METI JPO-RIETI International Symposium

# Toward Solving Disputes over Standard Essential Patents (SEPs): Licensing 5G SEPs (Summary)

## Information

As we enter the 5G and Internet of Things (IoT) era, issues regarding solving disputes over standard essential patents (SEPs) could hinder innovation. Therefore, we must discuss how we can avoid or resolve disputes in a manner that will not restrict innovation in any way. In the first half of this symposium, David Kappos, former director of the United States Patent and Trademark Office, delivered a speech covering changes in the environment surrounding SEPs and trends in each country in recent years. Also, Randall Rader, former chief judge of the United States Court of Appeals for the Federal Circuit, delivered a speech addressing the current situation and issues of international arbitration for resolving disputes concerning SEPs. In the second half of this symposium, four panels explored the ideal modality of negotiations on SEP licensing, preventing disputes over SEPs involving parties from different industries in the 5G era, the concept for calculating FRAND royalty rates, and the utilization of international arbitration as a means for resolving disputes over SEPs.

## Summary

### Opening Remarks

KISHIMOTO Yoshio (Vice Chairman, RIETI)

We are honored to have Professor Kappos and Judge. Rader presenting today as special lecturers. After that, we will have panel discussions with many experts in the field.

Regarding solving disputes over SEPs and licensing 5G SEPs, a draft guideline has been created to facilitate negotiations. Recently, the Japan Patent Office (JPO) has been collecting opinions regarding the draft version of the guideline which it produced, and hopefully this will prove to be useful in the future.

The Fourth Industrial Revolution is occurring in Japan and 5G is coming. We hope that SEPs will be widely used during this time. During this symposium, disputes and resolutions in the 5G era will be discussed including international arbitration opportunities. There are diverse topics for the day, and hopefully will prove to be fruitful for discussion.

### Keynote Speech "Facilitating SEP Licensing -JPO's approach-"

MUNAKATA Naoko (Commissioner, Japan Patent Office)

Toward Smoother SEP Licensing—an approach by the Japan Patent Office

Spread of the Internet of Things (IoT) in which various types of infrastructure and equipment connect via the Internet, has brought about a major change in the parties involved in licensing negotiations. With telecommunications technologies now being used by a whole range of business types, members from the auto and service industries, for example, are being drawn into telecoms licensing negotiations. Small and medium enterprises too of course are not immune.

The Japan Patent Office (JPO) is currently developing a guide for Standard Essential Patent (SEP) negotiations to forestall SEP disputes or at least assist their early resolution. This guide is neither legally binding nor a recipe for negotiations that will automatically produce appropriate royalty rates. It is designed simply to serve as a reference in approaching negotiations.

Recent years have seen increasing cross-border convergence in case law as to how parties should behave in SEP licensing negotiations. The guide, therefore, offers some notes on factors for consideration in terms of the scope of information that should be provided by the parties at each stage of negotiations, along with response times. In addition, it lays out some factors for consideration in terms of the level of the supply chain from which businesses (for example, end-product manufacturers or component manufacturers) should be party to the conclusion of licensing agreements or should be involved in the negotiations.

The guide also lays out some factors for consideration in terms of how to determine a base for calculating royalties. Some patent-holders suggest that where SEP technologies contribute to the functions of an end product as a whole and to driving demand for that product, an Entire Market Value (EMV) approach should be taken, where the price of the whole end product will be the calculation base. Implementers have argued, on the other hand, that if a SEP technology is used only in a component comprising the smallest salable patent-practicing unit (SSPPU), an SSPPU approach is appropriate, where the price of the component will be the calculation base. Patent-holders also say that if a technology is used in different end products, the royalty rate and amount should differ according to the use—in other words, a use-based licensing approach should be taken, while implementers counter-argue that applying different royalty rates constitutes discrimination and contravenes FRAND terms.

SEP disputes tend to be international, with rights contested simultaneously in a number of countries. Alternative dispute resolution (ADR), such as mediation and arbitration, enables disputes over multiple rights in multiple countries to be settled as a package. Arbitration awards in particular can be enforced internationally under the New York Convention, opening the way for the expeditious and effective resolution of international disputes, and therefore international arbitration would be an effective means of resolving international SEP disputes.

I expect heated discussion in this symposium, which will provide a productive and meaningful experience for us all.

### Special Lecture 1: "Changes in the Environment Surrounding SEPs and Trends in Each Country in Recent Years"

David KAPPOS (Former Director, United States Patent and Trademark Office)

Nurturing the type of innovation that transformed 5G from the abstract to the concrete depends on how we value and protect intellectual property and standards. That requires balance because any time you have two positive activities in tension with one another, it is the balance between them that enables both to succeed. Balance should be prioritized.

