The phenomenon of standardization has been assuming a significant importance in recent years. Standards represents a global-spread and pervasive phenomenon which affects any sector that demands compatibility and interoperability. Without even realizing it, we constantly rely upon the interoperability of countless technological devices. Let’s just think about how telephones must be able to talk to each other, how webpages need to be read by different computer systems. WiFi has reshaped the way we connect to the Internet; USB cables allow us to connect our computers, phones, cameras, music players and countless other devices; we send text messages via SMS, listen to music in MP3 format and watch DVDs and Blu-Ray discs.
It’s easy to fall into the habit of underestimate the value of the standardisation process, but without it there wouldn’t have been a mass production or a mass communication. In other words, without standardisation there wouldn’t be a modern economy, at least as we have come to know it.
With technology development being so crucial, the interoperability between the various technologies is key to the survival of the technology itself. To keep pace with the never-ending technology development, industries must ensure to manufacture technologies that are able to dialogue with pre-existing – and future – complementary products. If so does not happen, there is a good chance that the technology in question will be left out, thus slowly dying. Hence, to achieve interaction, industries rely upon the creation of a standard. A standard can be defined as “any set of technical specifications that either provides or is intended to provide a common design for a product or process”.
The development, adoption and implementation of standards, however, is not a straightforward issue and involves numbers of questions. Standards often comprise proprietary technologies which raise concerns as to the correct and undistorted use of intellectual property rights.
FRAND as a solution to anti-competitive behaviours
Technology standards can produce both costs and benefits. It is a matter of fact that standards offer a solution to coordination problems (avoiding double R&D), provide reduced uncertainty and develop interoperability while enhancing innovation and attracting investments. If not abused, standard setting allows the combination of different technologies to create better solutions. The creation of new technologies might be accelerated, consumer welfare improved and competition between manufacturers encouraged. If used properly, the participation to a standardisation process allows market players to secure returns while lowering entry barriers to the standard-compliant market. The expected significant licensing revenues flowing from the inclusion of a proprietary technology in a standard induce firms to participate to the standard setting. The participation to the standard setting automatically incentivizes the investments in R&D, to the benefit of technological progress and efficiency. On the other side, implementers expect significant benefits to rise from standardization as well. The interoperability secured by the standard makes consumers more confident when purchasing standard- compliant products.
However, standards are also capable of creating barriers to trade and hindering competition in a number of different ways. The standardization process, inevitably, excludes forms of alternative technologies and is capable of locking in standard users to the specific technology adopted. Furthermore, various exploitative behaviours can rise, such as refusal to licence and collusion between firms, leading to higher costs for goods and a slower innovation process.
The need to deal with IP issues therefore lies at the very heart of standards setting and standards implementation. Once a standard is adopted, it becomes impossible to manufacture a product compatible with the standard without infringing the essential patents underneath it, as there is no option of designing around the patents and still compete on the market. Standard essential patents (SEPs) are patents which would inevitably be infringed by operating in accordance with the standard. Patent holders might then, abusively, give rise to patent hold up situations, refusing to licence – or refusing to licence unless an excessively high royalty rate is agreed upon. Hold up practices leverage on the ex-post market power that stems from the irrevocability of the adoption of a standard. Aware of holding the “winning” technology, patent holders can try to negotiate unfair royalties which are higher than the ones they would have asked for ex- ante, when other technologies were still available.
The anti-competitive risks underlying standard setting abuses led to the adoption of IPRs policies in order to avoid distortive effects. These policies seek to find a balance between the interest of the patent holder to be fairly remunerated and the interest of implementers not be left out of the standardised technology. The main object of such policies is to guarantee that the competitive conditions that existed before the standardization process began are preserved. Indeed, ex ante, the patent holder would have been able to charge royalties that amounted exclusively of the incremental value that his technology added to the many other technologies (then) available for the same purpose. Different solutions have been adopted in order to mitigate the potential anti-competitive results. However, so far, the most significant one is the commitment to licence on fair, reasonable and non-discriminatory terms (FRAND). Each member of an SSO is asked to commit themselves to grant any future licence on FRAND terms. Endorsing a duty to license IP rights on FRAND terms ensures that SEPs holders will moderate their royalty claims. A reasonable royalty rate avoids rendering the standard inefficient, as no industry would be able to make the investments necessary to implement the standard, were the royalties charged excessively high. FRAND should allow for a sufficient – and predictable – remuneration of SSOs participants so that the participation in the cooperative standard setting is incentivized, while, at the same time, guaranteeing to implementers a sufficient profit as to enable the making of the necessary investments for the manufacture of products implementing the standardised technology.
However, despite the FRAND commitment, the enforcement and the licensing of standard essential patents is far from being a level playing field, and many questions are yet to be answered.
The legal nature of FRAND commitment
The legal nature of FRAND commitment is arguably one of the most questioned and debated area of standard essential patents. Traditionally, especially within a Continental European culture, FRAND commitments have been interpreted as being the expression of Antitrust Law. From a competition law point of view, the infringement of FRAND undertaking links either to Article 101 of the TFEU, as the non-compliance with the FRAND commitment might result in the anti-competitiveness of the standardisation process, or to Article 102 TFEU. The FRAND commitment not to exploit the market power originated by the standardised technology, is reflected in the wording of Article 102, which identifies as abusive the practices consisting of ” directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions” ( which clearly reflects the “fair and reasonable” requirement of the FRAND commitment) and which apply “dissimilar conditions for equivalent transactions with other contracting parties, thereby placing them at a competitive disadvantage” (to which the non-discrimination prong of FRAND clearly refers) .
Therefore, once a dominant position on the market has been assessed, the holder of the standard essential patent is bound by the undertaking to grant FRAND licensing conditions. In particular, it must be stressed that the commitment to negotiate on FRAND terms, from a competition law perspective, is enforceable regardless of the endorsement of the FRAND commitment, and even regardless of the existence of a specific IP rights policy on the SSO. The commitment to negotiate FRAND licence conditions lies, that is, in the competition law itself, without any need to find it in private agreements.
On the other hand, however, from a civil law perspective, FRAND commitments shall be – at least in theory – qualified as genuine contractual obligations. The most challenging question relates, then, to the possibility, for the FRAND commitments entered into with the SSO, to constitute contractual agreements. This matter can itself be divided into two different questions. For the sake of clarity, a distinction must be made between the question as to the nature of the association agreement concluded between the holder of the essential patent and the SSO; and the one – and most challenging – about the possibility for the agreement between the SEP holder and any third party wishing to implement the standardised technology and, to that end, willing to negotiate the terms of a FRAND licence, to qualify as a contractual agreement. In other words, can the FRAND commitment give rise to a contract for the benefit of third parties? 
While the assumption that the agreement between the SSO and its members is binding and, therefore, requires the SEP holder to undertake the FRAND obligation, does not raise particular questions; the question as to the external significance of such agreement, i.e. whether it can be qualified as a contract for the benefit of third parties, is significantly thornier.
The recognition of the contractual nature of FRAND commitments is frequent to common law jurisdictions. North American judges have been among the most willing to accept the contractual nature of FRAND undertakings, identifying implementers as third-party beneficiaries. In Realtek V. LSI, the Court interpreted FRAND as a “binding contract” between the essential patent holder and the SSO. In this framework, implementers were found to be the beneficiaries to such contract. The Court further held that the SEP holder is bound by a contractual obligation to offer FRAND licensing terms to future implementers. Judge Robart in Microsoft Corp v Motorola, Inc found that Microsoft was one of the intended third parties to the benefit of which Motorola had stipulated a contract with IEEE and ITU. Such finding implied that Microsoft had the right to enforce the FRAND commitment to its benefit. Similarly, in Apple Inc v Motorola Inc the Court found that, since the main purpose of FRAND commitment is to protect the players on the SEP markets, and since Apple was one these players, Apple could be identified as the intended third party beneficiary. In particular the Court held that “Motorola’s membership in ETSI and IEEE and the intellectual property declarations it made established a contractual relationship that required Motorola to license its essential patents to third parties on fair, reasonable and non-discriminatory terms” .
In sum, the U.S. Courts have found that, being the purpose of FRAND to maintain a fair competition while not allowing abusive conducts by SEP holders, such commitment is endorsed to the benefit of implementers. Therefore, the standard implementers are the third parties to which the FRAND commitments aim when imposing a duty to licence patents that are essential. It follows that, being the parties able to enforce FRAND commitments just by claiming a breach of a contract, it is rare to see antitrust authorities intervening against patent hold up. The U.S. Courts have availed themselves of several legal bases to deal with anti-competitive outcomes on the SEP market. This lead to Antitrust authorities being rarely engaged with FRAND issues. However, the DOJ and the FTC – the two main U.S. antitrust authorities – have not excluded that the violation of FRAND might amount to monopolization. In cases of aggressive litigation of SEPs, competition law will step in. In such legal environment, Antitrust law will act as a deterrence and will thus be able to provide a further layer of protection.
The construction of FRAND as contracts for the benefit of third parties, however, does not hold true to any jurisdiction in the world. Civil law countries, such as Germany, have traditionally taken a more rigid approach. German Courts have never recognised the contractual nature of the FRAND commitment. In cases such as IPCom v Deutsche Telekom and Vodafone, the Court interpreted FRAND as being no more than a declaration to conclude a contract that already existed under competition law.
Unwired Planet v. Huawei
On 5 April 2017 the English High Court of Justice released the seminal Unwired Planet v Huawei decision, appealed and upheld on October 2018. The British decision stands out as the first European ruling to proudly establish the contractual nature of FRAND commitments. FRAND undertakings are – in the Court’s ruling – contractual obligations for the benefit of third parties. Therefore, following the Court’s ruling, FRAND undertakings are enforceable by any third-party implementer. This result in the declaration not only being a way to inform the market of the standardised technology available and to disclose information to the relevant SSO, but also being a binding commitment upon which the declarant will be required to grant future licenses on FRAND terms.
However, linking FRAND to contract law creates a novel, and in some respect controversial, distinction between “competition law” and “contractual law” FRAND. With FRAND undertakings being enforceable under contract law, the need to engage in a competition law assessment seems not to be necessary anymore.
As a result, the question to be asked is what role, if any, competition law will play in such context. While it could be argued that contract and patent law, being more specific and more detailed, are more suited to play the key role, on the other hand, it can be questioned whether competition law will act as a watchdog, only stepping in when contract law fails to. For contract law to actually play a dominant role in FRAND issues, some questions left unresolved by the English Court will have to be answered. To begin with, it could be asked to what extent, for example, will the contract concluded between the patentee and the SSO pre-determine the content of the future licence with a specific implementer. Moreover, divorcing the concept of FRAND from competition law is not a straightforward operation if we consider that FRAND obligations are fundamentally a creature of competition law.
That said, the real novelty of Justice Birss’ ruling relates to having openly and incontrovertibly reshaped the interplay between contract and competition law. If FRAND are enforceable under contract law, there is no need to establish market dominance, which would be inevitable, were competition law the legal basis for the commitment. The conducts requirements that FRAND involves will not be scrutinized only in the event of a breach of competition law. FRAND will then guide the parties’ behaviours regardless of any violation of antitrust law. The road embarked by the English Court results in a switch in the relationship between competition and contract law. With the contractual interpretation of FRAND, antitrust law might continue to act as a watchdog, yet remaining silent more often.
In conclusion, the decision of the English Court has reshaped the way to deal with FRAND commitments within the European Union landscape. The findings of Mr Justice Birss play a critical role in the long felt need to provide certainty to standard market players. With FRAND being dealt as contractual promises, the parties will be freer to express their positions during the negotiations, without having to fear for competition law to be triggered at any time.
The contractual nature of FRAND commitment is further justified when analysing the requirements FRAND commitment imposes during the negotiation process. Were FRAND only a way to avoid abuse of dominance – or other exploitative conducts – only the behaviours of SEP’s holders would be under scrutiny. In fact, art. 102 (and art. 101) – the lenses trough which assessing competition law breaches – only consider the conduct of the dominant firm. With the imposition of conduct requirements also on standard users, FRAND cannot but be interpreted as a contract. Contracts require bilateral undertakings, mutual exchanges in order to benefit from a common result. Antitrust law involves unilateral conducts by dominant firms with the aim of avoiding the distortion of market efficiency. FRAND requires both the implementer and the SEP holder to behave, thus rendering the commitment more similar to a contract than to a simple declaration, capable of being the object of antitrust law.
However, the legal nature of FRAND and the role that competition law will play in the future arguably represents one of the many aspects on which future decisions, and most importantly, future CJEU decisions, will have a role to play.
The increased attention that standard essential patents have received in recent years is fully understandable: compatibility and interoperability standards are critical and highly beneficial to the modern economy. In order to promote the growth and development of new technologies, such as, just to make a few examples, 5G and the Internet of Things (IoT), the licensing of standard essential patents must be balanced and predictable. Uncertainty as to the enforcement of IPRs and long and expensive litigations will deter firms from entering into the SEP market.
Accordingly, the growing importance of standardisation entails the unavoidable necessity to precise regulate the relationship between competition law and civil law (both in the form of patent and contract law).
Although there is not a magic rule to deal with FRAND negotiations, and, more generally, with the interface between competition law and intellectual property rights, the decision of the English High Court of Justice has proved to be full of engaging findings.
Qualifying FRAND commitments as contractual obligations, and dealing with them as enforceable terms of a bilateral contract, gives SEP negotiations a fresh touch. Throughout the judgment, the Court has attempted to indicate the direction to standard market players, relying on a pragmatic approach. Justice Birss has shown a dedicated willingness to deal and resolve key FRAND issues, employing a commercial approach while doing so. To the merit of Justice Birss goes, furthermore, the attempt to provide market players with a comprehensive guide on how to deal with SEPs – an attempt that had rarely been engaged before. The contractual road embarked by the Court has allowed Justice Birss to create an area for negotiators which is free from any antitrust law constraints, thus helping in building a real “safe harbour”.
This is most likely not the end of the saga, however, given the scope of Unwired Planet v Huawei, an eye should be kept on future SEP litigations.
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Camilla si è laureata con lode in giurisprudenza presso l’Alma Mater Studiorum Università di Bologna nel 2019 discutendo una tesi in Diritto Commerciale.
Nell’anno 2017/2018 ha conseguito un LLM in Intellectual Property & Information Law presso la Dickson Poon School of Law del King’s College di Londra.
È attualmente trainee lawyer in uno studio legale internazionale.