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Standard Essential Patents and Fair, Reasonable and Non-Discriminatory Terms

On August 3, 2016, the Supreme Administrative Court delivered the 2016-Pan-Zi-No.403 judgment, declaring to uphold the Gong-Jie-Zi-No.103001 decision rendered by the Taiwan Fair Trade Commission (hereinafter the “FTC”) on February 19, 2014.  According to the Supreme Administrative Court, even if the patentee promised to exercise their rights under fair, reasonable and non-discriminatory (“FRAND”) terms upon the issuance of standard essential patents (“SEP”), the commitment is merely made to a specific standard setting organization (“SSO”) and thereby will not hinder the FTC from playing its role as the competent authority to maintain a competitive market in Taiwan imposing additional conditions or restrictions on mergers filed by patentees.


The case in question arises from the Shares and Assets Purchase Agreement entered by and between Microsoft Corporation (“Microsoft”) and Nokia Corporation (“Nokia”) on September 2, 2013.  Microsoft planned to acquire substantially all of the operations and assets of Nokia's Devices and Services Division, including its design team, support functions related to operations, sales and marketing activities of all production facilities, as well as design patents covering the division's products.  Nokia agreed to grant Microsoft a 10-year non-exclusive patent license while Microsoft has an option to extend the 10-year license in perpetuity.  On the other hand, Microsoft would grant Nokia reciprocal license of Microsoft's another division, HERE (digital map and location service). Said deal constitutes the category of a merger as specified in Subparagraph 3, Paragraph 1, Article 6 of the then Taiwan Fair Trade Act (“FTA”); therefore, Microsoft and Nokia applied to the FTC for a merger of the two enterprises on November 20, 2013.


The FTC, though approving the filed merger, imposed two burdens in its decision in accordance with Paragraph 2, Article 12 of the Fair Trade Act so as to ensure that the overall economic benefits of the merger outweigh the detriments resulting from competition restraint.  The two burdens are, after the merger of Microsoft and Nokia, (1) Microsoft shall not, when licensing patents related to smart mobile devices, make any improper pricing decisions or conduct any discriminatory treatment, which would hinder manufacturers of smart mobile devices from freely choosing mobile operating systems; and (2) Nokia shall continue to license SEPs under FRAND terms and shall ensure any assigned enterprise, to which Nokia would assign its SEPs, to license acquired SEPs under the same FRAND terms.  Both Microsoft and Nokia were dissatisfied with the two imposed burdens and filed respective administrative appeals against the decision but both had their appeals rejected.  The two then filed respective administrative litigations but ended up being rejected again.  Nokia then appealed to the Supreme Administrative Court against the judgment of the previous instance.  The Supreme Administrative Court, however, rejected the appeal and upheld the two burdens imposed by the FTC on Microsoft and Nokia in its decision.


The specialty of this case under the patent-related field is that the FTC's decision that the imposition of the two specific burdens on patentees' execution of the patent rights was made based on FRAND terms.  To be specific, because a patent grants its holder a set of exclusive rights, a patentee in possession of essential patents will be able to legitimately exclude competitors from enforcing these patents if the legislative intention of the Patent Act is carried out without any compromise.  This will make it difficult for competitors to enter into the market or will cost them excessive royalty fees in exchange for patent licenses.  In addition, consumers tend to consider whether key components or functions of a target product are compatible with other brands while making a purchase decision.  A lack of compatible technical standards/specifications among enterprises not only increases research and development costs but it is also a disadvantage to consumers.  Therefore, in practice, the SSO would step in and require the patentee to license SEP to enterprises or individuals willing to comply with established technical standards under FRAND terms.


Nokia argued that it had promised to comply with FRAND terms, which does not entitle the FTC to impose the disputed burdens.  However, according to the Supreme Administrative Court, Nokia holds a set of SEPs and is thereby obliged to promise an exercise of rights under FRAND terms.  Nokia’s promise is, however, a commitment made merely to the SSO and does not hinder the FTC from playing its role as the competent authority to maintain a competitive market in Taiwan imposing additional conditions or restrictions on mergers filed by Nokia.  To be specific, a patent must meet the following conditions to be qualified as a SEP: (1) its patentee is a member of the SSO; (2) said SEP is disclosed in technical standards; and (3) said SEP is a must to practice these technical standards.  By disclosing SEPs, the patentee allows members of the SSO to cross-license the SEPs for free or at a cost and to expand market shares by practicing identical technical standards.  Nokia’s commitment is therefore made merely to other members of the SSO but not necessarily to other enterprises, and the FTC may impose, by ex officio, the disputed burdens.


However, efforts still need to be made in Taiwan in order to apply FRAND terms. The SEP mechanism was originally adopted to resolve patent warring among enterprises but has ended up being the root of licensing problems.  That is, FRAND terms were originally designed to facilitate the patentee to license patented technologies to individuals or enterprises willing to practice the established technical standards.  However, in practice, it is actually difficult to convert a FRAND licensing commitment to royalty fees of a SEP, problems including how to calculate SEP royalty rates, its calculation basis, whether enterprises are allowed to claim compensation for any patent infringement committed in the past, and whether the compensation, if any, should be calculated based on royalty rates provided in FRAND license terms or other methods.  Therefore, how to resolve such disputes still relies on the opinions form cases and precedents.  The ultimate purpose of the Patent Act and the Taiwan Fair Trade Act to enhance consumer welfare can only be achieved by seeking a balance between the patentee and individuals/enterprises practicing established technical standards.