The Fourth Industrial Revolution is defined by IoT which uses innovative standards such as 5G as network building blocks. If the IT era dominated progress in the 20th century, standards-based innovation will likely dominate the 21st century. Standards-based innovation creates ecosystems that produce many winners, starting with consumers and products that are created. As important as standards-based innovation are, they also involve substantial risks borne by the innovators themselves.

Incentives must be in place to continue to nurture critically important standards-based innovation. To create a balance between standards and SEPs, fresh priority should be placed on protecting innovators because innovation is where the action is and where it matters most.

The U.S. Intellectual Property (IP) System

The U.S. IP system has weakened and is now only the 12th strongest in the world. This weakened system has encouraged more companies to hold their innovations as trade secrets. Basically, concerns over patent trolls was one major factor in the push to weaken the U.S. IP system. To counter the issue of patent trolls, the U.S. Supreme Court scaled back patent strength. In 2011, the American Invents Act (AIA) was passed. Most states have passed legislations setting tough rules for infringement to put further downward pressure on patentees. It is fair to say that the United States has addressed its troll problem.

Antitrust vs. IP

Turning our attention to how anti-trust concerns led to a misguided effort to weaken patents generally and SEPs in particular. Antitrust law and intellectual property law are viewed by some to be fundamentally incompatible. While short term costs of intellectual property rights are immediate and apparent, the benefits of intellectual property rights occur in the longer term. When we weaken incentives to innovate, we can't know what innovations we have preempted and how much better off those innovations would have made us.

Antitrust regulators seeking to correct what they viewed as an IP system exceeding its proper bounds saw SEPs as a prime example. Their belief was fed by the then popular theories of SEP friction with antitrust, namely, in the form of patent hold ups, royalty stacking, and broken fair, reasonable, and non-discriminatory (FRAND) norms. Although these theories sounded plausible 10 years ago, data have shown there is no evidence that these factors and the problems they claim to impose on standards implementers occur.

European courts have taken a balanced approach. The court of justice of the EU placed requirements on both SEP holders and implementers regarding when SEP holders can enjoin implementers.

Things may also be changing in the U.S. Department of Justice (DOJ). For the first time in our history, the DOJ's top antitrust attorney is also a registered patent attorney. He has stated publicly that previous antitrust policy strayed too far in protecting the interests of implementers at the expense of innovators.

These recent events demonstrate that authorities are beginning to realize that good faith policy calls for balance between the interests of all parties. A balanced approach is particularly important for policies of standard setting organizations (SSO) because they are critical as stewards of standards and SEPs. However, some SSOs, based on the perceived threats of patent hold-up and royalty stacking, have taken an unbalanced approach—for example, IEEE's decision to amend its patent policy to mandate reasonable royalty rates account for SSPPU.

The SSPPU was developed to address admissibility of damages testimony in jury trials. It is an evidentiary tool to prevent juries from being swayed by large revenue figures that do not relate to inventions. SSPPU is a determination of admissibility of evidence that lies with the discretion of a trial judge, but it is certainly not the only guidepost or mandate. There are multiple reasons why the SSPPU theory should not be applied in the SEP licensing context.

Despite how much value standards-based innovation has for employment, opportunity, consumers, and society, innovation deployed through standards is under siege. Policymakers must realize that leadership in innovation requires carefully crafted policies that balance the interests of both implementers and innovators. There is no incentive for innovators to continue to contribute to standards in the face of an unattractive investment environment unless there is a commitment to protect the interests of innovators with strong intellectual property rights (IPR) enabling innovators to recoup their investments through reasonable royalties.

In conclusion, a system where everyone is incentivized to take and no one to give presents a classic tragedy of the commons. Licensing is the most natural and scalable method of sharing value among a few innovators and many implementers. As we further reduce the royalties paid to innovators, the value generated by innovators is not so much licensed as it is appropriated. The countries who take leadership in incentivizing innovators will be poised to reap the tremendous economic opportunities that flow from their creative endeavors. Let's remember that innovation matters most.

### Special Lecture 2 "Current Situation and Issues of International Arbitration for Resolving Disputes Concerning SEPs"

Randall RADER (Former Chief Judge, Court of Appeals for the Federal Circuit)

In general, our licensing system works very well. Most competitors, innovators, and licensers reach agreements. It is only a small percentage of instances where there are disputes. However, these disputes can be very important because they can upset the balance that affects the entire process.

The process of dealing with a complex SEP case is a challenging endeavor. Thousands of patents are often dealt with and grouped in different portfolios. Complex arguments of impacts on different markets with different markets are being discussed.

##### Factors that influence the dispute resolution system

To give you a feel for the forces that drag this dispute resolution system in different directions; there is a vast variety of companies involved in the 4G area. Contributions from these companies must be balanced against the standard-setting need.

