PublishedDecember 5, 2012

Samsung v. Apple at the ITC – Summarizing the Public Interest Briefs

On November 19 the ITC announced that the full Commission would review the Final Initial Determination in Investigation 337-TA-794, Samsung v. Apple.  The ALJ had determined that there was no infringement by Apple of Samsung’s asserted patents, which Samsung has declared as standard essential patents covering technology implemented by the European Telecommunications Standards Institute (ETSI).  The full Commission review is important because it may signal a divergence of policies relating to patents that are declared as SEPs and those that are not.  Furthermore, the Commission’s apparent willingness to consider exercising its public interest standard represents a departure from a long-standing reluctance to decline an exclusion order on public interest grounds.  Traditionally, the ITC has taken the position that strong patent rights are in the best public interest over the long-term.

Upon announcing the full Commission review, the ITC also requested that the parties answer a set of discrete questions in briefs filed to the ITC.  Finally, the ITC invited public and third-party comments on four specific questions that relate to SEPs, FRAND rates, and the viability of exclusion orders or injunctions.  Two of these questions are at the heart of the debate:

  • Does the mere existence of a FRAND undertaking with respect to a particular patent preclude issuance of an exclusion order based on infringement of that patent? Please discuss theories in law, equity, and the public interest, and identify which (if any) of the 337(d)(l) public interest factors preclude issuance of such an order.
  • Where a patent owner has offered to license a patent to an accused infringer, what framework should be used for determining whether the offer complies with a FRAND undertaking‘? How would a rejection of the offer by an accused infringer influence the analysis, if at all

Several of the briefs have been posted at the ITC, including Apple, Samsung, RIM, Ericsson, Sprint, Hewlett-Packard, Intel, RIM, and Qualcomm.  These briefs are instrumental in framing and understanding the SEP debate moving forward, as these briefs represent those companies that are in the trenches and dealing with these issues not only on a daily basis, but for the past two decades.

Competing Views – Anti-Availability of Exclusion Orders

The parties are divided fairly evenly on whether an exclusion order should be available to an SEP holder.  Apple takes the position that a company with FRAND encumbered patents should not be able to seek an exclusion order.  This view is largely echoed by Intel, Sprint, and Hewlett-Packard.

Apple’s opening paragraph in response to Question 1 summarizes their view:

Yes. The existence of a FRAND obligation precludes issuance of an exclusion order, other than in the exceptional scenarios such as where a potential licensee has refused to pay a royalty after a U.S. court has determined that royalty to be FRAND, or where no U.S. court has jurisdiction over the potential licensee in order to set a FRAND rate.

The reliance on U.S. courts to determine a FRAND rate before an exclusion order may be considered a relatively new argument given that a U.S. court is just now ready to decide a FRAND royalty rate.

Apple goes on to explain the public interest standard:

The basic problem is this: if FRAND patent holders could obtain ITC exclusion orders, then every holder of any standard-essential patent—and for ETSI standards, there are thousands of declared essential patents, held by dozens of companies—could threaten standards implementers with the prospect of not being able to import any standards-compliant products into the United States market.

Apple’s view is that the risks of hold-up inherent in the standard setting context require a remedy that prevents injunction or exclusion at any level.  The conversation invited by the ITC should not be a discussion of whether damages are a sufficient remedy, but rather only what that level of damages should be.  Apple also asserts that the rejection of a license by a putative licensee does not offer proof whether a SEP holder’s offer was FRAND or not.  Finally, Apple stresses that evaluating an offer as FRAND or not must be done both procedurally and substantively, meaning that the finder of fact must look both at the negotiations between the parties, as well as the objective assessment of whether the license constitutes FRAND.

For their part Sprint and HP are largely worried that allowing the ITC to issue exclusion orders threatens the long-term viability of standard setting organizations.  Not coincidentally, this is the same argument that pro-exclusion order supporters make.  Below is the statement from anti-exclusion order HP:

Allowing the holder of a RAND-encumbered patent to obtain an exclusion order short circuits the holder’s RAND obligation and recreates the hold-up problem that RAND licensing commitments are intended to mitigate. This harms the public interest and threatens the continued vitality of the standards development process, which is integral to technological progress.

Compare that to the statement of pro-exclusion order Ericsson:

Removing or limiting possibilities for a return on investment in standardization would undermine incentives for technology developers to invest in open, standardized technology and instead encourage a shift towards proprietary technologies. Eventually, this could threaten interoperability between equipment from different vendors, leading to consumer lock-in and reduced consumer choice.

As to the second question, Apple maintains that money is the only remedy available, and a district court is the only method available for determining the appropriate amount of money if negotiations break down.  Apple argues there are three elements for determining whether an offer is substantively fair: (1) royalty base should correspond to standardized functionality; (2) royalty rate; and (3) offer must be even-handed and non-discriminatory.

