First Munich IP Dispute Resolution Forum Meeting

IPDR // 1 15 01 First Munich IP Dispute Resolution Forum Meeting November 10, 2015 at the Max Planck Institute for Innovation and Competition Is arbitration a promising way to settle FRAND disputes EVENT REPORT Speakers Prof. Dr. Josef Drexl Director of the Max Planck Institute for Innovation and Competition Prof. Gsell Executive Director of the Munich Center for Dispute Resolution (MuCDR) Dr. Claudia Tapia García Director IPR Policy, IP Policy and Communications at Ericsson Dr. Michael Fröhlich Legal Counsel and Senior Director of EU Intellectual Property & Strategy at BlackBerry Prof. Dr. Henkel Chair for Innovation and Technology Management at the Technical University of Munich Dr. Matthias Zigann Presiding Judge at the Munich Regional Court I, patent dispute division Munich IP Dispute Resolution Forum e.v. c/o King & Wood Mallesons LLP Karlstraße 12, 80333 München +49 89 890 81-387 info@ipdr-forum.org

IPDR // 2 First Munich IP Dispute Resolution Forum Meeting on November 10, 2015 at the Max Planck Institute for Innovation and Competition I. The Munich IP Dispute Resolution Forum e.v. The Munich IP Dispute Resolution Forum is a new association (e.v.) that, in cooperation with the Max Planck Institute for Innovation and Competition and the Munich Center for Dispute Resolution (MuCDR), focuses on discussing and developing mechanisms for alternative dispute resolution in the field of intellectual property. The first meeting was held on November 10, 2015 under the heading "Is arbitration a promising way to resolve FRAND issues?". The turnout of about 120 attendees suggests great interest in topics at that intersection. Dr. Peter Picht (Senior Research Fellow at the Max Planck Institute for Innovation and Competition) welcomed the audience and expressed his belief that there is a need and a space for a forum focusing on Intellectual Property and Arbitration. He gave a special welcome to the heads of two of the leading institutions in that field: Prof. Dr. Josef Drexl as Director of the Max Planck Institute for Innovation and Competition and Prof. Dr. Beate Gsell as Executive Director of the Munich Center for Dispute Resolution. II. Prof. Dr. Josef Drexl (Director of the Max Planck Institute for Innovation and Competition) Prof. Drexl opened the meeting with a presentation on Standard-essential patents The long way from Huawei to arbitration. He started with a short overview of the Huawei decision 1 of the CJEU on 16 July 2015 and explained the general mechanisms that are at play when standard-essential patents (SEP) are enforced. When a patent is notified as essential for a standard (in the Huawei case for the LTE 2 standard developed within ETSI 3), the patent holder is asked to enter into a FRAND commitment 4 to the respective standard-setting organization (SSO). The question of the Huawei preliminary ruling was regarding the circumstances under which the implementer of a standard can raise a competition law defense against a claim for injunctive relief based on SEP covered by such a FRAND commitment. Prof. Drexl pointed out that the Court recognized that holders of SEPs are in a very powerful (if not dominant) position in the market, which can lead to patent hold-up or royalty stacking. Enforcing an injunction based on SEP can have anticompetitive effects, like potentially excluding competitors, delaying or hindering the implementation of a standard, slowing down follow-on innovation in downstream product markets, and undermining trust in the standardization process in general. On the other hand, there is also the risk of reverse hold-up or patent hold-out" exercised by the standard users. 1 2 3 4 EuGH, 16.07.2015 C-170/13. Long Term Evolution (4G). European Telecommunications Standards Institute. Committing to enter into fair, reasonable and non-discriminatory licensing agreements with licene seekers (the user of the standard).

