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Electronic copy available at: https://ssrn.com/abstract=3092219
TILEC Discussion Paper
TILEC
Validity of Non-Disclosure Agreements in
SEP Licensing
By
Vikas Kathuria and Jessica C. Lai
DP 2018-004
ISSN 1572-4042
January 2018
ISSN 2213-9419 http://ssrn.com/abstract=3092219
Electronic copy available at: https://ssrn.com/abstract=3092219 Electronic copy available at: https://ssrn.com/abstract=3092219
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Validity of Non-Disclosure Agreements in SEP Licensing
Vikas Kathuria* and Jessica C. Lai#
1 Introduction
Intellectual property (IP) and competition law are often considered to be at odds with each
other. While the former confers property rights and, by definition, a degree of exclusivity,
competition law seeks to prevent the accumulation of market power and abuse thereof.1 The
exact relationship between competition law and patent law remains opaque, despite its ever-
growing importance. For example, while the fact that patents are granted means certain
licensing and enforcement practices do not contravene competition law, it must also be the
case that some do. Where exactly the line lies, or should lie, is uncertain. This paper focuses
on non-disclosure agreements (NDAs) and the prevalent industry practice of patent owners
requiring NDAs before they will negotiate or conclude licensing agreements, allegedly to
protect their patent rights. The paper examines licensing practices surrounding standard-
essential patents (SEPs), where there is typically a higher degree of market power or dominant
position and patentees have obliged themselves to license under Fair, Reasonable and Non-
Discriminatory (FRAND) terms. In particular, the paper addresses the effect of NDAs on the
non-discrimination prong of FRAND.
There is a general push for the disclosure of patent licensing terms, which is not
something new or particular to the SEP-FRAND situation. The fact that most patent licences
are never disclosed is partly to blame for the difficulties involved with developing a market
for patents and, related to this, in securitising patents.2 The core issue is patent valuation in the
absence of a reference point. Nevertheless, the SEP-FRAND situation is different. While a
patent owner always desires non-disclosure to prevent licensees and potential licensees from
comparing terms with one another, the SEP status increases the likelihood that the patent
* Assistant Professor, Bennett University Law School, India; Extramural Fellow at Tilburg Law and
Economics Center (TILEC). Contact at vikaskathuria18@gmail.com. I worked on this article while working
at the Competition Commission of India as a Research Associate. The opinions expressed in this article are
the author's own and do not reflect the view of the Competition Commission of India. We are grateful to
Santanu Mukherjee and Abhinav Dixit for very helpful discussions and comments on the paper.
# Senior Lecturer, School of Accounting and Commercial Law, Victoria University of Wellington. Contact at
jessica.lai@vuw.ac.nz.
1 Olav Kolstad, ‘Competition Law and Intellectual Property Rights - Outline of an Economics-Based
Approach’, in Josef Drexl (ed.), Research Handbook on Intellectual Property and Competition Law,
Cheltenham, UK: Edward Elgar, 2008, pp. 3-26, at pp. 11-13
2 See e.g. Jeff Leung ‘Patent Securitizations, Patently Bad Idea? Risk/Benefit Approach Reveals Possible
Reasons for Lack of Patent Securitizations’ (2006) 25 IPL Newsletter 4; MC Odasso and E Ughetto ‘Patent-
backed Securities in Pharmaceuticals: What Determines Success or Failure’ (2011) 41(3) R&D Management
219; M Ritsch ‘Patent Portfolios as Securities’ (2013) 63 Duke LJ 89; A Nikolic ‘Securitization of Patents
and its Continued Viability in Light of the Current Economic Conditions’ (2009) 19(2) Alb LJ Sci & Tech
393
Electronic copy available at: https://ssrn.com/abstract=3092219 Electronic copy available at: https://ssrn.com/abstract=3092219
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owner conducts anti-competitive behaviour. This is because a truly standard-essential patent
is near (or actually) impossible to work around, making the technologies they protect akin to
essential facilities. An SEP is, thus, more likely to confer substantial market power or a
dominant position compared to a non-SEP patent.3 Moreover, non-disclosure makes it
difficult (if not impossible) to determine if terms are “non-discriminatory” with reference to
comparable licences.
The following part of this paper examines the patent law and competition law interface,
generally and with regard to SEPs and FRAND. Part three then analyses NDAs and licensing
practices with respect to SEPs and FRAND. The objective of the paper is to discuss NDAs
against the backdrop of the standardisation process, FRAND commitments and the
commercial realities of patent licensing. The paper shows that the inclusion of royalty rates in
NDAs in licensing negotiations may be seen as contrary to FRAND obligations, especially
with respect to the non-discriminatory prong, and may run afoul of competition law where the
patent is FRAND encumbered. On a broader level, the paper underscores the changing
relationship between competition law and patent law in light of complex technologies and
standardisation, where simply recognising IP created exclusivity, by giving the patentee a
right to restrain any infringement or to impose reasonable conditions, might result in abuse of
dominant position. At the same time, the paper recognises that patent licensing is multifaceted
in real life. It examines the fact that there are valid justifications for NDAs and that the idea of
“non-discriminatory” might be illusory due to the commercial realities surrounding patent
licensing.
2 Patents and Competition Law
2.1 The General Relationship
Though some patents do form the basis of market monopolies, patents do not automatically
equate to market monopolies.4 Most granted patents are never worked or exploited, and of
those that are the majority do not result in market monopolies. This is because patents do not
preclude the introduction of close substitutes or competing products/services.5 Patents
3 Not all SEPs are actually essential for a standard, as it depends on the definition of “essential” that an SSO
uses. Furthermore, many SEPs are substitutable by other SEPs or cover side or extra technologies. See
David J. Goodman and Robert A. Myers, ‘3G Cellular Standards and Patents’, International Conference on
Wireless Networks, Communications and Mobile Computing (13 June 2005, Maui, HI, USA).
4 That IP grants monopolies is often mistakenly claimed; e.g. GS Alexander and EM Peñalver, An
Introduction to Property Theory (Cambridge University Press, 2012) at 185; United States Department of
Justice and Federal Trade Commission, ‘Antitrust Guidelines for the Licensing of Intellectual Property’ (12
January 2017) at 4.
5 As noted by RA Epstein ‘Intellectual Property: Old Boundaries and New Frontiers’ (2001) 76(4) Ind LJ 803,
817. See also EW Kitch ‘Elementary and Persistent Errors in the Economic Analysis of Intellectual
Property’ (2000) 53 Vand L Rev 1727, 1729–30; KW Dam ‘The Economic Underpinnings of Patent Law’
(1994) 23 J Legal Stud 247, 249-51, who submits that a better description for patents would be the grant of
‘economic rents’ (a cost advantage that one economic actor enjoys over competitors). The fact that patents
seldom confer market monopolies (and the fact that patent owners can price discriminate) means that the
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typically only assist in the creation of market monopolies in situations where there is no
economically viable substitute technology, no substitute at all (such as with certain gene
patents, for example), or the patent forms part of a global (or semi-global) standard and is an
SEP. Examples of SEPs are patents that cover the necessary technology for MP3, DVD, 3G
and 4G. SEPs and the particular competition law issues they raise are discussed in more depth
below (Parts 2.2 and 3.2).
