Restoring Balance and Clarity in the Innovation Ecosystem

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December 6, 2021

consumers enjoy an incredible range of products that deliver enhanced convenience, safety, entertainment, and many other benefits. Many of these products are built upon technologies developed by companies that don’t actually manufacture the products. While these manufacturers are quite happy to harvest the profits delivered by technology owned by others, they’re often reluctant to pay a fair share back to the companies that invented the technologies upon which they are based. This has caused a crisis that threatens to throttle the innovation that delivers the new products that consumers love to buy and own. Levelling the playing field to ensure that innovators get a fair reward for their investments in technological progress and implementers continue to convey the benefits of these innovations to society remains a critical goal.

Some of the recent legal developments and discussions surrounding this fundamental issue were tackled by the article, Restoring Balance and Clarity in the Innovation Ecosystem, which appeared in the September issue of The Licensing Journal. It’s authored by an all-star cast of intellectual property professionals, including Roberto Dini, Founder of Sisvel, Sir Robin Jacob, Sir Hugh Laddie Chair of Intellectual Property Law at UCL, Eeva K. Hakoranta, EVP, Chief Licensing Officer at InterDigital, Gustav Brismark Founder and CEO at Kazehara & Former Chief IP Offers at Ericsson, and Richard Vary, Partner at Bird&Bird. By way of background, the article was inspired by a webinar session of the same name produced in May 2021 for the LES International Annual Conference.

The article first puts in context the Anti-Suit Injunction (ASI) phenomenon by briefly reflecting on the history of SEP-based patent litigation, and thereafter addresses three topics: how to support the standards-based innovation ecosystem, factors to consider when setting FRAND rates, and the benefits of arbitration to resolve patent-related disputes.

The article will be highly useful to all IP professionals, particularly those charged with setting or enforcing IP-related policies.

From Preserving Sovereignty to Anti-Suit Injunctions

To set the stage, the authors review the case law surrounding the licensing of standard-essential patents (SEPs) like those involved in communications technologies like cellular and Wi-Fi where standards are necessary to ensure broad-based compatibility between systems and devices. Since many products are sold in multiple jurisdictions, the issue of setting a global royalty rate is paramount. In Unwired Planet v. Huawei, the UK Supreme Court found that a national judge could set a global royalty rate. However, the Court preserved the sovereignty of other jurisdictions by presenting the technology implementor with a choice; either accept the global rate or receive an injunction from selling products in the UK which was the country of the patent infringement lawsuit.

The author’s point out that this decision has been misconstrued by other courts, particularly those in China, which have proceeded to set a global rate in the absence of an underlying patent infringement lawsuit and with no measure to preserve the sovereignty of other jurisdictions. In fact, in multiple instances, Chinese courts have set global rates and issued anti-suit injunctions (ASIs) to stop lawsuits in other jurisdictions, which positions the ASI “as a defend the interests of their local industries.”

Supporting the Standards-Based Innovation Ecosystem

The authors posit that “the European Commission, competition authorities, SSOs and courts have a fundamental role to support the standards-based innovation ecosystems, avoiding market distortions.” A partial list of priorities include:

  • Recognizing that some countries, particularly China, have tilted the playing field to benefit their own industries, including by subsidizing industries so they can support lower pricing, and by rendering legal decisions that support their industries even if they contradict other decisions generally considered to be legally correct.

  • Recognizing that “unwilling” licensees that unnecessarily delay entering into a licensing agreement should be subject to additional damages beyond FRAND royalties.

  • Clarifying the duties owed by licensees to prevent hold-out behaviour and other market distortions by implementers who exploit this lack of clarity.

  • Considering ways to efficiently resolve the problem of “nonpayers,” because it is unfair and anti-competitive when some implementers pay, and others, either singly or through concerted practice, act as free riders.

The authors conclude this section by highlighting the importance of rewarding research that will deliver new and improved products stating that “Failing to recognize this essential driver of technological progress may discourage innovators from investing in new research. Alternatively, they may decide to avoid participation in the standardization process and revert to proprietary, closed solutions, or trade secrets.”

Factors to Consider When Setting a FRAND Royalty Rate

The authors next shifted their focus to factors to consider when setting a FRAND royalty rate, observing that standards must benefit innovators as well as implementors and consumers. To do so, “a FRAND royalty rate should reflect the value of patented functionalities included in any product; the higher the value generated, the higher the royalty rate” (emphasis supplied).

One particular focus was a call to reject “component-level licensing”, which bases the royalty calculation on the price of the component rather than the value the technology brings to the end product. Under this theory, car manufacturers have argued that royalties for cellular connectivity should be based upon the value of the mobile chip rather than the value that cellular technologies deliver to the end product. This, of course, ignores the fact that few, if any, consumers would buy an $80,000 car that lacked cellular capabilities.

Arbitration Solution

The last subject tackled in the article was a call to arbitration to resolve royalty disputes. Recognizing that royalty negotiations involve complex issues on both sides, the authors ask the question, “When the negotiation fails, is litigation the only tool available?” No, they conclude, finding arbitration faster, cheaper, and a more complete solution than expensive litigation in multiple jurisdictions.

To promote arbitration, the authors make several suggestions, including that standard-setting organizations should encourage arbitration among their members and that competition authorities should imply a fair obligation for “both patentees and implementers to arbitrate.” Finally, the authors call for national judges to advocate for arbitration, and find that “if a party refuses to enter arbitration, this should be considered evidence of being an unwilling licensee” addressed by injunction or additional damages.

Overall the article highlights the importance of delivering value back to innovators and stopping the “efficient infringement" which threatens to discourage investment in new research to deliver the next generation of products that consumers want and our economies need. To avoid this, authorities should provide a clear guidance in SEP licensing negotiations, dissuade parties from procedural litigation like ASIs, and foster arbitration.

For more insights, please have also a look to the following excerpts from the panel “Restoring Balance and Clarity in the Innovation Ecosystem” produced in May 2021 for the LES International Annual Conference.

Gustav Brismark – ROI to the Innovators is Essential
Roberto Dini – So-called Efficient Infringement Discourages Innovators
Eeva Hakoranta – We Can’t Afford Hold Out Behavior
Richard Vary – Licensing Rules Tailored for the Auto Industry will Destroy Other Successful Markets
Sir Robin Jacob – Arbitration is the Best Solution

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