How Should Standard-Essential Patents Be Licensed?

from the that's-not-fair dept

Patents are intellectual monopolies, designed to give the patent-holder control over an invention by excluding others from using it without permission. That’s a problem when standards include patented elements. Anyone who wants to implement that standard must use the invention, which gives the patent-holder the ability, in theory, to demand and obtain any licensing deal it might propose. To limit that power, holders of these standard-essential patents are often required to agree to offer licensing terms on fair, reasonable and non-discriminatory (FRAND) terms.

Of course, that leaves open the rather important question of what exactly FRAND means in practice, and an interesting case before the Court of Justice of the European Union aims to obtain some guidance on this issue. The court itself has not yet handed down its judgment, but as usual, an Advocate General has offered his own thoughts as preliminary guidance (pdf). Here’s the background to the case:

Huawei, a Chinese telecommunications company, holds a European patent regarded as ‘essential’ to the ‘Long Term Evolution’ (LTE) standard developed by the European Telecommunications Standards Institute (ETSI). The LTE standard relates to next generation — that is to say, fourth generation — mobile phone communications. Anyone complying with the standard inevitably uses the patent owned by Huawei, which is why that patent is categorised as ‘essential’. Huawei is a member of ETSI and notified the patent to that institute. Huawei also made a commitment to ETSI to grant licences to third parties on fair, reasonable and non-discriminatory (FRAND) terms.

However, when another Chinese company, ZTE, sought a license from Huawei, they were unable to agree on the terms, so Huawei brought an action for infringement against ZTE. According to ZTE, Huawei’s attempt to obtain an injunction against it constituted an abuse of its dominant position, since ZTE was willing to negotiate a license.

Here’s the key part of the Advocate General’s opinion. After making the alleged infringer aware of its infringement, the standard-essential patent-holder must also:

Present the alleged infringer with a written offer of a licence on FRAND terms and that offer must contain all the terms normally included in a licence in the sector in question, including the precise amount of the royalty and the way in which that amount is calculated.

The infringer must respond to that offer in a diligent and serious manner. If it does not accept the SEP holder?s offer, it must promptly present the latter with a reasonable counter-offer, in writing, in relation to the clauses with which it disagrees.

The rest of the opinion then goes on to fill out details of what is reasonable and unreasonable as the negotiations continue, and as recourse is made to the courts. In many ways, it’s an attempt to flesh out what that problematic “fair, reasonable and non-discriminatory” means. But a far better solution would be to stipulate that all standard-essential patents must be licensed on an RF — royalty-free, also known as requirement-free — basis. That’s precisely what the leading web standards body, the W3C, specifies in its patent policy:

In order to promote the widest adoption of Web standards, W3C seeks to issue Recommendations that can be implemented on a Royalty-Free (RF) basis. Subject to the conditions of this policy, W3C will not approve a Recommendation if it is aware that Essential Claims exist which are not available on Royalty-Free terms.

To this end, Working Group charters will include a reference to this policy and a requirement that specifications produced by the Working Group will be implementable on an RF basis, to the best ability of the Working Group and the Consortium.

It’s quite reasonable to expect holders of standard-essential patents to agree to RF licensing since the inclusion of their invention in a standard is, in itself, an important benefit: it places the patent-holder at the center of the standard, and enhances its influence over the field it refers to. It also helps it avoid the need for costly and pointless lawsuits like the one between Huawei and ZTE.

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Companies: huawei, zte

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Comments on “How Should Standard-Essential Patents Be Licensed?”

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23 Comments
Anonymous Coward says:

Maybe free?

I’ve always thought that standards-essential patents should be licensed for free. If not free, then there should be a fixed rate for the licensing, which is “standard” across the industry for all organizations. However, if the owner wanted to negotiate a lower rate as a “discount” for certain organizations, go for it.

TKnarr (profile) says:

Or at least specify the license terms

If not RF, at the very least if a patent’s to be included in a standard the patent-holder should agree to a fixed set of licensing terms and rates and they should be specified in the standard. Then there’d be no ambiguity. Everybody would know exactly what the licenses would cost going in. The only question later would be whether a licensee had paid the rate and abided by the conditions stated in the standard, and if they had then there’s no infringement period.

Andrew D. Todd (user link) says:

The Patent Office Has To Be Involved in the Standards Process

In the first place, I don’t believe there are any legitimate standards-essential patents in computers and electronics, at least not at the level of non-immediate-obviousness which the Supreme Court insists on. The unavoidable fact is that the Air Force and the Navy did it first, more than twenty years ago, and paid a million times more than what you are willing to pay. Patents were not a very big issue at the time, because the actual scarcity was a “friend at court,” that is, a colonel, or general, or navy captain, or admiral who was willing to become convinced of the merits of a technology, and push for its funding and eventual adoption.

