Good Things Come in Threes? DOJ, FTC and EC Officials Wax Eloquent About FRAND

Guest Post By Professor Jorge L. Contreras

For years, developers of standards in the information and communications technology (ICT) sector have committed to license patents that are essential to those standards on terms that are "fair, reasonable and nondiscriminatory" (FRAND). This February, I summarized the reasons that these vague but somewhat reassuring commitments have become so prevalent in the industry. Since then, the litigation over FRAND commitments has only intensified. In April, I summarized the major pending lawsuits that revolve around allegations that FRAND commitments have been violated. One of these, Microsoft v. Motorola (W.D. Wash.) is scheduled to go to trial on this issue in November, and Judge Robart has suggested (some would say threatened) that he may define FRAND for the parties if they can't reach agreement before then.

Against this backdrop, regulators in the U.S. and Europe have actively pursued a FRAND clarification program of their own. As I noted in February, the U.S. Department of Justice (DOJ) appears to have persuaded Microsoft, Apple and Google to release a trio of "voluntary" statements describing their interpretations of FRAND. This public display occurred in connection with DOJ's review (and approval) of major patent acquisition transactions by each of these parties. The European Commission, which approved Google's acquisition of Motorola Mobility shortly thereafter, also exhibited a keen interest in Google's view of FRAND commitments.

Six months later, there has been another flurry of FRAND clarifications. This time, however, guidance is being offered not by companies, but by the regulators themselves (or, rather, by senior agency officials speaking "on the record" at public events). These include the following speeches by officials of the DOJ, FTC and EC:

  • Jon Leibowitz, Chairman of the FTC, at the Georgetown Global Antitrust Enforcement Symposium (September 19),
  • Joseph Wayland, Acting Asst. Attorney General in the Antitrust Division of DOJ, at the Fordham Competition Law Institute (September 21),
  • Joaquin Almunia, Vice President of the European Commission responsible for Competition Policy, also at Fordham (September 20),
  • Fiona Scott-Morton, DOJ Deputy Asst. Attorney General for Economic Analysis, at the National Academies of Science (NAS) Symposium on Management of Intellectual Property in Standard Setting Processes (October 3),
  • Howard Shelanski, Director of FTC Bureau of Economics, also at NAS (October 4), and
  • Renata Hesse, Deputy Attorney General in the Antitrust Division of DOJ at the International Telecommunications Union (ITU) Patent Roundtable (October 10)

It is no coincidence that these officials each came forward with comments regarding FRAND within a few weeks of each other. As suggested by Dr. Scott-Morton, this effort was at least loosely coordinated within the three agencies, each of which is actively involved in matters involving the licensing of patents essential to industry standards. For example, the FTC has initiated an investigation of Google/Motorola in relation to its FRAND licensing practices and submitted a public statement to the ITC in Microsoft's case against Motorola (now resolved), the EC has launched FRAND-related investigations of both Google/Motorola and Samsung, and the DOJ is reported to have opened an investigation into Samsung's practices in this area. But despite the clear desire by these three agencies to send a message to the industry regarding FRAND, the scope of that message is not entirely clear. Below is a brief summary of the FTC, DOJ and EC officials' statements regarding FRAND:

Injunctive Relief. If the agency viewpoints share on one thing, it is a strong aversion to injunctions that seek to block the use of a standard after a FRAND commitment has been made. However, even here the extent of agency accord is unclear. For example, Mr. Almunia declares that "the worst-case scenario is when a company willing to take a license for standard-essential patents is hit by an injunction" (Almunia, p.6), yet he does not indicate whether, or on what basis, such an injunction might be limited. The FTC's position on injunctive relief is more restrained, and Chairman Leibowitz only notes that such relief may be "in tension" with the FRAND commitment (Leibowitz, p.7). This statement is consistent with the FTC's earlier comments to the ITC, suggesting that if a patent holder has made a "reasonable royalty offer" that has subsequently been refused by an infringer, relief in the form of an exclusion order might be appropriate. The most steadfast opponent of injunctive relief in the face of a FRAND commitment appears to be DOJ, which tipped its hand back in February when it applauded Apple's and Microsoft's statements "that they will not seek to prevent or exclude rivals' products from the market", while viewing Google's more qualified commitment as "less clear". Mr. Wayland refers to these earlier statements (Wayland, p.7), and to his testimony before the Senate Committee on the Judiciary, which held hearings on ITC exclusion orders in September (Wayland, p. 10-11). With respect to ITC exclusion orders he echoes the FTC's position, which has generally disfavored injunctive relief for FRAND-committed patents due to the increased leverage that negotiating in the "shadow" of such an injunction can give to the patent holder (FTC 2011 Report, p.225-26). But like the FTC in its recent public comments to the ITC, he indicates some tolerance for such injunctions when a potential licensee has not negotiated reasonably or is beyond the reach of the U.S. courts (Wayland, p.10-11). However, it is FTC Chairman Leibowitz who makes the boldest statement regarding injunctive relief, suggesting not only that such relief should not be granted in the face of a FRAND commitment, but that even seeking such relief could amount to unfair competition under Section 5 of the FTC Act (Leibowitz, p. 9). He thus warns companies that violating their FRAND commitments could lead to enforcement actions by the agency.

