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Strategic Considerations in Litigating FRAND Royalty Rates for Standard Essential Patents

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Many strategic considerations influence negotiations to license patents that protect the intellectual property incorporated in technical standards. This article analyzes some of these factors and how they should impact a party’s evaluation of how to conduct negotiations for a royalty rate for patents that cover technical standards, and when to cease negotiations and initiate litigation.

Standards provide the framework for many technological innovations. They enable coordination and interoperability of technological devices developed by different entities. Examples of commonly used standards include WiFi, HTTP, MP3, USB, and LTE. These standards enable internet and wireless communication, the connection of computers to peripheral devices, sharing and streaming of audio files, and cellular communication, among other technologies. Standards are typically defined, developed, and propagated by standard setting organizations, or standard developing organizations (“SSOs” or “SDOs”). SSOs are usually comprised of individual technical experts and major multinational corporations, represented by their technical experts. Members of an SSO usually contribute technical features to the development of the standard(s) governed by that SSO. These members may choose to protect their technical contributions by applying for patents, and SSOs typically require that their members declare and identify any patent assets they own that cover aspects of the standard. Such patents are identified as Standard Essential Patents (“SEPs”).

SSOs also typically require their members to sign an SSO agreement obliging members to license their SEPs on terms that are fair, reasonable and non-discriminatory (“FRAND”) (also referred to as “RAND”). The purpose of this FRAND obligation is to reduce barriers to the adoption of the standard and reduce the possibility that an SEP holder can demand exorbitant royalty rates for its SEPs after working to encourage the adoption of the standard for which the SEPs have been declared essential.

Though SEP holders are required to license their SEPs at FRAND rates, there is no widely accepted notion of what constitutes a FRAND royalty rate. Thus, an SEP holder and a party seeking to develop a product that practices the standard (the “implementer”) usually enter negotiations to determine a FRAND royalty rate. These negotiations occur against the backdrop of many factors. Given that an SEP holder’s patents may be a fraction of the thousands of SEPs for a given standard, implementers often argue that the negotiated FRAND royalty rate for the SEP holder’s portfolio should be a representative portion of the total royalty rate for the use of the standard. Also, because the SEPs are self-declared, there is no objective determination as to whether the patents are essential to the standard or how essential they are. In addition, during negotiations of the FRAND royalty rate, SEP holders often assert infringement simply by virtue of the accused product practicing the relevant standard. For the implementer, regardless of whether it actually infringes the asserted SEPs, the cost of litigation and the potential for additional lawsuits from other SEP holders may not be worth litigating infringement of every patent in the SEP holder’s portfolio.

Whether to Negotiate or Litigate
Throughout negotiations the parties will weigh whether they can obtain a better outcome by negotiation or through litigation. Under the framework for negotiating a FRAND rate for an SEP, both parties have a cause of action if good faith negotiations fail. The parties will need to independently determine when further negotiation is unlikely to be fruitful and it is time to initiate litigation.

If an SEP holder believes that the implementer is no longer negotiating in good faith towards a FRAND royalty rate and has unilaterally abandoned negotiations or is attempting to stall indefinitely, the SEP holder may file suit for infringement of its SEPs. The SEP holder would argue that it has met its obligation to offer a FRAND royalty rate and negotiated in good faith without progress, and ask the court or jury to determine infringement, as well as a FRAND royalty rate.

On the other side, if an implementer has a basis to believe that the royalty rate offered by an SEP holder is not FRAND, the implementer can initiate suit for a declaratory judgment that the SEP holder’s offer was not FRAND or that the SEP holder had breached its obligation to offer a FRAND license for its SEPs. In Microsoft Corp. v. Motorola Inc., No. C10-1823JLR, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013), Microsoft, the implementer, initiated suit alleging that Motorola, the SEP holder, had breached its SSO agreement by offering a royalty rate that was not FRAND. Microsoft had been engaged in negotiations with Motorola and initiated suit 11 days after its second counteroffer to Motorola. Its argument was validated when the court determined Motorola’s royalty rate offer was not FRAND and awarded a lower royalty rate than that offered by Motorola. This is the typical outcome in such litigation - a FRAND rate decided by the factfinder. Historically, the FRAND rate were typically decided by judges, but given the Federal Circuit’s decision in TCL v. Ericsson, 942 F.3d 1360 (Fed. Cir. 2019), FRAND royalty rates will likely be decided by jurors in future.

Under U.S. law, the FRAND obligation placed on an SEP holder can limit the SEP holder’s ability to initiate suit or seek emergency remedies if it believes an implementer is infringing its SEP. Consistent with its obligations under the SSO agreement, an SEP holder should first attempt to negotiate in good faith so as not to be accused of breaching its duty under the SSO agreement to license its SEPs. In addition to limiting when an SEP holder can initiate suit, the FRAND obligation also limits the remedies available to the SEP holder. The fact that an SEP holder signs an agreement to license its SEPs indicates that money is an adequate compensation for infringement. As such, it can be difficult for an SEP holder to win an injunction to prevent the implementer from manufacturing or introducing its product to market. Obtaining an injunction under the eBay Inc. v. MercExchange, LLC standard requires proof the plaintiff will suffer irreparable harm for which monetary damages would not adequately compensate them. 547 U.S. 388 (2006).

