14 February 2012

The Fraught Issue of FRAND II: the Politics of FRAND

your-way-my-wayIn Part I of this series, we introduced a few background concepts, namely: FRAND licensing; royalty stacking; and patent pooling. In this article we will focus more closely on the recent political manoeuvrings of various interested parties.  Part III looks at antitrust issues and how the current disputes over standards-essential patents might be resolved. 


In particular, recent actions by Apple, Microsoft, Google and the European Commission are of interest:
  1. the reported ‘leaking’ of a letter from Apple to the European Telecommunications Standards Institute (ETSI), dated 11 November 2011, complaining about ‘a lack of consistent adherence to FRAND principles’;
  2. Microsoft issuing a statement promising to make ‘essential patents’ available to competitors at fair and reasonable licensing rates, and promising not to seek injunctions or exclusion orders against unlicensed companies making products that infringe these patents;
  3. reports that Google was informing standards setting organizations that Motorola Mobility's standards-essential patents will continue to be available on FRAND terms after its acquisition of the company, followed closely by a ‘leak’ of Google’s actual letter to the IEEE standards body; and
  4. the decision of the European Commission (EC) to open a formal antitrust investigation into whether Samsung’s use of its standards-essential patents constitutes illegal anticompetitive behaviour.
Notably, all of the companies identified above – not to mention the EC – are large, powerful and well-heeled.  They do not need to make promises or issue complaints, or launch investigations, in order to resolve their differences.  If they wished to do so, they could settle everything amongst themselves behind closed doors. 

Failing this, all of the companies involved are perfectly capable of funding the litigation necessary to have the courts decide their disputes for them.  And we should not forget that this is the role of the court in civil litigation – to reach decisions, based on the law, about disputed matters coming before it, and to make orders as to how the parties are to settle their differences.  In short, parties go to court to get an adjudication because they could not – or would not – sort their issues out for themselves.

STANDARDS-ESSENTIAL PATENTS – PRO AND CON

As we have written before, on this blog and elsewhere, a standards-essential patent is likely to be technically ‘strong’ – in the sense that it is both specific in application (and therefore more likely to be valid than some broad, ‘generic’, patent) and inevitably infringed by anyone implementing the relevant standardised technology – and strategically weak because it is encumbered by FRAND obligations. (See, e.g. Apple vs Android – IP Supremacy and the Mobile Market, and How Apple Punches Above Its Weight in Smartphone Disputes.)

Companies such as Samsung and Motorola have therefore found themselves in a position where owning huge numbers of standards-essential patents – representing perhaps tens or hundreds of millions of dollars in R&D investment – is proving to be a shaky defence against a comparative handful of patents owned by Apple.

Apple’s best patents relates to ideas which improve the user experience (UX) of touchscreen mobile devices, and which are therefore highly desirable in competing devices also. However, since these do not form part of any standard they are completely unencumbered by any FRAND obligations. Apple does not have to license these patents to anybody, at any price, and is completely free to use them to obtain injunctions against the sale of any infringing products.

DOES ‘FRAND’ MEAN ‘NOT NEGOTIABLE’?

Just because a standards-essential patent is available on FRAND terms does not mean that every manufacturer of compliant products has actually secured a license. Offering a FRAND license is not simply a matter of publishing a price, and stating that this is what everybody must pay. You can be sure that every prospective licensee would argue that the price was ‘unreasonable’, or the terms ‘unfair’, and would want to negotiate. But if you are then negotiating slightly different deals with different licensees, how do you ensure that you meet the ‘non-discriminatory’ requirement?

These are all complex issues, and they do not have simple solutions.

The fact is that all licensees are not equal. Not all want to pay in cash, and may have other forms of consideration to offer. For example, some may have their own standards-essential patents to cross-license. Other may have non-essential patents, e.g. covering desirable UX features, which they would like to trade. There is no ‘FRAND market’ for these patents, so they are harder to value. Should they be worth more than a standard-essential patent, because they directly impact consumer perceptions, or less, because you can build a workable device without them?

So, a third warning, to add to those in Part I: do not believe anybody who peddles the idea that only a single FRAND license, applied equally to all licensees, can satisfy the ‘non-discriminatory’ requirement. There is no company out there, seeking in good faith to maximise benefits to its shareholders and customers, which would not be willing to negotiate as either a licensor or licensee. And this can be done while remaining within the spirit of the FRAND pledge.

DOES ‘FRAND’ MEAN ‘NO INJUNCTIONS’?

The major controversy around standards-essential patents relates to their use in applications for injunctions or exclusion orders.  Many argue that making a FRAND pledge, in order to have a patented technology included in a standard, should preclude the use of the patent to restrain a competitor, and that a court should only be asked (or permitted) to make orders relating to fair terms and reasonable royalties.

Probably our most controversial opinion in this series of articles is this: the idea that a FRAND patentee is necessarily barred from obtaining injunctive relief is misconceived and unreasonable.

Why should a company be able knowingly to use a patented technology while dragging out licensing negotiations with the patentee, secure in the knowledge that the greatest power the patentee has if agreement cannot be reached is to ask a court to rule on license terms and royalty rates?  The availability of an injunction is the main bargaining chip that a patentee has to bring a difficult prospective licensee to the negotiating table.  It is particularly true that without there at least being the possibility that a preliminary injunction might be granted, any court proceeding over the terms of a FRAND license is likely to drag on for so long that the final decision – taking into account possible appeals – might be irrelevant by the time it is delivered.

