A Million Unlicensed Pieces - Nondiscrimination Commitments In The Supply Chain

Published date21 December 2020
Subject MatterAnti-trust/Competition Law, Intellectual Property, Antitrust, EU Competition , Licensing & Syndication, Patent
Law FirmYigal Arnon & Co
AuthorMr Eli Greenbaum

Rarely must patent infringers demand their right to pay royalties. But several multinational manufacturers have gone to court to insist that they - and not other participants in the supply chain - make payment of any patent royalties. From a contractual perspective, judicial analysis of such claims has focused on the non-discrimination prong of the fair, reasonable, and non-discriminatory ("FRAND") patent licensing commitment. In other words, some manufacturers have argued, and some courts and administrative agencies have agreed, that a patentee's refusal to provide FRAND licenses at all levels of the supply chain constitutes discrimination and, as such, violates the patentee's contractual obligation to license their patents in a nondiscriminatory manner.1 This Essay argues that such claims are misplaced - the principle of nondiscrimination provides no easy framework for analyzing such selective licensing of the supply chain. Rather, such questions must be examined through the more complex empirical, legal, and economic factors in specific circumstances.

I. Standards & Supply Chains

Patentees most often make FRAND commitments in the context of technological standard-setting. To take a common example, firms may hold patents that are "essential" for the implementation of cellular telecommunication standards. Manufacturers will not produce equipment for such telecommunication standards unless they can be sure of obtaining a license to such patents. On the other hand, patentees want to be sure they obtain fair compensation for their efforts in the research and development of the standard. Industry has typically tried to balance these conflicting interests by requiring patentees to license their standard-essential patents (often abbreviated as SEPs) pursuant to terms that are "fair, reasonable and non-discriminatory".2

But supply chains for the manufacture of standard-compliant equipment are often complex, and can involve several levels of manufacturing and integration.3 Current legal doctrine provides that patentees can only require a license from a single firm in such chains of manufacture, and that firms positioned later in the chain do not need additional licenses.4 As such, patentees must choose upon which element of the supply chain to bestow their licensing grace - and patentees have often chosen to maximize licensing revenue by choosing the last link of the chain. Patentees have reasoned that end manufacturers (often referred to as original equipment manufacturers or OEMs) sell their products at the highest price and, as such, are best placed to reward the patentee with the highest royalty payments.5

Firms in intermediate positions in the supply chain have attacked the choice of FRAND-committed patentees to license only the final, OEM entity. Debates over such practices have looked at their economic impact, as well as possible alternative arrangements in which the patentee neither snubs the intermediate manufacturers nor provides an actual license.6 Courts and commentators have also asked the more factual questions of whether intermediate components actually infringe FRAND-encumbered patents, and whether the language of any specific FRAND commitment addresses intermediate components.7 In practice, however, courts have defaulted to the perhaps simpler argument that ignoring intermediate manufacturers violates the contractual FRAND nondiscrimination commitment - that a patentee discriminates against intermediate supply links when it refuses to license those firms. This Essay argues, however, that the principle of nondiscrimination provides no easy response to the demand for component-level licensing, and that nondiscrimination cannot be used as a simple proxy to elide analysis of the more complex economic, legal and factual questions.

II. Nondiscrimination

Caselaw has used the nondiscrimination prong of the FRAND commitment to require the licensing of SEPs at all levels of the supply chain. For example, in the recent case of FTC v. Qualcomm, the Federal Trade Commission (FTC) asserted that Qualcomm was required to license its patents covering wireless telecommunications standards to all levels of the supply chain.8 Qualcomm, in contrast, argued that its FRAND commitments extended "only to device suppliers and not modem chip suppliers", the latter occupying a different rung on the supply chain.9 The district court dismissed Qualcomm's position, asserting that these distinctions along the supply chain violated Qualcomm's FRAND non-discrimination obligations.10 The court further held that Qualcomm's refusal to grant licenses to all entities in the supply chain constituted "an example of discriminatory conduct."11 However, aside from summary statements that Qualcomm's alleged discrimination against modem chip suppliers would have allowed Qualcomm to "achieve a monopoly" and "limit competing implementations," the court did not actually examine whether this interpretation of the nondiscrimination commitment would indeed quash economic inequalities in the royalty burdens borne by modem chip suppliers.12

The Qualcomm interpretation of the nondiscrimination commitment was quickly brandished by plaintiffs in the recent case of Continental v. Avanci.13 Avanci is a patent pool that provides licenses to cellular standards for use in automotive vehicles.14 Avanci generally restricts the grant of FRAND licenses to automotive original equipment manufacturers (OEMs) - the final link in the automotive supply chain - and does not grant FRAND licenses to intermediate component manufacturers.15 Continental, a supplier of components to automotive OEMs, argued that this practice breached contractual FRAND commitments and violated antitrust law. Specifically, the plaintiff argued that in refusing to license intermediate component suppliers, Avanci (and its members) discriminated between potential licensees and violated the contractual nondiscrimination requirement of the FRAND commitment.16

The court in Innovatio IP Ventures used similar logic in establishing FRAND royalties.17 In that case, the plaintiff brought a patent infringement suit against a wide range of commercial end users of the Wi-Fi technology standard. The plaintiff argued that any FRAND royalty awarded by the court should be calculated as a percentage of the value of the end use product that included wireless functionality, such as "laptops, tablet computers, printers" and wireless "access points."18 The court, however, held rather that the royalty rate should rather be based on the value of an intermediate component - the wireless chip incorporated within the end...

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