After the FRAND wars – time for FRAND 2.0?

In January 2017, the European Commission held a workshop on patent licensing under the 5G telecommunications standard (now in development) and has prepared an outline proposal attempting to balance the interests of technology developers with those of makers of consumer products.

What’s the issue?

Companies that declare the patents they hold ‘essential’ to the functioning of a technology standard are required to make a declaration that they will grant a licence on fair, reasonable and non-discriminatory (FRAND) terms to all-comers.  The requirement originated with an investigation by the Commission into the IPR policy then being operated by the European Telecommunications Standards Institute (ETSI).  The Commission was concerned to ensure that holders of key patents would not be able to hijack makers of complex products relying on the technology standard by demanding royalties for the use of the patent disproportionate to the technology value.  The fly in the ointment, of course, is the difficulty of establishing what value should be attributable to any given component of the technology. After all, where a declaration of essentiality is well-founded, the technology is part of the standard, and every component has in theory to be used and so each component is invaluable.

The result has been a decade or more of licensing discussions and disputes, culminating in the 2016 CJEU ruling in ZTE v Huawei, which laid out requirements to be satisfied by a patent holder before it can obtain an injunction against an alleged infringer of such a patent.  But parties have continued to dispute even following that judgment; the German courts have appeared unwilling to force patentees into any discussion of what terms might constitute FRAND and continued to grant injunctions; and the uncertainty as to the appropriate licence terms persists.

One major issue is the business model under which licensors choose which party in the product supply chain should pay for the licence.  Currently, the licensors aim to license the final producer of the smart phone or other device – with a substantial retail value – rather than the makers of the individual technical components, in particular chips, which embody much of the technology.  Since chips retail for a few dollars and phones for hundreds, it looks as if the patent holders are targeting the big money in an effort to maximise their returns.

The Commission’s proposal attempts to address this by requiring licensors to move away from this business model and grant licences to any party in the supply chain that requires one.  But the royalty rate can be variable, to reflect the actual use to be made of the technology – and the licensor can demand disclosure of what that use is to be.

What’s next?

If this proposal is taken forward, the process for licensing 5G-essential patents could be transformed – but not necessarily for the better.  Patent holders may have to grant licenses to suppliers of multiple components, but will be reluctant to reduce the total receipt for their technology, which could lead to the price of those components rapidly escalating.  The knock-on effect on prices of products incorporating licensed components is hard to predict, particularly in the smartphone market where individual consumers rarely pay for the phone except as part of an overall package of services.

On the other hand, where a particular technology is implemented through multiple components from different suppliers, then the patent holder may reasonably argue that the patent itself is engaged only at the stage where all of the components have been integrated.  In such a case, a licence fee becomes due only for the final product, and the Commission’s proposal may have little, if any, effect.