26 February 2012

The Fraught Issue of FRAND III: Antitrust and the Future of FRAND

Trust No One... In Part I of this series, we introduced a few background concepts, namely: FRAND licensing; royalty stacking; and patent pooling. In Part II we focussed on the recent political manoeuvrings of various interested parties, in particular Google, Apple and Microsoft. In this final part, we look at the tension between patents, FRAND licensing agreements and competition law, and what this might mean for the future of FRAND and the current disputes.

On 31 January 2012, the European Commission (EC) announced that it has opened a formal antitrust investigation into whether Samsung’s use of its standards-essential patents constitutes illegal anticompetitive behaviour.  It had been conducting a ‘preliminary investigation’ for some months, as part of which the EC had requested that both Samsung and Apple provide information regarding ‘the enforcement of “standards-essential” patents in the mobile telephony sector’.  Samsung’s response at the time was that it had ‘at all times remained committed to fair, reasonable and non-discriminatory (FRAND) licensing terms’ for its wireless standards-related patents,” and was cooperating fully with the EC.

Since then, both Apple and Microsoft have filed official complaints about similar behaviour by Motorola Mobility (with Microsoft’s complaint also naming Google).

The main competition concern appears to be over holders of standards-essential patents seeking injunctions based on those patents, which they have pledged to make available on FRAND terms.  As discussed in our previous article in this series, we cannot see why a patentee should not be entitled to an injunction in appropriate circumstances, such as when another party has refused to take a license on identical terms to other licensees.  However, Europe’s competition regulator, and companies that do not have large portfolios of standards-essential patents, may well see things differently.

In this final article in our series on FRAND we look at the antitrust complaints, the effect these may have on the balance of power in the ongoing disputes, and what this may mean for future developments.

EC INVESTIGATION INTO SAMSUNG

In a speech entitled ‘Unleashing Europe’s potential for growth: The role of competition policy,’ delivered on 1 December 2011, the Vice President of the European Commission responsible for Competition Policy, JoaquĆ­n Almunia, stated:

Competition policy is … an effective tool for fostering innovation, which is the basis of high sustained growth in the long term.

Nowadays, in the advanced economies, innovation means knowledge. The knowledge economy relies on ideas, and intellectual assets have never been more valuable.

We want to make sure with our control that Intellectual Property Rights [IPR] are used to reward inventions and motivate innovation, not as tools to foreclose access or expansion in markets.

Recently we have seen a rise in the strategic use of IPR. Take for example the mobile communications industry, where it seems that everybody is suing everybody else for patent infringements, often to block certain products from entering the market.

I have instructed my services to look closely into how intellectual property rights are used; for instance, we have recently asked Apple and Samsung to send us information on their patents for smartphones.

It is concerning that this statement appears to imply that there is something wrong with the ‘strategic’ use of IPR, such as patents, as though this is distinct from using those rights to obtain lawful rewards for invention and innovation.  IP rights are of little value without some strategy to monetise them, and it is not apparent at this stage that anybody other than Apple has deployed rights preemptively with the primary aim of blocking products from the market.

Samsung’s use of standards-essential patents, for example, appears to have been retaliatory, as part of a defensive, rather than offensive, strategy. 

As for the formal antitrust investigation into Samsung, the EC’s official media release states that:

In 2011, Samsung sought injunctive relief in various Member States' courts against competing mobile device makers based on alleged infringements of certain of its patent rights which it has declared essential to implement European mobile telephony standards. The Commission will investigate, in particular, whether in doing so Samsung has failed to honour its irrevocable commitment given in 1998 to the European Telecommunications Standards Institute (ETSI) to license any standard essential patents relating to European mobile telephony standards on fair, reasonable and non-discriminatory (FRAND) terms. The Commission will examine whether such behaviour amounts to an abuse of a dominant position prohibited by Article 102 of the Treaty on the Functioning of the EU (TFEU).

