Arbitration and mediation: resolving patent licensing disputes in the world of standardized technology

By Margarita Kato, Legal Case Manager, WIPO Arbitration and Mediation Center

With our mobile phone, we can play music on the move, phone a friend halfway around the world, or even print a document. Two important factors have made these things possible. First, impressive advances in technology, and second, the standardization of technology, which ensures our devices are able to communicate with one another. The aim of developing technology standards is to create a seamless and efficient business landscape for the commercialization of these technologies. However, in practice, market inefficiencies often emerge, which can create obstacles to business. Arbitration and mediation offer useful avenues to overcome such obstacles.

Standardization for interoperability

Standardized technology enables interoperability between products. These standards often go unseen but play a crucial role in enabling seamless communication between our digital devices. 5G, a cellular communication standard, is an example. Devices adopting the 5G standard can benefit from using the global infrastructure that enables 5G use. 5G promises faster data transmission speeds, ultra-low latency, greater reliability and access to huge network capacity. Some estimates suggest up to 100,000 patents make up the 5G standard.

Other standards relate to WiFi, semiconductor manufacturing and even the ability to share your location automatically when making an emergency call. The patents which are “essential” to a standard are called “standard essential patents” or “SEPs”. Devices that will use 5G, which may include everything from game consoles, factory equipment, to wearable health tech, will need to license the patented technology, or SEPs, which makes up the 5G standard.

Developing and managing standards

Standards are developed and set by a variety of different stakeholders. Standards for 3G and 4G technology were designed by the International Telecommunication Union (ITU), which, together with its members, is now developing international standards for 5G networks. The European Telecommunications Standards Institute (ETSI) also develops standards for 5G and has a number of patented component technologies, which will be integrated into future 5G systems.

A patent holder of a technology that has become part of such a standard is in the enviable position of knowing that there will be a large market for that technology. For example, if a patent becomes part of the 5G standard, the patent holder knows its technology will need to be licenced by all relevant manufacturers using the 5G standard. However, this scenario also creates the risk that holders of standard essential patents decide to exploit their position and demand higher royalty fees than justified.

Ensuring a fair deal with FRAND

To solve this problem, and ensure use of SEP-related technologies on fair terms, standard-setting organizations introduced “FRAND” licensing. FRAND stands for “fair, reasonable and non-discriminatory.” Patent holders who wish to have their patents included in a standard must agree to license their patents on FRAND terms. If they do not offer a FRAND license, the licensees may take legal action and request the court to set a rate deemed to be in line with FRAND terms. Equally, if a licensee refuses to take a FRAND license but continues to use the patented technology, the licensee may be sued for patent infringement.

Unwrapping the meaning of FRAND

So what does “fair, reasonable and non-discriminatory” licensing really mean? The “non-discriminatory” element of FRAND is fairly straightforward: patent holders agree to license their patents to anyone, thereby giving up their freedom to exclude anyone from using their technology. However, the terms of FRAND licenses also have to be “fair and reasonable,” which are inherently subjective concepts. This is where issues arise. For example, is a licensing rate, which at first seems too high, in fact reasonable insofar as it reflects the fact that other patents, which are not included in a standard, are also being licensed? Or are differences in rates justifiable because they are offered at different stages of the supply chain? For example, with one rate offered to the up-stream manufacturers of individual electrical components and another to the company further downstream, which is selling the final device. These are all considerations, which make the determination of what is “fair and reasonable” a very fact-specific process.

Some FRAND licensing negotiations inevitably end up in court with parties seeking clarification on what constitutes FRAND terms. However, such court disputes can become very expensive and messy. In some instances, companies have sued each other in different countries, requested injunctions and even drawn out proceedings for strategic purposes. Perceptions have also been created, fair or not, that certain national courts are more favorable to patent holders and others more favorable to implementers. Parties then have an incentive to pursue litigation in one country over another, depending on their objectives, and to try to block their counterparty from pursing litigation elsewhere. Such dynamics benefit no one, least of all end users, who may be the ones absorbing these costs of doing business.

Interaction with national courts

That is why, increasingly, courts are recommending that parties try arbitration or mediation to resolve SEP-related disputes. For example, in InterDigital v ZTE and Nokia , the Delaware District Court in the USA expressed its view that arbitration may be a suitable alternative, with the judge stating: "It does not seem to me that the litigation by itself is a very effective means to make an agreement between willing parties. I understand that the parties cannot agree on the scope of arbitration. If they could, or they could decide to have the arbitrator decide the scope, that would appear to be a possible way to proceed .”

