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Do licensees have a friend in FRAND?

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On 30 January 2012 the European Commission (the “Commission”) initiated proceedings against Samsung for potential abuse of dominance[1] and has taken less than a year to issue a statement of objections in this case, suggesting it attaches particular significance to this case.[2] In essence, the Commission’s concern is that Samsung failed to honour its commitment to license its standard essential patents (“SEPs”) on fair reasonable and non-discriminatory (“FRAND”) terms[3] by seeking injunctions against Apple in certain Member States of the European Union for patent infringement.

This paper discusses the attitudes taken by different regulators and courts to the issue of whether it is an abuse of dominance for a licence holder of SEPs to seek injunctive relief against a licensee who is willing to licence on FRAND terms.

Background

Wireless devices such as smartphones and tablets need to be able to interoperate smoothly with other technologies to provide audio, video and computer functionalities. Interoperability is also key to promote innovation: industry participants often work together through standard setting organisations (“SSOs”) to develop technical standards to achieve the level of interoperability necessary to develop smarter phones.

The injunctions sought by Samsung in this case involve SEPs which relate to the third generation (3G) UMTS standard - an important industry standard for mobile and wireless communications. In 1998, the 3G mobile and wireless telecommunications system standards were adopted in Europe. Many patent holders, including Samsung, committed irrevocably to the European Telecommunications Standards Institute (“ETSI”) to license their relevant SEPs on FRAND terms to anyone who requests a licence.

What’s so special about SEPs?

The Commission’s case is not that patent holders cannot seek injunctions in case of patent infringements. On the contrary, it sees the use of injunctions in such circumstances as a legitimate remedy.[4] What is troubling the Commission is the use of injunctions by SEP holders. This is because each SEP is essential to the standard and therefore the grant of a licence of that SEP is essential for any party to be able compete on the market. As a result of the essential nature of the SEP, a licensor of SEPs may be abusing its dominant position by excluding competitors from the market by charging excessively high royalty fees (in breach of their FRAND obligation) and subsequently threatening to injunct potential licensees who refuse to pay such fees even though those licensees would have been willing to pay a reasonable (FRAND) royalty rate. This is often referred to as “patent hold-up”.

US regulatory concern regarding the use of injunctions by SEP holders

It is not only the European Commission which is becoming concerned over the potential competition issues arising from the use of injunctions by SEP holders. The US Department of Justice (“DOJ”) expressed similar concerns about patent hold-up in its statements relating to the acquisition by Google of Motorola Mobility Holdings Inc. (“MMI”):

“Once a patent is included in a standard, it becomes essential to the implementation of that standard, thus the term “Standard Essential Patent.” After industry participants make complementary investments, abandoning the standard can be extremely costly. Thus, after the standard is set, the patent holder could seek to extract a higher payment than was attributable to the value of the patented technology before the standard was set. Such behavior can distort innovation and raise prices to consumers.”[5]

The DOJ also expressed neatly some of the major anticompetitive concerns relating to patent hold-up:

“Such hold up could include raising the costs to rivals by demanding supracompetitive licensing rates, compelling prospective licensees to grant the SEP holder the right to use the licensee’s differentiating intellectual property, charging licensees the entire portfolio royalty rate when licensing only a small subset of the patent holder’s SEPs in its portfolio, or seeking to prevent or exclude products practicing those SEPs from the market altogether. In this analysis, the critical issue is whether the patent holder has the incentive and ability to hold up its competitors, particularly through the threat of an injunction or exclusion order...”[6]

However, the DOJ ultimately cleared the merger on the basis that it would not substantially lessen the degree of competition in the market that had already existed pre-merger. Shortly afterwards however, the US Federal Trade Committee (“FTC”) found that Google had:

‘reneged on its [FRAND] commitments and pursued – or threatened to pursue – injunctions against companies that need to use MMI’s standard-essential patents in their devices and were willing to license them on FRAND, terms.’[7]

The case was ultimately settled on 3 January this year after Google committed to stop seeking injunctive relief against willing licensees of MMI’s SEPs unless the licensee ‘indisputably demonstrates’ it is not willing to negotiate a FRAND fee for the licence or if the licensee is outside the jurisdiction of the United States’ courts.[8]

Orange book standard

In the EU, patent law is national in scope. Therefore the availability of injunctive relief varies from country to country. However, in relation to the enforcement of patent licences, a judgement given by the German Federal Supreme Court in 2009[9] in relation to CD-ROMs provides insight into how Germany has dealt with the issue.

