Standard-essential patent holders and implementers may face uncertainty regarding licensing practices following a May 23 Texas court ruling. In the ruling, a Texas federal judge reached a conclusion different from a recent California court decision—FTC v. Qualcomm—on the question of whether an SEP holder must base its royalty rates on the “smallest salable patent-practicing unit” in order to comply with a fair, reasonable and non-discriminatory royalty commitment.
On May 21, a California federal judge ruled in favor of the Federal Trade Commission (FTC) in its suit against Qualcomm in a much-anticipated decision, concluding that Qualcomm violated the FTC Act by maintaining its monopoly position as a modem chip supplier through a number of exclusionary practices, including refusing to license standard essential patents (SEPs) on fair, reasonable and non-discriminatory (FRAND) terms. Qualcomm likely will appeal the decision to the US Court of Appeals for the Ninth Circuit, but in the meantime, the court’s sweeping decision is likely to affect the course of dealing between SEP-holders and licensees. The decision is likely to substantially affect the ways in which SEP-holders take their technology and associated components that they manufacture to market.
On February 15, a Texas federal jury found that Ericsson did not breach its obligation to offer HTC licenses to its standard-essential patents (SEPs) on fair, reasonable and non-discriminatory (FRAND) terms. The verdict ended a nearly two-year dispute as to whether FRAND obligations preclude a licensing offer based on end products rather than components. Ericsson succeeded in convincing the jury that its FRAND commitment does not require it to base royalty rates for its SEPs on the value of smartphone chips rather than the phones themselves. The jury verdict suggests that other SEP holders may be able to successfully argue that basing royalty rates on end products rather than components does not violate their FRAND obligations.
Ericsson holds patents that the parties agreed are essential to the 2G, 3G, 4G and WLAN wireless communication standards, and made a commitment to several standard setting organizations to license those SEPs on FRAND terms. HTC makes smartphones that implement Ericsson’s SEPs and brought suit against Ericsson in April 2017, alleging that Ericsson overcharges for its SEPs.
The US District Court for the Eastern District of Texas ruled that for the purposes of honoring a fair, reasonable and non-discriminatory (FRAND) commitment, a pool member is not required to base royalties for its standard essential patents (SEPs) on the value of components. HTC America Inc. et al. v. Ericsson Inc., Case No. 6:18-cv-00243-JRG (E.D. Tex. Jan. 7, 2019) (Gilstrap, J). According to the court, Ericsson’s commitment to the European Telecommunications Standards Institute (ETSI) does not specify whether it must use the value of components or end-user devices to calculate royalty rates. Thus, there is no ETSI prescribed methodology for calculating the license fee under the FRAND commitment.
Ericsson holds patents that are essential to the 2G, 3G, 4G and WLAN wireless communication standards and made a commitment to ETSI to license those SEPs on FRAND terms. HTC makes smartphones that implement Ericsson’s SEPs and alleged that Ericsson is overcharging for SEP licenses. According to HTC, Ericsson’s FRAND commitment to ETSI requires it to base its royalties on the value of the “smallest salable patent-practicing unit (SSPPU) in the phones.” In October 2018, Ericsson moved for a ruling that its FRAND commitment does not require this method of calculation and allows Ericsson to base its royalties on the value of end-user devices, i.e., smartphones.
On 20 April 2016, the European Commission (Commission) cleared, under its merger control rules, the acquisition of Equens and PaySquare by Worldline subject to, amongst others, a commitment to license technology to any customer interested, at Fair, Reasonable and Non-Discriminatory (FRAND) conditions.
Worldline is a French provider of payment services and terminals, financial processing and software licensing and e-transactions services. Equens offers a number of services across the value chain of both payments processing and cards processing services. Its fully-owned subsidiary, PaySquare, provides merchant acquiring services. This transaction combines two large payment systems operators, active across the full value chain in both payment processing and card processing services.
The EU antitrust regulator was concerned that the acquisition would have raised certain issues with respect to, in particular, merchant acquiring services in Germany. The Commission’s market investigation revealed that Worldline’s Poseidon software and modules are used by the majority of German network service providers (including PaySquare), there are no other readily available alternatives to Poseidon and post-transaction, Worldline would have the ability and the incentives to favour its new subsidiary PaySquare, in terms of price and quality, over other network service providers relying on Poseidon.