Despite the potentially anti-competitive nature of patents, we grant them on the
presumption that – in most cases – it is of overall benefit for society to put up with a time-
limited decrease in competition in exchange for incentivising the creation or invention and
disclosure of the invention, and the investment put into bringing it to market. The presumed
decrease in competition is only in the exact thing the patent protects and this does not
necessarily affect market share.6 Of course, ‘patent thickets’ can, in theory, reduce
competition and innovation.7 Patent thickets of fragmented and overlapping patent rights have
been argued to contribute towards a tragedy of the anti-commons, where information or
knowledge is not further developed because there are too many different owners who can
block each other and other potential users.8 Yet, there is little empirical evidence that patents
actually hinder innovation,9 for various reasons.10 At the same time, if a few strong
incumbents dominate the existing market, forming a patent thicket, having a patent (and the
shield-like bubble it can create) can help a new entrant to penetrate the market.11 Patents can
thereby facilitate competition.
Moreover, though patents might introduce short-term reduction in competition, they can
promote innovation by, firstly, incentivising invention and, secondly, forcing competitors to
come up with non-infringing competing products or services, which ultimately increases
consumer choice and competition. The flip side of the coin is that a competitive market forces
deadweight loss usually associated with monopolies may not be so extreme; FS Kieff ‘Property Rights and
Property Rules for Commercializing Inventions’ (2001) 85 Minn L Rev 697, 727–32.
6 FS Kieff ‘Property Rights and Property Rules for Commercializing Inventions’ (2001) 85 Minn L Rev 697
at 730.
7 ‘Patent thickets’ have been defined as “a dense web of overlapping intellectual property rights that a
company must hack its way through in order to actually commercialize new technology.” See Carl Shapiro,
‘Navigating the Patent Thicket: Cross Licenses, Patent Pools and Standard Setting’, in Adam B. Jaffe, Josh
Lerner and Scott Stern (eds), Innovation Policy and the Economy, Vol. I (Cambridge, MA: MIT Press,
2001) 119-150
8 As famously stated by Michael A. Heller and Rebecca S. Eisenberg, ‘Can Patents Deter Innovation? The
Anticommons in Biomedical Research’ (1998) Science, 280, pp. 698-701.
9 See James Bessen and Michael J. Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put
Innovators at Risk (Princeton: Princeton Univeristy Press, 2008) at Chpt. 6, who conclude from empirical
evidence that patents are a “brake” or “drag” on innovation (including research and development), not a
“roadblock” (at 145-146).
10 See Jessica C Lai, ‘A Right to Adequate Remuneration for the Experimental-Use Exception in Patent Law:
Collectively Managing our Way Through the Thickets and Stacks in Research?’ (2016) 1 Intellectual
Property Quarterly 63-86, at 64-65.
11 Stuart JH Graham and Ted Sichelman, ‘Why Do Start-Ups Patent?’ (2008) 23 Berkeley Tech LJ 1063, 1065
and 1079-1080. See also Ted Sichelman and Sean O’Connor, ‘Patents as Promoters of Competition: The
Guild Origins of Patent law in the Venetian Republic’ (2012) 49 San Siego L Rev 1267.
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firms to innovate to gain a cost advantage, differentiate their products or bring new products
to market.12
Patent law’s perceived positive externalities do not mean that using, relying on or
enforcing patents can never be in contravention of competition law. The competition laws and
guidelines of many jurisdictions explicitly deal with the competition law and IP relationship.13
Though society is willing to accept a certain level of exclusivity and even market power or
dominance resulting from patents, there is a line that competition law monitors. What exactly
is across the line varies depending on the jurisdiction.
2.2 SEPs and FRAND
SEPs are patents that contain technology that is essential to a technological standard, such as
3G or 4G. Standardisation is often a lengthy process where Standard Setting Organisations
(SSOs) set the standards in negotiations with the competing developers of the technology. The
European Telecommunications Standards Institute (ETSI),14 is one such SSO that the
European Union officially recognises as a European Standards Organization.15
Standardisation is desirable because it ensures interoperability of products from different
manufacturers, which is pro-competitive, and can result in positive network-externalities.16
For a patent to become recognised as an SEP, patent owners usually oblige themselves to
license their patents on FRAND terms.17 The patentees gain by having their patents
recognised as SEPs, which raises their status and ensures that whoever wants to use the
standard has to license their patent.18 In exchange for the recognition, the patentees essentially
lessen their patent rights by undertaking to grant licences on FRAND terms.19 If FRAND
12 The relationship between market structure and innovation is debatable in industrial organization literature.
While Arrow showed that a market that has several competitors is more conducive to innovation,
Schumpeter suggested that it is a monopolist that has the necessary incentives to innovate. The latest
research by Aghion et al., however, suggests an ‘inverted-U’ relationship between competition and
innovation, see, Kenneth Arrow, ‘Economic Welfare and the Allocation of Resources for Invention’ in The
Rate and Direction of Inventive Activity: Economic and Social Factors (Princeton University Press 1962);
Joseph Schumpeter, Capitalism, Socialism and Democracy (G. Allen & Unwin Ltd 1943); Philippe Aghion,
Nick Bloom, Richard Blundell, Rachel Griffith, and Peter Howitt, ‘Competition and Innovation: an
Inverted-U Relationship’ (2005) 120 Quarterly Journal of Economics 701.
13 e.g. Competition Act 2002 (Ind), s 3(5)(i); Commerce Act 1986 (NZ), ss 36(3) and 45; Competition and
Consumer Act 2010 (Cth), s 51; Commission Regulation (EC) No 772/2004 of 27 April 2004 on the
Application of Article 81(3) of the Treaty to Categories of Technology Transfer Agreements; and United
States Department of Justice and Federal Trade Commission, ‘Antitrust Guidelines for the Licensing of
Intellectual Property’ (12 January 2017).
14 ETSI <http://www.etsi.org/> accessed 24 April 2017.
15 ETSI <http://www.etsi.org/about> accessed 24 April 2017.
16 Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to
horizontal co-operation agreements (2011/C 11/01), para 263.
17 E.g. ETSI, ‘Intellectual Property Rights Policy’, cl 6.1. On FRAND licensing, see Chryssoula
Pentheroudakis and Justus A Baron (European Commission), ‘Licensing Terms of Standard Essential
Patents: A Comprehensive Analysis of Cases’ (2017).
18 Daryl Lim, ‘Standard Essential Patents, Trolls, and the Smartphone Wars: Triangulating the End Game’
(2014) 119(1) Penn State Law Review 1 at 4 and 10-11.
19 FRAND obligations turn property rights into pseudo liability rules. SSOs are private and agreements to
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terms were not a requirement for recognition as an SEP, this would potentially give patentees
the opportunity to abuse the dominant position that the SEP recognition gives them. The
patentees would then be able to extract higher rents from users compared to their pre-SEP-
recognition position.20
In Ericsson v CCI, a case pertaining to SEPs on 2G and 3G technology, the High Court of
Delhi stated that:21
the Competition Act is not concerned with rights of a person or an enterprise but the
exercise of such rights. The position of a proprietor of an SEP cannot be equated with
a proprietor of a patent which is not essential to an industry standard. While in the
former case, a non-infringing patent is not available to a dealer/manufacturer; in the
latter case, the dealer/manufacturer may have other non-infringing options. It is, thus,
essential that bargaining power of a dealer/manufacturer implementing the standard be
protected and preserved.
