Abstract The author Dr Ashish Bharadwaj is Assistant Professor at Jindal Global Law School and Director of Jindal Initiative on Research in IP and Competition (JIRICO) at O.P. Jindal Global University, India. This article The problem of reverse patent holdup or patent holdout arises when an implementer uses a standard-essential patent (SEP) without initially obtaining a licence from the patent holder based on the reasoning that the amount charged is in violation of the FRAND agreement. This issue has been a significant problem in the mobile communications industry because of the growing need for connected devices to use new and improved standards that involve multiple patents. This article briefly presents the position on reverse patent holdup of the courts of the United States, the European Union and India. The licensing practices prevalent in the industry, based on FRAND terms, have a major role to play in ensuring that the delicate balance between sufficiently rewarding innovators and ensuring uninterrupted access to essential technologies is not jettisoned. Introduction The purpose of this article is to provide a comparative analysis of the case law developed by the courts of the European Union, United States and India on the issue of reverse patent holdup in standard essential patent licensing. The importance of this issue is grounded in the need for a functional market for technologies that balances the interests of innovators, which rely on incentives to further develop technologies, and implementers, which rely on these technologies to make standard-compliant devices available to end-users.1 This balance is disturbed when the incentives for innovators are constrained in ways that are commercially unviable, or when access to technologies is hindered by strategic and opportunistic behaviour of the patent holder. Either way, an environment is created where innovation is at suboptimal level. A standard-essential patent (SEP) protects a technology that is essential for complying with a standard, which is a set of technical specifications to support a common design for a product or process, used in several industries including mobile communications to support interoperability.2 The SEP is functionally a patent with a claim that an invention must be used to comply with a standard, and, as a result, gives the holder a certain amount of market power because users of the standard must reach a licensing agreement with the patent holder.3 Theoretically, an SEP holder can act opportunistically to charge more for a license to use the patented technology than what the license would have been worth but for the creation of the standard by the SSO.4 The concept of patent holdup has been an integral part of debates around innovation and technology policy for several years, but the analogous conduct of holdout by a would-be licensee has not received the same kind of attention.5 To curtail the possibility of exploitation by the patent holder, standard-setting organizations (SSOs) require holders to agree to grant licences for essential patents on royalties, the terms of which are fair, reasonable and nondiscriminatory (FRAND).6 Since both innovators and implementers contractually determine them, FRAND obligations serve the interests of both licensing parties and make the resulting bilateral exchange economically meaningful. The agreement usually stipulates that the patent holder cannot refuse to license to a party that is willing to pay royalties of these basis. Essentially, FRAND terms are a range of royalty rates calculated on the basis of reciprocity and a royalty base, keeping in mind the duration, scope and geographic markets covered in the license agreement. In the FRAND jurisprudence emerging around the world, what stands out is that determining (reasonable) royalties for an essential patent has been the most debated issue due to: (1) the level of complexity of the underlying issues and (2) the multiplicity of (opposing) opinions regarding this issue.7 Contemporary standards have become ubiquitous in technology markets. Standards foster interoperability, avoid inefficient rivalry between competing systems and facilitate competition in downstream product markets.8 One narrative is that firms that commit their patents to a standard often abuse their dominant position by demanding excessive royalties or by seeking injunctive relief against infringers of their essential patents.9 Competition agencies around the world generally prevent collaborations among competitors, but they are not hostile to voluntary standard-setting by competitors in technologies that rely on principles of interoperability and compatibility.10 Because an implementer of the technology has presumably made a large R&D investment towards a product so that it meets the standard established by the SSO, the holder of the patent could attempt to obtain an unreasonably high licensing fee. Whether the holder of the patent has violated the agreement with the SSO then becomes a matter for litigation. On the other hand, the problem of ‘reverse holdup’ or ‘holdout’ arises when an implementer uses the essential patents in a standard without initially obtaining an approval from the patent holder and refusing to negotiate a license in good faith.11 The economic rationale for reverse holdup is for the user of the SEP to avoid paying the license fee to use the standard. Injunctive relief as a statutory remedy may be justified in cases of patent infringement where breach of promise to charge royalties (on FRAND terms) as an affirmative defence cannot be proved by the licensee.12 To understand opportunistic behaviour that is expected in negotiations for a patent license, it is essential to focus on the conduct of the licensee and the licensor. In other words, the question of whether a licensor’s conduct is acceptable depends on how reasonable the licensee’s conduct is during the negotiations, and vice versa.13 Recently, the