FRANDly Licensing in Mobile Telecommunication

After the EU Commission has opened a formal antitrust investigation against Samsung a few weeks ago the dispute between the biggest stakeholders in the Telecommunication equipment market recently takes a new turn. The EU Commission has opened two further formal antitrust investigations, this time against Motorola. These investigations are based on complaints filed by Apple and Microsoft. According to these complaints, Motorola has failed to honor its irrevocable FRAND licensing commitments made to standard setting organizations by seeking and enforcing injunctions against Apple’s and Microsoft’s flagship products such as iPhone, iPad, Windows and Xbox on the basis of patents it had declared essential to produce standard-compliant products. Allegedly also Samsung has failed to honor a FRAND licensing commitment in licensing negotiations and by seeking injunctive relief before the courts of certain Member States in relation to standard essential patents.

The EU Commission’s investigations give reason to examine the FRAND issue again. Even the more reason now as three recent decisions by German courts have been given dealing with FRAND licensing conditions from the position of a company who is seeking a license. The decisions precisely formulate demands on the embodiment of FRAND Licensing conditions.

Background of FRAND licensing commitments are cross company standard setting processes. In particular these standard setting processes take place in the mobile telecommunication sector. Due to the very high density of patents in this area of technology it is impossible to adopt any technology specification by which patents of involved companies or third parties are not touched in their protective area. Often the implementation of standard-compliant products mandatorily requires the use of the patent protected technology. These patents are called essential patents. If the standard is once adopted, the owner of such patents significantly strengthens its market position on the market for licensing the mentioned patents. With respect to this strengthened position the big standard setting organizations like ETSI, 3GPP, ITU and many others, require from their participants the filing of a FRAND licensing commitment. By this commitment, the companies commit to license own essential patents to fair, reasonable and non-discriminatory terms. The objection of this commitment is bounding the companies and hindering them to exploit their strengthened position on the licensing market.

We have already pointed out the difficulties with this FRAND licensing commitments a few times. In particular it is problematical that is not clear so far, which licensing conditions in concrete could be regarded as FRAND. That is also and in particular true with respect to a reasonable royalty rate.

The new investigations could bring some more clarity. Indeed, the investigations are firstly directed to the alleged violation of antitrust provisions. That may be surprising with respect to the complaints of Microsoft and Apple. But one must realize that FRAND actually is not an antitrust term. Thus, the violation of a FRAND commitment could not be put on a level with the violation of antitrust provisions. However, the terms which coin the term FRAND are also known in the antitrust area. And basically, the complaints of Microsoft and Apple should result from the allegation of restraint of competition, market foreclosure and/or exploitation by demanding too high royalties. FRAND only adds another level in which the well-known antitrust questions are framed. Consequently we should draw some conclusions from the findings of the EU Commission. That should be also true for the question of the reasonable royalty rate and how it should be defined to fit the requirements of FRAND.

However, we may not await too much from the investigation at all. The EU Commission already ended a similar investigation against the US Company Qualcomm without any fruitful findings before. Also Qualcomm allegedly misused its dominant position on the licensing market for standard-essential patents by exploiting its competitors through the demand for too high royalties. And another antitrust proceeding against the US Company Rambus was ended by a commitment from Rambus lowering royalty rates for DDR-RAM memory chips to 1.5 %.

On a first sight, that may give an indication for the opinion of the Commission which royalty rate could be regarded as reasonable also in the new investigation. Though we must consider, that standards specifying mobile communication equipment often require the implementation of hundreds or even more patents. The basically “low” rate of 1.5 % for a specific patent could thus easily totalize to a really extensive amount (royalty stacking). That is even true by considering that those patents are owned by several companies und royalties have to be paid to all these companies. To make matters worse a part – not all – of these companies made their patent portfolios accessible for each other via cross licensing agreements. Consequently these licenses are accessible to a “zero royalty rate” for the mentioned companies. But other companies which do not participate to any cross licensing agreements are exposed to the full demand for royalties. This fact is easily acknowledged as a strong barrier for market access. Before this background it should be very hard for the Commission to find out acceptable assessment factors by which a royalty rate could be regarded as reasonable or not.

But FRAND should not be reduced to a discussion about the reasonable royalty rate. German courts recently defined own requirements to FRAND licensing conditions with respect to the so called FRAND licensing objection. By this objection an alleged patent infringer could defend against an action for an injunction by arguing the patentee itself infringes on the FRAND-licensing commitment made to a standard setting organization. However, the application of the defense depends – inter alia – on an own irrevocable FRAND offer by the alleged infringer.

The Regional Court Mannheim decided in a recent judgment (LG Mannheim 9.12.2011 – 7 O 122/11) that this offer must also include an unconditional acknowledgment of the patent in question to meet the requirements of FRAND. This opinion was approved by the District Court Karlsruhe (OLG Karlsruhe 27.2.2012 – 6 U 136/11, not publicly available yet). Moreover, the District Court requested that the FRAND offer must entitle the patentee to an extraordinary right to terminate the license agreement for the case that the patent will be challenged by the licensee in future. Both decisions cause substantial difficulties for companies defending against unsubstantiated claims. The company which wants to fend an infringement action by using the FRAND licensing objection must acknowledge the patent in its irrevocable licensing offer to the patentee. But for this patent it is neither their actual essentiality for a given standard ascertained nor that the challenged embodiment makes actually use of it. The essentiality of a patent for a given standard is just based on a simple declaration of the patentee made to the standard setting organization. It is not verified at all. In an extreme example the company makes and is bound to an irrevocable licensing offer for a patent which it actually not requires at all. However, in a subsequent decision (OLG Karlsruhe 27.2.2012 – 6 U 136/11), the OLG Karlsruhe relativized its opinion with respect to the royalty rate. According to this recent decision it is not demanded that the licensee withdraws any objections against the amount of royalty rate in its licensing offer.

Stephan Dorn