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'Internet of things' spurs broad interest in standard essential patent licensing

Out-Law Analysis | 04 Feb 2019 | 4:41 pm | 6 min. read

ANALYSIS: A push to set new principles around the licensing of standard-essential patents highlights the growing number of businesses whose operations, products and services now rely on standardised technology.

In this context, a group of tech-focused companies has announced a draft guide on the licensing of standard-essential patents for use in internet-connected devices. The guide includes six core principles that offer the potential to clarify which behaviours are consistent with 'fair, reasonable and non-discriminatory' (FRAND) licensing. One of the principles touches on issues that arose in recent court proceedings.

Broadening interest in the FRAND system

Many of the communications technologies we take for granted today were developed as industry-standardised technologies necessary to the operation of the communication services at hand. An example includes the LTE mobile communications standards associated with '4G' connectivity. A patent that protects technology believed to be essential to implementing a standard is termed a standard-essential patent (SEP).

Standards are often developed by businesses working together in collaboration under the auspices of standardisation bodies – commonly groups such as the European Telecommunications Standards Institute (ETSI) or the telecommunication standardisation sector of the International Telecommunication Union (ITU-T).

Typically, businesses wishing to benefit from working under the framework of groups like ETSI or the ITU-T are obliged to ensure that any patents relating to standardised technologies they obtain are made available to others by way of a licence on FRAND terms.

What constitutes 'FRAND' varies, and often the patent holder and prospective licensees get into significant negotiation, and sometimes dispute, over the terms proposed.

The issue of licensing SEPs is complex and patent holders must be careful to ensure that the demands they make for the licensing of their patents and the way they enforce rights in SEPs against alleged infringers can be squared with competition law. Conversely, prospective licensees must show willingness to licence SEPs on FRAND terms or they will otherwise open themselves up to potential claims of patent infringement and injunctive relief.

A number of courts in Europe have issued rulings which offer some clarity on the approach both SEP holders and prospective licensees should follow to conform to the obligations of FRAND. However, the FRAND system can be opaque and complex and subject to a range of variables that can make it difficult to navigate.

It is one of the reasons that an increasing number of businesses have taken interest in how the system of FRAND will impact them.

It is no longer just telecoms and technology companies that have a keen interest in the licensing of SEPs – the 'internet of things' (IoT) means businesses across multiple sectors are engaged in the topic. As the next generation of innovative new wireless technologies, such as '5G', take shape and offer new possibilities, we will see thousands of new products and services of the future dependent on wireless communications, from manufacturers of autonomous vehicles to developers of digital health devices.

New principles proposed

The broadening interest in issues around FRAND is reflected in a recent consultation opened on draft new core principles and approaches for licensing of SEPs.

The principles and approaches that have been proposed have been devised by a diverse group of businesses under the leadership of industry groups and within the framework of standardisation bodies.

This 'CEN Workshop Agreement' (CWA), reflects the consensus of the individuals and organisations responsible for its content. The CWA has been developed under the framework of the European Committee for Standardization European Committee (CEN) and the Electrotechnical Standardization (CENELEC), with support from the German national standards body Deutsches Institut für Normung.

CENELEC is a European regional standards organisation that, together with its sister organisations CEN and ETSI, compose the European standards organisations (ESOs) that are officially recognised by the European Commission and act as a European platform through which European standards are developed. CEN, CENELEC, ETSI are the regional mirror bodies to their international counterparts, i.e. the International Organization for Standardization (ISO), the International Electrotechnical Commission (IEC) and the ITU-T respectively.

The working group developing the new principles is jointly chaired by the Fair Standards Alliance (FSA) and The App Association (ACT).

Created in 2015, the FSA is an association that "advocates for an open and collaborative approach to the licensing of SEPs that are needed for the creation of the next generation of wireless technology products". Members range from SMEs to multinationals and include companies such as Volkswagen, BMW, Deutsche Telekom, Intel, Denso and Microsoft. FSA Chairman Robert Pocknell said recently that the FSA is "committed to help build a balanced negotiation environment for SEPs, which is crucial to foster innovation in Europe and beyond".