issue of reverse hold-up or hold-out has been discussed in the European Commission's Communication to the European Parliament14 and also in the speech delivered by Mr. Makan Delrahim, the recently appointed Assistant Attorney General of the Antitrust Division in the US Department of Justice.15 The focus of the EC Communication paper is on the nature of negotiations during the SEP licensing. The paper mentioned that one of the reasons of a rise in SEP-related disputes is delay in licensing negotiations, thereby focusing on the importance of undertaking negotiations in good faith. The paper discussed the symmetric nature of hold-up, and stressing on the ramifications of hold-out as it has often been neglected. The paper also recognized the ‘behavioural criteria’ as established in the Huawei judgement in order to ascertain the ‘unwillingness’ of the licensee.16 According to the paper, the SEP holder should provide sufficient and relevant information to the implementer related to the essentiality of the patent, the nature of infringement of the SEP, proposed royalty calculation and non-discrimination prong of FRAND.17 The counter offer from the implementers should be precise but there are no established rules on the timeliness of the offer. But responding at a reasonable time is a step towards transparency on SEP licensing.18 Lastly, the paper provides that the security by an SEP user should be kept at a minimum in order to avoid hold-out situations.19 Similarly, this issue of hold-out has also been discussed by Mr. Makan Delrahim in his speech.20 He discussed that hold-out is a bigger issue as compared to hold-up. The favour has always been towards the implementers and the patent holders who have invested in developing the technologies have often been ignored. He said that when hold-out is practiced the implementers delay the negotiations so that their royalty demands are met, and this might discourage the innovators to innovate further. Patent holdup in its broader context At the outset, some points need to be highlighted. An alleged infringer of a patent can very well reject a licensing offer as unreasonable and can decide to continue using the patented technology until it is sued. In order to enforce its patents, a holder must then go through the costly process of litigation in courts. The party infringing on the patent can then use various legal manoeuvres, sometimes to prolong litigation, in the hope that the licensing fee will be lowered or the litigation, at some point, will be abandoned.21 The concept of reverse holdup implicitly includes an element of bad faith because the party engaging in it uses the law to avoid paying the cost of essential inputs for the business or to resort to coercion to reduce the fee. It allows firm to use the technology without reimbursing the patent holder for the sunk costs incurred in developing the technology. This can provide a critical competitive advantage if the cost of litigation is less than the cost of licensing the patented technology. The mobile communications industry has been battling this problem for quite some time. The SSOs establish standards for mobile communications that permit interoperability of telecommunication systems. Some examples of standards pivotal for mobile communications industry include interoperability standards of 2G (GSM/GPRS), 3G (UMTS) and 4G (LTE). Because a company cannot sell advanced devices (such as smartphones or tablets) without conforming to such critical standards, they must obtain licences for essential or otherwise patents they use. The position of the courts towards reverse patent holdup varies significantly in the jurisdictions of the United States, the European Union and, more recently, in India. In the United States, court decisions do not exhibit a consistent approach to the issue of reverse holdup because of the absence of a consensus on what is ‘fair’ or ‘reasonable’.22 In addition, the courts cannot grant an injunction to protect the SEP holder because of antitrust considerations. In the European Union, the courts are also generally unwilling to permit injunctions to protect the SEP holder. However, they may require the user of the technology to negotiate with the SEP holder with the possibility of an injunction if the user, in bad faith, delays participating proactively in negotiation process.23 The Indian courts, however, have granted injunctions in cases where the implementer was found to be infringing on valid and essential patents, and where it was found that the implementer was unwilling to enter into a licensing agreement and was, in fact, delaying negotiations in bad faith. Many jurisdictions have often misunderstood the symmetric nature of the holdup problem, and have erroneously considered holdout to be same as routine infringement of a patent. However, there is a difference between traditional patent litigation in the absence of an ex ante commitment to license and the modern litigation, where patent disclosure and commitment to FRAND obligations—key ingredients of an SSOs IPR policy—precede disputes around licensing of SEPs. Further, essential patents, given the complexity and complementarity of the underlying technologies, are licensed as a portfolio, and not on the basis of individual patents. But, as per existing legal frameworks worldwide, the patent holders cannot contest an entire portfolio of patents during litigation.24 Eventually, when a claim of the SEP holder prevails in the court, only those patents that have been proven to be valid and infringed are taken into consideration for the purposes of making payments. Expectedly, the result is that the SEP holder receives a payment that is below the FRAND standard if the transaction costs associated with a lengthy litigation and the speed of change of these technologies are factored in. On the other side, a standard implementer that has to enter a market and offer standard-compliant products faces