Federal Circuit and European Commission Tackle Issue at the Heart of the “Smartphone Wars”

Collaborative technical standards have become even more important in recent years with the proliferation of electronic devices, such as smartphones, that require interoperability with common networks. Patented technology incorporated into a standard, known as “standard essential patents” (SEPs), can be enforced in anticompetitive ways. SEP holders can extract monopolistic royalties once a standard has been commercialized and widely adopted. To increase their bargaining leverage, SEP owners can threaten to seek injunctions against standard implementers, who do not accept the offered terms, and exclude their products from the market. This “patent holdup” can raise costs to consumers, frustrate the evaluation of competing technologies at the standard selection stage, and deter participation in collaborative standard setting activities. To protect against holdup, many standard setting organizations have required SEPs to be licensed on “fair, reasonable, and non-discriminatory” (FRAND) terms. SEPs have been at the heart of the “smartphone wars” among Apple, Samsung, and other handset manufacturers.

Three recent developments – an appellate court decision in the United States and two enforcement actions in Europe – offer some guidance on SEP enforcement practices. The Federal Circuit addressed when the owner of a SEP can seek injunctions against standard implementers. And the European Commission (EC) affirmed that a SEP owner’s threat to seek injunctions against willing licensees can be an illegal abuse of dominance.

The Federal Circuit’s Fractured Decision in Apple v. Motorola
Among other questions it decided, a three-judge Federal Circuit panel issued a fractured decision on April 25, 2014 on when a SEP owner is entitled to an injunction against a standard implementer.[i] While the three opinions agree that courts should employ a flexible standard, their conception of how the test should be applied varied drastically.

Judge Reyna, writing for the majority, held that courts should apply the four-factor eBay framework. The majority stated that a per se rule that denies injunctions for SEP holders is unwarranted. It also generally rejected the adoption of a “separate rule or analytical framework for addressing injunctions for FRAND-committed patents.”[ii] The court noted that a SEP owner may have difficulty showing irreparable harm if it is denied an injunction, which counsels against granting it an injunction per eBay. On the other hand, an injunction may be necessary if an infringer rejects a FRAND royalty or improperly prolongs negotiations. At the same time, the court held that an alleged infringer that refuses a licensing offer should not be automatically subject to an injunction because the royalty rate may be above a FRAND level. In applying the eBay public interest factor, the court noted that “the public has an interest in encouraging participation in standard-setting organizations but also in ensuring that SEPs are not overvalued.”[iii] While not making the point explicitly, the court appears to recognize that granting injunctions to SEP holders too readily can produce monopolistic royalties for some patent owners and also discourage participation in collaborative standard setting organizations.

The majority affirmed Judge Posner’s decision[iv] to grant Apple summary judgment on whether Motorola was entitled to an injunction on its SEP. It found that Motorola’s willingness to license its SEP to many other parties suggested that money damages are adequate to compensate Motorola fully. In addition, Motorola had failed to show that a denial of an injunction against Apple would cause it irreparable harm. Finally, the court found nothing in the record to indicate that Apple was unwilling to license Motorola’s SEP on FRAND terms.

Chief Judge Rader dissented on the issue of whether the district court was correct to deny Motorola’s request for an injunction. He agreed with the majority’s flexible test for deciding this issue and said that per se rules—either in favor or denying injunctions—are not appropriate. He, however, parted ways on the application of the test. His dissent recited the basic economics of standard setting and noted that a SEP’s value can reflect both the commercialization of the relevant standard and the inherent value of the technology embodied in the SEP. In addition, it observes that a standard implementer’s unwillingness to license is “equally as likely and as disruptive”[v] as a SEP owner’s unjustified royalty demands. Because a SEP’s inherent value cannot be ascertained a priori, the dissent said determining what constitutes a FRAND license is a factual question. And if Motorola’s license offer to Apple was FRAND and Apple rejected it, Motorola may be entitled to an injunction. On this basis, Judge Rader wrote that the district court erred in granting Apple summary judgment and denying Motorola the chance to show that its license offer to Apple was FRAND and that Apple was subsequently an unwilling licensee.

