FRANDulent misrepresentation

Companies participating in the standard setting process for connectivity standards agree to license their standards essential patents (SEPs) on fair, reasonable and non-discriminatory (FRAND) terms. SEP holders negotiate with companies using the standards and represent to potential licensees that they are licensing their SEPs on FRAND terms. The challenge in the telecoms industry for years, and now an issue in the Internet of Things, has been determining what FRAND means. Revelations in recent US and UK cases have highlighted the extraordinary variations in licensing rates for SEPs.??

An interesting question arises as to whether these revelations may give rise to claims for misrepresentation. Under English law, misrepresentations can occur innocently, negligently or fraudulently. The five basic requirements for a civil claim for misrepresentation are (1) a statement of (2) existing fact or law which is (3) false and unambiguous, that is (4) made by the representor who becomes party to the contract and (5) the party must rely on the statement which induces the contract.

When negotiating SEP licenses, SEP holders will often make a variety of representations about their SEP licensing programmes and the agreements they have entered into; these could be about the essentiality of the patents, the patents they are licensing, the number of existing licenses they have, the types and sizes of companies they have licensed, the products they have licensed, the discounts they have given, the rates that other companies have paid and are paying. They might do this because they want to claim that the rates they are charging are “FRAND”, and they want to give the impression that the rates they are demanding are the same or similar to the rates payable by others (i.e., satisfy the ‘ND’ or non-discriminatory limb of FRAND).

A SEP holder may represent that there are comparable benchmark agreements it has signed, or that everyone pays the same. A SEP holder will often say to a prospective licensee that that the agreements are confidential and they can only be produced in litigation or under a Court order, or to a Government body like a competition or antitrust authority. Therefore, unless a prospective licensee goes to Court or arbitration, ?or unless rates are made public in reported decisions, there is no realistic way of verifying if the SEP holder’s representations are true.?In a recent case of Optis vs Apple, a SEP holder often represented that the rate it sought from prospective licensees was a ‘court-approved rate’, when in fact they were referring to the rate decided in another case by another SEP holder [see comments of the Judge at: judiciary.uk/wp-content /uploads/2024/02/Optis-Cellular-Technology-v-Apple-Retail-UK-10.05.23-Redacted-version.pdf at para 200].

When referring to fraudulent misrepresentation, fraudulent is defined as ‘knowingly; or without belief in its truth; or recklessly, careless whether it be true or false’. Fraudulent misrepresentation is rooted in the tort of deceit where motive is irrelevant. There are four facets to the tort of deceit which will be applied to the facts:?

1.????? The defendant makes a false representation to the claimant;?

?2.????? The defendant knows that the representation is false, or alternatively is reckless as to whether it is true or false;?

?3.????? The defendant intends that the claimant should act in reliance on it; and,

?4.????? The claimant does act in reliance on the representation and consequently suffers loss.?

In a SEP licensing negotiation context, fraudulent (or “FRANDulent”) misrepresentation may therefore take place if:?

1??????A SEP holder claims that the rates demanded are fair and reasonable and non-discriminatory (FRAND);

2??????The SEP holder knows that it has offered, or is receiving, significantly lower rates for the same patents to other companies selling the same products, or if there has already been a Court determination, or an arbitration, where there was a finding that the FRAND rate is lower than the rate claimed by the SEP holder;?

3??????The SEP holder intends that the prospective licensee will rely on the representation that the rates they are paying are FRAND and do not discriminate against the licensee; and,

4??????The licensee signs the SEP license based on the assurances and representations given by the SEP holder, and the licensee suffers loss by paying more than the true FRAND rate, or the rate payable by others.?

Silence?does not of itself usually amount to a?misrepresentation?as there is generally no duty to disclose facts which if known would affect the other party’s decision to enter the contract. However, under English law there are exceptions to this rule, ?

• Misrepresentation by conduct. The court may find that a representation has been implied by an express statement; in a claim based on an implied representation, the court must consider "what a reasonable person would have inferred was being implicitly represented by the representor's words and conduct in their context". A?misrepresentation?can be implied or be a "representation by conduct" if there is representation that there exists some state of facts different from the truth;
• Where a party makes a statement which is a half-truth (that is, a statement which may be true as to what is said, but which becomes a?misrepresentation?by virtue of what is left unsaid). This exception often arises in practice;
• Where a party makes a statement that is true when it is made, but before the contract is entered into the circumstances change so that the statement is no longer true. In this situation, the party who made the statement has a duty to tell the other party about the change and failure to do so will amount to a?misrepresentation?if it knows that the other party (the representee) is relying on the representation; or,
• Where the contract is a contract of the utmost good faith or deals with certain fiduciary relationships.

Clauses in agreements that seek to avoid any claims for fraudulent misrepresentation will be void under public policy under English law..?

Misrepresentation can also be a criminal act in the UK. Under the Fraud Act 2006, a person breaches section 2 (fraud by false representation) if he dishonestly makes a false representation, intending to either: make a gain for himself or another, or to cause loss to another or expose them to a risk of loss. Section 2(2) defines representations as false if they are untrue or misleading and if the person making the false representation knows that it is, or might be, untrue or misleading. Representation means any representation as to fact or law (including state of mind) of the person making the representation or any other person.??

Of course, every negotiation will turn on its facts, but recent published judgments in the US, the UK and elsewhere have highlighted the enormous variations in rates payable by licensees, largely depending on their size. Where new facts come to light about the rates payable for portfolios of SEPs, existing SEP licensees should review carefully what representations, verbal or written, were made by SEP holders when they were negotiating the SEP licenses. Prospective licensees should record carefully what representations are made by SEP holders and their representatives, both orally and in writing, during the negotiations, and all of those verbal representations should be confirmed in writing to the SEP holder, and any such representations should be set out and recorded in the license agreement.??If the SEP holder refuses to confirm them in writing, then seek an explanation as to why they will not do so.

If it turns out that there have been misrepresentations, licensees may wish to consider seeking to renegotiate the licenses to ensure that they pay the proper fair and reasonable and non-discriminatory rate, for past and future sales

I’d be interested to hear from practitioners in other jurisdictions whether there are similar provisions for misrepresentation as under English law.

Thanks to Lizzy Pocknell for her help with legal research for this article.

#SEPs #SMEs #FRAND #misrepresentations #frandulent