FOSS patents and the royalty base

In a recent FOSS patents post, blogger Florian Mueller continues to advocate that the SEP license royalty base for cellular mobile devices should be changed from the end-product to the "smallest saleable unit", i.e. the chipset. In the post, quite some disappointment is expressed regarding Judge Robart's "failure" to mandate a chipset royalty base in Microsoft vs. Motorola. 

As I mentioned in a previous post, the royalty base is a parameter in a specific royalty calculation model. What matters in the end is the absolute payable royalty, and that it considers the value that the patent portfolio in question brings to the end-product. I believe that judges adjudicating patent cases are generally well aware of this.

But there's a statement in the FOSS patents post that specifically caught my attention: "Apple's position is that the difference between the price of an iPhone and that of a cheap "feature" phone (colloquially also called "dumbphone") is unrelated to wireless communications standards. I support Apple on that one"

I'm not sure I'd support that statement. The difference in price between a "dumbphone" and a "smartphone" most certainly appears to be related to wireless communication standards. 

Imagine a "smartphone" that only includes 2G wireless communication standards. Such a "smartphone" would hardly command a high price on the market, if indeed it could be sold at all. But simply add 3G/4G to it and suddenly it becomes a very attractive product. Clearly, the 3G/4G wireless communications standards bring tremendous value to a "smartphone" device. 

But while we're at it, why not compare Apples to Apples?

I'll simply quote myself from an earlier post: We can look at the illustrating example of the iPod Touch vs. the iPhone. These products are very much alike, with the difference largely being that one has cellular connectivity and the other one doesn't. The products have similar specs and both carry the "brand magic" of the OEM, Apple. Yet today's price difference between the two is around $250. 

Surely that's a more interesting price difference.

CJEU ruling follow-up - other scenarios

In my previous post I commented on the Court of Justice of the European Union's (CJEU) opinion on when an injunction request by an SEP-holder would be non-abusive. The ruling is largely in line with those of other competition authorities, encouraging diligent and timely bi-lateral negotiations, including a path to timely third party adjudication.

The ruling describes a certain presumed scenario or "flow-chart" under which an injunction request from an SEP holder would not be considered abusive. However, there are in fact real-world situations that clearly fall outside the scope of the CJEU's flow-chart but for which injunction requests would also be perfectly appropriate. In this post I'll describe two examples of such.

One surprisingly common real scenario is the "no response" situation. Some infringing OEMs may simply choose not to respond at all to formal letters from an SEP-holder offering an SEP FRAND license and an invitation to a license discussion. SEP-holders may very well send multiple such letters - even hand-delivered by international courier - over a period of months or even years, without ever hearing a word back from the alleged infringer through any communication channel whatsoever.

Clearly, such behaviour clashes with the general principles of good faith, diligence and timeliness emphasized in the CJEU ruling, while preventing the SEP-holder from - no matter how much it wishes to do so - providing detailed infringement information to the OEM, i.e. the first step of the CJEU's flow-chart scenario. In such a situation, an injunction request by the SEP-holder can surely not be considered abusive.

Another scenario occasionally encountered nowadays is the "no NDA" situation. While patents and wireless standards are documents available in the public domain, patent claim interpretations are typically not, as they ultimately constitute the legal opinions of either party. For at least this reason, the established practice in the field since at least two decades is for the parties to sign a Non-Disclosure Agreement (NDA) before details of the infringement are presented to the alleged infringer and discussed between the parties. Such NDAs are normally fully reciprocal, time-limited and non-binding with respect to concluding any other agreement than the NDA itself. Hence the signing of such must be seen as virtually harmless to either party.

Nevertheless, some infringing OEMs argue that an NDA can not be a prerequisite for negotiating an SEP license and therefore simply refuse to sign one. This again prevents even the first step of the CJEU's flow-chart from being reached. So again we have a reduction of licensing efficiency through non-compliance with established practices in the field, delaying tactics, and lack of good faith. Accordingly, an injunction request can not be seen as abusive in this case either. 

These kinds of behaviours are often part of an overall reverse patent hold-up / patent hold-out strategy with a clear objective; to avoid or severely delay (to minimize past damages) obtaining necessary licenses for SEP portfolios. In fact, some OEMs even consciously exclude SEP license costs - and sometimes other IPR license costs - from their business cases from day one. All this points to a disregard for the substantial creative efforts and intellectual property rights of others which arguably - and somewhat ironically - provide the very foundation of these OEMs' business. Such infringing OEMs are clearly "unwilling licensees", and courts and competition authorities worldwide have repeatedly confirmed that injunction requests are perfectly appropriate in such instances. But actually, they shouldn't have to keep reminding market participants about that. It should be patently obvious.

