We need to talk about hold-out

Courts around the world have called out bad faith negotiation delay strategies by unwilling licensees in FRAND-related disputes. It is important they do so because of the multiple harms such behaviour causes. Policy makers should take note

By David Muus

Last week I wrote a piece for Sisvel Insights that looked at a recent decision by the Delhi High Court in a FRAND/SEP dispute involving Ericsson and Indian device manufacturer Lava. The ruling touched on several important issues and looks set to have significant long-term implications.

Among the most important aspects of the case is that the judge, Honourable Justice Amit Bansal, recognised Lava had engaged in something that is all too familiar to standard essential patent (SEP) holders offering licences to implementers: the deliberate frustration of FRAND negotiations by an unwilling licensee. This is a strategy commonly known as “hold out”.

Courts call out unwilling licensees

The Delhi decision is just the latest in a string handed down by major courts across the world that acknowledge this bad faith practice as a major obstacle to the completion of FRAND licensing agreements. It is one that policy makers should take note of too.

In essence, hold-out is a negotiation strategy based on a “why don’t you make me?” approach to licensing. This type of bullying behaviour has been documented to include:

• Ignoring notice letters and other communications (for months or years).

• Saying that you are willing to take a FRAND licence for individual patents if essentiality and validity are confirmed by a court.

• Ceaseless, drawn-out information requests and endless NDA “negotiations”.

• Claiming not to understand licence offers.

• Denying access to information on sales that would enable royalty discussions.

• Making ridiculous counter offers (we have seen offers which turned out to be more than 350 times lower than what a court found reasonable) or not making any at all.

• Refusing offers of a global licence, despite having global sales and supply chains.

• Pointing negotiations towards suppliers that are, in turn, lukewarm on engaging.

There are many more examples. Most, if not all, SEP licensors will have been on the receiving end of such tactics. They are designed to do just one thing: delay the day a royalty is paid in the hope that the owner of the patented technology runs out of steam, or the patent runs out of time.

Personal experience

At Sisvel, we have our own experience of judges identifying hold-out. In Sisvel v Wiko, the Karlsruhe Appeals Court found that reactions to licence offers by the defendant always had a belated response and that they were only forthcoming after constant reminders. Serious engagement was usually only inspired by developments in the court proceedings.

That case saw some truly egregious examples of the hold-out genre. These included: refusing the court’s suggestion to engage in settlement negotiations; refusing to sign an NDA without any explanation, despite repeated offers; and trying to argue that school holidays and staff shortages were sufficient justification for delaying negotiations (really!?).

All were considered by the court to be signs of unwillingness as they demonstrated the infringer was not prepared to participate in negotiations in a “target-oriented manner”.

The German Supreme Court took a similar approach in the much discussed Sisvel v Haier case. According to this landmark judgment, an implementer must “clearly” and “unambiguously” declare willingness to conclude a licence agreement with the SEP holder on FRAND terms and, subsequently, engage in negotiations in a “target-oriented” manner.

By contrast, it is not sufficient, in response to a notification of infringement, to only say that you are willing to agree a FRAND licence without saying what it might be. Neither is it enough to only enter negotiations about whether and under what conditions taking a licence comes into question. In other words, real negotiations with real counteroffers matter; mere lip service does not.

Beyond Europe

Meanwhile, in the United States several recent first instance decisions have - as I explored in an article earlier this year - also shone a light on bad faith approaches by implementers to FRAND licensing negotiations.

Traditionally, the American courts have tended to see the damage done to the licensor as their primary consideration. However, over the last year, during the trials of 3G Licensing v HTC and G+ Communications v Samsung, much greater emphasis has been placed on whether a defendant has genuinely engaged in the proper process of bargaining a deal under FRAND principles.

Now we have the Delhi High Court’s findings to add to the list. It is worth highlighting a couple of extracts from the judgment document which are contained in the summary of the decision Justice Bansal provided at the end of the full ruling. On page 471, he writes:

I have highlighted the necessity of negotiating FRAND rates in Good Faith, while holding that since SSOs do not assess patent validity or essentiality, alleged infringers have a right to challenge patents during or even after negotiations. At the same time, patent owners can seek legal remedies, including damages for past use, if infringers fail to respond in good faith to a FRAND offer.

Lava has been held to be an Unwilling Licensee due to its failure to negotiate with Ericsson in good faith, consistently delaying licensing negotiations, and failing to respond to offers or present any counteroffer. Additionally, Lava’s lack of response to the court’s specific query on willingness to accept the same royalty rates as Micromax further demonstrates its unwillingness to engage constructively in the licensing process.

Multiple harms

In deliberately deploying bad faith delaying tactics, the unwilling licensee causes harm to multiple interests. Of course, it negatively impacts the innovator that has invested in the R&D which led to the creation of the technology the SEPs in question underpin. But it also damages the interests of the unwilling licensee’s competitors. After all, they are paying licensing fees while it is not.

All this means consumers are harmed too. They lose out twice: once because hold-out disincentivises further investments in R&D – so reducing the regular supply of cutting-edge new products; and again, because it distorts markets by giving bullies an advantage over moral actors.

This is why it is so important to constantly shine a light on hold-out behaviour. The courts are leading the way. Judges and juries see the reality of disputes up close and personal. They get to review matters of fact, inspect correspondence, ask questions, look the parties in the eye and get a 360-degree view as to why they are sitting in a court, instead of around a table.

This is a benefit that we don’t see repeated in the process that leads to regulation. Instead, too often in the recent past, legislative moves around patents seem to have been built within an information bubble full of opinion and theory leading to the assumption that the developers of technology are bad actors who need to be constrained.

Take the proposed EU SEP licensing regulation, for example. It is entirely one-sided in its perspective, placing greater burdens on patent holders while staying completely silent on hold-out. This is despite courts in various parts of Europe finding that unwilling licensees cause real and harmful problems.

Early in my career I was told that one of the jobs of a court is to figure out who the bad guy is and work its way towards applying the law to stop that bad behaviour. Bullying inventors with war-of-attrition-style hold out strategies sounds pretty awful to me. I am pleased the Delhi High Court has become the latest court to recognise this.

David Muus is head of licensing programmes at Sisvel