two choices: negotiate and sign a licensing agreement to pay FRAND royalty or delay this process with an almost assured end result of having to pay a royalty that is less than FRAND.25 The competition agency and the courts in India have dealt with cases that required them to make a distinction between holdup and holdout.26 United States In the United States, the resolution of reverse holdup claims hinges on two issues: the conditions for the grant of injunctive relief and the benchmark used to determine if an implementer is acting in bad faith. In the absence of injunctive relief, the issue shifts to whether the company infringing on the patent is actually engaged in reverse holdup. Apart from the method of looking at comparable licenses, courts in the US have considered ‘hypothetical negotiations’ between a willing licensee and a willing licensor,27 which could be considered as a derivative of comparable licenses method. When it comes to the selection of an appropriate authority for the determination of royalties, there are conflicting opinions. In the Matter of Certain Electronic Devices, Investigation No. 337-TA- 794 (2011), brought before the United States International Trade Commission (USITC), Samsung complained that Apple had infringed on two SEPs related to mobile communication standards. The complaint before the USITC was one of many suits and administrative proceedings filed by both Samsung and Apple in an ongoing patent infringement dispute concerning SEPs for mobile communication. In determining Apple's claim of violation of the FRAND agreement in licensing of patents essential for the UMTS standard, the administrative court asked for evidence supporting the claim for Apple to seek relief. The court determined that Apple could claim that Samsung was reneging on a FRAND commitment only if Samsung refused to pay a court-determined royalty. In the absence of such a determination given by the court, it is necessary for the parties to negotiate upon a FRAND rate. As a result, the court did not declare Samsung to be an unwilling licensee in this matter. One of the important cases in the United States where the court found in favour of the company engaged in reverse patent holdup is Microsoft v Motorola Mobility, 696 F. 2d 872 (9th Cir. 2012). In this case, Microsoft was using technology in some of its operating systems patented by Motorola and it entered into discussions with Motorola for licensing the underlying patents. Motorola made a licensing offer based on the standard FRAND terms it offered to other companies, which was 2.25% of the selling price of the products produced by Microsoft. Microsoft rejected the offer and brought suit claiming that Motorola had breached its FRAND agreements with the SSO, to which Microsoft was a third-party beneficiary. Motorola obtained an injunction in a German court, but Microsoft, subsequently, obtained an anti-suit injunction in a US district court that was upheld by the appellate court. Motorola was trying to find the court that would most likely rule in its favor (ie forum shopping).28 Motorola selected a German court because the law in Germany required an injunction to be issued in the event of a finding of patent infringement whereas the courts in the United States had a substantial amount of discretion in the decision to grant an injunction. Motorola was sure to obtain the injunction that it sought from a German court, while such a request was not assured in the United States. The district court determined that the FRAND terms are inherently different from company to company and, therefore, the matter of unreasonable amounts being charged in the wake of FRAND must be decided on a case-by-case basis. In part, the decision was based on the vagueness of the terms of the FRAND agreement related to the case. Consequently, Microsoft was allowed to use the technology protected by essential patents and was not required to become an unwilling licensee. An implementer may decide to continue use of SEPs (as a potential infringement) and, if infringement is proven in court, make a payment later of almost the same amount. By taking this route, the implementer would shift the discussions from licensing terms to infringement and validity of the patents. Because any award to the SEP holder by the court will not cover the expenses incurred in litigation, the expected cost of ensuing litigation plays an important factor in cost-benefit analysis.29 Recently, the International Trade Commission made this conclusion regarding infringement of Samsung’s patents by Apple: ‘Apple has no intention of paying Samsung any royalties until after the conclusion of litigation’,30 even though Samsung conducted the negotiations in good faith. The commission noted that this absence of good faith during negotiation forces the innovator to either opt for ‘expensive litigation’ or forego royalties almost entirely.31 The Microsoft case demonstrates the fundamental problem of reverse patent holdup in US courts by contradicting the requirements for negotiation on FRAND terms as established by the USITC. The alleged infringer can claim unreasonableness based solely on the initial licence offer by the SEP holder. The court then focuses on establishing whether the offer is reasonable based on the specific circumstances of the case. The approach gives the court substantial latitude in determining whether unjustified reverse patent holdup has, in fact, occurred. The use of injunctive relief is a common remedy for patent infringement in patents other than SEPs. Granting the holder of a SEP an injunctive relief to restrict a company from infringing upon the patent is deemed as anti-competitive under the Federal Trade Commission (FTC) ruling in Motorola Mobility LLC, FTC File no. 121-0120 (3 January 2013). The case involved SEPs held by Google that had applications in mobile communications in devices produced by Motorola, but were not licensed for use. The FTC