Invention tension

The unique combination of patent and competition law issues in the area of standardisation is an increasingly hot topic, with a number of high-profile standards-related spats rumbling on. By Nicola Dagg and Mark Ridgway

These days technology companies seldom bring products to market solely on the back of their own R&D and IP rights (IPRs), and inevitably they will rely, at least in part, on the research of others. From a legal perspective, each stage of development gives rise to new IP rights (generally patents), which protect the commercial interests of innovators and are thereby intended to encourage progress. The flipside of this, however, is that IP rights owners have the right to prevent others from using their IP rights. This can actually hinder progress in certain circumstances.

A relatively recent addition to the legal lexicon is the term ‘patent thicket’, which describes the situation where a large number of patents exist in a particular area and are making it very hard for companies to achieve freedom to operate. Furthermore, important patents (generally those for which there is no substitute technology available) can block anyone but the patent owner from working in the area. Where different companies own different blocking patents, this can lead to deadlock. It is in this context that standard-setting organisations and standard development organisations (SDOs) add value.

SDOs can be ad hoc groups of interested parties or they can be formal bodies mandated with setting standards in a particular area. A high-profile and topical example is the European Telecommunications Standards Institute (ETSI). In either case, the participants’ objective is to agree a specification for the way in which a new technology should work. However, in order for anyone to be able to implement this agreed specification, arrangements must be put in place to guarantee access to IP rights. As would be imagined, this is where difficulties first arise.

Commercial realities
Coming to the table, different companies will have different objectives. Those that are light on IP rights (or which depend more on manufacturing/selling products for revenue) will want the best possible standard from a technological viewpoint. They will also want to keep royalties to a minimum and their costs of production low. By these twin mechanisms they will hope to maximise sales and, therefore, profit. On the other hand, those companies that are relatively IP rights-heavy will be more interested in maximising royalty income. It is still in their interests for sales to be high (since royalties will likely be based on sales), but they will only obtain royalties at all if their IP rights are incorporated in the standard. This will therefore be their priority.

As a result there is ample scope for commercial skulduggery in any standard-setting arena. Most obviously there will be a temptation for IP rights owners to delay disclosing their IP rights/patents to other participants until after the standard has been finalised (when they will be able to extract maximum royalties). Such tactics resulted in a number of high-profile references to the competition authorities in the US in the 1990s (most notably involving Dell and Intel). More recently, in August computer chip manufacturer Rambus Inc was charged with breaches of US antitrust law as a result of its approach to one particular standardisation process.

In order to avoid ‘ambush patents’ of the type described above – and the references to the competition authorities that inevitably ensue – a common approach is for SDOs to stipulate that all ‘essential’ patents must be declared to the other participants in a timely manner. This approach is usually twinned with an obligation to license the patents in question on fair, reasonable and non-discriminatory (Frand) terms.

Excessive disclosures
Following the adoption of such rules, it has been suggested that the number of disclosures of ‘essential’ patents disclosed to SDOs has increased dramatically. While this may be a reflection of increased patent filings generally, it may also be the result of patentee companies over-declaring their essential IP rights (ie declaring patents in the knowledge/suspicion that they may well not be essential).

If this is the case, it brings its own problems, since it makes if difficult for would-be licensees continued #to know which licences to take. This suits the patentees just fine, of course, since it may result in them receiving royalties that they would not otherwise get. It clearly does not suit those trying to implement a standard and makes wrangles about essentiality somewhat inevitable.

Fortunatelythe courts appear willing, at least in England, to assist licensees in this situation. Recently, in an action between Nokia and Interdigital relating to 3G mobile phone standards, the High Court agreed to hear an application from Nokia for a declaratory judgment as to the essentiality of certain of Interdigital’s patents. While no such judgment has yet been delivered, it is hoped that one will soon be forthcoming.

Defining Frand
When negotiating licences, a patentee will always contend that its patents are of great value (in order to justify higher licence fees). In unstandardised industries, potential licensees are free to walk away and perhaps use substitute technology if the price demanded is too high. However, in a standardised industry any manufacturer wishing to enter the market must agree a licence of some sort, and it is for this reason that the Frand obligation is imposed in the first place. Unfortunately this is by no means the end of the matter, since there is little guidance from the courts as to what Frand actually means.

In contrast to the likely position of the patent owner, the potential licensee will view the patent as deriving its value (or the vast majority of it) from the fact that it has been incorporated in the standard. The potential licensee would therefore wish to pay royalties at a rate that would have been agreed in the open market before the standard was finalised (which it would argue was much lower). The patentee, on the other hand, will maintain that the patent was always of great value and that its incorporation in the standard merely reflects this.

These are not easy arguments to resolve, and it is easy to see how, in industries where the licence fees paid by the key players can be huge, further litigation is the inevitable result. Indeed, we have seen an example recently, again in relation to mobile telephone standards, with a group of mobile handset manufacturers/vendors complaining to the European Commission about the royalty rates charged by Qualcomm, a major holder of mobile telecoms patents. Despite Qualcomm purportedly being bound to Frand terms, there was considerable dispute between the parties as to what this actually meant, and this is a matter that it is now left to the Commission to resolve.

The live areas in the field of standard-setting relate to the ‘essentiality’ of patents and the agreeing of Frand licence terms. While essentiality or otherwise is a matter for the patents courts (and is one in which the English courts appear willing to assist), the latter areas are likely to continue to give rise to references to competition authorities.

With no easy solution to the difficulties in defining Frand, parties are also likely to continue to litigate creatively by combining competition and patent law causes of action in multiple jurisdictions in order to achieve their objectives. -Nicola Dagg is a partner and Mark Ridgway is an associate at Allen & Overy+ continued