Real World Negotiations Under the Willing/Unwilling Paradigm

A few weeks ago, I wrote about how the rubric of willing/unwilling has passed its use by date (see Time to Throw Away the Willing/Unwilling Paradigm).  Today I wanted to talk about what it is like to negotiate a license under that rubric.   This post is based on my decades of experience being involved in SEP license negotiations and disputes. It contains actual (anonymized) quotes from correspondence between various SEP licensors and implementers over those years.

The Demand Letter

SEP licensing negotiations usually start in one of two ways. In some circumstances, the implementer first learns about the demand when a lawsuit is filed by the SEP holder alleging infringement.[1]  The second way is the subject of today’s post:  the negotiations start when the implementer receives an assertion letter (sometimes called a “demand letter”).  This is a letter that alleges infringement of one or more patents that are asserted to be SEPs and includes a request/demand to take a license.[2] 

SEP holders that aspire to be able to obtain injunctions in Germany (or now the UPC) under the willing/unwilling rubric almost always send demand letters first. These days, demand letters typically are sent to the General Counsel or Chief Legal Counsel of the company, or to the head of IP at the company, the head of a subsidiary that resides in the jurisdiction in which the patent holder wants to sue or to the recipient for notice if there has been a prior license agreement between the parties.   These letters generally state:

1.      The entity sending the letter (“Licensor”) has a portfolio of patents related to a particular standard(s):

“We are writing to inform you that [Licensor] . . . is actively licensing a portfolio of Wi-Fi patents originally filed by [Patent Owner 1], [Patent Owner 2], [Patent Owner 3] and [Patent Owner 4].”

“I am writing to you today on behalf of [Licensor], which owns a portfolio of patents that relate to wireless products that operate in accordance with 2G, 3G, 4G and/or other wireless standards.”

“I am writing because we represent [Patent Owner] in intellectual property enforcement matters.  [Licensor] owns a portfolio of domestic and foreign patents that are relevant to . . . 5G technologies.”

2.      The patents are standard essential:

“Every consumer electronic product that is Wi-Fi enabled implements one or more of the above listed revisions of the IEEE 802.11 standard and uses teachings disclosed by patents listed” in the enclosures (sometimes these enclosures are stated to be a list of all SEPs owned or licensable by the Licensor but more often, they are stated to be an exemplary list of those patents).

We have enclosed claim charts for a “subset” of the SEPs we are licensing which show “which portion/feature of the IEEE 802.11 standard is covered.”

The portfolio “includes patents that are essential to several mandatory portions of various versions of the . . . standard.”

3.      The entity sending the letter either owns the patents or has the right to license them:

We have been appointed by the patent owner “to negotiate a worldwide, non-exclusive, royalty bearing license.”

“With respect to ownership, [Licenser] confirms that [SEP developer 1] and [SEP developer 2] were the owners of all right, title and interest in their respective SEP portfolios . . . and have now transferred ownership to” Licensor.

We are “the licensing advisor” for the SEP owner.

“We offer licenses under our patents to companies, such as [Implementer], that design, manufacture, use and/or sell wireless products that practice the aforementioned standards.”

4.      The company to which the letter is sent (“Implementer”) sells products that implement the identified standard:

Products “manufactured, imported, sold, offered for sale, and/or otherwise

disposed of by [Implementer], such as those listed below are covered by” the patents listed in the enclosures.

“Through our ongoing market research, it has come to our attention that [Implementer] is currently offering products compliant with some or all of these standards.”

“I have included . . . infringement charts exemplifying how [Implementer] practices [Licensor’s] patent claims.”

5.      The Implementer therefore needs to take a license – this license demand usually comes with a thinly veiled threat of litigation if unsuccessful:

“We take the protection of [Licensor’s] intellectual property very seriously.  We firmly believe that [Implementer] has a responsibility to secure all necessary patent rights to commercialize products operating under the aforementioned standards.”

We prefer resolution of this matter through licensing “to the inefficiencies of enforcement through litigation.”

“We will consider your failure to respond as a refusal to obtain a license under the patents and treat your company as an unwilling licensee.”

6.      Sometimes the amount demanded for the license is stated in the letter, but much more frequently it is not.

The Response Letter

In response to the initial letter, savvy[3] implementers promptly send out a response letter that states a willingness to take a license on FRAND terms.  Usually, the response letter also contains a request for information to aid the implementer in evaluating the demand. 

Here’s some of the types of information typically requested by implementers:

• A copy of the proposed license agreement, including the amount sought;

• An explanation of how that amount was calculated and the basis on which it was determined to be FRAND;

• A list of all the alleged SEPs that are in the portfolio being licensed;

• Claim charts for those patents, including how the licensor is interpreting the relevant terms;

• A list of all licensees;

• Copies of all licenses;

• An explanation of how actual license rates and terms vary from published rates and terms for entities that have published rates and licenses and are only willing to share those published rates;

• The relationship between the licensor and the SEP owner (when they are not the same entity) and a copy of the agreement establishing that relationship; and

• The relationship between the licensor and other SEP owners that are believed to be related.