One item of note – Apple calls Samsung’s patents FRAND encumbered because they are essential to the SEP standard, but also argues that the ITC should uphold the ALJ’s decision of non-infringement.  This is a logical impossibility.  If Apple complies with the standard, and there are patents that are essential to that standard, then it must be the case they infringe on the patent.

Competing Views – Pro-Availability of Exclusion Orders

Samsung contends that exclusion orders should be available to all patent holders, including those holding SEPs.  Motorola, RIM, Qualcomm, and Ericsson took similar stances.  Samsung’s brief stresses several key points:

  1. SEPs are not synonymous with market power
  2. The availability of an exclusion order balances bargaining power against the unwilling licensee (deemed “reverse hold-up” by Samsung)
  3. Congressional intent is clear that exclusion orders should be available
  4. The current system requires substantial evidence and a long process that protects against abuse or hold-up

The thrust of the Samsung brief is not really theoretical problems concerning hold-up are not true, but rather that they are not limited to SEPs.  SEPs pose a threat of hold-up in which they may demand a high licensing fee because putative licensees are locked in to implementing technology that reads on their patents.  Samsung argues that the hold-up threat is concurrent with the threat of “reverse hold-up” in which the putative licensee will merely declare any offer as not FRAND, and refuse to pay a license while continuing to implement the technology reading on the patent.  Both of these potential threats may exist, and a bright line rule would ignore this reality. In non-SEP patent litigation contexts, courts and regulators look to a bevy of factors, including economics, contractual relationships, and industry course-of-dealings to determine if a patents are being leveraged improperly.  Samsung’s brief suggests that this is the correct framework for all patents, SEP or not.  Samsung also stresses that SEPs “are not licensed in isolation” a continuation of the difficult questions Judge Crabb considered before dismissing the case between Apple and Motorola in the Western District of Wisconsin.

Motorola’s brief on the public interest invokes Judge Crabb’s reasoning, quoting “[t]here is no language in either the ETSI or IEEE contracts suggesting that Motorola and the standards-setting organizations intended or agreed to prohibit Motorola from seeking injunctive relief.”  Motorola’s brief also counsels against categorical rules precluding the seeking of an exclusion order, provided that the SEP holder has complied with its FRAND obligations.  Recall that Motorola has been involved in the ITC before, and recently withdrew an Investigation request against Apple.

The key word in the Motorola brief is balance.  For instance, Motorola suggests “the Commission has the necessary tools to balance the public’s interest in both promoting standardization and the availability of standards-compliant products while also fulfilling Congress’s intent that enforceable patent rights protect technology investment and domestic industry.”  Motorola also cautions that a per se bar on exclusion orders would prevent the ITC from determining whether patents are truly essential, or whether the infringing product is part of the FRAND commitment.

In Motorola’s view, a blanket rule is impossible to implement.  Each case is unique in terms of patentee, licensee, industry, SSO, FRAND commitments, and other relationships between the parties.  Furthermore, Motorola is particularly worried about the unwilling licensee, and event argues:

If an implementer of standards is not willing to pay license fees like its competitors, it should not be heard to complain when it faces exclusion orders for its unlawful importation of infringing devices. Indeed, to hold otherwise harms the lawful competitors who do pay license fees. Competition is served by barring unlawful infringement where others in the market are competing legally.

Motorola argues that banning exclusion orders would create a disincentive to participate in SSOs, and ultimately a disincentive to license patents.

Finally, Motorola’s view concerning the determination of a FRAND rate is equally case-specific.  Motorola explains “The complicated, case-specific nature of many negotiations for portfolio-wide technology licenses resists the application of a rigid framework for assessing FRAND because such a framework cannot reasonably account for all of the factors that may be important to particular parties in a particular negotiation.”  Ultimately Motorola shares the views of Samsung, Ericsson, RIM, and Qualcomm that the SEP/FRAND debate is too complicated for bright line rules, but rather requires a delicate case-by-case analysis for each dispute.

Qualcomm offers yet another methodology for navigating the SEP standoff – treat FRAND commitments as purely contractual relationships between sophisticated and knowledgeable parties on both sides.  In this framework, the following guideposts would apply:

  1. A FRAND commitment is not a waiver of the right to seek an injunction or exclusion order
  2. Failure of a FRAND holder to negotiate in good faith will constitute waiver of or otherwise preclude the right to seek an injunction or exclusion order
  3. An offer is only the first step in negotiations, and the initial offering of an unacceptable license does not by itself constitute bad faith negotiations
  4. FRAND allows for a wide range of outcomes, and the definition of what is FRAND is subjective to each party and negotiating relationship
  5. Adherence to accepted licensing terms should provide a “safe harbor”
  6. The ITC can consider intrinsic and extrinsic evidence of bad faith
circle 09

Brendan Coffman

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