In order to address the Commission’s concerns, the companies offered a commitment to grant licenses for the Poseidon software on FRAND terms during a period of 10 years. Specifically, this commitment consists of the following elements:
- The granting of a license for Poseidon and its modules to third-party network service providers under FRAND terms and capping of the maintenance fees
- A monitoring mechanism to ensure compliance with FRAND terms by a licensing trustee and by a group composed of network service providers
- Giving access to the Poseidon source code under certain conditions
- Transferring the governance of the ZVT protocol, on which most German point of sale terminals run, to an independent not for profit industry organisation
The Commission’s decision to accept this commitment is interesting for a number reasons; the Commission generally has a strong preference for structural rather than behavioural undertakings, FRAND obligations are typically applicable to technologies that are standardised, and this case presents the first time that a commitment to licence on FRAND terms has been used as a remedy under the EU Merger Regulation.
On April 13, 2016, the US District Court for the District of Delaware denied InterDigital’s motion to dismiss an antitrust suit filed by Microsoft (Microsoft Mobile, Inc. v. InterDigital, Inc., Case No. 15-cv-723-RGA). In the suit, Microsoft alleged that InterDigital engaged in an unlawful scheme to acquire and exploit monopoly power over standard essential patents (SEPs) required for 3G and 4G cellular devices. Specifically, Microsoft asserted that InterDigital falsely promised to license its 3G and 4G SEPs on Fair, Reasonable, and Non-Discriminatory (FRAND) terms in order to ensure its SEPs were included in standards set by the European Telecommunications Standards Institute (ETSI). According to the complaint, InterDigital failed to live up to its commitment to FRAND licensing terms, and instead acquired monopoly power in the 3G and 4G cellular technology markets and used that power to demand supra-competitive royalties, “double-dip” royalty demands, and has pursued “baseless” International Trade Commission litigation against Microsoft and others.
In its motion to dismiss, InterDigital asserted that Microsoft failed to adequately plead a Sherman Act § 2 monopolization claim, namely that Microsoft failed to show that InterDigital possessed and exercised monopoly power and failed to adequately allege injury. The court disagreed, finding Microsoft’s allegations to be materially similar to those found to be sufficient by the Third Circuit in Broadcom Corp. v. Qualcomm Inc. (2007). With respect to monopoly power, the court found that Microsoft’s allegations as to the necessary technology standards, market entry barriers, and InterDigital’s market share to be sufficient. The court found that allegations of an “intentional false promise” to license technology on FRAND terms, which was relied upon in selecting the technology for inclusion in mandatory standards, and breach of such promise was “sufficient to show anticompetitive conduct.”
As to injury, InterDigital asserted that its litigation activity was protected by the Noerr-Pennington doctrine. The court held that injury was sufficiently pled, and that the Noerr-Pennington doctrine did not immunize InterDigital as its scheme, as alleged by Microsoft, would have been “ineffective without the threat of litigation” and therefore it was properly included in Microsoft’s anticompetitive scheme allegations.
This latest ruling demonstrates that prospective licensees may be able to raise antitrust claims against SEP holders when negotiations fail and litigation ensues.
In the long-running patent dispute between Microsoft and Motorola, a U.S. District Court jury in Seattle found that Motorola breached its commitment to license certain standard-essential patents on fair, reasonable and non-discriminatory (FRAND or RAND) terms. The jury awarded Microsoft damages of approximately $14.5 million.
The litigation has witnessed numerous legal firsts. In May, the district court became the first U.S. court to set FRAND royalty rates and ranges for standard-essential patents. The dispute between Microsoft and Motorola centered on patents that covered wireless and video technology used in the Xbox game console. Motorola sought a royalty calculated as a percentage of the net selling price of the product. Microsoft claimed this method would have required it to pay approximately $4 billion per year and argued that royalties should instead be modeled on much lower rates charged by related patent pools, which would have resulted in approximately $1 million in royalties. The court’s ruling established a broad, multi-factor analysis to be used to assess a reasonable rate range for standard-essential patents. Applying this test, the court found that the reasonable rate was much closer to the rate proposed by Microsoft than the rate initially demanded by Motorola.
