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.
In testimony before the Senate Subcommittee on Antitrust, Assistant Attorney General Makan Delrahim from the US Department of Justice (DOJ) and Chairman Joseph Simons from the US Federal Trade Commission (FTC) staked out differing interpretations of when antitrust considerations are relevant in standard setting agreements restricted by fair, reasonable and non-discriminatory (FRAND) rates, a rare divergence of opinion between the two antitrust enforcement agencies.WHAT HAPPENED:
- Since AAG Delrahim took over as head of the DOJ Antitrust Division in September 2017 he has consistently hinted at a differing interpretation of antitrust law as it relates to standard essential patents and FRAND rates in the context of antitrust.
- Standard essential patents (SEPs) are patents that have been incorporated into a standard by a standard setting organization and industry participants to facilitate interchangeability between products. Often, to be included in a standard, patent holders agree to license a patent essential to that standard at a FRAND rate.
- With the proliferation of standards, more scrutiny has been devoted to SEPs and FRAND rates, and some companies have brought antitrust suits relating to “patent hold-up” or the refusal to license a patent on FRAND terms (typically seeking higher royalties or fees on patents for widely adopted standards).
- In testimony on October 3, 2018, AAG Delrahim indicated his view was that a patent holder’s unilateral decision not to license a patent—even if that patent is part of a standard—is not conduct intended to be reached by the antitrust laws. AAG Delrahim indicated such a dispute would more appropriately be handled by contract law.
- This position differs from that of the FTC, where Chairman Simons has indicated that antitrust law can be relevant in patent hold-up cases.
- The FTC demonstrated its view in a recent complaint filed against Qualcomm, Inc. The complaint summarizes the patent hold-up concern:
Once a standard incorporating proprietary technology is adopted, the potential exists for opportunistic patent holders to insist on patent licensing terms that capture not just the value of the underlying technology, but also the value of standardization itself. To address this “hold-up” risk, [standard setting organizations] often require patent holders to disclose their patents and commit to license standard-essential patents (“SEPs”) on fair, reasonable, and non-discriminatory (“FRAND”) terms. Absent such requirements, a patent holder might be able to parlay the standardization of its technology into a monopoly in standard-compliant products.WHAT THIS MEANS:
- Going forward, US antitrust enforcement with respect to SEP issues may be limited to the FTC. AAG Delrahim’s speeches indicate that it will be the rare case that the Antitrust Division pursues such cases in the future.
- This divergence between the two US agencies responsible for enforcing antitrust laws will create confusion for SEP holders and their licensees with respect to the risks of US government intervention. Companies dealing with SEPs and FRAND rates will want to be cognizant of which agency is reviewing, as approaches may be [...]
THE LATEST: FTC Acting Chairman Ohlhausen Signals Potentially Reduced Role for Antitrust Oversight of Intellectual Property Disputes
- On Friday, October 13, acting FTC chairman Maureen Ohlhausen delivered a speech at the Hillsdale College Free Market Forum titled, “Markets, Government, and the Common Good,” highlighting her view on the intersection between IP and antitrust domestically and abroad.
- Chairman Ohlhausen’s position, that IP rights must be vigorously protected, is in line with her long-held belief that some enforcement of antitrust laws, especially abroad, has been overzealous when it comes to intellectual property.
- In 2012, Ohlhausen objected to the FTC’s decision to require Robert Bosch GmbH to refrain from pursuing injunctions on certain SEPs (standard essential patents), and she wrote a dissenting opinion on the commission’s consent agreement with Google Inc. and Motorola Mobility Inc. requiring Google to withdraw claims for injunctive relief on SEPs.
- In Friday’s speech, she argued that though “foreign [governments] take or allow the taking of American proprietary technologies without due payment,” the US should continue to protect patent rights and avoid punishing a company for “a unilateral refusal to assist its competitors.”
- Ohlhausen also addressed what she termed the current “age of IP skepticism” as it relates to patent-assertion entities (PAEs).
- She concluded that while some minor changes may be appropriate to promote innovation in the face of “Litigation PAEs” employing nuisance litigation techniques, these changes should be “narrowly tailored to address observed behavior.”
- She voiced support for case management practices that could mitigate litigation cost asymmetries between PAE plaintiffs and defendants, increased transparency, and rules encouraging courts to stay litigation by PAEs when parallel proceedings are already underway, but eschewed more drastic measures such as the creation of “new, specialized guidelines to address particular types of IP disputes,” which, she argued, are unsupported by the available evidence.
- In her view, “the key to addressing the US patent system lies in incremental adjustment where necessary based on a firm empirical foundation.”
- Ohlhausen’s concern that certain antitrust enforcement “inappropriately morphs antitrust law into a tool for price regulation” is a notable policy direction that could make the FTC less inclined to pursue cases involving alleged violations of SEPs.
- Under her direction, any changes forthcoming at the FTC are likely to be minor adjustments reflecting the belief that protecting patent rights is “fundamental to advanc[ing] innovation.”
On January 13, 2017, the Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) issued updated Antitrust Guidelines for the Licensing of Intellectual Property (the Guidelines). The revised Guidelines follow nearly half a year of consideration and public commentary. According to the FTC, the updates were “intended to modernize the IP Licensing Guidelines without changing the agencies’ enforcement approach with respect to intellectual property licensing or expanding the IP Licensing Guidelines to address other topics.” In that vein, the modest updates to the Guidelines affirm that the antitrust agencies still believe that IP issues do not require an altered analysis and that the licensing of intellectual property is generally procompetitive.”
DOJ Issues Business Review Letter Pertaining to SSO Policy on Standard-Essential Patents and RAND Commitments
The Antitrust Division of the U.S. Department of Justice (DOJ) recently issued a business review letter stating that it would not challenge the Institute of Electrical and Electronics Engineers, Inc.’s (IEEE’s) proposed revisions to its patent policy. These patent policy revisions seek to address the “wide divergence” in expectations between holders of patents essential to an IEEE standard and the market participants seeking to implement such standards. The DOJ’s response looked favorably on the IEEE’s proposed revisions pertaining to RAND royalties and limitations on injunctive relief for standard-essential patent holders.