What is the process for obtaining a FRAND licence?

Giancarlo Penza of Bugnion examines the different elements involved in establishing a FRAND licence,

including NDAs, counter-offers and litigation

The purpose of this article is to illustratethe complexity of the process for negoti-ating a FRAND licence for a standard es-sential patent (SEP).

SEPs are patents declared essential for implementing atechnical standard, such as standards in the telecommu-nications field. The IP policy of standard developmentorganisations (SDO) requires an SEP proprietor to de-clare that a patent might be essential for implementingthe standard and declare irrevocably that he is availableto licence the SEP on fair, reasonable and non-discrim-inatory (FRAND) terms, so that the technology pro-tected by the SEP patent (included in the standard) isavailable to any interested party, by payment of aFRAND royalty.

SDO IPR policy does not define in detail the meaningof the terms fair, reasonable and non-discriminatory.These are evaluated on a case-by-case basis during aconfidential negotiation between the parties or aremade publicly available when a patent litigation deci-sion is issued.

The parties who take part in FRAND negotiations arethe proprietor of the SEP (SEP proprietor) and the al-leged infringer of the patent (implementer).

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First phase: negotiation

The FRAND process starts with the negotiation phasebetween the SEP proprietor and the implementer. Themost important steps of the negotiation are defined bythe landmark decision of the Court of Justice of the Eu-ropean Union (CJEU) Huawei Tech/ZTE dated July 12015, case C-170/13, which will be referred to here-inafter as the CJEU decision. This stipulates the re-quirements that must be fulfilled for the SEP proprietorto seek an injunction against the implementer withoutabusing its dominant position (Article 102, Treaty onthe Functioning of the European Union (TFEU)).

First request for a FRAND licence bythe SEP proprietor

The first step is carried out by the SEP proprietor whoinforms the implementer with a warning letter aboutthe SEP and about the availability of a licence onFRAND terms.

According to the CJEU decision, the SEP proprietor isrequired to provide a notice including the number ofthe SEP, reference to the specific standard, details aboutthe product(s) infringing the SEP and an explanationof the alleged infringement. Moreover, the warning let-ter indicates a deadline for receiving feedback from theimplementer, after which the SEP proprietor can pro-ceed with a request for an injunctive relief (if it does notreceive any feedback from the implementer).

Willingness of the implementer

The second step is carried out by the implementer, whoanalyses the warning letter. At this stage the implementerperforms a preliminary analysis of the validity of thepatent and if it is really essential for the specific standard.

Regarding the preliminary analysis of the validity, theimplementer checks if the patent is really granted andif it is granted after substantive examination of the nov-elty and inventiveness requirements by a patent office.

Regarding the preliminary analysis of the essentiality,it is necessary to remember that the declaration of es-sentiality of a patent for a standard is a self-assessment

by the SEP proprietor. That is, neither the SDO nor thepatent office who granted the patent checked in detailif the patent is really essential for the standard. In par-ticular, the implementer should check whether the SEPpatent is really included in the database of the relevantSDO and for which standard, in order to double checkthe information provided by the SEP proprietor.

After assessing that the patent is at first appearance validand actually essential for the standard in question, theimplementer has two possibilities:• reject the warning letter, incurring the risk of an in-

fringement proceeding concerning the SEP patent;• enter into a negotiation with the SEP proprietor for

a discussion about the grant of a FRAND licence.

Let’s suppose that the implementer chooses the optionof FRAND negotiation, the implementer will send a re-sponse letter to the SEP proprietor, indicating willingnessto conclude a licensing agreement on FRAND terms.

NDA and first offer of a FRANDlicence by the SEP proprietor

The third step is carried out by the SEP proprietor, afterreceiving the response letter. At this stage, the SEP pro-prietor usually asks the implementer to sign a non-dis-closure agreement (NDA). The NDA might include aclause stating that the SEP proprietor will not sue the im-plementer during the FRAND negotiation, although thispossibility is already dealt with in the CJEU Decision.

The NDA usually includes a clause defining the mannerin which the SEP proprietor can terminate the NDA be-fore its expiration date, so that the SEP proprietor cansue the implementer without violating the NDA in casethe implementer delays the negotiation in bad faith. Forthe same reasons, the implementer should carefullychoose the duration of the NDA. It should not be ex-cessive. One year seems reasonable, with an automaticextension of one further year in case one of the partiesdoes not inform the other about the termination.