The WIPO Arbitration and Mediation Center, which administers a variety of arbitrations and mediations, is seeing an increase in the number of FRAND cases, in particular, in the number of FRAND mediations. Filing mediation requests with the WIPO Center can be of strategic value to parties because a crucial element of FRAND licensing is for the licensor to demonstrate it is a “willing” licensor. Depending on the jurisdiction, agreeing to a mediation process may be one factor a court considers when determining willingness to license. The WIPO Center has seen one party make such systemic use of WIPO Mediation – filing numerous requests for WIPO Mediation as one way of demonstrating its willingness to make a deal.

Mediation can help parties resolve their disputes confidentially and in a manner that focuses on commercial interests.

The benefits of mediation and arbitration

There are other notable benefits of using mediation and arbitration.

Mediation can help parties resolve their disputes confidentially and in a manner that focuses on commercial interests. During a mediation, the mediator discusses the dispute with the parties to better understand their individual perspectives on the dispute. The mediator then uses that information to help the parties reach their own settlement, or suggest possible ways forward.

The focus isn’t on legal analysis but on identifying the mutual commercial benefit to the parties. And that’s a real benefit. In a number of such cases handled by the WIPO Center parties have not only reached a settlement but have concluded new commercial agreements.

Many courts have recognized the benefits of mediation. For example, the IP Courts in China have referred ICT patent infringement cases to WIPO Mediation. In addition, courts with particular expertise in IP in the United States and Germany have been encouraging parties to attempt mediation throughout court proceedings. The United States Patent and Trademark Office has also recently expressed its support for mediation and arbitration, by partnering with the WIPO Center to facilitate the resolution of SEP disputes.

The value and cost of FRAND disputes

There is a misconception that the patent portfolios at the heart of FRAND-related disputes and negotiations are of astronomically high-value. In fact, this is not always the case. For the many SMEs operating in this area, the sums at play in FRAND licensing simply do not justify the cost and time involved in going to court. Mediation is an affordable alternative, where costs can be kept low. For example, the WIPO Center often sees mediations where a mediator spends approximately 15 hours on a case. With indicative mediator fee rates between USD 300 and USD 600 per hour split between the parties, this can be a very affordable option, even if settlement isn’t reached. Indeed in two recent FRAND mediations, while the parties did not settle in full, they managed to significantly narrow the issues in dispute. The mediations related to disputes pending before courts in Europe and China and the parties were able to review sensitive information, such as comparable licences - by virtue of the confidential nature of WIPO Mediation - and reach agreement on certain issues.

Avoiding parallel proceedings

A final point to note is that mediation is a consensual procedure and a party can abandon the process at any time. Where parties want more finality, they can opt for arbitration, which offers a number of benefits over court litigation. For example, when a patent holder alleges breach of its patents in many different jurisdictions, inevitably, the patent holder will need to either start proceedings in those countries or choose to forgo enforcement in certain countries. However, with arbitration, parties can agree to consolidate all possible claims across all jurisdictions. This feature eliminates the uncertainty created by the broad use of injunctions where a party can apply for an anti-suit injunction to stop the other side from filing a claim in a different national court. However, what sometimes happens in FRAND disputes is that the other party then applies for its own anti-suit injunction. These conflicting anti-suit injunctions create additional costs and delays. These can be avoided with arbitration (and mediation), as parties can resolve their disputes and conclude a global license confidentially.

Like courts, arbitration offers interim measures

There is also a common misconception that if parties opt for arbitration, they must forego the legal tools available to national courts, such as, injunctions, measures for the preservation of assets, and orders for a party to provide security. However, under the WIPO Arbitration Rules, an arbitral tribunal can make such interim orders and parties are also permitted to seek interim orders from judicial authorities. This means that parties can benefit from a range of tools that are usually incorrectly associated with court litigation alone.

Increasingly, courts are recommending that parties try arbitration or mediation to resolve SEP-related disputes.

Given the support from courts to promote the use of arbitration and mediation for FRAND disputes, the hope is that parties will increasingly select mediation and arbitration as vehicles to resolve their disputes. This will benefit both the parties involved as well as end-users, who ultimately bear the costs of FRAND disputes.

Further information regarding the WIPO Center’s services is available online and any questions can be emailed to arbiter.mail@wipo.int.

Related Links

• Worldwide activities on licensing issues relating to standard essential patents