The need for most of this information to conduct an informed evaluation of the license demand is self-evident. 

The Non-Disclosure Agreement

Once the initial letter has been received and a response sent, the next phase is nearly invariably a long, drawn-out negotiation of a non-disclosure agreement (“NDA”).  I will never forget the first time an NDA came up in the context of SEP licensing negotiations.  The licensor demanded that we enter into an NDA before the licensor would agree to share claim charts.  I was incredulous.  I could not understand how a claim chart that was based on a published, public standard and a published, public patent and contained no confidential information could require a non-disclosure agreement.[4]   

This was in the early days of the willing/unwilling rubric.  I was informed that the Europeans viewed confidentiality differently, and the company might be considered to be an unwilling licensee if it refused to enter into an NDA. 

Thus began the current period of seemingly infinite negotiations over NDAs in SEP licensing matters.  Since that day, the shortest NDA negotiation that I have been involved in for a SEP licensing matter took six months.  The longest took over two years.  So why does it take so long to negotiate something that in a commercial context is usually done much more quickly? 

There is a fundamental disagreement between licensors and implementers about the importance and meaning of transparency in SEP licensing.  Many of these “implementers” are themselves standards developers and often have participated in the development of the very standard implicated by the demand letter.  Many implementers have given FRAND commitments and have a well-informed understanding of what FRAND and transparency should mean. 

“[Implementer] believes that FRAND negotiations should be open and transparent.  However, at [Licensor’s] insistence, [Implementer] entered into a non-disclosure agreement.”

“[Implementer] does not agree with [Licensor] that an NDA is needed for patent-to-standard mappings . . . In [Licensor’s] experience, NDAs with inappropriate terms often inhibit and delay the negotiation process by preventing analysis of whether the relevant patents are standard essential and by preventing analysis of whether a licensing offer is FRAND.”

“[Implementer] does not understand how claim charts purporting to establish that [Licensor’s] patents are standard essential can be confidential.”

But licensors are well-served by keeping their information confidential and typically demand that almost all of their information be kept confidential.  This usually includes the claim charts, the full list of the licensor’s SEP portfolio, the amount it is seeking, who it has previously licensed and the scope and extent of those licenses. This is representative SEP holder response:

As “to your inquiries on the licensing terms and the establishment of the essentiality of the [alleged SEPs], we are ready and willing to provide you with the relevant information and materials for our negotiations with [Implementer].  We, however, would like to enter into a mutual Non-Disclosure Agreement (“NDA”) before we share such information and materials.”

And, because of the European willing/unwilling rubric, implementers always end up eventually signing some type of NDA. The only question is how broad.

The Negotiations over What Information the Licensor Will Provide

Here’s the rub: signing the NDA does not stop the endless, usually fruitless negotiations over information sharing.  Here’s a typical response to implementers’ requests for information after an NDA was signed:

“With respect to [Implementer’s] request that [Licensor] provide it a list of licensees, we cannot provide the names of any licensees which are subject to confidentiality obligations that would prohibit us from doing so. That said, we are happy to provide [Implementer] with a representative list of past and current licensees.” 

In my experience, what implementers usually get in response to their requests for information after they have signed an NDA is:

• “Exemplary” claim charts, i.e. a limited set of claim charts for patents selected by the licensor;

• A “representative” list of licensees;

• No (or a small number of cherry picked) copies of actual executed licenses;

• From non-owner licensors, a short statement that the licensor has full authority to license the patents but no actual documentation of what is that authority or of the relationship;

• No information or a denial of affiliation with other companies believed to be affiliated; and

• A whole lot of stonewalling on just about everything else.

So, even with an NDA in place, licensors usually categorically refuse to share their other license agreements or even a fulsome list of their other licensees.  In that licensor quote above, when they say “provide the names of any licensees which are subject to confidentiality obligations that would prohibit us from doing so” what they mean is: most of our license agreements have confidentiality provisions that we claim prevent us from sharing the agreement or even the name of the licensee with you, even under an NDA. 

In other words, signing the NDA does not mean the licensor provides the implementer with the information necessary to make an informed decision or properly assess whether an offer comports with the licensor’s FRAND obligations.

There are Also Extensive Negotiations Over the Order in Which Discussions Should Take Place

There also is usually a lengthy disagreement over the order in which information should be shared.  Licensors always want to start by providing exemplary claim charts and maybe some patent lists.  They then demand sit down meetings to review those patents and claim charts.  This usually costs the implementer a lot of time and money:  the implementer has to engage counsel to review the charts and patent file histories, possibly do some preliminary prior art analysis, check whether the patents have been litigated before and if so, review any information from those cases and then sit down and discuss it for several hours. 

And because these charts are so often only provided under an NDA, this means that every potential licensee has to expend a similar amount of time and money.  With secret claim charts, implementers cannot share analyses and reduce costs.  Conversely, the licensor only needs to do each claim chart once no matter how many implementers it approaches for a license. 