ACT is a US-based group that acts as the industry voice of the app economy. Its members include a number of US and EU-based businesses, including a health data app developer in Brussels and a Grenobles-based company that uses wireless tags and beacons to deliver indoor geolocation solutions for factories and other workplaces.

The groups behind the draft new principles set out in this CWA have stated their hope that this CWA will: 

  • provide educational and contextual information regarding SEP licensing and the application of FRAND; 
  • identify and illustrate some of the questions that negotiating parties may encounter, and; 
  • set forth some of the key behaviours and 'best practices' that parties might choose to adopt to resolve any SEP licensing issues amicably and in compliance with the FRAND  obligation.  

Its guidance is aimed at "both experienced and inexperienced SEP negotiators", at helping others "to more effectively reach fair agreements" and at better promoting "the goals and interests of industry, standardisation and, ultimately, consumers". Indeed, section 3 of the CWA aims to provide the reader, including those with limited experience in SEP licensing negotiations, with some practical guidance on how to prepare for and approach SEP negotiations.

The breadth of companies represented by the groups that have developed the draft principles is testament to the relevance of FRAND issues to many businesses in the IoT age.

The core principles

Six core principles have been proposed to "drive FRAND licensing practices and ground them in processes and approaches that facilitate FRAND results".

The principles, among other things, seek to limit the enforcement of SEPs to "exceptional circumstances", ensure "anybody that wants one" can obtain a FRAND licence, and ensure SEPs are only valued on "their own technical merits and scope", and not in relation to "downstream values or uses".

The principles also promote FRAND licensing of SEPs in cases where there is a dispute over the licensing of other patents in a portfolio, and decry "overbroad secrecy arrangements" being mandated in FRAND negotiations.

The principle on secrecy addresses issues that arose in a recent dispute before the courts in London.

Confidentiality in FRAND negotiations

Last summer, the High Court considered what information prospective licensees of allegedly standard-essential patents are entitled to access, and what can be legitimately labelled for 'external eyes only' by the patent holder.

'External eyes only' conditions prohibit employees of the prospective licensee viewing the information, and instead mandate that only select third parties such as the prospective licensees' legal advisers can access the information.

Patent holders often seek to impose 'external eyes only' conditions on highly sensitive information they wish to rely on in FRAND negotiations, such as draft licensing terms they propose and examples of existing licensing agreements they already have in place with others.

The proposed new core principle on secrecy states: "Neither party to a FRAND negotiation should seek to force the other party into overbroad secrecy arrangements. Some information, such as patent lists, claim charts identifying relevant products, FRAND licensing terms, aspects of prior licensing history and the like are important to the evaluation of potential FRAND terms, and public availability of those materials can support the public interest in consistent and fair application of FRAND. A patent holder should not seek to exploit its information advantage regarding the patents or prior licenses to interfere with the potential licensee’s ability to effectively negotiate."

This push towards greater transparency was endorsed by the High Court in London in a case between TQ Delta and ZyXEL. Pinsent Masons, the law firm behind Out-Law.com, advised ZyXEL in the dispute.

In a ruling that will be welcomed by new market entrants dabbling in IoT that are not as familiar with the FRAND landscape as incumbent telecoms and technology providers, the High Court considered that 'external eyes only' confidentiality obligations should not be the norm.

Instead, the High Court said two representatives from the prospective licensee ZyXEL should be given access to the documents under a 'confidentiality club agreement'. It said redactions to information "confidential and irrelevant to the dispute" could further be imposed to limit what information is disclosed by patent owners. Only in "certain exceptional cases" will imposing 'external eyes only' conditions be justified, it said.

Principles for the future

The core principles drafted are open to feedback until 28 March 2019. In a parallel CEN-CENELEC workshop, proposed by IP Europe and Nokia, a set of alternative views on the subject of the licensing of SEPs is being developed.

It therefore remains to be seen whether the core principles will subsequently evolve and how influential they will be on policy makers, standard-setting bodies and businesses involved in negotiating FRAND licences.

Mark Marfé and David Lancaster are both experts in patent law at Pinsent Masons, the law firm behind Out-Law.com.