Excerpt: The question of where in the supply chain a standard-essential patent (SEP) owner that has committed to license on fair, reasonable, and non-discriminatory (FRAND) terms must license is of global significance. The Fifth Circuit will soon address an antitrust complaint alleging a conspiracy to deny FRAND licenses to component suppliers in favor of licensing car companies. The European Court of Justice had also been set to address questions referred to it by a German court in litigation between Nokia and Daimler about Nokia’s argument that it has discretion to determine the point in the supply chain at which it licenses its SEPs until that case recently settled.
As these cases demonstrate, notwithstanding that a commitment to license on FRAND terms and conditions requires “non-discrimination,” some SEP owners argue that they are not required to license component suppliers so long as they license suppliers of end products. In support of this position, these SEP holders principally contend that (1) the FRAND commitment has historically not been understood to require such licensing and (2) requiring licensing of component suppliers would be inefficient and jeopardize investments in standard setting. Neither of these positions withstands scrutiny.
In the Federal Trade Commission’s litigation against Qualcomm, Judge Koh addressed the first argument on a summary judgment motion, concluding that Qualcomm’s FRAND commitments under the Telecommunications Industry Association (TIA) and Alliance for Telecommunications Industry Solutions (ATIS) Intellectual Property Rights (IPR) policies require Qualcomm to license its SEPs to modem chip suppliers. Although the Ninth Circuit reversed Judge Koh’s 2019 judgment and vacated her 2018 summary judgment determination as moot, the Ninth Circuit explicitly did not reach the merits of Judge Koh’s determination that Qualcomm’s FRAND commitments obligate it to license to rival chip suppliers.
This two-part series addresses this ongoing dispute about who must be licensed to FRAND-committed SEPs, and shows that the arguments advanced by some SEP holders that licensing component suppliers will reduce incentives for investments in standard setting and is inefficient for licensing are fundamentally flawed. First, as discussed in Part 1, SEP holders that now advocate against licensing component suppliers made the decision to invest in standard setting when they understood FRAND commitments to require licensing everyone and developed their large SEP portfolios with such an understanding in mind. Second, as will be discussed in Part 2, litigation of SEPs demonstrates that involving component suppliers—the parties that best understand the technology at issue—in licensing negotiations promotes efficiency, and assertions of SEPs against phone suppliers regularly require the involvement of baseband chip suppliers to provide evidence about how the accused functionality operates. Part 2 will also discuss the financial motives of SEP holders—specifically, that licensing at the device level is far more lucrative because it provides outsized royalties. In contrast, licensing at the component level—or the smallest salable unit—ensures that SEP holders are compensated for the value of their invention instead of the other features of complex, multi-component products.
Overall, it is not efficiency and innovation that drives SEP holders’ arguments, but rather that licensing to original equipment manufacturers (OEMs)—entities that manufacture devices such as mobile telephones—is much more lucrative than licensing at the chip level.