Canada's Competition Bureau Issues Draft FRAND Guidelines

A few weeks ago I blogged about the Japan Fair Trade Commission's proposed FRAND policy (here), and also mentioned comments filed by Commissioner Wright and Judge Ginsburg (here).  In addition, J. Gregory Sidak has filed comments, available here, and I'm still interested in seeing any other comments that were filed prior to JFTC's deadline if readers are willing to share them.

Canada's Competition Bureau also recently published Draft IP Enforcement Guidelines, available here.  Unfortunately, I found out about this only after the Competition Bureau's deadline for submitting public comments had lapsed on August 10, but I imagine that readers will be interested in seeing what the guidelines have to say about FRAND issues, among other things.  (The draft guidelines also address, among other matters, the hot topic of settlement of pharmaceutical patent disputes.)  The portions directly relevant to SEPs and FRAND can be found in section 7.3 ("Standard Essential Patents").  Interested readers will want to read the section in its entirety, but here is some of the most relevant language:

Another competitive concern that can arise in the context of standard setting is when a patentee makes a licensing commitment before its technology is adopted in a standard and then later seeks injunction orders against firms that are potentially willing to license the technology on terms and conditions meeting the commitment. By seeking an injunction against firms that are "locked‑in" to the standard and that face prohibitive costs to switch to alternative technologies, the patentee can "hold‑up" potential licensees and demand higher royalties than if it did not seek the injunction. The use of injunctions can be particularly problematic when the patentee’s patented technologies only comprise a small component of the standard but can nonetheless block a prospective licensee’s ability to manufacture and sell standard‑compliant products. Given the significant risk to its business, a prospective licensee that is threatened by an injunction may be compelled to pay a high royalty rate. Similar to the other cases involving patent hold‑up described above, the Bureau’s concern from the patentee’s conduct is that it will increase the cost of accessing the standard for firms that wish to develop products that incorporate the standard and thereby reduce their incentive to innovate or otherwise produce products that use the standard. The patentee’s conduct may result in complete foreclosure of rivals making standard‑compliant products. There is also concern that the increased cost of access will result in increased prices to consumers of standard‑compliant products. Finally, the Bureau would also have concerns that the conduct may weaken incentives for firms to participate in procompetitive standard setting activity generally.

The Bureau recognizes that a firm’s commitment to license on fair, reasonable and non-discriminatory (“FRAND”) terms does not mean that it is committing to license for excessively low royalties or on a royalty-free basis. Firms make large investments in research and development and are entitled to seek rewards to compensate them for their efforts. Potential licensees may seek to take advantage of FRAND commitments by “holding-out” for very low royalties or simply by not undertaking licensing negotiations in good faith. Because of this potential problem, in its inquiry to determine the underlying purpose for a patentee seeking an injunction (whether seeking the injunction was, or was part of, a practice of anti-competitive acts under paragraph 79(1)(b)), the Bureau would look for evidence to determine whether the potential licensee was willing to enter into negotiations and pay a FRAND rate. The Bureau accepts that in certain circumstances it may be appropriate for a firm that has made a FRAND licensing commitment to seek an injunction against an infringing party. Circumstances where the Bureau would conclude that the seeking of an injunction was appropriate include:

• when a prospective licensee refuses to pay a royalty that is determined to be FRAND by a court or arbitrator; or
• when the prospective licensee does not engage in licensing negotiations.

The Bureau would likely review conduct that could result in patent hold‑up under section 79 of the Act. The Bureau is of the view that conduct such as patent ambush, reneging on a license commitment or seeking an injunction after making a licensing commitment is "something more" than the mere exercise of patent rights. Accordingly, the Bureau would not consider the exception in 79(5) to apply nor would it review the conduct under section 32 of the Act.

In determining whether conduct that could result in patent hold‑up has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Bureau would look to identify whether, but for the patentee’s conduct, there would likely be substantially greater competition in the markets where it has a competitive concern. This exercise would, in part, have the Bureau examine whether the patentee’s conduct created, preserved or enhanced its market power in technology markets that included its patented technologies due to those patented technologies being necessary to implement the standard. Central to this examination, the Bureau would look to identify any alternative technical standards or technologies that firms could turn to as a substitute for the SDO standard. If such alternatives existed, the Bureau would seek evidence on the magnitude of the switching costs that firms would face to switch to these alternatives. If alternatives did not exist, or if switching costs were prohibitively high, the Bureau would likely conclude that the patentee increased its market power in the technology markets that include its patented technologies. The Bureau would also look to determine whether competition would be harmed in the market for products that implemented the SDO standard. This analysis would determine whether consumers of standard‑compliant products would likely pay higher prices due to manufacturers of these products facing increased costs of accessing the standard. The Bureau would seek evidence as to the effect that royalties had on standard‑compliant product prices and the options that consumers could turn to if faced with an increase in these prices.

Broadly speaking, the Competition Bureau's proposed approach seems consistent with the JFTC's and with the emerging trend within the E.U. (see my analysis of the CJEU's decision in Huawei v. ZTE here), though there may be differences at the margin in determining whether an implementer is a "willing"  licensee.