The licensing of standard-essential patents (SEPs) on fair, reasonable, and non-discriminatory (FRAND) terms is a longstanding issue. Recently, SEP licensing has attracted increasing attention as technological developments accelerate the proliferation of the internet of things (IoT). For small and medium-sized enterprises (SMEs) that develop devices for IoT use cases like agriculture, manufacturing, healthcare, and consumer electronics, the ability to either license on FRAND terms or to get access to fully licensed modules and chipsets is vital for their competitiveness and innovative capacity.
To explore some of the questions surrounding FRAND licensing and consider steps to ensure a fair and balanced SEP system for all stakeholders, the ACT | The App Association hosted an online conference “High-Level Reflections on Standard-Essential Patents” on November 10.
In his opening remarks, Iban Garcia Del Blanco, Member of the European Parliament (MEP) and Vice-Chair of the Legal Affairs Committee, noted the importance of the ability to get a direct license for the competitiveness of European companies. Such a license needs to be balanced against the patent owners’ right to enforce their patents in the case of infringement so that tensions and issues between the stakeholders’ positions can be resolved. He noted in particular that EU leadership in industrial digitalization requires a robust standardization strategy with involvement from both the European Commission and the European Parliament.
Slawomir Tokarski, director of industrial policy and innovation in the European Commission’s Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, gave the keynote address. He highlighted that the Commission is keeping a close eye on SEPs and developments around the issue but made clear that the position of the Commission has not changed since 2017. Nonetheless, the Commission is concerned that the current legal disputes in the automotive sector will spill over into other IoT verticals. Therefore, the Commission is eager to find a solution to SEP licensing that balances the interests of all parties.
The opening remarks and keynote were followed by two panel discussions.
Panel I: Use-based pricing a hindrance to innovation?
Moderated by Dr. Rebekka Porath (Policy Director, Intel GmbH)
Professor Dr. Henkel (TUM School of Management) gave a broad overview of the IoT context in which the licensing of SEPs takes place. Based on his interviews with SMEs and start-ups, Prof. Henkel opined the solution is upstream licensing with price differentiation at the chipset level. The use-based licensing methodology, which means licensing happens at the end-device, hinders innovation, especially in start-ups and SMEs. Barriers induced by use-based licensing include: (i) high transaction costs because of informational asymmetries and opportunistic behaviour, (ii) slow adoption of new IoT technologies, (iii) impediments to downstream innovations, (iv) inconsistent licencing practices.
Sylvie Vollet (General Counsel) and Koen Van Oost (System Architect) of App Association member company AirTies shared their experiences of trying to license SEPs as an SME. They both noted that the process is unnecessarily complicated and that it is often unclear how the claims of the SEP align with the standard in question. AirTies voiced frustration about having to spend hundreds of human-hours per year to deal with baseless SEP claims from patent holders. In addition, the resource asymmetries between a small company and a SEP holder mean that AirTies will never be in a position to be able to litigate. Koen Van Oost noted, in particular, that there is an excess of infringement claims on small companies.
Dr. Roya Ghafele (Director, OxFirst) noted that the views of consumers are not being adequately represented in the SEP debate. She called on the European Parliament to launch an initiative to examine this area of law in detail. Dr. Ghafele also elaborated further on the various licensing methodologies the European Commission suggested in its 2017 Communication on SEPs, namely the present value-added method, not to be confused with use-based licensing. Dr. Ghafele stated that the present value-added method makes a clear departure from hedonic regression models and shows great promise for accurately and fairly valuing SEPs.
Sabine Agé (Partner, Hoyng Rokh Monegier) mentioned the lack of case law on the topic of use-based licensing and valuation because courts in the EU have shied away from determining FRAND rates. Except for the English High Court in Unwired Planet v. Huawei, there are few decisions to establish a precedent. Nonetheless, there seems to be a broad consensus that the top-down approach combined with a bottom-up, comparable licensing approach is preferred.
Panel II: The antitrust implications in the refusal to license standard-essential patents
Moderated by Jim Beveridge (Innovators Network Foundation Fellow)
Dr. Frank-Erich Hufnagel (Partner, Freshfields Bruckhaus Deringer) opened the discussion by outlining the ongoing litigation between Nokia and the automotive sector. The key issue in those cases is whether licensees in the value chain are entitled to a license. Dr. Hufnagel expressed concern that European courts (especially German courts) are not fully grasping or considering the issues in SEP licensing. Rather than undertake a careful economic analysis of the issues, courts are all too ready to issue injunctions.
Hans Joachim Gerstein (Partner, Gramm Lins & Partner) emphasised that patent law requires a license-to-all approach. He cautioned that if Europe cannot resolve issues of licensing in the value chain, European manufacturers will be forced to purchase components from Chinese suppliers. Such a development would undermine the European industrial strategy and Europe’s digital sovereignty.
Brian Wyld (Former CTO), of App Association member company Wyres S.A.S., shared his experience of working as an engineer at small and large IT and telecommunications companies for 25 years. Mr. Wyld stressed that for an SME, SEPs pose a significant challenge that can determine business decisions. As an SME that implements various technology standards in its products, Wyres relies on its chip suppliers like Nordic Semiconductor, to sell them products that are free of third-party rights. Without that guarantee, Wyres would never use those standards in its products because it simply does not have the resources to deal with SEP licensing issues.
To conclude, Marianne Frydenlund (Legal Director, Nordic Semiconductor) highlighted that as a vendor to companies like Wyres, Nordic Semiconductor would prefer to be able to sell products that are fully licensed with the cost already incorporated into the chips they sell. Unfortunately, the company is unable to get licenses from SEP holders because they refuse to engage in negotiations. There are no licensing models for cellular IoT, which inhibits the rollout of IoT in the European Union. She echoed the concerns of Mr. Gerstein, that in the future, companies will purchase their components from Chinese companies that can acquire licenses.
After a Q&A with the audience, the event wrapped up. If you missed the conference, you can read some of the highlights on Twitter and access the full video of our event here. We thank our speakers and our members for contributing to a great event!