Antitrust and Competition Law Claims. Several of the agency officials suggest that violation of FRAND commitments could, under certain circumstances, constitute violations of antitrust or competition law. Mr. Almunia, for example, while acknowledging that the recent smartphone patent wars are "primarily patent cases, not competition cases", goes on to suggest that "this state of belligerence may encourage a company to use its patents as weapons to harm legitimate competitors" (Almunia, p.5). Ms Hesse of DOJ notes the "risks to competition" that may arise from collaborative standards-setting and so-called "patent hold-up" (Hesse, p.5). And Mr. Wayland unambiguously states that "the [Antitrust] division is ready to enforce the antitrust laws against standard-setting activities that harm competition" (Wayland, p.8). Mr. Almunia likewise indicates that the EC is "willing to provide clarity to the market through our enforcement" (Almunia, p.6).

But perhaps the most interesting comments regarding antitrust remedies are Chairman Leibowitz's statements regarding the "unfair methods of competition" that may result from seeking an injunction in the face of a FRAND commitment (Leibowitz, p.9). As noted above, he suggests that such conduct may run afoul of Section 5 of the FTC Act "which, as all of us in this room understand, Congress intended to extend well beyond the reach of the antitrust laws" (Id.). Chairman Leibowitz thus hedges his bets: even if antitrust doctrines are not sufficient to prosecute FRAND violations, the agency has tools beyond antitrust that it may use to correct such behavior (an argument that, perhaps, arises from the FTC's 2008 reversal by the D.C. Circuit in its antitrust case against Rambus, Inc. for abuse of the standardization process).

Magnitude of FRAND Royalties. Not surprisingly, the agency representatives do not speak much about the complex question of the magnitude of FRAND royalty rates. Historically, the FTC has maintained that appropriate royalties for standards-essential patents should be based on the ex ante value of the patented technology prior to adoption of the standard (FTC 2011 Report, p.22-23). Obviously, determining such a royalty in hindsight can be challenging, and perhaps Judge Robart's upcoming judicial intervention in Seattle may shed light on how best to conduct this analysis. Another nettlesome question regarding the magnitude of FRAND royalties arises from the comparative value of the many different patents that may cover the same standard (sometimes ranging in the thousands). In this regard, Chairman Leibowitz offers an interesting observation, possibly alluding to the pending disputes over Motorola's proposed royalty: "When the allegedly infringing component is, say, only one of 15,000 patents used in a smart phone or a tablet, is it fair to demand two percent of the entire sales price? To ask that question is to answer it."

SDO-Based Solutions. Unlike the FTC and EC representatives, the DOJ officials strongly encourage SDOs to implement policies that are likely to alleviate some of the risks and uncertainty currently associated with FRAND commitments. Both Mr. Wayland and Ms. Hesse reflect favorably on DOJ's 2007/2008 Business Review Letters approving the "ex ante" licensing disclosure policies proposed by VITA and IEEE (Wayland, p.8-9, Hesse, p.7-8). Such policies permit (in the case of IEEE) and require (in the case of VITA) that patent holders disclose their "most restrictive" licensing terms (including royalty rates) before adoption of a standard. Ms. Hesse notes that "[w]e saw then, and continue to see now, the potential benefits to competition from the implementation of such an approach" (Hesse, p.8). In addition to ex ante licensing disclosure, Mr. Wayland, Ms. Hesse and Dr. Scott-Morgan of DOJ all suggest concrete steps that SDOs should consider in relation to FRAND (Wayland, p.9; Hesse p.9-10; Scott-Morgan, p.1-4). These are summarized below (based primarily on Ms. Hesse's presentation, which is the most detailed and occurred latest in time).