In this case, the court held that an infringer of a licensor’s patent could, when faced with a claim for injunctive relief by the licensor, invoke abuse of dominance by the licensor as a defence where the licensor refused to conclude a licence with the potential licensee on reasonable and non-discriminatory terms.

However, it could only do so where the potential licensee made an unconditional offer for a licence from the licensor and where the potential licensee had actually deposited a reasonable licence fee in a trustee account and renounced any right to the funds. In addition, the offer from the licensee had to be so reasonable that no licensor could reject it without discriminating against that potential licensee.

In Germany therefore, the burden of proof appears, in the first instance, to be on the licensee to show that it has offered a reasonable licence fee to the licensor and then to prove abuse of dominance. This judgement appears to differ somewhat from EU case law which focusses on proving abuse of dominance of the SEP holder but somewhat reverses the burden of proof by requiring the SEP holder to prove that it has offered a licence at a reasonable rate. The Orange Standard may also be distinguishable as it did not specifically relate to SEPs. The Commission has also noted that ‘an interpretation of that …[Orange Standard] ruling whereby a willing licensee is essentially not entitled to challenge the validity and essentiality of the SEPs in question is potentially anti-competitive. [10]

The position under EU law: is it ever acceptable to prohibit a company from seeking injunctive relief?

Critics of the Commission’s proposed approach in the Samsung investigation, argue that it would be unreasonable to prevent a SEP holder from seeking injunctions against licensees who are not willing to pay a ‘reasonable’ royalty just because the licensor has given a commitment to licence on FRAND terms.[11] Such a ban would arguably alter the dynamic of FRAND licence negotiations and may even reduce the commercial value of the SEPs. In particular such critics note that access to the courts is a fundamental right[12] (now also expressly set out in Article 47 of the Charter of fundamental rights of the European Union) and a general principle of the European Union. As such, any restriction on that right may risk breaching EU law.

In ITT Promedia, the court nonetheless held that the right of access to the courts may be restricted for a dominant company wishing to bring legal proceedings against a competitor a) where that dominant company cannot reasonably be considered to be attempting to establish its rights, b) where its actions only serve to harass the opposite party, and c) where the dominant company’s actions are part of a plan to eliminate competition.[13]

Under the first and second criterion, the action of the licensor must be “manifestly unfounded.”[14] Arguably the fact that a potential licensee is prepared to negotiate a reasonable royalty forms part of proving these two criteria. The third criterion requires that “the aim of the action is to eliminate competition”. This is particularly important as it is not an abuse for a dominant company to start unmeritorious litigation unless it has an anticompetitive object.[15]

Because these criteria constitute an exception to the general principle of access to the courts, they must be interpreted restrictively.[16]

In a more recent case,[17] the Court held that access to the courts was a right which had to be balanced with other fundamental rights such as freedom to do business pursuant to Article 16 of the Charter.

Alternatives to an outright ban on injunctions?

The Commission’s clearance of the acquisition by Google of Motorola Mobility may suggest there may be some terms that Samsung could offer (should it wish to), to allay the Commission’s concerns regarding abuse of dominance.