The Court, thus, acknowledged that the competition law implications with SEPs are different
than with normal patents. Implicitly, the mere refusal to license a normal patent does not
constitute an abuse of dominance, unless there are other aggravating circumstances.22
However, SEPs are a special class of patents due to the inability (or extreme difficulty) to
work around SEPs and the patentees’ FRAND commitments.23 Similarly, while seeking an
injunction for patent infringement of a normal patent might not be abuse of dominant position,
licence on FRAND terms are made within a private setting. That is, they are private in personam
agreements, and not in rem. Situations have arisen where SEP-holding firms have sued third parties for
injunctive relief, because of a failure to negotiate a licence. The third parties have argued that injunctive
relief should not be available, because the SEP-holding firms are obliged to licences on FRAND terms and
failure to do so is an abuse of dominant position. As with any area of law, the exact outcome of these cases
has depended on the law of the relevant jurisdiction and the behaviour of the parties of the dispute. E.g.
Broadcom Corp. v Qualcomm Inc., 501 F 3d 297 (2007); C-53/92 P Hilti AG v Commission [1991] ECR II-
1439; KZR 39/06 (6 May 2009) BGH; Huawei Technologies Co Ltd v ZTE Corp (16 July 2015) Case C-
170/13.
20 This is known as ‘hold up’ problem. To know how standardisation may confer market power “that distorts
competition and generates returns in excess of those contemplated by the IP laws”, see Daniel G. Swanson
and William J. Baumol, ‘Reasonable And Nondiscriminatory (RAND) Royalties, Standards Selection, And
Control Of Market Power’ (2005) 73(1) Antitrust Law Journal, 1-58, page 4.
21 Telefonaktiebolaget LM Ericsson v Competition Commission of India (30 March 2016) WP(C) 464/2014 &
CM Nos 911/2014 & 915/2015 at [199] (Delhi HC).
22 EU case law considers refusal to license IP right an abuse only in ‘exceptional circumstances’. See, Joined
Cases C-241 & C-242/91 P, Radio Telefis Eireann & Indep. Television Publ’ns Ltd v Comm’n,
[1995] ECR I-743 (ECJ) (Magill); Case C-7/97, Oscar Bronner GmbH & Co. KG v Mediaprint Zeitungs
[1998] ECR I-7791 (ECJ); Case C-418/01, IMS Health Gmbh & Co. v NDC Health Gmbh Co. KG [2004]
ECR I-5039 (ECJ). Case T-201/04, Microsoft Corp. v Comm’n [2007] ECR II-3601 (Ct First Instance); Case
COMP/C-3/37.792, Microsoft Corp. [2007] OJ (L 32) 23 (24 March 2004, Commission Decision). The
latest US case law mentions no such ‘exceptional circumstances’ and makes action against refusal to license
IP rights almost immune to antitrust application. See, Verizon Communications, Inc v Law Offices of Curtis
V Trinko, LLP, 540 US 398 (2004).
23 Huawei (n 19) paras 49–50; see also, Grasso, Roberto. ‘The ECJ Ruling in Huawei and the Right to Seek
Injunctions Based on FRAND-Encumbered SEPs under EU Competition Law: One Step Forward’.World
Competition 39, no. 2 (2016): 213–238, pages 221-222.
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this might be different for an SEP.
3 Non-Disclosure Agreements
3.1 Patent Licensing Practices and NDAs
Innovators often license their technology to downstream users or to technology implementers.
Licensing is a good way to monetise technology. There are no legal restrictions on the number
of licensees. As is often the case, the patent owner may also be present in the downstream. In
this situation, the conduct of the owner is subject to greater competition law scrutiny.24
Additionally, when the technology is FRAND-encumbered, the conduct of the owner invites
greater scrutiny, not only under competition law, but under civil law as well.25 The entire
process of licensing technology is intricate, and could be commercially and legally risky for
both licensor and licensee. So far as the rights of a licensee are concerned, contract law and
antitrust law can keep the behaviour of the licensor under check. At the same time, licensors
also need protection, even when their patents are not being infringed.
Patent licensing agreements are aimed at achieving the sharing or transfer of patented
knowledge.26 The kind of information that is usually disclosed may include trade secrets,
know-how, inventions, technical data or specifications, compilations of information, records,
testing methods, business or financial information, research and development activities,
product and marketing plans, and customer and supplier information. For licensors, this
information is critical and can affect their businesses substantially if misappropriated by
licensees or third parties. Therefore, such information that accompanies a licence ought to be
kept confidential.
While mutual trust plays a vital role in any commercial transaction, parties should take
adequate legal steps to safeguard their interests. There exists the possibility that one party
(potential licensor) accuses the other party (potential licensee) of misappropriating the
information disclosed during the negotiations.27 To avoid such a scenario and to safeguard the
24 This can be a case of ‘margin squeeze’, where the dominant firm in upstream market charges its downstream
competitor for a key input more than it charges its own downstream business. See, Richard Wish and David
Bailey, Competition Law (8th edn, OUP 2015) at 796-802. See also, Case C-280/08 P, Deutsche Telekom AG
v Commission (2010) ECR I-09555; Case C-52/09, Konkurrensverket v TeliaSonera Sverige AB (2011) ECR
I-00527; Case C-295/12 P, Telefónica & Telefónica de España v Commission (2014) EUR-Lex CELEX
LEXIS 2062 (10 July 2014)
25 For example, to strike a balance between ‘hold-up’ and ‘hold-out’ situations, the ECJ affirms that seeking
injunction against a ‘willing licensee’ may amount to abuse of dominant position by the SEP holder. Case
C-170/13 Huawei Technologies Co. Ltd v ZTE Corp. and ZTE Deutschland GmbH (Judgment of the
5th Chamber, ECJ, 16 July 2015).
26 Henry R. Hertzfeld, Albert N. Link and Nicholas S. Vonortas, ‘Intellectual Property Protection Mechanisms
in Research Rartnerships’ (2006) 35 Research Policy 825.
27 WIPO and ITC, ‘Exchanging Value. Negotiating Technology Licensing Agreements: A Training Manual’
(2005) WIPO Publication 906, available at
<http://www.wipo.int/edocs/pubdocs/en/licensing/906/wipo_pub_906.pdf> accessed 23 April 2017.
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entire transaction, potential licensors often require potential licensees to enter into NDAs
before they will even begin negotiating a licence. NDAs are agreements between two parties
(a disclosing party and a receiving party) that set out the information that the receiving party
is obliged to keep confidential; the breach of this agreement is actionable under law.28 In
general, NDAs are important for protecting secret information that can be sensitive if
competitors get hold of it.
Any sort of valuable information such as ideas, scientific research results and data,
chemical compositions and formulas, software development information, recipes, laboratory
methodology, and manufacturing techniques, trade secrets (in the form of valuable know-how
and/or show-how) can be kept confidential through NDAs.29 Price-related information
(licensing fee and/or royalty fee) is also often mentioned within the licensing agreement and
is therefore confidential. It should, however, be noted that all NDAs or confidentiality clauses
take into account the possibility that the parties may be required by law, rule or regulation to
disclose confidential information (which includes price-related information).
