South Korea is Not a ‘FRAND Rogue State’!

On 24 August 2012, the Seoul Central District Court issued its decision in one of the many ongoing patent cases between rivals Apple and Samsung.  We did not report on the ruling at the time because, frankly, there was very little information available in English, and we therefore did not feel that there was anything much we could add to the news reports (such as this one, from Bloomberg).

Overall, while the decision produced a rare win for Samsung, things certainly did not all go the way of the Korean company.  Of four patents which it asserted against Apple, two were found invalid, and one was found not to be infringed.  Furthermore, Apple was successful in a counterclaim, which resulted in injunctions against various Samsung products, and an award of 25 million Korean won (about US$23,000) in damages.

Samsung’s single valid and infringed patent also earned it an injunction against a number of Apple’s 3G-capable devices, and a damages award of 40 million won (about US$35,000).

One widely-read commentator, however, was willing to infer a great deal from very little.  Florian Mueller, in a FOSS Patents blog post entitled ‘Apple-Samsung ruling suggests South Korea is a FRAND rogue state’, wrote:

A couple of court decisions announced in Seoul, South Korea, this morning indicate that South Korea has decided to become a rogue state in connection with standard-essential patents, essentially telling foreign companies that in order to sell their technology products to the country's 50-million population, they must bow to extortion by Samsung and LG.

This is highly problematic and will have diplomatic repercussions. The victims of such abuse will be companies from the United States, Europe and Japan, and increasingly also Chinese companies. I don't know what Apple is going to do, but it would make sense to talk to both U.S. presidential candidates at the earliest opportunity.

So far, we are unaware of any credible allegations of ‘extortion’ having been made against any Korean companies, or of any diplomatic repercussions, or indeed of any impact on the US presidential race now drawing to a conclusion!

However, this week we have come into possession of a full English translation of the Media Report issued by the Seoul Court on 24 August in relation to its ruling on the Samsung patents, and we have to say it makes very interesting reading, with none of the hallmarks you might expect of a document issued by a ‘rogue state’.

The translation was prepared by Korean IP law firm Lee & Ko (which acted as cousel for Samsung in the case), and was circulated to delegates who had attended the AIPPI Congress in Seoul on 20-23 October 2012.  Lee & Ko have kindly provided their permission for Patentology to make the translation available in full, and it can now be viewed and/or downloaded from Google Drive.  The following is a summary of the Court's main points and reasons.

BACKGROUND

Samsung complained that various Apple products, including the iPhone 3GS, the iPhone 4, and the iPad WiFi+3G (both first and second generation), infringe three 3G standards-essential patents (SEPs), and one further patent relating to a ‘method of providing data service on a wireless device’.  Samsung sought injunctions, and damages totalling 100,000,000 Korean Won (around US$90,000).

Apple’s defences against the allegations were:

1. basic non-infringement (i.e. that their products to not practise the patented inventions);
2. invalidity (lack of novelty and/or inventive step);
3. patent exhaustion (that the three SEPs were lawfully licensed by Intel, which supplied the relevant components in the Apple devices);
4. violation of FRAND obligations (that under its declaration to the standard-setting body ETSI, Samsung was obliged to provide a licence to its SEPs, and precluded from seeking an injunction); and
5. anti-competitive conduct (that Samsung’s use of its SEPs was a violation of South Korean fair trading laws).

INFRINGEMENT

The Court found that Apple’s accused products use 3G standard technology, and thus necessarily infringed the three 3G SEPs.

With regard to the fourth, non-essential, patent, the Court found that it was ‘difficult to conclude that the technology embodied in Defendant Apple’s accused products’ fell with the scope of the patent claims.  Thus there was no infringement.

INVALIDITY

The Court found that two of the three SEPs to be invalid based on lack of novelty.

As a result, the Court also found that Samsung’s assertion of claims based on these two patents constituted ‘a patent misuse’.

PATENT EXHAUSTION

The Court concluded that the radio communications ‘baseband’ chips used in the Apple devices imported into Korea were manufactured by Intel Corporation subsidiary Intel Mobile Communications (IMC), and then sold either directly or indirectly to Apple.  However, the court also found that:

…there is no evidence to support Defendant Apple’s contention that Intel’s license has been extended to IMC. Intel’s act of having IMC manufacture the baseband chips and then supply to … Apple is beyond the manufacturing work scope provided under the license agreement.  Therefore, such baseband chips cannot be considered to be Intel’s licensed products.

Importantly, this is a finding based upon the specific terms of the licence agreement between Samsung and Intel.  Unless the licence is expressly extended to subsidiaries, or other related companies, and/or sublicensing for the purpose of manufacturing and sale of licensed products is permitted, the Court’s finding here is entirely reasonable.

This is not to say that a different conclusion might not be reached in other jurisdictions – particularly common law countries in which a court might be prepared to look further behind the exact terms of the contract to determine the ‘intent’ of the parties.  It is also the kind of issue on which a different judge in the same jurisdiction might arrive at a different view.  We are not sufficiently familiar with Korean law, or the terms of the licence in question, to form any firm opinion of our own.

