The Burden of Proof regarding Cellular Wireless Standard Related Patents: Final Thoughts for Our Critics

“Critics advocate requiring patent owners to establish essentiality, while simultaneously permitting implementers to challenge the same—or to have their FRAND cake and eat it too.” owners of patents for which licensing declarations have been made enjoy more rights than other patent holders? Do such licensing declarations impose obligations on potential licensees rather than on patent holders? Should prospective licensees have no right to challenge such patents? In another responsive article, that is what one commentator claims our series of articles on IPWatchdog asserted, although we never wrote or suggested anything of the sort. In doing so the commentator employs intentionally misleading language like “declared essential patents” to characterize such licensing declarations as claims of essentiality, and “prov[ing]… licenses are needed” which, as will be explained, is not possible. These hyperbolic assertions are commonplace in the world of standards related patents, as are straw-man arguments concocted by implementers trying to escape the need to take a license. While we appreciate that all of this comes down to innovators wanting to be paid for their innovations embodied in standards and implementers wanting to pay less, or nothing, for using those innovations, we’d prefer the debate to be without histrionics and hyperbole.

We hope this final response will clear up any remaining misconceptions.

The Nature and Purpose of a FRAND Commitment

According to one of our critics, “when a holder of a declared essential patent voluntarily agrees to accept a [fair, reasonable and non-discriminatory] FRAND commitment, it has willingly agreed to limit the exclusionary rights associated with that patent” (emphasis added) and “[i]n return… it benefits greatly be expanding the pool of potential licensees… to include all those that support the standard”.  And “[r]ather than imposing obligations on a licensee, the FRAND commitment creates an option for a potential licensee to receive a license on FRAND terms if a license is shown to be necessary” (emphasis added).

The problem with these statements, aside from the fact that they are self-serving characterizations, is that they are provided without any support. Notably, no citation is made to the language of the ETSI IPR Policy or licensing declarations, which is not at all surprising because both are silent with respect to the notions professed. Rather, the ETSI licensing declaration merely says “[t]o the extent the IPR(s) disclosed… are or become and remain ESSENTIAL, the Declarant and/or its AFFILIATES are…  prepared to grant irrevocable licenses under this/these IPR(s) on terms and conditions which are in accordance with Clause 6.1 of the ETSI IPR Policy…”.

While these statements may seem at first glance appealing, it is particularly misleading to advance the notion that patent owners have some duty to prove licenses are necessary because they voluntarily give away rights in exchange for licensing benefits associated with standardization. The problem with this alleged exchange of patent rights for licensing benefits theory is that it requires one to assume that licenses will be forthcoming, which is absolutely counter-factual to the ETSI design, the nature of contracts (which take two to tango) and the real-world practice and experience of innovators. “[A] unilateral commitment by an SEP holder does not impose obligations on potential licensees to take a license or even to negotiate,” the same critic openly acknowledges later in his own article. Indeed, he is correct. While the FRAND commitment requires innovators to offer a license there is no associated obligation for implementors to even negotiate, let alone take a license, even if they are using the standard or infringing the patent.  Of course, this is not to say that patent holders should be able to impose licenses, but rather the “benefits” associated with making IPR declarations to ETSI are grossly exaggerated.

In any event, our articles never said that an IPR declaration to ETSI imposed any obligation on implementers to obtain licenses or to negotiate.  What we did refer to, however, were obligations on implementers who seek to rely on such IPR declarations as the basis for a defense or counterclaim in patent infringement actions.  For example, according to the CJEU’s decision in Huawei v. ZTE  (Case C-170/13), an alleged infringer cannot argue an abuse of dominant position if it does not express a willingness to conclude licenses on FRAND terms and/or diligently respond in good faith to the patent owner’s offer. The Federal Trade Commission’s Decision and Order In the Matter of Motorola Mobility LLC and Google Inc. ( “the Google Consent Decree”) sets forth a similar framework for purposes of Google and/or Motorola seeking injunctive relief.  The Beijing High People’s Court’s Guidelines for Patent Infringement Determination (2017) (“Beijing Guidelines”) also set forth guidelines for when an injunction is appropriate having reference to both actions, and inactions, of an accused infringer.  Notably, these decisions and guidelines refer to situations where an injunction is being sought, which only occurs after issues of infringement and validity have been resolved (i.e. after the alleged infringer had an opportunity to “challenge the claims” of the patent owner).

