Competition authorities and FRAND

Disputes arising in wireless SEP FRAND licensing are very rare. But when they do occur, parties normally turn to courts for settlement. In certain instances though, national or international government agencies in the form of competition regulators become involved in one way or another. Without getting into too much detail, I'll here briefly examine the net outcomes of some key rulings and settlements of competition agencies in recent years, relating to wireless SEPs and FRAND licensing. 

Starting in the US, in June 2012 the US Federal Trade Commission (FTC) launched an investigation into whether Google, through its then subsidiary Motorola Mobility, breached FRAND commitments by seeking exclusion orders for SEP infringement against "willing licensees". This investigation concluded on July 24, 2013 with a "consent order" where Google accepted certain restrictions on seeking exclusion orders for SEP infringement against US companies. The consent order set out detailed procedures for Google and willing licensees to timely conclude a global SEP-portfolio license. I won’t go into the details here as it’s a bit lengthy, but essentially there's a six month negotiation period followed by – in case of no agreement - a global FRAND determination by a court or a binding arbitration. See also my earlier post where I discuss this order.

Moving on to the EU, the European Commission (EC) on January 31, 2012 opened an investigation into whether Samsung, by seeking injunctive relief against SEP infringers within the EU, breached FRAND commitments and engaged in abuse of a dominant position. On April 29, 2014, the EC concluded its investigation by accepting certain commitments made by Samsung. For a period of five years Samsung committed not to seek injunctions within the EU on SEPs against infringers that agree to the following licensing framework:

· “a negotiation period of up to 12 months; and

· if no agreement is reached, a third party determination of FRAND terms by a court if either party chooses, or by an arbitrator if both parties agree on this.”

Over in China, in May 2013, the National Development and Reform Commission (NDRC) opened an investigation into InterDigital's SEP-licensing practices. The NDRC  suspended its investigation on May 22, 2014 after accepting InterDigital's commitment including:

“Prior to commencing any action against a Chinese Manufacturer in which InterDigital may seek exclusionary or injunctive relief for the infringement of any of its wireless standards-essential patents, InterDigital will offer such Chinese Manufacturer the option to enter into expedited binding arbitration under fair and reasonable procedures to resolve the royalty rate and other terms of a worldwide license under InterDigital's wireless standards-essential patents. If the Chinese Manufacturer accepts InterDigital's binding arbitration offer or otherwise enters into an agreement with InterDigital on a binding arbitration mechanism, InterDigital will, in accordance with the terms of the arbitration agreement and patent license agreement, refrain from seeking exclusionary or injunctive relief against such company.” 

The net outcomes of these cases are in fact quite similar. They provide a "safe haven" for SEP holders to avoid competition concerns and for infringers to timely obtain SEP licenses without the risk of exclusion orders. SEP holders can avoid competition scrutiny by offering infringers the option of “formally” becoming willing licensees by accepting a process that typically includes timely FRAND determination or arbitration of the global patent portfolio value. Importantly, infringers who choose not to accept such processes continue to be susceptible to exclusion orders. 

We can see that an important common concern of these US, EU and Chinese competition authorities has been the availability of exclusion orders for SEP infringement without proper FRAND scrutiny by a court or arbitration panel. However, it's good to note that the authorities have clearly also considered the risk of so-called reverse patent hold-up. Such behaviour, also known as patent hold-out, is nowadays a common problem in SEP portfolio licensing, leading to reduced R&D investment incentives and increased SEP transfers. Importantly, the net outcomes of these cases emphasize timely resolution of global SEP portfolio licenses and keeping exclusion orders on the table for those who decline the process. These are measures that can help mitigate reverse patent hold-up.

What's also clear is the deferral of the FRAND determination issue to courts and arbitration panels. In other words, the competition authorities acknowledge that they are themselves not suited to handle patent and price-setting issues in SEP FRAND matters. This makes perfect sense in my opinion since courts and arbitration panels are arguably more transparent, independent and experienced with such matters.

An interesting scenario in the light of these net outcomes is the case of an SEP holder who seeks an exclusion order for SEP infringement where the infringer refuses to accept the court's FRAND determination for a SEP portfolio. Given that the competition authorities' concern is related to exclusion orders without proper FRAND review, this type of situation would follow the precedent set by the authorities.

Finally, on July 16, 2015, the Court of Justice of the European Union (CJEU) also offered its guidance on under what circumstances a SEP-holder may or may not abuse a dominant position by seeking exclusion orders. It did this by responding to five specific questions put to it by a German court in the matter of Huawei vs. ZTE. On the face of it, the CJEU's decision seems to be consistent with the above-mentioned agency net rulings. But the ruling deserves some scrutiny in terms of real-world licensing, which I will save for a separate post.