##### The U.S. court analyzed different factors that contribute to the value of the patents

The top-down method approach means the court looked at the value of the entire product and tried to isolate the part of that product covered by the standard. The idea of the top-down approach is that you are taking the value of the product and what the standard has contributed to that entire product, and then determining what share of that standard is attributable to the few patents in suit. What we are beginning to see is that there isn't a sound set of principles that we can grab to say this will maintain the balance between the implementers and the innovators. The implementers refusing to license is a bigger problem than the innovators refusing to offer a license. It is important for us to recognize that both forces are present, and they are at least equal.

Europe has made a larger effort to force the parties back into the licensing procedure which is what really works when the parties know all about economics, markets, and products.

An important question posed is if we can impose remedies beyond our borders? You can't have enforcement of a contract which promises nondiscriminatory licenses worldwide without extending them worldwide. In the United States, the issue of different courts reaching different results in cases involving similar or the same patents is damaging because the ultimate result is uncertainty. Uncertainty disrupts this licensing regime which must work to preserve the balance between the innovator and implementer.

There is really no consensus on methodology, remedy, or whether antitrust is to be a major force and what contribution it is to make in the dispute resolution process. There does seem to be three clear rules: uncertainty, multiple appeals, and expense. I suggest that perhaps the way to return the balance to the implementer-innovator licensing system is to keep the focus on the licensees and the licensors; the parties that know and use this technology; and the parties that actually drafted the standards. Maybe that can be done best by resolving their disputes when they occur through arbitration. There are some concerns, the top of which would be the speed at which it can be completed. Another potential problem is that there is no appeal.

If there were to be an international arbitration center in Tokyo, it could gather together leading experts from around the world with leading acknowledged patent experts. Japan would be a great site for such a center because it is one of the largest economies in the world, but is renowned for its openness to balance.

Dispute resolutions are costly, and I think this can be done better. To address the difficulties of an international arbitration system, first, let's not have a lengthy process. Let's have a 1-year time limit. Second, the appeal issue could be accommodated with a board comprised of a leading judge. The board could review every decision, but the parties can have the ability to request a hearing to point out a major error.

In conclusion, I would suggest that this is the time—as we are at the beginning phase of the 5G revolution—to think collectively about the best way to put the licensees and the licensors back in the position of maintaining balance in their own industry. That can be done with the promise of a confidential dispute system if agreement can't be reached.

### Panel Discussion 1 "Ideal Modality of Negotiations on SEP Licensing"

Heinz GODDAR (Senior Partner, Boehmert & Boehmert / German Patent Attorney and European Patent and Trademark Attorney)

The meaning of licensing is the justification which is given to the developing world by the developed world (the patent owners). Why should there be a strong IP system? It is for not only creating innovations but also sharing the promotion of technology transfer. If the system is not strong enough, we can't create innovations anymore and can't share with others.

#### Presentation 1

NAGASAWA Kenichi (Group Executive of Corporate Intellectual Property & Legal Headquarters, Canon)

We would like to pay more attention to the balances. The number of patents have evolved and increased drastically. As far as I remember, for public telecommunications, video streaming, compression, and wireless, there are over 10,000 SEPs. Can startup and venture companies all read more than 10,000 patents in a thorough manner? If they can't, they just keep silent which leads to a hold out problem.

We cannot only talk about SEPs because if we only receive SEP licenses, we will not be able to produce products. In the case of cross licensing, we need to consider about many contract factors, such as what product/technology in particular should be excluded and what specific time frame should we adopt as a deadline. Also, in actual practice, if we have some patents, we will not just try to license SEPs alone because protection for the business is not sufficient. If we have SEPs, we will be declaring them as much as possible. Therefore, it requires time to consider such factors when making a contract and negotiating. However, based on my own experience, prolonging a negotiation is being observed for some of the parties involved. If prolonging the periods does not constitute substantive discussion related to the contract it could be regarded as bad faith.

For SEPs FRAND declaration, we think that a blanket declaration without identifying specific patents are desirable. Also, judgment of essentiality is very difficult to make. It is important "who" judges and "how." I hope that the transparency will be ensured as much as possible.

#### Presentation 2

SUZUKI Masabumi (Faculty Fellow, RIETI / Professor, Nagoya University Graduate School of Law)

With respect to litigation involving FRAND-encumbered SEPs, there are several different types of disputes depending on the contested legal issues, but here I would like to focus on the kind of disputes where SEP holders try to enforce their rights. FRAND has two aspects and refers to a range or set of licensing terms, and acts as a process to agree on licensing terms. Because of these two aspects, we must think about FRAND in the licensing negotiation. While it is a global trend to limit the enforcement of FRAND-encumbered SEPs, the approaches taken by courts in different countries are diverse. There are basically two approaches: the contractual approach and the competition law approach. Some court decisions in the United States and the United Kingdom recognized a contractual obligation by SEP holders to implementers (third party beneficiaries) based on the FRAND declarations. The Japanese IP High Court also recognized a good faith negotiation obligation for SEP holders. These are examples of the contractual approach. The competition approach has been taken in Europe, particularly by German courts and the Court of Justice of EU. What are the differences between these two approaches? Under the latter approach, the impact on competition needs to be examined in order to restrict the enforcement of SEPs. Treatment of damage claims can also be different in the two approaches.

