SEP Licensing Across the Supply Chain: An Antitrust Perspective

The rise of the Internet of Things (IoT) is set to add a new layer of complexity to the current practice of standard essential patents (SEPs) licensing. While until recently the debate centred on the nature of fair, reasonable and non-discriminatory (FRAND) commitments and the mechanisms to avoid hold-up and reverse hold-up problems between licensors and licensees, a new hotly debated issue has now emerged. Namely, in our recent article we evaluate whether competition law mandates SEP holders to grant a FRAND license to any implementer seeking a license (including component makers) or they should rather be free to target the level of the supply chain at which the license is granted.

Under the first solution (so called ‘license-to-all’), the SEP owner’s rights are exhausted whenever the manufacturer of a component obtains the license it needs to produce a feature implementing the standard at stake. Once the component manufacturer pays the royalty, the patent owner’s rights are exhausted. As a result, any other downstream firm does not have to pay any additional royalties to the SEP owner. By contrast, under the second solution (so called ‘access-for-all’), the SEP owner lets component manufacturers to make free use of its patented technologies and charges all the royalties to final producers. While all the parties in the supply chain have access to the relevant patents, the component manufacturers are prevented from demanding their own individual licenses. By adopting an antitrust perspective, the article assesses the arguments in favour of both solutions against the most recent case law dealing with the matter on both sides of the Atlantic and argues in favour of the access-for-all system.

An increasing number of manufacturers of connected products needs now to produce standard-compliant products incorporating several patented technologies. Unlike in the past, these implementers do not belong consistently to the mobile communication industry. They produce a wide range of different goods (from new generation automobiles and trucks, household appliances, medical items, etc) incorporating patented features that are essential for ensuring compliance to specific standards, such as the 5G, and ultimately their very own market viability. Depending on whether SEP owners are entrusted with license-to-all obligations or not, the bargaining game between implementers and patent holders is going to change significantly together with incentives on further R&D investments.

The article frames the current scientific debate from a legal and economic angle. Firstly, it considers the main arguments put forward by proponents of the license-to-all solution: the limited licensing expertise of end-product manufacturers, the problem of supply disruptions brought by court injunctions, and the need to avoid exploitative rents in favour of SEP holders. By contrast, advocates of the access-for-all stress the importance of reducing monitoring costs, the practical unfeasibility of charging different royalties based on different projected end uses, and the need of selecting the most appropriate royalty base across the supply chain. Finally, we highlight the heterogeneity and the lack of clarity on the point concerning the IPR policies of the main standard setting organizations (SSOs).

Finally, we focus on the most recent antitrust case law dealing with the matter on both sides of the Atlantic in order to assess whether a patent owner’s refusal to license a FRAND-committed SEP at any point in the supply chain constitutes an antitrust violation.

In the US, the Ninth Circuit in Qualcomm, the Northern District of Texas in Continental v Avanci, and the DoJ in Avanci’s Business Review Letter stated that an SEP holder is free to choose the party across the supply chain that it deems most appropriate for negotiating a FRAND licence. It follows that licensing at end-product level, instead of component level, cannot be considered an antitrust violation. More generally, these decisions reflect the DoJ’s recent policy approach of evaluating FRAND commitments as mere contract law problems and emphasising the significance of hold-out risks.

In Europe, while awaiting the CJEU’s ruling in Nokia v Daimler, the decisions of the German Federal Supreme Court in Sisvel v Haier and of the UK Supreme Court in Unwired concurred with the US approach as to the contractual nature of FRAND commitments and their aim to address both hold-up and hold-out risks in order to achieve a fair balance between the interests of implementers and SEP holders. Moreover, neither the Huawei landmark judgement nor the Guidelines accompanying the European Block Exemption Regulation for horizontal co-operation agreements support the argument that SEP holders have an antitrust duty to license in favour of a specific licensee.

Given that the debate on level discrimination is a corollary of the broader discourse concerning the function of FRAND promises, we argue that the emerging transatlantic convergence on the nature and purpose of FRAND commitments does not provide solid economic and legal bases in favour of licence-to-all solutions.

Oscar Borgogno is a Researcher at the Bank of Italy and a Fellow at the University of Turin.

Giuseppe Colangelo is the Jean Monnet Chair in European Innovation Policy and Associate Professor of Law and Economics (University of Basilicata).