“If people take an extreme position such as, ‘You can have a royalty when you pry it from my cold, dead hands,’ that’s classic holdout behavior by someone who is gambling that, in a worst-case scenario, they’ll just pay a reasonable royalty decided by a court.” – David Long
On March 20, U.S. District Judge Gonzalo Curiel of the Southern District of California issued an order denying a motion by Apple, which was seeking partial judgment against Qualcomm on that company’s claim that it had fulfilled its fair, reasonable and non-discriminatory (FRAND) obligations for licensing its standard-essential patents (SEPs). As a result, Qualcomm can move ahead with its efforts to prove that its SEP portfolio licensing activities have met the company’s FRAND obligations and that Apple has forfeited its right to FRAND licensing because it hasn’t been a willing licensee.
The SEPs that are the subject of this case cover 3G and 4G wireless communications technologies that have been standardized by the European Telecommunications Standards Institute (ETSI). As a patent owning member of ETSI, Qualcomm is obligated to offer licenses to manufacturers such as Apple on FRAND terms. Qualcomm and Apple had been in negotiations for a direct license agreement between 2015 and 2017, and Qualcomm made two licensing offers to Apple in 2016. While Qualcomm alleges that these particular offers comply with FRAND obligations, Apple filed suit accusing Qualcomm of violating FRAND terms.
Judge Curiel rejected Qualcomm’s arguments that a declaration that it had met FRAND obligations through the 2016 licensing offers resolved Apple’s claims that Qualcomm had been employing monopoly tactics in licensing its SEPs. The court said the 2016 offers only related to a small part of the FRAND issues Apple had brought before the district court, which included claims of abusive licensing practices involving a no license-no chips policy and exclusivity arrangements going back as far as 2008. Further, the determination of Apple’s antitrust claims were likely to involve factual findings to be undertaken by a jury, and Qualcomm hadn’t cited any case in which a jury had considered FRAND compliance in the context of an allegedly unlawful business model.
The court did, however, side with Qualcomm in finding that Apple’s arguments regarding the unsuccessful licensing negotiations presented a definite and concrete controversy. Qualcomm had cited to a 2017 Eastern District of Texas case, Huawei Techs. Co. v. T-Mobile US, Inc., to show an instance where a court had found subject-matter jurisdiction in a case where a patent holder sought a declaration that it had complied with FRAND obligations. In the current case, Apple hadn’t stated unequivocally that it wouldn’t pursue a stand-alone breach of contract action, giving rise to a substantial controversy with sufficient immediacy and reality to justify declaratory relief. A favorable outcome to Qualcomm on this claim would afford additional relief, as Qualcomm could demonstrate that Apple had engaged in unreasonable holdout behavior, relieving Qualcomm of further FRAND obligations towards Apple.
A Legal Term with an Economic Impact
While FRAND is a legal term, Menno Treffers, Founder of Treffers Alliance Management, notes that many people tend to miss the economic and business angles of the subject. “The key to fully understanding FRAND is that the concept originates from the contract between companies that create industry standards such as GSM, 3G or Wi-Fi,” Treffers said in an email to IPWatchdog. The industry groups developing these standards need an intellectual property rights policy that make all essential patents available for licensing. For the standard to be successful, it must be incorporated into as many products as possible and companies that are members of a standard have a joint interest in the standard’s success. “What is the point of contributing resources to develop the standard if there’s a risk that the standard may be blocked or become prohibitively expensive?” Treffers said. While it’s good to collect royalties, he added that the total stack of royalties cannot become so high that it prevents successful adoption of the standard, which is essentially an economic argument for having FRAND obligations. This point is borne out in the preamble to the charter for the Wireless Power Consortium, for which Treffers serves as Chairman.
