METI’s ‘Good Faith Negotiation Guidelines for Standard Essential Patent Licenses’

Japan’s good faith guides are essential for undertaking SEP negotiations in the country, explains Takanori Abe.

Good Faith Negotiation Guidelines for Standard Essential Patent Licenses (the Guidelines)

Japan’s Ministry of Economy, Trade and Industry (METI) established the “Good Faith Negotiation Guidelines for Standard Essential Patent Licenses” (the guidelines) on March 31, 2022. The guidelines are the norms of good faith negotiations provided by the Japanese government to be followed by SEP holders and implementers involved in SEP licensing negotiations, including for Japanese patents. The guidelines contain the following:

Standing of the Guidelines in SEP Licensing Negotiations

The guidelines are the norms of good faith negotiations provided by the Japanese government to be followed by SEP holders and implementers involved in SEP licensing negotiations, including for Japanese patents, to realise an appropriate licensing environment through improvement of transparency and predictability of the negotiations. The guidelines are not legally binding and do not guarantee that, even if followed, negotiations can be judged to be in good faith in each individual case as there are no clear global rules for SEP licensing negotiations. However, METI expects that various parties related to SEP licensing negotiations, such as those in the negotiations and the judiciary, utilise the guidelines, because METI established the guidelines considering the opinions of domestic and foreign companies, industries, and experts on intellectual property and competition law in Japan.

Actions to Be Taken at Each Step of SEP Licensing Negotiations

The following are the actions to be taken by a SEP holder and an implementer at each of the four main steps in SEP licensing negotiations.

While the framework based on the four steps, widely known worldwide, is useful in SEP licensing negotiations, not all licensing negotiations proceed in this order exactly. Therefore, the guidelines do not prevent the SEP holder taking the actions in STEP 3 together with STEP 1 or the implementer taking the actions in STEP 4 together with STEP 2. Moreover, if the parties go through all four steps once but they cannot reach an agreement, the parties may alternatively repeat the same actions as those specified in STEP 3 and STEP 4 thereafter.

<Four main steps in SEP licensing negotiations> ([ ] indicates party taking actions in each step):

• STEP 1: Licensing offer [SEP holder]
• STEP 2: Expression of willingness to conclude a contract under FRAND terms [Implementer]
• STEP 3: Proposal of specific license terms [SEP holder]
• STEP 4: Proposal of counteroffer (if the implementer refuses the offer proposed at STEP 3) [Implementer]

<Image of the four main steps in SEP licensing negotiations>

(1) STEP 1: Licensing offer [SEP holder]

When a SEP holder makes the licensing offer regarding SEPs to an implementer, the SEP holder should provide the following information regarding the patents subject to the license (the subject patents) to the implementer, either voluntarily or at the implementer’s request.

• a list of patent numbers
• claim charts mapping patent claims to standards element by element (when there is a large number of the subject patents, the claim charts are made for representative patents.)
• information indicating that the implementer’s products comply with the corresponding standard
• information indicating the existence of FRAND commitments and corresponding standard numbers (Note 12)

When the SEP holder presents the claim charts mapping patent claims to standards element by element, it is desirable that the SEP holder does not include them in the scope of a non-disclosure agreement (NDA) if requested by the implementer (Note 13).

(Note 12) The SEP holder does not need to prepare new documents to provide this information. It is sufficient for the SEP holder to provide existing documents, such as licensing declaration forms submitted to standard-setting organisations, if the documents indicate the existence of FRAND commitments and corresponding standard numbers for the subject patents.

(Note 13) This shall not apply when the claim charts include non-public information, such as interpretations of words by the SEP holder. However, even if the SEP holder presents the claim charts under an NDA, the SEP holder should not preclude the implementer from disclosing them to its suppliers, attorneys, patent attorneys, etc., if the implementer needs their knowledge to proceed with its own licensing negotiations. On the other hand, even if the SEP holder presents claim charts without an NDA following the implementer’s request, the implementer should not disclose them to third parties without the SEP holder’s consent for purposes other than the licensing negotiations, such as publishing them on the Internet.

(2) STEP 2: Expression of willingness to conclude a contract under FRAND terms [Implementer]

If the SEP holder has taken the actions specified at STEP 1 (licensing offer), the implementer should express its willingness to obtain a license for the subject patents under FRAND terms to the SEP holder. Even if the implementer expresses willingness while reserving the right to challenge the essentiality, validity, or infringement of the subject patents in the negotiation process as appropriate, its willingness to obtain a license under FRAND terms in good faith is not denied.

