Licenses are a type of contract that details the terms of a bargain between involved parties. Corporations use licenses as a way of standardizing and memorializing terms and conditions between parties. This article focuses on two specific types of licenses—FRAND and compulsory licenses. The term FRAND is an acronym for “Fair, Reasonable, and Non-Discriminatory” and thus, such features must be present in a FRAND license. On the other hand, compulsory licenses are involuntary contracts where the state can force the licensor to enter into a license agreement. Consequently, compulsory licenses can affect market price and exclusivity of a product. Both of these licenses have a similar objective—to create a value for the end product that is different from its true market value. The goal of this article is to investigate the pros and cons of such licenses to determine if one license is superior to the other in achieving these ends, or if a combination of both licenses is necessary, particularly in light of growing 5G use and the global COVID-19 pandemic.
I. FRAND Licensing
FRAND licenses are best understood by looking at their use in the software industry. Information and communications technology (ICT) patents are difficult to navigate due to the multitude of overlapping patents and the need for compatibility between products. Mobile phones and cellular network industries are a great example, as product interoperability is crucial to cellular networks being able to provide connectivity. Product interoperability not only makes things user-friendly, but also makes it simpler for phone companies to access technology and design information. Patents that overlap in their processes can be submitted to standards-setting organizations (“SSOs”), which can then designate these patents as standards-essential patents (“SEPs”). Every industry has its own SSOs, often made up of leaders from the industry, that set common standards in areas of significant innovation. This synchronizes different operational aspects of an industry and creates uniformity. In a globalized world, such standardization can help create business opportunities. If a patent is designated as a SEP, the owner can license it for free or for a reasonable royalty rate. It is usually in the patent owner’s interest to have their patent be designated an SEP because SSO licensing terms can greatly increase the market power of their patent and minimize delays on their product manufacturing. Most importantly, SSO policies state that SEPs must be licensed on “fair, reasonable, and non-discriminatory,” or FRAND, terms.
The FRAND licensing mechanism makes it such that users of an SEP can negotiate and pay royalties to a patent owner who has already promised to be reasonable and fair to the SSO when their patent became an SEP. This attempts to minimize and prevent licensing abuses by the owner. However, while the general agreement is to be fair and reasonable, these terms are undefined and ambiguous, making it very difficult to properly define FRAND terms. Although patent owners who agree to make their patents SEPs enjoy several benefits, such as holding considerable influence and authority over the direction of an industry, by agreeing to license on FRAND terms, the patent owner loses certain rights. Like any other contract, FRAND agreements suffer from the same disadvantages as other contracts; the scope for potential disagreements is large.
European Case Law on FRAND Licensing in Light of 5G
With the belief that 5G and the Internet of Things (IoT) will revolutionize various industries worldwide, there has been growing interest in FRAND licensing in these sectors. The basic idea is that those with 5G technology can designate their patents as SEPs through SSOs and subsequently license to various other companies using 5G on FRAND terms. In Huawei v. ZTE (2015), 4G LTE standards-essential patent owner Huawei sued ZTE for infringing its patent. ZTE then brought a FRAND defense under Article 102, arguing that Huawei’s application for an injunction was an abuse of its dominant position. Eventually, the European Court of Justice (ECJ) held that certain procedural steps must be taken when injunctive relief is sought by the SEP owner of an alleged infringer (including notice by the SEP holder, an expression of willingness to take a license on FRAND terms by the alleged infringer, and a written license on FRAND terms by the SEP holder). This decision has the benefits of increasing transparency between parties during licensing negotiations and harmonizing patent law in the EU. This is a neutral compromise that curbs potential anticompetitive behavior by SEP owners without entirely prohibiting enforcement rights, which would reduce incentives for innovation in the telecommunications industry.
Recently, the UK Supreme Court held that the SEP holders Unwired Planet and Conversant can insist on implementers (Huawei and ZTE, respectively) to take FRAND licenses on global terms. If they do not take these global royalty rates, they could be enjoined from operating in the UK market. These decisions have the effect of protecting smaller SEP owners against global telecoms companies that hope to implement these technologies in their products. With the emergence of 5G technology and the sure rise of SEPs in this realm, the Huawei v. ZTE framework—in conjunction with the Unwired Planet and Conversant decisions—will be critical in global growth of IoT.
The Current State of FRAND Licensing
Currently, the diversity of remedies and the differential outcomes of those remedies remains a concern in FRAND licensing. In any event, FRAND commitments differ on a case-by-case basis—thus, there are no standard terms or royalty rates for these contracts. In conclusion, although SSOs and FRAND licensing have the potential to be positive forces, they currently use up court time and often result in muddied water for all parties involved, especially since they involve more than one area of law. Compulsory licensing bypasses these issues because the government establishes a rate. Although that rate may not be ideal, the benefit is that the rate is clearly defined up front. The primary issue with compulsory licensing, however, is that a patent owner is forced to license, resulting in some concerns around negatively impacting innovation. The next section discusses whether the compulsory license can solve the problems associated with the FRAND license.
II. Compulsory Licensing
In compulsory licensing, the state forces an unwilling patentee to license their patent due to the societal need for the product outweighing the patent owner’s rights. Compulsory licenses, although relatively uncommon across the globe, aim to ensure that consumers have access to a product at a lesser price. Even in the United States where compulsory licenses are heavily disliked, U.S. law also allows for compulsory licenses when promoting domestic economic objectives. Many see compulsory licensing as unfair to the patent owners and inventors because it disincentives patent owners under the assumption that there are economic losses—but this is not always true. Some cases show that a patentee incurs greater profits from the increased sales following the compulsory licensing of a product than they would have without it. The increase in market size causes an increase the sale volume of the product (for example, in a poorer country with a large population) and may lead to large profits despite the lower price demanded by compulsory licenses.
