Several aspects of Fair, Reasonable, and Non-Discriminatory (FRAND) Licensing were discussed in the Ericsson Vs. Lava Case, and in this post, we will discuss three of those: Royalty Stacking, Hold Up, and Hold Out. While royalty stacking and hold-up are defenses/arguments available to implementers, hold-out is an argument available to Standard Essential Patent (SEP) holders. These arguments can play an important role in influencing the nature of remedies, particularly royalty rates.
Patent Hold Up
‘Patent Hold Up’ is a strategy where the patent holder attempts to derive higher royalty rates, licensing revenues, or damages by holding up licenses, and demanding higher royalty rates following standard adoption. By holding up SEP holders can stifle innovation, product development, and competition. Talking about ‘Patent Hold Up’, the Court stated as follows:
“761. The concept of patent hold-up refers to the ability of SEP owner to extract higher and unfair royalties once the industry is locked into the standard and switching to an alternative technology is not feasible. This situation arises when a company, having pledged to license its essential technology on FRAND terms, later demands exorbitant fees or unfavorable licensing terms.
Royalty Stacking
‘Royalty Stacking’ is a scenario where making, using, or selling a product or technology in the market requires hundreds of licenses from different patent holders, which makes it difficult or impossible to launch the product or technology. Owing to the multiplicity of patent holders and licenses required, the costs involved can be prohibitively high, making the launch and development of products problematic. In the Court’s words, royalty stacking has been described as follows:
“762. On the other hand, the concept of royalty stacking refers to the problem where a single licensee faces the accumulation of royalty claims from multiple patent holders. This occurs particularly in industries where products, like standard-compliant devices, may infringe upon thousands of patents. Each patent holder might demand a royalty, leading to an overall cost that can be unsustainable for the licensee, potentially stifling innovation and market competition.”
Patent Hold Out
‘Patent Hold Out’ is a situation where a potential licensee or implementer of technology delays or refuses to take licenses from the patent holder on FRAND terms. The user of technology in this scenario continues to use the patents without paying a license fee, or attempts to negotiate lower, unfair royalty rates. This strategy may give an unfair advantage to the implementer of SEPs, and may also give rise to market distortions. Speaking about hold out, the Court stated as follows:
“777. Hold-out strategies lead to the continuous use of patented technology without the payment of appropriate royalties. As a result, the implementers gain undue advantages, such as prolonged access to the technology without financial obligations. This approach can be deemed unfair and unreasonable as it disrupts the balance between the rights of the patent holder and the interests of the implementer. Such hold-out actions undermine the principles of FRAND licensing, which are designed to ensure equitable access to SEPs while providing fair compensation to the patent owners. …”
Court’s Analysis
After reviewing the facts, the Court came to the conclusion that Ericsson’s actions do not amount to hold up, and that Lava’s actions give rise to hold out. The Court also concluded that Lava failed to make out a case for royalty stacking.
Talking about ‘Patent Hold Up’, the Court stated that claims of hold up cannot be based on mere allegations and that there must be sufficient, concrete, and tangible evidence to prove the same. As per the Court, Ericsson was offering a lower royalty rate over its portfolio, and it had proposed terms to Lava on several occasions over a four year period. While Lava made allegations of hold up, it was unable to produce any evidence to show that Ericsson was charging unreasonably high royalties following the adoption of its patents into the standards. To the contrary, the Court stated that Lava had behaved in an unreasonable manner by not responding to Ericsson’s offers, and by delaying the licensing process. Therefore, the Court stated that Ericsson was not committing acts that amount to hold up, but Lava was holding out.
With respect to ‘Royalty Stacking’, the Court stated that Lava’s claims were not substantiated because it failed to produce any evidence relating to the licenses it had to take from other SEP holders. Stating that all standard essential patents need not be licensed to implement particular products/technologies, the Court stated that not even a shred of evidence was available to show that Lava was under the burden of royalty stacking. As per the Court, Lava had not taken any additional licenses, and no case of royalty stacking could be made out based on the evidence on record.
