Is it Time for a Global FRAND Rate-Setting Tribunal? Boston University - Technology & Policy Research Initiative IP Day 2018 Is it Time for a Global FRAND Rate-Setting Tribunal? July 27, 2018 Jorge L. Contreras University of Utah

Overview What/why is FRAND licensing? What’s the problem? Fairness/accuracy Consistency Transparency Comprehensiveness Inefficiency (administrative) Is there a solution that (appropriately) balances these factors?

Interoperability Standards

Voluntary Consensus Standards Development Ecosystem Standards Development Organizations (SDOs) or Standard Setting Organizations (SSOs) On board: Q: Who develops standards?

= Apple AT&T Broadcom Cisco Ericsson Intel Juniper Microsoft Motorola Nokia Qualcomm Sony Toshiba ZTE etc, etc. =

Patent “stacking” and standards IEEE 802.11 (Wi-Fi networking) 3000 patents ETSI GSM (2G mobile telephony) 4700 patents ETSI UMTS (3G mobile telephony) 7,700 patents 251 Standards Blind (2011), Innovatio (2013), Biddle et al (2011)

Standards Hold-Up The imposition of excessive patent royalty demands after a standard has been widely adopted in the market (lock-in has occurred)

How SDOs attempt to address hold-up and stacking Disclosure Policies SDO participants must disclose essential patents prior to approval Licensing Policies SDO participants commit to license essential patents on terms that are royalty-free (RF) or Fair, Reasonable and Nondiscriminatory (FRAND)

Typical FRAND Language is Imprecise A holder of standards-essential patents must offer all implementers of the standard “reasonable terms and conditions that are demonstrably free of any unfair discrimination” ANSI Essential Requirements, Sec. 3.1.1.b

The Result: FRAND Methodology Disagreements Point vs. range Top-down vs. bottom-up Ad valorem v. percentage rate EMVR v. SSPPU Comparable licenses Numerical proportionality vs. individual valuation Ex ante vs. ex post

Major Cases Calculating FRAND Royalties US Microsoft v. Motorola Innovatio Ericsson v. D-Link (jury) Realtek v. LSI (jury) CSIRO v. Cisco TCL v. Ericsson UK Unwired Planet v. Huawei Japan Apple Japan v. Samsung China InterDigital v. Huawei Judge James Robart Colin Birss, J.

Your results may vary: U.S. Judicial FRAND Rates for 802.11 35 out of 3,000 patents 4.5% combined royalty Differing methodologies, results Source: Bartlett & Contreras (2017)

Difficulties Addressing Stacking Bottom-up methods Patent-by-patent Patentee-by-patentee Little consideration of other components Top-Down methods Better but… Total value somewhat arbitrary

Unwired Planet and Global FRAND Rates UK Court required Huawei to accept a worldwide license Huawei only wanted a UK license But if Huawei refused, injunction in UK would issue UK court can thus force a worldwide deal “a licensor and licensee acting reasonably and on a willing basis would agree on a worldwide licence.” To do otherwise would be “madness”

Global FRAND Rates and the Race to the Bottom? If a UK court (Unwired Planet) can force a global FRAND rate, so can any other country with a sufficient domestic market to threaten parties with a national injunction U.S., UK, Germany, France, Japan, China, Korea, etc. Courts can issue “anti-suit injunctions” to prevent parties from pursuing parallel litigation Race to the courthouse? Parties race to file suit in a favorable country Race to the bottom? Jurisdictions compete to offer FRAND terms favorable to one side or the other E.g., EDTX

Social Planner perspective: What needs to be fixed? Fairness/accuracy Consistency Transparency Comprehensiveness Efficiency Reduction of unnecessary transaction costs

A thought experiment What if global FRAND rates were determined by a single tribunal and publicly disclosed? Reduce litigation costs Reduce uncertainty (improve planning) Reduce opportunities for hold-up and holdout Avoid jurisdictional gamesmanship/race to the bottom Precedent exists Copyright Royalty Board (CRB)

Weak and Strong Versions Tribunal is the mandatory vehicle for adjudicating FRAND disputes Requirement imposed by: Treaty and national law [?] SDO policies Weak version Tribunal is not mandatory, but available for parties to use But possibly encouraged (e.g., antitrust safe harbor) With sufficient take-up, courts may respect determinations as industry norm

1. Establishment of Tribunal Neutral, expert body Within structure of an existing arbitral body (e.g., ICC, AAA) or international NGO (e.g., WIPO, OECD). Procedures to comply with New York Convention on the International Enforcement of Arbitral Awards -- binding and enforceable in all signatory states. Not: SDO Government SEP owner

2. Mandatory Nature (strong ver., SDO option) SDOs will require that all FRAND rate disagreements among SDO participants and implementers be decided by the tribunal. SDO members must agree via policy Outsiders not impacted though may be informative for outsider rates as well Some SDO needs to go first Encouragement by agencies?

3. Tribunal’s Limited Authority authority limited to determination of worldwide FRAND royalty rates But determinations are binding and non-appealable will not extend to the adjudication of other claims (e.g., breach of contract, antitrust/competition law) These are subject to adjudication in any court having jurisdiction over the parties

4. Tribunal Proceedings initiated when any party petitions for a FRAND rate determination tribunal will consider evidence from all interested parties, including SEP holders, implementers and SDO staff SDO participants agree to provide the tribunal with all reasonable information concerning their SEPs includes licensing terms offered to other parties (confidentially) Rebuttable presumption that declared SEPs are essential to the standard in question Can be challenged by any party SDO participants will agree not to seek injunctive relief during the pendency of the tribunal’s proceedings

5. Tribunal Determinations Tribunal will determine a top-down, aggregate FRAND royalty rate applicable to the standard in question Valuation analysis rather than hearsay/self-serving evidence allocation of that rate among the different SEPs covering that standard Tribunal can authorize any reasonable rate schedule vary by country volume-based vary by tier in the distribution chain Use based [?] subject to any particular limitations of the relevant SDO policy. Allocation will be presumed to be divided among individual SEPs on a numerical proportionality basis unless evidence strongly suggests that particular SEPs are deserving of a greater share. Determinations of the tribunal will be made publicly available

6. Enforcement and Collection The tribunal will have no enforcement or collection authority. Merely determines FRAND rates In the event of non-compliance, relevant parties may seek Administrative (SDO) remedies Legal claims (under NY Convention)

7. Tribunal Composition Panels of three (from larger pool) Selected by consensus of participating SDOs Must have substantial expertise in technical standardization processes Should not be employed by any company having a direct interest in the outcome of such disputes Should not include government officials [?] Recommended: retired judges, economic damages experts, private legal practitioners, academics, engineering consultants

8. Tribunal Fees/Costs Establishment requires initial grant Government / NGO / Industry group Thereafter transaction-based fees similar to ICC, ICANN small % of each license payment Fairly spreads cost among industry participants (implementers and SEP holders) But individual panel member compensation should NOT be tied to fee revenue (avoid inflationary incentive/bias)

Conclusions Methods of adjudicating FRAND royalties today lack consistency, transparency, comprehensiveness Significant administrative/transaction costs A unitary rate tribunal for FRAND rates could eliminate many problems Consideration of all essential patents Consistent, top-down methodology Transparent decisions Mandatory application by SDOs is stronger, but even voluntary application could help

Thank you! Jorge L. Contreras University of Utah S.J. Quinney College of Law Salt Lake City, UT jorge.contreras@law.utah.edu SSRN page: http://ssrn.com/author=1335192