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Standards and FRAND Terms in the Post Huawei World

By Giuseppe Colangelo

The judgment of the European Court of Justice (CJEU) in Huawei/ZTE (Case C-170/13)
marked a milestone in the patent war which has characterized standardization activities in the last decade. The CJEU identified the precise steps which standard essential patents (SEPs) owners and users have to follow in negotiating fair reasonable and non-discriminatory (FRAND) royalties. Compliance with this code of conduct will shield IPRs holders from the scrutiny of competition law and, at the same time, will protect implementers from the threat of an injunction and the consequent disruptive effect on sales and production.

In primis, the patent holder must inform the SEPs user about the alleged infringement and make a specific and written FRAND offer, provided the latter has shown willingness to obtain a license on fair and reasonable terms. The exact amount of the royalty and the way in which it has been calculated should be specified in the offer. In case of refusal, the implementer must promptly propose a counter-offer that complies with FRAND requirements. If such counter-offer is also rejected, the alleged infringer must provide appropriate security to continue using the patents, either by providing a bank guarantee or by placing the requisite amount on deposit. In addition, the parties have the option to request that the royalty level be set by an independent third party decision without delay. Patent owners will instead be granted an injunction if the implementer, while continuing to use the patent in question, have not diligently responded to the first licensing offer, in accordance with recognized commercial practices in the field and in good faith, which is a matter that must be established on the basis of objective factors and which implies that there are no delaying tactics. Furthermore, with regard to liability for past acts of use, the CJEU also explained that Article 102 TFEU does not prohibit the SEPs owner from bringing an action for the award of damages or the rendering of accounts. The above requirements and considerations do not, however, deprive the potential licensee of the right to challenge the validity and essentiality of the patent at issue.

Despite the CJEU’s efforts, many shadows still loom on the horizon of the EU standard-setting community. In such a complex context, the recent activity by certain national courts in filling the gaps left by the CJEU and shedding light on some of the thorniest questions is undoubtedly welcome, and deserves the utmost consideration. Among these decisions, the UK judgement Unwired Planet v. Huawei[1] recently delivered by Mr. Justice Birss is of utmost importance.

 

The UK dispute Unwired Planet v. Huawei

Unwired Planet, a U.S. based patent assertion entity that holds a worldwide patent portfolio which includes numerous SEPs to various telecommunications standards, claimed that Huawei was an unwilling licensee. Huawei counterclaimed that Unwired Planet was abusing its dominant position by offering to license its entire global portfolio (SEPs and non-SEPs) and by demanding royalty rates higher than FRAND ones.

On 5 April 2017, the High Court of England and Wales delivered its judgement.

Justice Birss addressed several important topics. First, Birss stated that only one set of licensing terms can be ultimately considered FRAND in a given set of circumstances. From this perspective, the judge disregarded the view of those authors, U.S. judges (e.g. Robart in Microsoft v. Motorola) and perhaps even the CJEU in Huawei, according to whom FRAND may well comprise a range of terms. Indeed, although the Huawei case did not deal with FRAND pricing, yet it acknowledged that parties can make divergent FRAND offers and counter-offers, thereby confirming that there is no unambiguous FRAND point and that several distributional FRAND prices exist.

Furthermore, as a consequence of the single FRAND rate, Birss found that, during the negotiation, the parties could make offers that would not be FRAND. An obligation focused only on making FRAND offers is considered unrealistic since a process of fair negotiation will usually involve some compromise between the parties’ rival offers: if the standard setting organization demands that offers made by a patentee must themselves consist of FRAND terms, then that would condemn patentees to always end up with negotiated rates below a FRAND rate. Therefore, according to the UK Court, it makes much more sense to interpret the FRAND obligation as applicable primarily to the finally agreed terms rather than to the offers.

It seems that Birss aimed to reduce the relevance of the Huawei decision (and of the competition law, in general) also relatively to another point. After recalling the purpose of a FRAND commitment and its alleged contractual nature, the UK judgment concluded that the contractual commitments submitted to the standard setting organization (ETSI) are stricter than antitrust provisions. Indeed, since competition law fines only excessive prices, a rate can be in line with antitrust rules even if it is higher than the FRAND benchmark. In sum, according to the English Court, FRAND commitments can be enforced under contract law without recourse to competition law.

Turning to the process of negotiating FRAND licenses, with respect to the type of behavior that can be considered FRAND, the Court stated that making extreme offers and taking an intransigent approach is not FRAND. In this regard, Huawei was considered unwilling because it insisted on having an offer for just a UK license (instead of a worldwide one).

Moreover, Birss provided useful insights about the determination of FRAND rates. An appropriate way to establish the FRAND royalty would be to determine a benchmark rate governed by the value of the patentee’s portfolio: counting patents and making reference to existing comparable licenses are key steps of the determination process. In the High Court’s words, a patentee who refuses to accept those terms would be in breach of its FRAND undertaking. With respect to the non-discrimination element, the Court rejected a “hard-edged” approach capable of applying to reduce a royalty rate (or adjust any license term in any way) which would otherwise have been regarded as FRAND. On the contrary, the Court endorsed a “general” approach, which requires that rates cannot differ based on the licensee but only on the value of the portfolio licensed.

The UK judgement demonstrates that after Huawei there are still several pending questions. It is not surprising that the European Commission has recently intervened to announce a Communication in order to fill the gaps by complementing existing jurisprudence through best practice recommendations.[2]

[1] [2017] E.W.H.C. 711 (Pat).

