The proliferation of the Internet of Things (IoT) has fundamentally altered the landscape for Standard Essential Patents (SEPs). As connectivity extends to a vast array of devices, from automobiles and home appliances to industrial machinery, companies across diverse sectors—many new to the world of telecommunications standards—are finding themselves needing to navigate the complex rules of SEP licensing. For US businesses operating in or selling to the Japanese market, understanding the evolving global and local dynamics of SEPs, particularly concerning Fair, Reasonable, and Non-Discriminatory (FRAND) licensing commitments and dispute resolution, is critical.

SEPs are patents indispensable for implementing a technical standard, such as 5G, Wi-Fi, or video codecs. To ensure wide adoption of these standards, patent holders often commit to licensing their SEPs on FRAND terms. However, what constitutes "FRAND" and what obligations parties have during negotiation can be highly contentious, leading to disputes worldwide. Japanese courts and companies are increasingly influenced by, and participants in, these global trends.

The Evolving Definition of Good Faith in FRAND Negotiations

A cornerstone of FRAND licensing is the expectation that both the SEP holder and the potential licensee will negotiate in good faith. Courts in key jurisdictions have been actively shaping the contours of this obligation.

European Benchmarks:
Europe has been a hotbed for SEP litigation, with its courts providing significant guidance.

• The Court of Justice of the European Union (CJEU) in its 2015 Huawei v. ZTE (C-170/13) judgment laid down a framework for such negotiations. This framework involves a series of steps: the SEP holder must notify the alleged infringer, specifying the SEP and the infringement. If the implementer expresses a willingness to conclude a FRAND license, the SEP holder must make a specific, written offer on FRAND terms. The implementer, in turn, must respond to this offer in good faith. If the implementer does not accept the offer, it should promptly make a counter-offer on FRAND terms. If no agreement is reached and the implementer is using the SEPs, it may need to provide appropriate security, such as a bank guarantee, and be willing to have a third party determine the royalty.
• Germany: The German Federal Supreme Court (BGH) has further refined this. In key decisions in 2020 (KZR 36/17 and KZR 35/17), it emphasized a case-by-case assessment. While seen as somewhat SEP-holder friendly in certain aspects (e.g., an SEP holder is not initially obligated to provide detailed claim charts, and an implementer's "hold-out" tactics are viewed critically), the BGH also clarified that the duty of good faith applies to both parties. Crucially, it stated that an implementer must express a willingness to license under any terms that are ultimately determined to be FRAND, even if they dispute the initial offer. Furthermore, the German courts have adopted a "loose non-discrimination" approach, meaning SEP holders are not necessarily required to offer the most favorable terms previously granted to another licensee to every subsequent licensee, allowing for some variation based on circumstances.
• United Kingdom: The UK Supreme Court's 2020 decision in Unwired Planet v. Huawei ([2020] UKSC 37) echoed some of these themes. It affirmed that an implementer must be genuinely willing to take a FRAND license. While not strictly binding itself to the CJEU's step-by-step framework as a rigid prerequisite for granting an injunction, the UK court emphasized a case-by-case analysis of conduct. It also aligned with the view that SEP holders are not automatically obliged to offer their most favorable past terms to all comers.
• Netherlands: The Dutch Supreme Court, in its February 2022 Philips v. Asus (ECLI:NL:HR:2022:163) decision, also reinforced a strict interpretation of an implementer's willingness to license to avoid hold-out. It found that an SEP holder isn't required to provide exhaustive technical explanations in its initial infringement notice. A breach of good faith negotiation obligations requires an overall assessment of conduct, not merely a failure to adhere to every step of the CJEU framework.

US Perspectives:
In the United States, the SEP landscape has different focal points:

• Since the Supreme Court's 2006 decision in eBay Inc. v. MercExchange, L.L.C. (547 U.S. 388), permanent injunctions for patent infringement (including SEPs) are generally difficult to obtain in District Courts, though the International Trade Commission (ITC) can still issue import bans.
• FRAND disputes are often viewed through a contract law lens when determining damages. For instance, the 5th Circuit Court of Appeals in HTC v. Ericsson (August 31, 2021) emphasized that the core issue is the fairness and reasonableness of the licensing offer, not just a patent damages calculation. This approach also implicitly supports the notion that different licensees might receive different, yet still FRAND, royalty rates based on their specific circumstances.

Implications for Negotiations in Japan:
While Japan has its own judicial system, these international precedents are highly persuasive and frequently referenced in legal arguments and academic discussions. Companies negotiating SEP licenses that cover the Japanese market, or where Japanese patents are involved, must be acutely aware of these global standards of conduct. A failure to demonstrate good faith as interpreted by these leading jurisdictions could weaken a party's position, even if a dispute ultimately lands in a Japanese court or arbitration.

