Imagine downloading four "Star Wars" movies in the time you finish reading this sentence, donning your $6.99 virtual reality headset, and then walking next to Darth Vader (or Luke Skywalker). 5G, with its gigabit download speeds and millisecond latencies, is bringing that world.

Along with artificial intelligence, virtual reality, internet of things and big data, 5G has sparked a super-connected revolution. Companies across industries strive to make smart and connected products, from the expected, vehicles and TVs, to the unexpected, inhalers, kitchen appliances, trash cans.

With the explosion of smart and connected products comes the need to navigate complex licensing negotiations and litigation over standard-essential patents in communications and networking technologies.

Recent Developments in the SEP Landscape

Escalating SEP Battles

Many standard-setting organizations require members to dedicate their SEPs or license them on fair, reasonable and nondiscriminatory terms. What constitutes a FRAND term, however, has long perplexed corporate negotiators, courts and governmental agencies around the world.

That problem becomes more difficult when one side is a relative newcomer to SEP/FRAND licensing. For instance, an auto or medical device manufacturer will generally lack the FRAND licensing experience of a smartphone maker. Up until 2018, SEP litigation mostly involved smartphone competitors and chip suppliers. Since then, telecom giants like Nokia Corp. and Qualcomm Corp. have sued auto makers like Daimler AG and Volkswagen AG. The next-generation connected vehicles, and various other super-connected products, require fast, stable networking, the type of connections 5G offers.

By January 2020, there were more than 95,000 applications and granted patents declared relevant to 5G worldwide, with Huawei Technologies Co. Ltd., Samsung Electronics Co. Ltd., LG and Nokia leading the race.1

With the emergence of patent pools targeting particular industries, nonpracticing entities continue to play a part in the SEP battles. Avanci LLC, for instance, aggregates SEPs for cellular standards (2G, 3G and 4G) from industry players and licenses them to IoT device manufactures like automakers. Avanci's licensors now include Qualcomm, Nokia and InterDigital Inc., and NPEs such as Sisvel SpA, Unwired Planet, and Conversant. Avanci has struck deals with Audi, Volvo, Volkswagen, Porsche, Peugeot and Lamborghini. For those who find the $15 dollar-per-vehicle rate not so fair, reasonable, or nondiscriminatory, Avanci and its members have turned to the courts.

Recently, Avanci member Conversant sued Tesla in Texas based on cellular SEPs acquired from Nokia,2 shortly after another member, Sharp, sued Tesla in Japan.3 Yet another Avanci member, Sisvel, sued Tesla Inc. (and 11 others) in Delaware in May 2020.4 Meanwhile, auto-parts supplier Continental has sued Avanci and its members for breaching FRAND commitments and committing other anti-competitive acts based on its practice of licensing only at the original equipment manufacturer level.5

In Europe, the world awaits the U.K. Supreme Court's ruling on whether a U.K. court can order Huawei to take a global FRAND license from Unwired Planet based on U.K. patents, or else face a U.K. injunction. Daimler, joined by Continental and a few other auto-connectivity module suppliers, continues its antitrust fight against Nokia. Nokia's 10 infringement suits in three German patent courts against Daimler have not yet forced it to accept Avanci's royalty demands.

All this is just the beginning. As more actors take part in the super-connected world, SEP battles will find their way onto the agenda of more players in more industries.

Recent Policy Shift - Does "Essential" Make It Special?

With industrywide deployment, an SEP magnifies the potential antitrust and anti-competition concerns of patents in general and has attracted increasing attention from regulators.

In December 2019, the U.S. Patent and Trademark Office, the U.S. Department of Justice Antitrust Division, and the National Institute of Standards and Technology issued a joint policy statement on remedies for SEPs.6 The 2019 statement replaces the 2013 statement jointly issued by the USPTO and the DOJ and signifies a shift in enforcement priorities from deterring patent holdup to ensuring compensation for SEP holders.