It is interesting that this statement says ‘…competing mobile device makers…’.  The use of the plural would suggest that there has been more than one company targeted by Samsung in Europe.  However, we are unaware of Samsung taking action against anybody other than Apple, and only then as a retaliatory or defensive measure most likely intended to strengthen its prospects of reaching an ultimate resolution to the dispute which does not involve removing its products from the market, or severely limiting their functionality.

And the EC is no toothless tiger in these matters.  While it cannot impose criminal penalties, it can levy fines of up to 10% of a company’s global turnover during the year preceding an investigation.  In 2004, for example, Microsoft was fined €497 million (US$794 million) over licensing, interoperability and software bundling practices.  In 2008, Microsoft was ordered to pay an additional €899 million (US$1.44 billion) for failure to comply with the 2004 decision.  And in 2009, the EC fined Intel €1.06 billion ($1.45 billion) for anti-competitive behaviour.

So Samsung has every reason to be concerned about – and to be cooperative with – the investigation.

RECENT DEVELOPMENTS

Over the past three weeks there have been further developments in Europe:
  1. the EC approved the acquisition of Motorola Mobility by Google, however in doing so it was clear that this was because the transaction was not going to alter the existing competitive environment in Europe, and that approval should not be considered an endorsement of Motorola’s existing policies regarding FRAND patents, or of anything that Google might do in the future;
  2. Apple made a formal complaint to the EC regarding Motorola’s use of FRAND patents; and
  3. Microsoft also made a formal complaint to the EC, naming both Motorola and Google, along with a public appeal to Google not to ‘kill video on the web’.
Microsoft’s public statement says that Motorola is ‘demanding that Microsoft take its products off the market, or else remove their standards-based ability to play video and connect wirelessly.’  However, it seems that this leaves out a third option that Motorola would have offered – Microsoft could pay the asking royalty rate for access to the standards-essential patents.  The dispute is thus almost certainly about whether or not (Microsoft considers) Motorola's proposed terms to be 'fair and reasonable', and not about any real desire by Motorola to remove Microsoft products from the market.

So, to summarise the key facts:
  1. Apple has sued Samsung for infringement of various non-standards-essential patents;
  2. Samsung has retaliated by suing Apple for infringement of various standards-essential patents, for which it claims it has attempted to negotiate licenses on FRAND terms, but been unable to reach agreement with Apple;
  3. both Microsoft and Apple have failed to reach agreement with Motorola on suitable FRAND terms for access to standards-essential patents, and have filed complaints with the EC;
  4. meanwhile, there has been no evident lessening of competition as a result of any of these disputes, as consumers continue to be provided with a dizzying choice of new products being released by Samsung, Motorola, HTC, Microsoft, Apple, and a swathe of lesser competitors;
  5. nonetheless, the EC has decided to weigh in at this stage, with a formal investigation into Samsung’s conduct.
It is difficult to identify any genuine competition concerns in any of this, and certainly nothing that the courts are not perfectly capable of resolving.  Does the EC not trust its member states’ courts to make determinations as to whether, and in what circumstances, injunctions should be granted?  Does it not trust the courts to resolve disputes over FRAND licensing terms, and set appropriate fees for access to standards-essential patents?  And why would it choose to intervene in matters that are currently before the courts, involving some of the world’s biggest companies, all of which are perfectly capable of competing with one another technically, legally, strategically and in the marketplace?

Furthermore, why is the EC so concerned about the activities companies which are not headquartered in Europe, when there is no apparent adverse impact on competition, and when Europe-based competitors – such as Nokia-Siemens, Ericsson and Alcatel-Lucent – have apparently raised no complaints that competition or innovation are being stifled?

There can only be one answer: politics.  It is not clear exactly why, however we would speculate that it may have something to do with controlling the activities of foreign companies within the European market.

It is therefore time for commentators to get down from their high horses and see all of this for what it is: an expensive game of strategy being played by the world’s elite tech companies using weapons including patents and related rights, standards, competition law, and powerful regulatory bodies.

The true sources of potential competition – small, innovative, companies – will never get a seat at this table.  And it is certainly not, as some would have you believe, about some important matter of principle concerning the integrity of the standards process and the honouring of FRAND pledges.

