Guest Post by Professor Jorge L. Contreras
There has been a fair amount of controversy recently over commitments that patent holders make to license patents on terms that are “fair, reasonable and non-discriminatory” (FRAND). As I have previously written here and here, FRAND commitments generally arise when a patent holder wishes to assure the marketplace that it will not seek to block implementation of a common technology platform or product interoperability standard. Making such a public commitment encourages widespread adoption of these technologies, which is often beneficial for both the patent holder and the market. As such, it is important that these commitments be enforced.
The dominant theory that several U.S. courts and commentators have adopted to justify the enforcement of FRAND commitments is common law contract. The argument goes like this: the patent holder makes a promise to a standards-development organization (SDO) that it will license its essential patents to others on FRAND terms. The SDO accepts this promise as consideration for permitting the patent holder to participate in the relevant standardization effort. Hence, the common law elements of offer, acceptance and consideration are all present. Then, after the relevant standard is adopted and a vendor incorporates it into a product, the vendor can insist that the patent holder grant it a patent license on FRAND terms. Even if the vendor was not a member of the SDO, it can seek to enforce the patent holder’s promise as a third party beneficiary. This line of reasoning was accepted by the federal district courts in Microsoft v. Motorola (W.D. Wash. 2012) and Apple v. Motorola (D. Wis. 2012), by the Federal Trade Commission in its settlement with Google/Motorola, and by several commentators.
Nevertheless, as I discuss in a forthcoming article, common law contract is a poor fit for the enforcement of most FRAND commitments, and relying too heavily on it is likely to have unwelcome results. Contract law fails as a general-purpose FRAND enforcement theory on several grounds. First, the simplified offer-acceptance-consideration model laid out above does not reflect the actual manner in which most FRAND commitments are made. Most of these commitments are not set forth in an agreement between the patent holder and the SDO. Rather, they are contained in SDO policies, bylaws and other types of statements. In addition, many of these policies (including those adopted by leading SDOs such as IEEE) do not actually require the patent holder to commit to license its patents on FRAND terms, but only to disclose to the SDO the terms on which it will, or on which it intends to, license its essential patents. Moreover, FRAND commitments are typically a sentence or two in length, and fail to set forth any of the relevant details of the promised license agreement, whether they be royalty rates, grant-back requirements, terms on which the license may be suspended or terminated, and the like. As such, whatever “contract” is formed is likely void for want of detail, a mere “agreement to agree”. Finally, the attempt to extend third party beneficiary rights to every product vendor in the world, whether or not it competed in the relevant business, or even existed, when the promise was made, stretches this venerable doctrine beyond any sensible boundaries. As a result, except perhaps in a few cases in which standards are developed by small groups of firms that have actual contractual arrangements amongst themselves, common law contract is a poor choice as a general enforcement mechanism for FRAND commitments.
At least one Administrative Law Judge at the International Trade Commission has recently come to the same conclusion in the ITC’s case against Interdigital (337-TA-868, June 18, 2014), expressly ruling that the FRAND policy adopted by the European telecom SDO ETSI “is not a contract”, and merely “contains rules to guide the parties in their interactions with the organization, other members and third parties.” I couldn’t agree more.
I am not arguing, of course, that FRAND commitments should not be enforced. I feel quite the opposite, and have argued that these promises form an important subset of a larger category of “patent pledges” that ought to be enforced for the benefit of the market. However, there are many more sound and coherent theories for enforcing patent pledges, and FRAND commitments in particular, than common law contract. These include various antitrust and competition law approaches, which have been advanced by the FTC and others, as well as my personal favorite, a modified variant of promissory estoppel that I call “market reliance”. The market reliance theory is grounded in the fact that patent pledges are promises, whether or not they fulfill the requirements of common law contract, and promises ought to be enforced. The theory overcomes the requirement that specific and actual reliance be proved in promissory estoppel cases by introducing a presumption of reliance based on the “fraud on the market” theory used in Federal securities law.
But whichever theory eventually prevails for the enforcement of FRAND commitments and other patent pledges, it seems fairly clear that common law contract is useful, at most, in a small subset of these cases.