Recent Developments in FRAND Litigation San Francisco- April 27, 2017 Jorge L. Contreras University of Utah

I. Background: Standards, SEPs and FRAND II. Recent Developments

A. FRAND Royalty disputes ▪ Precedent: Microsoft, Innovatio

▪ TCL v. Ericsson (C.D. Cal. – in trial)

▪ Unwired Planet v. Huawei (UK Patent Ct. – 2017)

B. Antitrust/Competition claims ▪ Precedent: Rambus, Google/Motorola. Huawei v. ZTE

▪ Apple v. Acacia (N.D. Cal – pre-trial)

▪ KFTC v. Qualcomm (Korea 2016)

▪ FTC and Apple v. Qualcomm (N.D. Cal. – pre-trial)

ITU H.264 (video compression)

2400 patents

ETSI GSM (2G mobile telephony)

4700 patents

ETSI UMTS (3G mobile telephony)

7,700 patents

3

251 Standards

4

The imposition of excessive patent royalty demands after a standard has been widely adopted in the market

5

Disclosure Policies SDO participants must disclose

essential patents prior to approval

Licensing Policies SDO participants commit to license

essential patents [often on Fair, Reasonable and Nondiscriminatory (FRAND) terms]

6

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

7

Issues: Did SEP holder comply with its FRAND obligation?

Direct “breach of contract” claim or defense to infringement action

Is implementer entitled to benefit of the FRAND commitment? (third party beneficiary)

What is FRAND rate/range?

Did implementer act in bad faith (holdout)?

Contract Claim for FRAND violation Court calculates FRAND range Methodology:

Relative value ▪ Patents to standard (low)

▪ Standard to product (low)

Modified Georgia-Pacific framework

Comparables ▪ Patent pools

▪ Bilateral agts

Value is ex ante

9

Judge James Robart

Infringement claims against end users with settlement offers $2-5K + Cisco and other mfgs.

Court determines FRAND rate prior to infringement/validity to facilitate settlement

Methodology:

Modified G-P framework

Royalty base = chip

Value of pats. = above average ▪ Ex ante value

Comparables (bilateral, not pool)

Top-Down royalty ▪ Profit margin as royalty ceiling (12.1%)

▪ Calculate roy. share based on number and value of patents

10

Infringement found FRAND royalty as “reasonable” royalty damages Jury instructions

Modified G-P framework

Apportionment

▪ Incremental value of patented invention only

▪ Ex ante value

Comparables based on EMVR are OK

▪ But caution jury re. royalty base (EMVR vs. SSPPU)

No instructions on holdup or stacking w/o evidence

TCL is an existing Ericsson 2G licensee Negotiation of 3G/4G licenses broke down Ericsson sued for infringement TCL seeks determination of FRAND rate Issues

Non-discrimination

▪ Is TCL entitled to rate paid by Apple, Samsung, even if their products are more expensive?

Royalty methodology

▪ May Ericsson set a royalty “floor”?

▪ Top-down royalty approach based on Ericsson % of 3G/4G SEPs?

FRAND Negotiation/Competition Law ¶806(3) “The boundaries of FRAND and competition law are not the same. A rate may be above the FRAND rate but not contrary to competition law.” ¶806(7) “Offers in negotiation which involves [sic] rates higher or lower than the FRAND rate but do not disrupt or prejudice the negotiation are legitimate” ¶806(12) “In assessing the dominant position of a SEP holder, the practical effect of the FRAND undertaking and the potential for hold out by an implementer are relevant factors and may lead to the conclusion that a SEP holder is not in a dominant position ” Sir Colin Birss, J.

FRAND Rates, Generally ¶806(4) “There is only one set of licence terms which are FRAND in a given set of circumstances” [i.e., there cannot be rival FRAND offers (Vringo)] ¶159 “it makes much more sense to interpret the ETSI FRAND obligation as applicable primarily to the finally agreed terms rather than to the offers. In other words, it is an obligation to enter into FRAND licences.” ¶97 “[Huawei’s expert] explained that he did not regard FRAND as a scheme which meant the patentee could not appropriate some of the [ex post] value that is associated with the inclusion of his technology into the standard and the value of the products that are using those standards. … Neither side disputed this ... it is not necessary to deprive the patentee of its fair share of those two sources of value in order to eliminate hold up and fulfil the purpose of FRAND. To that extent I may be differing from certain parts of the decisions in Innovatio IP Ventures and Ericsson v D-Link in the US”

Non-Discrimination ¶806(8) “An appropriate way to determine a FRAND royalty is to determine a benchmark rate which is governed by the value of the patentee’s portfolio …The rate does not vary depending on the size of the licensee ... Small new entrants are entitled to pay a royalty based on the same benchmark as established large entities” ¶806(9) “The non-discrimination limb of FRAND does not consist of a further “hard edged” component which would justify a licensee demanding a lower rate than the benchmark rate because that lower rate had in fact been given to a different but similarly situated licensee. If FRAND does include such a component, then that obligation would only apply if the difference would distort competition between the two licensees ” [Q: Is this what the parties/SDO intended?]

FRAND Rate Methodology - Comparables ¶806(10) “A FRAND rate can be determined by using comparable licences if they are available ... FRAND rate = E x R ¶807(7) The right number E to use as a royalty rate which measures the value of Ericsson’s 4G SEPs in order to scale against Unwired Planet is 0.80% for 4G. The value E for Ericsson’s 2G and 3G SEPs is 0.67%. (4) “The value R for the relative strength of Unwired Planet’s portfolio as compared to Ericsson’s for 4G is 7.69%. The values of R for 2G, 3G, and 4G range from 2.38% to 9.52%. (8) The benchmark FRAND rates for Unwired Planet’s portfolio are: a) 4G/LTE: 0.062% for handsets, and 0.072% for infrastructure; b) 3G/UMTS: 0.032% for handsets, and 0.016% for infrastructure; c) 2G/GSM: 0.064% for handsets, and 0.064% for infrastructure;

FRAND Rate Methodology – Top down ¶806(10) “A top down approach can … be used in which the rate is set by determining the patentee’s share of Relevant SEPs and applying that to the total aggregate royalty for a standard but this may be more useful as a cross-check ” ¶806(11) “In assessing a FRAND rate counting patents is inevitable ” FRAND rate = T x S ¶807(9) … the value T for the total aggregate royalty burden implied by these rates for 4G handsets is 8.8%. The values of T for 2G, 3G, and 4G for infrastructure and handsets range from 3.1% to 8.8%. (5) The value S for Unwired Planet’s share of all SEPs relevant to 4G handsets is 0.70%. The values of S for 2G, 3G, and 4G for infrastructure and handsets range from 0.21% to 1.30%.

Injunction ¶807(17) “Unwired Planet did not abuse their dominant position by issuing these proceedings for an injunction prematurely, by maintaining a claim for an injunction in these proceedings, by seeking to insist on a worldwide licence, by attempting to impose unfair prices or by bundling SEPs and non-SEPs ” ¶807(18) “Since Unwired Planet have established that Huawei have infringed valid patents … and since Huawei have not been prepared to take a licence on the terms I have found to be FRAND, and since Unwired Planet are not in breach of competition law, a final injunction to restrain infringement of these two patents by Huawei should be granted ” END RESULT: Unwired Planet to propose License Agreement conforming to Court’s FRAND assessment. If Huawei does not accept it injunction!

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