Use of Pharmaceutical Compulsory Licensing in India
India’s compulsory licensing provisions have been the center of attention recently. In India, Cipla—a generic drug company—declared that the needs of the public were not being met due to the high price of patented drug Nexavar. Controller General of the Indian patent office determined that the patentee was not satisfying the public market demands, an important criterion to avoid compulsory licensing. In turn, the Controller granted a compulsory license for this drug. The Indian government was able to negotiate a lower rate, and access was immediately given to those who needed it. Interestingly, in compulsory licensing, the patentee’s duty to meet societal needs in return for patent monopoly rights are at the forefront of licensing decisions, whereas, in FRAND licensing, these considerations are seemingly absent. Internationally, the Trade Related Intellectual Property Agreement (TRIPS) outlines the use of the compulsory licenses. One mechanism of compulsory licensing internationally is for the government to negotiate terms with the patent holder to license the patent on commercially reasonable terms. Meaning, what is reasonable is considered through the lens of national need, not the highest marketable price. Under TRIPS, licenses should be non-exclusive and should be non-assignable which allows the patent owner to continue to use the patent but also prevents governments from misusing the patent.
The Potential for Compulsory Licensing in the COVID-19 Era
Given the pressing need to vaccinate as many people around the world against COVID-19, compulsory licenses have been suggested by numerous countries to increase access to care. The Doha Declaration of the TRIPS agreement allows the use of compulsory licenses, particularly in developing countries where access to lifesaving medications can be a tremendous challenge. In such an approach, a country would circumvent a pharmaceutical company’s patent rights, and subsequently manufacture and distribute the product at a heavily subsidized price through domestic generic companies. This strategy was successfully employed at the height of the global HIV/AIDS epidemic in African countries that needed access to antiretroviral. While innovator pharmaceutical companies have rallied against this approach, arguing that it could have an adverse effect on R&D, countries like Brazil and Israel have advocated for compulsory licensing for COVID-19 vaccines and therapeutics alike. There is a dire need to vaccinate people from all countries, regardless of income level, not only because it is the morally correct thing to do, but also because the global economy cannot fully recover until everyone is vaccinated. Compulsory licensing may provide the solution in countries that cannot afford existing prices.
Importantly, an alternative route that can be taken by pharmaceutical companies is voluntary licensing, in which a company licenses its product to domestic generic companies, which can then sell these pharmaceuticals locally at a far lower price. From the standpoint of the pharmaceutical company, this could achieve a more acceptable price when compared to compulsory licensing as the government is not in the negotiations, and such coordinated technology transfer between the global innovator pharmaceutical company and the local generic could benefit distribution of the medicine. Gilead has already taken this approach with remdesivir, an FDA-approved COVID-19 therapeutic, through licenses with generic manufacturers in India, Pakistan, and Egypt.
A Comparison Between FRAND Licensing And Global Compulsory Licensing
This final section compares the two types of licenses with the goal of determining if the disadvantages of the FRAND license can be resolved by the use of a compulsory license or a hybrid of both. Operationally, compulsory licenses are much more efficient because price negotiations cannot go beyond a certain point. Although the question still remains whether compulsory licensing can discourage innovation and subsequently disincentivize patent owners, it is important to note that FRAND licenses in the SEP context are still inefficient due to patentees using strategies to gain more market power and slow competition—though this issue has been ameliorated in Europe after the Huawei v. ZTE decision in the context of telecoms. Compulsory licenses though, remove the biggest debilitating factor of the FRAND license: the royalty negotiation. The upfront determination of rates reduces cost and increases efficiency involved.
Of recent, the standard setting body is revising its policies such that royalties are determined based on the SEP’s value to the component instead of the whole product. This takes FRAND licenses a step closer to being a hybrid of compulsory licenses. The SSO imposing such rules creates clarity for the patent owner as well as the licensee.
It is necessary that licenses minimize delays and inefficiencies. Generally, access to technology is an important element of the trade regime, especially in poorer countries where access to technology is necessary to achieve the objectives laid out by the TRIPS agreement. Balancing innovation and access is especially important as technologies like 5G are being deployed and as vaccines for COVID-19 are being distributed worldwide in light of the global pandemic. The digital divide, which exacerbates class divisions in places like India and South Africa, is fueled by a lack of access to technology. Technology not only has the ability to connect people, but also the ability to provide people with access to limitless knowledge. Through technology, marginalized populations can create power and mobility for themselves in a class-based society. This is why international trade agreements are important. Although we are not suggesting all governments must immediately enforce compulsory licensing of relevant technologies, governments must not sit idly as individuals and corporations use technology as tools to their own advancement. In poorer countries, the hybrid model which standardizes royalty rates would lead to increased access, as well as direct more resources towards innovation, resulting in a more informed electorate and more efficient system. A hybrid of the FRAND and compulsory licenses which includes standardized royalty rates, could help eliminate major drawbacks currently affecting FRAND licenses. This is a particularly pressing issue today given 5G and COVID-19.
Sindhura Devalaraja, Neil Davey, and Raj Davé (respectively, Intern, Davé Law Group, Graduate of the University of Massachusetts, Amherst; J.D. Candidate at Harvard Law School; President, Davé Law Group, Virginia, USA.