European Commission Roadmap on Standard Essential Patents Response by One-Blue, LLC. May 4, 2017

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1 European Commission Roadmap on Standard Essential Patents Response by One-Blue, LLC May 4, 2017 One-Blue, LLC (One-Blue) is a New York-based patent pool that administers global patent licensing programs for standard essential Blu-ray Disc patents owned by 17 licensors. One-Blue's licensors include leading consumer electronics companies and other optical media innovators. One-Blue participated in the European Commission's Consultation on Patents and Standards in One-Blue submits this letter in response to the Commission's request for comments on the Roadmap for its "Standard Essential Patents for a European Digitalized Economy" initiative. One-Blue welcomes the opportunity to comment on the Roadmap and applauds the Commission' s goal of addressing practical problems related to the licensing of standard essential patents (SEPs). In particular, One-Blue commends the Commission for recognizing that the European Court of Justice' s (CJEU) decision in Huawei/ZTE has led to legal uncertainty with respect to portfolio licensing. For patent pool administrators such as One-Blue, and for SEP owners willing to license their patents through patent pools, this uncertainty undermines the ability to enforce legitimate patent rights and creates severe disincentives for patent pool formation. In addition, rigid application of the Huawei/ZTE framework has the potential to reinsert inefficiencies into the licensing process that patent pools were designed to eliminate. One-Blue would welcome further Commission guidance to complement the existing jurisprudence regarding SEP enforcement, and highlights in this letter the issues Huawei/ZTE has created, particularly for patent pools. One-Blue also offers potential solutions, including looking to the recent UK High Court's opinion in Unwired Planet/Huawei for direction in crafting the European Commission's guidance. Patent Enforcement Uncertainty in the Portfolio Licensing Context In its 2015 response to the SEP consultation, One-Blue explained that business and legal uncertainty is one of the main obstacles to successful patent pool formation and operation.2 SEP owners are less likely to make their patents available through patent pools if the commercial and legal framework of participation in a pool is unclear. One dimension of patent pools in which uncertainty is particularly problematic is the ability to enforce pooled patents against unwilling 2 Response by One-Blue, LLC, European Commission Consultation on Patents and Standards (January 29, 2015) (hereinafter "2015 Submission"). The 2015 Submission is enclosed with this letter Submission at 4. One Blue, LLC 1350 Broadway, Suite 1406 New York, NY USA

2 licensees. As One-Blue's experience has shown, 3 patent pools that offer enforcement mechanisms against companies that infringe pooled patents but are unwilling to pay royalties are more attractive to licensors and, therefore, more likely to operate successfully. Following the CJEU' s decision in Huawei/ZTE, seeking an injunction based on SEPs can constitute a violation of EU competition law where the patent holder has agreed to license its patents on FRAND terms and the implementer is willing to negotiate on such terms. 4 Because most SEP owners-including all of One-Blue's licensors-commit to license on FRAND terms, the critical question is how to determine whether a potential licensee is unwilling to negotiate on those terms. Huawei/ZTE seeks to resolve this question through an information and negotiation framework: prior to bringing an action against an implementer, an SEP holder must (1) alert the implementer of the infringement in writing, (2) present a written offer for a license on FRAND terms, (3) consider a promptly presented, reasonable counter-offer, and (4) accept that FRAND terms be determined either by a court or arbitration tribunal if negotiations are unsuccessful. An injunction is available only if the infringing manufacturer refuses to negotiate in good faith. Whatever the merits of this framework in the context of individual patent enforcement, it is ill-suited for patent pools. 5 One-Blue summarized the main practical problems with applying the Huawei/ZTE requirements in its 2015 response to the Commission's Patents and Standards consultation: 6 The first two Huawei/ZTE requirements (notice of infringement and written offer).are simply unnecessary in the patent pool context. Manufacturers of standard-compliant products typically do not need notice regarding the infringement because they intend their products to comply with the relevant standards and lists of pooled SEPs are publicly available. 7 In addition, there is rarely dispute over the terms that the patent pool is willing to offer because royalty rates and complete license agreements are routinely published online. 8 The third Huawei/ZTE requirement (consideration of counter-offers) is impractical, jeopardizes some of the key efficiencies of patent pools, and creates daunting 4 6 See Ruud Peters, One-Blue: A Blueprint for Patent Pools in High-Tech, Intellectual Asset Management, Sept/Oct. 2011, 38 at 39. Case C-170/13 -Huawei/ZTE (July 16, 2015). See 2015 Submission at 9. One-Blue's 2015 submission was prepared on the basis of the Advocate General' s opinion in Huawei/ZTE, without the benefit of the CJEU's decision. One-Blue' s concerns continue to be relevant after the CJEU's decision, however. S ee, e.g., One-Blue, (essential patents for BD Player and BD Recorder listed on One-Blue's website). See e.g., One-Blue, (license agreements BD Player and/or BD Recorder available on One-Blue's website). 2

