Unwired Planet v Huawei: a new FRAND injunction

Mr Justice Birss has once again broken new legal ground by granting what he has termed a ‘FRAND injunction in Unwired Planet v Huawei.

As a reminder, in April Mr Justice Birss handed down the first UK court decision determining a FRAND royalty rate (see here). A post-judgment hearing took place in May to establish whether or not Huawei should be subject to an injunction in the UK and the issue of permission to appeal.

The FRAND injunction

At the post-judgment hearing, Huawei had argued that the judge should not grant an injunction. As Huawei intended to appeal the decision, it said that it could not enter into the FRAND licence agreement at this stage, in case the Court of Appeal determined that different FRAND terms were appropriate. Huawei claimed that to grant an injunction now would effectively be punishing it for exercising its right to appeal. It also noted that if an injunction was granted, it would last until 2028 (when the patent found valid and infringed in the first patent trial expired), despite the FRAND licence agreement expiring in 2020. Therefore, Huawei would be forced to negotiate a new licence from an extremely weak position – it would automatically be injuncted if terms could not be agreed. 

Huawei requested that the judge accept undertakings in lieu of granting an injunction, offering to: (a) enter into the licence following its appeal, and (b) to comply with the terms of the licence as if it was in effect (including paying royalties) until its appeal was finished.

Mr Justice Birss essentially took the view that the offer of undertakings now was too little, too late. He decided that an injunction should be granted. However, he recognised the risk that this might affect negotiations or disputes about the terms of the licence in later years. To resolve this, he granted a new kind of injunction, which he called a “FRAND injunction”. This would be like a normal injunction, but with the following extra features:

  • A proviso that it would cease to have effect when the defendant enters into a FRAND licence; and
  • Express liberty to return to court to decide whether the injunction should take effect again at the end of the FRAND licence (if it ends before the relevant patents expire, or ceases to have effect for any other reason).
The injunction is to be stayed pending the result of the appeal, on terms that provide for appropriate royalty payments from Huawei to Unwired Planet in the meantime.

Permission to appeal 

Mr Justice Birss granted Huawei permission to appeal on three main issues:

  1. The global licence: including: (i) whether more than one set of terms can be FRAND, (ii) whether a UK only licence was FRAND, (iii) whether the court is able to determine FRAND terms, including rates, for territories other than the UK, and (iv) whether it is appropriate to grant an injunction excluding Huawei from the UK market unless it took a global licence.
  2. Hard-edged non-discrimination: Huawei have permission to appeal the finding that a distortion of competition is required for the non-discrimination aspect of FRAND to apply, but not whether or not there was a distortion of competition in this case.
  3. Huawei v ZTE (Article 102 TFEU): regarding the judge’s findings on abuse of dominance and injunctive relief.
This permits a fairly wide-ranging appeal, especially as regards the competition law elements of the latter two issues. The trial judgment appeared to downplay the importance of competition law in FRAND issues (see here for more information); the appeal may enable a renewed focus on it.

The FRAND licence 

In his main trial judgment, Mr Justice Birss settled the terms of the FRAND licence to be entered into by Unwired Planet and Huawei. This latest judgment annexes a copy of the final form of that licence. Given the shroud of secrecy that usually surrounds such patent licence agreements, this is a unique insight, reflective of the judge’s desire throughout the case to ensure as much transparency as possible.

Transparency is likely to be helpful as the law in this area continues to develop. With the advent of new technologies developed for 5G and the Internet of Things, new companies may need to enter the FRAND licensing field for the first time. Without being able to draw upon any previous experience of negotiating licences in this area, they will be at a disadvantage in negotiations. 

If other judgments follow Mr Justice Birss’ lead and annex copies of any FRAND agreement determined by the court, these would provide useful points of reference for negotiating parties. It might also reduce the requirements for third party disclosure (a costly, time-consuming exercise) in any subsequent litigation. Otherwise, such disclosure will be essential in FRAND cases involving relatively new entrants to the market – they are unlikely to have many licence agreements that can be used by the judge as comparables as part of the process for determining a FRAND rate.

Conclusion

Yet again, Mr Justice Birss provides plenty of food for thought. Assuming that Huawei does go ahead with its appeal, it will be fascinating to see how the Court of Appeal responds to these issues.