Navigating the Supply Chain: Who Gets the License and at What Price?

As technology standards permeate complex supply chains (e.g., in the automotive and electronics industries), two major questions have arisen:

1. At which level of the supply chain should a license be taken? (The "License to All" debate)
2. What is the appropriate royalty base? (The SSPPU vs. end-product price debate)

The "License to All" (LTA) Debate:
This concept posits that an SEP holder with a FRAND commitment should be willing to license its SEPs to any willing entity in the supply chain, whether it's a component supplier or the manufacturer of the final end-product. Implementers, particularly in the automotive sector, have argued that SEP holders unfairly "hold up" end-product manufacturers by refusing to license upstream component suppliers who are willing to take a license.

• German Position: German courts, particularly in cases involving connected cars, have largely rejected a strict LTA obligation. Decisions from the Mannheim and Munich regional courts in 2020 indicated that SEP holders are generally not obligated to license upstream suppliers if they choose to license at the end-product (e.g., vehicle) level. The rationale often involves the idea that the FRAND commitment doesn't dictate to whom the license must be offered, as long as it's offered on FRAND terms at some level that ensures the technology can be implemented.
• US Position: The US judiciary has also shown reluctance to mandate LTA. In Continental v. Avanci (5th Circuit, February 28, 2022), an automotive supplier (Continental) sued a patent pool (Avanci) for allegedly violating antitrust laws by refusing to license suppliers and instead licensing only automotive OEMs. The court dismissed Continental's claims, finding it lacked antitrust standing. This outcome effectively supports the practice of licensing at the OEM level in such industries.

The Royalty Base: SSPPU vs. End-Product Price:
The Smallest Saleable Patent-Practicing Unit (SSPPU) theory argues that FRAND royalties should be based on the price of the smallest component that incorporates the patented technology, rather than the price of the entire end-product (e.g., a car or smartphone). This is intended to prevent "royalty stacking" and ensure the royalty reflects the value of the patented invention, not the value of the unpatented features of the larger product.

• Trend Against Mandatory SSPPU: However, courts in key jurisdictions like the US and Germany have generally moved away from treating SSPPU as a mandatory rule. The 9th Circuit in FTC v. Qualcomm (August 11, 2020) noted that no US court has definitively adopted SSPPU as the sole or required methodology. German courts in the automotive SEP cases also favored using the end-product price as a royalty base, particularly when the standardized technology is essential to the product's core functionality or market value.
• The rationale is often that the economic value of the standard (and thus the SEPs) is truly realized and captured at the end-product level. However, this remains a highly debated area, and the appropriate royalty base can be very fact-specific.

Relevance to Japan:
These international trends significantly affect Japanese companies, many of which are major players in global automotive and electronics supply chains, both as SEP holders and implementers. While specific Japanese court decisions on LTA or SSPPU are less prominent than in Germany or the US, the global discourse heavily influences licensing negotiations and dispute strategies for products sold in or exported from Japan. Japanese companies are often involved in global supply chains where these issues are actively being litigated or negotiated.

The Thorny Issue: Global FRAND Rates and Jurisdictional Battles

Given the global nature of product markets and patent portfolios, there is a strong commercial impetus for global SEP licenses. This has led to a contentious new battleground: which country's courts have the jurisdiction to determine global FRAND licensing terms, and can they stop parallel litigation in other countries?

Assertion of Global FRAND Jurisdiction:

• The UK Supreme Court in Unwired Planet v. Huawei (2020) famously asserted its jurisdiction to determine global FRAND rates for a portfolio of SEPs, even though Huawei's UK sales were a small fraction of its global sales and Huawei objected to the UK court setting global terms. The court reasoned that a country-by-country licensing approach was impractical and that FRAND itself implies a global dimension. The ruling also controversially denied that Chinese courts, in that instance, were a more appropriate forum for setting global terms.
• In response, or as part of a broader trend, Chinese courts, such as the Shenzhen Intermediate People's Court in OPPO v. Sharp (October 2020), began asserting their own jurisdiction to set global FRAND rates.

The Rise of Anti-Suit Injunctions (ASIs):
This jurisdictional competition has been exacerbated by the increased use of Anti-Suit Injunctions (ASIs), particularly by Chinese courts. An ASI is a court order that prohibits a party from commencing or continuing legal proceedings in another jurisdiction.

• Chinese courts have issued ASIs to prevent parties from pursuing SEP litigation in countries like Germany or India, often attaching hefty daily fines for non-compliance.
• This has led to an escalatory dynamic, with courts in other jurisdictions sometimes issuing "anti-anti-suit injunctions" (or even "anti-anti-anti-suit injunctions") to counteract the Chinese ASIs.
• The practical effect of these ASIs can be significant, sometimes forcing parties to abandon litigation or enforcement efforts in their preferred forum or accept settlements under pressure to avoid massive penalties.

