The establishment of industry standards involves collaboration among industry participants that is essential yet fraught with antitrust concerns, since collaboration among competitors can easily veer into forbidden, anti-competitive territory.
The commonly adopted method for staying out of antitrust difficulties is for the standards-setting organization (SSO) to require its participants to agree to license to all takers any of their patents that are essential to the standard on fair, reasonable and non-discriminatory (FRAND)[i] terms.
We reported recently about Judge Richard Posner’s unusual opinion that no injunctive relief is available to the owner of a standards-essential patent (SEP). By agreeing to license the patent on FRAND terms, the owner effectively admits that money is a sufficient remedy for infringement of the patent, making injunctive relief inappropriate. The ruling in that case is currently on appeal to the Federal Circuit Court of Appeals.
Judge Posner is an influential judge who sits on the Sixth Circuit Court of Appeals but who acted as a trial judge in this case. He may have done so because it presented a rare opportunity for him to address patent issues, which are appealed to the Federal Circuit, not the Sixth Circuit.
In his opinion, Judge Posner cited a recently issued statement of the Federal Trade Commission (FTC), submitted to the U.S. International Trade Commission (ITC). The ITC has the power to exclude infringing articles from entering the United States.
The FTC urged the ITC not to issue exclusion orders on the basis of alleged infringement of SEPs for which FRAND commitments have been made, arguing that a reasonable royalty is all that the SEP owner should be able to obtain. Both the Posner opinion and the FTC statement stemmed from the wireless communications patent wars involving Samsung, Apple, Google and Microsoft.
Several recent actions by governmental agencies have further addressed the question of injunctive relief and SEPs. On December 21, 2012, the European Commission sent a Statement of Objections to Samsung, which had sought to ban the iPhone from Europe on the basis of its SEPs. The European Commission (EC) said that Samsung’s bid for an injunction against Apple “amounts to an abuse of a dominant position prohibited by EU antitrust rules.”
The EC issued this statement even though Samsung had, just days before, announced that it was withdrawing its objections to the sale of iPhones in Europe. The EC countered by saying that Samsung’s action did not necessarily correct the harm to the marketplace that had already been done. The EC has also launched an investigation into Motorola’s aggressive approach of seeking injunctive relief in the enforcement of its SEPs in Europe.
While not directly addressing the question of injunctive relief, China’s State Intellectual Property Office recently proposed regulations that will forbid the adoption of national standards that are known to be covered by patents or patent applications unless the patent owner or applicant has declared its willingness to license the patent to any organization or individual on FRAND terms.
On January 3, the FTC proposed to settle its investigation into Google’s SEP practices (conducted through its subsidiary, Motorola Mobility) on terms requiring Google to withdraw its claims for injunctive relief on FRAND-encumbered SEPs throughout the world.
On January 8, the U.S. Department of Justice (DOJ) and the U.S. Patent and Trademark Office (PTO) issued a joint statement (the “Joint Statement”) on remedies for SEPs that are subject to FRAND commitments, and forwarded it to the ITC.
The DOJ and PTO support the general proposition that ITC exclusion orders should not be available as a remedy for alleged infringement of such SEPs. The Joint Statement acknowledges that this reasoning should probably apply to injunctive relief as well.
The Joint Statement allowed for the possibility that exclusion orders might nonetheless be appropriate in special circumstances, such as where the infringer:
- Is not subject to jurisdiction in the United States;
- Refuses to negotiate concerning a reasonable royalty; or
- Insists on clearly unreasonable terms.
The Joint Statement has been criticized for blurring the bright line drawn by Judge Posner and the FTC. By allowing for exclusion orders (and presumably injunctions) if the infringer refuses to act reasonably, the DOJ and the PTO may have invited the possibility of injunctive relief on the basis of subjective criteria. What, for example, is a reasonable royalty on a patent that relates to circuitry in a cellphone that is also covered by thousands of other patents?
Opinion diverges widely over what is a reasonable royalty rate in this context. Motorola Mobility, in its lawsuit against Microsoft, is claiming a 2.25% royalty on the sale of Windows PCs and the xBox 360. Microsoft says this measure would mean a royalty of $4 billion annually and instead proposes a model based upon the MPEG-LA method, which allocates a single royalty for a license to all of the MPEG patents on a per capita basis.
Since the standards to which the Motorola Mobility patents are essential involve numerous patents, Microsoft proposes to pay royalties to Motorola at a much lower rate, and to base that rate on the revenue allocable to the chips that use the technology, not to entire retail devices such as PCs. Microsoft figures that it owes Motorola $1.21 million for 2012.
This huge difference is set to be resolved in court. However, in the context of a request for an ITC exclusion order or a preliminary injunction, the softer test articulated by the DOJ and the PTO could lead to exclusion orders or injunctions based upon a judgment as to which party was being reasonable.
By contrast, the philosophy of Judge Posner and the FTC would permit the infringer to enter the market and oblige the parties to resolve the question of the proper royalty rate at a later date.
In due course, guidance will likely emerge concerning reasonable standards in SEP cases, and it will likely be easier to tell whether a party is acting reasonably. But now, when the positions taken by two companies can vary by as much as they do in the Motorola/Microsoft litigation, it seems unwise to open the door, as the Joint Statement proposes, to injunctive relief or exclusion orders as a remedy for the infringement of FRAND-burdened SEPs on the basis of a refusal to offer a royalty that is reasonable.
Judge Posner got it right: If the infringer wants to take its chances in court, it should be able to do so. By committing to the FRAND terms, the SEP owner may have assured itself of royalties by having its patent embedded in a standard, but that gain should come at the price of foregoing the “hold-up” potential inherent in being able to keep a competitor out of the market that the standard helped to create.
A global consensus is fast emerging regarding SEPs and FRAND terms. The European Commission acknowledges that it is in communication with U.S. regulators in addressing these issues for Europe. Given the hard line that it appears to be taking with Samsung, it seems quite possible that the Posner / FTC analysis will prevail in Europe.
The ascendancy of that analysis in the United States has yet to be determined, but the Federal Circuit’s handling of the appeal of Posner’s opinion will be telling. China is playing catch-up in this field, but its laws are developing quickly and are likely to follow any consensus that develops among the U.S. and the EU.
[i] In some instances, the word “fair” is not used in the commitment, in which case RAND is the acronym used. Judge Posner, for one, concludes that there is no difference between the two terms. For an example of an official reference to the FRAND standard, see the paragraphs 287 – 299 of the 14 Jan 2011 Communication from the European Commission (“Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements”).