are too complex for us to be particularly brief, we will try, at least, to keep our explanations reasonably accessible.

This first article will cover a few background concepts, in particular those of FRAND licensing, ‘royalty stacking’ and ‘patent pools’.  This will lay the groundwork for two further articles, the first of which will look at the ‘politics’ of FRAND in the current disputes.  In the final article, we will look a bit more closely at the validity of some of the claims and complaints being bandied about, and provide our views on possible outcomes and solutions to the problems that are emerging in the mobile market.

‘FAIR, REASONABLE AND NON-DISCRIMINATORY’

The basic principle of FRAND is quite simple.  A company develops some technology, on which it holds one or more patents, and which becomes incorporated into an industry standard which every manufacturer needs to implement in order to participate in the relevant market.  We have written about this before (see FRAND Obligations to be Aired in Australian Court).

So long as the technology is made available to everyone, this is a potential win-win – the industry gets a workable technology on which everybody involved in the standardisation process can agree, and the company that invested in developing the technology gets a guaranteed return on that investment.  Of course, the problem is that the patentee might abuse this position to exclude competitors from the market, which is where a ‘FRAND pledge’ comes in – a promise to license the patents to competitors on fair, reasonable and non-discriminatory terms.

Now for our first warning: do not believe anyone who asserts that there is some common understanding of what is meant by ‘fair, reasonable and non-discriminatory’.  There is not.  The term is not defined, for example, in the European Telecommunications Standards Institute’s (ETSI) IP Rights Policy Document (PDF).  Furthermore, there is no guarantee that it will even mean the same thing in different countries.  In the absence of a clear definition, it will be up to the courts to determine the scope of the FRAND obligation.  And since every individual country has its own historical, legal and political perspective on licensing and competition issues, there is every reason to suppose that slightly different answers may be found in different jurisdictions.

The best ‘guess’ as to the general form of the definition is as follows:
  1. fair has to do with whether or not the terms of the license are consistent with fostering a competitive environment – for example, terms that force the licensee to agree to more than is strictly necessary to gain access to the patented technology may not be ‘fair’;
  2. reasonable relates to the cost of the license – for example, whether the royalty rates are consistent with products and services being provided at reasonable cost to the end consumer; and
  3. non-discriminatory – almost certainly the simplest of the three – means that, in principle, all licensees are to be treated equally so that, for example, a competitor-licensee should not be treated differently from a non-competitor-licensee, all else otherwise being equal.
However, the specifics of terms that may or may not be considered to meet these general requirements will not necessarily be the same in every jurisdiction.

‘ROYALTY STACKING’

We want to throw in a definition of the term ‘royalty stacking’ here.  It is commonly used in some other fields – such as biotechnology – although we have not yet seen it used in relation to the current debate about mobile technology patents.

‘Royalty stacking’ simply refers to the fact that, while individual royalty rates might seem reasonable (e.g. some would see no problem with a 2.25% royalty rate for access to Motorola Mobility’s entire massive portfolio of mobile patents), if licenses are required from multiple patent owners to implement a product or service, the total royalty rate payable can rapidly ‘stack up’.

Which brings us to our second warning: do not believe those commentators in the mobile technology space who give the impression that there is something new and especially problematic about this situation.  As the authors of the article Problems with Royalty Rates, Royalty Stacking, and Royalty Packing Issues (2007) have stated:

There are several techniques to manage royalty stacking and packing: royalty ceilings, royalty floors, variable royalties, and royalty alternatives (lump-sum payments and patent pools). Royalty stacking and packing are serious licensing issues that any organization involved in IP management and technology transfer can, and must, proactively and preemptively plan for and manage.

‘PATENT POOL’

One last definition – a ‘patent pool’ (mentioned in the passage quoted above), as the name suggests, is a single bunch or ‘pool’ of patents which are necessary to implement some specified product or process, and which can be licensed as a complete package.  A ‘pool’ differs from a ‘portfolio’ in that the latter term is normally used to refer to a collection of patents owned by a single entity, whereas a pool typically contains patents owned by a number of different patentees.  Usually the patent owners participating in a pool arrangement are competitors.

Patent pools thus have the potential to be anti-competitive.  A group of patent owners, who otherwise compete with one another in a market, could get together and agree on cross-licensing terms amongst themselves, and then pool all of their patents together and charge unreasonable rates which essentially exclude new competitors from the market.  This would be a form of collusion, and an abuse of collective market power.

In some jurisdictions it is necessary to obtain regulatory approval to operate a pool.  In others it is merely advisable since, if your pool has been approved by the US Department of Justice, or the Australian Competition and Consumer Commission, it will be much harder for an infringer to subsequently claim that they should not have to pay the asking royalty rate because the pool is anticompetitive.

Most pools are, in fact, pro-competitive, because they make it easier for new competitors to enter a market by providing a ‘one-stop shop’ for all the necessary IP rights at a reasonable combined royalty rate.

To our knowledge, there are currently no patent pools specific to the implementation of wireless communications standards.

NEXT TIME…

In the second article in this three-part series we will look at the politics of FRAND, focussing in particular on a number of recent events:
  1. the reported ‘leaking’ of a letter from Apple to the European Telecommunications Standards Institute (ETSI), dated 11 November 2011, complaining about ‘a lack of consistent adherence to FRAND principles’;
  2. Microsoft issuing a statement promising to make ‘essential patents’ available to competitors at fair and reasonable licensing rates, and promising not to seek injunctions or exclusion orders against unlicensed companies making products that infringe these patents;
  3. reports that Google was informing standards setting organizations that Motorola Mobility's standards-essential patents will continue to be available on FRAND terms after its acquisition of the company, followed closely by a ‘leak’ of Google’s actual letter to the IEEE standards body; and
  4. the decision of the European Commission to open a formal antitrust investigation into whether Samsung’s use of its standards-essential patents constitutes illegal anticompetitive behaviour.

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