What it Means When a Declaration is Submitted

According to the ETSI IPR Policy there is an obligation on any MEMBER submitting a technical proposal to draw attention the MEMBER’s IPR “which might be ESSENTIAL” (see section 4.1), i.e.  to disclose any patent asset that relates to the standard or what the standard may become.  Despite this reality, it is nonetheless argued that not all patents for which declarations are submitted ultimately read on the standard, so they “really” aren’t essential, and, therefore, patent owners should prove licenses are needed.  Accordingly, it is argued, a patent for which a declaration is submitted is to be assumed essential only for purposes of requiring the patent owner to surrender patent rights, but it is not to be deemed essential when it comes to whether or not licenses are needed. Heads I win. Tails you lose. Despite this Orwellian doublespeak, we never said that all patents for which licensing declarations have been submitted to ETSI are essential, nor did we say that implementers should be prevented from challenging the essentiality of any patents. Of course, an implementer establishing non-essentiality would simply mean there is no obligation on the patent holder to be prepared to grant FRAND licenses.  In any event, an IP declaration is not a declaration of essentiality (see our recent article on this subject).

Nature and Purpose of the Burdens Under the Patent System

Critics often mistakenly argue that licensing commitments do not change traditional burdens of proof for the patent owner in a patent infringement action to argue that patent owners should prove licenses are needed. This sounds nice at first hearing, but upon deeper analysis conflates the difference between the original infringement action and a defendant’s counterclaims and defenses. As we noted in the fourth article of our series, the burden of proof for FRAND-based counterclaims and defenses in patent infringement actions is on the party raising them.  So, while it is correct to say that licensing commitments do not change the patent owner burdens, such a statement is simply misleading, since the burden of proof with respect to infringement is not the same thing as the burden of proof with respect to FRAND-related contractual obligations, which the patent owner does not bear. See e.g. the ruling of the Court of Appeal of the Hague found Philips owed Asustek no duty to substantiate its offers were FRAND Koninlijke Philips N.V. vs. Asustek Computers Inc. et al. (Case number 200.221.250/01 (Court of Appeal of the Hague, May 7, 2019), pages 57-75), and Judge Rodney Gilstrap’s ruling that patent owners can satisfy their FRAND obligations by either offering a license on FRAND terms and conditions, or negotiating in good faith towards a FRAND license, i.e. not by proving licenses are necessary (see Memorandum Opinion and Final Judgment, HTC Corporation, HTC America Inc v. Telefonaktiebolaget LM Ericsson, Ericsson Inc, Case No: 6:18-CV-00243-JRG (E.D. Texas, May 22, 2019)).  Further, in the same case, Judge Rodney Gilstrap rejected HTC’s assertion that “Ericsson bears the burden of proving that its proposed royalty is FRAND”, instead finding that HTC bore the burden of proving its contractual breach of FRAND claims (see Order re: Defendant Telefonaktiebolaget LM Ericsson and Ericcson, Inc.’s Motion to Confirm Plaintiffs HTC Corporation and HTC America, Inc. Bear the Burden of Proof, HTC Corporation, HTC America Inc v. Telefonaktiebolaget LM Ericsson, Ericsson Inc, Case No: 6:18-CV-00243-JRG (E.D. Texas, November 8, 2018)).  Finally, the author fails to mention that in the very same case he cites for the uncontested proposition that the burden of infringement is on the patentee (In Re Innovatio IP Ventures, LLC Patent Litigation, 956 F. Supp. 2d 925), the District Court found that “the accused infringers should bear the burden of demonstrating the existence of a RAND obligation that limits their damages if they are found to infringe.”