  1. Identify Excluded Patents. Identify patented technology that will not be offered on FRAND terms and "consciously determine" whether or not such technology should be included in a standard.
  2. Transfer. Ensure that FRAND licensing commitments bind subsequent purchasers of patents. (This requirement was also advocated by Microsoft, Apple and Google in their February statements).
  3. Cash-Only. Require that patent holders offer FRAND licenses on "cash-only" terms (presumably to eliminate (a) perceived abuses arising from "bundling" of non-essential patents with standards-essential patents, and (b) inherent barriers to entry for market entrants lacking their own patents to use as cross-licensing barter with other patent holders).
  4. Limit Injunctions. Limit participants' right to seek injunctions after a FRAND commitment has been made. (This limitation was also advocated by Microsoft, Apple and Google in their February statements).
  5. Arbitration. Set guidelines for FRAND royalty rates, or establish an arbitration or other mechanism for resolving disputes over the level of FRAND royalties.
  6. Accuracy of Disclosure. Ensure that disclosure of "essential" patents is accurate and not overly broad (only suggested by Hesse, p.10).

The "inherent ambiguity" of FRAND commitments (Hesse, p.6) undoubtedly requires clarification, either by the parties making such commitments or, lacking that, by courts and regulatory agencies. The recent statements by agency officials at the DOJ, FTC and EC represent a good first step toward such clarification. At this point, there appears to be a developing consensus among private industry and the agencies that FRAND commitments should "travel with the patents" after they are sold, and that injunctive relief should be limited after a FRAND commitment is made. In other areas, however, there does not appear to be a high degree of consensus among the agencies and additional work by all stakeholders (SDOs, patent holders, product vendors and regulators) will be required before a common understanding of FRAND is finally developed. I agree with the DOJ commenters that SDO-based solutions are the most likely avenues toward widespread alleviation of FRAND uncertainty, and have proposed a slightly different set of recommendations for SDO policy reform. Barring this, however, the decision will be left to the courts.

24 thoughts on “Good Things Come in Threes? DOJ, FTC and EC Officials Wax Eloquent About FRAND

  1. IANAE, What do you mean by "sure?"  Where the Frack to you think the FRAND obligation comes from in the first place?

    Generally, a participant proposes a technical solution they have worked out and have patented.  At every meeting, the leader, generally not an employee of any participating company, calls for patents and the participants have to identify patents on the standard.  If they identify patents, they are subject to FRAND.  The other parties can ask for royalty terms.  If they are not forthcoming, the other members can object, meaning the standard cannot be based on the technical solution proposed.  Otherwise, what the standards making body is doing is authorizing or encouraging patent infringement.

    If the participant does not, when there is a duty to disclose, disclose the patent (or the terms) the patentee is or at least should be estopped.  Cf., Potter Instrument Co., Inc. v. Storage Technology Corp., 641 F. 2d 190 – Court of Appeals http://scholar.google.com/scholar_case?case=8157705663137046988&q=storage+technology+corporation+and+laches&hl=en&as_sdt=2,5

    I think a lot of us here are operating under some incomplete understand on how these standard making bodies actually operate.

  2. Standards bodies typically require essential patents to be identified.

    Sure, if the patentee happens to be involved in the standard-setting process. These bodies don’t have power over the US patent system generally. Who’s to say that there aren’t other standard-essential patents in other hands or that the patentee simply wasn’t aware that some others of his tens of thousands of patents were also essential?

    If the patent is essential to the standard, it needs to be treated as essential. You can’t go granting injunctions on standard-essential technology (that everybody is using) just because nobody realized until too late that it was essential, and you can’t make disclosure vel non to standard-setting bodies a principle of claim construction. So what do you suggest?

  3. IANAE, I think essential patents that are subject to FRAND must be known or knowable.  Standards bodies typically require essential patents to be identified.  Put up or shut up.  Otherwise, the whole point of the exercise becomes somewhat of a farce.
     
    If, in some cases, this is not done, then the problem here is the standards organization.  FRAND is meaningless here.  One either knows the patents and the terms of a license in advance or there is no standard possible.

  4. Is this unreasonable?

    I don’t know. How many patents was Motorola licensing together? What rates did others pay for the same portfolio? What rates are others getting for bulk patents in the same technology space? How many other patents are there in the space?

  5. The question is whether the patents are essential. Motorola’s are essential.

    Yes, that’s precisely why they are to be licensed on FRAND terms and not entitled to an injunction. Because they’re all essential, and the industry couldn’t exist at all without everybody getting to use everybody else’s patents. These smart phones are way more complex than sewing machines, you know.

    What we need are injunctions and that they be nearly automatic.

    Nearly automatic injunctions in such a crowded art? Do you even like having a phone?

    Incidentally, why would anybody bother investing the R&D to get thousands of patents in an art like this, if even one entitles you to a “nearly automatic” injunction, and the industry doesn’t let your competitors design around? Maybe a dozen patents would be all you need to get your 2% royalty – or more, considering how “essential” an injunction would make your patent.

    If MS wants a license to and essential patent, they should get one before they start infringing.

    You might also want to talk to the people who insist that patent owners don’t have to make their identity public.

    Even if everybody was perfectly happy to license their patents, which they’re not, and even if you could find them all, which you can’t, it might take years just to negotiate terms with so many parties. You don’t want people to release a phone until they get full market clearance? Funny sort of competitive market, that.

    Nobody is actually harmed by these acts of infringement, other than the existence of market competition which we all expect them to be able to handle like grown-ups. Especially since the aggrieved party is just as much an infringer himself.

    Let everybody take their reasonable royalty, which can just as easily be calculated after infringement as before, and add on a couple bucks for a box of tissues.

  6. Leo, in the words of Mr. Lincoln, if one sees a foundation being built, the frame erected, the windows and door located in certain positions, one can see the pattern.

    “15,000 patents.”

    Therefor, a 2% royalty on the Motorola patents is unreasonable without more?

    Don’t you get it? The argument implies that all patents are equal, when they are not necessarily equal.

  7. This whole line of argument is straight out of Karl Marx and Rousseau. Value added by any labor is equal. The rewards should be equal.

    Did these guys actually say either of these things, Ned?

  8. IIRC, Motorola had a standard rate of 2%.  They would negotiate for a lower rate in exchange for something back, like a cross license.

    Is this unreasonable?  if so, why so?

  9. IANAE, 

    The question is whether the patents are essential.  Motorola's are essential.  They should not be equated to a lot of "fluff" patents that are hardly essential at all.

    This whole line of argument is straight out of Karl Marx and Rousseau.  Value added by any labor is  equal.  The rewards should be equal.  

    What we need are injunctions and that they be nearly automatic.  If MS wants a license to and essential patent, they should get one before they start infringing.  They have "b # lls" to first not ask for a license, to refuse to make an offer, to not negotiate in good faith, and then like the man who murdered his parents, throw himself on the mercy of the court because he is an orphan.  He is an orphan through his own hand.

    Honestly, IANAE, the brand of thinking exhibited by our government representatives is offensive.  

  10. But, what if there is nothing to compare? How does one establish a RR?

    The same way licensors and licensees do it all the time. Or some reasonable approximation of that. Or you license someone else in the meantime (these are industry standards, remember?), and then you have your answer.

  11. Yeah, that’s right. None other that Karl Marx.

    Where are the self-appointed “strawman police” when you need them?

    Nobody is saying that all of the patents that read on a smartphone should be valued equally, just that the value of each must be small if there are so many. That’s a perfectly valid point, if you allow for the remote possibility that among those 15000 there could be a few gems so revolutionary that they command a measurable royalty all by themselves.

    However, when it comes to standard-essential patents, I’d go out on a limb and presume that all the patents essential to a particular standard should be of about equal value, because you can either practice the standard or not, and you can’t pick and choose which of the patents are worth using.

    I wonder what people would say about the incentive to design around when the entire market has gotten together and decided that either you infringe these thousands of patents or your device won’t work.

  12. Leo, the quoted statement by Mr. Liebowitz can be restated:

    Regardless of contribution, each patent should receive an equal share.

    Mr. Liebowitz seems to have gone to school and read what noted economist? Yeah, that’s right. None other that Karl Marx.

