FRAND licensing: Arbitration, arbitration, arbitration
Patent disputes are not a sign of illness—they are a sign of wellness,” says Bill Merritt, CEO of mobile technology research and development company InterDigital. “I would be really troubled if there were no patent disputes because that would suggest this is one sleepy industry,” he adds.
Founded in 1972, InterDigital designs and develops technologies used in digital cellular and wireless products and networks, including 2G, 3G and 4G. Spurred on by 180 engineers, it has 19,000 patents and patent applications. The company is a key contributor to global standards and, as a consequence, is actively involved in the licensing of standard-essential patents (SEPs).
The SEP field has witnessed many high-profile court disputes and regulatory investigations in the past few years, with authorities scrutinising SEPs’ licensing on fair, reasonable and non-discriminatory (FRAND) terms. Although Merritt fails to see why FRAND discussions are perceived as complex—“I’ve done this for 25 years, and it’s a very straightforward set of words”—he is a big believer in arbitration as the best means to resolve disputes.
He says this after much ink has been spilled on two FRAND court rulings from 2017. In the first, Unwired Planet v Huawei, the English High Court granted an injunction against Huawei over two patents. The decision represented the first time the court had made a FRAND determination and set a royalty rate—in this case, a single rate. But over in the US, where InterDigital is based, the US District Court for the Central District of California ruled in TCL Communications v Ericsson in November that a single rate does not apply to
SEP disputes.
Merritt argues that even though judges are “very smart” and are simply doing their job in resolving FRAND legal issues, they are not the best arbiters of such cases. Judges don’t always appreciate longstanding licensing practices and therefore approach the analysis in the wrong way, he says; in short, they are not experts.
Giving one example, Merritt says courts have struggled to calculate royalty rates because they have tended to think hypothetically instead of first assessing what other companies have paid for a relevant licence.
“That is a dangerous analysis,” he argues. “We have had hundreds of negotiations around 3G and 4G—what better body of work is there? It makes no sense to think hypothetically.”
Another example is how judges have tended to set FRAND rates for past unlicensed sales, but that is “not how things have worked”, as past sales are typically discounted in royalty discussions, says Merritt. Industry actors have applied such a discount because otherwise it could impede a deal being done, he adds.
He goes further, saying that courts are not looking at the FRAND concept in the right way. While courts ask the question of what a FRAND rate is, they miss the point that standards-setting bodies simply say SEP owners “should make a FRAND offer”, which may entail “all kinds of things”, including cash and a transfer of research, not just a licence.
