The Trouble with FRAND and SEPs–We Cannot Litigate our Way Out.

  • by Maxim Waldbaum

    In a free economy, there exists an inherent tension between the need to encourage individual innovation and the need for shared action between economic actors. FRAND—fair, reasonable and non-discriminatory terms—has been a means for finding the appropriate balance. Therefore, recent developments in the courts and in arbitration regarding the interpretation of FRAND have serious implications for inventors and the global economy as a whole.

    Let’s take a brief step back to make clear what FRAND is: It’s a voluntary agreement entered into by members of an industry to allow necessary technology to be shared. The inventor is paid a royalty fee deemed to be reasonable. When the system operates at equilibrium, an industry avoids monopoly—thereby benefiting consumers—while innovators still get the financial rewards necessary to encourage them to develop new technologies.

    Standard-essential patents (SEPs) is the term used by standards-setting organizations (SSOs) in each industry. An organization–for example, the Institute of Electrical and Electronics Engineers (IEEE) will issue a standard for an invention, which is then subject to approval by the Justice Department.

    The system loses it balance when consensus over just remuneration for innovation breaks down and there is considerable evidence that is taking place. Consider the following recent developments…

    *In Great Britain, Judge Colin Bliss issued a 163-page ruling declaring that Huawei was seeking compensation for wireless technology at a level that was unreasonable—and that the company will lose access to the United Kingdom market unless it accepts a royalty rate Judge Bliss deems to be reasonable.

    *Qualcomm has clashed with both Blackberry and Apple recently regarding a fair and reasonable rate for its semiconductor technology. Qualcomm entered into arbitration with Blackberry…and was forced to pay over $800 million. The conflict with Apple just ended with Apple no longer paying Qualcomm any significant royalties.

    *Ericsson Inc. is the latest innovator to feel the pinch, as HTC America filed a FRAND suit in the federal court system, charging Ericsson with a refusal to accept fair and reasonable rates for patents pertaining to cellular and wireless networks (HTC America, Inc et al v. Ericsson Inc et al, Case Number 2:17-cv-00534)

    The net result of all these cases can be to discourage innovation. When inventors are not confident in a reward they consider fair, it can have a negative effect on technological progress. To that end, the European Commission is working on developing a framework that will provide confidence to patent holders while still enabling industries to move forward collectively in an environment free of monopolistic practices.

    Perhaps more important is what SSOs themselves can do to bring greater clarity to the process. In the past, the standards for defining a SEP were deliberately ambiguous–the shades of gray allowed an industry room to negotiation and meet the financial interests of different parties on a case-by-case basis.

    But that very ambiguity is now inviting the current problems. The IEEE came out with more concrete standards regarding the commitments and compensation involved with SEPs and it remains to be seen if other SSOs will follow suit.

    That’s a challenge easier said than done. The telecommunications industry faces a conflict between inventors, who are naturally reluctant to license their patents for less than the going rate…on the other hand, SSOs note that when a patent is defined is “essential” that going rate becomes significantly higher than it would have been otherwise. Finding the right middle ground in compensation will go a long way toward defining the innovating environment for inventors.

    We must find the right middle ground through negotiation rather than litigation or there will be lasting damage to innovation.And the effort to re-establish FRAND’s equilibrium is going to be of vital importance in the months ahead.

     

    Eaton & Van Winkle partner Maxim Waldbaum has worked on resolving IP disputes for over forty years and has authored several books on the subject and has specialized expertise in the arena of international commercial arbitration intellectual property. Contact Mr. Walbaum and EVW today to set up a consultation regarding your own IP legal needs.