The Frand Wars: Who’s on First?

Guest Post by Jorge L. Contreras

Standards are powerful market tools that enable products and services offered by different vendors to interoperate: think WiFi, USB, and the pervasive 3G and 4G telecommunications standards. Yet once standards are widely adopted, markets can become "locked-in" and switching to a different technology can be prohibitively costly. Because patent holders have the potential to block others from deploying technology covered by their patents, the industry associations that develop standards ("standards development organizations" or "SDOs") often demand a trade-off from the companies that participate in standards-development: you can have a say in the technical direction of the standard, but in return you must license your patents that are essential to the standard on "fair, reasonable and non-discriminatory" (FRAND) terms.

Last month, I discussed a series of statements released by Apple, Microsoft and Google seeking to clarify how they interpret FRAND licensing commitments. Both the U.S. Department of Justice and the European Commission looked carefully at these interpretations in evaluating Google's $12 billion acquisition of Motorola Mobility, Apple's purchase of a number of Linux-related patents, and the $4.5 billion acquisition of Nortel's patent portfolio by a group including Microsoft, Apple, and RIM. The agencies concluded that these transactions did not present significant antitrust concerns, basing their reasoning in part on the interpretations of FRAND offered by Apple, Microsoft and Google.

Independently of these agency determinations, there continues to be significant disagreement among market participants over the meaning of FRAND. This disagreement arises both in reference to the level of royalties that should be considered "reasonable", and whether other tactics, such as seeking injunctive relief, are fair game when FRAND commitments have been made. Such disagreements have serious consequences because a commitment to grant a license on FRAND terms is not itself a license. A license to operate under a patent is not granted until the parties can agree on those "fair, reasonable and non-discriminatory" terms. So, if the parties can't agree on the terms of the FRAND license for a particular "standards-essential" patent, the frustrated licensee must either refrain from implementing the standard (and lose a significant market opportunity) or risk infringing the patent. The typical result: litigation.

To help get a handle on the current state of play in the courts, Table 1 offers a summary of some of the principal cases in which FRAND issues are currently being litigated in the U.S. and Europe. These disputes form only a part of the larger patent wars currently being waged across the smart phone industry. That wide-ranging litigation involves even more players and extends to patents that are not necessarily essential to the implementation of industry standards. But the more focused skirmishes over FRAND issues are important too, as some of the most basic technology needed to make mobile devices interoperate is covered by standards, and the terms on which "standards-essential" patents will be licensed will affect all players in the market, both large and small. Thus, while the scale, complexity and rapid pace of this litigation virtually guarantees that any summary will be incomplete and quickly outdated, I hope that it will be useful (at least temporarily) for those who want an overview of the current state of play regarding FRAND.

Table 1 – Current FRAND Litigation

Parties

Court

FRAND Issue(s)

Status

W.D. Wash

Royalty rate, injunctions

Summary judgment hearing scheduled May 2012, trial scheduled Nov. 2012.

 

Moto currently enjoined from enforcing German injunctions

European Comm'n

Injunctions, licensing conditions

EC investigation announced in Apr. 2012

N.D. Ill. & W.D. Wis.

Royalty rate

Ill. trial scheduled June 2012; Wis. trial scheduled Nov. 2012

S.D. Cal.

Defensive suspension, injunctions

Apple complaint filed Feb. 2012

N.D. Cal.

Injunctions, failure to disclose

Summary judgment motion scheduled for hearing May 2012; mediation pending

Netherlands – Hague

Injunctions

 

European Comm'n

Injunctions

EC investigation announced in Jan. 2012

Del. Ch.