3 FRAND compliance challenges for patent pool administrators. One of the key benefits of modern patent pools is that they reduce transaction costs by offering "onestop-shopping" for all relevant SEPs owned by their licensors on uniform terms. Patent pools can only achieve this benefit if they are not required to consider and accommodate "a la carte" license requests from infringing manufacturers. Patent pools also would face serious FRAND compliance risks if they were required to entertain alternative license requests, because each departure from the published terms and royalties raises the risk of discrimination claims from licensees that may have obtained a different rate or different terms. 9 More generally, the negotiation requirement is an invitation for abusive practices by implementers that seek to delay enforcement. For example, many patent poolsincluding One-Blue-offer licenses only on a global basis. A requirement that they negotiate individualized licenses could result in potentially lengthy delays in enforcement. Notably, infringers could evade royalties and enforcement for an extended period of time by negotiating for geographically narrow (perhaps countryspecific) licenses with the patent pool even though it is clear that the pool is not authorized to offer such licenses and their standard-compliant products infringe all pooled patents everywhere in the world. Potential Solutions As explained in the 2015 Submission, One-Blue strongly believes that there are differences between individual enforcement of standard-essential patents outside of the patent pool context, and enforcement when patent pools are involved. 10 These differences justify a modified framework for determining whether an implementer is "unwilling" to license relative to what may be appropriate outside the patent pool context. The recent decision by the UK High Court in Unwired Planet/Huawe/ 1 provides a compelling approach to enforcement of SEPs in the patent pool context. 12 As Justice Birss 10 II 12 To be clear, One-Blue does not believe that non-discrimination requires that each licensee pays precisely the same royalty and is subject to precisely the same terms as every other licensee. But a legal requirement to negotiate royalties and terms on a case-by-case basis for dozens or hundreds of licensees dramatically complicates FRAND compliance Submission at 11. Case No: HP Unwired Planet v. Huawei (April 5, 2017). One-Blue recognizes that the UK High Court departs from the Commission's decision in Motorola. Case AT Motorola (Apr. 29, 2014). Motorola however involved individual rather than portfolio license negotiations through patent pools. The Commission's decision also was based on the view that the country-specific license was FRAND. It did not consider the case from the perspective that there was only one set offrand terms in any given situation, as the UK High Court does in Unwired Planet, and does not analyze whether a worldwide scope would be FRAND. See Unwired Planet/Huawei at ii

4 observed in that decision, the CJEU in Huawei/ZTE did not intend to set out a series of rigid rules, deviation from which would be abusive regardless of the circumstances. 13 In addition, multi-jurisdictional portfolio licenses are unlikely to be inherently anticompetitive, and a licensor's demand for a worldwide license therefore does not necessarily harm competition. 14 Every licensing situation has only one FRAND rate, which can be determined by adjusting a benchmark royalty rate calculated based on the SEP holder's (or holders') portfolio. 15 In the case of a licensor with a worldwide patent portfolio, and a licensee that manufactures or sells in multiple countries (multinational implementer), a worldwide license is FRAND. 16 Country-bycountry licensing is inefficient, and tracking individual licenses and royalty payments require considerable effort, which the Court observes no rational business would choose to do. 17 As a result, an internationally active implementer is not a willing licensee when its willingness to take a FRAND license is conditioned on the license being a patent-by-patent or country-specific license. Applied in the patent pool context, the Unwired Planet/Huawei framework would allow patent pool licensors to seek injunctions against multinational implementers upon a showing that the implementer was offered a global license in accordance with standard patent pool terms, and that it refused to consider licensing of the offered package on a global basis. Although this approach does not solve every complexity of enforcement in the patent pool context, its adoption would greatly simplify enforcement of pooled SEPs against multinational implementers because it prevents such implementers from engaging in delay tactics by requesting narrower-than-global licenses that many patent pools-one-blue included- simply do not offer. Adoption of the Unwired Planet/Huawei framework in the patent pool context would not create undue injunction risks for implementers that in good faith require licenses only for a small set of countries. These implementers can easily demonstrate their willingness to license by engaging in negotiations with individual licensors. In One-Blue' s experience, however, implementers that are unwilling to take One-Blue' s global license rarely go down this path, preferring instead to negotiate for something that One-Blue does not (and should not be required to) offer, and seeking to rely on those futile negotiations to escape enforcement. * * * * Commission guidance regarding SEP enforcement is necessary to address some of the questions left unanswered by Huawei/ZTE. One-Blue recognizes that the Commission must Unwired Planet/Huawei at,-i Id. at,-i 535, 572. Id. at,-i 164. Id at~ , 572. Id at~

5 balance competing interests of licensors and licensees, and encourages the Commission to consider the UK High Court's opinion in Unwired Planet/Huawei and its reasoned and balanced judgment as it drafts its own guidance. One-Blue would be delighted to provide additional information about its licensing experience and about the administration of global patent pools in general. Please do not hesitate to contact One-Blue's General Counsel, Jack Slobod with any questions. 5