Apple and Ericsson - a first look

On January 12, 2015, Apple filed a complaint in the US District Court for the Northern District of California asking for a declaratory judgment that i) seven Ericsson US patents are not essential to 4G nor infringed by Apple or alternatively, if found essential and infringed, ii) the court sets reasonable royalties using a royalty base of "at most, the component that substantially embodies the alleged invention". It also asked the court to prevent Ericsson from seeking injunctive relief or exclusion orders based on the patents-in-suit.

Shortly after, Ericsson filed a complaint in the US District Court for the Eastern District of Texas asking for a declaratory judgement that i) Ericsson's global license offers have "complied with its FRAND commitment" and ii) Ericsson has "complied with its contractual obligations under its FRAND commitment".

There's been more filings in this dispute since, and of course there could be more to come. But in this post I'll specifically examine certain aspects of this first filing by Apple. There are some parts that I find interesting and related to what I have touched upon in previous posts. Also in relation to both of these first filings, I'll revisit the issue of SEP portfolio license valuation.

The first point in Apple's complaint concerns the "royalty base". Basically, a "royalty base" is the value of "something" that a royalty rate percentage is multiplied by, to arrive at a payable royalty for a licensed product. In its complaint, Apple argues that "the law requires" that the royalty base be selected as "(at most) the smallest salable unit", and explains that such a unit would correspond to "(at most) the baseband processor chip" inside its products. Apple further implies that the "current technological and legal environment" is one where this particular Apple opinion prevails, and that Ericsson has refused to "adapt" to it.

Let's first look at the law. The fundamental basis for US patent damages can be found in 35 USC 284, "...the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer..." (emphasis added). Clearly, there are no limitations of the type advanced by Apple to be found there.

So how about the "smallest salable unit"? Well, the phrase is actually part of the Entire Market Value Rule (EMVR) concept in US patent damages law. But Apple has embraced it in a completely out-of-context manner. The concept, as clarified only recently by the US Federal Circuit in Ericsson vs. D-Link in 2013, is only an "evidentiary principle" to be used to specifically assist a US layman jury to arrive at a reasonable royalty when there is a risk of it being misled (biased) by a higher end-product value. Moreover, in the very same breath the Federal Circuit made it crystal clear that i) licenses are "generally negotiated without consideration of the EMVR" and ii) the "substantive legal rule" is that the “ultimate reasonable royalty”– e.g. the result of multiplying a royalty rate and a royalty base–”must be based on the value that the patented invention adds to the end product” (emphasis added).

And if that's not enough, also the market has rejected Apple's position. It's an indisputable fact that the end-product selling price has been used as a royalty base in cellular SEP licensing for more than 20 years. That is, since more than a decade before Apple even got into the mobile phone business. During all those years, several hundreds, if not thousands, of cellular SEP license agreements were signed using precisely that royalty base.

If those hundreds of licenses would have been so clearly wrong, how could the world's legal systems - including the US legal system - have let such practices flourish for decades? Not to mention the tremendous global growth in the mobile phone business during those 20 years, from virtually zero to 7 billion mobile subscriptions and 2.5 billion devices sold annually today? All that, based on something that's basically against the law? I'm afraid I find that quite hard to believe.

Clearly, Apple's opinions about what "the law requires" and the "current legal environment" on the subject of royalty base do seem quite odd to say the least.

Moving now to the question about injunctive relief. Here Apple asked the court for "a ruling that Ericsson cannot seek injunctive relief or exclusion orders against Apple" based on any of the patents-in-suit found to be infringed and essential.

As I've mentioned before, there's no legal support whatsoever for banning the seeking of injunctive relief for infringement of SEPs. In fact, the US Federal Circuit in Apple vs. Motorola in 2014 could not have been clearer on this point: "To the extent that the district court applied a per se rule that injunctions are unavailable for SEPs, it erred." Indeed, "an injunction may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect." Clearly, an SEP holder does have the right to seek an injunction and it's up to the court to decide on a case by case basis whether an injunction is warranted, based on e.g. whether the infringer is deemed to have engaged in patent hold-out. An actual hold-out situation can be very damaging to the SEP holder and especially to other willing and existing licensees, as I discussed in a specific post on that subject. This is presumably why the US Federal Circuit believes that an injunction may be appropriate in such cases.