Relevant Paras
The relevant paragraphs of the Court’s Judgment relating to Royalty Stacking, Patent Hold UP and Hold Out read as follows:
“765. To address the challenges posed by patent hold-up and royalty stacking, the courts have increasingly emphasised the need for concrete evidence before considering these issues in determination of infringement proceedings. This approach was notably highlighted in Ericsson v. D-Link (supra), where the court required clear and substantial proof of patent hold- up and royalty stacking to warrant a jury instruction. The judgment underscored the necessity for parties alleging such practices to present specific instances and quantifiable data to substantiate their claims. This requirement for tangible evidence ensures that the considerations of patent hold-up and royalty stacking are grounded in actual market realities and not speculative assertions.
- The judgment in Ericsson v. D-Link (supra), which was a jury trial, specifically provides that a party alleging royalty staking and hold-up has to place on record sufficient and cogent evidence in respect of the same. The court emphasised that without concrete evidence, i.e., instances of Ericsson demanding higher royalty rates post-adoption of the 802.11(n) standard, jury instruction could not have been given for consideration of the said issue. In the said decision, the court underscored the fact that D-Link’s expert did not quantify the actual royalties paid for 802.11 patents, nor did D-Link present evidence of other licenses or royalty demands related to its Wi-Fi enabled products. The relevant paragraphs from the said judgment are set out below:
“In this case, we agree with the district court that D-Link failed to provide evidence of patent hold-up and royalty stacking sufficient to warrant a jury instruction. JMOL Order, 2013 WL 4046225, at *25-26 (”Defendants failed to present any evidence of actual hold-up or royalty stacking.” (emphasis in original)). If D-Link had provided evidence that Ericsson started requesting higher royalty rates after the adoption of the 802.11(n) standard, the court could have addressed it by instructing the jury on patent hold-up or, perhaps, setting the hypothetical negotiation date before the adoption of the standard.10 D- Link, however, failed to provide any such evidence. Absent evidence that Ericsson used its SEPs to demand higher royalties from standard-compliant companies, we see no error in the district court’s refusal to instruct the jury on patent hold-up or to adjust the instructions expressly to take patent hold-up into account. Indeed, as noted above, the court found that Ericsson complied with its RAND obligations and did not demand an unreasonable royalty for use of its technology.
A jury, moreover, need not be instructed regarding royalty stacking unless there is actual evidence of stacking. The mere fact that thousands of patents are declared to be essential to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder. In this case, D-Link’s expert ”never even attempted to determine the actual amount of royalties Defendants are currently paying for 802.11 patents.” JMOL Order, 2013 WL 4046225, at *18.
In other words, D-Link failed to come forward with any evidence of other licenses it has taken on Wi-Fi essential patents or royalty demands on its Wi-Fi enabled products. Because D-Link failed to provide any evidence of actual royalty stacking, the district court properly refused to instruct the jury on royalty stacking. We therefore hold that the district court did not err by refusing to instruct the jury on the general concepts of patent hold-up and royalty stacking.”
(Emphasis supplied)
- In the present case also, no evidence has been led by Lava to prove royalty stacking and hold-up.
- Further, in respect of the portfolio wide license that has been offered in the present case, there has been a reduction in the royalty rates that Ericsson sought to charge from various implementors including Lava. This is also detailed in the subsequent section in which specific rates have been considered by this Court.
…
- From the aforesaid cross examination, it is evident that Lava has not entered into any patent license agreements with SEP holders for the standards for which the suit patents are SEPs. The absence of any licensing agreements or royalty payments to SEP holders by Lava is a clear indicator that Lava is not fulfilling the obligations that implementers have towards SEP holders.