3.2 NDAs, SEPs and FRAND
3.2.1 Violation of the “non-discrimination” prong
SEP holders often use NDAs in their licensing practices. In fact, some SSOs advise using
NDAs. For instance, the ETSI Guide on Intellectual Property Rights states:30
It is recognized that Non Disclosure Agreements (NDAs) may be used to protect the
commercial interests of both potential licensor and potential licensee during an
Essential IPR licensing negotiation, and this general practice is not challenged.
Nevertheless, ETSI expects its Members (as well as non-ETSI Members) to engage in
an impartial and honest Essential IPR licensing negotiation process for FRAND terms
and conditions.
So far, the majority of literature on SEP licensing has focused on the ‘fair and reasonable’
prong of the FRAND commitment.31 The literature has addressed which contractual terms,
particularly regarding royalty, are fair and reasonable. Academics and courts have also paid a
28 For a general understanding of NDAs, see European IPR Helpdesk, ‘Fact Sheet. Non-Disclosure
Agreement: A Business Tool’ (June 2015), available at
<https://www.iprhelpdesk.eu/sites/default/files/newsdocuments/Fact-Sheet-Non-Disclosure-Agreement.pdf>
accessed 23 April 2017.
29 Stanley P. Kowalski and Anatole Krattiger, ‘Confidentiality Agreements: A Basis for Partnerships’, in
ipHandbook of Best Practices, Chapter No. 7.2, available at<http://www.iphandbook.org/handbook/ch07/p0
2/> accessed 24 April 2017.
30 Adopted by Board #94, § 4.4 (19 September 2013)
31 For a notable exception see, Richard Gilbert, ‘Deal or No Deal? Licensing Negotiations by Standard Setting
Organizations’ (2011) 77(3) Antitrust LJ 855. See also Roger G. Brooks and Damien Geradin, ‘Interpreting
and Enforcing the Voluntary FRAND Commitment’ (2011) 9(11) International Journal of IT Standards and
Standardization Research 1-23.
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significant amount of attention to determining the circumstances when approaching courts for
an injunction against putative licensees will be in violation of FRAND terms;32 essentially,
when seeking an injunction is not fair or reasonable.
The European Commission has dealt with allegations of excessive royalty resulting from
an SEP holder’s threat of injunction — this is an indirect way to check for a high royalty. For
instance, in the EU, in both Motorola and Samsung cases where the putative licensee (Apple)
contested the practice of determining royalty rates by looking at the net revenue from the sales
of the end-user device, the Commission saw the problem as being triggered by a patentee’s
use of an injunction against the putative licensee.33 As is clear from recent case law, the
European Court of Justice (ECJ) will only issue an injunction if the would-be licensee is
‘unwilling’.34 In the US, the Courts have been more disposed to determine the royalty rates
that could be fair and reasonable.35
The determination of fair and reasonable is not independent of the non-discriminatory
prong. Terms and conditions that discriminate between the similarly situated parties cannot be
termed as fair and reasonable.36 There have been allegations of discrimination as a
consequence of SEP holders using the value of end-user devices to determine the royalty
rate.37 Once again, there is a considerable amount of literature from both economists and legal
32 On this issue, see Pierre Larouche and Nicolo Zingales ‘Injunctive Relief in FRAND Disputes in the EU –
Intellectual Property and Competition Law at the Remedies Stage’ (2017) TILEC Discussion Paper DP
2017-004. In a case pertaining to 2G and 3G technologies, the High Court of Delhi stated that an SEP holder
seeking injunctive relief can amount to abuse of a dominant position in some circumstances, as it might
place undue pressure on the third party and affect bargaining power during negotiations. See
Telefonaktiebolaget LM Ericsson v Competition Commission of India (30 March 2016) WP(C) 464/2014 &
CM Nos 911/2014 & 915/2015 at [199] (Delhi HC). The threat of injunction “may significantly impede
effective competition by … forcing the potential licensee into agreeing to potentially onerous licensing
terms which it would otherwise not have agreed to”; Case COMP/M.6381 Google/Motorola Mobility [2012]
OJ C 75/01 at [107] (Commission Decision).
33 Case At.39985, Motorola - Enforcement Of GPRS Standard Essential Patents (29 April 2014) at 486; Case
At.39939, Samsung - Enforcement Of UMTS Standard Essential Patents (29 April 2014) at 62.
34 Case C-170/13 Huawei v ZTE (16 July 2015) at [63]-[69]. On this decisions, see Andreas Heinemann,
‘Standard-Essential Patents in Standard Setting Organizations: Competition Law and the Realization of
Licensing Commitments’ (2015) 10(12) Journal of Intellectual Property Law & Practice 947; Björn
Lundqvist, ‘The interface Between EU Competition Law and Standard Essential Patents – from Orange-
Book-Standard to the Huawei Case’ (2015) 11 European Competition Journal 367; and Pedro Henrique D
Batista and Gustavo Cesar Mazutti, ‘Comment on “Huawei Technologies” (C-170/13): Standard Essential
Patents and Competition Law – How Far Does the CJEU Decision Go?’ (2016) 47 IIC 244.
35 European Economics, ‘Patent Assertion Entities in Europe’, eds. Nikolaus Thumm and Garry Gabison (Joint
Research Centre) at 11 <http://publications.jrc.ec.europa.eu/repository/bitstream/JRC103321/jrc103321
online version.pdf> accessed 24 April 2017.
36 The FRAND commitment does not mean identical rates. See, Allan Shampine, ‘Applying the Non-
Discrimination Requirement of FRAND When Rates Change’ (2016) The Antitrust Source, available
at <http://www.americanbar.org/content/dam/aba/publishing/antitrust_source/aug16_shampine_8_5f.authch
eckdam.pdf> accessed 23 April 2017; Damien Geradin, ‘The Meaning of “Fair and Reasonable” in the
Context of Third-Party Determination of FRAND Terms’ (2014) 21(4) George Mason Law Review 919. See
also Gilbert (n 30) at 858–59.
37 Roberto Grasso, ‘Standard Essential Patents: Royalty Determination in the Supply Chain’ (2016) Journal of
European Competition Law & Practice 1.
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academics on this issue.38 There is, however, another way to discriminate amongst licensees
that has not gained much attention from scholars. In 2013 and 2015, a few licensees
approached the Competition Commission of India (CCI), complaining about Ericsson’s
requirement of NDAs as a precondition for entering into SEP licensing negotiations.39 They
alleged that by prohibiting the licensees from comparing the royalty rates, Ericsson was
charging some licensees more than others, which is discriminatory. Complaints filed against
Ericsson with the CCI by putative licensees have brought NDAs under antitrust scrutiny.
Consequently, there is now a need to discuss the non-discriminatory limb of the FRAND
commitment, in view of patentees requiring the non-disclosure of royalty rates.40
In the following, we argue how the non-disclosure of licensing/royalty rates may be seen
as a violation of the non-discriminatory prong of the FRAND commitment. Non-
discrimination essentially requires SEP owners to license similarly situated implementers on
the same terms.41 Non-discriminatory terms are determined by looking at comparable
licences.42 If all licensees sign NDAs, this can make it impossible for licensees to compare
their licensing terms, both price and non-price terms, which in turn can make it difficult to
determine whether terms are non-discriminatory.43 This gives the impression that the patentee
is seeking to make supra-normal profits by price discriminating between licensees.44
38 Some scholars argue that royalty rates should be based on the end-user product; see, Koren W. Wong-Ervin
and Jorge Padilla, ‘Portfolio Licensing at the End-User Device Level: Analyzing Refusals to License
FRAND-Assured Standard-Essential Patents at the Component Level’ (2016) available at
<https://ssrn.com/abstract=2806688 or http://dx.doi.org/10.2139/ssrn.2806688> accessed 23 April 2017; J.