The Commission cleared the merger on the basis that Google’s incentives to seek injunctions against its competitors who wished to license its SEPs was minimal given the threat of counter-suits against Google or Android OEMS posed by those competitors (who possess large patent portfolios). In addition, the Commission was content that Google’s commitments were adequate to allay any concerns of abuse of dominance. Google committed to license the SEPs in question on FRAND terms and to license them at a maximum per unit royalty rate of 2.25%. It also made a commitment to negotiate in good faith with potential licensees for a reasonable period provided neither party initiates legal proceedings against the other party's SEPs or seeks injunctive relief based on its SEPs during that period.[18]

However, this case may be distinguishable from the Samsung case in that Motorola had already committed not to charge a royalty rate above 2.25% prior to the merger. Thus by sanctioning this figure, the Commission was doing nothing more than restoring the status quo prior to the merger rather than identifying a figure from scratch. For the Commission to accept on offer from Samsung to cap the fee it charges for its licences would involve the Commission determining what a ‘reasonable license fee’ would be - a task that the Commission has resisted performing, preferring to allow market forces to determine prices.

What is a FRAND-friendly licence fee anyway?

The Commission has to date considered that it was not within its remit to determine what constitutes a FRAND rate in specific cases, considering that national courts and arbitrators are best placed to address this issue.[19] In its Horizontal Guidelines[20] however, the Commission has set out a number of different standards which it might use to measure a FRAND fee including: whether the fees bear a reasonable relationship to the economic value of the IPR (entailing a comparison between the fees charged by the IP owner before the industry became agreed with those charged after the standard had been agreed) or by independent expert to assess the “centrality and essentiality” of the standard at issue; or by disclosures of licensing terms in the context of the standard-setting process.

To date what constitutes a FRAND licence fee has been determined on a case by case basis with the onus being on the “whether the SEP holder can demonstrate to the court that he has actually offered a licence on terms which he could reasonably believe to constitute FRAND terms, but that this offer has been rejected by the other party.[21]

The Commission has investigated whether royalty rates were excessive in two recent cases: Rambus and Qualcomm. The Commission accepted commitments by Rambus in relation to its licence fees, while in Qualcomm, the Commission closed its investigation after the complainants withdrew their complaints.

A case pending in the UK High Court seems set to tackle head on the issue of what is a reasonable royalty rate. For a number of years Nokia and HTC have been involved in patent disputes with IPCOM. In July 2011 the court ruled that IPCOMs patents were valid and had been infringed. As a result, IPCom sought injunctive relief against Nokia and HTC. However, Mr Justice Floyd had stayed all other claims pending a ruling on validity and refused to grant an injunction in favour of IPCom before the remaining claims had been heard.  One of these was Nokia’s claim that IPCom had committed to license its SEPs on FRAND terms.

In May 2012, IPCom sought summary judgment against these other claims and injunctive relief. The High Court denied IPCom an injunction against Nokia for alleged breach of its SEPs on the basis that the Shelfer judgement applied.[22] The Shelfer judgement held that an injunction will be denied where monetary compensation could be applied. Given that IPCom had given a FRAND commitment in 2009 and Nokia also agreed to negotiate on FRAND terms, the court concluded that FRAND licensing provided an alternative to an injunction and that the court would facilitate the negotiation of FRAND terms. The Chancery division of the High Court is due to hear this case on what constitutes FRAND licence terms in July this year.

Next steps

On 21 March 2013, the German regional court in Dusseldorf made a reference for a preliminary ruling to the European Court of Justice seeking clarity as to whether a holder of a SEP is abusing its dominant position by seeking an injunction against potential licensee who is willing to negotiate a licence on FRAND terms.

If the Commission presses ahead with a decision against Samsung, it risks arriving at a different outcome to that of the Court of Justice. The impact of a different outcome would likely be an inevitable appeal by Samsung against the Commission’s decision and protracted litigation. The alternative is for the Commission to suspend its investigation pending a judgement from the Court of Justice. This could take years and appears to be an unpalatable option for the Commission given the precedent this case could set.

In July the IPCom case will be heard. It is anticipated that this case could be informative for other Member States and for the Commission in determining what a FRAND fee actually is.

