Part three of the webinar series: A new framework for standard-essential patents (SEPs)

On 8 February 2022, ACT | The App Association held the third webinar in a series of public events covering standards and standard-essential patents (SEPs) and how they impact European innovation and competition. The event focused on the transparency in methodologies for calculating fair, reasonable, and non-discriminatory (FRAND) rates for SEPs licenses. The full recording of the event is available here.

Previous editions of our webinar series revolved around:

  • Part I: Can injunctions be fair, reasonable, and non-discriminatory? Read our recap
  • Part II: Evaluating essentiality, validity, and infringement Read our recap

 

Opening address

Morgane Taylor, the App Association’s general manager for Europe, provided introductory remarks, shedding light on the ongoing criticalities in the field of SEP valuation. Ms Taylor highlighted that as representatives of small business innovators that rely on FRAND licensing terms to protect their ability to use standards, the App Association seeks to ensure that a SEP is valued based on its technical merits and scope, rather than the value or uses created by downstream innovators or from its inclusion in a standard. Further, transparency in the licensing process is crucial to realising FRAND licensing terms that benefit all parties involved.

At the same time, the App Association believes it is important that SEP holders should be reasonably compensated by those licensing their SEPs. According to Ms Taylor, such compensation is at the centre of the FRAND bargain: in exchange for the inclusion of the patented technology into the standard, the patent holder volunteers to license to any implementer on FRAND terms. In return, the SEP holder creates the potential for a broader market of users willing to license their SEPs.

When there are disagreements on licensing terms between licensor and potential licensee, and alternative disputes resolutions are not able to define an agreement between the parties, Ms Taylor indicated that it is the courts that are best equipped to resolve these disagreements based on the arguments and evidence presented by the parties in each individual case.

 

Panel discussion

Brian Scarpelli, senior global policy counsel at the App Association moderated the panel. In their introductory remarks, each panellist provided a different angle to analyse the complex and multi-layered framework of SEP valuation.

Gunther Friedl, Professor of Business Administration at the Technical University of Munich

Dr Gunther Friedl delivered an overview of different methodologies that are available for SEP valuation in court disputes and identified the comparable licence method and the top-down method as the two most used approaches, each having distinct characteristics. Dr Friedl expressed that the implementation of these approaches is hindered by the lack of transparency on precedent licensing contracts due to overly strict non-disclosure agreements (NDAs). He also pointed out that the present-value method is also one to consider, as well as the cost-based approach. Dr Friedl held that the right methodology needs to be assessed on a case-by-case basis.

Benno Buehler, Attorney and Vice President at Charles River Associates

Mr Buehler built on Dr Friedl’s intervention specifying how transparency is uniformly important for SEP negotiations. He highlighted those negotiations in standardisation are often carried out with a great asymmetry of information in favour of the SEP holder. The licensee often needs several complementary patents from varying portfolios – and thus, the costs and risk for getting these patents is significant. Small and medium-sized enterprises (SMEs) often lack the resources to carry out the proper assessment of patent portfolios, and therefore a lack of available information may further have the effect of ‘crowding out’ weaker parties in the market.

‘Looking for the same information over and over again in different negotiations, then having certain transparency, […] is something that may decrease transaction costs as a whole and make licensing more efficient.’ 

In addition, Mr Buehler argued that enhanced transparency of licensing rates may even decrease licensing costs, positively impacting the whole innovation framework. In order to generate greater transparency, Mr Buehler suggested that further considerations of essentiality checks are worth considering, as well as decreased use of extensive/blanket NDAs. He also stated that greater clarity on intellectual property rights (IPR) policies within standards-setting organisations is an important solution.

Christian Helmers, Associate Professor of Economics in the Leavey School of Business at Santa Clara University

Prof Christian Helmers provided an overview of the recently completed study—Are Market Prices for Patent Licenses Observable? Evidence from 4G and 5G Licensing—he co-authored. The study focusses on the transparency of FRAND licensing of 4G and 5G SEPs. The core findings of the study show that there is surprisingly little information on pricing available, and that the information available is often difficult to interpret. There are ‘search costs’ involved with coming to licensing agreements, and to large firms these costs may be relatively insignificant, whilst riskier for smaller players (i.e. SMEs).

‘There’s very little information out there [on available price points on 4G and 5G SEPs], and what is there is impossible to interpret. Even when royalty rates are available, information that provides context is not.’

Because there is little transparency in today’s market, which seems to be the consensus (or collective action) in the industry amongst various players, Prof Helmers asks an interesting question: who exactly benefits from this current situation? While there is a general understanding that enhanced transparency will produce greater efficiencies in the market, he indicated that parties seem to defer to withholding information to maintain a competitive advantage.

Andreas Kramer, Attorney-at-Law and Partner at Vossius & Partners

The concluding panellist, Dr Andreas Kramer, discussed whether it is the role of courts to be tasked with the job of assessing whether a valuation was carried out fairly. Dr Kramer indicated that from a litigation standpoint, a lot of patentees choose Germany as a location for patent litigation because courts have a track record of patent holder-friendly decisions facilitated by its bifurcated system. In Germany, if a licensee questions in court why certain rebates have been given in other license agreements, and the court receives insufficient explanations for why this is, then the court will assume that the licensee has indeed been discriminated against and the burden of proof would be upon the licensor to explain why these differential rates were provided to certain parties.

In the Q&A session that followed the panel, speakers provided further clarification as to the importance of transparency in the SEP licensing process and the impact that a lack thereof might have on new and small players in the market. In addition, the overall issue of competition that lies in the standardisation system was raised, pointing to standard-setting organisations and courts to generate higher certainty in a field where implementers are ‘locked in’ to generate innovation.

 

Webinar series: EU’s evolving framework for standard-essential patents

Part I: Can injunctions be fair, reasonable, and non-discriminatory? Read our recap

Part II: Evaluating essentiality, validity, and infringement. Read our recap

Part III: Transparency in FRAND methodologies for SEP evaluations – Read our recap