A few weeks ago, a court in Munich, Germany issued injunctions against Chinese manufacturer OPPO for infringing a number of standard essential patents (SEPs) held by Nokia, which OPPO uses in its smartphones. This followed the granting of injunctions against OPPO by a court in Mannheim, Germany, in June and July.
In response to the court decisions, the Chinese company announced that it will be exiting the Germany mobile phone market. Following OPPO’s lead, some commentators have taken the opportunity to use the ruling as evidence of “a failed SEP licensing system.” In reality, the details of this headline-catching case illustrate how the issue at the heart of the SEP – or any patent licensing system – is the relative lack of means to hold bad actors accountable. Without other incentives or penalties, the first, last, and only real recourse for a patent holder is an injunction. To better understand this, a little background on standards development is helpful.
The technology that enables 4G and 5G cellular connectivity is developed by multiple companies and individual innovators, under the framework of open, consensus-based standards. The rules of engagement are simple in concept. The standards development process is open and accessible to all. If a technology developer’s solution is selected, that firm or individual agrees to license its standards essential patents (SEPs) on fair, reasonable and non-discriminatory (FRAND) terms to companies that will implement that technology. R&D firm that invest in ground-breaking solutions early have the opportunity to make a return on their investments and implementors can design and manufacture new products with new, advanced capabilities.
This open innovation process of technology development can be contrasted to the closed or proprietary systems of technology development like iOS and Android mobile operating systems. Under the latter system, both ecosystems are controlled by a single gatekeeper, Apple or Google. The gatekeeper decides who has access to the technology and/or the platform – and who does not. Moreover, there seems to be no limit to the amount that these gatekeepers can charge. Currently, Apple and Google charge up to 30% of the resulting revenue for app developers to access the iOS and Android app stores.1
Armed with a deeper understanding of how open standard frameworks function, the suggestion that the injunction against OPPO is a sign of a failed SEP licensing system holds no water.
In Germany and throughout the EU – indeed in all countries that follow the seminal CJEU Huawei v. ZTE decision – an injunction will not be granted against an implementer like OPPO unless the implementer has rejected a FRAND offer or it has acted as an unwilling licensee, i.e. the implementer acted in ways that made it clear to an evaluating judicial system that it was not interested in negotiating or agreeing to a licence on FRAND terms and conditions.
What is important to note here is that before any injunction is granted, courts evaluate the conduct of the parties, in detail, to see whether they are willing to negotiate a licence on FRAND terms. An injunction will only be issued against an implementer if they are found to be unwilling to negotiate a FRAND licence.
In this particular case, OPPO would not be facing injunctions in Germany if it had been willing to negotiate licences in good faith. This points to the real problem with the FRAND licensing system: some implementers are simply unwilling to negotiate FRAND licences. This is a further example of the “hold-out” problem; a strategy used by certain implementers to delay licensing negotiations by rejecting FRAND offers while free-riding, i.e., continuing to use the patented technology without licence in. This problem is not just confined to OPPO: other recent court decisions have detailed how hold-out has become an endemic problem.2
The effects of widespread hold-out, which amounts to strategic and wilful infringement, are pernicious. Companies that act in good faith and conclude FRAND licensing agreements are at a commercial disadvantage vis-à-vis free-riding competitors who engage in hold-out. Moreover, widespread hold-out lessens the incentive to invest in standards that are critical to Europe’s innovative strength, and may in the longer term even disincentivize European innovators to continue to invest in the contribution to the open standardization effort.
In context, the injunction against OPPO is indeed evidence, once again, of a fundamental problem in the SEP licensing system. However, this is not because OPPO was enjoined, but rather because OPPO had to be enjoined in the first place. It is worth keeping in mind that OPPO has been using the disputed 5G cellular technology for many years – without a licence, and, based on the evaluation of the court, without the intention of ever negotiating one in good faith. As a result, the SEP holder who developed the technology is not compensated for contributing their technology to the standard and making the upfront R&D investments. Looking at the intended design of the open standards framework, it is clear that it is geared towards promoting a mutually beneficial and innovative system, one in which SEP holders want to reach agreements with implementers so that their technologies are widely used in a mutually beneficial system – but crucially, they need good faith implementers with whom they can negotiate FRAND agreements. In the case of OPPO, they profited of access to the standardised technology, but were clearly unwilling to negotiate a licence on FRAND terms and conditions.
What this case makes clear is that access to the standards is not a problem. Rather, it is merely a red herring created by some free-riding implementers that want to be able to use technologies they have not developed without having to take a fair and reasonable licence. The real problem is the lack of incentives for implementers to negotiate FRAND licences to technology which they are already using – or penalties to deter or hold accountable those who do so anyway in bad faith. Until such incentives exist, SEP holders will be forced to use the only tool they have to bring recalcitrant implementers to the negotiating table: seeking injunctions in court.