ITC exclusion orders

Huawei complaint filed Oct. 2011

Microsoft v. Motorola (W.D.Wash, Case No. C10-1823-JLR): This case relates to Motorola patents covering the IEEE's 802.11 (WiFi) standards and the ISO/IEC's and ITU's H.264 video codec standards. In 2010, Motorola offered to license these patents to Microsoft at a proposed royalty of 2.25% of the end product (i.e., each Xbox 360, PC/laptop or smart phone implementing the standard). Microsoft did not take a license, sought declaratory relief that Motorola breached its FRAND obligations to the SDOs, and Motorola sued Microsoft for patent infringement. The crux of Microsoft's argument is that Motorola's license offer is inherently unreasonable because it is not tied to the value of Motorola's technical contribution and because it seeks to assess royalties on the price of a PC/laptop rather than Microsoft's contribution to that product (i.e., the Windows operating system). Microsoft has also contended that the absolute value of Motorola's royalty demand (about $4 billion, presumably across all product lines) is unreasonable and far exceeds the amounts that Microsoft pays to other holders of larger numbers of standards-essential patents. Motorola counters that its 2.25% royalty rate has been offered for many years and is well within industry norms (citing examples of royalty rates much higher than this). It also contends that Microsoft refused to negotiate in good faith, thereby repudiating its right to receive a FRAND license. In February, the District Court denied Microsoft's first motion for summary judgment, but each party has made additional motions for summary judgment relating to FRAND and breach of contract issues, which will be heard in May.

Last week, the court granted Microsoft a preliminary injunction and temporary restraining order preventing Motorola from enforcing injunctions enjoining the sale of Microsoft products in Germany, a matter on which the Mannheim Regional Court is scheduled to rule shortly. Microsoft has requested that the International Trade Commission (ITC) similarly postpone ruling on Motorola's infringement claims until the Washington court has had the opportunity to rule on the FRAND matter.

European Commission Investigations. On April 3, the European Commission (after receiving complaints from Microsoft and Apple) announced that it initiated an investigation to determine whether Motorola violated European competition law by failing to comply with its FRAND commitments to standard-setting organizations. In particular, the EC has stated that it will investigate whether Motorola's attempts to obtain injunctions on the basis of standards-essential patents, and the licensing terms that it has offered, amount to an abuse of dominant position in violation of Article 102 of the EU Treaty. In January, the EC opened a similar investigation of Samsung to determine whether its attempts to obtain injunctive relief in various European patent actions pending against Apple violated Samsung's FRAND commitments to ETSI and otherwise ran afoul of EC competition law. The EC has actively investigated FRAND compliance in the past, most notably the allegedly excessive royalty rates charged by Qualcomm on the CDMA and WCDMA wireless 3G communications standards. The Qualcomm investigation, which was initiated in October 2007, was closed in November 2009 after Qualcomm reached settlements with the original complainants in the case.

Apple v. Motorola (N.D. Ill, Case No. 1:11-cv-08540, transferred in part from W.D. Wis., Case No. 10-CV-00662-BBC). Apple and Motorola have been embroiled in patent litigation over smart phones and other products since late 2010. Not all of the patents at issue relate to standardized technology, but in a few critical cases standardization and FRAND issues are front and center. Most significant is the dispute playing out in the Northern District of Illinois before Judge Richard Posner, sitting by designation. In that case, Apple argues that Motorola should be equitably estopped from enforcing certain patents relating to the ETSI GSM/WCDMA and UMTS/3GPP standards. The gist of Apple's complaint appears to be that Motorola did not offer to license Apple on terms that were FRAND. Yet Motorola maintains that it did, beginning in 2007, offer to license its patents to Apple at its customary rate of 2.25%. The dispute, then, revolves around the issue whether this licensing offer complies with Motorola's FRAND obligations to ETSI and possibly other SDOs and, if not, what remedies are available to Apple. Trial is scheduled for June. Trial in Illinois is scheduled in June. It appears that some, but not all, of the FRAND-related claims in this case remain in the Wisconsin court, which is scheduled for trial in November.