How to Be FRAND
While Qualcomm’s FRAND obligations as a member of ETSI are the subject of this antitrust case, there are dozens of standards development organizations (SDOs) such as ETSI that establish standards for interoperability on technological platforms such as Wi-Fi or 4G mobile communications. According to Jorge Contreras, a Professor at the University of Utah College of Law who teaches on intellectual property subjects, SDOs bring competing firms together to collaborate on technologies in a way that allows different manufacturers to create a standardized product by licensing patents that are submitted by patent holders to be considered standard-essential by the SDO. “The thing that’s counter-intuitive about it is that it’s totally up to the patent holder to declare which patents they own which are essential to the standard,” Contreras said. Currently, companies are typically very careful to declare every possible patent they own as potentially being essential to a standard after a string of cases wrapping up in the 2000s involved allegations of deceptive practices among patent holders asserting patents that weren’t declared to the SDO; one of the more high-profile of such cases involved Qualcomm.
Patent owners can be members in multiple SDOs, and Contreras noted that the IBMs and Intels of the world can belong to 100 or more of these organizations. Each SDO will have an intellectual property policy that discusses licensing, but very few organizations go any further than saying that the patents have to be made available for license on FRAND terms. “Never has a standards organization said that you have to license patents at a certain royalty rate,” Contreras said. While there have been efforts to clarify what actual FRAND terms are, Contreras noted that such attempts have been controversial in the past. “If you clarify a policy so it favors a manufacturer, patent owners are going to be mad. If the policy favors patent owners, the manufacturers are going to be mad. These are membership organizations and taking a side isn’t a good business move.”
The obligation to license on FRAND terms is a contractual obligation only for the SEP owner, but if a technology implementer doesn’t appear to be negotiating in good faith (i.e.: won’t return phone calls), the SEP owner can file an infringement suit and seek an injunction preventing the sale of the infringing products. Contreras noted that there’s been a lot of developing law around the subject of when a patent owner can seek an injunction against an infringer without violating FRAND obligations. In the European Union, courts have recently found it a violation of competition law for patent owners to obtain injunctions by asserting SEPs against willing licensees. In 2014, the Court of Appeals for the Federal Circuit found that Motorola wasn’t entitled to an injunction based on a FRAND-committed patent despite Apple having infringed the patent.
Contreras also pointed out that it was very interesting to watch this case given the context of how antitrust authorities have been acting in a seemingly conflicting manner. For example, at the same time that Qualcomm faces another antitrust battle over its SEP licensing practices in the Northern District of California in a lawsuit brought by the Federal Trade Commission (FTC), the Department of Justice (DoJ) has recently done an about-face on a previous policy that disfavored SEP owners. “Before you could point to the FTC and DoJ being aligned on these issues and now they’re kind of opposite,” Contreras said. “It adds to the interest and excitement in these cases.”
When Does a Party Become an Unwilling Licensee?
The present case with Qualcomm is not the first time that Apple has had to overcome allegations that its unreasonable actions as a potential licensee should relieve an SEP owner of FRAND obligations. In June 2013, the U.S. International Trade Commission issued a limited exclusion order as a result of a Section 337 complaint for infringement filed by Samsung. In multiple filings during the ITC proceedings, Apple argued that it was a willing licensee, and in a motion for stay of remedial orders pending an appeal filed in July 2013, Apple argued that it had “unquestionably demonstrated its willingness to negotiate” by providing a specific royalty rate that it would pay to license one SEP “if Samsung obtains a section 337 determination from the Commission and prevails on an appeal of that determination to the Federal Circuit.” Of course, the Obama Administration ended up vetoing the ITC’s exclusion order in August 2013, reportedly the first such Presidential veto of an ITC decision in 25 years. But this seems to beg the question of whether a potential licensee can argue that it is a willing licensee if it agrees to pay a royalty only after being taken to court and then losing an appeal of an adverse decision.
FRAND obligations are a contractual commitment between a standard-essential patent owner like Qualcomm declaring standard-essential patents and the SDOs which develop the standards, with technology implementers like Apple being third-party beneficiaries of the FRAND commitment made by the SEP owner. The FRAND commitment isn’t a license itself but rather an “agreement to agree,” according to David Long, a patent attorney at Essential Patent LLC and Editor of the Essential Patent Blog. “That means that, if I’m a patent owner and not acting reasonably or in good faith in offering a license, then I’m violating my obligations, but what it also means that if the person seeking the license isn’t negotiating reasonably or in good faith, they may forfeit their ability to get a FRAND license,” he said.