In the 2013 statement, the agencies observed that injunctive relief may be incompatible with SEP holders' FRAND commitments and the public interest.7 In contrast, the 2019 statement explicitly endorsed all remedies, "including injunctive relief," for SEP infringement.8 In a footnote, the agencies clarified that there are "no special rules" limiting the remedies for SEP infringement, whether subject to FRAND commitments or not.9

The United States is not alone in balancing the conflicting interests of SEP stakeholders. The European Commission, for example, announced a list of key principles for SEP practice in 2017. The commission subsequently set up an expert group to assist the commission on SEP policies. Japan released a SEP licensing guide in 2018, seeking to enhance transparency and predictability in SEP licensing. As the innovation race instigates SEP battles around the world and pushes SEP onto government agendas, industry players now need to navigate evolving policies and the resulting interjurisdictional inconsistencies.

Behind the Scenes of the 2019 Statement

The United States' other principal antitrust enforcement agency, the Federal Trade Commission, was not a signatory of the 2013 or 2019 statements. In a footnote, the 2019 statement noted that consideration of competitive conditions in the U.S. International Trade Commission's public interest analyses "does not signify that F/RAND licensing disputes raise antitrust concerns."10 That seemed to signal different positions between the DOJ and FTC, which became more evident in the ongoing antitrust case against Qualcomm.

The 2019 statement was issued shortly before the appellate argument in FTC v. Qualcomm in February 2020, and after the U.S. Court of Appeals for the Ninth Circuit received over two dozen amicus briefs including briefs from Nokia, InterDigital, various industry associations, and the DOJ. The FTC sued Qualcomm for using anti=competitive tactics to maintain its monopoly in the CDMA and LTE chip markets, imposing licensing terms, and refusing to license competitors.

In 2019, U.S. District Judge Lucy Koh of the U.S. District Court for the Northern District of California enjoined Qualcomm, holding that it had a duty to provide competitors with exhaustive SEP licenses and avoid exclusive chip supply agreements.11 The court also ordered Qualcomm to report to the FTC annually to ensure compliance.12

The DOJ submitted a statement of interest supporting Qualcomm's motion to stay the injunction pending appeal, stating that the injunction "threatens competition, innovation, and national security."13

On appeal, the DOJ submitted an amicus brief urging vacatur, arguing that district court erred in concluding that Qualcomm's licensing practices caused anti-competitive harm.14 According to the DOJ, the injunction improperly policed Qualcomm's conduct across the globe and threatened to compromise national security.15 The Ninth Circuit heard oral argument in February 2020. Regardless of how the appellate court rules, the divide among the regulators and other stakeholders will continue.

For its part, the ITC largely avoided SEP and FRAND issues in a recent case involving Netlist Inc.16 by finding that the infringed patent in that case, U.S. Patent No. 9,606,907, was not "essential." In 2017, Netlist had alleged that certain memory modules sold by Hynix infringed its patents. Netlist claimed those patents were essential to a Joint Electronic Device Engineering Council, or JEDEC, standard.

In his initial determination, Chief Administrative Law Judge Charles E. Bullock found the '907 patent was essential to the JEDEC standard and recommended an exclusion order based on infringement of the '907 patent. The ITC, however, found ALJ Bullock's essentiality analysis flawed.

Referring to JEDEC policy, the ITC emphasized that essentiality requires not only (1) infringement of standard-compliant product, but (2) compliance with the mandatory portions of the standard necessarily infringes. The ITC noted that no party presented any evidence supporting essentiality or explained why the mandatory portions of the standard necessarily infringed.

Although reversed, ALJ Bullock's recommendation of an exclusion order is significant because it would have been the first exclusion order issued for SEP infringement since the 2013 investigation involving Apple and Samsung, and only the second in ITC history. Vetoing the exclusion order in the 2013 investigation during the presidential review, the United States trade representative cited to the 2013 statement's policy considerations cautioning against exclusionary relief for SEP infringement. But that is history now. The ALJ's initial recommendation, along with the recent policy shift, will likely increase ITC's popularity for SEP infringement disputes.

Practical Considerations for SEP Practice

SSOs - Participator Beware

The contractual relationship between the SSO, the SEP holder and the implementer remains an important inquiry in FRAND disputes. Interpretation of SSO policy and compliance with it may affect SEP enforcement in courts. When dealing with SSOs, industry players should carefully review SSOs' intellectual property rights policy before joining and ensure compliance during participation.

