This is the first in a series of two postings – the second part will be published later today -, that relate to both the political and business attitude towards FRAND licensing in Europe. As there are two main players in that game, namely the EU Commission as the political market watch-dog and the Smartphone industry as patent holders and actors on these markets, we will first have a look at the political agenda of the EU Commission towards ensuring free market access in a world of standard-essential patents, as articulated in clear words only recently. In the light of the Commissions approach, the hint at the “Commission’s position as regulator-in-chief of the global technology industry”, as seen by the Financial Times back in 2007 , might never have been more true than today.
In 10 February 2012 EU Competition Commissioner Joaquín Almunia held in Paris a speach titled “Quo vadis Europa? New Frontiers of Antitrust 2012” in which he sketched his agenda on competition and anti-trust law, which is exceptionally interesting when viewd from the point of view of patent law. The essential passages read (highlighting added):
Keeping markets open to new entrants is a key factor for the promotion of innovation. When monopolies and tight oligopolies are allowed to occupy a market, they tend to resist change and often end up caring only about the preservation of their business models.
Contestable markets, instead, allow new players to experiment, and new ideas to succeed. It is a major task of competition control to ensure that new generations of businesses are given a fair chance.
I am notably thinking of the surge in the strategic use of patents that confer market power to their holders. The potential abuses around standard-essential patents are a specific illustration of this concern.
Standards are the best tool to promote interoperability of devices or to define safety or quality benchmarks. In the communications technologies, standards are key for a universal interconnection and seamless communication. Once a standard is adopted, it becomes the norm and the underlying patents are indispensable. Owners of such standard essential patents are conferred a power on the market that they cannot be allowed to misuse.
Standardisation processes must be fair and transparent, so that they are not in the hands of established firms willing to impose their technologies. But it is not enough. We must also ensure that, once they hold standard essential patents, companies give effective access on fair, reasonable and non discriminatory terms.
This is crucial if we want industries and businesses relying on such patents to develop freely to their utmost potential.
I am determined to use antitrust enforcement to prevent the misuse of patent rights to the detriment of a vigorous and accessible market. I have initiated investigations on this issue in several sectors and we will see the results in due time.
Mr Almunia clarified in his speech that he intends to enforce the so called FRAND principle (“fair, reasonable, and non-discriminating license”) by the executive power of EU anti-trust law in order to urge owners of standard-essential patents to out-license them under fair, essential and non-discriminatory conditions, so as to also enable further market actors to market standard-conform products. In other words, the respective standards should be available to all market participants in order to prevent the standard degenerating to patent-protected cartels.
This idea, however, is not new as it follows the lines of the 2010 EU Regulations on horizontal agreements (IP/10/1702 and MEMO/10/676), which also underlined the EU Commission’s approach that FRAND conditions are essential prerequisites for a free access to standardised technologies.
The general principle of FRAND is fairly straight forward. It aims at keeping standards accessible for all market participants by ensuring that licenses to patents that would otherwise inevitably be infringed when implementing the standard, are available under fair, reasonable and non-discriminating conditions. In this way, restrictions of competition resulting from the market power given by standard-essential patents can be prevented. From here it is only a small step to terms like “compulsory license” and “abuse of dominant market power”.
However, the exact conditions under which a license agreement would be considered FRAND-conform have not jet been properly defined, not even in the IPR Policy of the European Telecommunications Standards Institute (ETSI) so that it remains to the discretion of a competent Court to check whether or not a (cross-) license agreement is in line with the FRAND principle based on pertinent national licence and competition regulations. The least common denominator, however, could be as follows:
- Fair: Is the license agreement in line with pertinent competition and antitrust regulations aiming at ensuring fair competition and free market access? In this regard, it would certainly be unfair to demand from the licensee further concessions independent of the license deal as such, e.g. purchase agreements, subcontracted production or the like.
- Reasonable: Are the license fees in accordance with the relevant industry? For example, license fees that do not allow the marketing of adequately priced end products certainly would be unreasonable.
- Non-Discriminatory: Are all licensees treated equally? For example, it certainly would be discriminatory to offer significantly different license terms depending of whether a licensee is a direct business rival or only a remote competitor.
ETSI IPR Policy: The ”ETSI Guide on Intellectual Property Rights (IPRs)” of 20 November 2011 integrates intellectual property rights into the standardisation process and asks for
- early identification and disclosure of IP rights that are considered essential or potentially essential to the standard (Art. 4 ETSI IPR Policy); and
- providing full access to the standard by FRAND license declarations (Art. 6 ETSI IPR Policy), whereas ETSI does not take part in the license negotiations between the proprietor of standard-essential patents (licensor) and potential users of the standard (licensee).