Even after the implementer expresses willingness, the SEP holder should not preclude the implementer from disclosing the information provided by the SEP holder to suppliers, attorneys, patent attorneys, etc., if the implementer needs their knowledge to proceed with its own licensing negotiations.

(3) STEP 3: Proposal of specific license terms [SEP holder]

If the implementer has taken the actions specified at STEP 2 (expression of willingness to conclude a contract under FRAND terms), the SEP holder should provide specific license terms, including royalties, to the implementer. In addition to explaining how the royalties are calculated, the SEP holder should explain that the license terms are FRAND by using appropriate information such as information concerning third-party licenses (Note 14), royalty rates of patent pools, and court cases so that the implementer can objectively understand that the license terms are FRAND.

(Note 14) In the guidelines, the term “third-party licenses” indicates license agreements that the SEP holder or the implementer has entered into with third parties in the past. There are cases where NDAs with the third parties prevent the SEP holder or the implementer from providing the other party with information concerning the third-party licenses.

(4) STEP 4: Proposal of counteroffer (if implementer refuses the offer proposed at STEP 3) [Implementer]

If the SEP holder has taken the actions specified at STEP 3 (Proposal of specific license terms) and the implementer does not accept the license terms proposed by the SEP holder, the implementer should provide specific license terms, including royalties, as a counteroffer to the SEP holder. In addition to explaining how the royalties are calculated, the implementer should explain that the license terms are FRAND by using appropriate information such as information concerning third-party licenses (Note 15), royalty rates of patent pools, and court cases so that the SEP holder can objectively understand that the license terms are FRAND.

(Note 15) Same as above note.

METI's Policy on Disseminating and Utilising the Guidelines

METI explains that it will disseminate the guidelines to foreign authorities and Japanese judicial officials, and put them to use at METI’s consultation counter on unfair trade practices in the Antimonopoly Act.

Practical tips

At the "Study Group on Licensing Environment of Standard Essential Patents" (the study group) in METI’s establishing the guidelines, the members of the study group and the industries made the following comments:

• “While the risk of losing a case in foreign courts increases if the guidelines deviate from movements in foreign countries, the parties involved cannot make a decision if nothing is disseminated and only the JPO's guidance describing different arguments by both sides in a parallel manner is available. Experts also have completely different opinions. We want guidelines that contribute to settlements in negotiations between the parties.”
• “Although the point of good faith negotiation is in line with movements in foreign countries, there is a risk that even if the parties think they have fulfilled the obligation to negotiate in good faith in accordance with the guidelines, European courts may not judge them to be in good faith. It would be better to describe in the guidelines’ standing and other aspects in a way that does not mislead the Japanese parties.”
• “If the guidelines deviate from movements in foreign countries, business risks will increase globally. It is better to show the overall picture of the standing of the guidelines and then enter into each issue. Since there are various forms of negotiations, we need to consider maintaining flexibility in negotiations without constraining practice.”
• “The national interests of the US, Europe and China are truly reflected in their establishments of SEP rules. In studying the guidelines, it should be considered that implementers represent the overwhelming majority in Japan. While I have no objection to establishing the guidelines based on the four steps, it would be helpful if it is in a way to maintain flexibility.”

In addition, at the 17th meeting of the Intellectual Property Committee, the Industrial Structure Council on March 3, 2022, committee members made the following comments.

• “I am concerned that the guidelines will become balanced norms between SEP holders and implementers. I hope it will serve the interests of Japanese industries, which have many implementers.”
• “Even if a system favourable to implementers is established in Japan, the system itself may lose its significance if lawsuits are filed in Europe and other countries.”
• “Since SEPs are licensed on a global basis, a message that diverges from the global trends could increase the risk for companies that rely on it. Governments should be cautious to issue messages. Statements that benefit only certain companies or industries are unlikely to be accepted. It is important to disseminate information about what we should aim for with a strong awareness of society and innovation.”

The guidelines have been established based on these comments as well.

The guidelines describe that the subject of the guidelines is not "SEP licensing negotiations for Japanese patents" but rather “SEP licensing negotiations, including Japanese patents.” This is in light of the fact that licensing negotiations for SEPs are often conducted not on an individual patent basis, but covering a global patent portfolio that includes both domestic and foreign patents. The guidelines are considered to be based on the fact that the scope of SEP licensing negotiations would be extremely limited if the guidelines were to cover “SEP licensing negotiations for Japanese patents.”