claimed that enforcement of the SEPs through an injunction to prohibit Motorola from producing a device would be anti-competitive because it would enable Google to prevent Motorola from participating in a market. On the other hand, in Ericsson v D-Link Systems, No. 13-1625 (Fed. Cir. 2014),32 Ericsson sued D-Link for infringing upon a set of its 802.11(b) SEPs. The district court gave a ruling in Ericsson’s favour and awarded damages. But on appeal, the federal court’s decision diverged from the district court’s ruling.33 The use of delaying tactics by the implementers have prior to the negotiation of the prices have been discussed in the Unwired judgment.34 The idea behind this is to finish the licensing negotiations at a reasonable time so that issues like hold-out are prevented at an initial stage. The European Union Under Directive 2004/48, national courts of member states of the European Union may grant an injunction to prevent a party from using a SEP without obtaining a licence from the patent holder. Article 11 of the directive states that injunctions need to be applied for by the parties in question, if even after this the parties continue to infringe, then additional penalties can be handed out in accordance with national laws. The national courts, however, have to consider EU competition law when granting an injunction. The outcome of the process is fundamentally similar to that in the United States (ie if the SEP holder is unable to obtain an injunction, it creates a greater risk of reverse patent holdup). In the EU, however, the SEP holder may obtain an injunction if the user of the technology unreasonably delays negotiations. The special circumstance doctrine for injunctions to protect intellectual property had been established earlier in Magill, Case ECLI:EU:C:1995:98, which recognized the potential for abuse of market power when the intellectual property is not provided to the other market players through licensing. It highlighted the market practice where a new player wanted to enter into the market and he wanted to make a consolidated TV guide book for all the channels, but then Mr Magill was denied the permission to use the data by three of the broadcasters. And when eventually this issue was brought in court, the court decided that this kind of refusal to grant a licence qualifies to be an abuse of the dominant market position. However, the CJEU refined the ruling in Magill for subsequent cases. In IMS Health GmbH & Co. OHG v NDC Health GmbH & Co. KG (ECLI:EU:C:2004:257), the CJEU established a four-condition test to determine whether an abuse of dominant position had occurred. The four conditions that were established in the ruling were: (1) whether a licence is indispensable for the production of a good or for providing a service, (2) whether not making a licence available creates an obstacle for the introduction of a new product or service, (3) whether all competition in a market is prevented because of the decision of a licensor not to issue a license and (4) whether there are no objective grounds for justifying the refusal to issue a license.35 The CJEU’s ruling in IMS Health should not be viewed as a change or correction from the ruling made in Magill. Instead, it indicated that the ruling in IMS Health was based on the provisions that had been included in Magill.36 The court ruled that there was continuity in its decisions, and that the subsequent decision should not be viewed as a new standard for determining whether an SEP holder was attempting to gain unfair competitive position by not licensing an SEP, but as a continuance and refinement of the earlier finding. This refinement of Magill continued in Microsoft v Commission (ECLI:EU:T:2007:289), which involved a decision by the European Commission to fine Microsoft for not providing information regarding interoperability to Sun Microsystems that would allow Sun’s software to work alongside the Windows operating system. Microsoft argued that it had provided interoperability information, so providing specific information to Sun was not necessary.37 The CJEU ruled in Microsoft that the European Commission had properly fined Microsoft for its unwillingness to provide interoperability information to Sun Microsystems. The CJEU ruled that the case against Microsoft met the four-condition test that it had established in IMS Health. Microsoft’s refusal to provide interoperability information made it impossible for Sun Microsystems and its operating system, which was a competing operating system to Windows, to be able to effectively compete against Microsoft. Furthermore, the court indicated agreement with the European Commission finding Microsoft’s lack of willingness to make information and licenses available to ensure interoperability of Sun’s operating system with Windows constituted an effort to prevent a new product from entering the market.38 Two other cases that further refined the decisions put forth by the CJEU in Magill and Microsoft were Ladbrokes Betting and Gaming Ltd, Ladbrokes International Ltd. v Stichting de Nationale Sportotalisator (ECLI:EU:C:2010:308) and Sporting Exchange (Betfair) v Minster Van Justitie (ECLI:EU:C:2010:307) that had been referred by Dutch courts regarding restrictions imposed in the Netherlands to foreign companies offering gambling services. The Dutch court asked whether the Dutch licensing system for providing gambling services constituted a lack of competition as required under EU law because it granted an exclusive right to a company to provide gambling services.39 The CJEU ruled in both cases that it was appropriate under EU law for a member state to provide exclusive rights, and it is justified when such an action occurs in order to prevent criminal or fraudulent activity, such as in the case of gambling and games of chance.40 In the 2014 antitrust decision against Motorola Mobility, the European Commission decided that even though ‘SEPs confer