The Price of Connectivity

A fast moving arena

The various digital solutions developed in the digital health sector increasingly make use of technologies that enable "traditional" products and services to connect with the Internet, including with mobile telecommunications networks. The solutions range from a simple computer connection for medical devices that remain static (while becoming able to exchange data with other devices) to wearable products that become "smart" devices capable of communicating wherever the users (patients, doctors, nurses, etc) are located.

Companies developing such products and services are automatically exposed to patents covering the technologies that are used for mobile communication. These technologies are to a large degree standardised to make sure different devices can communicate with each other in and between radio networks.

In Europe in particular, the European Telecommunications Standardisation Institute ("ETSI") has developed various generations of standards well known to any user of mobile devices such as smartphones. For the past eight years, the Long Term Evolution ("LTE") or 4G standard has dominated the telecommunications market, with 5G now becoming more and more ubiquitous.

Hobson's Choice

These standards are mandatory – there is no alternative – and the technologies defined in the standards are covered by tens of thousands of patents, usually owned by one of the ETSI members that have taken part in the standardisation process.

There are even more standards that are relevant to digital mobile communication, such as WiFi, audio and video compressing technologies issued by standard setting organisations ("SSOs") comparable to ETSI.

Most SSOs have intellectual property and antitrust policies in place, whereby each member has to make declarations leading to at least two obligations, namely to disclose any patent or patent application that is or will become essential for implementing a standard (so-called "SEP"s), and also to grant a license to any user of such standards under fair, reasonable and non-discriminable ("FRAND") terms.

In practice, patent owners will then need to negotiate such FRAND licenses with individual users – there is no automatic licensing that could be done through the relevant SSO. In almost all cases, a portfolio license of all available patents of the owner is offered in line with an established licensing programme conceived and maintained by the patentee.
 
The scenario in which the owner asks for a royalty fee that is objectively too high, or otherwise creates obstacles for the access to the patented technology, is called "patent hold-up."

The opposite situation, in which an implementer is not willing to take a FRAND license which objectively is FRAND and not exploitative, is called "hold-out."

Disputes about whether there is a hold-up versus hold-out have been taken to courts all over the world, usually within the framework of patent enforcement proceedings, and by now detailed relevant case law has developed. The focal point of the decisions is whether the patent owner should be granted an injunction against the implementer because they are an unwilling licensee and guilty of hold-out, or not.

The various aspects highlighted by the courts, eg the level of transparency the patent owner must meet with regard to their existing license agreements or the behaviour the implementer should show in negotiations to prove that they earnestly pursue a license, is an important part of legal advice necessary on both sides in light of the corresponding litigation risks.

The importance of patent pools

In telecommunications, it is important to note that now patent pools also play an important role. They are often an additional option for implementers to conclude a FRAND license. Instead of negotiating bilaterally with dozens or perhaps hundreds of individual owners of patents and patent portfolios, signing an agreement with a patent pool may cover a much larger amount of SEPs relevant to a particular standard or even several standards.

There are a number of pool solutions in the market for digital SEP licensing, and many of them have up to 50 or more members who are owners of relevant patent portfolios and with whom it becomes unnecessary to negotiate a license after a pool license was taken. In this way, the transaction cost for the implementer and for the patent owners who are members of a pool can be and usually are significantly lower compared to bilateral licensing. Most pools are very transparent about their royalty rates and even the standard terms of their license agreements, which usually leads to less contentious negotiations.

So what to choose?

For companies in the Digital Health sector, taking a FRAND license from an individual owner of SEPs or from a pool to cover a specific product or service can raise questions that have to do with the value of the licensed technology to such product or service.

To use a simple example, a wearable blood pressure unit is not a smartwatch. This is because the ability to connect and be interoperable with other devices in some cases leads to less opportunities for creating additional value for the implementer of the relevant SEPs (the company providing the digital health product or service).

This means that the royalty fee, even if it is an established one for a traditional use case, may not be adequate for an implementation in a different industry. It is therefore recommendable for both the implementer and the patent owner to develop arguments as to why the license cost must be lower – or higher – given the circumstances of a particular case.