First speaker is David Killough of Microsoft, on "One Litigator's FRAND Lessons Learned." One misconception: standard setting isn't necessarily about picking the "best" technology. It's more a question of "just pick one." Think about plugs and sockets in different countries; one is not necessarily better than another. Having a standard is valuable; consensus. Second misconception: it's not about picking patents. That's not what the SSO engineers do. And most technology in standards is not patented. FRAND allows SSO participants to ignore patents. They only worry about patents if they find out there's a patent that won't be covered by FRAND, then you try to design the standard around it. But there are a few bad apples that try to game the system
FRAND: What's reasonable? An SEP owner is not entitled to a royalty on the value conferred by standardization (lock-in or holdup value). Ask: what is the additional profit made from implementing the patented technology instead of the next best alternative technology? A reasonable royalty is a fair share of that additional profit. Usually a small number.
Be skeptical of comparable licenses. Is the comparable a holdup situation? Different standards, technologies, patents, not comparable. Be careful about "friendly" cross-licenses, which may not be comparable.
FRAND: what's next? Nondiscriminatory? Recent decisions in Japan and India: concern that SEP owner didn't show other licenses to implementer.
Second speaker is Scott Gilfillan (Standards Counsel at Intel) on "FRAND, Standards and Patents". How many standards in an iPhone? iPhone 3--slide shows standardized technologies in red circles. They are ubiquitous. How does Intel perceive FRAND? Four principles. First, injunctive relief is inappropriate except in limited cases where implemented not willing to license on FRAND terms. Second, must be available to everyone. Some SEP owners won't license; won't sue, but want to license customer only. Third, royalty rates should reflect: based on smallest compliant unit that infringes; value of alternative technologies considered during standard setting; avoid stacking. Fourth, transferees must assume responsibility for FRAND commitments made to SSOs. Part of the bargain for getting patent into standard.
Third speaker: Rosanna Lipscomb (Competition Counsel at Google). Focus on challenges for antitrust authorities in thinking about FRAND problems. First, balancing two priorities: holdup (by potential licensor) and holdout (by potential licensee). Equally important to consider. On the holdup side, problem is by now well understood. FRAND commitment induces lock-in, then patent holder reneges on promise. Has occurred, but more deterrence today as a result of enforcement efforts. Holdout: potential licensees refusing license even if on FRAND terms. What constitutes a willing licensee? If potential licensee is unwilling, shouldn't be allowed to expropriate IP just because it's part of a standard. FTC in Motorola consent decree addressed what a willing/unwilling licensee is. Set of circumstances in which Google/Motorola can seek injunctive relief. First, offer written and binding six months before seek injunctive relief. 60 days prior, must submit reasonableness of rate to binding arbitration. Balances holdup and holdout.
Problem two is defining a relevant market; do SEPs have market power? Breach of FRAND is unilteral act. Under Sherman Act section 2, must define market. Tempting to assume SEP = market power, but it's more complicated. Patents don't equal market power. Not all SEPs have market power. Sometimes you have two standards competing for adoption by implementer. Also, patents declared essential aren't always essential. Antitrust authorities take it on a case-by-case basis.
Where is enforcement headed? In academic literature and among practicioners and economists, FRAND commitment is FRAND commitment regardless of context. Lipscomb and coauthor published article in 2009 titled "Best FRANDs Forever": common thread: FRAND commitment made, induced lock-in, breached. Those were the essential components for enforcement actions. Doesn't have to be an SSO. See Unocal case (FRAND promise made outside SSO context). FTC: holdup can occur outside of SSO context. We may start to see agencies take a closer look at these commitments whether from SSO context or otherwise.
Fourth speaker: Luke McLeroy (Senior Counsel at Ericsson): 40% of world's mobile traffic passes through our equipment. Depend on standards. Different perspective on FRAND. Look at FRAND in larger context as business enabler. Advocate cautious approach to a FRAND system that has served well so far. Hundreds of license agreements.
Lars Magnus Ericsson, founder of company, over a hundred years ago wrote to his wife about the U.S. patent system. Bell controlled the telephone system at the time. Anticompetitive. This is how the telecom industry could operate without FRAND commitments. More recent example: in 1980s, no FRAND framework for 1G. Many standards. No tech sharing.
How does FRAND enable standard setting? SSOs don't standardize existing technology. Cellular standards are blueprints. SSO defines requirements for standard: what we want to do. Companies then model, test; come back with proposals for SSO. Competition on technical merits. End result: state of the art with very best technical soluutions.
Ericsson engineers working on 5G; expensive, risky, no guarantee will be adopted or that standard will be successful in 5 years. Incentive is ability to license on FRAND terms.
New entrants: in 2006-07, Apple introduced iPhone. Had never touched cellular tech. Now a dominant player. Were able to build product on tech that came before. FRAND enables this. R&D sharing. FRAND has been a great success. Must balance incentives to invest with availability to implementers.
Moderator David Taylor: asks Scott Gilfillan what the sticking points are in deciding whether to join SSO. Gilfillan: Consider the technology, and what is Intel trying to do with this technology? What is the burden on my IP portfolio? Some SSOs have royalty-free or no-patent policies. Things that take away patent value make it difficult to participate unless there is a very good business justification. But Intel believes in the fairness principles he spoke about earlier.