significant market power to the holders, there is no presumption that holding or exercising IPR essential to a standard equates to the possession or exercise of market power’. The question of market power can only be assessed on a case-by-case basis. It is critical to remember that dominant position, per se, is not illegal, and competition laws only prohibit and punish abuse of dominant position. The Commission made a similar decision in a case against Samsung (Case IP/12/89), in which it held that not licensing a FRAND-committed SEP was anti-competitive.41 However, these decisions went against the Orange Book standard in Germany, which made it possible for a prospective licensee to avoid being injuncted by making a FRAND offer.42 In the 2013 Huawei Technologies v ZTE Corp43 case, the Landgericht Düsseldorf (Düsseldorf Regional Court), before seeking guidance from the CJEU on several issues including the meaning of ‘unwilling licensee’ in the context of SEPs, opined that ‘a mere willingness on the part of the infringer to negotiate in a highly vague and non-binding fashion cannot, in any circumstance, be sufficient to limit the SEP-holder’s right to bring an action for a prohibitory injunction.’ The German court was seeking guidance on whether the previous decisions of the Commission superseded the Orange Book standard.44 The approach to reverse patent holdup in the European Union is largely controlled by the decision of the CJEU in Huawei Technologies Co. Ltd v ZTE Corp., ZTE Deutschland GmbH (EU:C:2015:477). The court determined that the enforcement of an SEP through injunction represented a special circumstance that could lead to abuse of market power. The case involved a declaratory judgment concerning the degree that Article 102 of the Treaty on the Functioning of the European Union (TFEU) applied to SEPs in situations in which no licensing agreement had been reached and the holder of the SEP sought an injunction against the party using a patented technology. The case specifically involved SEPs covering mobile communication technology. In this landmark ruling in 2014, the CJEU provided a clear step-by-step guide to determine abuse of a dominant position in SEP matters. It held that a patent holder must initiate by notifying the prospective licensee of the details of the infringement, including mentioning the SEPs that are being infringed and the way they are being infringed. The patent holder has an obligation to make a written licensing offer on FRAND terms (specifying the royalty amount and methodology adopted to calculate it), after the prospective licensee has clearly indicated its willingness to enter into a licensing agreement on FRAND terms. The court said that the prospective licensee has to then ‘diligently’ respond to the offer, in accordance with ‘recognized commercial practices in the field and in good faith’. In case the offer is unacceptable, the licensee should ‘promptly’ propose a counter-offer. In performing due diligence, licensing parties are therefore expected to act in good faith ie they do not engage in conduct that can be deemed as ‘tactical and/or dilatory and/or not serious’, delay negotiations, and defer the execution of a licensing agreement.45 India With over one billion mobile subscribers and the world’s second-largest wireless subscriber base, India is home to more than 150 mobile device vendors.46 The market share of domestic players is increasing in the wake of fierce competition from Chinese manufacturers. Smartphone litigation started in India four years ago, and, since then, multinational telecommunications companies led by Ericsson have brought multiple suits against a host of infringing Indian manufacturers. These legal actions have led to several orders being passed by the courts, mostly in favour of the SEP holder, as well as intervention by the Competition Commission of India (CCI). There have been multiple instances of Indian courts granting injunctions against the infringing party. The courts in India have adopted the position that an attempt by the SEP holder to obtain an injunction against the unlicensed patent user can be assessed from a competition law perspective to examine whether the SEP holder is abusing market power.47 The courts in India, however, have set the licensing fee with reference to the prevailing market rate based on a percentage of the downstream selling price of the infringing device. This approach appears to favour resolving the dispute as rapidly as possible, even if the resolution requires the court to determine an appropriate royalty rate. An example of the approach towards reverse patent holdup is the decision of the Delhi High Court in Telefonaktiebolaget LM Ericsson v Mercury Elecs. & Another.48 In this case, Ericsson sought damages and a permanent injunction on Micromax for infringement of eight SEPs related to 2G and 3G mobile communication systems. Prior to the suit, the negotiations between Ericsson and Micromax to reach a FRAND agreement repeatedly failed and, eventually, Ericson brought the matter to the court. Rather than grant an injunction, the court ordered Micromax to pay a licensing fee equal to a percentage of the selling price of the mobile communication device, which was an amount different from the interim fee that Micromax had paid to Ericsson. The court also noted that negotiations should continue with any licensing agreement reached between the two parties superseding the court-imposed licensing fee. Apart from the court proceedings, Micromax, and, subsequently, Intex, have approached the CCI49 claiming abuse of dominance by the SEP holder in its licensing practices. Prima facie, in its preliminary ruling, the CCI held Ericsson as dominant in the relevant market and considered its licensing practices to be anti-competitive. Although the final investigation is still underway, the position taken by the CCI is exactly opposite to what the courts have held until now.50 The