IPDR // 3 The judgment was expected to bring the German approach on coordinating injunctive relief and competition law in line with the European approach, articulated by the European Commission in the Samsung 5 and Motorola 6 decisions. Whether this was achieved and what impact the Huawei decision will have, warrants further analysis. At any rate, the CJEU clearly takes a more flexible approach on the application of Art. 102 TFEU in the context of SEP enforcement, than, for example, the German courts. Still, a clear competition law analysis on the role of FRAND commitments is missing. It remains unclear where exactly the Court sees anticompetitive effects at play and how to handle them. After a short reminder of the facts and findings of the Orange-Book decision of the German Federal Supreme Court 7, Prof. Drexl stressed that the case was about a de facto standard and therefore the patent holder, other than in Huawei, had not entered into a FRAND commitment. In Orange-Book, the Federal Supreme Court allowed a dolo facit defense ( 242 German Civil Code) based on competition law against a claim for injunction. Within the Orange-Book framework, a standard user can only rely on the concept of good faith, if he himself behaves like a faithful licencee. The user has to submit an unconditional offer, which the patent holder cannot reject without being unreasonable. Furthermore, the user has to fulfil those obligations that would arise from a FRAND-compliant licencing agreement, including the payment or deposit of FRAND-compliant royalties. To impose such duties on the licence seeker has provoked extensive critique: First, the user runs a great risk that the deposited amount is not considered FRAND-compliant. Second, the user has only limited knowledge on the existence of SEPs and existing licencing agreements of the owner. And third, with an unconditional offer, in the extensive interpretation of the lower courts, the user loses his most important defenses, namely the possibility to make invalidity claims. Prof. Drexl stated that under these harsh duties imposed on licence seekers, patent owners will be left with only few incentives to negotiate FRAND-compliant royalty rates. In contrast, the CJEU focuses more on the FRAND commitment and therefore more on the duties that arise on the side of the holder of an SEP. According to the Huawei decision, prior to bringing an infringement action, the patent holder has to alert the patent user of the infringement by specifying the SEP and the way of the infringement, and has to offer the conclusion of a licencing agreement on specific FRAND terms. The standard user then has to diligently respond to the offer ( without delaying tactics ) and, if he rejects the initial offer, has to promptly submit a counter-offer on FRAND-terms. Only if the patent owner rejects the counter-offer, the user has to provide an appropriate security in form of a bank guarantee or deposit. Still, the user carries the risk of the appropriateness of the security, which leaves the patent holder with very little incentive to negotiate FRAND royalty rates. The LG Düsseldorf 8, in the first German case after the Huawei decision, seems to take the position that only a slight failure on the side of the standard user suffices to grant injunctive relief against him. It remains difficult to judge: Do the courts go too far in favour of the licence seeker or not far enough? Is the patentee sufficiently protected against patent hold-out or is the burden on the licence seeker still too heavy? 5 6 7 8 http://europa.eu/rapid/press-release_ip-14-490_en.htm http://europa.eu/rapid/press-release_ip-14-489_en.htm BGH Kartellsenat, 06.05.2009 KZR 39/06, BGHZ 180, 312-323 = GRUR 2009, 694-698. LG Düsseldorf, judgements of Nov. 3, 2015, 4a O 144/14; 4a O 93/14.

