Standard Essential Patents: Examining and Learning from the European Approach

Given the case law, one might be forgiven if one thought that fair, reasonable and non-discriminatory (FRAND) is an implementer’s get out of jail free card in the United States with respect to issues dealing with standard essential patents.

Magnifying glass on Europe following introduction and article have been adapted from a panel presented during IPWatchdog’s Patent Masters Symposium – “Standard Essential Patents: Striking a Balance Between Competition & Innovation,” held September 10-11 in Arlington, Virginia. This is part one of a two-part series.

Standards-declared patents have been challenged in ex parte and post-grant review for years as part of enforcement efforts and other strategies, though the volume of patents declared essential and their largely unlitigated status has limited the appeal of post-grant challenges against them. One such standard, High-Efficiency Video Coding (HEVC), promises to be the successor to the current H.264 standard used by most streaming visual media.  As all parties seek to clear risk and license as they implement, developing patent pools have been utilizing new strategies for licensing standard-declared patents.

Recently, Unified Patents launched an HEVC zone aimed at encouraging adoption and shedding light on the standard-essential patent (SEP) landscape, and has conducted damages studies, landscape models, and analysis of the patent landscape around the HEVC standard. As part of those efforts, Unified has been challenging patents related to the standard. To date, only a handful of litigations have been filed related to HEVC patents. 

My participation in this panel was prompted by an article I wrote about Unified Patents’ attempts to invalidate, using inter partes review (IPR) before the USPTO, a number of patents in HEVC Advance and Velos’ patent pools of HEVC declared patents. In that article, I made a few observations:

1) Regulators, of late, have asserted that patent pools are a good way to license SEPs.

2) There are a lot of unhelpful pejoratives being hurled around with respect to SEPs.

3) There are a lot more declared SEPs that are part of the two HEVC focused patent pools (HEVC Advance and VELOS) that Unified Patent has targeted than Unified has been claiming in their press.

4) The real party in interest doctrine for IPRs appears to be a mess and I present the germ of an idea to fix it.

As I considered what to present for the Patent Masters Symposium, it occurred to me that a large part of what conferences are all about is to toy with ideas—even partially baked one— and then get feedback. So here it goes.


The European Approach to SEP Licensing

It appears to be well accepted in at least Europe that SEP owners and implementers must follow a set pattern of negotiation, mostly deriving from a duty of good faith (either implied in contract, or in some civil law countries like Japan, explicitly from statute), deviation from which will either remove from the SEP owner the right to seek an injunction or from an implementer the defense from an injunction under the FRAND regime.  Indeed, Europe seems to be taking the lead here. Thus, when the Japanese Patent Office published guidelines for SEP licensing in June of 2018, they—for the most part—followed European practice and not the United States.

Under these guidelines, an SEP holder that fails to make a compliant FRAND offer that includes at least a listing of SEPs alleged to be infringed, the basis of infringement, a royalty demand and an explanation for the demand, as well as giving the implementer a reasonable amount of time to respond, will lose the right to seek an injunction.

Conversely, an implementer who receives a compliant FRAND offer and fails to respond with a compliant FRAND counteroffer in a timely manner will lose the defense to injunction.

In all these interactions it is presumed that both parties negotiate in good faith.

What was particularly heartening about the Huawei v. ZTE decision by the European Court of Justice (ECJ)—from which the case law supporting these positions (for the most part) derives—was that, for what I believe was the first time, there was a consequence enshrined by a jurisdiction’s highest court for an implementer that engages in efficient infringement, i.e., is an unwilling licensee.

Indeed, I remember very vividly being told in 2013/2014 by the powers that be at the European Union’s Directorate-General for Competition (DG- Comp) that the remedy for efficient infringement is patent litigation. But the unwritten assumption was that if you sue an infringer and seek an injunction, the full force of the DG Comp would come down on you and make your life difficult, to say the least, so you had better be sure that your injunctive requests were justified.

FRAND and Standard Essential Patents in the United States

U.S. case law does not really focus all that much on particular SEP licensing practices.  What with Judge Selna giving TCL the same license rates that Apple received, despite Apple settling six months into litigation and TCL fighting for four years in litigations around the world, one might be forgiven if one thought that fair, reasonable and non-discriminatory (FRAND) is an implementer’s get out of jail free card: do what you want until you get caught with a judgment, and then you can always say the magic word “FRAND” and you will automatically receive a license based on the best possible terms that the SEP owner negotiated with a third party, regardless of that third party’s situation.

Judge Selna should have heeded Judge Wyzanski’s comments in 1948 in Rudenberg v. Clark when talking about a consent decree under the antitrust laws:

“2. To construe the decree as keeping licensing opportunities forever available to persistent infringers would serve no public policy and no public purpose … . [The Attorney General] undoubtedly was seeking to …assur[e] equality of opportunity to all who might have use for inventions disclosed in patents. That policy was intended to give the same chance to all who are or may be in competition regardless of whether they have or lack large funds and influential connections. But it was not intended to place the individual holder of patents at the mercy of large corporate enterprises which could use the invention, decline to accept the inventor’s reasonable offers, allow him to sue for infringement and in the end, if beaten in the infringement suit, pay him not even a royalty high enough to cover the expenses of the litigation but the lowest royalty rate the inventor is receiving from anyone whatsoever. Such a result would enhance not diminish the evils with which an Attorney General might properly be concerned.”

Nevertheless, I think there is a way to incorporate the European approach to SEP licensing into the U.S. framework. One can argue in the U.S. contractual framework for FRAND obligations is that these contracts presume that the implementers will negotiate with the SEP owner in good faith. One can further argue that implementers who DO NOT negotiate with the SEP owner in good faith are not covered by the terms of the FRAND contract and thus are NOT third party beneficiaries of the SEP owner’s contract, whether unilateral or with the SDO.

To the extent that these propositions are accepted by the court, it seems to me that a party that sues first and asks questions later loses its right to assert or prevent an injunction.

Thus, it would seem that an implementer that, unprovoked by an assertion or litigation or in the presence of a FRAND offer, and without responding with or proffering a FRAND counteroffer, decides to start a campaign to nullify an SEP portfolio through IPRs, straw man validity actions or nullity suits or oppositions, may be putting themselves outside the FRAND regime and precluded from claiming a FRAND defense to injunction.

Now, perhaps one could argue that nullity suits are a public good. Thus, for example, European case law prohibits no-challenge clauses in licenses (i.e., licensees cannot be prohibited from seeking to kill the licensed patents). Indeed, when Vringo was being investigated by DG Comp, it was seriously suggested to me by the economists at DG Comp that I offer a license with a variable royalty rate that continually fluctuated based on the number of then valid patents to allow for licensee nullification to have impact on royalty rate. Aside from this being ridiculously impractical—a royalty rate of the day?—and unfair— why else would parties enter into contracts if not for a degree of certainty?—I shut down the conversation by saying that I was all for it if the fluctuation were two ways, as I would plan to develop or acquire as many patents as possible to increase the royalty rate.

However, to be fair, the success rates of SEPs in validity challenges in Europe and the United States are not great—at least in the reported statistics. I was privileged to assert the first cellular infrastructure SEP found valid and infringed in the UK, and the first cellular SEP that could not be designed around and was not optional in the history of the UK.  It was the one of the few across Europe.

In a subsequent article, I will look at the statistics on SEPs in litigation in both the United States and Europe, where the Patent Trial and Appeal Board (PTAB) fits into all of this, and offer a theory for fixing the PTAB’s misguided approach to the real party in interest doctrine.


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