Comment

These cases promise to shed some light on not only on the issue of whether a dominant company who is holder of SEPs may be abusing its dominance by seeking an injunction against a licensee who is willing to negotiate on FRAND terms, but also the exceptionally knotty issue of what FRAND licensing actually means in practice and it is hoped these cases will bring the courts and regulators one step further to identifying a clear policy in this area.

What is becoming clear from emerging case law is that while the question of whether the defendant has breached the SEP holder’s patents will, of course, remain a question for patent law, whether a potential FRAND licensee and infringer of the SEP has a defence against the imposition of an injunction by the SEP holder now is no longer just a matter for patent law but involves a consideration of whether the SEP holder may be in breach of competition law.


For further information, please contact Elisabetta Rotondo.

 


[2] The Commission issued a statement of objections to Samsung on 21 December 2012. The oral hearing was held on 2 May 2013.

[3] For more discussion on the meaning of each of these terms see: http://www.kemplittle.com/Publications/item.aspx?ListName=KL Bytes&ID=51

[5] Statement of the Department of Justice’s Antitrust Division on Its Decision to Close Its Investigations of Google Inc.’s Acquisition of Motorola Mobility Holdings Inc. and the Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. and Research in Motion Ltd , 13 February 2012 http://www.justice.gov/opa/pr/2012/February/12-at-210.html

[6] Statement of the Department of Justice's Antitrust Division on its decision to close its investigations of Google Inc.'s acquisition of Motorola Mobility Holdings Inc. And the acquisitions of certain patents by Apple Inc., Microsoft Corp. and Research in Motion Ltd. http://www.justice.gov/atr/public/press_releases/2012/280190.htm

[9] Case KZR 39/06, [2009] 180 BGHZ 312, 316 KZR 39/06 of 6 May 2009- Orange-Book-Standard. An English translation can be found in (2010) 41 International Review of Intellectual Property and Competition Law 369. http://www.ipeg.eu/blog/wp-content/uploads/EN-Translation-BGH-Orange-Book-Standard-eng.pdf

[10] European Commission press release: Antitrust: Commission sends Statement of Objections to Motorola Mobility on potential misuse of mobile phone standard-essential patents- Questions and Answers Memo 13/403 http://europa.eu/rapid/press-release_MEMO-13-403_en.htm

[11] IP Rights and Competition Law Enforcement Questions, Bo Vesterdorf, Journal of European Competition Law and practice (2013), volume 4 p 109-111 http://jeclap.oxfordjournals.org/content/4/2/109.full

[12] Case 222/84 Johnston v Chief Constable of the Royal Ulster Constabulary [1986] ECR 1651 paras 17 and 18.

[13] Case T-111/96 ITT Promedia v Commission [1998] ECR II-2937, Para 30

[14] Case T-111/96 ITT Promedia v Commission [1998] ECR II-2937, para 30

[15] Ibid para 56

[16] Case T-105/95 WWF UK v Commission [1997] ECR II -313 para 56

[17] Case C-70/10 Scarlet Extended  SA v Société belge des auteurs, compositeurs et éditeurs SCRL (SABAM). ECR [2011] p0000, judgment of 24 November 2011, paragraphs 41 to 46.

[18]The Commission considered that although it did not endorse Google’s concept of a FRAND commitment, the commitment did provide a certain level of protection against non-FRAND licensing. http://ec.europa.eu/competition/mergers/cases/decisions/m6381_20120213_20310_2277480_EN.pdf

[19] European Commission Press Release:  Antitrust: Commission sends Statement of Objections to Motorola Mobility on potential misuse of mobile phone standard-essential patents- Questions and Answers MEMO/13/403 http://europa.eu/rapid/press-release_MEMO-13-403_en.htm

[20] Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal cooperation agreements OJ 2011/C 11/01.

[21] Bo Vesterdorf IP Rights and Competition Law Enforcement Questions, 7 February 2013, JECLP (2013) 4 (2): 109-111

[22] Shelfer v City of London Electric Lighting Co (1895) 1 Ch 287 Court of Appeal