Gregory Sidak, ‘The Proper Royalty Base for Patent Damages’ (2014) 10(4) Journal of Competition Law &
Economics 989–1037; but see Roberto Grasso, ‘Standard Essential Patents: Royalty Determination in the
Supply Chain’ (2016) Journal of European Competition Law & Practice 1.
39 Case No. 50 of 2013 [Micromax Informatics Limited v. Telefonaktiebolaget LM Ericsson (Publ.)]; Case No.
76 of 2013 [Intex Technologies (India) Limited v. Telefonaktiebolaget LM Ericsson (Publ.)]; Case No. 04 of
2015 [M/s Best IT World (India) Private Limited (iBall) v. Telefonaktiebolaget LM Ericsson (Publ.)].
40 This has been raised as a concern in Government of India, Department of Industrial Policy and Promotion,
Ministry of Commerce & Industry, ‘Discussion Paper on Standard Essential Patents and their Availability
on FRAND Terms’ (1 March 2016) at 26.
41 Daryl Lim, ‘Standard Essential Patents, Trolls, and the Smartphone Wars: Triangulating the End Game’
(2014) 119 Penn St L Rev 1.
42 See Chryssoula Pentheroudakis and Justus A Baron (European Commission), ‘Licensing Terms of Standard
Essential Patents: A Comprehensive Analysis of Cases’ (2017) at 96-99 and 147-150.
43 See Best It Worlds (India) Private Ltd v Telefonaktiebolaget LM Ericsson, Case No. 4 of 2015, Competition
Commission of India (12 May 2015) at [14]; Intex Techs (India) v Telefonaktiebolaget LM Ericsson, Case
No. 76 of 2013, Competition Commission of India (16 January 2014); and Micromax Informatics, Ltd v
Telefonaktiebolaget LM Ericsson, Case No. 50 of 2013, Competition Commission of India (12 November
2013). See also Daryl Lim, ‘Standard Essential Patents, Trolls, and the Smartphone Wars: Triangulating the
End Game’ (2014) 119(1) Penn State Law Review 1, at 83; and Chryssoula Pentheroudakis and Justus A
Baron (European Commission), ‘Licensing Terms of Standard Essential Patents: A Comprehensive Analysis
of Cases’ (2017) at 156, who state: “It is incumbent on the SEP holder to establish that its offer is FRAND.
This may require disclosure of existing licenses and other confidential information.”
44 See e.g. Intex Technologies (India) Ltd v Telefonaktiebolaget LM Ericsson, Case No. 76 of 2013,
Competition Commission of India (16 January 2014) at [7] and [17], where the CCI stated that Ericsson’s
refusal to share its commercial terms and royalty payments with other licensees was “strongly suggestive of
the fact that different royalty rates/commercial terms were being offered to the potential licensees belonging
to the same category” and “fortifie[d] the accusations of [Intex], regarding alleged discriminatory
commercial terms imposed by [Ericsson]”.
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It is true that patentees can charge differently situated licensees dissimilar royalty rates.45
“Non-discriminatory” does not mean that every licensee should have exactly the same terms
and pay the same licensing rates. Instead it means that those in a similar situation, wishing to
use the patented technology in the same way, should be treated the same.46 However, it seems
plausible that the formula or method used to determine different licensing/royalty rates can be
made public. Moreover, if non-discrimination essentially requires SEP owners to license
similarly situated implementers on the same terms, there is no need to keep the licence rates
with any particular party confidential.
Requiring an SEP holder to make royalty rates public does not mean that identical
licensing terms will result. In fact, requiring identical licensing terms for every licensee is
counterproductive.47 Richard Gilbert explains that any licensing programme for SEPs includes
a wide range of fixed and variable royalty terms.48 He further asserts that “[n]on-
discrimination does not require that every licensee pays the same royalty, but rather that every
licensee can choose from the same royalty schedule.”49
It may be the case that, in the initial phase of licensing, a successful licensee, who has
secured favourable rates from the patentee, insists on the non-disclosure of licensing terms,
including royalty rates, to achieve a competitive advantage over subsequent licensees.50 In
such cases, it may not be the intention of the patentee to generate supranormal profits by price
discriminating.
Notwithstanding any justifications for keeping the royalty rates classified, NDAs are not
impenetrable fortresses. NDAs are rendered essentially futile if the courts themselves decide
the royalty by comparing licences. In one Indian case, the Delhi High Court compelled the
SEP-holder, Ericsson, to furnish twenty-six global comparable licenses in sealed envelopes.
After examining these licenses, the Court determined the interim royalty rates pending trial.51
Interestingly, the royalty determined by the Court was less than the royalty agreed upon
between the parties. In another case, the Delhi High Court appointed an arbitrator and directed
45 Case T-201/04, Microsoft Corp. v Comm’n [2007] ECR II-3601, at 811 (“[N]on-discriminatory does not
mean that Microsoft must impose the same conditions on every undertaking seeking such licenses.”).
46 See Chryssoula Pentheroudakis and Justus A Baron (European Commission), ‘Licensing Terms of Standard
Essential Patents: A Comprehensive Analysis of Cases’ (2017) at 135.
47 Gilbert (n 30) at 21
48 “The royalty structures vary considerably among these programs and include fixed fees, fixed per unit fees,
fees that decline with the number of licensed units, different fees for different products, maximum caps, and
exemptions for small numbers of licensed units.” Gilbert (n 30) at 24.
49 Richard Gilbert (n 30) at 22
50 We are grateful to Santanu Mukherjee for this insight.
51 Telefonaktiebolaget LM Ericsson v Mercury Electronics & Anor, Case No. 442 of 2013 at [1] (12 November
2014, Delhi High Court) referring to an order made on 14 October 2014. The Court was careful to state that
it had not made a determination of the FRAND rates for Ericsson’s patents and that the “defendant shall not
rely upon the [determined] rates before the competition authorities or any other forums as it is not final in
nature.” At [9].
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the parties to enter into arbitration. The patentee was also directed to show agreements of
similarly placed parties to the putative licensee and directed that the information be kept
confidential in any jurisdiction.52 Furthermore, the US courts have also referred to existing
licences granted by the plaintiff to third parties to determine damages.53 The second factor set
out by the Georgia-Pacific decision provides for this method.54 If patent owners can be
compelled to divulge price-related licensing terms, the question arises of why such terms are
covered by NDAs in the first place.
Thus, in essence, one may prima facie conclude that NDAs do not serve any meaningful
purpose so far as they pertain to licensing/royalty rates. Economic theory suggests that price
discrimination is welfare inducing in some cases.55 Arguments based on this are convincing
with respect to justifying NDAs. However, price discrimination is not the issue here. Even if a
patentee has grounds to price discriminate, it is safe to reveal the formula used to differentiate
licensees. In other words, the patent owner can publish the different factors taken into account
in setting licensing/royalty rates and the weight given to the various factors. To ensure non-
discrimination, publication need not be to the public at large and disclosure of the formula
could be tied to the execution of an NDA. That is, once potential licensees sign NDAs
indicating that they are willing licensees, the patentee should divulge their formula for
calculating licensing/royalty rates. The increased transparency would allow putative licensees
to observe if similarly situated parties are paying a comparable royalty rate.