Pat Treacy and Matt Hunt



Unwired Planet v Huawei: Is FRAND now a competition law free zone? Not so fast…

It has been two weeks since Mr Justice Birss handed down his latest judgment in Unwired Planet v Huawei (see here for a summary), which is almost long enough to get to grips with the 150 or so pages. There has already been a huge amount of discussion as to what this judgment means in practice and we have even overheard some suggest that, when it comes to FRAND in the future, we can simply ignore competition law altogether. This week we were invited by our friends at the renowned IP law blog, IPKat, to have our say on this. You can check out our thoughts on the IPKat blog here.

Unwired Planet v Huawei: UK High Court determines FRAND licence rate

Mr Justice Birss has just handed down the first decision by a UK court on the ever controversial topic of what constitutes a FRAND royalty rate.  At well over 150 pages, the judgment covers a lot of ground: a lot of ink is likely to be spilled about it over the coming weeks and months.  From what we’ve seen so far, the judge has not been afraid to make findings that will have a considerable impact on licensing negotiations in the TMT sector. 

We’ve summarised the headline conclusions below, but also keep an eye out for future posts in which we’ll analyse some of the judge’s findings and reasoning in more detail.

Background

In March 2014, Unwired Planet (“UP”) sued Huawei, Samsung and Google for the infringement of 6 of its UK patents.  Five of these were standard essential patents (“SEPs”) that UP had acquired from Ericsson.  They related to various telecommunications standards (2G GSM, 3G UMTS, and 4G LTE) for mobile phone technology. 

Five technical trials, numbered A-E, were listed on the validity and infringement of the patents at issue.  These were to be followed by a non-technical trial on competition law and FRAND issues.  UP’s patents were found valid and infringed in both trial A and trial C, but two were held invalid for obviousness in trial B. Trials D and E were then stayed, and as Google and Samsung had settled with UP during the proceedings, this just left Huawei and UP involved in the 7 week non-technical trial, for which judgment has just been given. 

Judgment

There’s a lot to unpack in this judgment, but here is a short list of what we think are the most important findings:

General principles:
  • There is only one set of FRAND terms in a given set of circumstances.  Note the contrast between this and the comments of the Hague District Court in the Netherlands in Archos v Philips (here, in Dutch) which seem to interpret the CJEU decision in Huawei v ZTE as meaning that there can be a range of FRAND rates.
  • Injunctive relief is available if an implementer refuses to take a FRAND licence determined by the court. Mr Justice Birss indicated that an injunction would be granted against Huawei at a post-judgment hearing in a few weeks’ time (although presumably Huawei can avoid this by now taking a licence on the terms set by the Judge).
  • UP is entitled to damages dating back to 1 January 2013 at the determined major markets FRAND rate applied to UK sales. 
  • What constitutes a FRAND rate does not vary depending on the size of the licensee.
  • For a portfolio like UP’s and for an implementer like Huawei, a FRAND licence is worldwide.
  • It’s still legitimate to make offers higher or lower than FRAND if they do not disrupt or prejudice negotiations.
Abuse of dominance:
  • UP did not abuse its dominant position by issuing proceedings for an injunction prematurely (it began the litigation without complying with the Huawei v ZTE framework).
Calculating the FRAND rate:
  • A FRAND royalty rate can be determined by making appropriate adjustments to a ‘benchmark rate’ primarily based upon the SEP holder’s portfolio. 
  • In the alternative, if a UK-only portfolio licence was appropriate, an uplift of 100% on the benchmark rates would be required.
  • Counting patents is the only practical approach for assessing the value of sizeable patent portfolios, although it may be possible to identify a patent as an exceptional ‘keystone’ invention.
  • Comparable, freely negotiated licences can be used as to determine a FRAND rate.
The FRAND rates as determined:


Other FRAND terms:
  • The Judge goes into some details as to the terms which will be FRAND in the licence between Unwired Planet and Huawei – much of which will be worth reading for licensors and licensees in this field.  Of particular note is the royalty base for infrastructure (excluding services). 
Other remedies:
  • Damages are compensatory and are pegged to the FRAND rate.
Comment

There have been near continual disputes between the major players in the TMT field over the last decade or so.  The meaning of FRAND has been strategically important in a large number of cases.  However, many of these companies are very effective negotiators.  In the vast majority of cases, they are able to agree licences without resorting to litigation.  Where proceedings are initiated, the parties are usually able to settle long before a judgment is reached, particularly given the time and expense required to take a FRAND case all the way to trial.  (Such expense is, however, usually dwarfed by the value of the licence – many licences in this field are valued in $billions.) 