Apple v. Motorola (S.D. Cal., Case No. 12CV0355 JLS BLM). Last year the Apple-Motorola patent litigation spread to Germany and Motorola obtained an injunction against the sale of certain Apple products (e.g., iPhones) from the Regional Court (Landesgericht) of Mannheim (the injunction was recently suspended by the Higher Regional Court (Oberlandesgericht) in Karlsruhe pending further proceedings). Among the many patents being asserted by Motorola are two that are essential to the GPRS standard developed at the European Telecommunications Standards Institute (ETSI). This February, Apple brought a declaratory judgment action against Motorola in the Southern District of California, alleging that Motorola violated its FRAND obligations to ETSI when it sought an injunction from the Mannheim court. Apple bases its FRAND claim on a license that Motorola previously granted to Qualcomm, the supplier of GPRS-based communication chips used in the iPhone. Based on the pleadings, it appears that under the Motorola-Qualcomm license Motorola covenants not to sue Qualcomm's customers (such as Apple) for using Qualcomm's GPRS-based chips. However, Motorola seems to have revoked Apple's immunity under the Qualcomm license, asserting that Apple's enforcement of different patents against Motorola triggered the "defensive suspension" provisions of that license. In the California suit Apple seems to claim that either Motorola's revocation of Apple's rights under the Qualcomm license, or its enforcement of patents against Apple in Germany, violates Motorola's FRAND obligations to ETSI. The case is still at an early stage, and Apple's FRAND-based arguments, as well as Motorola's defenses, will presumably be clarified in the future.

Apple v. Samsung (N.D. Cal. Civil Action No. 11-CV-01846-LHK). Apple is also involved in wide-ranging patent litigation with Samsung, maker of the Galaxy smart phone than runs Google's Android operating system. In the Northern District of California, Apple and Samsung are each asserting patents against each other. Apple has moved for partial summary judgment arguing that Samsung failed to disclose patents essential to the ETSI UMTS telecommunications standard used in the iPhone and iPad, that Apple is licensed under these patents pursuant to a cross-license between Samsung and Intel (the supplier of chipsets used in these Apple products), and that Samsung's FRAND commitments to ETSI prevent it from now seeking injunctive relief against Apple. Apple's FRAND argument is interesting, in that it relies on French law (which purportedly governs the ETSI IPR policy and declarations). Samsung counters that Apple only sought a FRAND license from Samsung after Apple initiated litigation, then rejected Samsung's FRAND license offer and "steadfastly refused to engage in meaningful FRAND negotiations" (Samsung's Opposition to Apple's Motion for Partial Summary Judgment, Apr. 2, 2012, at 11). The sum of these actions, according to Samsung, is that Samsung's FRAND obligations should no longer prevent it from seeking an injunction against Apple under these circumstances. A hearing on Apple's motion is scheduled for May, 2012. The case is particularly noteworthy, as it involves not only FRAND issues, but also allegations that Samsung violated ETSI's patent disclosure rules (thus rendering Samsung's patents unenforceable), allegations reminiscent of those made in Rambus v. Infineon, 318 F.3d 1081 (Fed. Cir. 2003), cert. denied, 124 S.Ct. 227 (2003), and Qualcomm v. Broadcom, 584 F.3d 1004 (Fed. Cir. 2008). This month, the parties agreed to submit at least part of the dispute to mediation.

Apple v. Samsung (District Court – Hague, Netherlands, Case numbers 400367 / HA ZA 11-2212, 400376 / HA ZA 11-2213 and 400385 / HA ZA 11-2215). In March, a district court in the Hague, Netherlands, denied Samsung's request for an injunction against Apple, basing its reasoning (according to news reports – I do not have access to an English translation of the decision) on Samsung's commitment to grant FRAND licenses. The court apparently found that because Apple was willing to negotiate in good faith, Samsung's request for an injunction against the sale of Apple products in the Netherlands would not be sustained.

Huawei v. InterDigital (Del. Ch., No. 6974). InterDigital Communications has asserted eight patents relating to 3G telecommunications standards against Huawei in the ITC, seeking an exclusion order against the importation of infringing Huawei products into the U.S. Huawei alleges in an action brought in the Delaware Chancery Court that InterDigital has breached its commitments to ETSI and 3GPP by seeking to enforce its patents against Huawei products without first offering to enter into a FRAND license. Because an exclusion order is the only remedy that the ITC is authorized to grant, Huawei seeks to have the ITC action dismissed on this basis, as well as the establishment of a FRAND royalty rate for InterDigital's 3G patents.

