IPDR: Munich IP Dispute Resolution Forum “Industry 4.0 and FRAND Licensing" The Max Planck Institute for Innovation and Competition 

1. IPDR: Munich IP Dispute Resolution
Forum
“Industry 4.0 and FRAND Licensing"
The Max Planck Institute for
Innovation and Competition
David Perkins
March 16, 2017
David Perkins is a WIPO Arbitrator and Mediator. He is also a JAMS Neutral and an arbitrator/mediator on the
panels of the LCIA (London Court of International Arbitration); AAA/ICDR (American Arbitration
Association/International Center for Dispute Resolution); HKIAC (Hong Kong International Arbitration Centre);
SIAC/SIMC (Singapore International Arbitration and Mediation Centres); KLRCA (Kuala Lumpur Regional Centre
for Arbitration); SCIA (Shenzhen Centre for International Arbitration); the ADR Forum (formerly, the National
Arbitration Forum/NAF); PIAC (Pacific International Arbitration Centre); and Chairman of an ICC Dispute
Resolution Board. He is a member of CIArb. (the Chartered Institute of Arbitrators) and has also served as an
arbitrator for the IFTA (Independent Film & Television Alliance).

2. Topics for Discussion
• Are SEP/FRAND disputes likely to increase in the context of implementation of
Industry 4.0?
• Since new stakeholders ( for example, in the automobile industry) will be involved
in such future disputes, will this likely give rise to additional difficulties to be
resolved?
• Will mediation and/or arbitration best provide the dispute resolution means to
minimise/avoid the risk of hold-up in the new scenario resulting from Industry 4.0?
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3. Glossary of Terms
• ICT: Information & Communications Technology is an extended term for information
technology (IT) which stresses the role of unified communications and the integration of
telecommunications and computers as well as necessary enterprise software, middleware,
storage and audio visual systems, which enable users to access, store, transmit and
manipulate information.
• IoT: the Internet of Things refers to use of sensors, activators and communication technology
embedded into physical objects that enables such objects to be tracked and controlled over
networks like the internet.
• Industry 4.0: is the current trend of automation and data exchange in manufacturing
technologies. It includes cyber-physical systems, the IoT and cloud computing. Industry 4.0
creates what has been called a "smart factory". Within modular smart factories, cyber-
physical systems monitor physical processes, create a virtual copy of the physical world and
make decentralised decisions. Over the IoT, cyber-physical systems communicate and
cooperate with each other and with humans in real time, and via the Internet of Services,
both internal and cross-organisational services are offered and used by participants of the
value chain.
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4. More information on the IoT
• A 2013 McKinsey Study estimates the potential economic impact of the IoT to be $2.7
trillion to $6.2 trillion per year by 2025 with applications in Healthcare; Manufacturing;
Power; Urban Infrastructure; Security; Vehicles; and Agriculture.
• Lex Innova in its "Internet of Things Patent Landscape Analysis" categorises Patents into
4 broad "Level 1" categories, namely: Networking; Computing; Infrastructure; and
Miscellaneous Applications.
• Level 1 is then broken down into Level 2 sub-categories, which are the application areas
of each Level 1 category. Level 3 Patents cover the functional aspects of a Level 2
category
• Lex Innova then provides a classification of patent subject matter for each of Levels 1 to
3, identifying the main patent proprietors and the geographical spread of such patent
coverage as at the present time.
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5. More information on Industry 4.0
• Industry 4.0 is a German initiative. Other Regional initiatives in the EU are "Smart Industry" (NL); "Catapult" (UK); and
"Industrie du Futur" (FR).
• In its study "How to navigate digitisation of the manufacturing sector" (McKinsey Digital) 2015, Industry 4.0 is said to
comprise 4 technologies, namely:
1. Data, computational power and connectivity;
2. Analytics and intelligence;
3. Human-Machine Interaction (e.g. touch interfaces and augmented reality); and
4. Digital-to-physical conversion (e.g. advanced robotics and 3D printing).
• In "What everyone must know about Industry 4.0" (Bernard Marr) 2016, he sees the Smart Factory including:
1. Interoperability: machines, devices, sensors and people that connect and communicate with one another.
2. Information transparency: the systems create a virtual copy of the physical world through sensor data in order to
contextualise information.