6 European Commission Consultation on Patents and Standards Response by One-Blue, LLC January 29, 2015 A. Introduction This response is submitted by One-Blue, LLC ( One-Blue ), the administrator of a patent pool for Blu-ray Disc ("BD") Products. The pool administered by One-Blue presently includes patents of 15 licensors that are essential to the BD Standards, as well as patents of these licensors that are essential to the Digital Versatile Disc ("DVD") and Compact Disc ("CD") Standards. The essential DVD and CD patents are included for the purpose of enabling required backward compatibility with these earlier optical disc standards. More information about One-Blue is available at Contact information: One-Blue, LLC Attn. Jack Slobod, General Counsel 555 Madison Ave, 11 th Floor New York, NY (USA) Jack.Slobod@one-blue.com B. Key Issue 5 Patent Pools Related to Standardization Topic 1: Benefits and Costs of Patent Pools Q Target areas: What are the situations/external factors which render a patent pool useful? Are you aware of specific standards for which a patent pool would be useful but where there has been a failure to create one? Patent pools substitute a single regularized transaction (the pool license) for a licensing system in which each patentee and potential licensee must bargain individually for each licensing transaction. As such, patent pools have efficiency benefits that are particularly pronounced in industries with patent thickets, i.e. situations where the manufacture of standard-compliant products infringes multiple patents, and where manufacturers must obtain licenses from multiple patent holders. 1 This is the case with almost all standards for high-volume products for which large markets are expected. 1 See the definition on p. 9 of the Commission s Questionnaire. 1

7 BD technology is a textbook example of a patent thicket, with thousands of patents essential to make and sell standard-compliant, backward-compatible BD products. Here as in other patent thickets, individual licensing would be time consuming and complex, hinder the adoption of technology standards, 2 and expose even diligent manufacturers to potential infringement risks. 3 One-Blue s licensing programs eliminate these challenges by offering one-stop shop licensing under all relevant essential patents owned by its 15 Licensors. One important efficiency of One- Blue s programs is that unlike most other patent pools One-Blue provides licenses not only under patents essential to a single standard (e.g., BD), but under all patents essential to all optical standards used in BD products (i.e., BD, DVD and CD). 4 This is an important feature because greater technology convergence means that products increasingly include multiple standards. Consequently, the licensing complexity for implementers has moved up one level, from needing multiple licenses from different licensors for a single standard to needing multiple licenses from a number of individual licensors (and possibly patent pools) for multiple standards. One-Blue has solved this issue with its product-based licensing (as opposed to standard-based licensing) approach. Wireless telecommunications provides another example of widespread patent thickets, but is an area where patent pool formation has been less successful. For example, a large number of companies has declared thousands of patents standard-essential to the LTE standard, 5 but the existing Via and Sisvel LTE pools appear to cover patents from only a subset of these licensors. Moreover, even if the Via and Sisvel LTE pools included a greater number of patent owners, they would not fully address the needs of wireless device manufacturers because their standard-based licensing approach does not provide licenses under patents essential to predecessor standards (such as GPRS) in those devices. This emphasizes the importance of incentivizing standard essential patent owners to create and join patent pools. Q Benefits of patent pools: What are the benefits of patent pools in the above situations (Q 5.1.1) respectively for patent holders and/or patent users? What aspects in patent pool governance are particularly relevant in practice to ensure the realization of these benefits? See, e.g., Richard J. Gilbert, Ties That Bind: Policies to Promote (Good) Patent Pools, Antitrust Law Journal 2010, 1 ( The time and effort required to assemble [multiple patent rights] can interfere with the adoption and diffusion of new technologies and the cumulative payments to rights holders for the use of their intellectual property can weigh heavily on technology costs. ). Prior to the establishment of patent pools for essential BD patents, Apple founder Steve Jobs famously described the licensing of BD technology as a bag of hurt and announced that Apple would wait[.] till things settle down and Blu-ray takes off in the market place. See Darren Murph, Apple s Steve Jobs calls Blu-ray a bag of hurt, engadget, October 14, 2008, available at This is precisely the type of obstacle to the adoption of new technology that patent pools are designed to address. See Ruud Peters, One-Blue: a blueprint for patent pools in high-tech, Intellectual Asset Management, Sept/Oct. 2011, p. 38 at See Cyber Creative Institute Co. Ltd., Evaluation of LTE essential patents declared to ETSI, (Version 3.0), June 2013, at p. 29, 30, available at 2