In Core Wireless v. Apple,17 the U.S. Court of Appeals for the Federal Circuit held that Nokia's failure to comply with ETSI's policy to timely disclose its IP rights was misconduct that may result in an implied waiver to assert infringement. On remand, the district court held that Conversant (the assignee of Nokia's SEP) impliedly waived its enforcement rights because Nokia failed to disclose its patents to ETSI and that misconduct allowed Nokia and Conversant to inequitably benefit.18

Besides requiring a SEP declaration, SSOs may also impose restrictions on injunctive relief. The Institute of Electrical and Electronics Engineers' bylaws, for example, prohibit member SEP holders from seeking an injunction, with only limited exceptions.19 The push for more transparent standardization processes may stimulate more SSOs to update their IP rights policies. Industry players should monitor updates and evaluate potential loss of enforcement freedom when obtaining or renewing SSO memberships.

Considerations for the Negotiation Table

In negotiating FRAND terms, a party should be prepared to prove or refute the essentiality of the patents at issue. When declaring SEPs, patent holders are generally not required to provide evidence of essentiality, or even identify claims alleged to be essential or the relevant part of the standard. Lack of a coherent essentiality test and specificity in SEP declarations require both technical and legal expertise to determine whether a patent is truly essential. Absent a clear showing of essentiality, a potential licensee may consider proposing payment adjustments or renegotiation in case of a future essentiality challenge.

Negotiators also should evaluate licensing terms in the context of business strategies, considering potential transaction costs, available technological alternatives, and the competitive realities of the industry.

For instance, if a company plans to enter multiple geographical markets and the potential licensor holds corresponding SEPs in different jurisdictions, potential transaction costs may weigh against negotiating for each individual market. On the other hand, SEPs with only U.S. patent coverage would rarely, if ever, justify a royalty demand on a worldwide basis from a licensee operating primarily in the United States.

When dealing with a licensor or licensee from a different industry, one side may not have the leverage to offer a portfolio for cross-license, which may affect the bargain.

For instance, a smart-sensor maker seeking a 5G license from a telecom company may not have communications-related innovations to cross license. The smart-sensor maker, however, should keep in mind that a smart sensor may not need cutting-edge communication capability as much as a smart phone or handset does. 4G and other alternatives may provide sufficient connectivity for a sensor, and hence licensing flexibility for the negotiator. A separate product line without 5G capability may reduce infringement risk while satisfying customers who have yet to complete the full 5G transformation.

In addition, to reduce litigation risk, industry players may consider revisiting contract terms with upstream or downstream partners. The wars between Avanci members and automakers may well repeat in other industries as they become more connected.

When contracting with component suppliers (such as suppliers of network access devices), a maker of end-user devices may want to ensure IP warranty clauses in its agreements include clear noninfringement representations and indemnification coverage. Conversely, a component supplier may consider limiting the scope of any IP warranties, such as including a liability cap or warranting only for patents known as of the contract date.

Navigating Evolving Rules and Inter-Forum Inconsistences

Inter-forum inconsistencies demand caution in complying with requirements of different forums. FTC v. Qualcomm demonstrates that compliance with FRAND commitments may go beyond royalty demands within a particular license. Explicit or implicit conditions imposed on the license may be viewed as anti-competitive. SEP holders may consider establishing a fairness record by, for example, providing alternative licensing options with detailed "reasonableness" explanations for each when making an offer.

SEP implementers, on the other hand, should evaluate claims and remedies for breaches of FRAND commitments in a broader context. That can include reviewing SEP holder's dealings with SSOs leading to standard adoption and compliance with SSO policies. It can also involve investigating potential discriminatory royalty demands (e.g., higher fees for competitors) and transparency (or lack of it) during negotiations. Infringement allegations may be countered with breach-of-contract, breach-of-good-faith, unfair-competition or antitrust claims.

Continued evolution of SEP rules requires a deeper understanding of forum-specific rules and enhanced evidentiary support. The Netlist investigation demonstrates that pursuit of exclusionary relief at the ITC may fail based on the required showing of essentiality as well as domestic industry (which is not required in district court proceedings). The ITC criticized Netlist for failing to present evidence on how the functionality of its domestic-industry products satisfied the disputed claim limitations. Given the pace of ITC proceedings, a SEP holder seeking enforcement at the ITC should be ready to provide evidence supporting its claim on all fronts early in the case.

