Standard Essential Patents and FRAND – A New Test

In May 2015, IAM Magazine wrote: ”In the last couple of years there have been several attempts to stymie privateering – the model by which operating companies sell patents to an NPE which then seeks to monetize them, usually through an assertion campaign.”

This model will now face its most severe test when the Hon. Mr. Justice Birss takes up the question – remanded to him by the UK Court of Appeals – of whether or not Ericsson violated its FRAND obligations by transferring SEPs to Unwired Planet.

When Unwired Planet annonced its transaction with Ericsson on January 10, 2013 investors were promised a ”conscientious and sustainable long-term IP licensing program” from the 2,815 patent assets acquired from Ericsson covering ”fundamental communications technology” so-called ”telco DNA”.

The basic theory is straightforward: Ericsson has too many patents – and in particular standard-essential patents (SEPs) – and these assets are undervalued in Ericsson’s portfolio licensing agreements, especially by Ericsson’s need to negotiate reciprocal rights for its infrastrucre business. By carving out some of these patents and selling them to a non-practicing entity for some up front cash and retaining a back-end interest in royalty revenues, Ericsson can realize full value from these assets.

There is nothing wrong with this theory. From a finance point of view; it makes perfect sense. As Samsung explained ”the aggregate of the licence fees they can now demand is higher than the fees that Ericsson could have demanded before it entered into the MSA agreements.

The problem arises when Ericsson’s FRAND commitment is taken into consideration. As Samsung explained ”Ericsson’s object in entering into the MSA arrangements was and remains to allow it to maintain a continuing involvement in UP’s licensing strategy and to benefit on an ongoing basis from the increased royalty rates that UP, a PAE, is able to charge for the SEPs now they have been stripped from the rest of Ericsson’s patent portfolio.”

Hon. Mr. Judge Birss is now handed the unenviable task of deciding whether or not the division by Ericsson of its patent portfolio in this way was precluded by Article 101.

This is an interesting question and one which will have a massive influence on the value of SEPs divested by Ericsson, Nokia, and many others.

Eric Stasik (Avvika AB)

see also on FRAND: