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How will the Canadian Competition Bureau deal with enforcement of Standard Essential Patents?

September 15, 2016

By Paul Horbal and Victor Krichker

Earlier this year, the Canadian Competition Bureau updated its Intellectual Property Enforcement Guidelines. The Guidelines supersede earlier guidance published in 2014, and serve to clarify the circumstances in which the Bureau can be expected to exercise its enforcement powers in relation to behaviour by intellectual property owners. One topic that has received considerable attention in the new Guidelines is that of Standard Essential Patents (SEPs). Nonetheless, a number of open questions remain concerning some situations in which SEPs may be asserted.

SEPs are those patents that cover an element or feature that is required to implement a technological standard, such as the “LTE” communications standards found in mobile phones. Standard-setting organizations (SSOs) frequently request that participants in the drafting process of a standard disclose all relevant patents early on, so that infringement of the patents by the standard can be avoided if possible, or so that public notice can be provided that a patent license will be required to use the standard.

In practice, there are often many SEPs and multiple different owners of the SEPs for each standard. This presents the risk that one or more parties could hold “monopoly” power over the ability to use a standard. To avoid such an undesirable outcome, standards bodies often ask participants to commit to license SEPs on fair, reasonable and non-discriminatory (FRAND) terms as a condition for participation in the standard setting process. The FRAND concept is fluid but at its most basic involves a commitment to create a licensing regime that offers a license at a reasonable cost and under conditions that are consistent for all licensees (i.e., that do not single out any one or group of licensees for less favourable treatment).

Generally, the updated Guidelines make clear that the Bureau does not intend to interfere with the use of intellectual property rights for fear of undermining innovation incentives. The Bureau suggests that it would first analyze whether enforcement actions will “materially alter the incentives of the right holder or others to engage or invest in research and development” before seeking to remedy a perceived competitive imbalance. The approach to SEPs is consistent with this laissez-faire approach, which the Bureau justifies by recognizing that SSOs typically provide many procompetitive benefits, and by pointing out that competition enforcement policy in this area is constantly and rapidly evolving.

To this end, the Guidelines provide a number of straightforward examples with their likely treatment by the Bureau. For example, the setting of a maximum royalty by a SSO would not trigger scrutiny as a price-fixing arrangement, while on the other hand an “ambush” using an undeclared SEP or reneging by a participant in a standard-setting process on a FRAND licensing commitment would be likely to receive scrutiny. The latter two are obvious “bad actor” scenarios that cry out for a remedy, but there are other circumstances in which the outcome is less clear.

For instance, Example 18 of the Guidelines sets out a hypothetical scenario in which the owner of one or more SEPs considers that its patents are being used without adequate compensation and attempts to get an injunction against several businesses that have made investments to develop and sell competing technology that implements the relevant standard.

The Guidelines make clear that in such a case the Bureau would likely review the SEP owner’s conduct, but could still find the behaviour (and the act of seeking the injunction) appropriate where the prospective licensee:

  1. refuses to pay a royalty that is determined to be FRAND by a court or arbitrator;
  2. refuses to engage in licensing negotiations;
  3. constructively refuses to negotiate (for example, by insisting on terms clearly outside the bounds of what could be considered to be FRAND terms); or
  4. has no ability to pay damages (for example, a firm that is in bankruptcy).

However, item (iii) identifies what is probably the most frequent scenario in a SEP licensing dispute, but provides little practical guidance. The problem is that there is no universally agreed-upon definition of FRAND terms, and conversely, no clarity on licensing demands that would be considered outside the bounds of FRAND terms. Many SSOs decline to define FRAND license terms or behaviour for both practical and legal reasons.

The courts, too, have yet to settle on a clearly delineated definition. However, the U.S. 9th Circuit Court of Appeals recently offered some guidance on how a reasonable royalty for SEPs might be determined. While not binding on Canadian courts, or the Bureau, the decision may nevertheless prove influential.

At issue in the case, Microsoft Corp. v. Motorola Inc. [1], were SEPs related to video coding and wireless networking owned by Motorola. In licensing negotiations with Microsoft over a reasonable royalty, Motorola demanded a percentage of the price of the end product (e.g., PC, smartphone, etc.) and a “grant back” license of Microsoft SEPs. Microsoft contended that this was unreasonable, and that Motorola was entitled only to a royalty on the software components that made use of the patented technology.

The District Court (whose analysis was affirmed on appeal) determined the royalty for the Motorola SEPs based on factors for calculating a reasonable royalty used to determine damages in a generic patent infringement suit (these factors are known as the Georgia-Pacific factors from the case of the same name where they were first used). However, in the context of FRAND licensing, these Georgia Pacific factors were modified to separate the value of the patented technology (i.e., the SEPs) from the value that results from the incorporation of the patented technology into the standard. The court reasoned that failure to do so would “improperly reward the SEP owner for the value of the standard itself.”

Therefore, in determining reasonable royalties for SEPs, the Court found it important to consider the relative contribution of the patented technology to the standard, and to bear in mind that the purpose of FRAND commitments is to encourage “widespread adoption of the standard through avoidance of hold-up and [royalty] stacking.”

The issue of SEPs has also come up in European courts, which have taken similar steps to reign in the availability of injunctive relief. In Huawei Technologies Co Ltd v. ZTE Corp. [2], the Court of Justice of the European Union (CJEU) held that special care must be used to prevent the owner of SEPs from abusing a dominant position. To avoid such abuse, the Court considered that injunctions ought to be prohibited where the alleged infringer has demonstrated a “willingness to negotiate” without “delaying tactics”. Interestingly, the CJEU noted that this would be so even where the parties are not in agreement as to what constitutes FRAND terms. This suggests that the bounds of FRAND terms may be up to the parties to decide, and may vary based on a number of factors, such as the nature of the standard.

Returning to the Canadian Competition Guidelines, perhaps the examples of the Motorola and Huawei cases will be of some assistance in determining what is “clearly out of bounds of [] FRAND terms.” However, it is unclear for now whether the Bureau would consider the guidance of the U.S. and European courts in making this determination. It may be some time before we have a definitive Canadian answer to this question.

[1] 871 F. Supp. 2d 1089 (W.D. Wash. 2012), affirmed by 696 F.3d 872 (9th Cir. 2012)

[2] Case C-170/13

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Paul Horbal Paul Horbal
B.A.Sc., M.Sc. (Elec. Eng.), J.D.
416.957.1664  email Paul Horbal
Victor Krichker Victor Krichker
B.Sc. (Civil Eng.), LL.B.
416.957.1699  email Victor Krichker