IPDR // 4 Arbitration as a solution? In Huawei, the CJEU stated: In addition, where no agreement is reached on the details of the FRAND terms following the counter-offer by the alleged infringer, the parties may, by common agreement, request that the amount of the royalty be determined by an independent third party, by decision without delay. Arbitration has various advantages, many of them, for example, speed and confidentiality, being well publicized and known. But arbitration also has the potential to offer very specific advantages in the field of disputes revolving around FRAND-licencing, most prominently the ability to include portfolio licencing within its scope and to offer international solutions. However, there are considerable problems and uncertainties regarding the procedure in general and the calculation of FRAND rates in detail: The first problem is a procedural one, since there appears to be no focal point at which both parties will intrinsically be inclined to opt for arbitration. Within the framework of ongoing FRAND negotiations, the incentives for a patent holder to agree on an arbitration tribunal are low. In the view of Prof. Drexl, it could be considered to implement arbitration in an earlier stage, for example at the time of the FRAND commitment. This would circumvent the problem that the parties are later not sufficiently inclined to agree to ad-hoc arbitration, leaving the parties of the dispute with institutionalized arbitration. SSOs would have to establish their own arbitral bodies or refer to established institutions like the WIPO Arbitration and Mediation Centre. However, arbitration required by SSOs would have to comply with competition law. And as recent efforts at IEEE 9 to reform its IPR Policies have shown, any attempts by SSOs to proactively implement significant policy changes will open them up to critique. The second problem arises with regard to the calculation of FRAND royalties: Since arbitral tribunals have to respect and, in most cases, apply national law, they cannot build a framework for FRAND determination without being able to rely on sufficient case law from the national state courts. The SSOs could provide clearer rules on calculating royalties, yet again, as the example of IEEE shows, this is not an easy way. Prof. Drexl s analysis showed that national courts will still have to play an active role in determining FRAND royalties. They can be seized for FRAND determination in two ways: by damages actions and in the course of a request for injunctive relief. The CJEU in Huawei has clarified that an action for damages for past uses is not abusive even when a FRAND commitment had been given. However, interim decisions are not available in that regard. Quick answers in the form of preliminary judgements and interim measures are possibly available in the course of actions for injunctive relief, when after the deposition of a security by the user, the appropriateness of the security is handled as a preliminary issue. In conclusion: Huawei seems to bring German case-law more in line with the international trend. Still, determining whether a licencee is willing or not remains a difficult task. Namely, what should be an appropriate test for a willing licencee who tries to estimate the adequate level of the security deposit? In the CJEU s view, FRAND conformity of the royalties is not an issue for competition law (but see Art. 102(a) TFEU) as competition law is only used as a means to strike a balance between the bargaining power of the parties. Arbitration as a solution for FRAND issues faces its own challenges, one being the central role of SSOs and their regulation. 9 Institute of Electrical and Electronics Engineers.

IPDR // 5 III. Prof. Gsell (Executive Director of the Munich Center for Dispute Resolution, MuCDR) With her presentation, Prof. Gsell recalled the benefits of arbitration. Arbitration encounters criticism from numerous directions, some of it well-founded, while some is based on illconceived information. Arbitration provides the parties with a neutral and non-national forum. It lets the parties choose the language for the proceedings and guaranties a level playing field in most regards. The parties may decide on the material law and may even opt for specific sets of rules authored by international organizations or even customs of trade, as well as have the award rendered ex aequo et bono. The parties may select the arbitrators and nominate arbitrators with specific skillsets or technical expertise. The parties can agree to keep the proceedings confidential. They may benefit from a shorter overall length of the procedures, since there is only one instance and state courts have only limited room for setting aside an arbitral award. Moreover, due to the New York Convention, those awards can be enforced almost worldwide. Arbitral proceedings are defined by party autonomy and can be tailored to suit the specific interests of the parties. This flexibility, which is oftentimes presented as one of the great advantages of arbitration, may come with certain detriments that potentially can amount to severe impairments: Prof. Gsell pointed out that with the parties being responsible for the framework of the arbitral proceedings, problems may arise whenever one