As pointed out by our critic, the Google Consent Decree does not “negate or alter traditional burdens of proof or deprive implementers of their rights to seek judicial review, challenge infringement, or raise defenses…” either. As noted above, however, the Google Consent Decree merely sets out what Google and/or Motorola must do to avoid antitrust liability when seeking an injunction.  It in no way supports the author’s position that an IPR declaration to ETSI obligates patent holders to prove to implementers that their patents are essential and that licenses are necessary.

The Unwired Planet Misdirection

As has become almost cliché, in an attempt to refute our positions, a spurious mischaracterization of the decision in Unwired Planet v. Huawei is foisted upon us like a Scarlet Letter. It has become common to hoodwink those only casually familiar with the decision by saying the decision requires implementers to accept global rate setting. But, as the author well knows, Huawei was not forced to enter into any licenses, global or otherwise. Rather, the English Courts assessed what they believed were FRAND terms and conditions, for patents that had been shown to be valid and infringed, so as to decide whether or not to issue an injunction in the UK. The court presented the option for an injunction to issue in the UK to address the infringement of valid patents found infringed, or to have the matter finally resolved with a license. Huawei chose the license instead of an injunction in the UK. A global rate was not imposed on an unwilling litigant.

Essentiality: Having Your FRAND Cake and Eating it Too 

Essentiality is a condition to the obligation to be prepared to grant FRAND licenses. Nonetheless, critics advocate requiring patent owners to establish essentiality, while simultaneously permitting implementers to challenge the same—or to have their FRAND cake and eat it too. The reason for this seemingly inconsistent position is simple: beyond being a condition to the obligation to be prepared to grant FRAND licenses, essentiality is also a means to establish infringement.

Critics further argue that patent owners should prove licenses are necessary.  But given a license is an “agreement”, which necessitates a meeting of the minds and both parties to assume a certain amount of risk of unknowns, the proposal of critics is the proverbial Catch-22: to meet their obligations to ETSI, patent owners must prove licenses are necessary, but because implementers cannot be obligated to take licenses, licenses can never be necessary. What they really advocate, therefore, is that patent owners should have to sue for infringement on each patent individually and, if successful in doing so, implementers can then invoke their rights to FRAND licenses to avoid an injunction and cap damages to whatever a reasonable arms-length negotiation would have yielded many years earlier, before litigation was necessary. This dynamic is what led former Assistant Attorney General Makan Delrahim to say that hold-out deserves more attention that hold-up, given the “asymmetry in investment timing between the owner/innovator and the implementer…”.

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One comment so far.

  • [Avatar for Ron Katznelson]
    Ron Katznelson
    July 19, 2021 09:27 pm

    As the authors correctly point out, there appears to be a notion among ‘hold-out’ implementers that “patent owners should have to sue for infringement on each patent individually and, if successful in doing so, implementers can then invoke their rights to FRAND licenses to avoid an injunction and cap damages to whatever a reasonable arms-length negotiation would have yielded many years earlier, before litigation was necessary.”

    These hold-out shenanigans should not be available if patent owners who made FRAND commitments to a Standard Development Organization (SDO) actually insisted on enforcing contract common law when dealing with unwilling licensees. A FRAND commitment to an SDO is a contract with the SDO which has 3rd party beneficiaries — would-be implementers of the standard. However, the contract is not consummated with such 3rd parties, as it is merely an offer to license them under FRAND terms. Under contract law, the 3rd party implementer must accept an offer in order to bind the patent holder to his FRAND commitment with respect to that 3rd party. That implementer loses its rights as a 3rd party beneficiary of the patent holder’s FRAND offer if the 3rd party beneficiary rejects a FRAND offer or if it fails to accept the offer within a reasonable time. See “The FRAND Contract” by Greg Sidak.

    Refusing a FRAND offer takes the offer off the table and all bets are off. At that point, if the implementer does not ascend to the offer, the patent owner is actually free to withdraw the FRAND offer with respect to that 3rd party. It may set any other licensing terms, or even refuse to license altogether and seek an injunction. I hope to see patent holders actually take this contract law approach to stop the ‘hold-out’ shenanigans that the authors describe and to incentivize good-faith licensing negotiations.