01 November 2011

FRAND Obligations to be Aired in Australian Court

Under fire - the iPhone 4S Apple and Samsung today faced Justice Annabelle Bennett once again in the Federal Court of Australia, in Sydney, at a directions hearing in relation to Samsung’s application for an interlocutory injunction barring the iPhone 4S from the Australian market.

According to reports on ZDNet.com.au and ITNews.com.au (see Mobile telcos face Apple-Samsung scrutiny and Apple invokes French law in iPhone hearing) much of the discussion in court today centred around how the ‘FRAND licensing issue’ will play out.

As we reported on 18 October 2011 (see Samsung Appeals, Retaliates, in Patent War With Apple), the patents upon which Samsung is relying in this chapter of the dispute are technically strong, in that they relate to features of the core wireless communications technologies deployed in the 3G mobile communications standards.  If Apple’s products did not implement the patented functions, it is likely that they would be unable to communicate effectively with the networks operated by carriers such as Telstra, Optus and Vodaphone.

However, these patents also suffer from a potential strategic weakness, in that their very essentiality to implementation of the wireless communications standards could limit the manner and extent to which they are enforceable against Apple.

THE ‘FRAND LICENSING ISSUE’

So what is the ‘FRAND licensing issue’, and why is it likely to occupy so much of the court’s attention?

As we explained in our earlier report, the 3G standards were developed by the 3rd Generation Partnership Project (3GPP).  There are currently 384 individual members of the 3Gpp, including various Samsung entities, and Apple (UK) Limited, along with dozens of the best-known names in the global telecommunications industry.

When an individual member contributes patented technology to a standard, it may be required to make certain concessions.  In particular, if the use of the patented technology is essential to the implementation of the standard, such that nobody would be able to produce compliant devices without using it, the patentee must agree that it will not use its patent rights to shut anybody out of the market for devices and equipment which implement the standard.  This does not prevent the collection of royalties, or the enforcement of the patents against parties which refuse to enter into a license agreement.  However, the agreements generally bar the patentee from any discrimination in favour of, or against, particular participants in the market.

The usual requirement that is adopted in this situation is that the patentee must agree that it will license its patented technology to all comers on ‘fair, reasonable and non-discriminatory’ (FRAND) terms. In other words, a license must be granted to anybody who requests it, so long as they are willing to pay the same ‘reasonable’ royalty rates as all other licensees.

In the case of the 3G standards, the main governing body is the European Telecommunications Standards Institute (ETSI) and – to complicate matters further – disputes over FRAND licensing issues are subject to resolution under French law.  While this does not mean that the Apple/Samsung dispute will have to move to a French court, it may mean that Justice Bennett will need to study up on French law in order to properly apply the relevant agreements!

THE EFFECT OF FRAND TERMS UNDER AUSTRALIAN PATENT LAW

To the best of our knowledge, FRAND licensing obligations have not previously arisen in any Australian patent dispute (not one, at least, that has actually resulted in court proceedings).  Indeed, the issue has rarely arisen in any court worldwide. 

Patents subject to FRAND terms – relating to standards such as MPEG-2 video, and the DVD format – have been enforced in various courts (particularly in patentee-friendly Germany) against parties that have refused to sign up to a license on the terms offered to all other licensees.  This is not, however, the same thing as a dispute over the applicability and effect of the FRAND agreements themselves.

There is nothing in the Australian Patents Act 1990 about obligations to license patent rights.  Under the Act, any company that is using patented technology without the authorisation of the patentee is an infringer, and subject to the remedies for which the Act provides, including financial compensation (damages or an account of profits) and/or an injunction.

Accordingly, if Apple requires a license to use the 3G features covered by Samsung’s Australian patents, and if it cannot, or will not,  agree to appropriate FRAND terms with Samsung, then an Australian court could certainly grant an injunction.

However, this is not the issue at the present stage of proceedings.  As we explained in the wake of the preliminary injunction granted to Apple against the Galaxy Tab 10.1 (see Samsung’s ‘Eyes Wide Open’ Sinks Australian Galaxy Tab 10.1), the likelihood of an ultimate finding of infringement is only the first factor in determining whether an interim injunction is appropriate.  This must be coupled with an analysis of the ‘balance of convenience’, including am assessment of whether or not, in the event that the patentee is ultimately successful, an award of damages would be adequate compensation for the ongoing infringement.

As Apple’s lawyers have already argued in court, it may be difficult for Samsung to make the case that damages (in the form of the FRAND royalties that Apple should otherwise have been paying) are not an adequate remedy.  After all, if the patents are indeed subject to FRAND obligations, then Samsung does not ultimately have the right to prevent Apple from gaining access to them on the same terms as any other independent manufacturer of handsets.

THE ISSUES BEFORE THE COURT

There is no way yet to predict how this issue will play out.  The factors likely to be canvassed by the parties include the following:
  1. Samsung, for its part, will argue that FRAND obligations arising in Europe do not apply to its Australian patents;
  2. Samsung also alleges that Apple has refused to enter into licensing negotiations, and will no doubt argue that in doing so Apple has waived its right to now assert that an injunction is inappropriate;
  3. Apple has argued that, to the extent that the iPhone 4S implements the patented features, this occurs in integrated circuits sourced from Qualcomm, which is itself licensed, and that Apple therefore does not infringe;
  4. Samsung has asked the court to order that Apple provide source code to its firmware for inspection by Samsung experts, and they will no doubt seek to show that the patented features are implemented at least partially by Apple code;
  5. Samsung is also seeking an order for the major Australian carriers (Telstra, Optus and Vodaphone) to produce details of the subsidies they apply to Apple handsets supplied to consumers on service contracts, on the basis that these impact upon the subsidies available for other manufacturers’ products, including Samsung’s; and
  6. it is possible that an expert in French law will be called in to help the court trawl through the ETSI FRAND obligations.
This list may not be exhaustive, and excludes evidence and submissions relating to the actual technology covered by the Samsung patents, and the assessment of the likelihood that the iPhone 4S will ultimately be found to infringe any of the claims.

It is hardly surprising, then, that Justice Bennett is concerned that the matter may be unsuitable for an interlocutory ruling, unless the scope of the issues can be contained.  Apple has indicated that it considers at least five or six days of hearings may be required, and while Justice Bennett has suggested that this would be a more appropriate duration for a full trial, we note that she previously underestimated the scope of the hearings into the Galaxy injunction, which ended up running for a similar number of days, once all was said and done.

WHAT NEXT?

The parties are now due back in court on Friday (4 November) for further directions.  The interlocutory hearing is currently set down for 15, 16, 18 and 21 November.

A date for the Full Court hearing on Samsung’s appeal against the Galaxy Tab injunction is yet to be posted on the Commonwealth Courts Portal, but we have heard that it will take place on 25 November.

All in all, it looks to be a busy month for Apple, Samsung, their lawyers, and all of us trying to keep up with developments in the case!

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