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FTC Says Injunctions Related to Standard-Essential Patents Can Harm Competition, Innovation

Written by Federal Trade Commission
Posted: December 5, 2012 @ 4:06 pm
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The Federal Trade Commission filed an amicus brief in the Federal Circuit Court of Appeals explaining that it is ordinarily inappropriate for a court to issue an injunction barring the sale of products incorporating standardized, patented technology when the patent holder has previously committed to license the patent on fair and reasonable terms.  This brief is the latest in a line of FTC actions and public statements raising concerns about the potentially anticompetitive effects of seeking an injunction for the use of a standard-essential patent (SEP).

The brief addresses this issue in the context of patent infringement claims that Motorola, Inc. has filed against Apple, Inc. regarding technologies used in iPhones and iPads that allegedly are covered by Motorola’s SEPs.  It concludes that a district court correctly applied the governing legal principles when it dismissed Motorola’s request for an injunction that could have blocked Apple from selling iPhones and iPads in the United States.

The brief explains how, in general, the owners of SEPs can use the threat of injunctions to distort competition by insisting on high royalties and other favorable licensing terms that they could not have credibly demanded before the standard was set.  This distortion is called “patent hold-up.”

The brief explains that firms in the information technology and telecommunications industries frequently agree to set standards to ensure that the numerous components of a device or a technology network can work together seamlessly, often called interoperability.  According to the brief, interoperability standards can create enormous value for consumers.  However, once a standard is adopted, and implementers begin to make investments tied to the standard, it becomes very difficult to change a technology in the standard without impairing interoperability.  The SEP holder can then engage in hold-up by seeking compensation based not on the value of its invention, but on the costs and delays of switching away from the standardized technology.

To avoid hold-up, standard-setting organizations often require participants to promise to license their SEPs on fair, reasonable, and non-discriminatory (FRAND or RAND) terms as a condition for the inclusion of their patented technology in the standard.  In some cases, however, despite the RAND commitment, the patent holder and a prospective implementer may not be able to agree on the terms of a license.  In those situations, the Commission’s brief explains that the proper approach is usually to limit the relief available to the patent holder – specifically, to allow only monetary damages, and not an injunction that prohibits the sale of products incorporating the patented technology.  This is generally the proper approach, because allowing a patent holder to seek an injunction on a SEP can facilitate patent-holdup, which can raise prices to consumers, while undermining the standard-setting process.

The brief discusses in detail the factors the Commission believes that courts should consider when considering a request by a patent holder for an injunction on a SEP.  Those factors are set out by the U.S. Supreme Court in the landmark 2006 decision eBay Inc. v. MercExchange, and support the conclusion that injunctions are usually inappropriate in the context of an SEP.  Specifically, two of the eBay factors are a showing that the patent holder would be irreparably harmed without an injunction and that monetary relief (an ongoing royalty) would be inadequate. However, both of these are generally inconsistent with the underlying basis of the RAND commitment, where the patent holder already has agreed to license its technology, acknowledging that it can be adequately compensated by a royalty.

The other eBay factors (the balance of hardships between the patent holder and the alleged infringer and the public interest) also will usually militate against injunctive relief in the case of SEPs, because an injunction usually will harm the alleged infringer more than not getting an injunction will harm the patent holder.  This is because the alleged infringer likely will be forced out of the market in a case involving SEPs.  Further, the public would face the immediate impact of an injunction by losing access to the affected products, such as iPhones and iPads.  Moreover, if courts routinely grant injunctions in cases involving SEPs, it will undercut the pro-competitive benefits of standard setting and discourage future investment in standard-compliant products and innovation by firms that contribute to and depend on the standard.

Based on these considerations, the brief concludes that the district court properly applied eBay in determining that Motorola was not entitled to an injunction.

The Commission vote approving the amicus brief filing was 4-1, with Commissioner Maureen Ohlhausen voting no.  It was filed with the court on December 4, 2012.

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Posted in: Apple, Companies We Follow, Federal Circuit, Federal Trade Commission, IP News, IPWatchdog.com Articles, Patent Litigation, Patents

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  1. Enjoining a product for infringement of a patent for which the infringer has a right [an option?] to obtain a license on “fair and reasonable terms” does not make sense unless there is a material breach of the license. [One might even argue that that this is not even a fully effected license or option contract since it fails to actually define the most essential element, the cost.] But the infringer will argue against breach by arguing that the patent owner refused to license for an amount that was “fair and reasonable. Also, to argue that adequate money damages for non-payment all the patent owner is ever entitled to in this situation.
    So my question is this: could the D.C. issue an injunction compelling the patent owner to negotiate in good fath or be subject to independed compusory arbitration or special master determination of the disputed “reasonable” amount?