The drafter of the guidelines states that foreign policy authorities in Europe, the US, and other countries are also considering policies to resolve disputes over SEP licenses, and that in the absence of clear global rules for SEP licensing negotiations, METI has published the guidelines as norms of good faith negotiations in Japan, ahead of the considerations of foreign authorities. The drafter desires that foreign authorities will refer to Japan's approach to good faith negotiations as described in the guidelines.

However, unless the guidelines contribute to global rule making, there would be a discrepancy between the guidelines and judgments in foreign countries regarding whether or not to present claim charts. Under such circumstances, by deviating from the intent of the guidelines, it must be said that there is a risk a situation may arise, as the above comment states: "there is a risk that even if the parties think they have fulfilled the obligation to negotiate in good faith in accordance with the guidelines, European courts may not judge them to be in good faith."

Still, however, the guidelines could be a powerful weapon for implementers. That is, to ensure fair competition in the market, METI has a consultation counter on unfair trade practices in the Antimonopoly Act, also known as the “Consultation Counter on Disputes among Companies related to Unfair Trade Practices.” It is also cooperating with the Japan Fair Trade Commission (JFTC) to effectively collect information on and swiftly investigate and deal with cases of potentially unfair trade practices. Based on these schemes, when METI receives information concerning a suspected violation of unfair trade practices at the consultation counter, it will specify the facts concerning the conduct and collect supporting information, and if necessary, report the matter to the JFTC. In addition, when METI takes on a case related to SEP licensing via the consultation counter, it will utilise the guidelines as a reference to conduct consultations and review the potentiality of unfair trade practices. In this way, the implementer may be able to prompt the JFTC to invoke its authority to initiate investigation procedures by consulting with the consultation counter to claim the SEP holder does not follow the guidelines. This may give the implementer an advantage in negotiations hiding behind the guidelines, since the SEP holder, even if it is a foreign company, may be subject to an invocating authority or an administrative disposition as long as it is doing business in Japan.

According to the drafter of the guidelines, intending to establish the guidelines in light of developments in foreign countries, the guidelines referred to the framework of the 2015 preliminary ruling of the Court of Justice of the European Union (CJEU) in the Huawei v ZTE case, which coordinates actions to be taken by both parties in each step of the licensing negotiations. It was decided to establish the guidelines by way of specifying the actions to be taken by both parties in the four main steps of the SEP licensing negotiations.

Regarding STEP 1, the members of the study group and the industries made the following comments.

• “Claim charts should be presented, because it makes discussion easier. There are two types of specification in a standard specification: a mandatory specification that absolutely cannot correspond with the standard without it, and an optional specification that can correspond with the standard without using it. A claim chart will make it easier to understand whether it is a SEP for mandatory specifications only or a non-SEP that includes optional specifications in its claims. “
• ”There are a wide variety of claim charts, in which publicly-known information and non-public information are not always separable. It would be more practical to separate the cases in which claim charts include non-public information and those in which they do not, in order to determine whether they should be included in the NDA or not.”
• “It would be better to describe that this does not apply to claim charts including non-public information. It would also be sensible to describe the concerns of both implementers and SEP holders, such as the concern that an NDA will preclude them from disclosing information to their suppliers, or the concern of unlimited utilisation of the information by disclosing it without an NDA.”

As a result, presenting claim charts was explicitly described in STEP 1. This contrasts with the JPO's revision in June 2022 of its "Guide to Licensing Negotiations Involving Standard Essential Patents," where presenting claim charts was deleted.

For the issue of whether claim charts should be included in the subject of the NDA or not, it was determined that "it is desirable that the SEP holder does not include them in the scope of an NDA ... if requested by the implementer." According to the drafter of the guidelines, this is because, since both claims and standard specifications are publicly-known information, it is unlikely that the SEP holders would normally be disadvantaged even if claim charts that correspond to such publicly-known information on an element-by-element basis are presented without including them in the subject of the NDA. Rather, it is considered that it would contribute to facilitating negotiations by enabling the implementer to disclose the information to the parties who need to know in order to proceed with the negotiations without concerns.

The JPO's "Guide to Licensing Negotiations Involving Standard Essential Patents" is "a document objectively summarising issues concerning licensing negotiations based on domestic and foreign facts," whereas the guidelines are "the norms of good faith negotiations provided by the Japanese government," which is the major difference.

Takanori Abe is a partner at Abe & Partners. He is also guest professor, Graduate School of Medicine, Osaka University. He can be contacted at: abe@abe-law.com