Can A SEP Holder Refuse to License Its SEP to A Willing License-Seeker?

Standard-essential patents (“SEPs”) are patents that embody industry-adopted technical standards. While standardization presents many benefits, including interoperability of standardized products and lower manufacturing costs, to the consumers and the industries, it may also lead to the “hold-up” problem where a SEP holder demands a high royalty rate from an implementer using the standard-development leverage. To mitigate the hold-up problem, standard-setting organizations (“SSOs”) often require the participants to agree to license their SEPs to implementers on “fair, reasonable, and non-discriminatory” (“FRAND”) terms.

In recent years, disputes concerning FRAND-encumbered SEPs arise frequently worldwide. Among the many controversies around what FRAND means and entails, the issue as to whether a SEP holder is obligated to license its SEP to any implementer who is willing to license the patent is subject to heated discussion. On November 6, 2018, the U.S. District Court for the Northern District of California answered “no” to the question in FTC v. Qualcomm, 2018 WL 5848999, at *17, 20 (N.D. Cal. 2018), ruling that a SEP holder’s “FRAND commitments include an obligation to license to all comers,” including competitors, because the SSO IPR policies require non-discrimination and are essentially pro-competitive.

This same issue has not been specifically addressed by courts in China or Europe. On the one hand, Justice Birss expressed a different opinion in Unwired Planet v. Huawei, [2017] EWHC 711 (Pat) that a SEP holder should not be compelled to enter into a license against their will, but the refusal would deprive the SEP holder of any relief for patent infringement.[1] On the other hand, Professor Renato Nazzini at King’s College London in his article entitled “FRAND-Encumbered Patents, Injunctions and Level Discrimination: What Next in the Interface between IP Rights and Competition Law” reasoned that EU competition law did not permit “level discrimination,” where a SEP holder chooses to only license the SEP to implementers at a given level of the supply chain.[2] Applying his reasoning, a European court would rule against discriminatory licensing as a per se violation of the FRAND undertaking.

Chinese courts might reach a different conclusion. In Huawei v. IDC decided in 2013, Guangdong High People’s Court, an appellate court, agreed with the statement made by the lower court, Shenzhen Intermediate People’s Court, that a SEP holder could not refuse to grant a license to an implementer willing to pay a reasonable royalty fee.[3] The reasoning the court gave (i.e., “the FRAND obligation should not only guarantee a SEP holder to gain from the technology innovation, but also prevent the SEP holder from obtaining unreasonable royalty terms”), however, does not appear to support the conclusion. Therefore, this statement may be limited to the facts in that case.

China generally addresses the “refusal to license” situation in the context of antitrust law. When announcing the approval of Google’s acquisition of Motorola Mobility, the Ministry of Commerce of the People’s Republic of China required Google to “treat all original equipment manufacturers non-discriminatorily in terms of the Android platform” to prohibit Google from treating Motorola Mobility favorably.[4] And the original equipment manufacturers were further limited to those “who [had] agreed not to differentiate or derive from the Android platform.”[5] In 2015, the National Development and Reform Commission (“NDRC”) barred Qualcomm from refusing to license the SEPs after finding that Qualcomm had market dominance in the relevant market.[6] Later in December 2015, NDRC clarified in its published Anti-Monopoly Guidelines that refusal to license cannot be permitted if the SEP holder possesses a market dominant position and has no justifiable reasons for doing so.[7] Similarly, the 2017 Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights (Draft Guidelines) issued by the Anti-Monopoly Commission of the State, provides that a patentee’s promise on licensing the patent is one factor a court shall consider in determining whether the patentee’s refusal to license constitutes abuse of its market dominant position, which further mandates for SEPs the consideration of (1) market value, and application scope and extent of the standard; (2) whether alternative standards exist; (3) how much the industry relies on the relevant standard; (4) the development and compatibility of the relevant standard; and (5) the possibility of the standard-adopted technology being substituted.[8]

For the above reasons, when such a dispute arises, a Chinese court would probably conduct a fact-specific inquiry focusing on the anticompetitive effects of a SEP holder’s refusal to license, in contrast to the Qualcomm court’s sweeping prohibition against such a refusal to a willing license seeker. In Europe, although a court might very well side with Qualcomm, it might also permit a SEP holder to refuse to license but at the meantime take away the patentee’s right to sue for patent infringement.

 

[1] Unwired Planet v. Huawei, [2017] EWHC 711 (Pat):

“I do not believe it is necessary in order for the FRAND undertaking to be legally effective, for it to be true that the undertaking is specifically enforceable in such a way that the IPR holder could be compelled to enter into a contract against their will. . . . [I] if a patentee refuses to enter into a [license] which a court has determined is FRAND . . ., a court can and in my judgment should normally refuse to grant relief for patent infringement.”

[2] Renato Nazzini, FRAND-Encumbered Patents, Injunctions and Level Discrimination: What Next in the Interface between IP Rights and Competition Law. 40 World Competition 1, 5 (2017) (finding that Article 102 of the Treaty on the Functioning of the European Union [“TFEU”] prohibits level discrimination that constitutes an abuse of a dominant position). Pertinent part of Article 102 TFEU states: “Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.”

[3]  Huawei v. IDC (Guangdong High People’s Ct. 2013) (China).

[4] MOFCOM, Announcement No. 25, 2012 of the Ministry of Commerce —Announcement of Approval with Additional Restrictive Conditions of the Acquisition of Motorola Mobility by Google, http://english.mofcom.gov.cn/article/policyrelease/domesticpolicy/201206/20120608199125.shtml.

[5] Id.

[6] 2015 Fa Gai Ban Jia Jian Chu Fa No. 1, http://www.ndrc.gov.cn/gzdt/201503/t20150302_666209.html (China).

[7] Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights (Draft for Comments) Sec. 3, NDRC (Dec. 31, 2015).

[8] Guidelines on Prohibition of Abuses of Intellectual Property Rights (Draft for Comments) art. 13, 15, images.mofcom.gov.cn/fldj/201703/20170323141351774.doc (China).

 

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