However, there is no indication of ‘rogue’ status in reaching a conclusion which may well have been open on the specific facts of the case.

FRAND DECLARATION DEFENCE

The Court’s reasoning in relation to Apple’s FRAND defence was set out in some detail in the media report.  In summary, the discussion runs as follows:

1. French law applies to the FRAND declaration (a fact that is also recognised in the ongoing Australian litigation – see FRAND Obligations to be Aired in Australian Court);
2. under French law, and the terms of the declaration, a license agreement could not be established by the mere fact that Apple has practised the SEPs;
3. while it was disputed whether the principle of estoppel (under French law) could apply to substantive issues, the Court was , in any event, unwilling to conclude that an injunction claim by a patentee could automatically be viewed as a violation of the principle of estoppel;
4. in contrast to any ‘rogue state’ accusation, the Court stated clearly that 'in case of a standard essential patent, without use of which an equipment or a method cannot be used, or in case of a patent that has been selected by a standardization body and having declared the FRAND declaration, the scope of the rights relating to such standard essential patent may necessarily be limited in light of the purpose and philosophy behind the patent law’;
5. Samsung’s patents therefore needed to be examined to examined to determine whether ‘they have forfeited the right to protect as their use has deviated from the purpose and function of the patent system causing disorder in the fair competition and trade order and violating the principle of good faith to consumers or another party’;
6. under ETSI rules, the terms of the license agreement must be decided between the parties through negotiation;
7. the Court considered that seeking an injunction against the unauthorised use of SEPs was not ‘a deviation from the purpose and function of the standard essential patent system’;
8. Apple, for its part, had commenced use of the 3G standard technology in full knowledge of the existence of SEPs, and without seeking prior authorisation (i.e. a licence);
9. once court proceedings had commenced, Apple’s subsequent efforts to negotiate a licence were contingent upon the Court finding the patents valid and infringed, i.e. the Court was not persuaded that Apple was negotiating a FRAND royalty in good-faith, but rather was using the ongoing uncertainty over infringement and validity precipitated by the proceedings to obtain a more favourable, ‘sub-FRAND’ outcome;
10. the Court was not persuaded that an apparent one year and two month impasse in negotiations was entirely due to non-response by Samsung to good-faith offers by Apple;
11. the Court considered that Apple’s offers were quite different from the norm in such negotiations, and ‘significantly under-estimated the value’ of Samsung’s SEPs;
12. Apple made no proposal for any contingency arrangement, such as the grant of an ‘interim’ licence on Apple’s terms, pending the outcome of the case, even though this is provided for in ETSI guidelines, and Apple has done so in other countries (such as the Netherlands and Japan); and
13. the Court concluded that the main purpose of Apple’s show of negotiating with Samsung was to avoid an injunction, and furthermore that it had no intention of paying any royalties until, and unless, Samsung was successful in the court proceedings.

The main conclusion of the Court’s reasoning was that:

In light of ETSI’s policy purpose and philosophy on standardization, a patentee has the obligation, after having provided the FRAND declaration, to negotiate in good faith with a third party requesting a license for the royalty rate under FRAND terms. On the other hand, the potential licensee or a third party concurrently owes the obligation to properly request for a license to use the standard essential patents, and negotiate with the patentee regarding the royalty rate. Prohibiting a patentee from seeking injunction against the unilateral use of the standard essential patents without requesting the patentee for a license would result in offering more protection to the potential licensee or a third party in bad faith and in violation of the fundamental nature of the patent system.

Overall, this appears to be a quite balanced perspective, and not at all the rationalisation of a ‘rogue state’.  The Court seems simply to have been unwilling to allow Apple to manipulate Samsung’s FRAND obligations as leverage to achieve a favourable outcome, any more than it would have allowed an SEP-holder to abuse its monopoly power to extract an unreasonably high royalty.

ANTI-COMPETITIVE CONDUCT

The Court found nothing in Samsung’s conduct to suggest that it had violated the Fair Trade Act.  There was no evidence that the court action had been designed to strengthen a Samsung monopoly in the market place, that it had been offering Apple unfair conditions, terms or price, or that it had at any time sought to deceive ETSI as to the existence of its SEPs.

CONCLUSION

So there you have it – actual legal reasoning of a standard no different to that which you would expect to encounter in a western court, whether it be in the US, Germany, France, the Netherlands, the UK or Australia.  Or, indeed, any more ‘established’ Asian country, such as Japan.

Certainly, the laws vary from country-to-country, and there are no doubt places in Asia where a foreigner might feel quite nervous being on the wrong side of a dispute with a local!  However, there is no evidence to suggest that such issues formed any part of the decision of the Seoul Central District Court in this case. 

The suggestion that South Korea is any form of ‘rogue state’ is totally unwarranted.  And in the context of the way in which the term is applied to its northern neighbour, we imagine that many would consider it a quite offensive accusation.

Tags: Apple-v-Samsung, Damages, FRAND, Injunctions, Smartphone wars