Although some commentators point to concerns about the potential for “patent holdup” in FRAND licensing situations, Long noted that such concerns are actually lessened by the patent owner’s commitment to license on FRAND terms and that, in fact, such concerns are much more likely to be realized when dealing with negotiations for licensing patents that do not have a FRAND commitment. Long also said that similar concerns about royalty stacking tend to break down in the FRAND context. “As long as you pay the patent owner what is fair and reasonable under the FRAND commitment, royalty stacking should not be a concern,” he said. “If you’ve paid someone else too much for their tech, that’s a separate problem with them,” Long said. “Perhaps you want to obtain an OLED screen for your smartphone, but regrettably you’ve paid too much for the buttons – that’s a problem you have with the button supplier, not the OLED screen supplier. Implementers who say, ‘If I pay everyone what I pay you, it’ll cost too much,’ that’s not the right inquiry to make.” Components like screws don’t provide the same value input to a smartphone as a newly developed camera, and thus the fair value of the component varies based upon the component itself and is more easily determined by industry participants rather than SDOs or regulators. Again, the focus should be on whether the license for the instant SEP is fair and reasonable given its value to a product.
While FRAND obligations are generally written to be pretty vague in SDO intellectual property rights policies, Long said that there could be some bright line rules on when either side of the negotiation could be deemed to be violating the FRAND commitment “agreement to agree.” One such condition would be demands for royalty payments which are unreasonable based on comparable licenses which have already been negotiated for the SEP portfolio. “If the potential licensee comes back to negotiations and says, ‘I know you want $5 for each end product because that’s what other people pay, but I’m only going to give you a penny per unit, that could be an unreasonable counteroffer,” Long said. “The same thing holds true for a patent owner who says, ‘I’m going to license you my SEP portfolio for $5 per unit that you sell even though we’ve only licensed for a penny to other similarly situated licensees.’” However, there are points at which the two parties could be disputing a royalty rate and their differing positions are both reasonable but they just cannot come to an agreement. Courts have also acknowledge that unreasonable delays in the negotiation process could lead a potential licensee to be deemed as an unwilling licensee who doesn’t get to benefit from FRAND commitments.
As for Apple’s contention in the ITC case brought by Samsung, it’s very likely that a company’s stance that they will not negotiate a license and will pay a royalty only if they are found to infringe all the way up through appeal would make that particular party an unwilling licensee. “There are people who have the view that I don’t have to negotiate with you reasonably and in good faith and you can’t enjoin me unless you haul me into court and test each patent in a large portfolio with intensive litigation on every patent that is allegedly essential to determine the royalty rate,” Long said. “That’s an argument that has been universally rejected.”
There are instances where a court has found that there have been reasonable disagreements over whether an implementer is actually practicing a patented aspect of a standard, such as was the case in the Ninth Circuit’s 2012 decision in Microsoft Corp. v. Motorola Inc., but such cases typically involve alleged infringers who argue that they’ve developed their own proprietary systems to supplant functionality provided by the standard and not infringe the patent (or only infringe because they have to practice the standard in order to market their product as compliant). “If people take an extreme position such as, ‘You can have a royalty when you pry it from my cold, dead hands,’ that’s classic holdout behavior by someone who is gambling that, in a worst-case scenario, they’ll just pay a reasonable royalty decided by a court,” Long said. That behavior is universally condemned.
One final point to make is that if a court decides a patent is valid, infringed, and essential, the reasonable royalty awarded would likely be higher than the royalty paid as a result of FRAND negotiations. Long said that the reason for this is that the court has now removed any uncertainty that could have led the SEP owner to offer a discount to the technology implementer before those issues were decided. This concept has even found its way into case law such as the Northern District of Illinois’ 2013 decision in In re: Innovatio IP Ventures. “Say a party wants to go to court to litigate the validity of every claim,” Long said. “Whoever does that may be facing a higher royalty at the end of the day since the validity uncertainty discount may be removed.”
Image Source: “Qualcomm” by Karlis Dambrans. Licensed under CC BY 2.0.