However, there is no obligation for a proprietor of standard-essential patents that are covered by a standard to offer a FRAND license declaration vis-à-vis ETSI or potential users of the standard. In fact, a patent can only by incorporated into the standard by explicit agreement of the proprietor. In case a patent proprietor refuses to grant licenses under FRAND conditions after publication of the standard, Art 8 ETSI IPR Policy provides a detailed procedure for clarifying this deadlock (cf. also FAQ).
It has hast to be noted that the ETSI IPR Policy only relates to the established norming process of ETSI, which in Europa is competent for standards in the field of information and communications technology (ICT) but not to de facto standards which are only subsequently elevated to the rank of formal European standards.
EU Regulation on Standardisation: Now, in line with the EUROPE 2020 strategy [cf. COM(2010) 2020], the EU Commission is in the process of finalising a new EU Directive on European Standardisation [2011/0150(COD)] in amendment of a number of existing Directives (89/686/EEC, 93/15/EC, 94/9/EC, 94/25/EC, 95/16/EC, 97/23/EC, 98/34/EC, 2004/22/EC, 2007/23/EC, 2009/105/EC, 2002/23/EC). The Explanatory Memorandum motivates the new Regulation under Annex II as follows (cf. also Report of Furure of European Standardisation, 2010/2051(INI)):
[...] For European industry, standards summarise best practice in a specific area, because they encapsulate the collective expertise of the participating actors. [...] To respond rapidly to evolving needs in all areas, a comprehensive, inclusive, efficient and technically up-to-date European standardisation system will be required. [...]
Standards are indispensable in the digital society to ensure the interoperability of networks and systems, especially in the field of ICT. In a digitally driven society, ICT solutions are used in any economic sector as well as in our daily lives. ICT solutions, applications and services have to be able to communicate with each other; they should be interoperable. Interoperability requires standards. [...]
This proposal [for a Regulation] addresses three major problems:
1. [...] Some stakeholders argue that the entire process of creating European standards developed at the request of the Commission is too slow. The main negative consequence of a slow standard-setting process is that conflicting national standards continue [and, absence of harmonised standards,] businesses cannot use the relevant standard [...].
2. [...] One of the most important problems [...] is that SMEs [and relevant societal stakeholders] are in general under-represented in standardisation activities, in particular at European level. [...] The most negative consequence of [that] problem [...] is their lack of influence on the process.
3. In the field of ICT, many standards ensuring interoperability are not elaborated by the [European Standards Organisations] but by other organisations that develop standards. [...] [T]hese ["Fora and Consortia Standards"] do not, as such, fit into any of the categories of standards to which public authorities may refer in their calls for tenders [...]. The consequence is that the ITC that they are procuring may not be interoperable with ITC purchased by other authorities. [...]
Before the background that item 3 relates to Internet and World Wide Web related standards, one can easily imagine that European ICT business might otherwise struggle and put the EU behind in the worldwide innovation game. Regarding this isolated issue for a moment, the draft Regulation 2011/0150(COD) suggests an elaborated list of requirements for the recognition of technical specifications in the field of ICT, which basically require that a de-facto standard is (i.) accepted on the market and (ii.) has been developed by a non-profit organisation fulfilling specific criteria such as openness, consensus, and transparency, whereas the latter criterion requiring further that
intellectual property rights essential to the implementation of specifications are licensed to applicants on a (fair) reasonable and non-discriminatory basis ((F)RAND), which includes, at the discretion of the intellectual property right-holder, licensing essential intellectual property without compensation.
Currently, there is lying on the table the Proposal of the EU Commission and a Draft Report (PE478.420) of Ms Lara Comi (IT, EPP), Rapporteur of the EU Parliament Committee Internal Market and Consumer Protection (IMCO). The IMCO committee will have its vote on the Draft on 22 March 2012 while the first plenary sitting is scheduled on 22 May 2012.
The German standardisation organisation DIN has criticised the approach (cf. statement, in German) to adopt ‘fora and consortia standards’ by entirely circumventing established standardisation processes and presented only recently a Position Paper as well as a Suggestion for a more appropriate legitimation process, together with important German industry representatives such as BDI, BITKOM, and DKE.
For the posion of the various players in the so called ‘Smatphone War’, which acts as a sort of driving force in this conflict between exploiting patentes and accessing free markets, please see Part 2 of this posting.
Volker 'Falk' Metzler
European Patent Attorney, German 'Patentanwalt', European Trademark and Design Attorney, Computer Scientist, PhD, IP Blogger, Father of Two, Mountain Enthusiast
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Some of the patent attorneys of the KSNH law firm have joined their efforts to research what is going on in the various branches of IP law and practice in order to keep themselves, their clients as well as interested circles of the public up to date. This blog is intended to present results of such efforts to a wider public.
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