“FRAND negotiations workshops have shown promise in resolving disputes involving large patent portfolios through pre-litigation mediation.”
Patent licenses include a complicated assortment of interdependent terms and conditions. Successfully negotiating patent licenses, especially patent portfolio licenses, requires both parties to make business-driven tradeoffs to reach mutually acceptable agreements. Mutually acceptable rarely means that either party believes it “won” the negotiation against the other party. In most cases, the patentee will possess a strong belief that its patents are valid, infringed and valuable while a putative infringer will possess an equally strong belief that the patents are not valid, infringed or valuable. Nonetheless, patent litigation is often avoided by entering into a license agreement because the parties’ shared interest in avoiding litigation offsets the value that each party believes it has left on the table by compromising. The parties’ disagreements over the validity, scope and value of the patents are not resolved by the agreements they choose to enter but rather their business interests in avoiding litigation.
This article describes a pre-litigation workshop used to assess whether parties that disagree about the validity, scope and value of patents can reach agreement through pre-litigation mediation. The workshop is based on a hypothetical scenario involving a licensor with a large patent portfolio and a large well-resourced licensee with an emerging technology product roadmap. The parties in this scenario are both willing to participate in a condensed mediated negotiation to determine if they can avoid years of multi-jurisdictional patent litigation or at least limit the issues to be negotiated. The results from three different pilots of the workshop are discussed. Although the results from only three pilots are not conclusive, they are nonetheless promising in connection with disputes involving large portfolios and support the need for further investigation, especially for other patent-related disputes.
The SEP/FRAND Policy Debate
Disputes over standard essential patents (SEPs) and fair, reasonably and non-discriminatory terms and conditions (FRAND) licensing began decades ago with debates within standards development organizations (SDOs) involving their patent policies. Increasingly, these disputes have been playing out in courtrooms across the globe. The policy debates and global litigation are often fueled by larger corporate entities that utilize different competing business models rather than by companies competing over products.
On one side, large well-resourced companies that invest substantially in R&D to produce new innovative products (“Product Innovators”) seek low-cost or free patent licenses for SEPs and infrastructure generally. Product Innovators tend to generate profit from the sale of their products and services and often retain the exclusive use of their inventions for the benefit of their own products. They do not share many of their core inventions with others.
On the other side, large well-resourced companies invest substantially to develop new disruptive infrastructure that enables the next generation of products and services. These companies (“Standards Innovators”) contribute their inventions to SDOs and mainly generate profits through licensing their SEPs and related patents to Product Innovators, generally on FRAND terms.
In reality, few companies are pure Product Innovators or Standards Innovators, but rather fall on a spectrum in between. A company’s position on SEP policies and licensing disputes, however, aligns with its predominant business model as a Product Innovator or Standards Innovator.
For years, Product Innovators and Standard Innovators have endlessly argued over patent policy, legal reforms, and regulatory proposals. With a few exceptions, very little progress has been made, nor have the arguments led to effective compromises. While the amount of litigation given the number of standards and SEPs is still relatively small, multi-jurisdictional litigation that may take years to resolve at great expense has been problematic for both Product innovators and Standards Innovators. Both groups can spend substantial sums on legal fees associated with litigation in several jurisdictions around the world for many years before the patent disputes are finally resolved.
Standards Innovators may need to wait years before receiving licensing revenue to reinvest in R&D efforts to develop new standards and subject their patent portfolios to risk if the litigation is unsuccessful. In the end, many Standards Innovators can only hope to procure the same FRAND license agreement with an accused infringer that the Standards Innovator offered at the outset before spending millions on defending and enforcing its patents.
Product Innovators also have serious business concerns stemming from protracted and expensive worldwide litigation. Even the threat of an injunction can place a cloud over the Product Innovator’s commercialization efforts with both partners and customers. Pressure from partners and customers may induce Product Innovators to accept terms in agreements that they would not normally accept, increasing their costs and potential liabilities.
Once parties begin to dispute the scope, validity, and value of specific patents, it is often very difficult to step back and negotiate a patent license even when both parties would benefit by avoiding litigation. When large patent portfolios are involved, a patentee should reasonably assume that at least some of the claims of the patents-in-suit will ultimately be found invalid, not infringed or of little value. Similarly, an accused infringer should assume that at least some of the claims of the patents-in-suit will be found valid, infringed and having substantial value when a large patent portfolio is involved.
A workshop was designed to engage willing parties in a pre-litigation mediated negotiation that focused on business-driven licensing comprises as opposed to resolving disagreements involving the scope, validity and value of the patents. The workshop tested the proposition that willing parties could reach agreement in a short timeframe through mediation without discussing the merits of any particular patents, provided that the parties were given tools and options to help them find mutually acceptable solutions to their respective business concerns.
