Licensing Terms of Standard Essential Patents A Comprehensive Analysis of Cases Authors: Chryssoula Pentheroudakis, Justus A. Baron Editor: Nikolaus Thumm 2017 EUR 28302 EN This publication is a Science for Policy report by the Joint Research Centre (JRC), the European Commission’s science and knowledge service. It aims to provide evidence-based scientific support to the European policy- making process. The scientific output expressed does not imply a policy position of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use which might be made of this publication. Contact information European Commission, Joint Research Centre Address: Edificio Expo. c/Inca Garcilaso, 3. 41092 Seville (Spain) E-mail: [email protected] Tel.: +34 954488318 JRC Science Hub https://ec.europa.eu/jrc JRC104068 EUR 28302 EN PDF ISBN 978-92-79-64458-0 ISSN 1831-9424 doi:10.2791/32230 Print ISBN 978-92-79-64459-7 ISSN 1018-5593 doi:10.2791/193948 Luxembourg: Publications Office of the European Union, 2017 © European Union, 2017 Reproduction is authorised provided the source is acknowledged. How to cite: Chryssoula Pentheroudakis, Justus A. Baron (2017) Licensing Terms of Standard Essential Patents. A Comprehensive Analysis of Cases. JRC Science for Policy Report. EUR 28302 EN; doi:10.2791/32230 All images © European Union 2017 Title: Licensing Terms of Standard Essential Patents. A Comprehensive Analysis of Cases Abstract The prospect of licensing patents that are essential to standards on an industry-wide scale is a major incentive for companies to invest in standardization activities. Most standard development organizations (SDOs) have defined intellectual property rights (IPR) policies whereby SDO members must commit to licensing their standard- essential patents (SEPs) on Fair, Reasonable and Non-Discriminatory (FRAND) terms. This study aims to provide a consistent framework for both the interpretation of FRAND commitments and the definition of FRAND royalties. Our methodology is built on the analysis of landmark and significant decisions taken by courts and competition authorities in Europe and worldwide. The purpose of the comparative analysis is to provide a comprehensive overview of how FRAND licensing terms have been defined in the evolving case law, while testing the economic soundness of the concepts and methodologies applied by courts and antitrust authorities. TABLE OF CONTENTS PREFACE ........................................................................................................... 4 ACKNOWLEDGMENTS ......................................................................................... 5 GLOSSARY ........................................................................................................ 6 EXECUTIVE SUMMARY ................................................................................... 10 I. RESEARCH QUESTIONS AND OBJECTIVES .................................................. 10 II. COMPARATIVE CASE STUDY ANALYSIS ...................................................... 10 III. OVERARCHING PRINCIPLES OF FRAND ...................................................... 12 IV. LEGAL AND ECONOMIC ANALYSIS OF CASE LAW ON FRAND ........................ 13 V. POLICY RECOMMENDATIONS .................................................................... 14 1. INTRODUCTION ..................................................................................... 17 1.1. BACKGROUND OF THE STUDY ........................................................... 17 1.2. OBJECTIVES AND METHODOLOGY ...................................................... 19 2. THEORIES OF FRAND ............................................................................. 21 2.1. THE ECONOMIC FUNCTION OF FRAND ................................................ 21 2.1.1. FRAND and incentives to contribute to standard development .............. 21 2.1.1.1. FRAND and incentives to develop standard-essential technology ........ 21 2.1.1.2. FRAND and incentives to participate in SDOs .................................... 23 2.1.2. FRAND and market failures in SEP licensing ....................................... 24 2.1.2.1. General ....................................................................................... 24 2.1.2.2. Patent hold-up .............................................................................. 24 2.1.2.3. Anti-commons and royalty stacking ................................................. 29 2.2. A LEGAL VIEW OF FRAND .................................................................. 33 2.2.1. Contract law .................................................................................. 33 2.2.2. Competition and antitrust law .......................................................... 35 2.2.3. Patent law ..................................................................................... 37 3. COMPARATIVE CASE STUDY ANALYSIS .................................................. 40 3.1. OVERVIEW OF CASES ....................................................................... 40 3.1.1. Case selection criteria ..................................................................... 40 3.1.2. List of cases by country – background and legal context......................... 41 3.2. FRAND AS A BILATERAL NEGOTIATION PROCESS ................................ 54 3.2.1. Defining timing and other factors of the negotiation process ................ 55 3.2.1.1. Ex ante negotiation benchmark ....................................................... 55 3.2.1.2. Georgia-Pacific factors ................................................................... 59 3.2.1.3. Ex ante benchmarks v. ex post considerations? ................................. 64 3.2.2. Evaluating the parties’ conduct in the context of injunctions ................ 65 3.2.2.1. Legitimacy of injunctive relief and the concept of the “willing licensee” ...................................................................................... 66 3.2.2.2. Assessing abusive conduct in German case law post-Huawei v. ZTE .... 68 1 3.2.2.3. Converging practice in European jurisdictions in the context of injunctions ................................................................................... 73 3.2.2.4. Evolving landscape of injunctions in emerging SEP markets ................ 75 3.2.2.5. Frequency and predictability of injunctive relief in the United States post-eBay .................................................................................... 81 3.2.2.6. Availability of injunctive relief from an SDO perspective ..................... 83 3.3. QUANTIFYING FRAND ROYALTIES ...................................................... 84 3.3.1. Incremental value .......................................................................... 84 3.3.2. Apportioning value from the royalty base .......................................... 86 3.3.2.1. Apportionment requirement ........................................................... 86 3.3.2.2. Entire Market Value Rule (EMVR) .................................................... 87 3.3.2.3. Smallest Saleable Patent Practicing Unit (SSPPU) .............................. 91 3.3.3. Judicially defined FRAND rates ......................................................... 94 3.3.3.1. Bottom-up approach and the proportionality contribution method ....... 94 3.3.3.2. Top-down approach ....................................................................... 95 3.3.3.3. Comparable licenses and patent pools ............................................. 96 3.3.3.4. Will the European courts set a FRAND royalty rate? ........................... 99 3.3.4. Compliance of patent portfolio licensing with the notion of FRAND ....... 100 3.3.4.1. Cumulative rates and royalty stacking ............................................ 100 3.3.4.2. Complexities of value apportionment for large portfolios ................... 100 3.3.4.3. Privateering – FRAND enforceability, royalty stacking and portfolio splitting ...................................................................................... 102 3.3.5. Evidentiary challenges in the context of SEP litigation ........................ 104 3.3.5.1. Evaluation of expert testimony and jury instructions......................... 104 3.3.5.2. Assumptions of essentiality, validity and infringement ...................... 106 3.3.5.3. Evidence for hold-up, royalty stacking and hold-out ......................... 110 3.4. FRAND-COMPLIANCE AND ANTITRUST CONCERNS .............................. 114 3.4.1. European Commission – competitive enforcement priorities................ 114 3.4.2. US antitrust authorities – from enforcement to advocacy ................... 116 3.4.3. Evolving antitrust landscape in the emerging SEP markets ................. 117 3.4.3.1. China ......................................................................................... 117 3.4.3.2. Japan ......................................................................................... 121 3.4.3.3. Korea ......................................................................................... 121 3.4.3.4. India .......................................................................................... 122 3.5. CONCLUSIONS - EVOLUTION OF CASE LAW AND CONVERGING TRENDS ......................................................................................... 123 4. COMPREHENSIVE ANALYSIS OF FRAND LICENSING ............................. 125 4.1. DEFINITION OF FRAND LICENSING TERMS .......................................