party is able to obtain significantly more bargaining power than the other party. She also stressed that flexibility comes with a price for those who have an interest in the proceedings, but cannot partake in, let alone influence them. This commands increased concern whenever an interest of the general public is involved. Once a private arbitral proceeding, held in confidentiality and tailored to suit only the specific needs of the two parties of the arbitration, touches upon areas of public interest, the latter cannot be protected effectively. Therefore, traditional arbitration proceedings are not appropriate in these situations, or at least have to be adapted in order to safeguard the protection of the respective public interests. Prof. Gsell gave a recent example in which the aforementioned problem comes to mind. It is the ongoing discussion revolving around investment arbitration as part of the Transatlantic Trade and Investment Partnership (TTIP). Whenever a public entity is privy to an arbitration agreement, for example in a public-private partnership, the issues of procedural transparency and democratic legitimization of the arbitrators powers arise. It is in that regard that the new UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, dated April 2014, shed light on possible ways to deal with a problem that is well known, yet not solved in its entirety. The new rules, together with a modification of the UNCITRAL Arbitration rules, stipulate that memoranda and witness statements have to be released to the public, and proceedings have to be open to the general public. Prof. Gsell then brought up a second example to illustrate the concerns voiced by critics of arbitral proceedings that private arbitral proceedings can impair the interests of the general public. The example cited dealt with consumers as a party to arbitration agreements. In the United States, class action suits are regarded as a way to ensure, among other things, interests of the general public, in particular the prevention of illegal commercial practices. It is therefore worth pointing out that, following the Supreme Court decision in AT&T Mobility v. Concepcion, more and more US courts have upheld general terms and conditions that contain arbitration agreements combined with class action waivers. In case of a conflict, consumers can only individually initiate arbitral proceedings, which they rarely do due to the well-documented rational apathy of the consumer. The aim of general prevention is, in those cases, undermined

IPDR // 6 by arbitral proceedings, and purposefully so, as a new study by the Consumer Financial Protection Bureau from March 2015 shows. Prof. Gsell refrained from labeling US-style class actions as a positive or negative phenomenon, but pointed out that they are, in part, instruments to protect public interests. In contrast, arbitration, as a mechanism that is tailored specifically to suit individual interests and to uphold a high level of confidentiality, cannot serve the aforementioned purposes. Prof. Gsell thus welcomed the fact that the Consumer Financial Protection Bureau suggested to prohibit combinations of pre-dispute arbitration agreements and class-action-waivers in the finance sector, whenever a consumer is party to the contract. In Germany, there are no class actions and therefore, arbitration agreements in contracts with consumers are not very common. Nevertheless, there is a broad consensus in Germany that consumer protection cannot be achieved by striving for individual justice only, but by fostering the development of the law by judicial decisions. As to European law, under the EU ADR Directive (11/2013/EU) arbitration-agreements have no binding effect for consumers if they were concluded before the dispute has materialized and have the effect of depriving the consumer of his right to bring an action before the courts. Having presented all the perils of arbitration, Prof. Gsell closed her talk by emphasizing that arbitration is and will be an important mechanism, especially in an international context. She added, however, that the complexity of today s reality forces us to differentiate: like traditional court proceedings, arbitration is not a one size fits all solution. IV. Panel discussion A fair way to fair licencing conditions? Introductory statements a. Dr. Matthias Zigann (Presiding Judge at the Munich Regional Court I, patent dispute division) Dr. Zigann stressed that to reach a satisfying solution on how to determine FRAND-rates, a twofold approach is needed. Arbitration tribunals on their own cannot solve the question of determining FRAND because they need clear rules and case law to apply. Dr. Zigann underlined that applying and developing the law is the domain of the state courts and something at which they typically excel. On the other hand, state courts have difficulties defining FRAND from the factual side. They have to rely on the facts provided by the parties. Fact-finding in front of a state court is time consuming, especially when court- or party- appointed experts are involved. Dr. Zigann reported that a lot of time and energy is spent discussing the expertise of an expert and the value of his opinion. In his experience, proving almost anything in state court prolongs