The scarcity of judicial opinion in this area means this is a rare opportunity to see how a respected UK judge has approached a number of the unresolved questions regarding FRAND. 

A number of significant questions remain unanswered however, and we will be exploring these in future blog posts.  There’s also the matter of the upcoming post-judgment hearing in a few weeks’ time, which will establish whether or not Huawei will actually be subject to an injunction in the UK, and of course the chance that either party might wish to appeal.  All in all, there’s plenty of interest to talk about, plenty of advice to be given to clients, and the FRAND debate will undoubtedly continue on.

FTC settles abusive acquisition of pharma licensing rights

On 18 January, the FTC announced that Mallinckrodt ARD Inc. (formerly Questcor Pharmaceuticals, Inc.) and its parent company have agreed to pay $100 million to settle FTC charges that they violated antitrust laws when Questcor acquired the rights to a drug that threatened its monopoly in the U.S. market for adrenocorticotropic hormone (ACTH) drugs.  The announcement was made concurrently with the release of the FTC's complaint.

Antitrust (as opposed to merger) cases about acquisitions of competing technology are not an everyday occurrence.  However, this complaint has something of the flavour of the EU Commission’s Tetra Pak 1 decision.  In that case, the EU Commission objected to Tetra Pak’s acquisition (through a merger) of exclusive rights to what was at the time the only viable competing technology to Tetra Pak’s dominant aseptic packaging system.  The Commission (and subsequently the EU courts) held that this would prevent competitors from entering the market and therefore amounted to an abuse of a dominant position.  

The FTC’s Mallinckrodt complaint alleges that while benefitting from an existing monopoly over the only U.S. ACTH drug, Acthar, Questcor illegally acquired the U.S. rights to develop a competing drug, Synacthen (a synthetic ACTH drug which is pharmacologically very similar to Acthar).  This acquisition stifled competition by preventing any other company from using the Synacthen assets to develop a synthetic ACTH drug, preserving Questcor’s monopoly and allowing it to maintain extremely high prices for Acthar.  

To judge by the FTC’s complaint, the case appears to contain some pretty stark facts which may have contributed to the immediate settlement of the proceedings by Mallinckrodt.  Those facts also bring the case squarely into line with the US and EU competition regulators’ current concern over excessive pricing in pharma.

First up is the finding that Questcor had a 100% share of the U.S. ACTH market and that it took advantage of that monopoly to repeatedly raise the prices of Acthar from $40 a vial in 2001 to more than $34,000 per vial today – an 85,000% increase.  The complaint details that in August 2007 Questcor increased the price of Acthar more than 1,300% overnight from $1,650 to $23,269 per vial and that it has taken significant and profitable increases on eight occasions since 2011 pushing the price up another 46% to its current $34,034 per vial.  Acthar is a speciality drug used to treat infantile spasms, a rare seizure disorder affecting infants, as well as being a drug of last resort (owing to its cost) for a variety of other serious medical conditions.  According to the FTC, Acthar treatment for an infant with infantile spasms can cost more than $100,000.  In Europe, Canada and other parts of the world doctors treat these conditions with Synacthen which is available at a fraction of the price of Acthar in the U.S. (Synacthen is not available in the U.S. as it does not have FDA approval.)  The FTC relies on the supra-competitive prices charged in the U.S. for Acthar as evidence of Questcor’s monopoly power as well as its 100% market share and the existence of substantial barriers to entry.

It is also part of the FTC’s case that Questcor disrupted the bidding process for Synacthen when the rights came up for acquisition.  According to the complaint, Questcor first sought to acquire Synacthen in 2009, and continued to monitor the competitive threat posed by Synacthen thereafter.  When the U.S. rights to Synacthen were eventually marketed in 2011, dozens of companies expressed an interest in acquiring them with three firms proceeding through several rounds of detailed negotiations.  All three firms planned to commercialise Synacthen and to use it to compete directly with Acthar including by pricing Synacthen well below Acthar.  In October 2012, Questcor submitted an offer for Synacthen and subsequently acquired the rights to Synacthen for the U.S. and thirty-five other countries and did not subsequently bring the product to market in the US.

In addition to the $100 million payout, the proposed court order requires that Questcor grant a licence to develop Synacthen to treat infantile spasms and nephrotic syndrome to a licensee approved by the FTC, a pretty far-reaching remedy.  