3. Technical assistance: first, the ability of assistance systems to support humans by aggregating and visualising
information comprehensively for making informed decisions and solving urgent problems on short notice. Second,
the ability of cyber physical systems to physically support humans by conducting a range of tasks that are
unpleasant, too exhausting, or too unsafe for their human co-workers.
4. Decentralised decision making: the ability of cyber-physical systems to make simple decisions on their own and
become as autonomous as possible.
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6. Standardisation in the IoT and Industry 4.0
• "ICT Standardisation Priorities for the Digital Single Market". COM(2016)176 Final Notes that
there are already more than 600 closely related standards in the IoT area.
• It then identifies 5 priority domains as the building blocks of ICT standard setting. They are:
o 5G communications, which will provide the essential global infrastructure for
communication.
o Cloud computing.
o The Internet of Things, which will provide connectivity.
o Big data technologies, which will provide efficient sharing and exchange of data across
national borders within 'data value chains'.
o Cybersecurity.
• ICT Standardisation requires a balanced IPR policy, based on FRAND licensing terms. A balanced
policy should take into account a variety of needs: fair return on investment to incentivise R&D
and innovation, a sustainable standardisation process, wide availability of technologies in an open
and competitive market, and the difficulty for SMEs to participate.
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7. ADR vs Litigation in National Courts
• In "Landscaping Study on SEPs" (Pohlmann and Blind) IPLytics GmbH, Technical University of Berlin (2016),
the authors suggest that "essentiality" declarations could be assessed on a non-legally binding basis by
Patent Offices, which have the technological capacity, industry recognition and which might present a
more cost effective way to carry out essentiality checks.
• The Joint Research Centre for Policy Report "Licensing Terms of SEPs" (Pentheroudakis and Baron) of 2017
provides a detailed and comprehensive analysis of FRAND cases in both the United States and Europe. On
pp.152/3 it reads:
“In addition to bilateral negotiations and judicial adjudication, many observers believe that
arbitration is a promising middle way, and proposals to strengthen the role of arbitration have gained
increasing attention. ...... The attractiveness of arbitration resides in its lower cost as compared to
litigation. Nevertheless, unlike an arbitrator, the judicial system has the authority to declare that a
patent is invalid. Such a decision produces a positive externality for other standard implementers
who no longer have to bear licensing costs or judicial fees to seek invalidation of the patent
themselves. The possibility that the failure to agree on licensing terms may result in invalidation of a
patent furthermore exercises downward pressure on royalty requests in bilateral licensing
negotiations..... It is thus not clear that proposals making arbitration mandatory and restricting
access to litigation would result in lower royalties and more efficient licensing negotiations."
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8. ADR v Litigation in National Courts (2)
• In the above extract, Pentheroudakis & Baron ignore the fact that Arbitrators can
declare patents invalid inter partes. Also, that in subsequent arbitrations involving the
same SEPs, the originator will invariably be required to provide disclosure of the earlier
Award as evidence of comparable FRAND royalty rates. They also appear to ignore that
arbitration is not limited in terms of geographical reach, by comparison to the
necessarily limited territorial jurisdiction of National Courts.
• The extract is also somewhat contradictory to section 5.4 "Introducing Dispute
Resolution Mechanisms" on pp.177-184 of an earlier European Commission Study
"Patents and Standards" (2014). In that Study the Commission noted "Efficient SEP
licensing requires efficient mechanisms to resolve disputes where they occur" and
identified mediation and arbitration as appropriate mechanisms.
• However, the Commission went on to note that making arbitration mandatory for
FRAND disputes would need a change in the ETSI IPR Policy. The Study then referred to
the WIPO/ETSI Med/Arb model Submission Agreements, which were then under
preparation and to which I refer later.
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9. ADR v Litigation in National Courts (3)
• The most recent Paper to discuss this is "Facilitating the Fair and Balanced Settlement of Disputes on SEPs" (Fair
Standards Alliance) 15 February, 2017.
• Mediation: the Paper suggests that:
"...in order to enhance the efficiency of mediation in SEP-related disputes, it would be helpful to foster the
formation of mediation entities that are highly specialised in specific standards (i.e., that have in-depth
knowledge about the related technology, the SEPs of the standard and about usual licensing practises in the
related industries of the Parties, etc.)."