#### Presentation 3

Christian LOYAU (Legal Affairs Director, European Telecommunications Standards Institute (ETSI))

In French law, a FRAND license agreement presents something similar to a lease agreement provided that it complies with the code of intellectual property. Thus, France is basically under a civil structure. Under this civil structure, France introduced the notion of good faith negotiation. What we've realized is different countries have different benchmarks. Standardization, licensing, and disputes are international, but dispute resolutions are only national. Arbitration may be a solution to this. In an alternative dispute resolution (ADR), we are missing a mediation phase which is important. What the commission has stated is communication—mainly three things: transparency, valuation, and enforcement.

#### Presentation 4

Gustav BRISMARK (Chief Intellectual Property Officer, Ericsson)

The focus today is on 5G. We are entering a new era where we need new licensing standards. The main reason is because we anticipate the adoption of 5G to enter new areas. In the future, anything that can be connected will be done so. Ericsson has seen that there needs to be an incentive for both sides to negotiate and find an agreement. The problem that we've seen with hold ups is due to the fact that companies entering the market have not viewed it as a need to engage in negotiations. Price differentiation plays a crucial role because different prices allow for maximum adoption of standards for IoT.

#### PANEL DISCUSSION

GODDAR:
In German patent law, if a license has been granted under a patent, there are no problems when that patent is sold. The license sticks to the patent. Thus, entities cannot buy patents and strip off the license. They would still have to fulfill the license. There must be a contract, however. The German Ministry of Economy has a major concern about what to do with the FRAND declaration which is not a license and doesn't stick automatically by law to the patent. What does ETSI think about this? In France, does FRAND stick with the patent if the patent is sold somewhere?

LOYAU:
In the IPO policy, it is stated that the FRAND declaration must stick with the patent. That is part of the obligation of the declaration. Also, the question is if it is a third party beneficiary commitment to license or to negotiate?

GODDAR:
A possible solution that was discussed in the Ministry of Economy is whoever gives a FRAND declaration has to give a license to a pool and the pool has a license. This could lead to a patent having a license stuck to it. Should there be or does a FRAND application mean that to avoid discrimination, there must be an offer to all to get a license? If there is a remote party interested, is that party completely entitled in an FRAND license?

BRISMARK:
In short, there needs to be access for all. There should be access to all, and I think if you license one end product maker, you will have to license all of them.

LOYAU:
Basically, there should be access to all. But there is a big question of when licensing downstream the value chain, what is happening with the upstream cases? Something must be done if we want to have open standardization and continuous innovation.

SUZUKI:
I agree with licensing for all. However, because the patent right extends only within the country of registration and the possibility of disputes is limited to certain locations, there is a geographical limitation as a matter of fact.

NAGASAWA:
Of course, licensing for all. Being under a contract approach, those who declared FRAND will be obligated which could be problematic.

#### Q&A

Question:
Hold ups were regarded as a problem. As a rights holder, what are the options available? Litigation? Injunction? What is your view and what kind of remedy is possible? Are there options available for remedying the set rights holder?

BRISMARK:
As a rights holder, we need to think long term. We have seen an increasing problem with hold ups. In the end, my hope is the incentive to come to negotiated solutions will increase again by the development of the legal system.

LOYAU:
If you want to ensure that you have a successful standard, then you cannot afford to have either one or the other. We come back the topic of needing balance again.

SUZUKI:
I can't agree more with the problem of hold ups. At the same time, concerns for hold outs have also started to be stressed more by academic researchers. In order to achieve balanced dispute resolution, rather than introducing a completely new mechanism, we should resort to the current mechanisms with the IPR policy, utilizing the concept of FRAND. I hope we can have globally harmonized mechanisms. Dispute resolution should be made as quickly as possible, and realistic approaches should be taken.

NAGASAWA:
Negotiation is almost impossible for hold ups. One solution to that is to make a patent pool. In that case, the patent pool owner will use their right to act. Regarding licensers, for patents other than SEPs, they can list them as part of the whole group and discussion could ensue.

Question:
One thing clear is that antitrust law is always applicable because it is compulsory. What is the difference between the contract approach and the antitrust approach?

LOYAU:
I don't see much differences between the approaches.

SUZUKI:
As I pointed out, the effect on competition must be examined in the competition law approach. There can be a difference in handling claims for damages. When both parties are acting in a FRAND manner, the extent of damages the SEP holder can claim for may be different under the two approaches.

NAGASAWA:
The coverage of scope is different. In the case of contract law, with or without FRAND declaration matters. To apply it more broadly, if you are doing some standard-setting activities, you will be required to make a FRAND declaration. From this, you will cover a broader area for activities. For the competition law, a market-dominant principle is applied. However, if you are holding ownership of the SEP law, would that automatically constitute a dominant position or not? That requires more discussion.