Let’s suppose that the implementer signs the NDA. TheSEP proprietor gives the implementer a written offer fora licence on FRAND terms. Such an offer must include aproposed royalty rate and the manner in which that rateis calculated. The proposed royalty rate may be calculated

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“Criteria to be considered by the implementer forjustifying the amount of the proposed royalty can be theamount of royalties already paid by other licensee(s) (ifany) for the same SEP and the use (in terms of time) ofthe patented technology in the product.”

as a percentage of the price ofthe single product infringingthe SEP or as a percentage ofthe revenues from selling ofthe overall products.

Criteria to be considered bythe implementer for justify-ing the amount of the pro-posed royalty can be theamount of royalties alreadypaid by other licensee(s) (ifany) for the same SEP andthe use (in terms of time) ofthe patented technology inthe product.

A recent decision concern-ing Sisvel and Haier datedMay 5 2020 from the Ger-man Federal SupremeCourt clarifies that imple-menters have to accept aFRAND offer, even if alower amount was previ-ously offered to a competi-tor (i.e. the SEP proprietorcan request a higher rate),provided that suitable argu-ments are included by theSEP proprietor for justify-ing such higher rate.

Together with the written li-cence offer, the SEP propri-etor often provides furtherdetails about the essential-ity of the SEP, usually in theform of a claim chart map-ping the features of the in-dependent claim over theconsidered standard, if notpreviously provided in thefirst step. The SEP propri-etor indicates a deadline for receiving feedback from theimplementer, after which the SEP proprietor can pro-ceed with a request for an injunctive relief. The deadlinemight be between four and six months.

Counter-offer by the implementer

The fourth step is carried out by the implementer, whoanalyses the written licence offer. According to theCJEU decision, at this stage the implementer is not pre-vented from challenging the validity of the patent andits essentiality, thus the implementer performs a deepanalysis of the validity and essentiality of the patent.

Regarding the essentiality analysis, the implementerstarts from the claim chart provided by the SEP propri-

etor. If not yet provided, theimplementer can requestsuch a claim chart from theSEP proprietor.

At this stage the imple-menter allocates all the in-ternal human resourcesnecessary for carrying outsuch an analysis, involvingin-house or external patentattorneys, internal expertsin the field of the specificstandard and internal or ex-ternal lawyers.

It is worth noting that thedeclaration of a patent to aSDO is usually carried outwhen the patent is pendingand that a standard is usuallyapproved after a longprocess requiring several in-termediate versions, whichcan significantly differ fromthe final one. Therefore adeclaration of an SEP couldbe obsolete (if not updatedafter the final version), ei-ther because at the time ofthe declaration the patentwas pending with a scope ofprotection broader than thegranted one or because thefinal version of the standardcould be different. In the lat-ter case, the standard couldeven not include the solu-tion protected by the SEPany more or such solutioncould be optional and notessential. Moreover, the im-plementer carefully checksthe proposed rate of the roy-

alty and the way in which the royalty rate is calculated.Usually the rate of the royalty proposed by the SEP pro-prietor is higher than expected by the implementer. Theimplementer can provide a counter-offer at a lower rateand inform the SEP proprietor accordingly.

According to the CJEU Decision, the counter-offer ofthe implementer must also be FRAND and the imple-menter has to provide the details of the way in whichthe royalty rate is calculated, together with suitable ar-guments for proving that the royalty rate requested bythe SEP proprietor was not correct. The implementerthus informs the SEP proprietor about the counter-offer and the details of the calculation of the new roy-alty rate. The SEP proprietor expects to receive thecounter-offer in a short time, such as within one tothree months.

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Giancarlo Penza

Giancarlo Penza has a Master of Science intelecommunications engineering from the Uni-versity Politecnico in Milan (Italy). He was a CADengineer at ST Microelectronics where he workedon analogue and digital design of integrated cir-cuits, electric simulation and layout in CMOStechnology. He also worked on firmware and dig-ital design in VHDL for FPGA for equipment foroptical telecommunications networks at Alcatel.

He was a patent engineer at Alcatel-Lucent. Here,he drafted and filed European patent applicationsfor optical telecommunications networks and car-ried out corresponding prosecution in Europe, theUSA, China and Japan.