• Arbitration: here the Paper prescribes the following principles:
o Procedural Rules adapted to circumstances of the SEP dispute at hand;
o Arbitration procedures that are cost efficient, conducted in a competent and fair manner, and resulting in
equitable and proportionate judgments;
o The reuse of expertise and skills of Arbitrators in cases with overlapping subject matter (e.g. for the same
standard or some same patents in dispute); and
o Transparency, including the disclosure of arbitration decisions.
• The Paper then prescribes a number of FRAND principles that should be in the procedural rules of the arbitration
procedure
o The parties must agree to arbitrate.
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10. ADR v Litigation in National Courts (4)
FRAND principles (continued):
• The potential licensee's rights under patent laws to challenge the validity, essentiality or infringement of
the alleged SEP cannot be compromised in the name of licensing efficiency. The SEP holder should have
the burden of proving its entitlement to FRAND royalties through a showing that it owns infringed patents
actually essential to the standard (and whether the used features of the standard are mandatory or
optional) and withstanding any challenges to validity, enforceability, or other defences. ADR should not
simply be a matter of setting a rate if the licensee contests the SEP holder's claims.
• All aspects of arbitration findings to be appealable to a court.
• Although arbitration is by its nature confidential, in order to provide transparency and allow potential
licensees to verify claims of fairness and non-discrimination, some aspects of FRAND arbitration must be
made public, including findings of validity, infringement, and the FRAND terms and conditions. The more
data points regarding FRAND terms that are publicly available, the less often parties need to resort to
litigation as both will have a better understanding of the likely outcomes.
• The composition of the panel should favour neither the SEP holder nor the potential licensee.
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11. ADR v Litigation in National Courts: some
Case Comments.
• In the Matter of Motorola Mobility LLC and Google, Inc: US Federal Trade Commission
(FTC) Consent Order 23 July, 2013.
• This case concerned Motorola's use of injunctions and exclusion orders based on
infringement of SEPs subject to commitments to license on FRAND terms. The Consent
Order provided that, if FRAND negotiations failed after 6 months, having identified the
Contested Terms, the potential licensee could request a Determination or Binding
Arbitration. If the potential licensee elected to resolve the Contested Terms through a
Request for Determination and if the U.S. District Court determines that it cannot issue
a ruling on the Contested Terms, those terms shall be resolved through Binding
Arbitration.
• Qualified Arbitration Organisations identified for resolving such international disputes
were the AAA/ICDR; JAMS; and WIPO.
• Similarly, in the Consent Order in Samsung Electronics (Case Comp/C-3/39,939) in
2014, where FRAND negotiations should fail after 12 months of negotiations, the
dispute was to be resolved by a Court or by arbitration administered by the ICC. The
EU Commission Complaint related to Samsung's enforcement of its UMTS SEPs.
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12. ADR v Litigation in National Courts: some
Case Comments (2)
• In re Innovatio IP Ventures, LLC (District Court for the Northern District of Illinois Eastern Division) patents
essential to the IEEE 802.11 wireless standard were in issue. The Court and the Parties (Cisco; Motorola; Hewlett-
Packard and others) agreed to address damages before a determination of infringement and validity. In his
judgment Holderman J said
"The court hopes that by doing so, the possibility of settlement will be enhanced because the parties will be
better able to evaluate the potential risks and benefits of expending additional resources in the litigation.“
The assessment of damages involved, first, ruling on essentiality, then setting a FRAND royalty based on the value
of the patents in the context of their contribution to the standard.
• InterDigital Communications, Inc v ZTE Corp and Nokia (Delaware District Court Civ. Act. Nos. 1:13-cv 00009-RGA
and 1:13-cv 00010-RGA). A Motion to dismiss FRAND counterclaims that InterDigital had failed to offer a FRAND
rate was granted by Andrews J on 28 May ,2014. In his judgement Andrews J said:
"It seems to me likely that the parties do in fact want to reach an agreement. Negotiating such an agreement
involves mostly business considerations. It does not seem to me that litigation by itself is a very effective
means to make an agreement between willing parties. I understand that the parties cannot agree on the
scope of arbitration. If they could, or they could decide to have the arbitrator decide the scope, that would
appear to be a possible way to proceed.
All the Court's determination of a FRAND rate would accomplish would be to give a data point from which the
parties could continue negotiations."
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13. Med/Arb of SEP/FRAND disputes in the
context of implementation of Industry 4.0
• It is clear that there are likely to be multiple standards.
