Examining the Confounding Public Interest Statement by the FTC in a Recent ITC Investigation

“The FTC has no way of knowing at this point whether these patents are standard essential. Making grandiose statements about SEPs is particularly nonsensical given they have sworn off taking a stand on any factual issue.”

https://depositphotos.com/13471174/stock-photo-magnifying-glass-on-white.htmlOn May 17, 2022, the Federal Trade Commission (FTC) submitted to Lisa Barton, Secretary of the International Trade Commission (ITC), a statement they believed was relevant to the public interest considerations before the Commission in a matter involving certain UMTS and LTE cellular communication modules (337-TA-1240). The ITC in many cases will invite statements on the Public Interest, and the FTC is often invited to make a submission. It should be noted, however,  “Public Interest” in the ITC is a matter of statute, and there are four public interest factors which are statutory. Any statement in the Public Interest must address one or more of those factors. Other matters not within the statute are not public interest factors.

Defining Public Interest

The statutory factors that define what is, and through exclusion what is not, considered “public interest” for purpose of filing a comment are: (1) effect of such exclusion or order upon the public health and welfare; (2) competitive conditions in the United States economy; (3) the production of like or directly competitive articles in the United States; and (4) United States consumers. Any issue raised that is not within the scope of this statutory definition falls outside the invitation to comment on behalf of the “Public interest.”

Of particular note in this case, matters regarding the public interest may be raised when the ITC finds a violation of Section 337; it “shall direct that the articles concerned … be excluded from entry into the United States, unless, after considering the effect of such exclusion upon the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, and United States consumers, it finds that such articles should not be excluded from entry.” 19 U.S.C. §1337(d)(1). In the Initial Determination (ID) written by Judge Shaw, he found no violation of the statute, and without a violation of 337 and a proposed remedy, there would be no proper issue for statements regarding the public interest in the remedy.

A Puzzling Comment

As a preliminary matter, footnote 1 in the FTC comment states: “We take no position on the facts of Investigation No. 1240.” This comment is puzzling to say the least, as the issues in dispute in this or any ITC investigation under 337 almost exclusively are factual issues, and the Commission rules, specifically Rule 210.10(b)(2), instruct the Administrative Law Judge (ALJ) to take evidence in forming an initial determination. This is for the purpose of allowing the facts to be determined and then applied. Where the judge’s hearing is entirely one of factual determination, it is hard to understand how an agency that claims to take no position on the facts of the case can offer any opinion that is useful. In this particular matter, there was a finding of no violation in the judge’s ID, meaning he suggested no remedy, making comments such as that submitted by the FTC irrelevant. Of course, the Commission could overrule the judge, but at this point there is simply nothing to comment on, at least within the meaning of the statute. Without comments regarding the facts, on a remedy that did not get imposed, it is difficult to ascertain what the FTC was doing, and why they submitted a comment. But those preliminary matters aside, there are other errors and assumptions in the comments that should be challenged, in the interest of clarity.

The statute that forms the basis for ITC action, 19 USC 1337, makes no mention of Standard Essential Patents (SEPs) and provides no exceptions for handling a patent that might read on a standard. Notwithstanding, the FTC comment explains they are concerned about the SEPs involved, but this assumes a number of facts. While a patent owner may state to a standard setting organization (SSO) that their IP may read on a standard, it is not determined if the patent is standard essential, valid or infringed. Only a factual determination, such as an investigation or trial, can tell if a patent is standard essential. In the ITC investigation 1240, there are many factual issues that may render the speculation as to the existence of any SEP moot, such as validity, noninfringement, obviousness, enablement, and so on.  Other issues unique to the ITC, such as Domestic Industry, may also short-circuit the concern over the nature of the patent. In short, the FTC has no way of knowing at this point whether these patents are standard essential. Making grandiose statements about SEPs is particularly nonsensical given they have sworn off taking a stand on any factual issue.

Unfounded Speculation

In suggesting that the ITC focus only on SEP concerns, the FTC undermines the rights of the patentholder to have a full and fair hearing.  In addition to suggesting the ITC short change the rights of IP owners, the FTC states they are “concerned the SEP holders who have committed to license SEPs on fair, reasonable and nondiscriminatory (FRAND) terms are seeking exclusionary orders to ban products from the market place for the purpose of gaining leverage over existing or potential licensees.”

This statement by the FTC demonstrates a monumental misunderstanding of FRAND. Patent holders do not promise or commit to license based on fair, reasonable and nondiscriminary (FRAND) terms. Rather, SEP owners promise to offer a FRAND, but to conclude an agreement requires willing parties on both sides.

“SEP owners do not promise to license anything,” patent commentator and founder of IPWatchdog Gene Quinn recently explained. “A license is a contract, and one cannot unilaterally contract with oneself! So, for a license to be entered into, it requires mutually interested parties, and many implementers are simply not interested in doing anything other than refusing to negotiate…”

Nevertheless, is it possible the FTC could have a concern that this particular patent holder might be engaging in some untoward activities? Perhaps, but the problem is there is no evidence that this is occurring, and in fact patents that may read on a standard have faired poorly at the ITC, which isn’t exactly the prototypical recipe for holdup. Indeed, in the few relevant cases filed at the ITC, respondents have had success in defense of the complainants asserting SEPs, or patents believed to be SEPs since this issue has never, to my knowledge, been finally adjudicated at the ITC.

The concern on the part of the FTC, without reference to the facts in a case and after having sworn off comment on the facts of the case, is nothing more than unfounded speculation.