- On a specific query by this Court during the course of final arguments, if Lava is paying any royalty to any of the SEP owners, the counsel appearing on behalf of Lava took the liberty to answer the same on the next date of hearing. However, no answer was forthcoming and neither has the same been dealt with in the written submissions by Lava.
- The absence of a clear answer, especially after a direct query from the court casts significant doubt on Lava’s engagement with SEP holders on the aspect of licensing and royalty payments. The counsel’s failure to address this crucial aspect, despite being given the opportunity, is indicative of Lava’s attempt to free ride over patented technology.
- To make a valid argument for royalty stacking or hold-up, an implementor must present concrete evidence, as emphasised in Ericsson v. D-Link (supra) and reiterated in the present case. Specifically, the implementor must demonstrate that post-adoption of the standard, the SEP holder has started to demand higher royalties than those initially offered. In the absence of specific evidence that would prove even the demand for higher royalties, there can be no case made out that royalty stacking or hold- up is occurring. Without such evidence, the implementor’s claim lacks the necessary factual and evidentiary basis to substantiate allegations of anti- competitive behaviour by the SEP holder.
- In my considered view, no question of royalty stacking arises in the present case as Lava is not paying any royalty to any party in respect of any of the SEPs being implemented by it in its devices. Further, the fact that Ericsson has negotiated with Lava for more than 4 years and has in fact made various FRAND offers from time to time, despite the fact no counter- offer was ever given by Lava, also shows that there was never a situation of hold-up in this case.
- Moreover, from the above analysis, the clear position that emerges is that Lava’s approach in this negotiation can be characterised as a deliberate strategy of hold-out, which is a tactic adopted by the implementors to delay or avoid reaching an agreement. The potential for hold-out by a prospective licensee has also been recognised in Unwired Planet (supra) by Justice Birss. The relevant extracts are set out below:
“657. The other issue is the potential for hold-out by putative licensees. Hold-out is also called reverse hold-up. There is no difference. Hold out can be considered from two perspectives: the potential for hold out in theory, and the evidence for it in practice.
xxx xxx xxx
- Unwired Planet pointed out that in the experts’ joint memorandum Prof Neven accepted that there are circumstances in principle in which implementers can exercise bargaining power by holding out, but suggested that bargaining power must be assessed in the context of the court procedure that would be triggered in the case of disagreement. Unwired Planet referred to Prof Neven’s “Justice is not blind” paper cited above which indicated that in the context of the court procedures adopted in key jurisdictions in Europe, including the United Kingdom, licensee hold-out is a very real possibility. The paper includes a conclusion that “serious consideration should be given in the policy debate to the risk of reverse hold up by the licensees” and that while concerns of hold-up by SEP holders may not be well-founded, “In fact, it would appear that the licensee may often engage in a reverse hold-up.” The paper was put to Prof Neven in cross-examination. He emphasised that the modelling in the paper was theoretical and that the case law had moved on since then due to Huawei v ZTE. These points are both true as far as they go but in my judgment the Professor’s paper can properly be taken to recognise that hold-out by licensees is something which can occur and can be an economically rational approach for a licensee to take.
- Overall I find that there is clear potential on theoretical grounds for hold-out to occur.
(Emphasis supplied)
- … In the context of this negotiation, Lava’s hold-out strategy not only hampers the resolution of licensing terms but also poses a challenge to the integrity of the FRAND framework, affecting the overall ecosystem of SEPs.”
Citation: Lava International Limited v. Telefonaktiebolaget LM Ericsson, High Court of Delhi, 28th March, 2024, CS(COMM) 65/2016, CS(COMM) 1148/2016 and CC(COMM) 14/2017.
Disclaimer
The case note/s in this blog post have been written by IP Attorneys at BananaIP Counsels based on their review and understanding of the Judgments. It may be noted that other IP attorneys and experts in the field may have different opinions about the cases or arrive at different conclusions therefrom. It is advisable to read the Judgments before making any decisions based on the case notes.
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