This case is the latest in a string of cases on both sides of the Atlantic relating to escalating pharma prices (as discussed in our previous blog posts here and here).  While companies retain significant scope to price products as they see fit, it reaffirms that pharma companies should be wary of implementing very significant price increases in the absence of good objective reasons for doing so.  This is particularly so where the increase is facilitated by commercial strategies such as acquiring IP rights to existing/potentially competitive products.  In the EU, it is also worth remembering that – as established by Tetra Pak I (on appeal to the General Court) – an agreement which falls within a block exemption can at the same time constitute an infringement of Article 102.  So companies and their advisors should remember to wear Article 101 and 102 hats when reviewing agreements.

Helen Hopson

We need to talk…about Pharmaceuticals and Standard Essential Patents

At the end of last month, Commissioner Vestager gave a speech at the Chillin’ Competition Conference. The focus: how competition law can protect consumers from anti-competitive behaviours. The Commissioner gave examples of situations in which intervention could be justified, two of which are of particular interest in the competition/IP sphere - pharmaceutical goods and Standard Essential Patents (‘SEPs’)

Pharmaceutical goods

Commissioner Vestager noted that people’s health often relies on a drug sold by only one company. This can be because the company has a patent, but may also simply be because no other companies are interested in coming to the market due to low levels of demand. This isn’t a problem in itself if prices stay at a reasonable level but if prices go up, the Commission suggested it may warrant action by the competition authorities.

This could not be more topical – just today the Competition and Markets Authority’s (‘CMA’) has taken a decision in the Pfizer/Flynn case, which relates to excessive pricing of an anti-epilepsy drug previously branded as Epanutin (we reported previously on this investigation here). We’ll be providing a more detailed update on the CMA’s decision soon but in the meantime, our readers will be interested to know that both Pfizer and Flynn Pharma have already announced that they intend to appeal. 

The Pfizer/Flynn case follows the CMA’s recently launched investigation into excessive pricing in the pharmaceutical sector in the UK. Concordia International announced that it was in talks with the CMA about this. However, the investigation is still at the information gathering stage, with a decision on whether or not to proceed expected in February of next year.  

An article published in the Times last week suggested that certain generics drugs continue to be subject to significant price increases – the only manufacturer of lithium carbonate tablets is reported to have raised the price of its product by £39 in the last month, and from £3.22 to £87 over the last year. 

Similarly, the Italian Competition Authority recently investigated Aspen, a supplier of cancer drugs to the Italian Medicines Agency, and in October 2016 fined it over €5 million for increasing the price of its cancer drugs by up to 1500% (see here for our report on this).  

Pharmaceutical investigations continue outside of the EU as well. Last month Bloomberg reported that the first charges in the US DOJ’s antitrust investigation into collusion over generic price increases investigation (spanning over two dozen companies) are expected by the end of the year.

The prevalence of investigations relating to pricing regulation in the pharmaceutical sector represents a major change in policy from the days when competition authorities were wary of acting as price regulators. Perhaps, as is evidenced by Vestager’s recent speech, this is largely due to a renewed focus on consumer interests.  But it is far from clear that it is sensible policy for the competition authorities to have to intervene in cases which arguably result from regulatory failures.

SEPs

In her speech, Commissioner Vestager also suggested that in some situations, phone makers may be forced to accept whatever terms they are presented with, regardless of whether these are actually FRAND (fair, reasonable and non-discriminatory).  This is particularly problematic where this takes place under threat of an injunction, and can mean that they end up paying unjustified royalties, with customers also paying more as a result. While FRAND disputes have been around for many years, the Commissioner emphasised that this remains a topical issue – with 5G and the Internet of Things, more and more products will be connected with each other; innovation is increasingly important and restrictive practices could stifle development.  

The issue of whether offers are FRAND has a reflection closer to home in the UK at the moment.  This week marks the closing submissions in the Unwired Planet v Huawei FRAND trial, which looks set to become the first EU case to determine what a FRAND offer is. A judgment in this case is likely to be handed down in the first few months of 2017… 

Excessive pricing: the Italian version

Pricing issues in the pharmaceutical industry have continued to keep competition authorities busy, this time with the Italian Market Competition Authority (AGCM) fining the multinational South African pharmaceutical company Aspen near €5.2 million on 14 October 2016, following its finding that Aspen abused its dominance to artificially inflate the price of four of its cancer drugs.