8 The benefits of patent pools generally, and especially in industries with patent thickets, have long been recognized. 6 Notably, patent pools: reduce transaction costs (for licensees and licensors) involved in assembling and making available the necessary patent rights, as well as in reporting and paying royalties; mitigate royalty stacking; reduce litigation risks resulting from an incomplete portfolio of patent licenses; reduce uncertainty in the patent landscape, patent availability and pricing; and contribute to the establishment of a level playing field across implementers and reduce potential for discrimination between implementers and give equal access to all companies, whenever they enter the market. In practice, these benefits are best achieved in patent pools that: offer one-stop shop licenses under all essential patents owned by participating licensors under standard and transparent licensing terms; are separate from the relevant standard setting body(ies) in order to avoid conflicts of interest between the standards body (which focuses mainly on the promotion of the widespread use of the relevant standard) and the holders of essential patents (which are interested in standard promotion but also want to collect fair and reasonable royalties for their SEPs); allow essential patent holders to determine the structure and set-up of the licensing program, to ensure that they have sufficient incentives to participate in the pool and induce other SEP holders to join; use a separate licensing administrator to run patent licensing operations (this can be a dedicated patent pool service provider with a number of different licensing programs or an entity specifically created for the pool at issue, either by some or all of the participating licensors or by a third party); include a committee with representatives of the participating licensors to supervise the operation of the licensing administrator and address issues that may occur during the execution phase of the licensing program(s); 6 See, e.g., European Commission, Patents and Standards A Framework for IPR-based Standardization (Final Report 2014) ( 2014 Patents and Standards Report ), p. 173; European Commission, Guidelines on the Application of Article 101 of the Treaty on the Functioning of the European Union to Technology Transfer Agreements (2014) ( 2014 Technology Transfer Guildelines ), para

9 contribute to a level playing field through appropriate enforcement mechanisms against implementers that either fail to comply with their obligations under the patent pool licenses or refuse to take pool (or individual) licenses; involve independent experts to guide discussions among the essential patent owners, which may not have experience with setting up patent pools; involve and regularly consult competition counsel to ensure that the pool is structured and administered in line with competition laws in the relevant jurisdictions. One-Blue has adopted all of these features. Q Alternatives to patent pools: What alternatives to patent pools do you see to achieve efficient licensing in situations where ownership of patents which are essential to a standard is widely dispersed? In industries with patent thickets, One-Blue does not see licensing alternatives that would offer the same efficiency benefits as patent pools. Q Difficulties of pool creation: What are the main difficulties in setting up a patent pool and how can they be addressed? Are there differences in national law or its application across countries of the EU/EEA or worldwide that make patent pool creation more difficult? The main challenges of patent pool formation are costs, business and legal uncertainty, and the need to provide an attractive licensing model for patent owners with sometimes diverging interests. Public authorities such as the European Commission can best address these difficulties by offering clear frameworks that maximize pool formation incentives and minimize costs and legal uncertainty, as discussed in response to Q below. Costs. As the Commission has recognized, patent pool formation is expensive. 7 Pool founders must allocate often significant resources to the identification of potential licensors and licensees and to the negotiation and drafting of the pool s foundational documents. In addition, licensors that contribute their patents to pools for standardized technologies must bear the expense of determining standard-essentiality by independent evaluators Patents and Standards Report, p See the response to Q for estimated evaluation costs for One-Blue s licensors. Additional significant costs may result from pre-formation consultation (and sometimes filings) with regulatory bodies and postformation compliance efforts, especially with the patent and competition law rules applicable to patent pools. Compliance with these rules requires specialized guidance and ongoing scrutiny, which is expensive and time-consuming. In addition, to the extent the formation of a patent pool requires regulatory approvals, the preparation of the requisite submission is a significant cost factor. 4

10 Business and Legal Uncertainty. To generate the benefits typically associated with them, patent pools must attract a critical mass of licensors and licensees, or else they fail to form or become unstable. 9 Moreover, pools must form within a reasonable period of time after development of the licensed technologies or the adoption of relevant standards. Whether these requirements can be met is often uncertain at the time of planning of a patent pool, which is a significant practical obstacle to pool formation. In addition, there is continued uncertainty about the legal environment in which pools operate, as discussed in response to Q below. Licensor Incentives. Patent pools require compromise between the interests of multiple rights owners, which may not always align. This is particularly significant for patent pools in technology areas characterized by large patent portfolios and multiple rights owners. 10 For example: o Patent owners may disagree about the structure of the pool, such as whether the pool should be administered by one of the parties, by a dedicated licensing agent (such as One-Blue), or by a licensing agent that also administers other pools (such as MPEG-LA). o Patent owners may disagree about appropriate royalty rates 11 and how royalties should be allocated across the pooled patents and between licensors. In this context, One-Blue welcomes the Commission s acknowledgment that licensors of properly structured patent pools generally are free to negotiate and fix royalties for the technology package (subject to any commitment to license on fair, reasonable and non-discriminatory terms, FRAND) and each technology s share of the royalties 12 Given the sensitivity of licensors to royalty setting and allocation, this is an important contributor to the successful formation of patent pools. o Related to royalty allocation, patent owners may believe that (at least some of) their SEPs are more important to the standard than SEPs contributed by other licensors, and want to see that reflected in royalty distribution. Traditional pools Economic research suggests that a patent pool can work if the number of individual licensors outside the pool is limited to one or two. E.g., in patent pools for second or third technology generations, see den Uijl/Bekkers/de Vries, Managing Intellectual Property Using Patent Pools Lessons from Three Generations of Pools in the Optical Disc Industry, California Management Review 2013, 31 at 36. For example, licensors primarily active in downstream manufacturing may prefer lower licensing costs over higher potential revenues from the patent pool, while licensors with more limited downstream activities may seek to maximize licensing income for use in R&D and upstream technology areas Technology Transfer Guidelines, para