  13. Well, here are the “Georgia Pacific” factors one is supposed to use to calcuate a “reasonable” royalty in a normal patent infringement suit where an injuction might be available. Not that I think this well-established combination of sub-tests is particularly clear, but I doubt if you will get a much better test for a FRAND royalty calculation from the courts?
    Note that patents covered by FRAND contracts, or FRANDs judicially imposed by patentee participation in standards-settings, will get low scores on some of these Georgia Pacific factors:

    “1. The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.
    2. The rates paid by the licensee for the use of other patents comparable to the patent in suit.
    3. The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold.
    4. The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.
    5. The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter.
    6. The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.
    7. The duration of the patent and the term of the license.
    8. The established profitability of the product made under the patent; its commercial success; and its current popularity.
    9. The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results.
    10. The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention.
    11. The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.
    12. The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions.
    13. The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.
    14. The opinion testimony of qualified experts.
    15. The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee — who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention — would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.”

  14. IANAE, if one agrees to sell one’s house at a reasonable price, one pretty much know what is. If the patentee has established royalty rates on patents that it grants to all comers, everyone knows the rate. If the industry has established rates, we have something to reference.

    But, what if there is nothing to compare? How does one establish a RR?

    I think the people who what to use the standard have some obligation to inquire before they begin using that standard. If they don’t, and they use the standard without even asking or making an offer, they are no better than deliberate and wilfull infringers who, because of their intentional wrongdoing, should not receive equity.

  15. People who would deny a patent owner an injunction and enforce a FRAND obligation without specifying what that obligation is, are being completely unreasonable.

    Firstly, no they’re not, because the mere existence of a FRAND obligation pretty much completely negates the basis for an injunction.

    Secondly, no they’re not, because a court will determine the reasonable royalty as a matter of course, and the ITC can’t reasonably do more than deny the injunction.

    What we need is clarity on what a FRAND royalty obligation is.

    It’s exactly what it says on the tin.

  16. I think this is really a contract law question. There seems to be an ambiguity in one of the essential terms. It is my understanding that there is no contract if the essential terms are not agree to.

    People who would deny a patent owner an injunction and enforce a FRAND obligation without specifying what that obligation is, are being completely unreasonable.

    What we need is clarity on what a FRAND royalty obligation is. Standards organizations could then refer to it so that everybody understands their commitments when they make that obligation.

    Furthermore, like any reasonable royalty, a FRAND royalty should have prior examples that others have agreed to. Why is that not a starting point?

  17. Thanks, Jorge. Very timely comparative summary of the key FRAND / SEPs & antitrust issues in both the US and the EU.

    Under the heading SDO-Based Solutions, you state that “Unlike the…EC representatives, the DOJ officials strongly encourage SDOs to implement policies that are likely to alleviate some of the risks and uncertainty currently associated with FRAND commitments.” [my emphasis].

    The European Commission has also recognised the urgency of an SDO-led approach: “However, industry too has a role to play in guaranteeing the proper functioning of the standardisation system. I would therefore strongly encourage industry players to come together in the relevant standard-setting organisations and elaborate clear rules on the basis of these guiding principles to prevent the misuse of standard-essential patents”.

    In Europe too, for the moment intervention by antitrust agencies and courts is also seen as a second-best solution – Vice President Almunia’s speech “Higher Duty for Competition Enforcers” IBA Conference, Madrid, June 15, 2012, p. 4.

    Conor Maguire

  18. @Paul — yes, part of the general requirement for injunctive relief in equity is the inadequacy of monetary damages. This principle was restated by the US S.Ct. in the eBay case in 2006. Unfortunately, the ITC is not a court and is not bound by S.Ct. precedent. Rather, they have a less-developed exclusion that considers whether granting an exclusion order would be against the “public interest”. Many observers, including the FTC and myself, have urged the ITC to decline to grant exclusion orders when FRAND commitments have been made. We are all still waiting to see what they will do…

  19. Dennis, you are the law professor, not us, but isn’t it a long established legal principle that if money damages are adequate compensation [much less all one is even ever entitled to get, as for a FRAND] that you normally can’t get an injunction?

  20. “When the allegedly infringing component is, say, only one of 15,000 patents used in a smart phone or a tablet, is it fair to demand two percent of the entire sales price? To ask that question is to answer it.”

    One only has to monitor the filing of new patent infringement lawsuits for a short while to see that this demand is being made anew every week or so.

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