In its press release/statement, the AGCM stated that Aspen, which had acquired the rights to the four essential drugs (Leukeran (chlorambucil), Alkeran (melphalan), Purinethol (mercaptopurine) and Tioguanine (tioguanine)) from GlaxoSmithKline (GSK), had threatened to interrupt their supply to the Italian market in order to compel the Italian Medicines Agency to accept price increases for the drugs of between 300%-1,500% of the initial price. The drugs were described by the AGCM as “irreplaceable” and central to the treatment of blood cancers especially for children and elderly patients. In the relevant period Aspen was the only supplier of these drugs in the Italian market, which led to the finding that Aspen held a dominant position in the relevant national market and had unfairly increased the prices.  The AGCM noted in particular that there was no direct substitute for the drugs, the patents had been expired for years and no economic justification for the price increases could be established.

The antitrust authority applied a two-step test to determine whether the increase in pricing amounted to unfair pricing in contravention of Article 102. The AGCM first established that there was an excessive discrepancy between the manufacturing costs and the final prices of the products and secondly considered that the pricing was excessive and unfair, by reference to factors such as the change in prices and any economic basis for this change, any potential benefits for patients, and conversely any harm to the Italian National Health Service.

There is no easy method for competition authorities (or indeed companies) to determine what constitutes excessive pricing, due to the number of variables involved.  A justified price increase might be due to increased manufacturing costs or could be the reflection of a profitable market or a high-risk marketing strategy, among other factors.  Ultimately, the determination of when a price is excessive remains challenging, and – where pharmaceuticals are involved – may well vary from country to country.  As yet, the impact of excessive pricing on reference prices has not been examined.

Italy is not the only country to look at excessive pricing of off-patent drugs, however.  Another example from the UK (on which we have reported here and here) is the ongoing CMA investigation into the pricing of the anti-epilepsy drug Epanutin by Pfizer and Flynn Pharma (the latter having acquired the marketing rights of Epanutin by Pfizer in late 2012).   The CMA has recently updated its case file to push back the expected date of the conclusion of the investigation, to November 2016. The focus of the investigation is understood to be whether the pricing for phenytoin sodium capsules is excessive and unfair and thus constitutes an Article 102 and Chapter II abuse.

On the other side of the Atlantic, the antitrust authorities have considered similar issues with the 50-fold increase in the price of Turing Pharmaceuticals’ Daraprim and the more recent Mylan EpiPen controversy, caused by a six-fold price rise in the popular emergency allergy treatment.  In September 2016, Mylan became the subject of a congressional hearing on this subject. The allegations about increased pricing were followed by suggestions that Mylan had been misclassifying EpiPen as a generic, as opposed to as a branded product, in order to benefit from the lower rebate rate available (13%) than the equivalent for branded drugs (23%).  In this case, it was of significance that Mylan had a market share of around 90%, and the increase in pricing was accompanied by a direct increase in Mylan’s profits. The US FDA itself was criticised for not intervening more effectively in order to allow competing products to reach the market.

The complex topic of excessive pricing continues to be an issue in the EU more generally.  The announcement of the Aspen investigation has led to calls by public interest bodies such as the BEUC for the Commission to carry out EU-wide investigations into whether companies use similar tactics to increase pricing.  No doubt, as the case law develops, so will our understanding of when a company’s pricing tactics risk being in breach of Article 102.

Competition defences, patent litigation and costs…

A recent judgment from Mr Justice Roth in the Patents Court highlights the importance of parties considering the sensible case management of competition defences in patent litigation and potential cost implications.

The judgment is from a case management conference in proceedings between several parties including Illumina Inc, Sequenom Inc, and Premaitha Health Plc.  The case is primarily patent litigation that is due to go to trial in July 2017.  In April 2016, the defendant Premaitha Health plc sought to introduce various competition law defences.  Pleadings were already advanced on the technical patent issues and the defendant sought permission to amend its defence.  This was discussed at a CMC in April.  The presiding judge (Mr Justice Birss) adjourned the application to be heard at a later hearing.  The defendant had served its amended pleading only two days before the CMC and so he recognised that the claimants could not be expected to address a wholly new case at such very short notice.  The proposed non-technical defences addressed complex questions under competition law and the claimants were not represented by specialist competition counsel at that first CMC.  Regardless, the defendant pressed the court to grant permission to amend its defences at the first CMC taking the position that the claimants could subsequently on full consideration of the pleadings apply to strike them out or for summary judgment.  The judge (unsurprisingly) did not agree this would be appropriate.  He adjourned the application to a second CMC once the claimants had had time to consider properly the proposed amendments and had been able to give notice of the aspects of the defence to which they objected or consented.  He remarked that if this second hearing did not take place for some reason then the defendant would be given permission to serve the non-technical defences in the form annexed to the defendant’s application.