• It is also clear that there are already patents in the various categories of the IoT landscape (the Lex Innova
analysis) and that there will be multiple SEPs.
• Furthermore, to enable Industry 4.0 there will need to be licensing amongst the, potentially, numerous
stakeholders involved.
• It may be that Patent Pools will emerge, but from the various commentaries it seems more likely that FRAND
licensing will dominate.
• Inevitably, failure to agree FRAND terms will result in claims of SEP infringement.
• Experience to date would tend to indicate that National Courts are not best suited to Resolve FRAND terms. Look,
for example, at the Unwired Planet litigation in the English Patents Court. In his judgement of 29 April, 2016 Birss J
referred to the costs of the so-called "non-technical" part of the case - i.e. calculation of FRAND and resolution of
the Defendants' counterclaims under Arts. 101 and 102 TFEU - as being estimated as reaching £50 million:
Judgement, para.30.
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14. Mediation of such SEP/FRAND disputes.
• This is a solution proposed in the February, 2017 Paper from the Fair Standards Alliance.
• The ETSI Guide on IPRs para.4.3 provides for the possibility of mediation to resolve dispute, but I am not
aware of any significant take up.
• However, in the context of the likely future explosion of FRAND royalty disputes arising from the
IoT/Industry 4.0, it does seem that mediation could provide a relatively low cost and fast means of
resolution when negotiations have failed to provide agreement on terms.
• The Fair Standards Alliance Paper suggests use of Mediators with in-depth knowledge about the
technology in issue, the SEPs of the standard concerned and about the usual licensing practices in the
industries involved. It is, however, perhaps something of a tall order to find a mediator possessing all
those qualities.
• But, from my own limited experience, co-mediation can be extremely effective. This would allow use of,
say, a suitably qualified technical mediator with a legally qualified mediator able to deal with the
infringement, validity and licensing issues likely to be involved.
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15. Arbitration of such SEP/FRAND disputes
• The major issue for debate, it seems to me, is whether arbitration can be mandated for disputes relating to FRAND licensing
of SEPs, or whether - as currently - there must be an agreement between the parties to submit to binding arbitration.
• Under the current WIPO Submission Agreement for arbitration of FRAND disputes, it provides that
"Nothing in this agreement shall prevent any party from bringing any argument or defence it chooses in the arbitration.“
The note to that provision reads:
"This may include patent essentiality, validity, infringement and enforceability."
• Consequently, subject to the parties' agreement, one can find oneself with an arbitration facsimile of the unwieldy National
Court proceedings noted above. A possible way to avoid this is provided in para.6 of the Submission Agreement, which
provides:
"6. An initial Preparatory Conference pursuant to Art.40 of the WIPO Rules is scheduled within 15 days after the
establishment of the arbitration tribunal. The arbitral tribunal shall draw up, in consultation with the parties, a
document defining the scope of the arbitration, the methodology to be used and, if appropriate, stages of the
proceedings."
• But, this could founder on lack of agreement by the parties as in the InterDigital case (above). Art.40 of the WIPO Rules
provides:
"40. The Tribunal shall, in general within 30 days after its establishment, conduct a preparatory conference with the
parties in any suitable format for the purpose of organising and scheduling the subsequent proceedings in a time and
cost efficient manner."
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16. Arbitration of such SEP/FRAND disputes (2)
• Another possibility could be to provide for a two stage arbitration.
Stage 1: the scope of the arbitration could be to determine FRAND License terms. Parties would be
free to present arguments on essentiality.
Stage 2: If an appeal was filed against the first instance award, the scope of the second instance
arbitration could be to determine essentiality, validity, infringement and enforceability by providing
the following in the Submission Agreement:
“The Award pursuant to Art.64 of the WIPO Arbitration Rules shall only be subject to review
through an appeal to an Appellate Tribunal consisting of three arbitrators appointed pursuant
to Art.17 of the WIPO Rules. No arbitrator in the arbitral tribunal shall be an arbitrator on the
Appellate Panel. Such an appeal must be notified within 30 days of the date of the arbitral
award or otherwise the award shall become a final award pursuant to the WIPO Rules. (If an
appeal is sought the Appellate Tribunal shall conduct a de novo review of the legal
determinations of the arbitral tribunal and shall determine whether there is a reasonable basis
for all factual determinations.)”