15 thoughts on “The Frand Wars: Who’s on First?

  1. I think the patents must cover hardware, and that is why the FRAND is structured the way it is.  The software itself does not infringe.

    If what MS sells an OEM gives them a license, they can include the royalty in the price of software.  All in all MS seems to be complaining about nothing.

  2. I clearly don’t know all the facts but — if Microsoft is selling a copy of the Windows OS that allegedly infringes, shouldn’t the royalty percentage be based on the price of Windows and not the cost of a computer that Microsoft doesn’t sell?

    Also, if everyone pays 2.25% that would potentially show the license is ND (non-discriminatory) and not that it is FRAND. Many people enter into litigation-induced settlements for reasons other than that the license is reasonable.

  3. If MS does not sell computers, it does not owe the royalty.  Second, if its customer sell the computers, MS has bought them a license.  The only question is whether the 2.25% royalty was a standard royalty on computers for everyone.  If it was, then the royalty was FRAND.  If not, MS has a ground to complain.

  4. 2.25% on the price of a computer not the price of what Microsoft sells. Calculate that and I bet it is a super high royalty.

    In any event, what percentage of standards patents does Motorola own? Isnt the whole point that you can license everything and still be paying a single digit royalty? You can’t look at this like a normal patent. Standards patents aren’t necessarily valuable in their own right but just be abuse they are the standard. If there wasn’t a standard, work-around would often be easy.

    Perhaps the answer is ETSI, IEEE, etc to have more specific agreements that set forth FRAND.

  5. IANAE, it was my understanding that Motorola's 2.25% rate was the standard rate offered all comers and was taken.  Thus, the royalty was at least was fair and non discriminatory.   

    MS put up a stink, but in the end, demanded a royalty different from the standard rate others had taken.  That position was unreasonable on its face.

  6. willful infringement is a factor

    Only a factor. And there are no design-arounds, so what else did you expect? The only way to avoid infringement is to take a license, and the patentee unreasonably refused.

    No way you’d get an injunction.

  7. I think that the court should issue an injunction because what we have here is willful infringement.

    Willful infringement isn’t the test for an injunction, irreparable harm is. And there really isn’t a much weaker case for irreparable harm than a patent to a standard that the whole world is practicing and licensing at reasonable rates.

    Even treble damages are a stretch, when the patent is standard-essential and the patentee is unreasonably refusing a FRAND offer.

  8. IANAE, The FRAND offer has to be legitimate for there to be a right to injunction.  The purpose of the litigation, in part, is determine whether the offer was legitimate.  If it was, and the offeree refused to accept it and/or to negotiate in good faith as is alleged in the case of Microsoft, I think that the court should issue an injunction because what we have here is willful infringement.

  9. Say, isn’t this IANAE infatuation thing you got going supposed to expire after about 6 weeks?

    Or are you a LifeTime Member(TM) of the HIGFC(TM)?

  10. an injunction is in order if a FRAND offer is made and rejected.

    Wouldn’t that pretty much force royalties to the high end of the reasonable range, and result in royalty creep over time?

    Or would it depend on who got their offer in first? If the infringer offered to pay the low end of FRAND, would that shield him from an injunction? Or should an injunction ever be available on standard-essential patents? After all, if you’re willing to license on FRAND terms, you can’t suffer irreparable harm. It’s simply a matter of tweaking the royalty level to make sure the patentee is fairly compensated.

    Speak FRAND and enter.

  11. Persistent is the notion that an injunction is in order if a FRAND offer is made and rejected. I think this is right. Of course, the question has to be whether the offer was FRAND and whether the basis for the rejection/counteroffer was reasonable.

    The MS-Motorola lawsuit is the most interesting on this point.

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