The next telecommunications standard, 5G, and the nascent
Internet of Things (IoT), promise a world of high-speed interconnectivity. We are
already accustomed to people talking to smart devices to ask them to play music,
or to order a taxi or takeaway. The technology for truly smart homes and even
smart cities is following closely (see here for examples
of how the IoT is already being used).
Standardisation will be essential to maximising the benefits
of both the IoT and 5G. After all, there’s no point in having a smart
thermostat that can be adjusted remotely if you can’t connect to it whilst out
of the house because your phone is made by a different manufacturer. Standardisation
will ensure that 5G/IoT devices and systems can connect and work together.
There will be thousands of patents essential to the
operation of the standards developed. As the IoT grows and 5G is rolled out, the
issue of how these patents are licensed will become increasingly important.
Standard essential patents (SEPs) have to be licensed on a FRAND basis, but
determining a FRAND royalty rate is a challenging task.
The Commission’s
Roadmap
Following two studies on SEPs published at the end of last
year, the Commission released a Roadmap
on 10 April 2017 that sets out its plan to publish a ‘Communication on Standard Essential Patents for a European digitalised
economy’ later this year, possibly as early as May or June. The
Communication (which will not have the binding force of a Directive or
Regulation) is intended to complement the Commission’s Digital Single Market
project, and to help work towards the goal of having 5G rolled out across the
EU by 2025.
The Roadmap identifies three main issues that the Commission
will seek to address in its Communication to ensure a balanced, flexible
framework for SEP licensing:
- ·
Opaque
information about SEP exposure: the lack of effective tools for potential
licensees to identify which patents they need to take licences for in order to
implement relevant standardised technologies. - ·
Unclear
valuation of patented technologies: the difficulties in assessing the value
of new technology (for both licensors and licensees), including the lack of any
widely accepted methodology. - ·
Risks of
uncertainty in enforcement: the general framework provided by the CJEU in Huawei v ZTE is a starting point for
agreeing a FRAND royalty rate, but it does not provide complete guidance. There
are many technical issues that aren’t addressed, such as how portfolio
licensing, related damages claims, and ADR mechanisms should be dealt with.
(NB: some of these issues have been recently addressed in the UK case Unwired Planet
v Huawei [2017] EWHC 711 (Pat).)
It is unclear if the Communication will address other issues
with standardisation and SEP licensing, such as over-declaration, hold-up,
hold-out, the appropriate royalty base (a particularly difficult challenge in
the diverse world of the IoT) or whether a total aggregate royalty burden is
appropriate.
Use-based licensing?
The Roadmap does not offer any specific details as to how
the Commission intends to solve the issues it identifies. However, according to
MLex, an outline of the Commission’s Communication seen in February suggested
that the Commission was considering a licensing model that would enable
licensors to offer licensees different royalty rates depending on how the
relevant technology is used. This could extend to allowing licensors to refuse
to offer a licence if the final use of the technology cannot be identified and
tracked.
This suggestion has caused concern amongst a number of
companies. ACT | The App Association, an organisation sponsored by Apple,
Facebook, Microsoft, PayPal & others which represents more than 5,000 small
technology firms, has written
to the Commission claiming that such a licensing model poses a substantial
threat to innovation. It argues that in order for suppliers to obtain licences
under this model, they might be required to monitor their customers’ business
practices and potentially to charge different customers different prices
depending on how they use the technology. It also claims that this model could appropriate
the value created by new innovators. If a company succeeds in developing a new
use for a particular sensor by incorporating it into a health app for example, it
might find itself being charged higher royalties for this new use of the
sensor.
My Bristows
colleagues reported in September on how new licensing models may be required
to make best use of the IoT. Qualcomm, Ericsson and Royal KPN (among others)
have backed a new licensing platform called Avanci. This is designed to remove
the need for lengthy bi-lateral licence negotiations by making flat rate FRAND
licences available for particular patent portfolios. However, it is now over
six months since Avanci launched and there have been no reports yet of it
successfully concluding any licence agreements.
The proper royalty base for patent licences has been a
controversial topic for a number of years now. There has been considerable
debate over whether licences should be based upon the price of the smallest
component in which the patent is implemented, or the final price of the end product.
This issue has been addressed by the courts on occasion, particularly in the US
(see CSIRO v Cisco for example).
The new Communication is intended to provide best practice
guidance on SEP licensing. If the Commission does opt for a use-based licensing
model, this would be a controversial choice. However, whatever the Commission
decides, given the number of conflicting interests and amounts of money at
state, it is unlikely to satisfy everyone.
Matthew Hunt is an Associate in the Competition & EU
department of Bristows LLP, based in London.