So, like the royalty base issue, Apple's request about injunctions also seems out of touch with US law.

The last aspect I'll examine here is that of SEP portfolio license valuation, looking at both Apple's and Ericsson's filings.

Apple seems to view the entire issue from a patent-by-patent aspect, and asked the court for declaratory judgements on seven particular Ericsson patents in terms of essentiality and infringement, and assuming those are fulfilled, value.

Ericsson on the other hand appears to treat the issue as a SEP portfolio licensing effort, and asked the court to determine whether its terms for its entire worldwide alleged SEP portfolio as a whole - i.e. not just seven US patents - are to be considered FRAND.

So essentially we have two approaches pitted against each other; i) patent-by-patent license value adjudication and ii) global patent portfolio license value adjudication.

The patent-by-patent approach requested by Apple may be suitable when the matter at hand is a license to a limited explicit set of patents granted in the US. But that's really not the case here at all. The majority of Apple's sales are outside the US, and it sells tremendous volumes on every continent. And an SEP-holder like Ericsson surely has granted SEPs on every continent too. In addition, major standards-contributors tend to obtain new SEPs over time, adding to their portfolios. For at least these reasons, the license scope of the Apple-Ericsson negotiation preceding these court filings must have concerned a global SEP portfolio license. Anything else would have been highly inefficient if not irrational for companies such as these.

As I elaborated in an earlier post, when it comes to a license to a large global SEP portfolio, a  patent-by-patent, country-by-country approach to adjudication can never be a complete solution, and when pursued by an infringer it may in practice amount to a patent hold-out situation. Patent hold-out can in turn lead to the unreasonable result that the SEP-holder cannot efficiently enforce its SEP portfolio simply because it's so large.

Looking now at the "one-stop shopping" approach requested by Ericsson. It does have an obvious attraction point; it directly focuses on the very topic of the actual negotiation between the parties - the value of a license to a global SEP portfolio. And in cases where significant databases of existing license agreements to the very same global SEP portfolio are available as references, this approach should have the potential to be both efficient and fair. In particular if the vast majority of those existing license agreements have been negotiated in good-faith without litigation, something we know is generally true for SEP portfolio licensing. So if Ericsson's public statements about having "more than 100 patent-licensing agreements in place" are to be believed, this case should surely qualify for this approach.

In recent times the "one-stop-shopping" approach has indeed gained support from courts and agencies worldwide. In Microsoft vs Motorola in the US District Court for the Western District of Washington, although some dubious calculation methodology was used as I've mentioned earlier, the court did in fact determine a global FRAND rate to Motorola's SEP portfolio. And the “Request for a FRAND Determination” process endorsed by the US Federal Trade Commission in the consent degree of Motorola vs Google also expressly concerned a global SEP portfolio license. Even the Chinese National Development and Reform Commission (NDRC) in 2014 imposed a similar process on InterDigital for a global SEP portfolio license.

Concluding this review of the initial filings of Apple and Ericsson, I find the argumentation coming from Apple surprisingly unconvincing so far. Its arguments about royalty base and injunctions seem to be at odds not only with US law - including recent US Federal Circuit opinion - but also with decades of regular SEP-portfolio licensing. So for Apple's sake, one would hope that it comes up with some better argumentation as the case continues. Furthermore, the global license value adjudication sought by Ericsson seems to be rather more appropriate for the case at hand - a global SEP portfolio license - as compared to the patent-by-patent approach initiated by Apple.

China and Qualcomm - a new reference

On Feb 9, US chip maker and wireless SEP-holder Qualcomm reached a concluding settlement with the National Development Reform Commission (NDRC) of China, under the Anti-Monopoly Law investigation it has been subject to.

In practice, the settlement results in Qualcomm's cellular SEP portfolio royalty rate being 3.25% of the net selling price of 3G- or 3G/4G-compliant devices sold in China. Clearly the Chinese authorities deemed Qualcomm's original rate to be unreasonably high, since the imposed discount is almost 35%.

But besides that specific message to Qualcomm, a broader message can also be detected here. China tells the world that it does not embrace market disruptiveness with respect to the cellular SEP FRAND licensing model per se. It confirms the applicability of long-standing basic SEP-portfolio licensing principles, with the end-product price as the royalty-base and royalty rates in the order of lower single-digit percentages for strong SEP-portfolios.

This message from China is actually a powerful endorsement of the importance of basic wireless R&D to the ecosystem. Hopefully regulators and policy makers worldwide will consider this input when confronted with various SEP-devaluing proposals popping up in recent times.