Part one of the webinar series: A new framework for standard-essential patents (SEPs)
On 27 September 2021, ACT | the App Association held the first in a series of public events covering fundamental standard-essential patent (SEP) licensing legal and policy issues that impact the ability of European small businesses to innovate and compete in internet of things (IoT) markets and will only increasingly do so. This inaugural event focused on injunctions and explored whether this legal measure constitutes a part of the concept of fair, reasonable, and non-discriminatory (FRAND) licensing terms.
Opening address
Member of the European Parliament (MEP) Marion Walsmann (Germany, European People’s Party), who is also the Rapporteur of the own-initiative report on the Intellectual Property (IP) Action Plan, gave opening remarks. MEP Walsmann highlighted that even if patent holders and innovators who use standards conduct many negotiations in good faith, multiple issues remain, including patent hold-up by SEP holders. She stressed that legislators need to act to reduce legal uncertainty and make SEP licensing more efficient, ratifiable, and transparent.
Panel discussion
Maurits Dolmans from law firm Cleary Gottlieb Steen & Hamilton LLP kicked off the discussion by stressing that ‘hold-up is real’. He noted that SEP holders derive ex-post market power from the adoption of standards, and, therefore, seeking an injunction for an SEP is an extreme penalty for not reaching a license agreement. With an injunction, the costs of the penalty become significantly greater than the incremental value of the patent in question and easily exceed the SEP licensee’s entire profit opportunity, defeating the business case for using standardised technologies. The existence of non-performing entities (NPEs) further imbalances the relationship between SEP holders and innovators as an NPE is often invulnerable to counterclaims. Quoting from The Role of Antitrust in Preventing Patent Holdup by Carl Shapiro & Mark Lemley, Dolmans illustrated that a substantial body of empirical evidence supports the theory of hold-up, which demonstrates that antitrust and competition law should address this problem.
Mr Dolmans stated that, nonetheless, enforcing FRAND obligations remains difficult. Extensive litigation, as well as strategic maneuvering, may result in delays and uncertainty. He also pointed out that enforcing competition law is hard and diverges across jurisdictions. According to Dolmans, the European Commission (EC) rarely takes action on complaints, whereas the UK Courts almost ignore competition law, and the German courts misapply it. Mr Dolmans concluded the EU could consider proposing a regulation, on the condition that the regulation must comply with existing EU competition law.
Michael Schlögl, head of IP SEP at Continental, presented the position of the automotive industry. The decision from Nokia and Daimler to settle their litigation and enter into a SEP licensing agreement, while resolving their specific dispute before the European Court of Justice, perfectly illustrates how hold-up works, according to Mr Schlögl. He stressed that neither party ultimately desires an injunction in a SEP licensing dispute scenario. For a SEP holder, requesting the injunction is merely a means to an end. In this case, Continental was a co-defendant.
Despite some initially positive outcomes for Daimler, a German patent court ultimately granted Nokia two injunctions. Mr Schlögl noted that the court awarded both of these injunctions without carrying out a proper assessment of the validity of the patents. In Germany, Mr Schlögl indicated, courts and regulators view the FRAND principle as a formal concept rather than a true economic theory, making it difficult to properly evaluate a relevant portfolio.
According to Mr Schlögl, Daimler had to agree to a worldwide license agreement with Nokia this year, noting that this likely happened under duress. A large company like Daimler has the means to fight back against Nokia’s practices, Mr Schlögl pointed out. He expressed his concern for SMEs in the same market with limited resources, as he does not believe SMEs could stand a chance to defend themselves against abusive behaviour from SEP holders. Mr Schlögl felt Nokia showed no interest to negotiate in good faith with Daimler and no interest to negotiate with suppliers and reiterated that this case demonstrates that patent hold-up is real and is concerning.
Ralf Scheibach, head of the legal department at the German Association of the Automotive Industry (Verband der Automobilindustrie e.V.), reflected on how vehicles have entered the internet of things (IoT) world. Accordingly, this industry now strongly relies on telecommunications and IoT technologies. Mr Scheibach recognised that NPEs from all over the world bring cases before German courts because it is the fastest way to be granted quick injunctions. This pattern disadvantages producers, especially in Germany. However, Mr Scheibach noted that the recent patent law reforms in Germany should mitigate this unfortunate situation to a certain extent. The reform permits injunctions after considering proportionality, which means an injunction can be restricted if it would result in disproportionate hardship for the infringer or third parties. Nonetheless, Mr Scheibach warned it remains to be seen how effective these amendments will be, adding that it will be interesting to watch courts put this explicit proportionality test into practice.
Mr Scheibach reiterated that VDA represents both car manufacturers and suppliers, who share concerns as to how a FRAND SEP licensing agreement will work within the automotive supply chain, and to what extent a supplier can use a FRAND license. He expressed hope that without the pressure of court proceedings or injunctions, market participants, SEP owners, and suppliers would all be able to meet on equal terms.
Rafał Sikorski, professor of law at the Adam Mickiewicz University of Poznan, discussed the different approaches to SEP litigation in various jurisdictions and added that, overall, the patent market today is more complex than it used to be. The technologies today are comprised of hundreds or even thousands of inventions, making the risk to infringe patents greater – even if this was often not the intent. Mr Sikorski added that this complexity makes it more difficult to accept that a minor patent would be able to stop the release of a product, for example a car.
Mr Sikorski added that injunctive relief has become a tool for SEP holders to leverage their position, and some SEP holders have developed business models to go after producing companies. Mr Sikorski noted that prior to German patent law reforms, the courts already had the means to adopt the EU’s proportionality principle into its law. In light of EU law, Mr Sikorski stated, FRAND should not be uncertain and all jurisdictions, including Germany, should recognise the need to control the exploitative behaviour of companies that seek to expand (and leverage) ambiguities in FRAND to attain unreasonable licensing terms.
According to Mr Sikorski, the infringement of a small, patented invention in a vehicle should not allow the patent holder to get an injunction against the manufacturer considering proportionality, especially if it is unclear whether that single patent drives demand for the vehicle. He concluded that, given the large consensus on this issue, industry and legal experts would welcome a communication from the European Commission showing the relevance for the proportionality analysis.
After a question-and-answer session with the audience, the webinar wrapped up. We thank all our panellists for their participation and excellent interventions and look forward to the next event on SEPs later this year.