HYPOCRISY

There can be no better evidence that the parties are merely acting in their own self-interest than to look at how they respond when the shoe is on the other foot.

Last year, prior to Google’s acquisition of Motorola Mobility, and when it therefore had no standards-essential patents of its own, Google Senior Vice President and Chief Legal Officer David Drummond blogged that legal actions by ‘Microsoft, Oracle, Apple and other companies’ against Barnes & Noble, HTC, Motorola and Samsung are really all about Android.  (See Apple v Samsung: Google Says It’s All About Android.)  Subsequent events have largely vindicated this view, but not Drummond’s claims of ‘a hostile, organised campaign … waged through bogus patents,’ or that Google’s ‘competitors want to impose a “tax” for these dubious patents that makes Android devices more expensive for consumers. They want to make it harder for manufacturers to sell Android devices.’

Compare this with Google’s recent ‘promise’ to maintain Motorola’s existing FRAND licensing policy and terms when it takes over, including royalty rates of 2.25% on the net selling price of the ‘relevant end product’ (discussed in Part II of this series).  Can we assume that royalties are only an imposed ‘tax’ when charged by somebody else?

As for Apple’s charges of anticompetitive conduct, we need point only to the company’s failed attempt to indict Nuevas Tecnologias y Energias Catala for counterfeiting over its Spanish NT-K tablet.  This action not only appeared to violate one of the unspoken ‘rules of engagement’ – pick on people your own size – but has also resulted in the Spanish company filing its own antitrust complaint against Apple with the country’s competition regulator.  Generally, concerns about anticompetitive conduct are greater when a very large company with substantial market power suppresses a much smaller competitor, than when two comparable parties fall into dispute with one another.

Apple has also played strategic games with its own standards-essential patents elsewhere.  It is a member of the World Wide Web Consortium (W3C), which sets the standards to be implemented by servers and browsers on the Web.  Members are required to disclose any patents that they consider to be essential to a proposed W3C standard.  Furthermore, if they actually participate in the development of the standard, the are required to make any essential patents available on a royalty-free basis.

The W3C has recently been developing a specification for handling of touch events by browsers executing on touch screen devices.  An obvious area of interest to Apple, one would have thought.  Which is precisely why it did not participate in that particular exercise.  Had it done so, it could have influenced the standard to operate according to its own preferences, e.g. to work the same way as an iOS device.  But then it would have been required to pledge its corresponding patents on a royalty-free basis.

So it did not participate.  Instead, it simply disclosed its relevant patents – as required – at the last possible opportunity, and now the W3C is left to determine whether the proposed specification will infringe Apple’s patents and, if so, then go back and find a workaround.  And, as explained in this article from Ars Technica, this is not the first time Apple has done this.

THE FUTURE OF FRAND: LICENSING AND PATENT POOLS?

The future of FRAND licensing in the mobile market may now be decided by the courts and/or the competition regulators, since the major players seem themselves to be unable to find common ground.

This is in no small part due, however, to the fact that the two main complainants – Apple and Microsoft – hold few standards-essential patents themselves.  Apple may well hope to use its patents to exclude competitive devices from the market, while Microsoft’s preference appears to be allowing Android to compete with Windows Phone, subject to payment of royalties reportedly in the range of $5-$15 per device.

There is, therefore, no downside for Apple or Microsoft in championing the cause of barring the use of standards-essential patents to obtain injunctions.  Their interests are clearly served by disarming their competitors in this way, while their own ability to enforce non-essential patents will be unimpeded.  Without injunctions, the ‘penalty’ which can be imposed by the courts will be limited to determining what constitutes ‘fair, reasonable and non-discriminatory’ terms and royalties in a license agreement.

Apple’s products are already priced at the premium end of the market.  Facilitating their enforcement of patents by reducing the strategic value of their competitors’ patents can only serve to lessen competition by allowing the dominant producer of higher-priced devices to further limit the choice of lower-priced competing products.  This is not necessarily a breach of any competition laws, because patents are supposed to grant a monopoly to their owners so that they can capitalise on investment in innovative new products and features. However it does cause one to wonder whether there is any sense, from a competition perspective, in further restricting the ability of standards-essential patent holders to exercise their rights.

