4iP News

​Growing European Jurisprudence on Hold Out

19 June 2019

Follow up to our 2017 paper by Heiden & Petit where the authors observed an increasing trend of significant delays.

In a 2017 paper Heiden & Petit explored patent holdout, conducting a survey with 20 licensing executives from SEP licensing firms. Holdout strategies are where implementers seek to delay taking a license as long as possible, in order to pressure SEP holders to accept sub-optimal terms. The authors observed an increasing trend of significant delays across all actors with since 2011 and survey respondents noted a reduction in licensing revenue from delay (44%) and non-payment (39%). The authors noted that SEP implementers therefore had a rational incentive to delay in accepting an early offer, as this would drive down on FRAND royalties.

Heiden & Petit listed different tactics, such as ignoring correspondence; unreasonable postponement of negotiations; extreme counter-offers or not in accordance with industry practice; seeking licenses to individual patents instead of SEP portfolios; focusing on specific jurisdictions instead of worldwide markets; refusal to engage a 3rd-party to set the FRAND rate (e.g. arbitration); complaining to competition authorities; and seeking to alter standard setting organisations’ IPR policies.

In the last years, however, national courts across Europe have given strong support to the Heiden & Petit paper, by identifying clear hold up strategies. The basis of national jurisprudence is the guidance handed down by the European Court of Justice in Huawei v ZTE, which imposed requirements on implementers to demonstrate willingness, good faith and diligence. National courts sought to qualify the extent of these obligations and found the following to demonstrate unwillingness; a 5 months delay in responding to the initial FRAND licensing offer; submitting a counter-offer 1 and a half years after receiving the SEP holder's FRAND licensing offer; waiting half a year after the SEP holder brought an infringement action; the implementer rendering accounts and providing security for potential royalties based on a counter-offer, more than a month after it’s first counter-offer was rejected. Of course, in a number of these cases, implementers may not have been acting in bad faith but rather were faced with a lack of legal clarity as to what was required of them.

There are a now a growing number of cases where courts have identified deliberate hold out strategies. In 2018, UK Court of Appeal, in Unwired Planet v Huawei, recognized that it would be wholly impractical for a SEP holder to negotiate a licence or enforce its patents on a country-by-country basis as this would incentivise hold out on a country-by-country basis. In Conversant v Huawei and ZTE, the UK High Court took a consistent view; forcing a SEP holder to separate licenses per-country rather than take a global license could be characterized as a ‘hold-out charter’. Earlier this year, in TQ Delta v ZyXEL, the UK High Court explicitly found that ZyXEL engaged in ‘hold-out’ by infringing a patent in suit for many years, yet postponed any payment for as long as possible (prevaricating whether to submit to a court-determined RAND rate for valid and infringed patents, and only for the UK patent). The court noted that denying TQ an injunction would enable ZyXEL to benefit from their hold-out strategy.

Most recently, on 7 May 2019, the Court of Appeal of The Hague handed down its decision in Koninklijke Philips N.V. v Asustek Computers INC. The court found that Philips had discharged its FRAND burden to notify Asus, but that Asus failed to demonstrate its willingness to obtain a licence on FRAND terms. In these conditions the Court of Appeal found that Philips was entitled to seek an injunction.

The court details the tactics that Asus deployed to avoid taking a license. In particular, Philips always initiated negotiations; Asus was not represented by technical experts needed to evaluate Philips’s portfolio, and so negotiations could not progress; where Asus raised technical issues these were a pretext intended to stall the negotiating process which the court qualified as ‘behaviour also referred to as “hold-out.”

Hold-out is no longer a theory but an observable and ongoing practice, not only by fringe players but world-renowned companies. It raises the question whether the regulatory framework is effective in protect long-run consumer welfare, as implementer leverage their stronger bargaining power resulting in market inefficiency, reduced R&D efforts and standards evolution.