CJEU's judgement on SEP and injunctions

On July 16 2015, the Court of Justice of the European Union (CJEU) delivered its response to specific questions from a German court handling a cellular SEP licensing dispute between two Chinese rivals ZTE and Huawei.

The German court basically asked: In what circumstances will a request for an injunction by an owner of a FRAND-committed SEP be regarded as an abuse of dominant position?

The CJEU essentially replied that seeking an injunction would not be considered abusive when:

1) the SEP-holder has presented to the alleged infringer details of the infringement, and
 

2) after the alleged infringer has expressed its willingness to conclude a FRAND license, the SEP-holder has presented to the alleged infringer a FRAND license offer, including explicit royalty terms, and
 
3) the alleged infringer has not diligently responded to that offer, in accordance with recognized commercial practices in the field, in good faith and in particular without delaying tactics, and in case of the alleged infringer not having accepted the offer made to it, has not submitted to the SEP-holder, promptly and in writing, a specific FRAND compliant counter-offer.

The CJEU also noted that if no agreement is reached about FRAND terms after the alleged infringer's response or counter-offer, "the parties may, by common agreement, request that the amount of the royalty be determined by an independent third party, by decision without delay."

In reality, the actions of the SEP-holder in CJEU's points 1) - 3) are not at issue. There's hardly anything in this world that an SEP-holder wishes more than to present infringement details and a FRAND license offer to an infringer of its intellectual property rights. Although infringers may in some cases try to prevent the SEP-holder from doing just that, which I can talk about in another post, providing such information is the first objective of any serious licensing effort. This means that in practice, the main importance of points 1) - 3) is the wording concerning the behaviour of the alleged infringer.  

So what comes across very clearly from the judgement is the strong emphasis on diligence and timeliness on the part of the alleged infringer. I see this as very positive and a strong acknowledgement of the very real and present danger of reverse patent hold-up. 

As discussed in my previous post, competition regulators worldwide have focused on maintaining efficiency in SEP FRAND licensing matters by e.g. requiring bi-lateral negotiation with time limits and in case of no agreement, a single third-party adjudication of global license SEP portfolio royalty terms. While not providing explicit time limits per se, the CJEU judgement also strongly demands timeliness, e.g. with wordings such as "no delaying tactics" and "prompt" responses by the alleged infringer. In case the alleged infringer refuses the offer from the SEP-holder, it has to make a FRAND-compliant counter-offer "promptly and in writing". The parties are also encouraged to seek third-party adjudication - "without delay" no less - in case of no agreement, again in line with competition regulators' measures for licensing efficiency.

The CJEU judgement also generally promotes diligent bi-lateral negotiation as the means to reach a FRAND agreement. In essence the CJEU endorses the principle that the market should ultimately decide the FRAND terms for a given SEP portfolio license. In this sense it's also consistent with case law from other parts of the world that stresses the importance of existing licenses as FRAND references, including e.g. the Ericsson vs. D-Link case. 

With respect to what a FRAND offer may actually be, the CJEU judgement notes that "in the absence of a public standard licensing agreement, and where licensing agreements already concluded with other competitors are not made public, the proprietor of the SEP is better placed to check whether its offer complies with the condition of non-discrimination than is the alleged infringer." The CJEU thus seems to recognize that the SEP-holder's offer is likely closer to the actual FRAND rate than an offer from the alleged infringer, due to the SEP-holder's real concern of non-discrimination. In a sense this is also in harmony with the US ITC's "everybody's watching the SEP-holder" observation in Interdigital vs Nokia/Microsoft.

Overall I see this judgement by CJEU as a step in the right direction in tackling the real-world problem of reverse patent hold-up. It makes it clear to infringers that in order to avoid the risk of injunctions against their products, they need to act promptly, diligently, in good faith and in accordance with recognized commercial practices in the field to obtain necessary SEP FRAND licenses. 

Now, the CJEU judgement was based on a given "normal" scenario of the referring court, and as such it doesn't necessarily capture all possible aspects of contemporary licensing reality. There are in fact some interesting real scenarios that fall outside the scope of the judgement, but under which a request for an injunction must clearly also be non-abusive. However, I'll save those for another post.

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.