23 October 2013

Samsung’s European Proposal – Fair, Foul or Foolhardy?

EU LogoIt has been widely reported in the past few days that Samsung has made a proposal to the European Commission (EC) in the hope of avoiding a fine of up to $18.3 billion, following an EC investigation into the Korean company’s use of its standard-essential patents (SEPs) in ongoing litigation, particularly against Apple.

The EC opened the proceedings in January of 2012, based on Samsung’s applications for injunctive relief in various European countries against ‘competing mobile device makers’ (i.e. Apple).  While Apple has principally asserted non-standards-related patents, Samsung’s defensive strategy has been based substantially on alleged infringements of patents which it has declared as being essential to implement global mobile telephony standards.  The EC was concerned, in particular, that Samsung may have failed to honour its commitment to license any SEPs on fair, reasonable and non-discriminatory (FRAND) terms, and that such behaviour might amount to abuse of a dominant position.

Samsung is right to be concerned about the consequences of an adverse finding by the EC, which 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.  Samsung’s global turnover during 2011 was over $180 billion!

Samsung’s proposal has been published by the EC, which is seeking comments from ‘interested parties’.  The proposed commitment is simple enough.  As summarised in the EC press release:

Samsung has proposed to commit for a period of five years not to seek any injunctions on the basis of any of its SEPs, present and future, that relate to technologies implemented in smartphones and tablets ("Mobile SEPs") against any company that agrees to a particular licensing framework.

The licensing framework consists of: (i) a negotiation period of up to 12 months and (ii) if no agreement is reached, a third party determination of FRAND terms by either a court or an arbitrator, as agreed by the parties. If the parties cannot agree on either submitting to court or arbitration, the parties will have to submit to arbitration.

Personally, I think that this is a pretty fair compromise.  Certainly it lies somewhere between the two more extreme views expressed by IAM Magazine (that denying Samsung the ability to obtain injunctions will actually harm, rather than benefit, consumers) and by FOSS Patents’ Florian Müller (that ‘Samsung's proposals would make things worse, not better, and they would increase, not decrease, legal uncertainty’).  I do not agree with either of these positions.

FRAND: One Size Does Not Fit All!

I have written previously that I do not believe a ‘one size fits all’ solution to SEP and FRAND licensing is appropriate or practical.  The very idea that there can, or should, be hard and fast ‘rules’ regarding the enforcement of SEPs and terms of FRAND licensing just seems ridiculous to me.  Anybody with any reasonable level of practical experience with real-world scenarios knows that no two negotiations are identical.  The circumstances of the parties vary, as do the market conditions, and the ‘fair’, ‘reasonable’ and ‘non-discriminatory’ requirements may be in tension with one another. 

For example, while it might seem ‘fair’ to charge all licensees the same rate, is it ‘reasonable’ to charge a single fixed fee per unit when licensees in some markets may have higher fixed costs and thus pay those fees from a smaller profit margin (or pass the cost on as higher prices to consumers in those markets)?  And is it ‘non-discriminatory’ to enter into cross-licensing agreements with some licensees, and not others?  These kinds of issues are not simple, and my view is that there must be some flexibility for parties to negotiate terms that are fair, reasonable and non-discriminatory relative to their particular circumstances.  Only a theoretician – not a pragmatist – could believe in some absolute standard of FRAND that applies in all places at all times!

And while I would agree that an injunction should not be a remedy automatically available through enforcement of an SEP, if a prospective licensee simply refuses to negotiate in good faith, I believe that injunctions absolutely should be available.  A patentee is largely deprived of negotiating power if the worst-case scenario for an unwilling licensee is an arbitration process out of which it will be ordered to pay no more than it might have negotiated in any event.

Samsung’s Proposed Commitments

In this context, Samsung’s proposal appears to be a fairly good compromise.  It enables any prospective licensee to obtain the benefit of the commitment by Samsung not to seek an injunction by simply signing and returning Samsung’s ‘Invitation to Negotiate’.  This commences a 12-month mandatory negotiating period, during which time the parties must work towards concluding a FRAND licensing, and/or cross-licensing, agreement.  If they fail to do so, the proposed commitment also sets out, in detail, processes for arbitration, or alternatively court adjudication, in order to resolve the matter.

Despite all this, if a prospective licensee fails to meet its obligations under the terms of the commitment (which is, in effect, a binding contract between the parties), then Samsung would be relieved of its own obligations, and would be free to file a claim for injunctive relief.

No doubt there will be objections to the fact that the terms of individual licences, whether settled through mandatory negotiation, arbitration or adjudication, may be confidential.  To such objections I would say: welcome to the real world, in which commercial arrangements between parties are not, generally, public property.  It is already a fact of life that existing SEP licences, including those offered by various patent pool operators in a range of industries, are subject to confidential individual variations, even where the general terms of the licences are published.

Samsung’s proposal to place a five-year limit on the (initial) term of the commitment will also attract criticism.  The fact is, however, that it would be completely unreasonable to expect Samsung to make an indefinite commitment.  Five years is a long time in the mobile communications market (we should not forget that it was little more than five years ago that the first iPhone was released).  If nothing significantly changes during this period, then Samsung will have to recommit for a further period, or once again face investigation and fines from the EC.  However, if there are substantial changes in the market, then the currently proposed commitment may no longer be appropriate – either for Samsung, or for its licensees.

Will Injunction Limitations Harm Standards or Consumers?

There is no reason to suppose that restrictions on obtaining injunctions in relation to SEPs would have any impact on the decision by Samsung – or any other company – to participate in the standards-setting process, or cause any harm to consumers.

For one thing, the benefits of participation in standardisation extend far beyond the prospect of royalties derived from SEPs.  The ability to influence the directions taken by standards, to have privileged access to information on emerging standards, and to commence development of standard-compliant products at an early stage, are all of immense commercial value.

There is no doubt that commercial entities will participate in standards development even in the absence of any prospects of future royalties.  For example, the World Wide Web Consortium (WC3), which develops open standards for the web, has a patent policy which requires all Working Group participants to license essential patents on a royalty-free basis.  W3C members and Working Group Participants include numerous commercial entities, including Apple and Samsung.  (However, nothing in the W3C patent policy prevents a member organisation from declining to participate in a particular working group, if it does not wish to make its patented technologies available on a royalty-free basis.)

SEPs undoubtedly facilitate compensation – by way of royalties – to companies that choose to contribute time, energy and R&D effort to standards development.  But this not the sole reason that companies participate in standardisation efforts.

There is, additionally, no evidence that patents on mobile communications technology – standard-essential or otherwise – are contributing to higher prices or other ‘harm’ to consumers.  On the contrary, competition in the mobile device market is fierce, and consumers are, if anything, spoilt for choice!

Conclusion

Overall, it seems to me that Samsung has put forward this proposal in good faith.  The fact that the EC is publishing it for comment, where it has (reportedly) rejected previous proposals from Samsung, indicates that it considers the proposed commitments to be a serious candidate for addressing the existing objections.  No doubt the proposal will attract many comments, and I expect that some of the most interesting will be from other SEP holders – because whatever commitments the EC ultimately agrees to, they are likely to become the model applied to all other owners of SEPs.

My own view is that, while the document is quite lengthy, and no doubt can be improved further, it is a good starting point which strikes, in principle, a fair compromise.  I hope that it will form the basis for a resolution to the EC’s issues with Samsung.

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