decision of the Delhi High Court to set the FRAND rate may have been the result of the preliminary finding of CCI that Ericsson had violated its FRAND commitments in licensing to Micromax.51 Imposing a licensing fee was the best means available to the court to ensure the agreement was fair to both parties and was not so high as to impose an undue burden on competition. Nonetheless, the approach adopted by the court substituted the market mechanisms of negotiations for a fair price. In Telefonaktiebolaget LM Ericsson v Intex Technologies (India) Limited,52 the Delhi High Court refused to grant an injunction to Ericsson to end SEP infringement when negotiations with Intex concerning a FRAND rate failed. But the court imposed licensing fee on Intex based on its calculation of the appropriate FRAND rate. Despite the differences in the decisions of the Indian courts in reverse patent holdup cases when compared to the courts in the United States and Europe, the Indian courts do consider the decisions in foreign courts. In both cases, the court cited the Microsoft case from the United States when considering the effect of an injunction on competition. In addition, the court may have relied on the rationale used by the CJEU in Huawei when requiring the parties to continue to negotiate. The court, however, modified the approaches used in the United States and Europe to conform to Indian law. The Delhi High Court has not had the chance to examine the FRAND compliance of a counter-offer made by an implementer. This is primarily because in most cases there were no counter-offers and the court had to set royalty rates itself. This is supplemented by the fact that most of the implementers in these disputes were held as ‘unwilling licensee’ by the court, after examining their conduct, held as tactics for delaying negotiations.53 Conclusion What possible strategies are available for implementers of SEPs to resist injunctions when the holders of such patents sue them for infringement? The defensive approach would be to wait and see if the SEP holder refuses to license under FRAND terms. A prospective licensee can then attempt to show that it had followed proper procedures to negotiate with an SEP holder for a FRAND-compliant license, and the SEP holder had refused. In this way, the licensee is defending itself against the claim that it violated a patent holder’s right by simply using a patent without seeking a proper licence agreement. Alternatively, in an offensive approach, a prospective licensee may infringe the patent, and, in parallel, argue that the conduct of an SEP holder not in compliance with FRAND terms, or seeking injunctive relief, constitutes abuse of its dominant position. The problem of reverse patent holdup is particularly severe in the mobile technology industry. The courts in the United States, the EU and India have taken slightly different stands on the issue. A significant difference among the approaches to the issue of patent holdup in the United States, the EU and India is the way the courts address negotiations between the SEP holder and the unlicensed implementer of the technology. There seems to be less ambiguity in the EU, where the courts granted injunctions when the implementer had created unwarranted delays in the negotiation process. In the context of licensing of SEPs, the landmark decision of the CJEU in Huawei v ZTE brought much-needed attention to remedies available against licensees unwilling to enter into licensing negotiations. The highest court of the European Union ruled that FRAND is a ‘two-way street’ wherein both the licensors and licensees must act responsibly, diligently and in good faith, making it clear that the adverse effects of free-riding are curtailed. The licensing practices prevalent in the industry, based on FRAND terms, have a major role to play in ensuring that the delicate balance between sufficiently rewarding innovators and ensuring uninterrupted access to essential technologies is not jettisoned. The author acknowledges valuable research assistance from Shruti Bhushan and Joy Saini, research assistants at Jindal Initiative on Research in Intellectual Property and Competition (JIRICO) at O.P. Jindal Global University, and Yefei Guo from the Chinese University of Political Science and Law. The author would like to thank the participants of the annual summer institute (August 2017) at the Institute of Innovation Research at Hitotsubashi University (Tokyo) for their feedback. Opinions expressed in the work are independent of any research grants received from governmental, intergovernmental and private organisations. The authors’ opinions are personal and are based upon their research findings and do not reflect the opinions of their institutional affiliations. Footnotes 1 While certain companies operate on both sides of the market—upstream as an innovator and downstream as an implementer—a number of companies only focus on creation of innovative technologies and do not have a presence in downstream markets. In this article, ‘innovative’ companies refers to those companies that have an ability to generate innovative technologies to be used by others, and ‘implementer’ companies refer are those that have manufacturing capabilities for devices for use by end consumers as an integral part of their business. The latter can also be innovators. 2 M. A. Lemley, ‘Intellectual Property Rights and Standard-Setting Organizations’, (2002) 90 California Law Review, 1889, 1896. 3 C. Shapiro, Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting. Innovation Policy and the Economy (MIT Press, Cambridge, MA, 2001) <http://www.nber.org/chapters/c10778.pdf>. 4 M. Lemley and C. Shapiro, ‘Patent Holdup and Royalty Stacking’, (2007) 85 Texas Law Review 1991, 1992–93. 