A Balanced View on FRAND Is Essential for the Industry

3/2015 2.9.2015
(Kuva:iStock/Petar Chernaev)
The telecoms industry has operated on a FRAND basis in standardization and commercialization efforts. Without standards, we would not have the interoperability required for mobile devices and networks to work seamlessly together and consumers and industries would not have benefitted as they have done. But something is changing.

The telecoms industry has been fundamentally built on the standardization of technologies. Without those standards, we would not have the interoperability required for mobile devices and networks to work seamlessly together and consumers and industries would not have benefitted as they have done. Simply put, it would not be possible to communicate using devices from different manufacturers across networks built on equipment from a number of vendors and operated by dozens of different companies in countries around the world.

Standards are usually created in a cooperative multi-party process facilitated by standard setting organizations (SSOs), such as the European Telecommunications Standards Institute (ETSI). Patented technologies developed by companies or individuals may be contributed to the process and adopted as part of a standard. A patent is considered to be essential to a standard if it is not possible to make a product implementing the standard without infringing that patent. The contributor of the essential patent is usually required to make a commitment to the SSO to grant licenses to such essential patents on fair, reasonable and non-discriminatory (FRAND) basis.

Rewards for innovators, bigger markets for implementers

The telecoms industry has, since its early days, operated on a FRAND basis in standardization and commercialization efforts. This has ensured that the interests are balanced between those who invest resources to innovate and contribute to standards (innovators, contributors) and those who implement the standards in their products (users of technology, implementers).

Those who contribute to standardization are motivated by the prospect of reward for those contributions, while those who implement them have been able to launch products and benefit from a relatively lower cost of market entry. Rewards for innovators have generally been through patent royalties paid by those who implement standardized technologies without investing themselves in research and development of the technologies used.

Overall, FRAND continues to work well for the industry. The best proof of that is the enormous growth seen in markets subsequent to adoption of the 2G, 3G and 4G technologies. Strategy Analytics figures show that global mobile phone shipments reached 445 million units in the first quarter of 2015, with annual growth around 8%. Over the years, many major manufacturers have joined the market without having a significant mobile technologies patent portfolio of their own.

Were it not for standardization enabled by FRAND licensing, mobile communication technologies would not have been as successful as they have been. Hundreds of patent owners with thousands of patents have not prevented new entrants from entering the market. Instead we have witnessed the massive wave of Chinese and Indian manufacturers expanding their presence to global markets. If patent hold-up – where the threat of a court injunction supposedly forces licensees to accept higher royalties than they otherwise would – had truly been a problem then these new business successes would not have been possible.

Huawei v ZTE gives guidance

Despite the great market success of mobile communication technologies and the telecoms industry, working with FRAND has not at all times been straightforward. Lack of clear rules in some markets has provided room for opportunistic behaviors, such as creation of hold-up based on only few or individual allegedly essential patents. Largely due to the emergence of such unfortunate behaviors by a few patent holders the debate on FRAND has lately focused on patent owners and their behavior, despite the overwhelming evidence of market success showing there have been no real barriers to entry.

But FRAND remains a framework for continued success, with clarity on rules improving. For example, the judgement of the European Court of Justice in a recent Huawei v ZTE case (C-170/13)  gives further guidance on the behavior of both patent-owners and the implementers and rightly recognizes that both are relevant for FRAND. While there may be genuine disputes over the meaning of FRAND in particular cases, the tools and means exist to resolve such disputes, for example through independent arbitration to determine portfolio value.

Resolution of FRAND disputes seems to be more dependent on the willingness of the implementing party for resolution than anything else. In the telecoms sector, the attitude of potential licensees has dramatically changed, with some perceiving there is currently little or no threat of an injunction against their products in the market. A number of implementers seem to have adopted a strategy of avoiding licenses to standard essential patents unless forced to take them by the courts. Such behavior on the part of implementers leaves patent owners no choice but to litigate, fundamentally changing the market dynamics.

The number of technology implementers on the market is increasing and avoidance of licenses – referred to as “free-riding” – puts competitors respecting the IP rights of standard essential patent holders into disadvantage and distorts the market. As a consequence, rather than a largely unproven risk of patent “hold-up” by patent owners, a real problem of “hold-out” by implementers is seen to be developing as a result of the recent policy debate having focused mainly on availability of injunctions for holders of standard essential patents, rather than the behavior of both parties.

Policies are changing

Recent regulatory and policy trends, such as changes to the Patent Policy of the Institute of Electrical and Electronics Engineers (IEEE), have been more concerned with limiting the ability of patent owners to protect their rights than with addressing the issue of unwilling licensees and free-riding. For standardization to continue to work effectively, it is vital that regulatory bodies and SSOs do not work against contributors to standards by limiting their rights to prevent unauthorized use of their technology by unwilling licensees.

Making it more difficult to get an injunction for standard essential patents will only encourage misuse of the patent system and decrease innovators’ incentive to invest in new technology and contribute to standards. This would be harmful for the development of new technologies, new products and ultimately also consumer choice and the communications industry.

Sonja London
Director
Nokia Technologies

The judgement of the of the European Court of Justice
C-170/13 Huawei Technologies Co. Ltd v ZTE Corp. and ZTE Deutschland GmbH, 16.7.2015

Aiheet: Patentit
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