Scholars have proposed that disclosing the licensing terms to willing licensees is in
furtherance of the non-discrimination prong of FRAND.56 Mark Lemley and Carl Shapiro,
while proposing mandatory arbitration for the determination of FRAND royalty, suggested
that in order to give effect to the non-discrimination prong of FRAND, SSOs should require
SEP holders to mandatorily disclose to any willing licensee the terms on which it has already
licensed its SEPs to other parties. As a safeguard, they suggests a “suitable mechanism” to
protect the SEP holder’s confidential non-price business information.57 It should be noted
that, as a result of the non-discrimination commitment, former licensing terms are binding for
52 Case No. 50 of 2013 [Micromax Informatics Limited v. Telefonaktiebolaget LM Ericsson (Publ.)
(10.04.2013)
53 Jonathan S Masur, ‘The Use and Misuse of Patent Licenses’ (2015) 110 Nw U L Rev. 115
54 Georgia-Pacific Corp. v US Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970)
55 See, in general, Robert O’Donoghue and A Jorge Padilla, The Law and Economics of Article 82 EC (Hart
Publishing 2006) at 558-561. See also Richard Schmalensee, ‘Output and Welfare Implications of
Monopolistic Third-Degree Price Discrimination’ (1981) 71(1) The American Economic Review 242-47;
and FS Kieff ‘Property Rights and Property Rules for Commercializing Inventions’ (2001) 85 Minn L Rev
697, at 727-732.
56 “This disclosure is justified by the non-discrimination provision; it is hard to know whether a royalty
unfairly favors one party unless we also know what other parties had to pay.” Mark A Lemley and Carl
Shapiro, ‘A Simple Approach to Setting Reasonable Royalties for Standard-Essential Patents’ (2013) 28
Berkeley Tech LJ 1135, at 1145.
57 Mark A Lemley and Carl Shapiro, ‘A Simple Approach to Setting Reasonable Royalties for Standard-
Essential Patents’ (2013) 28 Berkeley Tech LJ 1135, at 1141. Of course, the licensee has to be a ‘willing’
one. The patentee is not supposed to share crucial business information with those who are not bonafide
licensees.
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later agreements, if the putative licensees are in a similar position.58 As discussed above, a
possible way to determine whether a party is a potential licensee is through the execution of
an NDA. In other words, once a potential licensee signs an NDA, the patentee should be
obliged to divulge its methodology for calculating licensing/royalty rates and its previous
licensing/royalty rates for the patents at issue.
Gilbert suggests bilateral negotiations between rights holders and industry members
“along with a clear non-discrimination requirement” before a technology is chosen as a
standard.59 Subsequent to the standardisation of the technology, other implementers can
benefit from the non-discriminatory prong of FRAND.60 He suggests that emphasising the
non-discriminatory prong of the FRAND commitment by making provision for ex ante
bilateral negotiation between patentees and implementers can provide a meaningful
alternative to the ‘fair and reasonable’ prong of FRAND. It has also been argued that licence
rates agreed upon in an arbitration proceeding with respect to FRAND-encumbered SEPs
should be made public.61 However, any such proposal can only be successful if the patentee
shares the licensing terms, more importantly, royalty rates, with other implementers.
3.2.2 Violation of competition law
Discrimination among similarly situated licensees resulting from the inclusion of royalty rates
in NDAs might not only be contrary to FRAND, but also run afoul of competition law. For
instance, Article 102(c) TFEU prohibits dominant companies from applying “dissimilar
conditions to equivalent transactions with other trading parties, thereby placing them at a
competitive disadvantage”.62
The inclusion of licensing/royalty rates in NDAs and potential discrimination is not the
only cause for concern for antitrust law. NDAs can additionally be used to extract
unreasonable rents through other means. In Intex Technologies (India) Limited v
Telefonaktiebolaget LM Ericsson, Intex argued before the CCI that Ericsson abused its
position of market dominance by insisting that Intex sign an NDA before Ericsson would
58 Mark A Lemley and Carl Shapiro, ‘A Simple Approach to Setting Reasonable Royalties for Standard-
Essential Patents’ (2013) 28 Berkeley Tech LJ 1135, at 1149
59 Richard Gilbert (n 30) at 4. One may disagree with this, as in an ex ante negotiations patentees may not “be
aware of the scope of the ultimately issued patents, and thus of what it is that they will be licensing”. David
David J. Teece and Edward F. Sherry, “Standards Setting and Antitrust” (2003) 87 Minn. L.Rev. 1913, at
1958, footnote 153.
60 Using the non-discriminatory prong of FRAND, albeit ex-post standardisation, for ensuring FRAND has
been suggested by others as well, see Anne Layne-Farrar, Gerard Llobet, & Jorge Padilla, ‘Preventing Patent
Hold Up: An Economic Assessment of Ex Ante Licensing Negotiations in Standard Setting’ (2009) 37
AIPLA Q J 445.
61 Yoonhee Kim, ‘Lifting Confidentiality of FRAND Royalties in SEP Arbitration’ (2013) 16 Colum Sci &
Tech L Rev 1.
62 Case C-27/76 United Brands Company and United Brands Continentaal BV v Commission (1978) ECR 207
(ECJ); Case 92/163/EEC Tetra Pak II (1992) OJ L72/1 (Commission Decision); Case T-301/04 Clearstream
v Commission (2009) ECR II-03155, 317 (Ct First Instance).
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even disclose which patents Intex was allegedly infringing.63 The NDA additionally prevented
Intex from sharing information with its vendors, who had guaranteed that they were providing
products that did not infringe upon any IP rights.64 This prevented Intex from checking with
its vendors whether they in fact already had licences for the allegedly infringed patents and,
therefore, there was no infringement. Thus, the NDA prevented the licensees from knowing
with certainty which specific patents were infringed. This is a serious allegation, as patent
owners could use such a strategy to essentially obtain two licences for a single exploitation; if
the licensee cannot discuss with its vendor, the patentee may charge multiple times for every
exploitation of a patent.65 NDAs could, thus, be used to circumvent the doctrine of exhaustion
or first-sale, which dictates that once a legal embodiment of a patented invention enters the
stream of commerce, the patentee’s rights to use, offer for sale, or sell are exhausted.66 A
patent owner cannot, thus, insist that both a manufacturer/vendor and a purchaser/user license
its patent. The use of NDAs to potentially “double dip” was one of the allegations in the
complaint against Rockstar.67
In the US case Charter Communications, Inc. v Rockstar Consortium US LP, the plaintiff
argued against the validity of NDAs with respect to SEPs, vis-à-vis antitrust laws. In some
cases, Rockstar required that the target company refrained from disclosing the substance of
licensing negotiations to any third party for any purpose whatsoever.68 Another complaint
made by Charter Communications against Rockstar was that the defendant required potential
licensees to sign NDAs as a pre-condition for negotiating licensing agreements, for the
purpose of obtaining royalties in excess of its royalty-free or F/RAND obligations.69 More
63 Telefonaktiebolaget LM Ericsson v Competition Commission of India (30 March 2016) WP(C) 464/2014 &
CM Nos 911/2014 & 915/2015 at [19.2]-[19.3] (Delhi HC). See also Charter Communications Inc. v
Rockstar Consortium US LP (1:14-cv-00055) (District Court, Delaware), where the plaintiff complained of
patent hold-up partly based on Rockstar’s refusal to identify the allegedly infringed patents. It appears that
this was settled out of court; <https://www.courtlistener.com/docket/4220382/charter-communications-inc-
v-rockstar-consortium-us-lp/>.