To overcome this hurdle, an SEP holder will have to make the case that the “infringer [has] unilaterally refuse[d] a FRAND royalty or unreasonably delay[ed] negotiations to the same effect.” Apple Inc. v. Motorola Inc., 757 F.3d 1286, 1332 (Fed. Cir. 2014) (overruled on other grounds by Williamson v. Citrix Online, LLC, 792 F.3d 1339, 1349 (Fed. Cir. 2015)). In such a situation, the SEP holder may be able to convince a court to issue an injunction to prevent the release to market of the allegedly infringing product. This is because the FRAND obligation presumes a willing licensee. Hence, though there is an obligation on the SEP holder to license the SEP for compensation, if  the implementer, refuses to provide a counteroffer or delays negotiations without reason for years, there could be an inference that the implementer has no desire to license the SEP. This inferred refusal to license the SEP would allow the implementer’s alleged infringement to continue and could provide a basis for the SEP holder to argue that it will be irreparably harmed. The possibility of an injunction against its product does not mean an implementer must accept an offer for a clearly discriminatory royalty rate. The requirement instead is that the implementer continue to engage meaningfully in negotiations or move to initiate suit itself.

Where to Initiate Suit
In addition to the question of when to proceed with litigation, the question of where to file a complaint can be equally important. It is important for the party initiating suit to initiate suit in a forum with judicial oversight over a market that is important to the other party. National courts cannot enforce patents outside of their national jurisdiction. Yet, in many instances FRAND judgments involve FRAND rates for a global patent portfolio. Despite jurisdictional limits, judgments from national courts involving FRAND rates for a global patent portfolio are effective because the implementer agrees to be bound by the decision. The reason for such acquiescence is often because the jurisdiction where the case is decided is economically important to the implementer. For example, in the case decided by the Supreme Court of the U.K., where the court set the FRAND rate for a global portfolio, Unwired Planet International Ltd. v. Huawei, [2020] UKSC 37, Huawei was required to submit to the court’s decision as to a global FRAND rate or forgo access to the U.K. market. Where the market is important enough, the party against which the judgment is to be enforced will likely submit to the court’s judgment. The U.S. market is important to most major technology companies.

While legal precedent in the U.S. encourages implementers to engage in good faith negotiations, precedent in Germany and the U.K. place a greater burden on implementers.1 Under German law, an implementer must communicate its willingness to negotiate in a clear and unambiguous manner. Sisvel v. Haier, Case No. KZR 35/17, FRAND-Einwand II (Fed. Ct. Justice, Nov. 24, 2020). Even if presented with a royalty rate that deviates from that offered to a similarly positioned implementer, the implementer is required to continue to engage in negotiations and work to reach consensus with the SEP holder. During negotiations, the implementer should stay engaged and document communications that can make a persuasive case for a lower royalty rate, a case that could persuade a court if presented to the court. In Unwired Planet, the Supreme Court of the U.K. held that a court in the U.K. could enjoin an implementer from alleged infringement where the implementer is willing to take a U.K. license but unwilling to take a worldwide license. [2020] UKSC 37. The implementer must provide a counteroffer based on the worldwide portfolio if that is the offer it receives, even if it has no desire for a worldwide license.

These European decisions give an SEP holder leverage going into a negotiation and could encourage the SEP holder to preemptively initiate suit in Europe. This is a risk an implementer will need to monitor when negotiating a FRAND royalty rate with an SEP holder that may have reasons to avail itself of the favorable precedent in either European or British courts.

In the U.S., while the obligation to negotiate a FRAND rate is placed on the SEP holder alone by virtue of the SSO agreement, there is still an expectation that the implementer will engage in negotiations in good faith. Failure to do so allows the SEP holder to proceed with an infringement suit as a means to resolve the infringement dispute and the FRAND rate of its SEPs.

Decisions reached by courts in various jurisdictions have created incentive for forum shopping as well as the need to anticipate when it is necessary to abandon negotiations and initiate litigation. Despite the favorable precedent for SEP holders in Europe, the U.S. is still an attractive forum for filing suit for many SEP holders and implementers. U.S. precedent from judicial decisions determining FRAND rates provide an analytical framework for parties to follow in negotiating FRAND royalty rates. These decisions also provide guidance for the parties to follow in litigating cases before judges or juries. For an implementer, U.S. jurisprudence regarding the obligation to continue to negotiate even where the FRAND royalty rate seems discriminatory on its face, is more favorable than precedent in Europe. On the other hand, while U.S. law may not be as favorable to an SEP holder as European law, there are still remedies for an SEP holder who is faced with an intransigent licensee under U.S. law. And as noted earlier, the U.S. is also a key market for most technologies.

1 The discussion of German and British precedent is done with the goal of highlighting the factors parties negotiating FRAND royalty rates should consider. The author of this article is not licensed to practice German or British law. For specific legal questions related to these issues in those jurisdictions, please consult a lawyer licensed in Patent law in the relevant jurisdictions.

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