A few thoughts on the non-discriminatory prong of FRAND

Guest post by Carlos Muñoz Ferrandis*

While the Fair and Reasonable prongs of FRAND have been largely discussed, the prong now deserving an exhaustive analysis in the light of latest case law in Germany, UK and US is the Non-Discrimination (ND) prong of FRAND. At the end of the day, the interpretation given to the Non-Discrimination rule will have an impact on the incentives to innovate of the firms participating in the standard setting process and seeking a return on investment via SEP licensing. Hence, a “miss-shape” of this rule has the potential to harm the standardization process in itself.

So, how does one assess whether an offer complies with the commitment to license at non-discriminatory terms?

Back to the roots

When the IPR Policy of the European Telecommunications Standards Institute (ETSI) was first set, back in 1993, the ND prong of FRAND was meant to refer to a “most-favored-licensee” (“MFL”) rule (see Roger G. Brooks & Damien Geradin). Hence, every time a licensor would have started negotiations with a potential licensee, the latter would have been able to “enforce” the ND prong of FRAND and claim one of the past or current licenses of the licensor which presented the most favorable terms. In other words, a “happy-clappy” rule for the licensee, a considerable burden for the licensor, and a harm to the standardization process in the long run.

This IPR policy did not last too long as it was dethroned by a new one a year later, in 1994. The 1994 ETSI IPR policy refused the previous interpretation of the ND prong of FRAND. There was an aim of according the necessary flexibility to licensors to enable them to negotiate appropriate terms with each licensee based on the specific commercial circumstances of each case. Non-Discrimination did not necessarily imply identical terms. 

If ND is not aligned with an MFL rule, then what is meant by ND?

Through a competition law prism, price discrimination is not per se prohibited, but rather, it is seen as a possible natural effect derived from the behavior of the market itself, sometimes contributing to consumer welfare and economic efficiency. However, if price discrimination amounts to a distortion of competition, competitors can be excluded from the market and new-comers can even be prevented to access the market, and the licensor´s conduct may amount to an abuse of dominant position.

What it has to be highlighted here, so many times as needed, is the complexity in achieving this proof of harm to competition within the FRAND context. Some people believe in an automatic – and aimless – link between SEPs and abuse of dominant position. That said, the million-dollar-question is whether a distortion of competition is to be considered an essential requirement for the assessment of a potential break of the Non-Discrimination prong of FRAND.

 If this is the case, this sets a high and solid standard for the assessment of an abuse of dominant position on the basis of a FRAND violation. In practical terms, due to the genuine dominant position of every single SEP holder within its SEP licensing market, under the FRAND commitment, the SEP owner will always have to license out its SEPs (sooner or later, but always). Hence, the licensee here would have to prove a distortion of competition in downstream markets where these hypothetically discriminatory prices – or other contractual terms – will produce their effects.

Following the Non-Discrimination analysis performed by the Court of Appeal in the Unwired Planet vs. Huawei case (commented here by Vicente Zafrilla Díaz-Marta), first, a difference was struck between hard-edged Non-Discrimination according to the most favored licensee rule and general/soft-edged Non-Discrimination based on the intrinsic value of the SEPs. The Court, eventually, endorsed the general/soft-edged approach to ND. The general ND approach gives FRAND the holistic and agnostic meaning it was made for, thus establishing an objective benchmark to set the contractual terms – rates – for the license. On the contrary, the hard-edged approach does not fit with the Fair and Reasonable prongs of FRAND, as it establishes a primacy in favor of the ND prong, which will always apply no matter what the Fair and Reasonable royalty will be in the case at sight, and thus going against the unity of the FRAND concept.

The soft-edged interpretation of the Non-Discrimination prong of FRAND leads to the setting of a benchmark royalty “which is then available to all-comers who are similarly situated, taking into account comparable licenses as an essential element to assess the ND prong of FRAND” (parr. 183 Unwired Planet vs. Huawei appeal).

Once the benchmark for ND has been established, an effects-based approach to assess potential anti-competitive effects will be appropriate (parr.197 Unwired Planet vs. Huawei appeal). Within a competition law perspective, as stated by the AG in his opinion on the Case C-525/16 MEO-Serviços de Comunicações e Multimédia SA vs. Autoridade da Concorrência (decision commented here by Urška Petrovčič) : […] the fact that an undertaking has been charged a higher price […]  may be characterised as a disadvantage, but it does not necessarily result in a ‘competitive disadvantage‘ ”. “The rules of competition law are designed to safeguard competition, not to protect competitors” [62].

Last two cents…

It is pertinent here to refer to Judge Selna’s decision in TCL vs. Ericsson case in the US. Firstly, he does not differentiate between hard and soft-edged ND, rather embracing the former. Furthermore, he held that harm to the firm being offered discriminatory rates is sufficient to amount to a FRAND violation. Such a hard-edged approach which does not take into account the “no distortion-of-competition” requirement appears to be inconsistent with EU law.

In this regard, it is to be recalled that, under the article 102(c) TFEU, applying dissimilar conditions to equivalent transactions with other trading parties may amount to a harm of competition if it is proved that:

  1. Equivalent/comparable transactions;
  2. Resulting in an actual or potential distortion of competition ;
  3. Absence of objective justification.

As held by the appeal court in the Unwired vs. Huawei case: “Competition law will always be available in an appropriate case” [182], but it is necessary to take into account the settled EU law jurisprudence on discriminatory conducts which is inconsistent with the hard-edged approach adopted so far in the US.

 

*Carlos Muñoz Ferrandis is an IP professional strongly interested in the ICT field, and more specially in the standardization context. He is currently doing a specialization course in Competition Law in the Instituto de Estudios Bursátiles de Madrid. He holds a University Degree in Spanish and French Law from University Complutense of Madrid & University Paris I Panthéon-Sorbonne of Paris, and an LL.M – Magister Lvcentinvs – in Intellectual Property & Information Technology from the University of Alicante. carlosmunozferrandis@gmail.com

 

 

 

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