Building upon the earlier decision, the district court jury considered whether Motorola’s initial royalty demands were so unreasonable that they constituted a breach of Motorola’s contractual commitment to offer the patents on RAND terms. Motorola argued its proposal was a first offer meant to be subject to additional negotiation; Microsoft countered that the initial offer was a sham designed to elicit Microsoft’s rejection. The jury unanimously found that Motorola’s actions breached the commitments made in two standards setting organizations.
In addition to legal costs, Microsoft sought $23 million in damages for the costs associated with relocating a distribution center to avoid the impact of a German injunction Motorola had obtained in related litigation. The jury only granted about half the damages that Microsoft sought, but the penalty imposed on Motorola was still substantial.
The jury verdict suggests patent holders should approach licensing negotiations for standard-essential patents with due care. While the facts in the case may present an extreme example, opening royalty rate offers that are viewed as unreasonable may nonetheless expose patent holder to claims of breach of the RAND obligation. More importantly, the case establishes that damages may extend beyond legal costs and can be substantial.
The U.S. International Trade Commission has issued an exclusion order barring importation of certain older model Apple products for infringing a Samsung patent. The case is significant because the infringed patent was standard essential and encumbered by a commitment to license on fair, reasonable and non-discriminatory terms. Patent holders and potential defendants should carefully monitor further developments regarding the availability of injunctive relief for infringement of standard essential patents.
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Last week in Microsoft v. Motorola, the U.S. District Court Western District of Washington became the first U.S. court to set fair, reasonable, and non-discriminatory (FRAND or RAND) royalty rates and range for standard-essential patents (SEPs). See Findings of Fact and Conclusions of Law, Microsoft v. Motorola, 2:10-cv-01823-JLR (W.D. Wash. Apr. 25, 2013). The suit stems from Microsoft’s allegation that Motorola’s offers to license certain Wi-Fi and video compression SEPs was too high and therefore violated Motorola’s contractual RAND commitments. This issue is arising with greater frequency in antitrust/IP matters when patent licensing is involved with licensors who are standards setting organizations as well.
Microsoft v. Motorola is important because it is the first thoroughly reasoned decision by a U.S. federal district court that developed a framework for courts to assess FRAND terms for SEPs. In setting forth the basic principles at issue, the court stated that “a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.” Id. at 25-26. So, the court focused its analysis on its conclusion that “the parties in a hypothetical negotiation would set RAND royalty rates by looking at the importance of the SEPs to the standard and the importance of the standard and the SEPs to the products at issue.” Id. at 7. The court’s analysis employed a modified-version of the Georgia-Pacific factors, which courts use to calculate “reasonable royalty” damages in patent infringement actions. Of note, the court modified the first Georgia-Pacific factor (the royalties received by the patentee for the patent(s) at issue) to include consideration only of certain types of royalties, i.e., those “comparable to RAND licensing circumstances,” including both “license agreements where the parties clearly understood the RAND obligation, and … patent pools.” Id. at 35-36 (emphasis added). Another of the court’s noteworthy modifications to the Georgia-Pacific factors is that the fourth factor (the licensor’s policy and marketing program to maintain its patent monopoly via selective licensing), “is inapplicable in the RAND context because the licensor has made a commitment to license on RAND terms and may no longer maintain a patent monopoly by not licensing to others.” Id. at 36. Finally, as relates to the final factor (a hypothetical negotiation), the court concluded that “reasonable parties in search of a reasonable royalty rate under the RAND commitment would consider the fact that, to induce the creation of valuable standards, the RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property.” Id. at 40.
Concluding that several of Motorola’s patents provided only minimal contribution to the standards and played only minor importance in the overall functionality of some of Microsoft’s products, and that the characteristics of a similar patent pool (of which Microsoft and Google, Motorola’s parent, are members) “closely align with all of the purposes of [...]
Proposed Remedies in the Midst of the Patent Wars: EU and US Antitrust Watchdogs Push to Strengthen FRAND in Standard Setting
Chief Economists from the US Federal Trade Commission, the US Department of Justice and the EU Directorate General for Competition, have agreed on a set of four, non-binding suggestions that should—if followed by standard-setting organizations – increase the level of protection afforded to consumers and promote innovation.
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