Moderator: asks Killough what fair and reasonable means. Killough:says you're trying to identify what is the extra profit the patent allows. Implementer gets some of the profit. There is a sharing. In deciding what is reasonable, try to ascertain what that extra profit is. Often a very small number. Applies equally in FRAND context as in patent damages context. Tremendous value to patent once adopted, need to extract that out. One good check on that is to consider royalty stacking.
Turns to Luke McLeroy. A lot of what David said we agree with. Reasonable aggregate rate is important. But we disagree about incremental value approach. Practical reasons. First, when you try to identify what that margin is, you ignore the fact that the next best alternative is probably covered by someone else's patent. And you're trying to reconstruct the world from a previous time; that alternative may have been abandoned. Add in portfolio cross-licenses and it gets very complicated; impractical. Intellectually appealing but tough to do in practice.
Lipscomb: Discusses Sidak paper on FRAND [which Norman Siebrasse and I blogged about in December].
Bill Page: Does incremental value standard imply that FRAND royalty is zero, if there is competition? Killough: No. But if there isn't an economic advantage of one over the other, you need to look at that. If could be really small or zero. Gilfillan: before a standard is set, you have two competing patented technologies before standard is set. Absent standard, will compete. Will reflect value of technologies; one may be better than the other. But you need to take into account the value of the competing technology as well, so the "delta" doesn't go to zero. (Killough agrees.) In standards context, two competing technologies, one is chosen. Now that patent holder has a huge monopoly. Royalty base is an important part of the conversation too. McLeroy: you can't calculate a royalty based on marginal cost on making the next copy (e.g., of a DVD). Need to account for costs of invention. Using smallest saleable unit would be a change from the way FRAND licensing is done now. [I don't think that's right; choice of base doesn't relate to marginal cost, as I see it.]
Moderator: asks about FRAND mitigating competition concerns. Lipscomb: nondiscriminatory aspect of FRAND alleviates risk of collusion. Complying with competition rules in different jurisdictions can be a challenge, but take jurisdiction by jurisdiction approach, learn other countries' rules.
Moderator: what is a typical FRAND licensing negoitation like? McLeroy: begin with claim charts from both sides; business discussions re terms. Need subject matter experts (engineers), sometimes economists, always the business people. Best practices: fair and reasonable extends to conduct in negotiations, not just rates.
Moderator: asks Killough whether courts should be setting FRAND rates, or what about baseball-style arbitration? Killough: Courts should do so if there is a legal obligation. Note that sometimes the implementer is not a party to the SSO. But courts except in Germany believe there are subject to the FRAND benefit. But not necessarily compelled to arbitrate. Note too that implementer may believe patent is not essential or invalid; must have opportunity to challenge in court. That doesn't make you a holdout or subject to an injunction; FRAND means money is enough. Lipscomb responds: FTC order does take this into account. Thinks baseball-style arbitration would force people to be reasonable in advance. McLeroy: a FRAND commitment sometimes may be a commitment not to seek an injunction depending on SSO policy, but not for most SSOs such as ETSI. They've discussed this and not adopted it. Gilfillan: A negative about arbitration is that outcome is confidential. Need to consider other licenses to determine FRAND. As for McLeroy's point, SSOs are being pulled in the direction of adopting a no-injunction policy. A matter of time.
Moderator: What is the current role of government agencies re FRAND? Lipscomb: antitrust agencies don't want to be in the business of setting rates. Want a framework that enables bilateral negotiations. Of course, agencies around the world have different perspectives. In China, must consider effect on Chinese businesses, for example. McLeroy: tends to agree. Antitrust regulators haven't pushed for a no-injunction rule but rather a safe harbor. If licensee wants to take a license and not be subject to an injunction, participate in a FRAND determination, as in FTC consent order. Killough: SSOs, regulators each have their own constituencies. Courts can look at things a little more black-or-white. Patent = right to exclude, but FRAND commits you to license and impairs your right to exclude; money is enough.
My question: What about ex ante contingent incremental value, as Siebrasse and I have blogged about here and here? Gilfillan: including the fact that the patent has been embodied into a standard shouldn't come into play. And yes, it is difficult to quantify ex ante value, but that's not a reason not to do it. Lots of things are difficult but not impossible. McLeroy: sounds like something I'd like to study. But we do need practical solutions.
Haw: asks Scott Gilfillan that the best way to evaluate is to use smallest salable unit. My understanding is that the reason we don't do that is that it's often not available. Empirically? Gilfillan: look at smallest salable unit that infringes. Could be a component or a chip; a sellable unit. Can be difficult, but it's not as simple as saying it's part of a phone so we should use the phone as the base. Killough: I agree there's value in coming up with the right theoretical construct, and then come up with applications that are consistent with it. Don't charge based on a component if it doesn't incorporate the patent. Lipscomb: Maybe too utopian, but what we've seen as a result of litigation and regulatory scrutiny is that patent holders are not contributing their technology to SSOs as much as they used to. You would need to take that into account, ideally. McLeroy: royalty should have a connection based on the R&D and on the value to the end user, regardless of what the base is.