11 often have allocated royalties based on a patent count rule that attributes the same value to each licensed patent, which has the benefit of simplicity but encourages over-reporting of essential patents and inevitably undervalues some patents relative to others. As a result, significant patent owners have sometimes declined invitations to join patent pools. One-Blue s founders recognized this problem and sought to minimize it by (i) differentiating the value of each patent based on the nature of its underlying invention and (i) limiting the number of divisionals or continuations for each parent patent. 13 o Patent owners may differ in their willingness to litigate in order to induce unwilling licensees to take a pool license. In One-Blue s experience, effective enforcement is an important element of patent pool strength that many previous patent pools have lacked. 14 One-Blue has addressed this by requiring mandatory participation in legitimate enforcement action; pool members are required to make their patents available for infringement litigation 15 unless they waive the right to damages or royalties paid by the unwilling licensee. Q Costs of pool creation: What are the costs involved (do you have estimates)? What do these costs depend on? How are they usually (pre-)financed? The cost of One-Blue s formation was borne by its founders, six companies that made the initial investments in One-Blue LLC. 16 Most of the cost of its formation arose from the need to dedicate investor resources (employees, time, travel expenses, etc.) to the negotiation of the pool s foundational agreements over a period of several years, as well as from external legal and consultant fees. One-Blue estimates that the costs of its formation to the six founders was between 10 and 15 million Euros. These costs include legal and administrative fees for the preparation of competition law filings and interaction with regulatory bodies in various For a description of One-Blue s royalty allocation mechanism, see Ruud Peters, n.4 supra, at 40-41; see also den Uijl/Bekkers/de Vries, n.10 supra, at 42. See Ruud Peters, n.4 supra, at 39 ( In most patent pools, licensors individually decide whether to engage in and cooperate with enforcement actions. This creates a serious free rider problem. Companies that do not participate in an enforcement action obtain almost all of the benefits at no cost; whereas companies that participate not only bear the costs, but are also disproportionately exposed to retaliatory action from the companies that were targeted by the enforcement initiative. [ ] In order to avoid the problem, the One- Blue companies agreed that if One-Blue decides that an enforcement action is warranted, each licensor must make its patents available for use. ); see also den Uijl/Bekkers/de Vries, n.10 supra, at 42, ( They learned that a key requirement for these licensees was a true level playing field whereby the pool would ensure that all participants in the market would take licenses and pay royalties due. To achieve this, One-Blue had to find a way to protect licensees and licensors from companies that failed to pay royalties, and to be effective in engaging non-licensees. ) See Ruud Peters, n.4 supra, at 39; see also den Uijl/Bekkers/de Vries, n.10 supra, at 42. In alphabetical order, the six investors are Cyberlink Corporation, Hitachi Consumer Electronics Co. Ltd., Koninklijke Philips N.V., Panasonic Corporation, Samsung Electronics Company Ltd., and Sony Corporation. 6

12 jurisdictions, which can be another disincentive to pool formation. One-Blue believes that this is an area where competition regulators interested in successful pool formation should consider simplified filing requirements, exemptions from filing fees, or other forms of direct or indirect ways of reducing the financial burden on pools and their founders. Additional costs to individual licensors resulted from the pool s requirement that pooled patents be reviewed by independent experts. 17 One-Blue estimates that for the nearly 10,000 patents included in the pool, the total cost of evaluation amounted to about 40 million USD. 18 Topic 2: Incentives for Pool Participation Q Decision to participate in pool: What factors influence a patent holder's decision to participate in a pool or not? One-Blue believes that patent holders join patent pools for the following reasons: Lack of resources and expertise to license themselves; Individual licensing on a bilateral basis to numerous licensees is expensive, burdensome, and time-consuming; Patent pools license a multitude of patents which allows licensors to license more efficiently, stimulate faster standard adoption and generate revenues more quickly; Patent pools generate a level playing field among manufacturers, which is important to licensors active in downstream markets for standard-compliant products; and Patent pools can provide an effective enforcement mechanism for its pool members. Q Incentives for pool participation (follow-up to 5.1.1): How can this balance be influenced positively? What incentives can be provided by public authorities and/or standard setting organizations to increase patent pool participation? Public authorities can best provide incentives for patent pool formation by establishing clear legal frameworks for the formation and administration of patent pools. One-Blue commends the European Commission for its detailed, economics-based patent pooling guidance published as part of the recently updated Technology Transfer Guidelines. One-Blue has found this guidance to be very helpful for its formation and daily operation and believes it generally strikes an In addition to the six founding investors, nine other licensors currently make their relevant patents available through One-Blue but do not own membership interests in One-Blue, LLC: Dell Global B.V.; Fujitsu Limited; Hewlett-Packard Company; JVC KENWOOD Corporation; LG Electronics Inc.; Pioneer Corporation; Sharp Corporation; Taiyo Yuden Company Ltd.; and Yamaha Corporation. The answer to this question is also relevant to Q of the Commission s Questionnaire. 7