Judge Prost joined Judge Reyna’s opinion but wrote separately to state that SEP owners should receive injunctions under only very limited circumstances. She stated that an implementer’s unilateral refusal to license is not sufficient to invite an injunction. First, her concurrence recognizes that a licensee is entitled to challenge the validity of a SEP and should not be punished for “less than eager negotiations”[vi] over what may be an invalid patent. Second, damages can be increased to above a FRAND rate to punish an infringer that negotiated in bad faith. The availability of enhanced damages would seem to address Judge Rader’s concern about standard implementers that refuse to license a SEP. According to Judge Prost, “monetary damages are likely adequate to compensate for a FRAND patentee’s injuries.”[vii] She said that injunctions may be justified if a patentee is unable to collect damages to which it is entitled because, for example, the infringer is judgment proof. An injunction may also be warranted, as part of a sanctions package, if an infringer refuses to pay court-ordered damages. Her concurrence is functionally similar to the position endorsed by the AAI’s brief: courts should apply a strong presumption against granting injunctions on SEPs.

The European Commission Remedies the Abuse of SEPs by Motorola Mobility and Samsung
On April 29, 2014, the EC found Motorola Mobility’s enforcement of a SEP against Apple in a German court to be illegal abuse of dominance.[viii] Motorola Mobility had sought and enforced an injunction against Apple, a willing licensee, in Germany on a SEP it had committed to license on FRAND terms. It had also used the threat of injunctive relief to compel Apple to forgo any challenge to the validity of the SEP. The EC stated that FRAND terms on SEPs promote a wide choice of interoperable products and ensure that patent holders are adequately compensated. The threat of injunctive relief against willing licensees can distort licensing negotiations between implementers and intellectual property owners and lead to supracompetitive royalties. And implementers should not have to pay for patents that are either invalid or not infringed. The EC ordered Motorola Mobility to end this behavior. Citing a lack of European Union case law on the question of when patent holdup is an abuse of dominance and a decisional split among national courts, the EC opted not to impose a fine on the firm.

On the same day, the EC accepted a binding commitment from Samsung regarding enforcement of its SEPs.[ix] Beginning in April 2011, Samsung sought injunctions against Apple for allegedly infringing its SEPs, which Apple had been willing to license. The EC found that this conduct may be an illegal abuse of dominance. The EC ended the action after Samsung promised not to seek injunctions against parties that agree to a two-part licensing framework. This framework provides for: 1) a maximum 12-month license negotiation period, and 2) if no agreement is reached at the end of the 12 months, a determination of a FRAND royalty by a court, if either party chooses, or an arbitrator, if both parties consent to it. The Federal Trade Commission established a similar SEP licensing procedure, with a minimum six-month negotiation window, in its July 2013 consent order with Motorola Mobility.

_____________

Sandeep Vaheesan is Special Counsel at the American Antitrust Institute (AAI). The AAI is an independent non-profit research, education, and advocacy institution in Washington, DC.

[i] Apple Inc. v. Motorola Mobility, Inc., 2014 U.S. App. LEXIS 7757 (Fed. Cir. 2014).

[ii] Id. at 106.

[iii] Id. at 107.

[iv] Judge Posner was sitting by designation in the Northern District of Illinois. Apple, Inc. v. Motorola, Inc., 869 F. Supp. 2d 901 (N.D. Ill. 2012).

[v] Id. at 110 (Rader, C.J., dissenting).

[vi] Id. at 137 (Prost, J., concurring).

[vii] Id. at 137-38.

[viii] Press Release, Eur. Comm’n, Antitrust: Commission Finds that Motorola Mobility Infringed EU Competition Rules by Misusing Standard Essential Patents, Apr. 29, 2014.

[ix] Press Release, Eur. Comm’n, Antitrust: Commission Accepts Legally Binding Commitments by Samsung Electronics on Standard Essential Patent Injunctions, Apr. 29, 2014.