Moreover, when the portfolio is large (some of these portfolios have tens of thousands of alleged SEPs in them) and originates from a company or companies that actively participated in the development of that standard, it is to be expected that at least a few patents in the portfolio are valid and essential. 

These “exemplary” claim charts usually involve patents that the licensor believes most likely to be found to be valid and essential.  And if an implementer provides evidence that a particular patent is invalid or not essential, the licensor of a large portfolio can simply toss that patent and reach in to its large portfolio to find another reasonably good patent to assert.

Given this reality, rather than expend the tremendous resources it takes to have these discussions about a particular set of patents, most implementers want to know how much a license is actually going to cost and whether the amount and terms of the deal comply with the licensor’s FRAND obligations. 

Licensor is insisting “on an in-person meeting” to discuss claim charts “while refusing [Implementer’s] requests for information” about its licenses and licensees.

Many licensors do not even share how much they are seeking until several years down the road of negotiations.  Even when a licensor provides a number up front, it is almost always a “rack” rate, e.g. the amount and terms they have publicly disclosed.  But they do not provide information that would allow the implementer to determine whether other implementers have agreed to those rack rates and under what terms or have gotten different deals.  At no stage, no matter how fair along in the process, no matter the NDA, does the licensor share its actual license agreements (again sometimes a licensor will share a cherry-picked "exemplary" license or two or the license agreement provided on its website with no evidence that is actually what other implementers have agreed to).

The Secret We All Know Going Into this Multi-Year Process: the Negotiations Were Unlikely to Result in a License

At some stage of the negotiations, the licensor makes an offer.  It is often one, two or sometimes even three orders of magnitude[5] greater than the implementer believes is reasonable.  And here’s the final cherry on top of this multi-year odyssey of negotiations:  from the beginning we all suspected that would be the case.[6] 

In other words, both sides believed very early in the negotiations that the negotiations were unlikely to result in a completed license.  When parties are orders of magnitude apart on valuation, negotiations rarely result in enough movement in either side’s position to reach a deal. 

So why do parties engage in these multi-year negotiations when both sides are pretty sure from the beginning that no deal will be reached?  One of the primary reasons for this multi-year, very expensive, very time-consuming dance is to position the parties for a determination of willingness/unwillingness in FRAND litigation.  The licensor is attempting to get the implementer to misstep during this multi-year process in order to be able to obtain an injunction (and higher settlement rates) and the implementer is trying as hard as possible to remain a willing licensee in difficult circumstances with limited information.

By eliminating the willing/unwilling rubric, the parties could cut to the chase earlier.  As I said in my earlier post, the real issue is not whether the parties are willing or unwilling to enter into a license.  At the right price, almost every party would agree to a license.  The real issue is that when the parties fundamentally disagree about the FRAND value of a license for a SEP portfolio, without a determination of the FRAND value of that portfolio, no agreement can be reached. 

[1] I’ve had representatives of several large licensing entities and even some UK/European jurists express public doubt that any entity would file first.  However, in my experience, this is a relatively common occurrence in the United States with smaller U.S. based SEP holders.  These US based SEP holders often engage in a file first, often against multiple companies all at the same time, and then make licensing (e.g. settlement) demands second methodology.

[2] Sometimes both occur – a lawsuit is filed but not served, or drafted but not filed, and the implementer receives a “courtesy” copy of the lawsuit along with a demand to take a license.  Or a lawsuit is filed and served but service is rapidly followed up by a demand letter.

[3] By savvy, I mean implementers that have addressed SEP licensing issues previously and have some sophistication about how to deal with SEP licensing demands.  Smaller and less sophisticated implementers often act like deer in the headlights when they receive a demand letter: they freeze up and often do not respond quickly or decisively.  Such a failure to respond does not usually evidence an unwillingness to license, but simply unfamiliarity with the process, a lack of individuals within the company who know what to do when they receive such a demand or a fear of what might occur if they do respond to the demand.  “Passive implementers” often know very little about the accused technology and so have no basis to determine whether the allegations are correct. They may turn to their suppliers for help or indemnity before responding to a demand letter. But this can itself turn into a lengthy process with the discussions between the implementer and its supplier further delaying the passive implementer's response to the letter.

[4] Let me be clear.  Claim charts that do not contain confidential information but that have not been shared with a third party may be protected from disclosure because they involve, for example, attorney work product.  But, once shared with someone on the other side of a negotiating table, such claim charts lose whatever such protection they might have had.

[5] For those who are math challenged, this means that, for example, if the implementer thinks the FRAND value is three million dollars than the licensor thinks it is worth thirty million dollars (one order of magnitude), three hundred million dollars (two orders of magnitude) or three billion dollars (three orders of magnitude).  You can see how bridging the gap in these circumstances can be difficult.

[6] This is not to say that all parties in all SEP negotiations suspect that the negotiations will be unsuccessful. Not all SEP negotiations are created equal, but it is usually apparent to experienced parties near the beginning of negotiations whether they are likely, unlikely, or extremely unlikely to reach an agreement through negotiation.