proceedings by at least two years. Next, Dr. Zigann made a distinction between questions of law and questions of fact. For example, the question of whether a global licence instead of an individual licence should be considered fair is a question of law and therefore ideally to be decided by state courts. Whereas the question of whether a reasonable royalty rate would be 2 percent or 0.5 percent is predominantly a question of fact and therefore better dealt with by an arbitral tribunal. With this, Dr. Zigann arrived at his first conclusion: Some FRAND cases have to be decided by state court the majority, however, should be decided elsewhere. Parties will usually consider the chances of success, the time needed, and the costs when deciding whether to litigate in court or to agree to arbitration. When opting for a state court, parties should expect lengthy and expensive procedures, since experts need to be hired and an in-depth discussion on FRAND terms is very time-consuming. Dr. Zigann added that even if a party were to succeed, the costs will most likely be split 50/50 between the parties. Hence, Dr. Zigann formulated his second conclusion: even if the parties try a FRAND case in state court,

IPDR // 7 they should refrain from bringing everything up in court. Amidst proceeding in a state court, arbitration and mediation can contribute to a timely and cost-efficient solution. Dr. Zigann proceeded to raise the issue of burden of proof. He illustrated this by referring to the question of allocating the burden of showing in preliminary proceedings on whether the security deposited by the defendant is satisfactory, i.e. meets FRAND criteria. In Judge Zigann s opinion, it would most likely be with the defendant. In main proceedings, the judges can revert to 287 German Code of Civil Procedure, which gives the courts room for discretion to investigate and determine damages. But still, to exercise this discretion, the courts need a verifiable, factual basis. Thus, judges will often ask the parties to produce existing licence agreements entered into with third parties, which then can be used as templates. This approach has proven useful in disputes about copyright licences. It allows for a market-oriented perspective on the value of the patent in question. It does, however, limit the assessment to a very specific set of circumstances, namely those conditions the patent-holder saw fit to licence the patent to a third party. Those conditions may not be what the patent-user in the case at hand would agree to, for example in terms of the length of the licencing agreement. Still, Judge Zigann argued that considering executed licence agreements with third parties is a procedural way to establish an economical perspective as basis for determining the height of FRAND rates. Nevertheless, Judge Zigann stated that no new or modified procedural rules are needed to handle FRAND issues. He argued that the uncertainty revolving around the FRAND topic would hinder an effective modification to the existing rules. Furthermore, new rules would have to be applied to all civil procedures with potentially undesired side-effects. Finally, Dr. Zigann once again referred to the guidance that comparable licence agreements can provide and stated that this argument also applies to the question of whether fees for global or single patent licencing should be paid by the user of the SEP. Using existing agreements of the patent holder with third parties has proven useful in copyright law. When a patent holder can establish that he routinely uses global portfolio licences, the courts should take that practice as the basis for their considerations on FRAND terms. b. Dr. Claudia Tapia García (Director IPR Policy, IP Policy and Communications at Ericsson) Dr. Tapia gave some insights on management considerations when dealing with SEPs. She reported that companies like Ericsson contribute large parts of their R&D results to standardization, thereby building large portfolios of SEPs. When some pieces of standardized technology are found to be covered by patents, the respective patent holder usually commits to make its technology available on FRAND terms and conditions and, after identifying the users of those patents, tries to enter into licencing negotiations. The majority of those negotiations are being held in good faith, despite their complexity. Even with two willing parties at the table, licencing negotiations can be extremely complex since large portfolios are at stake and numerous issues have to be considered. The parties have to agree, among many other things, on a general fee structure, the use of running royalty payments, the rules on auditing, the geographical scope of licences, the consequences if the company is sold, and the definitions, such as components, affiliates or licenced products. Dr. Tapia stated that arbitration can potentially add to negotiations, even if those are held in a friendly and open way, as it can provide the parties with a neutral assessment of specific issues. However, in order to assist the parties in the aforementioned way, an arbitrator needs to be experienced and skilled. He or she needs to understand the business as a whole in order to have a firm grasp of specific interests of the parties, to understand the standardization landscape and