64 Telefonaktiebolaget LM Ericsson v Competition Commission of India (30 March 2016) WP(C) 464/2014 &
CM Nos 911/2014 & 915/2015 at [19.3] (Delhi HC). Intex further maintained that the NDA Ericsson
compelled them to sign was onerous because it was subject to the laws and jurisdiction of Singapore, which
could cause potentially high legal costs.
65 It is worth noting that there does not appear to be any valid reason for patentees refusing to divulge which
patents are allegedly being infringed prior to the conclusion of an NDA, or that an NDA prevents discussion
with third parties about which patents are allegedly being infringed. Patentees might argue that the SEP
portfolio is in flux, and may include more patents as and when they are granted, or less if a patent
application is refused or a patent expires. However, it is hard to believe that a company (especially one with
the resources that Ericsson has) does not know exactly what patents it has at any given time.
66 The right to make does not exhaust. That is, owning a legal embodiment of a patented invention does not
give one the right to copy that invention. See e.g. Bowman v Monsanto Co, 133 S. Ct. 1761 (2013)
67 “Rockstar used this strategy in an effort to coerce Plaintiffs, and others, to take a license to Rockstar’s entire
portfolio, including to patents not relevant to those parties’ products and/or services, as well as to patents
that were already licensed by Plaintiffs’ vendor(s).” Complaint, Charter Communications, Inc., v. Rockstar
Consortium US LP (D. Del. Jan. 17, 2014) (No. l:14-cv-00055-UNA) at [176].
68 Complaint, Charter Communications, Inc., v Rockstar Consortium US LP (D. Del. Jan. 17, 2014) (No. l:14-
cv-00055-UNA) paragraphs 166, 167.
69 Complaint, Charter Communications, Inc., v Rockstar Consortium US LP (D. Del. Jan. 17, 2014) (No. l:14-
cv-00055-UNA). Note that, in the US, FRAND is referred to as RAND.
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specifically, the plaintiff alleged that the “[d]efendants’ strategy of entering into non-
disclosure agreements … concealed the scope of Defendants’ assertions and further cast a
cloud of uncertainty over Plaintiffs’ business requiring the declaratory relief sought in this
Answer.”70
Connected to this, NDAs may result in exploitation because they can result in excessive
royalties. However, excessive royalty has not directly been an issue, so far, for competition
law. Rather, competition bodies have scrutinsed the use of injunctions as a tool to leverage
excessive royalties. Moreover, for a putative licensee, the chances of successfully bringing a
complaint through a competition agency, based on the allegation of exploitative prices, is very
low, as competition bodies hesitate to intervene on the basis of high prices.71
It is true that there are problems associated with using the antitrust framework to address
high prices. At best, competition agencies look for proxies. For instance, in China, an
allegation was made against Qualcomm regarding unreasonably high prices for licensing its
SEPs. Rather than looking into the high prices, the National Development and Reform
Commission (NDRC) looked at two strategies that allegedly led to high prices. First,
Qualcomm, when licensing its patents, did not offer a specified list of patents included in its
licences. Second, Qualcomm constantly conditioned the licensing of its SEPs on a free cross-
licensing agreement from its licensees.72 The Chinese competition authorities found that both
the strategies violated competition law and penalised Qualcomm heavily. It is not only easy to
apply such proxies to deal with exploitative prices,73 competition authorities can also use
proxies to avoid the accusation that they are using competition law for the purposes of
protectionism or to apply industrial policy.
Any antitrust scrutiny of the NDAs is, however, based on the assumption that such
restrictions are aimed at discriminating between the licensees to appropriate higher rates that
go beyond the incremental value of the SEP. The paper so far discussed the reasons for such
an assumption. The following part of the paper, however, looks at the practicalities of patent
licensing and discusses the plethora of factors that are potentially relevant for calculating
70 Complaint, Charter Communications, Inc., v Rockstar Consortium US LP (D. Del. Jan. 17, 2014) (No. l:14-
cv-00055-UNA) paragraph 163.
71 While Advocate General Wahl notes that competition bodies can intervene in cases of excessive prices, the
situations are limited. “… I am convinced that unfair prices under Article 102 TFEU can only exist in
regulated markets, where the public authorities exert some form of control over the forces of supply and,
consequently, the scope for free and open competition is reduced. See, Case C‑177/16, Biedrība
‘Autortiesību un komunicēšanās konsultāciju aģentūra – Latvijas Autoru apvienība’ v Konkurences padome
(Opinion of Advocate General Wahl, delivered 6 April 2017) at [48]. At paragraph 4, however, AG Wahl
notes that intervention is justified “… in markets with legal barriers to entry or expansion and, in particular,
in those in which there is a legal monopoly.” It is not clear if AG is also referring to the legal monopoly
created by patents.
72 Liyang Hou, “Qualcomm: How China has Invalidated Traditional Business Models on Standard Essential
Patents” (2016) 7(10) Journal of European Competition Law & Practice 686-689.
73 Case C‑177/16, Biedrība ‘Autortiesību un komunicēšanās konsultāciju aģentūra – Latvijas Autoru
apvienība’ v Konkurences padome (Opinion of Advocate General Wahl, delivered 6 April 2017).
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royalty rates and the reality that most licensees are probably not similarly situated.
3.3 Practical Difficulties: Who is “Similarly Situated”?
A core concept of the non-discriminatory prong of FRAND is the “similarly situated”
licensee. The meaning of “similarly situated” and what factors one can look at when
determining whether parties are similarly situated is an unsettled matter of definition. There is
a strong argument to be made that few licensees are similarly situated. More still, in light of
the significant range and complexity of patent licences, it could potentially be an
administrative burden for SEP-holders to furnish and justify their different royalty rates for
different licensees.
Patents are often licensed as part of a portfolio and may additionally include cross-
licensing. David Teece and Edward Sherry note that most licensing happens on a portfolio
basis.74 Furthermore, there may be licensees who have taken an entire portfolio, only to
subsequently have an included patent be declared an SEP, post-standardisation. In such a
situation, it is difficult to use the royalty rates for the entire portfolio to determine FRAND
rates for the single SEP that subsequent licensees want to use. Likewise, cross-licensing
among different portfolios reflects the commercial importance of the respective portfolios and
cannot be compared with each other.75 Determination of royalty rates in cross-licensing is a
lengthy and cumbersome task.76
There are other additional commercial factors that influence the royalty rates of patents. A
particular royalty rate may reflect the “long-term strategic consideration” of a patentee.77 If
both the parties expect to deal with each other in the future, an aggressive royalty rate in the
present will make any future negotiations more difficult, especially “when the balance of IP
may have shifted in a different direction.”78 Firms may also have overlapping interests in
other markets.79 A particular licence may also be a part of a collaborative joint venture,
resulting in favourable licensing terms that do not reflect market value.80 Additionally, there
have been instances where patents were traded for know-how, making it very difficult to
determine the value of the patent.81
74 Teece and Sherry (n 59).
75 In such cases balancing payments are negotiated between two parties. Net royalty payment goes to the party
with greater contribution after evaluating the value of both firms’ contribution. See, Peter C. Grindley
and David J. Teece, “Managing Intellectual Capital: Licensing And Cross-Licensing in Semiconductors
And Electronics” (1997) 39 (2) California Management Review 8-41, at page 18
76 ibid, at page19
77 ibid, at page 20
78 ibid, at page 20. For instance the authors note that “HP recognizes that it is likely to deal with the same
partners repeatedly and therefore normally does not require high royalty rates that could be used as
aprecedent against it in the future.”, at page 23.