### Panel Discussion 2 "Preventing Disputes over SEPs Involving Parties from Different Industries in the 5G Era"

David KAPPOS (Former Director, United States Patent and Trademark Office)

How does a policymaker go about reducing disputes in general enabling other to agree to bilateral terms? Disputes are prevented when parties have reasonable expectations, when they understand where each other is coming from, and when the legal system facilitates cooperative consensual resolutions to negotiations. If you want negotiations to conclude efficiently, innovators need to come in with reasonable positions. Implementers need to be responsive and show a willingness to engage toward resolution.

#### Presentation 1

Dan LANG (Vice President of Intellectual Property, CISCO)

I reject the idea that this is an issue between innovators and implementers. We are dealing with complementary forms of innovation. When we have disputes over SEPs, we are not talking about innovators, we are talking about how we value different kinds of innovation relatively. The goal of having patents is to drive innovation so that people can benefit from the technology. Standards alone are not useful unless until they are implemented, and there is a tremendous amount of complementary innovation that follows. Complications with royalties cause disputes. There are numerous important standards that are royalty free which have been successful. If we are going to alleviate disputes, what are the things we can do to set valuation? What can we do to make valuation more predictable? I think we should focus on the SSPPU. Assigning different SEP royalties to different uses means that the SEP holders are expecting value from the innovation of others.

#### Presentation 2

Max OLOFSSON (Director of Licensing, AVANCI)

The number of patent holders and product manufacturers increases with every new generation that we standardize. The patent holders find it increasingly difficult to license their patents. For small companies, it is becoming almost impossible which leads to the situation where patents are sold much more than before. That doesn't really contribute to simplicity and transparency. This lack of transparency is probably the biggest problem. The most important ingredients for preventing disputes over SEPs from different industries are simplicity, transparency, and predictability.

#### Presentation 3

For companies whose business model is based on licensing, getting a fair return is very important. Regarding expanding to new industries, we would like to expand to automotive. We commissioned independent research into the value consumers put on connectivity in autos, and the results suggest a range of $400-$1,000 per car. There is a practical question of what is going to be the license. We always license the complete, fully functional end product.

#### PANEL DISCUSSION

KAPPOS:
Max, can you comment on the TCU as the licensing base? Can you comment on how the TCU works as a royalty base for charging for the cellular connectivity component of an automobile?

OLOFSSON:
We have not focused on a royalty-based times a royalty rate, but rather a price per car. The point is that the cars will have more than one connectivity unit because you don't want to mix up the entertainment system with other units. So, there are many units in a car which can become quite expensive. It is much more transparent to license on the top level. It is too complicated to license on lower levels.

LANG:
The right approach is to simplify and focus on the SSPPU that is very common to other technologies and not get caught up by complexity.

OLOFSSON:
The point is transparency and predictability. The car companies we talked to said they would pay more if their competitor has fewer connectivity components. The way to make it simple is to pay one time for the whole car regardless of how many components there are.

KAPPOS:
If tier 1 suppliers can participate in the negotiations, disputes can be resolved. On the other hand, bringing in third parties is just a way to complicate things. Is it okay to have the tier 1 suppliers at the negotiating tables to help solve disputes?

RAHNASTO:
We are used to seeing many experts in licensing discussions. The challenge is that ultimately someone must make a decision as to whether they start paying a license fee.

KAPPOS:
Max, please tell us about your BMW experience. Take us through how that tier 1 experience played out for you.

OLOFSSON:
In the beginning, it was not a constructive discussion, but it changed and all three of us saw the benefits of licensing the cars. In other discussions we have had, the tier 1 suppliers were not keen on taking the license. BMW realizes that if it has a license, then it knows exactly what patents are licensed, what products are licensed, how long they are licensed, and it doesn't have to rely on obscure indemnification promises.

KAPPOS:
Can you elaborate on changing the discussion with the tier 1 supplier from unconstructive to beneficial?

OLOFSSON:
Insight came when the tier 1 supplier realized that there would be many modules in the car. If people sit down and analyze the problem, solutions will come if there is a willingness to find the solution.

RAHNASTO:
In licensing, people are afraid of making a big mistake.

KAPPOS:
From the perspective of an implementer, can you talk about why is it that a piece of information that could be conveyed to the implementer will help them make a positive decision toward taking a license and avoid being deemed to be negotiating in bad faith?

OLOFSSON:
We are placed between the product manufacturers and the patent holders. We try to find a solution, so we listen to both sides. Transparency is the key here because people will trust each other.

KAPPOS:
From a licensee's perspective, what frustrates you such that you wish you could get licensors to tell you what is necessary to enable you to make a good decision as to whether to take a license?

LANG:
It's not a piece of information that we are missing, but rather if the amount is realistic. If they are respecting the product and its value, that goes a long way.