5 A. Layne-Farrar, ‘Why Patent Holdout is Not Just a Fancy Name for Plain Old Patent Infringement’, CPI North America Column, February 2016, Competition Policy International. Farrar defines patent holdup as a situation ‘where a standard essential patent (SEP) holder exploits a licensee’s costs to switch away from the related standard as a means of obtaining royalties above the fair, reasonable, and non-discriminatory (FRAND) level’, para. 2. <https://www.competitionpolicyinternational.com/wp-content/uploads/2016/02/North-America-Column-February-Full.pdf>. 6 Microsoft Corp. v. Motorola, Inc. 854 F. Supp. 2d 993, 999 (W.D. Wash. 2012) (‘The court agrees with Microsoft that through Motorola’s letters to both the IEEE and ITU, Motorola has entered into binding contractual commitments to license its essential patents on RAND terms.’). 7 Gregory Sidak, ‘What Aggregate Royalty Do Manufacturers of Mobile Phones Pay to License Standard-Essential Patents?’ (2016) 1 CJI 701; Anne Farrar and Koren W. Wong-Ervin, ‘Methodologies for Calculating FRAND Royalty Rates and Damages: An Analysis of Existing Case Law’ (2014) Law360 <http://ssrn.com/abstract=2668623> (accessed 10 November 2017); Gregory Sidak, ‘The Proper Royalty Base for Patent Damages’ (2014) 10(4) JCLE 989; Jorge Padilla and Koren W. Wong-Ervin, ‘Portfolio Licensing at the End-User Device level: Analyzing Refusals to License FRAND-Assured Standard-Essential Patents at the Component Level’ (2016) <https://ssrn.com/abstract=2806688> (accessed 10 November 2017); John C. Jarosz and Michael J. Chapman, ‘The Hypothetical Negotiation and Reasonable Royalty Damages: The Tail Wagging the Dog’ (2013) 16 Stan. Tech. L. Rev. 769; Mark A. Lemley and Carl Shapiro, ‘A Simple Approach to Setting Reasonable Royalties for Standard-Essential Patents’ (2013) 28(2) Berkeley Tech. L. J. 1135; Koren W. Wong-Ervin, Douglas H. Ginsburg, Bruce H. Kobayashi and Joshua D. Wright, ‘FRAND in India’, In: Bharadwaj A., Devaiah V., Gupta I. (eds) Complications and Quandaries in the ICT Sector. Springer, Singapore. <https://link.springer.com/chapter/10.1007/978-981-10-6011-3_8> (accessed 10 November 2017); Jorge L. Contreras, ‘Injunctive Relief in U.S. Patent Cases’ (March 15, 2017). Injunctions in Patent Law (Rafal Sikorski, ed., 2018 Forthcoming); University of Utah College of Law Research Paper No. 183. <https://ssrn.com/abstract=2845036> (accessed 5 December 2017). 8 Standard can be de facto when a particular patented technology is widely adopted by market participants, or de jure when the standard is created by a formal agreement by the members of a standard-setting organization (SSO). 9 Prywes I. Daniel and Robert S. K. Bell, ‘Patent Hold-Up: Down but Not Out’, ANTITRUST, summer 2015 <https://d11m3yrngt251b.cloudfront.net/images/content/7/0/v4/70447/Smmr15-PrywesC.pdf> (accessed 10 November 2017). 10 See above n 4. 11 Colleen V. Chien, ‘Holding Up and Holding Out’, (2014) 21 Michigan Telecommunications & Technology Law Review 1. 12 Gregory Sidak, ‘Holdup, Royalty Stacking, and the Presumption of Injunctive Relief for Patent Infringement: A Reply to Lemley and Shapiro’, (2008) 92 Minnesota Law Review, 714, 747. 13 For example, if the terms of the first offer made by a patent holder deviates from what is considered to be FRAND, then it sets an incorrect anchor in licensing negotiations, making it difficult for the licensee to accept it or respond with an acceptable counter-offer. 14 European Commission, ‘Setting out the EU approach to Standard Essential Patents’ COM (2017) 712 final <https://ec.europa.eu/docsroom/documents/26583> (accessed 2 January 2018). 15 Makan Delrahim, ‘Take it to the limit: Respecting Innovation Incentives in the Application of Antitrust Law’, (USC Gould School of Law, Los Angeles, California, 10 November 2017) <https://www.justice.gov/opa/speech/file/1010746/download> accessed 2 January, 2018. 16 Case C-170/13 Huawei Technologies Co. Ltd v ZTE Corp., EU:C:2015:477. 17 European Commission (n 14) para 3.1. 18 ibid. 19 ibid. 20 Delrahim (n 15). 21 E. Egan and D. Teece, ‘Untangling the Patent Thicket Literature’ (2017) Working paper 7, Tusher Center for the Management of Intellectual Capital <https://pdfs.semanticscholar.org/0b85/ea551cf0666ba09f784c01e4b92d1036f621.pdf> (accessed 6 September 2017). 22 E. Dorsey and M.R. McGuire, ‘How the Google Consent Order Alters the Process and Outcomes of FRAND Bargaining’, (2013) 20 George Mason Law Review, Vol. 979, pp. 22–23. 23 P. Maume, ‘Huawei/ZTE or How the CJEU Closed the Orange Book’ (2016) 6, Queen Mary Journal of Intellectual Property. 24 Microsoft v Motorola, which did determine a FRAND rate for a portfolio of SEPs, was a bench trial over breach of contract initiated by the putative licensee Microsoft, not a jury trial for patent infringement initiated by the SEP holder Motorola. Findings of Fact and Conclusions of Law in Microsoft Corporation v Motorola, Inc, et al, Case No. C10-1823JLR. 25 In light of recent court rulings and antitrust agency guidelines, it appears that SEP holders only have the option of seeking an injunction when they can show the infringer is an unwilling licensee. Implementers can agree to pay a court adjudicated FRAND amount to avoid being cast as an unwilling licensee. Therefore, they do not face the risk of a shutdown. 26 See CCI Order under Section 26(1) of the Competition Act, 2002, In re Micromax Informatics Ltd. v Telefonaktiebolaget LM Ericsson 17 (12 November 2013), <http://www.cci.gov.in/sites/default/files/502013_0.pdf?download=1>; CCI Order under Section 26(1) of the Competition Act, 2002, In re Intex Techn. Ltd. v Telfonaktiebolaget LM Ericsson 17 (16 January 2014), <http://www.cci.gov.in/sites/default/files/762013_0.pdf>. The first investigation was brought based on complaints from Micromax Informatics Ltd.; the second was brought based on complaints from Intex Technologies (India) Ltd. See also Koren W. Wong-Ervin, Standard Essential Patents: The International Landscape (Spring 2014). Public Domain, The ABA Section of Antitrust Law Intellectual Property Committee Newsletter <https://ssrn.com/abstract=2668602> (accessed 5 December 2017). 