He was then a patent attorney in an Italian intel-lectual property office where he drafted Italian,European and international patent applicationsin the fields of electronics, software and tele-coms and carried out corresponding prosecu-tions in Europe, the USA and China. He alsodrafted patentability and infringement opinions.

He has been a technical consultant for patentlawsuits before Italian courts. Penza has workedat Bugnion since April 2013. He deals withpatents in Italy, Europe, the PCT, the USA, China,Japan and Canada in the fields of electronics,software and telecoms.

According to the CJEU decision, at this stage, the SEPproprietor cannot sue the implementer. He has to waitfor a response from the implementer within the re-quested deadline. Only after expiration of such deadlinecan the SEP proprietor proceed with a request for in-junctive relief, if not receiving any feedback from theimplementer, despite one or more reminders.

Evaluation of the counter-offer(s) bythe SEP proprietor

The fifth step is carried out by the SEP proprietor, whoanalyses the counter-offer rate. The third and fourthsteps can be iterated more than once, i.e. the SEP pro-prietor can make more than one licence offer and theimplementer can make more than one counter-offer.The duration of such iterations differs on a case-by-casebasis and it can last one year or more, but reasonably, itshould not exceed two years.

If the SEP proprietor is satisfied with the last counter-offer of the implementer, an agreement is reached andthe negotiation process terminates successfully. If theSEP proprietor is not satisfied with the last counter-offer or if the SEP proprietor considers that the behav-iour of the implementer is in bad faith (for example,because of delaying tactics), the negotiation process ter-minates unsuccessfully and the parties can request acourt or an arbitration court to determine the FRANDlicence.

The court is often asked for a decision, either by theSEP proprietor who sues the implementer for infringingthe SEP, or by the implementer who sues the SEP pro-prietor to invalidate the SEP and/or for a non-infringe-ment declaration.

Second phase: SEP litigation

When the negotiation ends without reaching an agree-ment, a patent lawsuit is usually filed by the SEP pro-prietor, requesting injunctive relief against theimplementer. Before filing the lawsuit, it is advisable forthe SEP proprietor to check if the NDA between theparties includes a clause stating that the SEP proprietorwill not sue the implementer during the FRAND nego-tiation. If this is applicable, the SEP proprietor further

checks if the NDA allows the revocation of such a con-straint by informing the implementer of the intentionto revoke the NDA:• If positive, the SEP proprietor informs the imple-

menter accordingly.• If negative, the SEP proprietor has to wait for the ex-

piry of the NDA term.

Let’s suppose that the SEP proprietor is authorisedto file a lawsuit, either because the term of the NDAhas expired or because it is terminated by the SEPproprietor. The first issue to evaluate for the SEP pro-prietor is to whom to address the lawsuit, especiallywhen the implementer is a multinational companywith headquarters and several subsidiaries elsewherein the world.

It is advisable to sue the same legal entities with whichthe FRAND negotiation took place, otherwise there isthe risk that the injunctive relief request will be rejectedbecause the requirements of the CJEU decision are notfulfilled (i.e. the SEP proprietor didn’t alert the suedparty, but another one). If the lawsuit is started cor-rectly, the judge may order the implementer to providea bank guarantee or to deposit funds at the court, in re-spect of its past and future use of the SEP.

The essentiality of the declared SEP patent is checkedfor the first time during the course of the lawsuit. Par-allel lawsuits for the same SEP could be pending inother countries or can be terminated. Although the de-cisions of such lawsuits are not legally binding for thecountry in question, they are often taken into accountby the judge and thus it is convenient to cite the deci-sions in other countries, either for the SEP proprietoror for the implementer, depending on the outcome ofthe foreign decision.

The outcome of the decision can be one of the following:• a licence is imposed on the implementer, with a pre-

cise royalty rate;• it sets the terms of a licence which the implementer

has to accept, in order to avoid injunctive relief;• it issues injunctive relief against future infringement,

i.e. preventing manufacturing and selling of theproducts (decision Huawei/Samsung of January 112018, Shenzhen Court), with or without compensa-tion for past damages.

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“Usually the rate of the royalty proposed by the SEPproprietor is higher than expected by the implementer.The implementer can provide a counter-offer at a lowerrate and inform the SEP proprietor accordingly.”