The second CMC took place on 1 July (the judgment has just been handed down).

Roth J, decided that actually the most appropriate course of action in terms of the efficient conduct of the litigation at this stage would be to further adjourn the non-technical defences application to be restored once the technical judgment had been handed down.  The main reason given is that the precise content of the competition law arguments in this case depends on the scope of the patents.  The market definition alleged by the defendant is framed in terms of patented technology that is an essential input to the allegedly infringing product produced by the defendant.  So any change to the scope of the patent in the technical trial could have a substantial effect on market definition and non-technical arguments that depend on that market definition.  Additionally, the Judge notes that the draft non-technical pleadings are vague and general in places and that a technical judgment would enable a much more sophisticated and tighter focus to be brought on the competition issues.  He also mentions two additional (but subsidiary) reasons why he thinks this is a more sensible approach: (i) the Commission is conducting a competition law investigation which appears to cover the same ground as in the draft non-technical defences (on which we reported here) and further clarity as to the Commission’s investigations should be reached by when the technical judgment in the current proceedings is handed down; and (ii) one of the non-technical defences relates to a settlement agreement between Illumina Inc and Sequenom Inc which to date the defendant has only seen a heavily redacted version.  Roth J suggests that this issue can be dealt with by way of further disclosure in due course which will enable consideration of whether the proposed pleading raises an arguable case.

On costs (which Roth J notes were significant), he ordered that they should be reserved (as a fair assessment requires knowledge of how the matter is going to proceed after judgment in the technical trial) save as to the defendant’s costs which the defendant had to bear.  He stated that an applicant (here the defendant) has a responsibility to consider how its application should sensibly be managed and determined.  He warned “[t]here may perhaps be some lessons from all this. If competition defences are now being introduced on this contingent basis in patent litigation, consideration needs to be given as to how the pleading, and any argument about strike out or summary judgment for the respondent to that pleading, should sensibly be managed. I doubt that this is the last case where such non-technical defences will be introduced”.

This case acts as a reminder of the importance of parties taking a reasonable position when asserting competition law defences in patent litigation and considering how they should best be case managed in the circumstances (or alternatively being prepared for costs consequences).  The facts of this case (notably, the proximity of the raising of the non-technical defences to trial and the defendant’s approach to how strike out or summary judgment should be handled) are not entirely standard and this no doubt had a particular bearing in this case.  However, given the propensity of the UK courts to be inclined to order “patents first, non-technical defences second” in the absence of agreement between the parties to the contrary, and also to defer to any parallel competition law investigation particularly where the alleged non-technical defences concern complex issues of competition law, the outcome is not entirely surprising.  Something for all defendants (and claimants) to keep in mind.

Patent Licensing and the Internet of Things – a Solution?

The Internet of Things (IoT) – a term used to describe the interconnectivity of electronic devices via the internet or wi-fi – is no longer an entirely new phenomenon.  Smart fridges, meters, watches and countless other connectable gadgets which have the ability to store and exchange data have been at the forefront of discussions by tech experts over the last few years.  The next wave of additions to the the IoT includes driverless cars and smart cities – and more as yet unimaginable changes may follow.

Issues such as security and safety, data protection and regulation have added a dash of reality to the otherwise positive picture of the IoT.  Nevertheless, an increasing number of companies are incorporating some form of connectivity into their business plans.  The most recent Ericsson Mobility Report for example, forecasts that there will be approximately 28 billion connected devices by 2021, of which 16 billion will be related to the IoT. 

However, one area that may pose a significant barrier to companies wishing to break into the emerging market of the IoT is in the arrangements to be put in place for the licensing of relevant patents and software.  The market for connected devices could be at risk of being ‘held up’ by IP disputes.  One question that has not yet been comprehensively answered is how makers of connected devices can acquire the licences necessary for their IoT products in a simple and efficient way.  