79 ibid
80 bid
81 ibid
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Therefore, while it is true that the non-discrimination prong safeguards those licensees
that are similarly situated, it is a fact-based inquiry to identify the similarity or otherwise of
the licensees.82 As the foregoing discussion illustrates, there are a variety of factors that
differentiate (and likely individualise) the situations of various licensees. Because the
commercial reality is quite different from the “one patent, one standard, one licence”83
scenario, it will be burdensome for a patentee to justify the royalty for each granted licence.
This is especially the case when the licensing takes place on a global level, as there may be
numerous licensees. Thus, from a commercial standpoint it is not possible for the patentee to
justify a particular royalty each time a licensee comes to negotiate or renegotiate. During the
course of negotiation, justifying a particular royalty will result in enormous transaction costs
and delays that will slow down the dissemination of that very technology, resulting in social
costs. From a legal standpoint, however, it is for the licensee to argue that the royalty rates are
discriminatory. Only when the putative licensee discharges this burden, can the court call
upon the SEP-holder to defend the impugned royalty.
Furthermore, it is likely that making royalty rates for an SEP transparent will result in
existing licensees trying to renegotiate their royalty rates, if the standard is already in place.
Disclosing royalty rates with existing licensees could, therefore, open Pandora’s Box with
respect to a standard that is already in use, such as 4G. However, with respect to a pipeline
standard, for instance 5G, a mechanism could be devised that strikes a balance between the
non-discriminatory prong of the FRAND commitment and the business realities involved in
licensing.
4 Concluding Thoughts
NDAs, SEPs and FRAND underscore the realities of modern technologies and the power of
information asymmetry. In light of the mounting complexity of technologies, standardisation
and the related increase in bargaining power of SEP owners, it is crucial that competition law
has the ability to check against certain behaviours of SEP owners with respect to NDAs and
FRAND. As shown in this paper, the inclusion of price-related information in NDAs may be
contrary to the non-discriminatory prong of FRAND and in violation of competition law. The
change in bargaining power also suggests that we might have to reconsider the
appropriateness of statutory exemptions for IP and practices surrounding the exploitation and
enforcement of the same in competition law statutes,84 an issue outside the scope of our
inquiry, but worthy of further examination.
High technology embodied in SEPs is dynamic, where a product’s life-cycle is short.
While it is crucial to be able to quickly monetise patents to recoup risky R&D, equally
82 This explains the reason why the Delhi High Court ordered Ericsson to produce ‘comparable licenses’
83 See, Teece and Sherry (n 59), at 1963. The authors explain that ‘non-discriminatory’ issue is controversial in
the context of cross-licenses, where the licensing takes place between firms on portfolio basis
84 E.g. Competition Act 2002 (Ind), s 3(5)(i); and Commerce Act 1986 (NZ), ss 36(3) and 45.
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important is the avoidance of any legal risk. One such source of legal risk is the inclusion of
royalty rates in NDAs. This paper has examined the validity of NDAs from two different
dimensions. The first dimension showed that shrouding royalty rates in the cloak of an NDA
gives rise to the assumption that a patentee intends to price discriminate between licensees to
make supranormal profits — a violation of the non-discriminatory limb of the FRAND
commitment and potential antitrust infringement. To avoid such an adverse finding under
antitrust law, we first suggested that regardless of how the royalty calculation is made,
whether based on the smallest saleable patent-practicing unit or the end product, the
calculation methodology can be made public to the ‘willing licensee’. The SEP-holder can
explain why different implementers are charged different prices. Indeed, as NDAs include a
list of exceptions, licensing/royalty rates could be one of the exceptions to non-disclosure.
That being said, the second dimension showed that patent licences are often complex and
highly variable. Patents are often licensed as part of a portfolio, a cross-licensing agreement,
or an on-going relationship, or because of a joint venture, for example. It is, thus, often
difficult (if not impossible) to determine the royalty rate of an individual patent, or to
determine the royalty rate given to a similarly situated party, as few parties are similarly
situated. It might additionally be resource intensive for a patentee to explain and justify the
royalty rates for every pre-existing licence. Therefore, the suggestion that royalty rates be
disclosed to all licensees, does not hold well in view of the practical realties of patent
licensing. We, therefore, argue that, while it is justifiable that the FRAND commitment
regulates the opportunistic behaviour of licensees, antitrust laws should not restrict the
legitimate conduct of patentees. Of course, the challenge is to separate between opportunistic
and legitimate conduct, and one would expect that antitrust bodies look beyond the theoretical
possibilities and take account of the practical realties of the sector.
There is still a need to strike a balance between a patentee’s right of non-discrimination
and the business reality for not disclosing royalty rates. Perhaps, the answer is to be found in
the new licensing practice that Ericsson has proposed. After all the competition law
controversy that Ericsson faced regarding its licensing practices pertaining to its 2G and 3G
SEPs, including the use of NDAs vis-à-vis FRAND obligations, recent media reports suggest
that Ericsson will charge a fixed fee per licensed device for its 5G technology.85 While ex ante
offering a global royalty fee is not economically efficient86 and might even disadvantage some
85 See Susan Decker, ‘Ericsson Tries to Avoid Patent War by Publishing Rates for 5G’ (18 March 2017)
Bloomberg, available at <https://www.bloomberg.com/politics/articles/2017-03-17/ericsson-tries-to-avoid-
patent-war-by-publishing-rates-for-5g> accessed 23 April 2017. However, as the putative licensees are not
similarly situated, charging uniform fee may not only be economically inefficient, but also against the spirit
of the Non-Discriminatory prong of the FRAND commitment.
86 Ex ante the patentee does not know how the standard will evolve and what will be the market value of its
patent; Teece and Sherry (n 59); Mario Mariniello, “Fair, Reasonable and Non-Discriminatory (FRAND)
Terms: A Challenge for Competition Authorities” (2011) 7(3) Journal of Competition Law & Economics
523–541. As Mariniello notes, it is of course a possibility that patentee chooses to declare the terms of
licensing including royalty ex ante. In fact, the EU Guidelines on the Applicability of Article 101 of the
Treaty on the Functioning of the European Union to Horizontal Co-Operation Agreements, 2011 O.J. (C 11)
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licensees, it could offer a compromise between – on the one hand – shrouding royalty rates in
secrecy, violating the non-discrimination prong of FRAND and potentially falling under
antitrust scrutiny, and – on the other hand – expending resources to individualise royalty rates
and later having to justify the methodology used in each case.
contemplate this scenario in paragraph 299. The Guidelines state “ex ante disclosures of most restrictive
licensing terms, will not, in principle, restrict competition within the meaning of Article 101(1) [of the
TFEU]”.
