To Establish FRAND Negotiation Mechanism of Standard-Essential Patent

To Establish FRAND  Negotiation Mechanism of Standard-Essential Patent

Zhu Jianjun

Judge of Shenzhen Intellectual Property Court


Standard-essential patent (SEP) is of great significance for any wireless communication company and the country where the company is located. The SEP technology is the most valuable technology among all technologies contained in the patent. The larger number and higher quality of the SEP are owned by a wireless communication company , the stronger advantageous competition may be established by it in the international and domestic wireless communication market. Accordingly, the wireless communication technologies and industry in the country where the company is located are more likely to achieve sustainable development and progress.


Due to the high cost occurred in the research and development of the SEP and the fact that the implementer of SEP obtains economic benefits from his use of such SEP, it is necessary to ensure that the obligee of the SEP has a reasonable return from his research and development of new technologies, which requires that the implementer of SEP pays the royalties to the obligee.


Necessity for establishing FRAND negotiation mechanism

SEP is different from ordinary patent in its features such as irreplaceability, compulsion, and inevitable exploitation. In order to prevent the obligee of the SEP from conducting "patent hold-up" by use of the foresaid advantages contained in SEP and to avoid the unreasonable "overlap" of royalties, all international standard organizations require their members to grant others to use SEP according to the FRAND (Fair, Reasonable, Non-Discriminatory) principle. Based on the principle that civil rights should correspond to civil obligations and in order to prevent the implementer of SEP from conducting "reverse hold- up" which is contrary to "patent hold-up" conducted by the obligee of the SEP, various countries have established a common rule that "the implementer of SEP shall abide by the FRAND principle in negotiation of exploiting SEP" in their judicial practices.


The various international standard organizations are operated in a relatively loose way. They have not established corresponding examination systems of whether the numerous SEP claimed by members are true SEP or not and have no stipulations on how the FRAND negotiations should be conducted by and between all members and the SEP exploiters at the same time. Due to the lack of systems and rules, disputes over SEP have arisen from time to time. There are two examples in this regard: one was the SEP infringement war between Apple Inc. and Samsung Electronics Co., Ltd. which was broken out in the United States and Japan at the international level, and the other was the SEP infringement dispute between ZTE and Huawei which was heard by the Shenzhen Intermediate People's Court at Chinese domestic panel.


Due to the numerous evidences and materials as well as the complexity of legal issues involved in SEP disputes, vast judicial resources will be consumed in the trial of a SEP case. For example, it took China's Shenzhen Intermediate People's Court hearing the case of Huawei v. Samsung 18 days to hear the case and conclude the case by a judgment of 170,000 Chinese characters (about 85,000 English words). The courts outside China hearing such kind of cases have to face similar situations. In order to win the litigation, the parties involved in the case have to invest great manpower, material resources and financial resources in handling the dispute, which will inevitably exert great adverse effects on their normal productions and business activities. Therefore, in order to ensure the healthy operation of SEP system, except for the ex post facto remedy measures such as hearing the case by judicial organs to resolve SEP disputes, the more important issue is to establish an ex ante prevention mechanism to prevent the occurrence of SEP disputes. The core of a good prevention mechanism lies in the establishment of FRAND negotiation mechanism of SEP, based on which both parties can negotiate in good faith with clear rules and systematic constraints so that a patent license agreement on SEP can be reached and concluded in a timely manner.


How to design a FRAND negotiation procedure of SEP? 

The license negotiation of SEP involves the SEP patentee and the SEP implementer, whose interests are exactly opposite: the SEP patentee wishes to receive royalties from the implementer of SEP as more as possible but the implementer of SEP wants to pay royalties to the SEP patentee as less as possible. Due to the lack of FRAND negotiation mechanism of SEP and based on the motive of pursuing interests, some patentees of SEP often ask exorbitant prices, whereas some implementers try their best to demand lower prices or arbitrarily delay negotiations. Therefore, the relevant license agreements are often delayed.


An honest and efficient FRAND negotiation mechanism of SEP is important for both parties to reach an agreement. The establishment o f such mechanism involves the interest of all parties in the industry. Therefore, all parties in the industry need to grope for experiences, which include: what practices are conducive to the successful agreement between both parties, and what practices are the lessons that lead to the failure of both parties in terms of agreement conclusion. The positive and negative experiences summarized by the industry can provide both parties in negotiation with specific guidelines for their actions, which will facilitate the conclusion of an agreement between both parties as soon as possible and avoid falling into a quagmire of protracted negotiations. At the same time, when disputes arise between both parties in negotiation, it also provides an important reference for the judiciary organs to make a determination that which party is at fault and which party is not so as to timely correct the act of the party at fault.


The FRAND negotiation mechanism of SEP mainly includes the issue of how to design a negotiation procedure for both parties. Of course, such design should be based on the negotiation experience in the industry. For example, when the patentee of SEP sends an intention to the implementer of SEP for negotiation and consultation, both parties will usually sign a confidentiality agreement on non-disclosure information(NDI) in time so that the subsequent negotiation between both parties will be kept in a confidential state. Immediately afterwards, the patentee of SEP will present a list of the SEP it owned to the implementer of the SEP. If the implementer of the SEP questions the strength of the SEP owned by the patentee, both parties will enter the technical negotiation stage. In order to prove such strength, the patentee of the SEP usually displays the patent with better quality to the implementer of the SEP, and make analyses and explanations for whether the patent's technical features correspond to the features of the corresponding wireless communication technology standards in order to help the other side to understand the strength of his patent. After the display of the SEP strength, the patentee of the SEP sends the specific price catalog (offer) to the implementer of the SEP with reasons. After the implementer of the SEP receives the price catalog, he must accept or reject it within a reasonable time; if he refuses to accept, he should propose a counter price catalog within a reasonable time with reasons. When both parties fail to reach an agreement after several rounds of negotiation, they can agree to submit the dispute to a neutral arbitration institution or judicial authority for adjudication.


There should be a consideration of differences between different negotiation subjects in the design of FRAND negotiation procedure o f SEP, which includes the differences between the respective implementers of NPE and SEP, the different subjects of SEP with different or same strengths. Therefore, different negotiation procedures should be designed for different subjects.


The industry should fully realize that the SEP system can only be operated in a healthy and sound way and help reduce the disputes arising from SEP after the true establishment of honest and efficient FRAND negotiation mechanism of SEP.


(Translated by Yuan Renhui)