International Response:
The aggressive use of ASIs by Chinese courts in SEP disputes has drawn international concern.

• In February 2022, the European Union initiated a WTO dispute settlement case against China, arguing that these practices unfairly restrict EU companies' rights to protect and enforce their SEPs in foreign courts. Japan, the US, and Canada later joined this WTO consultation.
• In the United States, bipartisan legislative proposals like the "Defending American Courts Act" have been introduced, aiming to prevent US courts from recognizing or enforcing foreign ASIs that interfere with US court proceedings or ITC investigations.

Considerations for US Companies:
This jurisdictional quagmire presents significant risks for US companies involved in global SEP licensing:

• The possibility of being dragged into litigation in an unfavorable jurisdiction.
• The risk of being subjected to an ASI from one country that prevents them from pursuing legitimate claims in another.
• Increased complexity and cost in managing international SEP disputes.
• Strategic decisions about where to initiate litigation or seek licenses now require careful consideration of these cross-jurisdictional ASI risks. This impacts strategies not only for litigation directly involving Chinese patents but also for global portfolios where a Chinese entity is a counterparty.

Japan's Position and What to Expect

While Japan's courts have not been as central to the high-profile global FRAND rate-setting or ASI battles as those in the UK, EU, US, or China, the Japanese IP system and its stakeholders are deeply integrated into the global SEP ecosystem.

• Influence of Global Precedents: Japanese courts, particularly the IP High Court, closely monitor international legal developments. Decisions from the CJEU, BGH, UK Supreme Court, and US appellate courts regarding FRAND interpretation, good faith negotiation, and injunctions are well-studied and will undoubtedly influence how similar issues are approached if they arise in Japanese litigation.
• JPO and Government Initiatives: The Japan Patent Office and the Japanese government have issued guidelines and reports related to SEPs and FRAND licensing, often emphasizing the importance of good faith negotiations and transparency. For example, the JPO published a "Guide to Licensing Negotiations involving Standard Essential Patents" to provide principles and considerations for parties. These guides generally align with promoting fair and efficient licensing.
• Balanced Approach: It is likely that Japanese courts will adopt a balanced approach, drawing from the established principles in other major jurisdictions while tailoring them to the specifics of Japanese law and procedure. There's a strong emphasis in Japan on finding practical and reasonable solutions, which might favor negotiated outcomes or mediations where possible.

Practical Strategies for US Companies Operating in or with Japan

Given this complex and evolving global SEP environment, US companies should consider the following strategies concerning their Japanese operations and IP:

1. Proactive SEP Portfolio Analysis: If you own patents, regularly assess which ones might be essential to current or emerging standards. If you are an implementer, conduct due diligence to identify relevant SEPs held by others that your products might use.
2. Understand FRAND Commitments: Thoroughly understand the FRAND licensing commitments associated with any standards your company implements or contributes to.
3. Benchmark Negotiation Conduct: Approach licensing negotiations with a clear understanding of the global benchmarks for "good faith," as established by key court decisions in Europe and the US. Document your negotiation efforts carefully.
4. Strategic Litigation Planning: If disputes arise, carefully consider the most appropriate jurisdiction(s) for litigation or seeking licenses, keeping in mind the global nature of FRAND, the potential for ASIs, and the specific strengths and weaknesses of litigating in various forums, including Japan.
5. Clear Contractual Terms: Ensure that agreements with suppliers, customers, and other partners in the value chain clearly address SEP indemnification, licensing responsibilities, and royalty flow-downs to mitigate risks within the supply chain.
6. Consider ADR in Japan: For disputes with a Japanese nexus, explore ADR options like the specialized IP Mediation system, which can offer a faster, more confidential, and expert-driven path to resolution.
7. Stay Informed: The SEP and FRAND landscape is highly dynamic. Continuously monitor legal developments, court decisions, and policy changes in Japan, the US, Europe, China, and other key jurisdictions.

Conclusion

Standard Essential Patents are an indispensable yet challenging feature of the modern technological economy. For US companies, successfully navigating the SEP landscape in relation to the Japanese market requires more than just understanding Japanese patent law; it demands a keen awareness of the interconnected global legal trends. The principles of good faith negotiation, the approaches to supply chain licensing, and the intensifying jurisdictional conflicts surrounding global FRAND rates and anti-suit injunctions all have direct or indirect repercussions. A proactive, informed, and globally-minded strategy is essential to managing risks and leveraging opportunities in this complex domain.