Introduction

Patent is a monopoly right conferred upon by the Patent Office on an inventor to exploit his invention for a limited period of time.

Patents are predominantly used to protect an invention from being abused by competitors.

What do we mean by the term ‘Patent licensing’?

A patent licence is an agreement that transfers less than ownership rights in a patent or, which grants certain rights to the licensee. A patent licence can be exclusive or non-exclusive, for a specific field of use or for a specific geographical area. It is common for companies engaged in complex technical fields to enter into dozens of licence agreements associated with the production of a single product. There are four types of patent licenses- compulsory licence, cross-licensing, defensive patent licence and reasonable and nondiscriminatory (FRAND).

What is FRAND?

FRAND stands for Fair, Reasonable and Non- Discriminatory. It is also known as Reasonable and Non-discriminatory terms (RAND). It is a licensing obligation that is frequently required by standardsetting organizations for members that participate in the standard-setting process. The term FRAND has not been defined. The individual terms are defined as under:

Fair primarily relates to the underlying licensing terms. The term ‘Fair’ means terms which are not anti-competitive and that would not be considered unlawful if imposed by a dominant firm in their relative market.

Reasonable refers mainly to the licensing rates. According to some people, a reasonable licensing rate is a rate charged on licenses which would not result in an unreasonable aggregate rate if all licenses were charged a similar rate.

Non-discriminatory relates to both the terms and the rates included in licensing agreements. As the name suggests this commitment requires that the licensor treats each individual licensee in a similar fashion. This allegiance is included in order to maintain fairness in the competitive market with respect to existing competitors and to ensure potential new entrants are free to enter the market on the same basis.

FRAND requires that holders of essential patent do not discriminate, and do not restrict competition downstream. Licensors must avoid discriminating:

1. against and between other technology providers (e.g., by requesting unremunerated grant-backs, discriminating against IP-rich licensees and diminishing innovation incentives and technology competition);
2. against and between rival firms in downstream markets (e.g., by refusing to provide reciprocal licenses to rival manufacturers of standardized components or products);
3. against and between licensees in downstream markets (e.g., by offering royalty rebates and incentives, particularly when such discrimination is linked to exclusive or preferential supplies - resulting in “primary line” antitrust injury).

FRAND (fair, reasonable and non-discriminatory) licenses allow companies to develop open standards for systems such as 3G mobile networks by sharing information and technology. Standards bodies typically require that companies participating in the development of a standard agree to licence any relevant patents they hold on FRAND terms if their technology is essential to the standard.

Standard Setting Organizations set common standards for a particular industry in order to ensure compatibility and interoperability of devices manufactured by different companies.

They have rules that govern ownership of patent rights that apply to the standards the organization has adopted. One of the most common rule is that a patent that applies to the standard must be adopted on “ reasonable and non-discriminatory terms” (RAND) or on “fair, reasonable, and nondiscriminatory terms” (FRAND).  The two terms are interchangeable.

The term FRAND is mostly preferred in European countries and the term RAND is preferred in the United States of America. The rules framed by this organization are intended to prevent its members from engaging in licensing abuse based on the monopolistic advantage generated as a result of having their intellectual property rights included in the industry standards. The members of this organization are required to offer FRAND licence to anyone, not necessarily members of the organization.

Recent judgments and news on FRAND Patent Licenses

In June 2012, the Federal Trade Commission (FTC) asked the US International Trade Commission (ITC) to carefully reconsider banning products like the Xbox 360 that allegedly infringe upon patents that are required to be fairly licensed as part of standards agreements. FTC has issued a statement to the ITC in both the Apple vs. Motorola and Motorola vs. Microsoft cases  now pending, saying that it’s concerned a company might make a promise to license a standard-related patent under fair, reasonable, and non-discriminatory (FRAND) terms, and then fight to ban products using those patents as a way to negotiate higher, unfair rates. That’s exactly what Apple and Microsoft claim Motorola is trying to do, but so far they haven’t been successful — Moto won ITC rulings saying the Xbox 360 infringed several FRAND patents on H.264 video encoding and that the iPhone and iPad infringe a FRAND patent on wireless communications.

It has become a serious international issue as companies like Motorola and Samsung rely heavily on their standards-related patents in various lawsuits.

The most talked about lawsuit was the APPLE v. SAMSUNG (2011).

The biggest lawsuit had two smartphones giants, on one side world’s most valuable company Apple Inc. which changed mobile users experience with its iPhone and iPad and on the other the world’s largest mobile phone manufacture Samsung Electronics.