The sentence in parenthesis is optional.
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17. Arbitration of such SEP/FRAND disputes (3)
• Probably, there cannot be a "one size fits all" procedural order. Instead, a Submission
Agreement could provide a series of options for contracting parties. Perhaps an Agreement
that limits the Tribunal's jurisdiction to determining FRAND terms. Parties would be free to
present arguments on essentiality, validity and infringement, but the Tribunal would not have
jurisdiction to make a binding decision on those issues.
• If such a Submission Agreement further provided that the parties, having agreed on FRAND
determination by arbitration, could not subsequently separately raise essentiality, validity
and infringement in National Courts, would this be (i) acceptable to stakeholders (e.g.
originators and implementer) and (ii) compatible with Competition Law (the no-challenge
provision inherent in such an agreement)?
• To what extent must the FRAND Principles proposed by the Fair Standards Alliance ( slides 9
and 10 above) be incorporated in an Agreement to Arbitrate? In particular, the potential
licensee's right to challenge in court the essentiality and validity of the SEPs, the right to
appeal an arbitration award to Court and making the arbitration award public.
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18. Arbitration of such SEP/FRAND disputes (4)
• One possibility, which does not thus far seem to have been suggested, would be to use Dispute Resolution Boards (DRBs) in
place of mediation and as a precursor to arbitration in the event the parties decline to accept the findings of the DRB.
• What is a DRB? They are normally setup at the outset of a contract and remain in place throughout its duration. Comprising
one or three members thoroughly acquainted with the contract and its performance, the DRB informally assists the parties,
if they so desire, in resolving disagreements arising in the course of the contract and it makes recommendations or decisions
regarding disputes referred to it by any one of the parties. Determinations made by DRBs are not enforceable at law as such,
although they may become binding on the parties pursuant to the DRB Agreement.
• While typically used in long term contracts - e.g. construction and engineering contracts - they can be applicable to disputes
involving IPRs. A DRB was provided for to deal with any disputes arising use of technology licensed for a 10 year term to the
Chinese car maker, Geely, as part of its purchase from The Ford Motor Co. of VOLVO cars. DRBs were also established in
relation to construction of the Channel Tunnel, where a dispute arose as a result of the Contractor tendering for additional
drilling equipment using the original supplier's U.S. Patent as the specification for the tender.
• The ICC has Dispute Board Rules and the WIPO Arbitration Centre is currently developing DRB Rules for disputes involving
IPRs. While, clearly, such Rules would need to be adapted specifically for FRAND disputes, it may be that a three person DRB
could be attractive to stakeholders involved with patents essential to the various technologies applicable to the IoT/Industry
4.0. Each party appoints a member of the DRB and those members agree on a Chairman or, in default of agreement, the
Chairman is appointed by the administering authority, for example WIPO or the ICC. In that way, parties could ensure
appointment of technically qualified members.
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19. Future mechanisms for resolving SEP/FRAND
disputes arising from implementation of
standards developed for the IoT/Industry 4.0
• The experience of obliging declarants of SEPs in the telecommunications sector to offer licenses on
FRAND terms has lead to costly and time taking litigation in both National Courts and arbitration.
Those disputes have, thus far, failed to provide any industry wide guidelines for setting appropriate
royalty rates.
• With the new landscape arising from Industry 4.0, which necessitates development of a mechanism
to prevent hold-up and enable pro-competitive licensing of patents essential to the new standards,
clearly both industry and Regulators do not want to allow repetition of the cumbersome and
unsatisfactory disputes that have arisen and continue to arise in the Telecoms sector.
• Is arbitration to be preferred to National Court litigation? If it is, because arbitration is a consensual
process, the current system would seem to require changes to meet the demands of the new
technologies. If Industry fails to agree adequate mechanisms, will Regulators step in? In terms of
SEPs will even the Regulators be restricted in devising dispute resolution solutions by existing
International Treaties, for example the Rights Conferred by a Patent Art.28 of the TRIPS Agreement
and the limited exceptions contained in Art.31?
• Is the Fair Standards Alliance on the right track, or not? FRAND issues in future SEP scenarios are
inevitable. Can the IPDR Forum, WIPO and Industry Bodies provide guidance either to adapt
existing arbitration mechanisms or create new dispute resolution means to deal with the
inevitable?
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