IPDR // 8 the idea of FRAND, to identify the value of the patents, to have experience in litigation, and to have an expert knowledge on technology licencing. Dr. Tapia reported that assembling a panel that consists of arbitrators with the exact skills needed can be very challenging. Against this backdrop, companies are generally hesitant to vest a tribunal with the authority to render a decision that would substitute the entire negotiation process. Dr. Tapia explained that doing so might entail the danger of entering into a contract that does not cover every aspect necessary. Especially having an arbitral award that was expected to bring every aspect of the negotiation to an end or to only determine a licence fee without considering other terms and conditions, is not a suitable result in practice. Arbitration is therefore best used when parties can agree on most terms of the licencing agreement and only a few specific points are left to be decided by the arbitrators. In conclusion, Dr. Tapia reported, the goal for the patent holder is to have a complete, binding and enforceable agreement, which will be possible to achieve if the scope of arbitration is kept very narrow. c. Dr. Michael Fröhlich (Legal Counsel and Senior Director of EU Intellectual Property & Strategy at BlackBerry) Dr. Fröhlich noted that he is speaking on his own behalf and is neither representing BlackBerry nor speaking on BlackBerry s behalf. He pointed out that in the field of IP, ADR traditionally has been used to solve disputes which arise from a divergent interpretation of an existing licence agreement or when claims are raised by licensors after the termination of the agreement. He noted that recently arbitration plays an increasingly important role for solving disputes, which arise before a patent licence agreement has been entered into, and that this scenario particularly arises in connection with disputes involving FRAND. He identified two main reasons for this increasing importance: First, the offer to utilize arbitration can have an influence on both, the patent owner and the potential licencee when it comes to the availability of injunctive relief. Depending on the jurisdiction, it impacts the question whether a licencee is considered to be willing and therefore safe from an injunction, but it can also be relevant for the determination of a potential antitrust liability of the patent owner. And second, when it comes to the complex determination of FRAND rates, state courts are not always considered well suited to deal with these issues. Regarding the former, Fröhlich explained that in some cases, the offer to use ADR can protect licencees who are willing to enter into a FRAND licence from an injunction, while also providing a safe harbour from antitrust liability to the licensor. Dr. Fröhlich cited the consent order issued by the FTC in the United States concerning Motorola/Google s enforcement of SEPs as an example. In the same vein, he mentioned the European Commission s settlement decision against Samsung, where arbitration was named as a useful part of a larger negotiation mechanism. Finally, the European Court of Justice, in its Huawei decision, pointed to arbitration as a possible tool to establish FRAND royalties in very common, albeit specific, circumstances. Dr. Fröhlich stated that utilizing ADR in issues concerning SEPs is not a novel concept; SSOs often provide for the use of ADR in their bylaws. These rules range from mere encouragements to binding provisions, e.g.: - The DVB-Project, requires its members to resolve all disputes regarding licences of DVB standards under the ICC rules, although a switch to WIPO rules is currently contemplated. - VITA even provides for mandatory binding arbitration by a panel drawn from members of the VITA Board of Directors to resolve any disputes over applications of the patent policy. - The BlueRay-Disc Consortium refers its members to the rules of the American Arbitration Association to solve disputes on FRAND, but allows basing the commitment to arbitration on reciprocity, so that injunctions or any other available legal relief can still be sought against non-members in front of state courts. - ETSI, on the other hand, has no formal arbitration requirement, but only encourages its members to solve disputes relating to the application of the IPR Policy in an amicable manner.

IPDR // 9 Dr. Fröhlich reported that these provisions in the bylaws or IPR Policies of the SSOs have only rarely, if ever been invoked. He noted that an explanation for this may be found by looking at the classical advantages and disadvantages of arbitration in the context of FRAND-disputes:. As a creature of contract, arbitration can allow for individually tailored proceedings, is flexible and can result in streamlined procedures. Most parties involved in arbitral proceedings value the confidentiality it can provide. Especially compared to litigation in front of an US court, it also means less discovery and allows to avoid a jury trial. Furthermore, an arbitral award can be enforced in multiple jurisdictions. Also, arbitration can be proceeded by mediation, which is very beneficial when there are ongoing business relations to be preserved. Concerning possible disadvantages, Dr. Fröhlich