RAHNASTO:
We have a systematic approach to our licensing, so we provide information packages. I think it is difficult to have a single patent and collect significant royalties. I think interest in pooling also plays a role.

#### Q&A

Question:
Let's talk about the value added to the user of a technology. How do you determine the value?

RAHNASTO:
We use external economic consultants to provide us with data about connectivity in the auto industry, for example. You need to have a willing seller and buyer, and it is about accruing a price that reflects the expectations on both sides.

LANG:
I think we need to get back to it being a flat value, and we have price discrimination in other aspects of business, and it is not appropriate for standard setting.

Question:
What kind of problems do you anticipate for ordinary citizens depending on the industries?

KAPPOS:
Statistics show that disputes over SEPs peaked several years ago. Something like 60% or more of all of the disputes were accounted for by just two companies that had a global patent war. Since then, the number of disputes has been going down.

RAHNASTO:
In the IP world, we always have disputes. It looks like the peak in litigation was a few years ago.

OLOFSSON:
I think the public will be minimally affected because it has been minimal so far, and I think the only problem that may arise is if all product categories in one vertical industry are injuncted. I see no problem for the public.

KAPPOS:
What about a system which is empowered to give a warning sign when either party engages in reckless or unreasonable behavior as a way to help keep parties in some reasonable norm?

RAHNASTO:
If people misbehave, I think there should be consequences. The question is what the right way is of implementing something like that; it could be in courts or arbitration panels.

LANG:
We already have some similar measures in the United States.

### Panel Discussion 3 "Concept for Calculating FRAND Royalty Rates"

NAGAOKA Sadao (Faculty Fellow, RIETI / Professor, Tokyo Keizai University / JPO Economic Advisor)

Before starting discussions, I would like to remind the audiences that the views expressed by industry experts today are those of the individuals and not necessarily those of the firms they represent. First, I would like to present four questions about FRAND. Is it reasonable to include the perceived market values that standards have achieved into the royalties? How can reasonable royalty rates be calculated (in particular, what is the appropriate royalty base?) Is establishing royalty rates based on the intended use of patents considered discriminatory? Does FRAND include global licensing terms? As starting points, I would like to also express my own views on the economic principles of FRAND licensing. Royalties linked with the downstream value of standards can serve as incentives for the upstream investments for developing and contributing a new technology to standards. Royalty base should be chosen to maximize the total value of the SEP holders and the implementers, including its effects on the innovation incentives. Differentiation of royalties across different markets per se is not discrimination and can enhance the value of standards. Standards are global so that a national court addressing the global license question would greatly save the costs of diffusing the standard.

#### Presentation 1

John HAN (Senior Vice President, Qualcomm Inc. and General Manager, Qualcomm Technology Licensing)

Technology innovators like Qualcomm take huge risks by spending billions of dollars in developing fundamental technologies for potential adoption by standards bodies years and sometimes decades in advance; when the risk and unknowns are high. We do this to develop the ecosystem by solving system-level problems and provide technology that enables everybody to bring the best product to the market. Due to our long-term commitment to research and development and the importance we attach to intellectual property rights, Qualcomm has filed for patent protection in over 123 countries with a global patent portfolio of over 130,000 active patents and patent applications.

Patent-by-patent licensing is where you have one, two, or a limited number of patents and take a look at the claims from those patents for particular jurisdictions, and get into a licensing discussion. Because of the size and breadth of our patent portfolio and new patents being granted or applications being filed on a regular basis across the globe, the last thing we want is to do patent by patent licensing. Qualcomm and our licensees both want to avoid having inefficient and repeated licensing discussions by discussing, negotiating, and taking a license one patent at a time for one product at a time. Accordingly, the cellular industry has adopted global portfolio based licensing as a way for both parties to achieve an efficient and practical licensing arrangement for large patent portfolios. Major patent holders like Qualcomm therefore license their innovations through portfolio licensing whereby through a single agreement, a portfolio of granted patents and all of the newly granted patents during the term of the agreement are licensed for all of the covered products manufactured/sold by the licensee during the term of the agreement.

#### Presentation 2

Dylan LEE (Deputy Director for IP Licensing and Transaction, Huawei)

As of last year, we have about 74,000 granted patents globally, which is not including the patent applications. A large portion of our patent portfolio are SEPs. Also, we are a very active contributor to the 5G standards. I believe the license scope will be influenced by various factors, such as the countries where the products are manufactured and sold, the strength of the patent portfolio, the legal environment in different countries, etc. Regarding 5G and IoT, I believe the aggregate royalty rate can be lowered. A "one-size-fit-all" approach is not desirable in the 5G/IoT context and thus that is why flexibility is needed. Many people think the patent pool could be a great idea in 5G/IoT, but in the 3G and 4G era, the patent pools for the licensing of the 3G and 4G SEPs have been largely unsuccessful in the smartphone industry. Thus, I doubt it could be successful in 5G/IoT.

