Portfolio Licensing to Makers of Downstream End-User Devices

• Author: Jorge Padilla,Koren W. Wong-Ervin
• Published date: 01 September 2017
• DOI: 10.1177/0003603X17719762
• Date: 01 September 2017
• Subject Matter: Articles

Article

Portfolio Licensing to Makers of

Downstream End-User

Devices: Analyzing Refusals to

License FRAND-Assured

Standard-Essential Patents at

the Component Level

Jorge Padilla* and Koren W. Wong-Ervin**

Abstract

Competition agencies around the globe are investigating whether a standard-essential patent (SEP)

holder’s choice to license to the makers of downstream end-user devices, rather than to makers of the

components of those devices, violates competition laws. Some authorities have already reached that

conclusion. While much has been written about FRAND-assured SEPs, the literature to date focuses

largely on the appropriateness of seeking and obtaining injunctive relief on such patents or on the

meaning of “fair and reasonable,” and has largely ignored the “nondiscriminatory” prong of FRAND

(fair, reasonable, and nondiscriminatory). This article analyzes what we observe to be the common

industry practice of licensing on a portfolio basis at the end-user device level, and whether a patent

holder’s refusal to license at only at the downstream end-user device level, and not at other levels of

the production chain, may constitute an antitrust violation. We conclude that (1) whether the

“nondiscriminatory” prong of the FRAND promise requires licensing at the component level is a fact-

specific inquiry that depends upon the specific standard-development organization’s policy; (2) even if

there is potential for a failure to comply with a FRAND assurance, that alone does not constitute an

antitrust violation; and (3) the refusal to license at component level cannot be anticompetitive when

the vertically integrated holder of one or more SEPs does not assert its patents against the makers of

components but, instead, licenses its SEP portfolio to end-device manufacturers on FRAND terms.

Keywords

standard-essential patents, FRAND, refusals to license, tying, bundling

* Barcelona Graduate School of Economics, Barcelona, Spain

** Antonin Scalia Law School, George Mason University, Arlington, VA, USA

Corresponding Author:

Koren W. Wong-Ervin, Antonin Scalia Law School, George Mason University, 3301 Fairfax Dr., Arlington, VA 22201, USA.

Email: kwongerv@gmu.edu

The Antitrust Bulletin

2017, Vol. 62(3) 494-513

ªThe Author(s) 2017

Reprints and permission:

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DOI: 10.1177/0003603X17719762

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Competition agencies around the globe are investigating whether a standard-essential patent (SEP)

holder’s choice to license to the makers of end-user devices, rather than to makers of the components

of those devices, violates competition laws. Some have already reached that conclusion. For example,

the Competition Commission of India (CCI) has brought two investigations against Ericsson, alleging

that the company “seem[s] to be acting contrary to the FRAND terms by imposing royalties linked

with cost of product of user for its patents,” that is, for charging royalties based on the end-user device

as opposed to a component part.

1

Thus, “[f]or the use of [a] GSM chip in a phone costing Rs. 100, [the]

royalty would be Rs. 1.25 but if this GSM chip is used in a phone of Rs. 1000, [the] royalty would be

Rs. 12.5.”

2

According to the CCI, “[c]harging of two different license fees per unit phone for use of the

same technology prima facie is discriminatory and also reflects excessive pricing vis-a

`-vis high cost

phones.”

3

Similarly, the Korea Fair Trade Commission (KFTC) investigated Qualcomm for allegedly

“abusing its dominance” by “licensing patents only at the device level” as opposed to the component

level.

4

The Taiwan Fair Trade Commission (TFTC) is also investigating the company based on similar

conduct.

5

Other competition agencies, including in China and Japan, have recently issued revised final

or draft guidelines that would seem to increase scrutiny of such conduct. For example, in 2016, the

Japan Fair Trade Commission (JFTC) issued final revised antitrust intellectual property (IP) guidelines

that create an unfair trade practices violation for refusing to license a FRAND (fair, reasonable, and

nondiscriminatory)–assured SEP to any party willing to take a license “if they tend to impede fair

competition, even if the acts do not substantially restrict competition.”

6

Similarly, in 2015, China’s

National Development and Reform Commission (NDRC) issued several draft versions of its antitrust-

IP guidelines, which would prohibit “unjustified” refusals to license patents, focusing on, among other

things, “the license commitments undertaken” by patent holders, such as commitments to license on

FRAND terms.

While much has been written about FRAND-assured SEPs, the literature to date focuses largely on

the appropriateness of seeking and obtaining injunctive relief on such patents or on the appropriate

royalty rate and the meaning of “fair and reasonable” (FR), and has largely ignored the

“nondiscriminatory” (ND) prong of FRAND or the common industry practice of licensing on a

portfolio basis at the end-user device level. To the best of our knowledge, the li terature has not

considered whether an SEP holder’s refusal to license at the component level represents a failure to

comply with a FRAND assurance or constitutes an infringement of the antitrust laws.

Part I of this article considers whether failure to comply with a FRAND assurance should be

regarded as an infringement of the antitrust or competition laws per se. Here we analyze the nature

1. In re Micromax Informatics Ltd. v. Telefonaktiebolaget LM Ericsson {17 (Nov. 12, 2013), http://cci.gov.in/sites/default/

files/502013_0.pdf; In re Intex Techn. Ltd., v. Telfonaktiebolaget LM Ericsson {17 (Jan. 16, 2014), http://cci.gov.in/sites/

default/files/762013_0.pdf.

2. In re Intex {17; In re Micromax {17.

3. In re Intex {17 (emphasis omitted); In re Micromax {17.

4. Qualcomm Says “Not a Patent Troll” amid Korea Antitrust Probe,H

ERALD BUSINESS (Sept. 5, 2016); Danbee Lee, KFTC to

Hold Series of Hearings on Qualcomm Investigation Between August and September,MLEX (Aug. 1 2016) (“The [KFTC’s]

hearing came almost eight months after the KFTC issued an examiner’s report in November challenging Qualcomm’s device-

level licensing practices, whereby the company charges royalties based on the price of a complete smartphone rather than on

the chip itself.”); Danbee Lee, Qualcomm Set to Have Second Hearing with KFTC on Aug. 17 over Antitrust Probe,ML

EX

(Aug. 12, 2016) (“In November 2015, the KFTC issued an examiner’s report challenging Qualcomm’s device-level licensing

practices, whereby the company charges royalties based on the price of a complete smartphone rather than on the chip

itself.”); Press Release, Korea Fair Trade Comm’n, “Strict Sanctions on Qualcomm’s Abuse of Cellular SEPs” (Dec. 28,

2016), https://www.qual comm.com/media/document s/files/kftc-issued-pr ess-release-dated-de cember-28-2016-unoffici al-

english-translation.pdf.

5. Qualcomm Discloses Details of Taiwan Antitrust Probe, PaRR Stock Exchange Announcement(s) (July 21, 2016).

6. JFTC ANTITRUST-IP GUIDELINES Part 4(2)(iv) (2016), http://www.jftc.go.jp/en/pressreleases/yearly-2016/January/

160121.files/IPGL_Frand_attachment.pdf.

Padilla and Wong-Ervin 495