Wednesday, April 19, 2023

Qualcomm outlines Reciprocal FRAND Agreement as superior alternative to European Commission's "fatally-flawed proposal" of non-binding standard-essential patent valuations

The Policy and Regulatory Report (PaRR) has been told by the European Commission that a proposal for a regulation on standard-essential patents (SEPs) is still planned for next week. A draft proposal leaked late last month. On Friday, the European Telecommunications Standards Institute (ETSI) communicated its concerns to senior EC officials. Toward the end of the post I just linked to, you can find a list to my other writings about the topic.

Now the chief licensing lawyer of the world's largest SEP licensing program--Qualcomm's Fabian Gonell, whose live testimony in an FTC case I watched in San Jose four years ago--has published a thoughtful LinkedIn article to explain how "[t]he European Commission can achieve its goals without putting European participation in future standards at risk."

At the end of its first paragraph, Mr. Gonell's article predicts that the envisioned regulation would be unhelpful:

"Put simply, the leaked draft Regulation would upend patent rights in Europe and have a host of unintended consequences. Worst of all, it would be for nothing because the Regulation as written is not going to meet the Commission’s goals."

The Commission's original objective is described in the article as "increasing transparency about patents used in standards – specifically, which patents are actually essential." Qualcomm made a proposal "at the last meeting of the ETSI IPR Special Committee that would have directly addressed this issue for cellular standards." I have to protect my sources, but I can say that this was already known to me. I have to protect that source, but the source is not affiliated with Qualcomm in any way and says the proposal was good, but it takes time to reach an agreement on such initiatives.

Somehow the Commission staff that drafted the regulation became more ambitious and in a "dramatic turn" (as Mr. Gonell describes it) expanded the scope of the measure by also "establish[ing] radical new rules to set royalty rates and make FRAND determinations." Just like commentators (including yours truly), Mr. Gonell notes "[t]he incongruous language in the new provisions, and drafting errors." He makes an interesting comparison between the essentiality-check process ("well-thought out, detailed") and "the lack of structure, due process and procedural safeguards in the FRAND determination and aggregate royalty provisions to reach that conclusion."

In that context, Mr. Gonell's article raises an issue I haven't previously discussed: the draft regulation does not provide procedural safeguards along the lines of a "motion to quash or limit" in U.S. discovery. Parties could request information, but the FRAND conciliators could not act as gatekeepers who would make sure that overreaching requests are modified or thrown out.

Another new issue to add to what was already a rather long list is that the draft version of the regulation, apart from failing to determine essentiality claim by claim (as I had also noticed), does not explicitly relate "only to assertions against standards-compliant products." That is an issue because such patents could be used for purposes other than implementing the standard to which they were contributed. And Qualcomm would deem it helpful to make it clear that "the relevant FRAND commitment" will be referenced and applied in those FRAND determinations.

While the Commission says it wants to streamline the licensing process, the only thing certain is that enforcement against unwilling licensees would be delayed. As I've recently discussed, the meaning of the term "enforcement" is not even perfectly clear, so litigants might be able to seek declaratory judgment in parallel to a FRAND determination. But the real issue is that anything designed to delay enforcement encourages hold-out behavior.

The following sentence is not only--but also--about Apple (without naming it):

"Court case after court case has featured implementers refusing to be bound or arguing that they should be able to refuse to be bound by even court-decisions on FRAND terms."

A refusal to be bound was an issue in an Ericsson v. Apple FRAND case in the Eastern District of Texas last year, and in a dispute with Optis in the UK, Apple also said that even after a court determination of FRAND terms it might decline to take a license on such terms.

Apple is extremely active in lobbying for the current version of the draft regulation. Even Apple appears to be aware of the need to correct errors, but it wants the political signal that implementers should have even more time before they face the threat of an injunction.

Mr. Gonell notes that "[a]s courts have repeatedly recognized, delay facilitates hold-out and favors implementers." In my observation, delays--during which a licensee will not make any payments--are a key factor that forces SEP holders to settle for much less than they would actually be entitled to, especially if the implementer engaging in hold-out accounts for a very significant percentage of the SEP owner's licensing income.

The article goes on to explain that the process won't become less costly because after a non-binding FRAND determination, litigation would still be necessary, and points out that the Commission is accusing (at the WTO level) China of violating the TRIPS agreement while also seeking to deprive SEP holders of access to courts for the duration of a FRAND determination proceeding.