#### Presentation 3

TAKAHASHI Hiroshi (Manager, IP Development Section 1, Innovation IP Department, Panasonic Intellectual Property Management Corporation)

Panasonic acts as the licensors and licensees as well. Accordingly, the company has experienced both aspects of IPR. 5G and IoT are new topics, and they are changing some business. In turn, the environment around SEPs are changing also. As was mentioned before, we believe that a balance would be beneficial going forward. Regarding calculating royalties, determining the royalty base is still problematic. Various implementers use communication technologies for a wide variety of services and products. Therefore, the degree of benefit which one implementer gets can be different from the degree which another implementer gets. Regarding the first question from Mr. Nagaoka, it is very difficult to determine a royalty before products complying with an industry standard are marketed. It may be more proper to limit an aggregate royalty stack because it is not reasonable that the accumulated value of SEPs exceeds the value of the standard as a whole. Regarding the second question, entire market value (EMV) is one extreme, whereas SSPPU is the other extreme. For the third question, royalties should be determined based on the degree of benefit which one implementer gets from the standard technologies in consideration of product classification, product price, sales volume, and benefit rate, even within the same standard. Lastly, which is more proper, a single worldwide rate or a regional rate, which depends on the case in consideration of the stage of the economic development of the country, the country of sale, and a regional area where the standard is adopted.

#### Presentation 4

BJ WATROUS (Vice President & Chief IP Counsel, Apple Inc.)

A suggestion has been made that this is a fight between innovators and implementers. That is not correct. This is a discussion that is taking place between two innovators about the value of their contributions and patented technology. Think about the fact that we have made a lot of progress since 2007, when we were out of balance. Now, in 2018, licensors and licensees have a lot more in common about FRAND valuations and a lot more in balance than the past. Injunctions on SEPs are and should be disfavored. They can distort FRAND valuations because they create hold ups. Patent merits matter. Royalty stacking is a concern. Apportionment is required. The value of a FRAND license should be related to the patented technology, not to the value of standardization or the end product.

#### PANEL DISCUSSION

NAGAOKA:
I think there are no disagreements among the panelists for characterizing the value of the SEPs as value added to the end product. At the same time, royalty stacking is an important issue. According to some panelists, although views doubting that were expressed in an earlier session, having a cap on the aggregate royalty could alleviate the royalty stacking. May I invite Mr. Han to comment on this issue?

HAN:
Before the technology is standardized and before we know what kind of patent portfolio strength and value we have, it is incorrect for somebody to set an arbitrary number for the aggregate royalty that can be charged for that patented technologies. Second, you cannot assume the value of all patents (or SEPs) is the same or even similar. Accordingly, numeric proportionality may not be the right mechanism to distribute royalties across patent owners. Simply doing patent counting that can provide an easy answer may not reflect the true value of the patented invention and may not be what is best for the industry.

NAGAOKA:
Thus, there remains a question of how the aggregate royalty concept can be implemented, even if it is desirable. I agree with Mr. Han on the complexity involved in implementing an ex-ante framework for royalty with appropriate consideration of R&D incentives for standards development. As for the other issues, I believe that there are broad agreements among panelists. The choice of an appropriate royalty base is best left to the negotiating parties, reflecting the nature of the product and the scope of the contributions of the SEP patents. Differentiation of royalties across different markets or across countries with different levels of development would not constitute a violation of FRAND terms.

### Panel Discussion 4 "Utilization of International Arbitrations as a Means for Resolving Disputes over SEPs"

#### Presentation 1

KATAYAMA Eiji (Attorney at Law, Patent Attorney, ABE, IKUBO & KATAYAMA)

With respect to international arbitration for SEPs, dispute systems that are discrete can be integrated, and an arbitration panel can be spread across countries. Former judges can be invited to take part as arbitrators. They could be chosen to oversee the panel. The experts could be managing the ruling, and it would be reliable and credible. Time wise, reliable arbitrations are quicker than litigation in courts. There are some concerns, for example, the licensor and licensee could be unwilling to use arbitration.

#### Presentation 2

Klaus GRABINSKI (Judge, Federal Court of Justice (Bundesgerichtshof), Germany)

Arbitration requires an arbitration agreement. The normal order of arbitration is that parties make an agreement, and, in the unlikely event that a disagreement occurs, they agree to go to arbitration. In SEP disputes, the parties start as being at odds. They still must agree on arbitration. The motivations to go to arbitration are that parties can be kept confidential, arbitration can be quicker than court litigation, and both parties influence who will be the arbitrators. The disadvantages are arbitrators do not have the power to issue an injunction, the arbitrator does not have jurisdiction on patent validity, and arbitration has no public case record. Other than arbitration and litigation, there may be a third option by bringing the initial SEP case to a court and transferring the determination of the amount of royalties to arbitration.

