Bringing Unwilling Licensors to the Table

Editor’s note: The author represents clients chiefly characterized as implementer companies, though many have considerable patent portfolios of their own, including SEPs, and participate in standards development.

Some months ago, two courts in Germany granted injunctions against Oppo, one based on a standard essential patent (SEP), and another on a non-SEP related to Wi-Fi. Rather than cave to the demands of Nokia, Oppo has since decided to pull its products out of the German market.

Since then, some commentators have claimed that this is another example of so-called “implementers” engaging in hold out. They point to the need for strong injunctive relief in order to force these “unwilling” licensees to the table.

The problem with these arguments is that they are based on the false premise that SEP holders are always willing licensors. Incidentally, they oftentimes also elide the fact that, as in this case, Oppo is a major SEP holder itself, and it is highly likely that Nokia is infringing many of Oppo’s SEPs. Nokia may be just as unwilling to license Oppo’s patents – but this is beside the point for the sake of this article.

Rather than the need for stronger injunctive relief, we need stronger incentives to bring unwilling licensors to the negotiating table. With the threat of injunctions, SEP holders have free reign to set non-negotiable supra-FRAND rates – a take or leave it proposition that equates to pay up or shut up (shop). For smaller companies this is a death sentence. When a “negotiation” is a take it or leave it proposition, it’s no longer a “negotiation”, it’s a dictation.

The problem in Europe is that some German courts do not even consider whether the SEP holder has actually made a FRAND offer before issuing an injunction. By misapplying the European Court of Justice’s framework in Huawei v ZTE, German courts have essentially allowed themselves to become the preferred destination for SEP holders and have given SEP holders an opportunity to evade competition enforcement.

If the (FRAND) market rate for my portfolio is €2 per device, and I’m asking for €10, as a patent holder, I have no incentive whatsoever to negotiate the price down to €2. So long as I can seek injunctive relief, I can continue to insist on getting €10 in the (high) likelihood that an injunction will force you to pay me €10. The fact you cannot avoid using my patent(s) because of the industry agreement to standardize a specific technology over other alternatives means that in the end, a SEP holder could, absent antitrust enforcement, force a company to pay or close up shop (as Oppo has done).

This is the exact opposite of what standardization is meant to be about.

Refusing to Negotiate a FRAND License is a Sign of Unwillingness

Indeed, while the “unwilling licensee” moniker is bandied about regularly by SEP holders, never enough attention is paid to licensors who are “unwilling” to enter into good faith negotiations. And there are many ways in which a licensor can be unwilling.

For example, licensors frequently use the excuse of non-disclosure agreements to withhold important information that allows the licensee to assess whether the licensing offer is FRAND and to propose a FRAND counteroffer. Even where this is possible, and a counter-offer is made, licensors have been known to reject out-of-hand multiple FRAND counter-offers without any explanation as to why. These are just a couple of examples of behavior SEP holders engage in.

In a FRAND licensing dictation, the SEP holder holds all the cards, sets all the rules, and keeps the injunction trump card tucked up its sleeve just in case it doesn’t get its way. Things desperately need to change to create a level playing field.

What is needed to bring unwilling licensors to the table is a set of ex-ante rules that apply pre-litigation that compel licensors to enter into FRAND licensing negotiations in good faith. The aim should be to decrease the amount of cases going to court. To start with, these rules should stipulate transparency requirements, such as providing information on comparable rates without NDAs. This does not entail disclosing every detail about those comparable licensing agreements, but it should certainly be enough that a licensee can clearly see that the licensor’s offer is FRAND and is in line with other agreements it entered into with similarly situated companies. Rules are needed to set a de minimis standard for the set of information required for a licensor to share for it to be considered willing.

Most importantly though, we need to disarm the injunctive threat. Courts must be more hesitant to issue an injunction without having first assessed whether the licensor is willing, including by examining whether their licensing offer is actually FRAND, and whether the licensor responded in good faith to the FRAND counter-offers of the licensee. Only when the threat of injunctions is removed will we see licensors acting with a genuine effort to reach a FRAND rate for SEPs.

Ultimately, the ability of European companies to get licenses on genuinely FRAND terms will be critical for the future success of the European economy as we push forward with digitalization. Instead of pushing companies out of European markets, we need stronger incentives for market entry and competition in such a way that supports the purpose of the standardization system.

See other views on this topic below:

‘I Shall Be Released’: A Favorite Song Among SEP Implementers

The Federal Government Should Reinstate the 2019 Policy Statement on Standard Essential Patents

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Copyright: stuartmiles