27 Jarosz and Chapman, ‘The Hypothetical Negotiation’ http://stlr.stanford.edu/pdf/royaltydamages.pdf; Georgia-Pacific Copr. v. U.S. Plywood Corp.’,318 F. Supp. 1116, 1120 (S.D.N.Y. 1970), 446 F.2d 295 (2d Cir. 1971), 299–300; Microsoft Corp. v Motorola, Inc., C10-1823JLR, 2013 WL 2111217, 16 (W.D. Wash. 25 April 2013); LaserDynamics, Inc. v Quanta Computer, Inc., 694 F.3d 51, 60 n. 2 (Fed.Cir.2012) (‘This court has sanctioned the use of the Georgia-Pacific factors to frame the reasonable royalty inquiry. Those factors properly tie the reasonable royalty calculation to the facts of the hypothetical negotiation at issue.’); Broadcom Corp. v Qualcomm Inc., 501 F.3d 297, 314–15 n. 8 (3d Cir.2007) (‘The reasonableness of royalties is an inquiry that courts routinely undertake using the 15–factor test set forth in Georgia-Pacific … and some courts have already applied this test in the [RAND] context’). 28 The strategy of forum shopping is adopted by companies to analyse which jurisdiction has the laws in place that will present them with the best chance to succeed in court. In this case, Motorola went ahead to file a case in the German court. 29 ‘[T]he SEP holder cannot refuse a license nor seek an injunction and instead can at best use infringement litigation to obtain the same FRAND rates and terms it would have gotten through good-faith negotiations (had they occurred), but only at a higher cost due to litigation.’ Anne Layne-Farrar, ‘Moving Past the SEP RAND Obsession: Some Thoughts on the Economic Implications of Unilateral Commitments and the Complexities of Patent Licensing’, (2014) 21 George Mason Law Review 1093, 1104. 30 Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers at 62 (Investigation No. 337-TA-794, U.S. International Trade Commission, 5 July 2013 Commission Opinion, Public Version) <http://scholarship.law.unc.edu/cgi/viewcontent.cgi?article=2036&context=ncilj> (accessed 10 November 2017). 31 ‘Apple’s position illustrates the potential problem of so-called reverse patent hold-up, a concern identified in many of the public comments received by the Commission. In reverse patent hold-up, an implementer utilizes declared-essential technology without compensation to the patent owner under the guise that the patent owner’s offers to license were not fair or reasonable. The patent owner is therefore forced to defend its rights through expensive litigation.’ 32 Ericsson v D-Link Systems, No. 13-1625 (Fed. Cir. 2014). 33 Patentlyo. ‘Ericsson v D-Link: Standards, Patents, and Damages’ (2014, online) <https://patentlyo.com/patent/2014/12/ericsson-standards-damages.html> (accessed 7 September 2017). 34 Unwired Planet v. Huawei  EWHC 711 (Pat). 35 J. Houdijk, ‘The IMS Health Ruling: Some Thoughts on its Significance for Legal Practice and its Consequences for Future Cases such as Microsoft’ (2005) 6 European Business Organization Law Review. 36 M. Squitieri, ‘Refusals to License Under European Union Competition Law after Microsoft; (2012) 11 Journal of International Business & Law. 37 B. Vesterdorf. ‘Article 82 EC: Where Do We Stand after the Microsoft Judgement?’ (2017) 1 Global Antitrust Review. 38 Squitieri, ‘Refusals to License’ (n 30). 39 J. Turney, ‘Defining the Limits of the EU Essential Facilities Doctrine on Intellectual Property Rights: The Primacy of Securing Optimal Innovation’ (2004) 3 Northwestern Journal of Technology and Intellectual Property. 40 A. Kaburakis, ‘European Union Law, Gambling, and Sport Betting. European Court of Justice Jurisprudence, Member States Case Law, and Policy’, in P. M. Anderson, I. S. Blackshaw, R. C. R. Siekmann and J. Soek (eds), Sports Betting: Law And Policy (TMC Asser Press, The Hague, 2011), pp. 27–98. 41 M. Angeli, ‘Willing to Define Willingness: The (Almost) Final Word on SEP-Based Injunctions in Light of Samsung and Motorola’ (2015) 6 Journal of European Competition Law & Practice. 42 P. Camesasca, ‘Injunctions for Standard-Essential Patents: Justice Is not Blind’ (2013) 9 Journal of Competition Law and Economics. 43 Huawei (n 16). 44 Before the Huawei case, the existing legal doctrine in EU was that the defendant had the burden of proof upon him to prove otherwise and the German courts have been historically generous in granting injunctions in patent infringement cases. 45 Huawei (n 16), ZTE Deutschland GmbH Opinion para. 88. 46 Telecom Regulatory Authority of India, The Indian Telecom Services Performance Indicators March–August 2016. <http://www.trai.gov.in/release-publication/reports/performance-indicators-reports>. Jorge L. Contreras and Rohini Lakshane, ‘Patents and Mobile Devices in India: An Empirical Survey’, Vanderbilt J. Transnational Law (2016), 2. 47 J. Sidak, ‘FRAND in India: The Delhi High Court’s Emerging Jurisprudence on Royalties for Standards-Essential Patents’ (2015) 10 Journal of Intellectual Property Law and Patents. 48 Interim Application No. 3825 of 2013 in Civil Suit No. 442 of 2013, Delhi High Court (6 March 2013). 49 In re Intex Technologies (India) Limited, complaint against Telefonaktiebolaget LM Ericsson (Publ) Case No. 76/2013, CCI. Fair Play (The Quarterly Newsletter of CCI) 13 (2015), 13 <http://www.cci.gov.in/sites/default/files/762013_0.pdf> (accessed 10 November 2017). 50 Ibid (n 34), 25. 51 R. Viswanath, ‘Demystifying the Indian FRAND Regime: The Interplay of Competition and Intellectual Property’ (2016) 21 Journal of Intellectual Property Rights. 52 Interim Application No. 6735 of 2014 in Civil Suit No. 1045 of 2014, Delhi High Court. 53 Ashish Bharadwaj and Dipinn Verma, ‘Failure is not Falling Down But Refusing to Get Up’: Recent Application of Huawei-ZTE Framework (2018), 17 J. Marshall Rev. Intell. Prop. L. 3. © The Author(s) 2018. Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)
Journal of Intellectual Property Law & Practice – Oxford University Press
Published: Mar 13, 2018
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