stated that arbitration is oftentimes neither cheaper nor quicker than state proceedings and bears the potential risk of an award being nullified by a state court on grounds of public policy, which includes antitrust. The latter can be of particular relevance in the context of FRAND-disputes. Finally, parties that are not members of the SSO in question are not subject to any arbitration agreement included in the respective bylaws and have therefore to be convinced to agree to arbitration. Dr. Fröhlich pointed out that in ex-ante licencing disputes, agreeing on the scope of arbitration and its framework is very hard. In conclusion Dr. Fröhlich was of the view that despite the possible disadvantages, arbitration will play an increasing role in solving FRAND disputes because of the recent developments that he described at the beginning of his talk. He noted however, that arbitration has to remain a voluntary mechanism and that it is no one size fits all solution. d. Prof. Dr. Henkel (Chair of Technology and Innovation Management at the Technical University of Munich) Prof. Henkel focused on patent evaluation. He started by explaining that around 70 percent of patents covered by (blanket) FRAND commitments are, in fact, not essential for the declared standard, or are not necessarily implemented. Further, recent studies have shown that the invalidity rate among SEPs is very high. In Prof. Henkel s opinion, patents should generally be granted much more restrictively. He stressed that the concept of FRAND was still very vague, as the "FR" (fair and reasonable) part is hardly defined at all and the ND" (non-discriminatory) part is not really actionable, since licencing contracts are not publicly available. Hence, the concept of FRAND-licencing entails technology being sold and the price being named later on. Prof. Henkel referred to patent pools and royalty caps as useful instruments to licence SEPs. He also stressed that it remains unclear who will eventually benefit from the additional value created in a patent through its inclusion into a standard. He argued that the standardization value should not be part of royalties, since it does not belong to the patent holder but to society. Prof. Henkel stated that in an ideal world, SEPs should be assessed by an independent party with regard to their validity, essentiality and quality. He suggested that SSOs could ex-ante set appropriate licencing rates for their standards and distribute the generated licence fees amongst its members (although that procedure would lead to discussions on distribution rates). Alternatively, independent institutions with competence in the technical, economic and legal field could be tasked with setting licencing rates for SEPs. As a general rule, the development costs can be used as a starting point to get a feel for what would be an appropriate licence rate, adding a risk premium as appropriate.

IPDR // 10 With regard to the appropriate royalty base, Prof. Henkel suggested using the smallest saleable unit whilst also taking the established practices in each industry into account. Especially in the telecommunication sector, focusing on the baseband chips as basis for royalty calculation could prove to be an efficient method. Although modern smartphones have a lot of functions not related to telecommunication (like cameras), the price of a handset usually correlates with the quality and price of its built-in chip. Prof. Henkel argued that focusing on the baseband chip would also reduce transaction costs, since it is easier for patent holders to inquire with the manufacturers on the rather concentrated chip market than to have to deal with the highly fragmented device market. Finally, referring to the chip as the smallest saleable unit would help to avoid royalty stacking or even the multiplication of royalties. On the other hand, using the entire end-product as a reference-point could potentially lead to absurd results and uncertainties, such as products like WiFi-enabled vending machines and power plants with LTE chips. V. Questions from the audience and discussion Dr. Tapia responded to Prof. Henkel s statements from an industry perspective. She stressed that parties in negotiation are very much aware that not all patents of the negotiated portfolios are essential or valid. However, she added, this uncertainty is always a factor in the negotiations, as parties will try to evaluate the respective portfolios, for example with claim charts, and then take uncertainties into account. Dr. Tapia argued that the smallest saleable device approach is not used in practice and was seconded by a Nokia representative from the audience. Referring to the smartphone example from Prof. Henkel, she explained that consumers would consider most of their smartphone s features as somewhat linked to connectivity. The phone s camera is not solely viewed as a way to take pictures, but also as a way to share those pictures with friends. Hence, there is no practical way to reduce a device as complex as a smartphone to a single saleable unit, such as a baseband chip. Dr. Tapia stated that the smallest saleable unit approach did not stem from negation practice, but had been introduced in US courts to lead juries to reasonable decisions on royalties and