13 appropriate balance between competition policy and the practicalities of patent pooling. It is also useful that the Commission s guidance is generally consistent with guidance issued by the Commission s sister agencies in the United States, especially the Department of Justice. However, several areas of uncertainty remain. Notably, (i) recent developments of the competition law of enforcement of standard-essential patents have created significant uncertainty for patent pools; (ii) certain parts of the Commission s patent pool guidelines would merit refinement; and (iii) patent pool guidance in jurisdictions outside the EU and US raises concern about potential divergence of the competition law of patent pooling. All of these uncertainties, laid out in more detail below, negatively affect incentives to establish and operate patent pools. I. Enforcement of Pooled Standard-Essential Patents The Commission has recognized that an efficient standardization process requires that patent holders contributing to standards get a fair return on their investment and that implementers get access to the standardized technology. 19 Patent pools contribute to both goals because they provide a framework that guarantees implementers efficient access to standard-essential technology while providing patentees with a regular stream of royalty income. Moreover, the Commission has emphasized that [r]ecourse to injunctive relief against unwilling licensees has to remain available in order to ensure that SEP holders can receive timely FRAND compensation for their SEPs. 20 This is important in the patent pool context because as One-Blue s experience has shown 21 patent pools that offer enforcement mechanisms against companies that infringe pooled patents but are unwilling to pay royalties are more attractive to licensors and, therefore, more likely to operate successfully. One-Blue welcomes the Commission s recognition that injunctive relief against unwilling licensees must remain available, but is concerned that recent developments of the law of Art. 102 TEUV create significant practical problems for patent pools that provide mechanisms for the enforcement of pooled patents, and for their licensors. Many of these problems are caused by divergence between the legal rules applicable to patent licensing and patent enforcement: while joint licensing through patent pools is possible and indeed encouraged in most major jurisdictions, enforcement of a complete pool of patents is extraordinarily difficult, especially for pools such as One-Blue whose licensing programs include several thousands of patents. This is because standing rules in most countries require licensors to bring suit in their individual capacity and, as a practical matter, typically only a few pooled patents can be enforced in such suits at any given point in time. As a result, unwilling implementers can refuse to take a pool license and force licensors into wasteful sequential litigation, by only taking licenses under the patents See Speaking Points by the European Commission Services for ETSI IPR Committee Meeting #20, September 2014 in Sophia-Antipolis (ETSI/IPR(14)20_017), p. 2. Id., p. 3. See Ruud Peters, n.4 supra, at 39; see also den Uijl/Bekkers/ de Vries, n.10 supra, at 42. 8

14 specifically in suit even though it is clear that their standard-compliant products infringe the entire pool portfolio. These effects are exacerbated by legal rules that impose additional obligations to negotiate on licensors before suit can be brought. Against this background, as further explained below, One- Blue would welcome clarification from the Commission that if a patent pool exists and has offered licenses to an implementer, which the implementer refused, individual licensors can bring suit (including for injunctive relief) unless the implementer makes a detailed licensing offer similar to the Orange Book 22 standard under German law. Without this clarification, One-Blue fears that the Commission s recent precedent on the application of Art. 102 TEUV on SEP enforcement could significantly diminish patent pool formation incentives and threaten the efficiencies generated by patent pools. Specifically: 1. The Impact of Motorola and Samsung on Patent Enforcement in the Patent Pool Context The Commission s recent Motorola 23 and Samsung 24 decisions, as well as the Advocate General s opinion in Huawei/ZTE, 25 suggest that the seeking of an injunction based on standardessential patents can constitute an abuse of a dominant position under EU law if the patent holder has committed to license its patent(s) on FRAND terms and the implementer is willing to negotiate a license agreement on such terms. However, the precise conditions under which an implementer is willing to accept a license are unclear. According to the Advocate General, 26 prior to bringing an action against an infringer, the patent holder must (i) alert the alleged infringer of the infringement in writing; (ii) present to the alleged infringer a written offer on a license on FRAND terms; (iii) consider a promptly presented, reasonable counter-offer by the alleged infringer; and (iv), if negotiations are not commenced or unsuccessful, accept that at the request of the alleged infringer FRAND terms be fixed either by a court or by an arbitration tribunal. In brief, the patent holder is required to negotiate a licensing agreement prior to bringing an action against an infringer. Whatever the merits of this framework in the context of individual patent enforcement, it seems ill-suited for patent pools. With respect to the first of the Advocate General s requirements, implementers that have previously negotiated with a patent pool hardly need alerts as to the alleged infringement because lists of the pooled essential patents are virtually always publicly See German Federal Court of Justice, Decision of May 6, 2009, KZR 39/06 Orange Book Standard, juris, paras. 29 et seq. Case AT Motorola (Apr. 29, 2014). Case AT Samsung (Apr. 29, 2014). Opinion of Advocate General Wathelet in Case C-170/13 Huawei/ZTE (Nov. 20, 2014). Id., para