The legal basis of patent prosecutions depends on openly scandalous and corrupt inferior courts, such as the East District of Texas and the Court of Appeals for the Federal Circuit; and on openly scandalous judges such as Lucy Koh. One of the lawyers said to Judge Koh, in open court, “Why bother to have a trial at all?” which, properly speaking, is Contempt of Court, and she swallowed the insult. When the Supreme Court regularly decides a class of cases unanimously, or 8-1, that is a sign that the inferior courts have become so corrupt that law is no longer relevant to them.

Let us assume, however, that there is such a thing as a legitimate and standards-essential patent. A standard cannot be a standard if it requires patent royalties. People will inevitably look for another way which does not infringe the patent, and compatibility will break down. The government, specifically the patent office, needs to be represented on standards committees, and, if the patent office becomes convinced that an essential technology is patent-encumbered, the patent office must use the power of eminent domain to purchase and cancel the patents at issue. In practice, one of the most scandalous patents, the Rambus patent, was achieved by breach of trust, and exploiting the lack of communication between the JEDEC standards committee and the Patent Office. If the government had been properly represented on the JEDEC committee, the Patent Office representative would have made a citizen’s arrest for perjury, and that would have been the end of the matter.

Anonymous Coward says:

If any so called intellectual property is included, then it should not become a standard.

btw, how does a Chinese company come to “own” a telephone communication standard? I have read about past instances where companies are allowed to participate in the standard setting process and they turn around and patent processes used in the standard they just helped define. This does not sound like they are following their standards of ethical behavior. Many of these companies like others to believe they are adhering to ethical practices, forcing their low level employees to attend training on the subject while looking the other way as higher ups do whatever it takes to increase their take. But hey, nothing personal, it’s just business.

Anonymous Coward says:

Just grant the patent… and expire it as needed. Once a patented specification gains 50% of the market share, as in the majority of devices being sold use it, then it should be remanded to public domain as a Special type, with an assigned 5% I.P. Tax attached for the remainder of its patent! This will remove abuse & give the owner of the patent their damn money! If a product has more than 1 patent in the Public Domain of this special type then the tax shall multiplied by 5% per and duly noted on the sales receipt so people can visually see where the true cost of a product goes! Organizations can choose to (globally) lower this % but never increase it beyond 5%. This would allow ANYONE to create a product without undue cost to them and allow a much greater degree of market competition! The inventor of a technology should not be allowed to determine who gets to use that invention once it gets big enough to control the market!

As far as the rest!
If a committee wants to grant something as a standard that costs money then so be it. corruption in this arena is far easier to deal with that the corruption in government deciding who the economic winners are!

Allowing the government too much say in economic matters allows stuff like Solyndra and the Halliburton no bid contract shit to go down! Those 2 are just a pair of examples that exist in a sea of them!

OldMugwump (profile) says:

Known terms in advance

I was a professional “standards guy” doing this stuff for about 15 years – none of these problems is new.

If a firm wants a standard to incorporate their patent, at the minimum they ought to be required to disclose the detailed licensing terms in advance to the standards committee.

Then the committee can decide whether the value from the patented technology is worth the price being demanded.

Transparency is what is needed here.

Coyne Tibbets (profile) says:

Standard fee to the standards organization

I agree that fees should be permitted, to benefit the holder of the patent.

But to prevent groundless refusal of licenses (as seems to be the case here) the patent should be conferred upon the standards organization, which collects the fee on behalf of the original owner.

The theory is that the standards organization has a primary goal of promoting the standard, not of promoting their proprietary supremacy.

Deepak Malhotra (user link) says:

FRAND should be replaced with FREE

Actually, all patents should be available on a royalty free basis. That way, benevolent companies like Microsoft and Google can maintain their strong market positions and freely incorporate technology developed by pesky startups who dare to try to challenge the market dominance of the big companies. If we had adopted this change in the past, formerly leading companies like Atari, Kodak, Worldcom, and Nortel might still dominate. Technological innovation is bad for currently dominating big companies and should not be encouraged. The last thing we need is incentives for investment in new companies that might someday challenge the big companies that we love, and who do so much of their new hiring overseas.