to prevent that they are misled by the high value of an end-product. Between industry players, however, a reasonable base is negotiated using the end product device. Prof. Henkel and Dr. Tapia agreed that the ongoing technological development calls for new approaches to effectively estimate royalties and that the industry is aware of that. Dr. Tapia pointed out that Ericsson has recently launched an initiative to enhance predictability for patent licencing on Internet of Things devices. Concerning past experiences with arbitration, a Nokia representative reported that Nokia has conducted two arbitration proceedings concerning SEPs so far and described them as burdensome but ultimately successful. The panelists mutually identified getting the parties to agree to arbitration and its scope as the biggest challenges and considered unwilling licencees and the risk of hold-out as problematic. Hence, the consensus was that the threat of injunction is still needed to get parties to the negotiation table. Another attendee argued that arbitration is nevertheless appealing when it comes to SEPs, as agreements concerning standardization usually need to cover multiple jurisdictions which cannot be achieved by litigation in front of state courts. Questioned by the audience on portfolio licences, Dr. Zigann reported that judges do not assess a portfolio in detail but solely examine whether the portfolio has actually been licenced and whether licence fees have been paid. He explained that the same approach is taken when it comes to determining FRAND fees and that the courts have to rely on the patent holder to present prior executed licence agreements and to show that the market has accepted such

IPDR // 11 agreements. Dr. Zigann furthermore stated that portfolio licencing is the current industry standard, to which Dr. Tapia agreed. Dr. Zigann furthermore reported that judges from all over Europe attending a UPC mock trial were reluctant to consider a standard user as a willing licencee if he is only willing to accept a national licence and refuses to licence a portfolio. Dr. Zigann pointed out that this consensus was based solely on practicability reasons, as state courts need to manage a tremendous caseload. Dr. Fröhlich replied that this would mean that parties could be forced into portfolio licences and that parties and courts should be careful to make sure that no unlawful bundling takes place. To the questions of whether state courts have means to foster arbitration, Judge Zigann answered that while the courts would be happy to delegate some FRAND issues to arbitral tribunals, the only active way to incentivize parties to opt for arbitration is to make state courts an unattractive forum, which is obviously not a viable solution. Dr. Fröhlich took over that point and stressed that a balanced procedure in front of state courts is required. Litigation should be equally unattractive to both parties, to incite both parties to negotiate in good faith and to foster a negotiated outcome over litigation. Dr. Fröhlich suggested to aim for justice by process, as this would be more effective than to search for a definitive FRAND-formula. Dr. Zigann argued for a so called "GEMA" approach. An independent party, vested with official power, should assess validity and essentiality of SEPs. Questioned on the deposit requirement, Dr. Zigann stated that current case law requires the licencee to make a deposit. New and different rules can only be enacted by the legislator. Dr. Zigann argued that it is up to the defendant to establish prima facie (in preliminary procedures) or in way of full proof in the main proceedings, that the deposited amount satisfies the FRAND criteria. To be on the safe side, the defendant should deposit the amount requested by the patent holder. VI. Closing remarks Dr. Picht closed the discussion. The event demonstrated how beneficial arbitration can potentially be in SEP settings. In order to tap this potential, however, it is necessary to increase the incentives for parties to enter into arbitration in the first place. Furthermore, with regard to the fundamental question how SEP arbitration works best, many issues remain as yet unsolved. Finally, arbitration is but one tool for preventing and resolving SEP conflicts. Its interaction with other parts of the toolbox, such as state judicature, needs to be worked out with a view to encouraging negotiated instead of litigated solutions. Hence, Dr. Picht concluded that there is need and space for a permanent forum focusing on IP and Arbitration and gave the floor to Dr. Axel Walz, Chairman of the Munich IP Dispute Resolution Forum. Dr. Walz thanked Prof. Gsell and Prof. Drexl for their presentations and expressed his gratitude that, with them, the directors of the two leading institutions in IP and arbitration were presenting at the first IPDR Forum Meeting. He also thanked the panelists for sharing their ideas and the guests for attending. He announced the next meeting for February 2 nd, 2016 with the topic The UPC Mediation and Arbitration Center at the Max Planck Institute for Innovation and Competition.

IPDR // 12 First Munich IP Dispute Resolution Forum Meeting November 10, 2015 at the Max Planck Institute for Innovation and Competition :: SPONSOR MEMBERS