Obviously it is hard to feel sympathy for giant companies like Apple, Samsung, Microsoft and Google/Motorola in these circumstances.  But consider the situation in which a small company owns a standards-essential patent, pledged on FRAND terms, and the prospective licensee is a goliath like Apple.  Should the goliath, in addition to its massive market advantage, and financial superiority, also be able to proceed with ‘negotiations’ secure in the knowledge that it could keep the whole matter tied up in court for years with no fear of a preliminary injunction?  If your answer is ‘yes’, please check your moral compass (or your employee pass, which probably has ‘Apple’, ‘Microsoft’ or ‘Google’ written on it somewhere).

So a fourth warning: do not blindly accept assertions that FRAND patents should not be used to obtain injunctions simply because they seem reasonable in a particular set of circumstances under discussion.

And the fact is, that even when it comes to the big players in the market it is irrelevant whether a FRAND patent can be used as the basis for an injunction.  Courts are perfectly capable of looking at the totality of the circumstances in any particular case to determine whether an injunction is appropriate, and big companies are perfectly capable of paying for them to do so.  Just ask Apple, Samsung, and the Federal Court of Australia!  (See Apple v Samsung Down Under – 2011 Redux.)

BLATANT SELF-INTEREST

Which brings us to the recent events relating to FRAND licensing.

Firstly, Apple’s letter to ETSI, in which the complaint is that:

…our industry suffers from a lack of consistent adherence to FRAND principles in the cellular standards area. … Apple is committed to a FRAND licensing framework for cellular standards essential patents based on three basic elements – appropriate royalty rate, common royalty base and no injunction … provided that other parties reciprocate.

This letter was sent to ETSI on 11 November 2011.  By this time Apple had achieved some successes in its various patent suits around the world, however Motorola and Samsung had begun to fight back using patents of the own.  These ‘retaliatory’ patents are said to be standards-essential (and thus unavoidable), but FRAND-encumbered.  It is claimed that there were licensing negotiations, which broke down.  It is also asserted that Apple does not need a license, because Qualcomm (which supplies the relevant chips in the Apple products) is validly-licensed.  These are all real issues, which will ultimately affect the outcome.  But they are complex issues – particularly in the international context – which will take the courts some time to resolve.

Meanwhile, Apple is trying to define appropriate ‘FRAND principles’, before the courts get a chance to do it for them.  This is not about improving certainty in the industry as much as it is about trying to ensure that the ‘rules’ – should any be made – suit Apple.

According to Apple’s proposal:
  1. an appropriate royalty rate is one ‘that is reflective of the party’s portfolio of cellular standards essential patents and patent applications as compared to the total, industry-wide pool of such patents and applications’;
  2. a common base ‘should be no higher than the industry average sales price for a basic communications device that is capable of both voice and data communications’; and
  3. no injunction means that to seek an injunction ‘would be a violation of the party’s commitment to FRAND licensing.’
So Apple is suggesting that someone should value the entire pool for standards-essential patents, and that royalties to each patent-owner should then be based on their contribution of patents to the pool.  This is actually how patent pools generally operate, the difference being that a patent pool involves the agreement of all participants, and usually the appointment of independent assessors to determine which patents are actually standards-essential and to assist in valuing the pool.  Whether it is workable in a market of patent-holders competing for a share of royalties, many of whom would probably assert that their patents are more important to the standards, is questionable.

The notion of a ‘common base’ set at a very low level suits Apple.  It basically means that the royalty should be the same on a $100.00 feature phone as on an $800.00 smartphone.  Apple only makes high-end devices.  Patentees would only get the benefits associated with the cheapest available devices.  And the makers (and consumers) of cheaper devices would be hit with a disproportionate royalty component in the product cost.  And we are not just talking about phones here, anyway – mobile communications interfaces are nowadays incorporated into many other types of devices, such as satellite navigation units with live traffic features.

The problem with ‘no injunction’ has already been outline above.

It is equally unsurprising that Microsoft was quick to come out with an almost identical pledge.  It, too, is more likely to be on the receiving end of an accusation that it is infringing an unlicensed standards-essential patent, considering that it has not made a declaration to ETSI of ownership of any patents essential to cellular standards.

Google, on the other hand, is joining the opposing side of the debate with its acquisition of Motorola Mobility Holdings Inc, along with its large portfolio of cellular standards-essential patents.  It should therefore come as no surprise that it has declared its intention to maintain Motorola’s existing FRAND licensing policies, which do not meet Apple’s proposals.  Motorola currently demands a royalty of 2.25% of the net selling price of the ‘relevant end product’, which Apple clearly considers ‘inappropriate’ (otherwise it would not be the target of Motorola litigation), and – being a percentage – is not tied to a low common base.  And Motorola only undertakes not to pursue injunctions against what it defines as a ‘willing licensee’.

And while 2.25% may not appear excessive in itself, Samsung reportedly demands 2.4% for a license to its standards-essential patents, already bringing the total to 4.65% before adding on the royalties that may be payable to many other essential patent holders, such as Ericsson, Nokia-Siemens, and others.  So there almost certainly is a real royalty stacking issue in the mobile technology area.

Ultimately, however, there is no ‘good’ and ‘evil’ here.  No moral ‘right’ or ‘wrong’.  What we have is a situation in which some of the biggest and most valuable technology companies in the world are publicly positioning themselves in order to further their own interests.  Which is exactly what we – and their shareholders – would expect of them.

NEXT TIME…

What should be apparent is that all of the companies we have been discussing here are quite capable of looking after themselves.  So why would the EC feel the need to involve itself?

In the final part of this series, we complete our discussion of the politics of FRAND by looking at the EC’s investigation of Samsung.  We will then conclude the trilogy with a few further observations on the changing positions of some of the protagonists, and provide our views on possible outcomes and solutions to the problems that have emerged in the mobile market.

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