Mike Masnick (profile) says:

Re: FRAND should be replaced with FREE

The last thing we need is incentives for investment in new companies that might someday challenge the big companies that we love

Out of curiosity, have you looked at funding stats for new companies lately? There’s a massive boom in venture investment, and it has nothing to do with patents…

Your suggestion that startups need patents to challenge entrenched companies is laughable.

Anonymous Coward (user link) says:

Good Suggestions

A lot of you had good suggestions. They should be royalty-free, but if not:
1. A set fee for all organizations;
2. No right of refusal to license;
3. Indemnity from patent suits by the owner;
4. The standards body should collect payments;
5. No lawsuits except non-payment of license fees;
6. When the patents expire, so do license agreements.

Coyne Tibbets (profile) says:

Re: Re: Good Suggestions

Well,…consider that there are three choices.

1. Let the creator of the patent, who won standard status, pick and choose who gets to benefit from the patent–even for a fee. (“We don’t like you because you’re our number one competitor: No license for you.”)

2. Tell the creator of the patent, “Thank you for all your good work. We’re taking it from you and giving it away now.”

3. Find a way to allow the creator to be paid fairly while ensuring the creator can’t pick and choose winners.

Basically, you can pick just one.

Anonymous Coward says:

Re: Re: Re: Good Suggestions

Only three? Why would you want to put a limit upon choices?

As one of many possible choices – how about “that is not patentable”. The subject of standards that incorporate something that has been patented surely is dominated by software patents – which should not exist.

I’m sure there is a good example of a standard that includes a patented item which is not a software patent, method patent, business patent or idea patent. Any good examples?

Coyne Tibbets (profile) says:

Re: Re: Re:2 Good Suggestions

Re your last question, yes there are a lot of them in the RFC collection. See, the people that created a lot of the RFC’s did it without getting a patent because they believed in the right of everyone to share in the benefits of the ideas they produced.

You’re also right about three being the only option. Those seemed the most reasonable. But there’s also:

4. Absolutely! No! Patented! Technology! in a Standard!

If you have more and better suggestions, do feel free.

John Fenderson (profile) says:

Patent-free standards

No standards should include patented technologies unless a blanket free license for everyone to use it is part of the deal. Period.

Standards are an effort to get everyone to do something in the same way for the benefit of society as a whole. Allowing patented things to be mandated in standards works against this benefit by locking the public into using a particular propriety thing. “Proprietary” and “standards” are completely opposed to each other.

OldMugwump (profile) says:

Re: Patent-free standards

The problem is that sometimes a patent covers a real breakthrough technology that vastly improves the functionality or performance of standards-conformant products.

Then you have a dilemma. You can follow your rule, and just not get those gains (in an interoperable standard) for 25+ years, or you can somehow deal with the patent.

In some cases the patent holder might be willing to license for free in exchange for incorporating their technology into the standard. But not always.

In those case you either need to expropriate the patent holder (assuming that the patent is legit, which only 0.1% are – but that’s another rant), or you need to have a system to compensate the patent holder without allowing them to (a) bamboozle the committee re what the license terms will be or (b) play favorites among the licensees.

Been there, done that.

John Fenderson (profile) says:

Re: Re: Patent-free standards

“The problem is that sometimes a patent covers a real breakthrough technology that vastly improves the functionality or performance of standards-conformant products.”

I’m aware of that, but on balance it’s better to forgo that breakthrough technology until such time that it can actually be used.

This will also encourage better patent behavior on the part of the patent-holders by giving them a choice: either see their technology get rapid and widespread adoption through standards, or keep it locked-down in the patent quagmire and reduce the odds that it will be widely adopted.

OldMugwump (profile) says:

Re: Re: Re: Patent-free standards

My personal view is that you’re right on that.

But that’s not the view of most of the people active in standards committees, who generally represent industry players (real ones for the most part, not trolls).

They represent firms that don’t want to lose sales by offering a standards-conformant product that can’t compete effectively with a proprietary product.

And given that standards committees by and large make their own rules (more precisely their parent orgs do, but the same people are involved), your idea (that I support) doesn’t fly.

So practical politics (the art of the possible…) requires the next least bad solution.

John Fenderson (profile) says:

Re: Re: Re:2 Patent-free standards

Yes, I’m well aware that I speaking of a utopian ideal. But I’ll stick by that ideal nonetheless.

That said, I actually am OK with the compromise position of patented things being included in standards so long as a free and non-revocable license to it is given.

I’m not OK with the horrible compromise that is the FRAND baloney. But, at least so far, reality stubbornly refuses to conform to my opinions so I recognize the reality of the world I actually live in while I do everything I can to make that world better.

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