15 available. 27 The second requirement is easily met for the pool license because pools normally provide public access to complete license agreements, 28 such that there can be no doubt about licensing terms. The third requirement, on the other hand, puts pools in a difficult position because they frequently offer only one standard license to avoid discrimination problems and lower administrative burden, and individual negotiation jeopardizes both of these goals. The Advocate General s requirements also raises significant uncertainty for individual licensors seeking to bring suit in the context of a patent pool s enforcement program. For example: Can the infringer s unwillingness to license be established by showing that the patent pool offered a license that included the patent-in-suit, which the infringer refused to accept? This is an important issue for the viability of enforcement mechanisms in patent pools, and for pool formation incentives more generally, because discussions between the infringer and the patent pool administrator about pool licenses can go on for months. If it is necessary for a plaintiff licensor to start a new, individual license negotiation after an extended period of pool license negotiations, it could be years before enforcement is possible in practice. To avoid enforcement delay, licensors effectively would have to offer specific individual licensing terms in parallel with the pool negotiations a highly inefficient outcome that generates precisely the types of transaction costs that pools are designed to avoid. What is the necessary scope of any potentially required licensing proposal? Patent pool licenses typically encompass all relevant essential patents from all participating licensors on a global basis. Indeed, One-Blue does not offer any other form of license. If the Motorola, Samsung, and Huawei line of cases does require some form of individual license offer even after potentially lengthy negotiations with the patent pool, the requisite scope of that proposal is highly uncertain. For example: o Can the plaintiff licensor establish unwillingness by offering a license under all of its pooled essential patents on a global basis, or does it have to adjust its proposal to the purported individual needs of the implementer? And if a tailor-made proposal is necessary, does the implementer have an obligation to explain how the pool license fails to satisfy its needs, or can it simply refuse the pool license and force the plaintiff licensor to take its best guess at what the implementer may want or need? Needless to say, the answer to these questions has a significant impact on whether, and for how long, implementers can delay enforcement an issue that will be a significant disincentive for licensors to join patent pools See, e.g., the essential patent lists for BD Players listed on the One-Blue website at It is routine for patent pool administrators to publish such lists, see e.g. (listing essential patents for MPEG-LA s AVC/H.264 program). See, e.g., 10

16 o Can one of the pool licensors establish unwillingness for all participating licensors by showing that the infringer has refused to accept a licensing proposal to one or more of the licensor s pooled patents, and refused to make a considered counteroffer? Or is it acceptable for the infringer to evade royalties and enforcement for an extended period of time by negotiating for narrow (perhaps country-specific) licenses with each participating licensor even though it is clear that its standard-compliant products infringe all licensors essential patents? o Can the infringer avoid enforcement at any given point in time during the individual negotiations by reverting back to the pool license that it previously rejected? For example, assume a patent pool with 15 licensors such as One-Blue. Manufacturer M discusses a pool license for BD players with One-Blue for one year, but ultimately refuses to accept One-Blue s licensing conditions. The licensors then start individual licensing discussions with M. At some point say three years after One-Blue first started discussions with M M realizes that the stack of the individual royalties exceeds One-Blue s royalty rate, rejects all individual offers, but accepts the pool license. Does the Motorola, Samsung, and Huawei line of cases mean that One-Blue s licensors would have been at risk of infringing Art. 102 TEUV if they sought to enjoin M from manufacturing infringing products somewhere along the way? One-Blue acknowledges that the enforcement of FRAND-encumbered standard-essential patents raises difficult legal and policy questions. However, as the above examples demonstrate, a direct application of available precedent to patent pools raises many practical problems and risks reinserting inefficiencies into the licensing process that patent pools are designed to avoid. As a result, licensors are likely to have fewer incentives to consider the formation of, or participation in, patent pools. 2. Potential Solution One-Blue strongly believes that there are differences between individual enforcement of standard-essential patents outside of the patent pool context, and enforcement when patent pools are involved. As noted above, one obvious difference is that implementers have already been presented with a license offer (i.e., the pool license) before enforcement becomes an issue. Moreover, implementers know precisely which patents they infringe because modern patent pools One-Blue included publish lists of essential patents licensed through them and there is rarely dispute about whether the offending products implement the relevant standard. 29 Finally, 29 The concern expressed by Advocate General Wathelet that the implementer may not be aware that it is infringing the enforced patent(s) therefore does not exist when there were prior negotiations with a patent 11