For essentiality, although the standard and required proof remain in flux, litigators should prepare for heightened evidentiary demands when asserting a SEP or raising FRAND-based defenses. For instance, in KPN v. Sierra,20 Sierra's FRAND-based counterclaims failed at the summary judgement stage due to insufficient evidence showing essentiality of KPN's alleged patent. The court noted that KPN's untested belief of essentiality was insufficient, and that Sierra failed to compare the claims to the standard or provide any analysis as to essentiality.21

Conclusion

Recent developments in the SEP landscape will lead to increased attention from regulators and potential inconsistencies among different agencies and forums. When participating in standardization activities, industry players should carefully review SSO policies and ensure compliance with them. SEP licensing negotiators should assess the strength of the essentiality claim, analyze the added value of the SEPs to the particular products, and consider the availability of technical alternatives.

SEP rules continue to evolve and their interplay with antitrust and anti-competition laws will likely intensify. Stakeholders should understand forum-specific requirements and prepare to respond to the heightened evidentiary demand either as a SEP holder or implementer.  

Footnotes

1 Tim Pohlmann & Knut Blind, Fact Finding Study on Patents Declared to the 5G Standard (Jan. 2020), iplytics, https://www.iplytics.com/wp-content/uploads/2020/02/5G-patent-study_TU-Berlin_IPlytics-2020.pdf.

2 Complaint, Conversant Wireless Licensing, S.A.R.L. et al. v. Tesla, Inc. et al., No. 6:20-cv-00323 (W.D. Tex. Apr. 24, 2020).

3 Sharp Files Patent Infringement Lawsuits Against Tesla Motors Japan, SHARP (Mar. 23, 2020), http://global.sharp/corporate/news/200323-a.html (last visited June 9, 2020).

4 Complaint, Sisvel International S.A. et al v. Tesla, Inc., No. 1:20-cv-00655 (D. Del. May 15, 2020).

5 Complaint, Continental Automotive Systems, Inc. v. Avanci, LLC, No. 5:19-cv-02520 (N.D. Cal. May 10, 2019).

6 Policy Statement on Remedies for Standard-Essential Patents Subject to Voluntary F/RAND Commitments (Dec. 19, 2019), USPTO.gov, https://www.uspto.gov/sites/default/files/documents/SEP%20policy%20statement%20signed.pdf.

7 Policy Statement on Remedies for Standard-Essential Patents Subject to Volunatary F/RAND Commitment (Jan. 8, 2013), justice.gov, https://www.justice.gov/atr/page/file/1118381/download.

8 2019 Statement, supra note 6, at 4-5.

9 Id. at 4 n.10.

10 Id. at 4 n.9.

11 FTC v. Qualcomm Inc. , 411 F. Supp. 3d 658, 820-21 (N.D. Cal. 2019).

12 Id. at 824.

13 United States' Statement of Interest Concerning Qualcomm's Motion for Partial Stay of Injunction Pending Appeal at 1, FTC v. Qualcomm Inc., No. 19-16122 (9th Cir. July 16, 2019).

14 Brief of the United States of America as Amicus Curiae in Support of Appellant and Vacatur, FTC v. Qualcomm Inc. at 4, No. 19-16122 (9th Cir. Aug. 30, 2019).

15 Id. at 1-2.

16 Commission Opinion, Certain Memory Modules and Components Thereof, Inv. No. 337-TA-1089 (Apr. 21, 2020).

17 Core Wireless Licensing S.A.R.L. v. Apple Inc. , 899 F.3d 1356 (Fed. Cir. 2018).

18 Conversant Wireless Licensing S.A.R.L. v. Apple, Inc. , No. 15-cv-05008-NC, 2019 U.S. Dist. LEXIS 148297, at *14-19 (N.D. Cal. May 10, 2019).

19 IEEE SA STANDARDS BOARD BYLAWS, IEEE SA, https://standards.ieee.org/about/policies/bylaws/sect6-7.html (last visited June 9, 2020).

20 Koninklijke KPN N.V. v. Sierra Wireless, Inc. , No. 17-90-LPS, 2020 U.S. Dist. LEXIS 67016 (D. Del. Apr. 16, 2020).

21 Id. at *12-13.

Previously published Law 360.

Originally published June 29, 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.