The Workshop
Three test runs of the workshop were conducted with different groups of participants. The first group included experienced licensing attorneys from a number of large SEP holders. The second group included individuals from the U.S. Patent and Trademark Office’s (USPTO’s) policy group. The final test group included a larger group with varied backgrounds and experience levels. That test run was offered at the AIPLA spring meeting. Although. the first test run was virtual and the second two were conducted in person, all three used the same scenario, format and overall time constraint.
The workshop is based on a hypothetical scenario involving a futuristic teleporting standard, a large SEP portfolio holder that has made the most significant contributions to the standard, and a large well-resourced product innovator that has deployed the teleporting standard in a new IoT device with several other IoT devices in its pipeline. The participants are broken into two teams, one representing the SEP holder and one representing the product company. Each group receives the same information about the scenario, including their disagreements about the patents involved, and a history of their discussions to date. Each party receives a second “Privileged and Confidential” document that lays out its respective CEO’s positions regarding showstoppers and some options that could be useful in promoting acceptable agreements with the other side. It was left up to the participants to decide if they want to propose any of these options or take other approaches.
The mediator’s role was to keep the parties focused on possible solutions, avoid debates about the patents involved, ensure that the discussions were constructive, and most importantly, explain the options that were provided in the Privileged and Confidential packets and how they could be employed to assess possible areas of compromise. The workshop was promoted in the theme of a cooperative game where both parties win or lose together.
The mediation schedule included segments where the mediator would meet with each party separately and then with the parties together. This sequence was repeated three times in a combined 1 hour 45-minute time slot. Given the short period of time to reach agreement, the parties were advised at the outset that they were not expected to agree on every issue but only the most significant ones, which included license scope, compensation and its structure, and how to handle specific issues, such as royalty stacking. The participants were also not expected to draft language reflecting their agreements but rather list agreements that they would feel comfortable recommending their respective CEOs accept.
The Results
The participants in all three test runs “won” in that they were able to reach agreements. Each of the agreements reached were different. In each case, the strength or value of the patents did not factor into the parties reaching a deal. The negotiations were heavily driven by business interests presented as part of the scenario.
The first run resulted in an agreement with the lowest royalty but the shortest term. The license only covered the licensee’s single commercially available product. Given the short term, the patent holder agreed not to assert against new products during the term of this license, although damages would continue to accrue. Both parties felt that the tradeoffs they made would pay off in avoiding litigation while they gained more market information.
The last run resulted in an agreement with the highest royalty, but it covered all the licensee’s teleporting products, current and future, and the license was perpetual. The parties agreed to a grace period for new products, meaning royalties were not owed until a new product generated a certain amount of revenue so that the licensee had a chance to establish the product before it had to start paying royalties on it.
The second run took an entirely different approach by including a royalty on net revenues plus a royalty on profits so that the parties aligned their interests in sharing in the commercial success or failure of the licensed products. The license term was twice as long as the term agreed to in the first run and covered all the licensee’s teleporting products.
Aside from the parties being represented by different individuals with different backgrounds and experience levels, feedback from the first test run was used to make slight changes to the second test run, and feedback from the second test run was used to make slight changes to the third test run. The changes primarily involved changing the timeframes for the individual and group meetings in each of the segments although the combined time for each run remained at 1 hour 45 minutes.
Further Investigation
Feedback from participants suggested that more time would be useful. This was especially true for test runs with more participants and for participants with less licensing experience. One of the factors that attracted participants is that the amount of time required for the workshop was minimal. Participants were asked to spend about 30 minutes reviewing the materials plus the 1 hour 45 minutes participating in the workshop. Future test runs will attempt to expand the overall time by about an hour.
The scenario could easily be modified to address situations that involve large non-SEP patent portfolios, such as portfolios directed to biotechnology. The options provided, as well as the workshop process and goals would be essentially the same. While pre-litigation mediation could be useful for resolving patent disputes by patent assertion entities (PAEs), participants would require different options for compromises. Because parties involved in litigations where the patent holder has few patents, such as lawsuits filed by PAEs, the parties may not be able to reach any compromises without determinations concerning the scope, validity, and value of those patents. Pre-litigation mediation could still be useful in narrowing the patent issues that require adjudication and could result in agreements that would eliminate the damages phase in such cases.
A Roadmap
FRAND negotiations workshops have shown promise in resolving disputes involving large patent portfolios through pre-litigation mediation. Participants in the workshops were able to reach agreements on license terms without debating the essentiality, scope, validity or value of the patents. Participants found that proposed options tailored to address each party’s business concerns were helpful in making business-driven tradeoffs among the many complicated terms found in patent license agreements. The workshop may ultimately be useful as a roadmap for resolving actual patent disputes in time-limited pre-litigation mediation.
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