Eroding Rights

The FTC’s next statement in the letter, “In our view where a complainant seeks to license and can be made whole through remedies in a different U.S. forum, an exclusion order barring standardized products from the United States will harm consumers and other market participants without providing commensurate benefits.” This assumes that the patent, without taking evidence, is standard essential and infringed, and that the “other forum” is available. One of many problems with this assumption is that district courts move much more slowly than the ITC. While damages may be available, a party may lose years of damages due to the speed of the district court, if they can get to trial at all. Without the ITC, a party may not have the ability to get to hearing in a timely manner and may not be able to get proper discovery. In addition, by suggesting that if a party has a patent that might read on a standard they cannot get an exclusion order, the FTC position would result in patent owners being denied rights provided in law.  This view, unsupported by fact or law, erodes those rights of parties doing business in the United States without input from Congress or any other legal authority.

A full and fair hearing may also bring out evidence that an exclusion order does not harm any public interest factor, or that the respondent’s conduct negates their right to a FRAND license, or other facts relevant to the investigation. Ignoring the facts in an individual complaint is a poor way to ensure the rights of all parties are respected. In the 1240 case, the FTC seems to suggest the ITC make a determination regarding a possible SEP without determining a patent was essential to the standard, that the respondents were entitled to a FRAND license without taking evidence as to their behavior, and to assume the validity, infringement, and nature of the patent. These issues must be addressed by the judge and the Commission, and the judge and Commission, must, unlike the FTC, take a position on the facts.

Once Again, the Harms of ‘Hold-out’ are Discounted over ‘Hold-up’

The FTC also urges the ITC to consider the impact of an exclusion order on a “willing licensee” without determining if the respondents were, in fact, “willing”. And how could the FTC know or even thoughtfully consider whether the respondents were “willing” after they stated they are not taking any position on the facts? The FTC seems to assume facts they believe favor their speculation, while hiding behind a disclaimer.

While the possibility of a patent “hold-up” does exist, as the FTC states, the FTC letter ignores the fact, as determined in actual cases, of holdout by implementors, who chose to manufacture items without taking licenses to the IP, daring IP holders to find them and sue, and then demanding a FRAND license. While the possibility of an exclusion order is a factor to consider in determining what is a FRAND rate, without looking at the facts regarding the parties, the industry, and the contribution of the IP to the device that is manufactured, it is impossible to tell if the threat of an exclusion order could cause a holdup, or only spur both parties to find a FRAND outcome. To assume that the possibility somehow, without evidence results in a license that is outside of a FRAND range is simply wrong. While the FTC statement “Standardization can thus put SEP holders in a position to demand more for a license than the patented technology, had it not been adopted by the SSO would be worth…” could be true, the FTC ignores the very real possibility that absent the ability of a patent holder to exclude infringing products from the market, implementors can be put in a position to refuse to pay a FRAND rate because the patent owners have no enforcement means to obtain a fair rate. The facts of each case, determined in a fair and honest investigation are key to determining if either or both parties acted in bad faith. By ignoring the facts, the FTC’s comments can shed no light on the case they have commented on.  The letter written by the FTC goes on again to describe that SSOs require FRAND commitments to limit the potential for competition-harming opportunism, however, nowhere does it address that SSOs have not put in their rules that parties may not seek an exclusion order, or that they are limited to licensing agreements. The system of SSOs working together has been generally considered a contractual structure, and an attempting to impose requirements on the parties after the fact, that the parties have never agreed to poses a greater risk of harm to the SSO structure than allowing the parties to seek their legal remedies.

The FTC also speculates that FRAND licensing commitments prevent hold-up by ensuring that licensing terms are tied to the value of the SEP. The letter suggests that companies would be less likely to invest in an area if there was a risk that IP owners could block them from commercializing standard-compliant products.  While this may be interesting to the FTC as an intellectual exercise, in the areas that are heavily covered by SSO, there has been no evidence of the possibility of exclusion orders or injunctions reducing the companies that might participate.  Companies invest heavily and throughout the world in these areas and the SSOs such as ETSI have resisted efforts to restrict remedies such as exclusion orders. The FTC once again considers only the possibility of misconduct by the patent owner, and ignores the very real possibility that companies that use technology may hold out and refuse to take a license even on FRAND terms.

Speculation and Assumptions

The FTC further states in its comments that “There is a public interest in avoiding remedies that allow for opportunistic behavior, including excluding willing licensees from the market to extract supra-FRAND royalties.” While this may be possible, without reference to the facts in a case, it not relevant. A judge would have to take evidence on the behavior of the parties, including the willingness to take a license and the negotiations on the license fees (in the cases before the ITC that might involve potential SEP patents, there has never been evidence presented that “supra-FRAND” royalties were in play; this appears to be a term coined by the FTC exclusively for this letter). As such behavior, or evidence of it, has never been documented at the ITC, it follows that the comment, “remedies that reward such behavior undermine the purpose of the FRAND commitment” has no bearing on the instant or any other ITC case.

The FTC follow up comment that “even firms that are willing and able to take FRAND licenses can be excluded from the market” has no basis in fact. In the 1240 case, the issue of “willingness” is one of fact for the judge. The FTC assumes such fact without evidence, and reaches a conclusion that has no bearing on the case. The FTC once more engages in speculation and assumptions that are not in evidence in the case: “an inappropriate exclusion order harms consumers in the short term by depriving them of desired products”. This is not shown in the evidence, nor is it correct if there is infringement of a valid patent. The FTC assumes that there would be less innovation, competition, quality and choice if firms choose to reduce investments in standardized products. There is no evidence in this case or in general that this is happening, and in general we are seeing more, not less, innovation in areas involving SSOs. Finally, in a case where the judge found no violation of the statute, it is irrelevant what would be the case if something completely different had happened.

Image Source: Deposit Photos
Author: jamesgroup
Image ID: 13471174 

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