#### Presentation 3

Zhipei JIANG (Former Chief Judge, IP Supreme People's Court)

Resolving disputes in an efficient and fair manner is essential for economic growth. China has emphasized two judicial policies for resolving disputes; judicial protection dominates the protection of intellectual property rights and having multiple ways of resolving disputes. The obstacle of solving disputes through arbitration is that parties must have an arbitration agreement. For that to happen, the arbitration agreement must be attractive for the parties. The parties should believe that the arbitration is reliable and convenient.

#### Presentation 4

Randall RADER (Former Chief Judge, Court of Appeals for the Federal Circuit)

An injunction won't be necessary because the parties have already entered agreement to take a license. The parties can't agree on appropriate royalties. A mediation component is a great idea for the arbitration process. I also strongly support the idea of having an international arbitration center in Tokyo. The two great advantages of this would be it would be the only arbitration with a default time limit of one year. The second point is it would be the only arbitration system where the parties could petition something they see as a major error. This center could make a significant contribution to SEP licensing and other forms of economic dispute.

#### PANEL DISCUSSION

TAMAI:
What do you think about the idea of having an international arbitration center for SEPs in Tokyo?

KATAYAMA:
I think it is a very good idea. The court system is fine, but having another forum determine this sort of thing is valuable. It gives the users another option.

TAMAI:
Is the time limitation of one year appropriate?

GRABINSKI:
From my experience as a judge, I think it is possible. You must keep a very strict timeline, and the parties must adhere to it. You won't be able to deal with hundreds of patents; you would have to make a choice. It would also have the advantage of having a one-stop global dispute resolution. In court, litigation is in parallel. I am critical about material law. In arbitration, when materials are not published, you don't really know the criteria.

TAMAI:
I would like to ask the audience about three choices by show of hand; one year would adequate, two years would be adequate, or three or more years would be adequate.

Regarding the selection of laws, I see it as a strength of arbitration. You can select the laws you want to have applied by the three arbitrators. They would be bound to apply that law, but you may elect to use the law of France.

TAMAI:
Which law would you like to choose?

It is common to argue on the choice of law question.

GRABINSKI:
This is not a normal arbitration situation. It is easier to agree on a law that is applicable when the parties like each other. If there is already a dispute occurring between the parties, the parties will choose a law that is more in their favor.

We would go through that same selection process of law, but we would do it in a manner that doesn't bring a swift global decision. It would be better to do it in one year using the international arbitration center.

TAMAI:
Would you have any experience of being supported by specialists in courts in China?

JIANG:
Retired judges often join the arbitration. Enforcement of arbitration has been occurring more often in the local courts recently. If you refuse enforcement, you must submit an application to the supreme court.

TAMAI:
The judgement of international arbitration would be less predictable than the decision in the courts. It depends on the choice of the arbitrators. How can you get a unified decision in international arbitration?

To get a unified decision, the arbitrators must deliberate and come to a decision. There is a strong tradition of attempting to reach a unified decision, so the three arbitrators will spend a lot of time in discussion. That tends to supply a credible legal judgement. They seem to have more clarity than court opinions. Court opinions must accommodate past judgments and avoid any conflicts. They become interesting literary productions, but the finest legal work I have seen has been in a well-crafted arbitration decision.

GRABINSKI:
I would say deliberations between German courts and arbitrations are, more or less, the same. It is true that the courts try to be consistent and predictable in the long run. You cannot control arbitration, but they also try to be consistent. I think the approach is mostly the same.

TAMAI:
Even in the countries of the New York Treaty, if the decision would be contrary to the public, it is not enforceable in that country. This means arbitration wouldn't provide the final solution. What do you think about this?

KATAYAMA:
The arbitrators will be careful enough when they decide a case.

In the United States, an arbitration decision is enforced by the courts unless it has departed so drastically from the law that it has no semblance of credibility.

GRABINSKI:
Punitive damages would be a problem. Regarding royalties, I think it should not be a problem.

TAMAI:
How is the situation in China?

JIANG:
Arbitration usually handles the contracts and business disputes. After some regulations were passed, few domain cases went through to the courts.

TAMAI:
Regarding the combination of mediation and arbitration, how can we combine these and what are the roles?

Mediation is a great skill where an officer helps both parties see the value of the settlement. In my experience, mediation tends to work better when it is combines with an ongoing judicial proceeding and not when there is a mandatory requirement from the court that you must go to mediation before you go to trial.

GRABINSKI:
In German procedure, it is provided that the judge should try for mediation between the parties. Since we are talking about patent infringement cases, it is very difficult to mediate when the result can either be infringement or no infringement. Usually in patent infringement cases, there is no mediation.

TAMAI:
We have three choices. One is an international arbitration center in Tokyo which would have a system like the court of appeals. The second choice is it allows petition to the board, very exceptionally. The third choice is no appeal or petition. What is the most preferable?

#### Q&A

Q1: Would you think that innovators or implementers willing to go to mediation is acting in good faith?