Ericsson’s offer of SEP terms to TCL held to adhere to FRAND standards by U.S Court

Patent-TugOn the 1st of August, 2016, California District Court Judge James V. Selna ruled that some of the license terms that Ericsson offered TCL Communication Technology Holdings Limited (‘TCL’) were fair, reasonable and non-discriminatory, narrowing TCL’s claims in their lawsuit against Ericsson.

This lawsuit was filed in 2014, and alleges Ericsson’s refusal to license their Standard Essential Patents (SEPs) of global 2G, 3G and 4G standards at fair, reasonable, and non-discriminatory (FRAND) terms. Importantly, only some of Ericsson’s contract terms were determined to be fair, while the rest are still in dispute.

TCL based their claims on the fact that Ericsson had granted their competitors a broader range of patents, and had therefore violated their FRAND term obligations. The order upheld Ericsson’s offer to TCL for only ‘licensed’ patents, holding that Ericsson was not being discriminatory simply by granting different terms to other companies. Referring back to an earlier order, Judge Selna reaffirmed that Ericsson was not obligated to offer Non-Essential Implementation patents to TCL, merely because they had been licensed to other companies. Hence, the Court essentially held that it was Ericsson’s offer to license that was fair, and is yet to rule on specific clauses of the agreement.

TCL had additionally brought up the issue of Ericsson’s pass-through licenses, and how these consequentially resulted in ‘double dipping’. Pass-through licenses are those that give middlemen the authority to sublicense specific software, and in this case, TCL has obtained a pass-through license from Qualcomm for access to Ericsson’s 3G technology. It is in this light that TCL claimed that Ericsson could not bundle these 3G patents with their 2G technology, thereby imposing a rate that did not adhere to FRAND standards. TCL therefore requested for a separate rate for 2G patents, as they felt that the current terms would result in an inflated cost for the 3G patents, and constituted double dipping.

The Court agreed with TCL, but ruled that Ericsson had the right to ask TCL to pay for all the patents it uses, as both the licenses were for two separate technologies. Holding that it was not unreasonable for Ericsson to include a term that provides for TCL to pay for a license for those 2G and 4G technologies that would otherwise be unlicensed on TCL’s devices, the Court dismissed the double dipping claim. A related development in Indian SEP litigation is the Delhi High Court’s finding that Ericsson had concealed information pertaining to royalties that they were receiving from Qualcomm. It is disappointing that this issue has not been emphasised in recent orders, as it involves the possibility of double dipping, and could be integral to all pending disputes with Ericsson.

The Court also held that TCL had failed to come up with evidence to prove Ericsson’s contract terms to deviate from FRAND standards. Further, when the case goes to trial, the jury is to consider two separate determinations – first, whether Ericsson’s contract offers were fair, and second, consider separately whether its dealings with TCL were fair on the whole.

Ericsson-Huawei arbitration

In May 2016, TCL had requested a partial summary judgement to find that Ericsson had offered discriminatory royalty rates to them based on a 2015 arbitration ruling between Ericsson and Huawei Technologies. The arbitration panel found Ericsson’s SEP rates offered to Huawei to be discriminatory, and it is based on this award that TCL attempted to invoke the principle of collateral estoppel, and non-mutual issue preclusion. While these doctrines are foreign to Indian law, their premise is essentially the principle of res judicata, banning the second hearing of a pre-decided issue. To this argument, Judge Selna was clear in stating that the jury would play a different role as compared to the Huawei arbitration panel, as well as confront a wider range of issues – and it is for this reason that the doctrine of res judicata could not be claimed in relation to the arbitration.

Pending disputes

The SEP disputes between the two companies is not limited to this lawsuit. On the other side of TCL’s plea for FRAND terms lie Ericsson’s multiple suits against TCL for the infringement of their SEPs. In their lawsuit filed in the Texas District Court, Ericsson brings up what they call patent licensing ‘hold out’ tactics as employed by TCL in their negotiations that have now lasted eight and a half years. Ericsson also accused TCL of being an unwilling licensee – with their refusal to both, renew their 2G license, and to reach a conclusion on licenses for 3G and 4G technologies.

Relating these lawsuits to our own in India, the Delhi High Court has almost consistently ruled in Ericsson’s favour on this point in their SEP lawsuits, finding both Intex, as well as Lava to be unwilling licensees in respect of their FRAND commitments. Alleging the other party to a SEP lawsuit to be an unwilling licensee now seems to be second nature to Ericsson, and it is worrying if Courts consistently agree with their interpretation of what constitutes an unwilling licensee. While there are no legislative or judicial guidelines in India for the determination of an unwilling licensee, the European Commission came out with a list of FAQs, or guidelines for SEP and FRAND disputes that provided some direction on the matter. Where Ericsson tries to classify companies as unwilling on the basis of the facts of specific cases, Europe recognizes that an unwilling licensee should be determined in a consumer friendly manner.

As noted by Rajiv in his post, the FAQs mandate that the determination of a willing licensee is based on the test that consumers should not have to pay for invalid, non-infringed and non-essential patents. Further, just because a prospective licensee challenges the validity, essentiality and even infringement positions for SEPs – it does not mean that he is unwilling. While this order is definitely a small victory for Ericsson, their numerous SEP disputes have seen only interim orders passed and are yet to be concluded, as is the Competition Commission of India’s (CCI) investigation into Ericsson’s alleged anti-competitive royalty rates.

(Image taken from here.)

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