Ultimately, it seems unlikely that Apple can succeed in removing Android devices from the market.  Its open source nature means that it has been widely adopted, and new Android-based devices are emerging at a rate far in excess of anything Apple can hope to arrest through court action.

Licensing is ultimately the best solution to everyone’s problems.  It generates additional income through royalty streams, while pushing the price of competing products up to cover the licensing costs, enabling the patent owner to reap greater profits in return for the investment in R&D which resulted in the patented innovations.  And it contains litigation, because the patent owner only needs to pursue those companies that refuse to take a license.

In other words, although a majority of Apple’s patents are not standards-essential, it might nonetheless benefit from making them available on substantially FRAND terms, just as Microsoft is doing.  This would effectively level the playing field, and allow the market to revert to a more ‘normal’ mode of operation.

And if competition regulators wish to ‘fix’ the problem of patents in the mobile market, this is what they ought to be pushing for, rather than seeking to punish holders of standards-essential patents.

This would, however, leave the problem of pricing, particularly considering the effect of royalty stacking.  As noted in Part II, the combined total royalties payable on Samsung’s and Motorola’s standards-essential patents is 4.65%.  If this is applied to a $300.00 device, it represents nearly $15, to which it might be necessary to add another $15 for a license to Microsoft’s patents.  On top of this, royalties might be payable to the Rockstar Bidco entity (the consortium which now owns all of Nortel’s former patents), Nokia-Siemens, Ericsson, LG, and many other contributors, large and small, to standardised and non-standardised mobile device technologies.

As noted in Part I of this series, royalty stacking is not unique to the mobile industry, and it has been successfully addressed before.  We would suggest that patent pools are likely to be a significant part of the solution.  While there seems little prospect of all of the parties getting together to form a single pool of patents accessible to everyone, the formation of a manageably small number of pools – perhaps three or four – seems realistic.

The formation of patent pools is also likely to please competition regulators, since it is common (and sometimes necessary) for operators to seek pre-approval of patent pool arrangements to ensure that the companies contributing to the pool – typically themselves competitors – are not colluding to exclude others from their market.

CONCLUSION

To summarise some of the main points we have made in this series of articles:
  1. we do not consider that the use standards-essential patents, pledged to be available on FRAND terms, should necessarily be restricted to bar the grant of injunctions in appropriate circustances;
  2. on the contrary, eliminating the possibility of an injunction significantly reduces the power of a patent holder to negotiate terms with a prospective licensee, which might enable large competitors to pursue more favourable terms with smaller patent holders;
  3. recent statements and allegations raised by major players in the mobile market – including Apple, Microsoft, Google, and Motorola – are largely self-interested, and should not be taken as principled positions on FRAND licensing and standards-essential patents;
  4. complaints by Microsoft and Apple to the EC over anticompetitive conduct by Motorola are moves in an overall strategy which is not limited to court action, but also includes elements of marketing, through public statements, and encouraging competition regulators to exercise power in a manner favourable to the complainants;
  5. in the absence of any clear existing impact of Samsung’s enforcement of its patents on competition in Europe, we can only conclude that the investigation of the company by the EC is largely politically-motivated;
  6. we anticipate that the legal and regulatory disputes over patents in the mobile technology space – both those that are essential to standards, and those that are not – have some time to run yet, but that eventually the market will settle back into a more ‘normal’ mode of operation, with access to IP rights being based on a range of licensing arrangements; and
  7. in the longer term, we would not be at all surprised to see the formation of patent pools in the mobile space.
It seems fairly clear that Apple and Microsoft are each running a campaign on the FRAND issue that is designed primarily to further their own interests.  And, so far, they appear to be succeeding.

But before joining the ranks of the cheer squad for the EC regulator, or for barring injunctions based on FRAND patents, ask yourself one question: however this all works out in the end, do you really want to be the way that best suits Apple and Microsoft?

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