17 enforcement of standard-essential patents after unsuccessful negotiation with a patent pool is ancillary to an unquestionably pro-competitive purpose the provision of bundles of licenses that otherwise would be costly and burdensome to negotiate, and may not be available at all. All of these benefits must be weighed against concerns about anticompetitive effects of injunctive relief. In One-Blue s view, they justify a more lenient framework for the determination of whether an implementer is unwilling to license than may be appropriate outside the patent pool context. 30 One option to mitigate the inefficiencies discussed above is the following: instead of requiring licensors to add to the pool administrator s unsuccessful efforts by proposing specific individual license terms to implementers, the law could shift the burden of making adequate individual licensing proposals to implementers that have rejected package license proposals from a properly structured patent pool, similar to the Orange Book 31 approach under German law. Shifting the proposal burden to the implementer seems appropriate because the implementer (i) has already been presented with a licensing offer; (ii) knows which conduct and which patents are at issue; and (iii) is best positioned to determine why the pool license does not meet its needs. Moreover, shifting the proposal burden eliminates the implementer s ability to engage in the delay tactics discussed above and decreases transaction costs. One-Blue hopes that the Commission will keep this proposal in mind, or consider other ways to allow properly structured patent pools to offer appropriate enforcement mechanisms to participating licensors, as it further refines the conditions under which infringing manufacturers may be considered unwilling licensees. II. Technology Transfer Guidelines As noted, One-Blue believes that the patent pool section of the Technology Transfer Guidelines generally provide a useful framework for the establishment and operation of patent pools consistent with EU competition law. The resulting legal certainty is an important factor in enabling pool formation. One-Blue respectfully submits, however, that a few areas would merit refinement: Safe harbor. The safe harbor concept in para. 261 of the Guidelines is useful, but many of the safe harbor conditions are vaguely defined. For example, to fall into the safe harbor, patent pools must adopt sufficient safeguards to ensure that only essential technologies are pooled. However, sufficient is not defined and requires consultation of other, highly complex, sections of the Guidelines. One-Blue encourages the Commission to increase the precision of the safe harbor in future revisions of the Guidelines pool administrator. See Opinion of Advocate General Wathelet in Case C-170/13 Huawei/ZTE (Nov. 20, 2014), paras. 82, 84. One-Blue takes no position about what principles should apply in cases where the patent(s) in dispute are not available for license through a patent pool. See German Federal Court of Justice, Decision of May 6, 2009, KZR 39/06 Orange Book Standard, juris, paras. 29 et seq. 12

18 Essential v. Non-Essential Patents. Paragraph 263 of the Guidelines recommends that formerly essential technologies, which have become non-essential because the standard was changed or in the case of so-called commercially essential patents due to the emergence of new technology, normally should be removed from a pool. The Guidelines also suggest that the resulting royalty rate should be lower. This seems unnecessarily restrictive. First, pools need safeguards to ensure that licensees that have sunk costs into formerly essential, but now superseded, technology are not subject to hold up from the licensor whose technology is no longer in the pool. This justifies inclusion in the pool license of formerly essential patents at least for existing licensees. Second, it is far from clear that removing certain technologies from the pool should automatically lead to lower royalties. Indeed, given the significant costs savings involved in patent pooling, the royalty rate post-exclusion of formerly essential patents often will continue to be fair and reasonable and there will be no need to adjust the total rate. Enforcement. The Guidelines are silent on patent enforcement in the patent pool context. One-Blue would welcome a clear statement that joint enforcement mechanisms in otherwise properly structured pools increase formation incentives and raise no competition concerns. III. Patent Pool Guidance Outside of the EU and US Jurisdictions outside of the EU and US have increasingly issued guidelines on the interface between intellectual property and competition law that also include guidance on patent pools. China and Korea are prominent examples. Although the relevant sections on patent pooling are still relatively basic, it will be interesting to follow their implementation in practice. Inconsistent guidance on patent pooling would complicate the formation and operation of patent pools because it is very difficult for patent pools with global license programs to tailor these programs to specific countries. One-Blue therefore encourages the Commission to monitor patent pool guidance of its sister agencies in other parts of the world, and proactively engage in dialogue to avoid divergent (and potentially more restrictive) patent pooling principles. Topic 3: Organizational Links Q Right moment for pool creation: What is the right moment in the standard setting process to start the process of creating a patent pool? What part of work on setting up a patent pool start could/should be done in parallel to the standard setting discussions? To maximize the adoption of new standards, patent pooling should begin as early as possible. A licensee should be able to apply for a pool license prior to manufacturing products reading on the pooled patents. To date, patent pooling mostly commences after the standard has been finalized, and patent pools typically are established only after standard-compliant products have entered the market. To ensure that a patent pool is established before products reading on the pooled patents 13