FRAND means Fair, Reasonable and Non-Discriminatory. While the Proposal improves transparency regarding SEPs, it has some significant flaws when it comes to ensuring a fair and non-discriminatory system. This post focuses on the provisions regarding setting an aggregate royalty with a brief discussion of non-discrimination which is barely mentioned in the Proposal.
There are four provisions in the Proposal that address the setting of an aggregate royalty (Articles 15 – 18). The Proposal defines an aggregate royalty as “the maximum amount of royalty for all patents essential to a standard.” The idea of setting an expected aggregate royalty is a good one. In theory, this allows implementers to assess the overall burden of SEP licensing and determine whether to implement the standard given the established aggregate royalty or not to implement the standard if the amount is too high. It also allows SEP holders to determine their approximate share of the aggregate amount and again, in theory, this should make FRAND licensing much easier. However, the approach contained in the Proposal to set an aggregate royalty is neither fair nor reasonable.
Articles 15 - 16 provide for the “notification” of an aggregate royalty by a group of SEP holders. Article 17 provides that the Center will facilitate the determination of an aggregate royalty if enough SEP holders (those that hold at least 20% of all SEPs for a standard) so request, and only the SEP holders will participate in the determination. Article 18 allows any stakeholder to request the Center to provide a non-binding expert opinion on such aggregate royalty, but only provides that the participating SEP holders may propose the amount of such a royalty (Article 18(8)).
I truly hope this is an oversight by the Commission and that the Commission did not intend to allow a group of SEP holders to unilaterally set an aggregate royalty for a given standard without any input from implementers. One of the primary reasons to set an aggregate royalty is to ensure that the sum total of all FRAND licenses does not unfairly burden implementers and implementation. We are in the current pickle because SEP holders are seeking royalty amounts that, separately and in the aggregate, are substantially higher than implementers deem reasonable. “Royalty stacking” (e.g. royalties or royalty demands that are excessively high when considered in the aggregate) is a significant concern for implementers.
I hope we would all recognize that it would be fundamentally unfair to allow a SEP holder to unilaterally dictate the amount an implementer pays for a FRAND license. Just because a licensor is seeking a particular royalty does not make that royalty amount FRAND. For example, it was reputed that Optis et al was seeking billions of dollars in royalties from Apple in its U.K. case against Apple, Optis Cellular Technology LLC et al v. Apple Retail UK Ltd. But, in the Court’s recent decision in that case dated 10 May 2023, the Court awarded a total of $5.13M per year for five years going forward and $25.65M going backward. This very different and substantially lower amount represented the Court’s determination, after hearing from both sides and multiple witnesses, about what a FRAND royalty should be for Optis’ portfolio.
Setting an aggregate royalty is no different. If only one side is allowed to set (or propose) the royalty amount, or only one side is allowed to give input in making a determination, the result almost certainly will favor that side. Entities that are pure SEP holders have little incentive to come up with a reasonable aggregate royalty. Each such SEP holder stands to gain by making the aggregate royalty as high as possible (just below the amount that would drive implementers to other technologies). But that is not the definition of “reasonable.”
Pure SEP holders are not properly positioned to determine how much of a burden for implementers a particular aggregate royalty would be, or to present balanced evidence to help a decisionmaker determine an appropriate aggregate royalty. Just as it is necessary to hear from witnesses from both the SEP licensor and the prospective SEP licensee in litigation before a court makes a determination of a specific FRAND rate, so too is it necessary to hear from all sides, implementers and SEP licensors, before setting an aggregate royalty. It would be fundamentally unfair, and the results likely would be highly skewed in favor of SEP holders, to allow just SEP holders to set an aggregate royalty for a standard.
In order to prevent unfair and excessive aggregate royalties, implementers must be part of any determination of an aggregate royalty. I urge the Commission to delete Articles 15 to 17 in their entirety and to update Article 18 to make clear that both SEP holders, and implementers, should be allowed to propose an aggregate royalty and must participate in any determination made by the Center.
“Non-discriminatory” is part of the FRAND obligation but is barely mentioned in the EU Proposal. The original, leaked draft contained the following statement: “If a patent owner makes this promise (called ‘FRAND commitment’), it cannot refuse to license its SEPs to a party who is willing to agree to FRAND terms and conditions.” It is troubling that the statement was removed from the final version and that non-discrimination is barely mentioned and not really addressed in the Proposal.
Non-discrimination is a baseline obligation of the FRAND commitment, however. And inherent in that FRAND commitment is an obligation on the SEP holder to offer FRAND licenses to all implementers. It would be, per se, discriminatory for the patent holder to refuse to license a particular implementer or a particular type of implementers. The patent holder was not required to agree to license on FRAND terms but, having done so, it is obligated to license all implementers in a non-discriminatory way. I urge the Commission to explicitly recognize and reiterate that all implementers are entitled to a license on FRAND terms and that the FRAND commitment requires SEP holders to license to all implementers in a non-discriminatory way.
 See for example, https://www.thisismoney.co.uk/money/markets/article-9775603/Apples-threat-quit-Britain-5bn-patent-row.html