Then Qualcomm proposes a"better way – a way that actually does provide a faster and more cost efficient resolution, is fair, and is not inconsistent with the Commission’s WTO complaint":

"The Commission should replace the EUIPO-run FRAND determination scheme with a requirement that an SEP holder offer the implementer an agreement in which the patent holder agrees to forego patent infringement remedies and the implementer agrees to enter into a license on FRAND terms if one is offered. This agreement (a “Reciprocal FRAND Agreement”), modeled on the FRAND Injunction decisions of the courts of the United Kingdom and Wales, would give the implementer the power to be completely free of the threat of an injunction by agreeing to enter into a license on FRAND terms as confirmed by a court or agreed-to neutral third party. This fully addresses any concerns about the German courts’ application of the Huawei/ZTE framework resulting in injunctions against unwilling licensees without sufficient inquiry into whether the patent holder made a FRAND offer. With an obligation to offer a reciprocal FRAND Agreement, a failure to agree on licensing terms would be addressed in a contract action in a national court over FRAND terms, and not in a patent infringement proceeding."

No implementer would have to take such a license until actually having been held to infringe one of the licensor's SEPs. But when that happens, the window of opportunity to enter into the reciprocal FRAND agreement will close within 30 days. Just like in the UK, an implementer could decide to just let a sales ban enter into force instead of entering into that agreement. It would be optional for the implementer.

The article contains a colored table that shows what problems are solved or created by the two alternative approaches (FRAND determination under auspices of EUIPO vs. the Reciprocal FRAND Agreement proposed by Qualcomm):

I wish to comment particularly on two cells of that table:

  • "Fair? No - enables hold-out":

    Unfortunately it appears that some people in the Commission's Directorate-General for the Internal Market (DG GROW) have been lobbied so hard by Apple and certain automotive industry stakeholders that they now believe hold-out equals fairness. The ultimate decision makers, however, hopefuly won't buy that. A solution is fair only if it tackles hold-out and hold-up at the same time.

  • "Addresses German court issue? Only if courts respect non-binding judgment":

    It's clear to me that the Commission initiative was triggered by decisions made by German courts--not their French, Dutch, or other counterparts. And the Commission knows that some of the same judges will have greater powers as they serve on the UPC (full-time or part-time). Whether the conciliators will set the low royalty rates that companies like Apple would like to see is anything but certain. I actually think the conciliators will have an incentive to arrive at relatively high rates. But those who welcome the proposal simply want to slow the whole process down, increase its costs, and generally make it more onerous on SEP holders, hoping that this will give them leverage when they make lowball offers shortly before or after the expiration of license agreements.

    The "if" in "[o]nly if courts respect non-binding judgment" is a big IF. I've previously discussed that courts, including but not limited to the ones in Germany, won't necessarily give much weight to advisory opinions. They could still identify Sisvel v. Haier reasons to enjoin; they could still require implementers to take global portfolio licenses to huge patent pools even if they are held to infringe only one patent. Damages awards could get costly. Patentees might prioritize non-SEPs in EU-based courts. There would likely be more assignments to licensing firms. But even if German courts including Germany-based UPC Local Divisions became unattractive venues for enforcement, SEP holders could sue elsewhere (the regulation would not result in a global license or a global portfolio valuation--only the EU parts would be affected).

An interesting if not intriguing effect of the Reciprocal FRAND Agreement proposed by Qualcomm would be that FRAND would become a matter of contract rather than antitrust law.

Whether or not one agrees with the particular approach outlined by Mr. Gonell on LinkedIn (in my opinion, it is clearly more balanced and effective than the FRAND determinations--including those for entire standards--envisioned by the Commission), at minimum it shows that the Commission should have engaged in consultation not only on potential and actual problems, but also on alternative solutions.

The last sentence of Mr. Gonell's article says the Commission would "put[] European participation in standardization at risk by sending the Parliament and Council a fatally-flawed proposal." That is not just Qualcomm's opinion. It's what ETSI itself has told the Commission. Does the Commission really want to take a legislative initiative with shortcomings (some of them structural) that the experts in the Council and in the Parliament--the two institutions that will be the co-legislators--will easily identify? An original proposal that requires numerous amendments even if one merely wanted to fix errors (regardless of one's objective) is not necessarily the fast track to new legislation. Qualcomm's idea of a Reciprocal FRAND Agreement wouldn't need the 24-month ramp-up period that the Commission's draft proposal needs just to get the EUIPO--a trademark (not patent) office--up to speed, so it could bring about change even more rapidly.