On April 15, 2011, Apple sued its component supplier Samsung in the United States District Court for the Northern District of California, alleging that several of Samsung’s Android phones and tablets, including the Nexus S, Epic 4G, Galaxy S 4G, and the Samsung Galaxy Tab, infringed on Apple’s intellectual property: its patents, trademarks, user interface and style. Apple’s complaint included specific federal claims for patent infringement, false designation of origin, unfair competition, and trademark infringement, as well as state-level claims for unfair competition, common law trademark infringement, and unjust enrichment. Further, Apple also stated that Samsung had breached its FRAND commitments made on December 14, 1998 and specific FRAND commitments for the two asserted declared essential patents on May 16, 2006 and August 07, 2007, respectively. Also Samsung seeks to enjoin Apple from selling products that support the UMTS standard and by refusing to offer Apple a license to declared-essential patents on FRAND terms.

Samsung challenged the validity of Apple’s patent. But, it failed to prove the same. The nine member jury sided with Apple, deciding that not a single Apple patent was invalid. The jury has ruled that Samsung willfully infringed a number of Apple patents in creating a number of devices. Justice Lucy H. Koh ordered Samsung Electronics Co. Ltd. to pay Apple $1.05 billion in damages.

After winning a battle on the home pitch, Apple is targeting other major Android players like HTC and Google (Motorola). Foss Patent’s recent publication reveals that Apple has made an offer to license certain FRAND, or standard essential, patents in the region, which Motorola is forced to accept in order to avoid breaking antitrust laws. In fact, Google is already investigated by the EU for FRAND patent abuse in the region, which means that it can’t keep refusing a patent license to Apple in hopes of using those FRAND patents as leverage to squeeze out a better settlement with the iPhone maker in the future.

In 2011, the European Commission issued a framework for analyzing FRAND issues. The guidelines issued by the EC explain that FRAND licensing prevents patent-holders from “making the implementation of a standard difficult” by refusing to license, requesting “excessive” fees, or imposing “discriminatory” royalties. Where there are disputes (which are not atypical in determining the reasonableness of royalties), analysis of whether fees are “unfair or unreasonable” is to be based on whether the fees “bear a reasonable relationship” to the patent’s economic value.¹

Now, let us analyze the other patent licenses available to a patent holder apart from FRAND.

1. A compulsory license, also known as statutory license or mandatory collective management, provides that the owner of a patent licenses the use of their rights against payment either set by law or determined through some form of arbitration. In essence, under compulsory license, an individual or company seeking to use a patent can do so without seeking the patent holder’s consent, and pays the patent holder a set fee for the license.

In March 2012, India issued its first compulsory licence to NATCO in the Bayer v. Natco patent suit. The Patent Controller had earlier ruled that the Bayer price (Rs 280,000 per month) was too high for most Indians and only about 2% could afford that. The compulsory license achieved its objective with the price of sorefanib tosylate coming down to Rs 8,880. Bayer argued that the fact that they had brought down the price to Rs 30,000 wasn’t considered by the Patent Controller. They also said that revoking the compulsory license won’t hurt ‘public interest’ because Cipla was already selling the drug for Rs 5,400.

2. A cross-licensing agreement is a contract between two or more parties where each party grants rights to their intellectual property to the other parties. In Patent law, a cross-licensing agreement is an agreement according to which two or more parties grant a license to each other for the exploitation of the subject-matter claimed in one or more of the patents each owns. The term “cross licensing” implies that neither party pays monetary royalties to the other party, however, this may be the case. For example, Microsoft and JVC entered into a cross license agreement in January 2008.
3. The Defensive Patent License (DPL) is a patent license proposed by Jason Schultz and Jennifer Urban, directors of the Samuelson Law, Technology & Public Policy Clinic at the University of California, Berkeley as a patent licensing equivalent of the GPL copyright license. It requires entities licensing their patents under the DPL to license all of their patents under the DPL, with free licenses granted to all other DPL participants. DPL participants remain free to launch patent lawsuits against non-participants.

Conclusion

The lack of transparency in the patent licensing procedure and the application of FRAND has made it essential for the courts to come out with a harmonized interpretation of FRAND . FRAND obligation places both contractual and antitrustrelated limits on the ability of the patent holder to exercise its patent in licensing negotiations, but the actual scope of those constraints is unclear.

(By Leena Desai, Singh & Associates)