A possible solution has recently been introduced by a new licensing platform called Avanci.  Backed by Ericsson, Qualcomm and Royal KPN (among others), Avanci builds on the traditional idea of the patent pool. It aims to offer flat rate licences on FRAND terms for a collection of standard essential wireless patents, with the aim of removing the need to negotiate multiple bilateral licences.  If it works, this could speed up the expansion and uptake of the IoT.

The uptake of this initiative is yet to be seen. Its success is likely to depend upon a number of factors including:

  • Whether the licensors are able to find a mutually agreeable pricing structure;
  • Whether the price offered is acceptable to device manufacturers; 
  • The number of patent holders offering their backing to the initiative; and
  • The willingness of manufacturers to take a licence without forcing the patentees to resort to litigation and potentially costly FRAND disputes;
  • How the platform deals with the relationship between its prices and those applicable in any pre-existing bilateral deals.
It is already evident that some aspects of Avanci’s pricing may be controversial – for example, royalty rates will remain fixed regardless of how many patents are added to the platform.  This may sound like good value for licensees, but will it offer sufficient incentives for new licensors to join and make the platform a genuinely one-stop shop?  Or does it suggest that the early prices are likely to be rather high, to allow headroom for further patents to be added.  The use of fixed prices per device rather than percentage rates could also be contested by manufacturers of lower value devices, in particular if they are staring down the barrel of a patent infringement suit.

We will be continuing to monitor this fascinating space…

Testing the patent pool waters

EC’s Investigation of Illumina for anticompetitive conduct

Demonstrating that life goes on outside of Brexit, the European Commission has opened an investigation into Illumina and Sequenom for suspected anti-competitive conduct. 

The Commission will investigate suspected breaches of Articles 101 and 102 TFEU, stemming from Illumina’s and Sequenom’s patent pool agreement concluded in December 2014 relating to non-invasive prenatal testing patents (“NIPT”). 

The agreement allowed Illumina to develop and sell in vitro diagnostic kits for NIPT and enter into licensing agreements with third parties willing to develop their own laboratory-developed tests. The agreement settled the ongoing patent disputes between the two parties and resulted in Sequenom receiving $50 million upfront and royalty payments on sales from the patent pool structure until 2020.

The information on the Commission’s investigation emerged during a Case Management Conference in UK litigation, when Premaitha Health, itself involved in litigation with Illumina in relation to NIPT-related intellectual property, referred to a communication from the Commission regarding this investigation. The Commission is believed to be looking into, on one hand, whether the 2014 agreement constitutes a restrictive agreement and gives rise to abuse of a dominant position, and on the other, whether Illumina’s licensing practices have an anti-competitive effect.

This investigation will be a rare opportunity for the Commission to give a decision in relation to patent pools, an area in which it has previously issued guidance (for instance in the rules for the assessment of technology transfer agreements (adopted on 21 March 2014 here)).

This case is also indicative of a growing trend for patent pools in the life sciences sector. This model of licensing has traditionally been more widespread in the TMT sector. Perhaps a sign that the FRAND wars (on which we reported earlier this week) may in future spread beyond the world of telecommunications…

Time to modernise standards?

As part of its Single Market Strategy, the Commission has announced that it will take steps to modernise the EU’s policy on standardisation. In particular, the Commission will launch a Joint Initiative on Standardisation to modernise, prioritise and speed up the delivery of standards by 2019. This initiative is intended to bring together European and national standardisation organisations, industry, SMEs, consumer associations, trade unions, environmental organisations, Member States and the Commission. 
 
The Commission has also emphasised the services and ICT sector as priorities for future standard-setting. The former bolsters its digital single market initiative by facilitating cross-border services (see our previous posts here, here, here, here…). The latter follows on from its recent communication on its ICT standardisation priorities (see our post here).
 
In relation to standard essential patents, the Commission intends to “provide guidance to ensure that the licensing frameworks… continue to bring benefits to innovation and implementation of new technologies such as 5G or the Internet of Things” (see the Commission's Factsheet). The Commission doesn’t provide any detail as to the direction of its guidance other than to repeat the well-worn rhetoric of aiming to incentivise R&D investment, whilst promoting access to technology and interoperability. Interestingly, the Commission does note that royalty-free licensing agreements for SEPs are a type of FRAND agreement, rather than an alternative. Such agreements are unsurprisingly welcomed by the Commission.
 
The Commission’s initiatives promise great things but it remains to be seen what will materialise...