[2] European Commission, Roadmap towards a Communication on ‘Standard Essential Patents for a European digitalised economy’, 2017, 2, available at https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2017-1906931_en.

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Apple and Qualcomm Proceeding

By Nicole Daniel

In January 2017 Apple filed suit against Qualcomm over its allegedly abusive licensing practices regarding wireless patents.

Apple filed patent, antitrust and breach of contract claims against Qualcomm; this could result in damages of billions of dollars. Apple’s suit comes after recent legal challenges against Qualcomm filed by the U.S. Federal Trade Commission in federal court and a class action by smartphone buyers. Furthermore, Korean authorities levied their own $854 million penalty and China’s National Development and Reform Commission extracted a penalty amounting to nearly $1 billion in 2015. Also in 2015 the European Commission sent statements of objections to Qualcomm.

Apple alleges that Qualcomm abused its monopoly in baseband processors that power both the iPad and the iPhone and broke its promise to license its standard essential patents at FRAND, i.e. fair, reasonable and non-discriminatory, rates. Qualcomm breached its FRAND obligations by selling chipsets powering smartphones and tablets and separately licensing standard-essential patents. Apple further alleges that Qualcomm refused to sell chipsets to customers unless they first licensed their standard-essential patents. This allegation is central to the Federal Trade Commission’s case too as well as Apple’s allegation that Qualcomm does not licence its standard-essential patents to competing chipset manufacturers. Tying the chipsets and licenses to cellular technology illegally strengthened Qualcomm’s monopoly and eliminated competition. Another allegation by Apple is that Qualcomm threatened customers who purchased chipsets from competitors with less favorable license and royaltyi terms.

Not only did Qualcomm charge inflated royalties for its patents but it also engaged in allegedly intimidating business practices. For example, Qualcomm allegedly tried to force Apple to lie to the South Korean antitrust enforcer in exchange for $1 billion which Qualcomm was obliged to pay anyway. Apple further states that because it provided evidence in antitrust investigations against Qualcomm in the U.S. and Korea, Qualcomm, as retribution, withheld $1 billion that it owed to Apple. Apple now wants damages for having been overcharged billions of dollars, enjoin Qualcomm from engaging in further violations of the law and declaratory relief holding that Apple does not infringe on a number of patents owned by Qualcomm. Apple also asks the court to determine the proper FRAND rates.

Qualcomm countered by calling Apple’s allegations “baseless” and accusing its opponent of encouraging the regulatory “attacks” on Qualcomm. Also the antitrust claims are driven by commercial disputes and Qualcomm will continue to defend its business model.

Furthermore, Qualcomm learned in January 2017 that an Apple subsidiary filed two complaints against Qualcomm in the Chinese intellectual property court. The first complaint regards inter alia violations of Chinese anti-monopoly law by offering excessive royalty terms on patents and chipsets whereas the second complaint regards a refusal to provide to Apple a royalty offer for cellular standard essential patents consistent with FRAND terms.

In April 2017 Qualcomm filed an answer and counterclaims in California federal court. In its filing Qualcomm detailed the value of the technologies it has invented and alleged that Apple failed to engage in good faith negotiations for licensing 3G and 4G essential patents on FRAND terms. The filing further outlines that Apple allegedly breached and mischaracterized both agreements and negotiations. Apple further encouraged regulatory attacks in various jurisdictions and did not utilize the full performance of Qualcomm’s modern chips in the iPhone 7. Apple allegedly also misrepresented the disparity in performance between iPhones using competitor-supplied modems and Qualcomm modems. Qualcomm was even threatened by Apple to prevent it from making any public comparisons about the superior performance of iPhones powered by Qualcomm.

Also in April 2017 Apple published a written statement stating that it has chosen to withhold patent royalties owed to Qualcomm by its contract manufacturers because over the course of the last five years Qualcomm has refused to negotiate fair terms.

It remains to be seen how the proceedings in this case continue.

Samsung alleges that Huawei used FRAND promises to monopolize smartphone technology

By Nicole Daniel

In an ongoing dispute, Samsung accused Huawei of breaching its patent licensing commitments in order to gain control over the market for commonly used cellular technologies.

In May 2016 Huawei sued Samsung in the U.S. and in China for infringing 11 standard essential patents for smartphones. The technology covered by these patents is allegedly used in almost all of Samsung’s cell phones. Huawei seeks damages in the U.S. proceeding; however merely seeks injunctions in the Chinese proceeding. In this regard, it must be noted that Chinese courts are becoming increasingly involved in patent disputes between big technology companies.

In July 2016 Samsung in turn sued Huawei in China for infringing six of its patents. In August 2016 Samsung responded to the U.S. lawsuit and filed antitrust counterclaims. Samsung accuses Huawei of breaching its promise to license the patents on FRAND terms thereby getting an unlawful monopoly over 3G and 4G wireless device technology. Furthermore, Samsung accused Huawei of patent infringement for 11 smartphone patents that may already be or may become essential to cellular technologies. Samsung also argued that two of Huawei’s patent infringement claims should be dismissed, since the underlying intellectual property are unpatentable math formulas.

Samsung further argued that Huawei merely sued for injunctions in China to gain leverage in licensing negotiations in other areas of the world.

Samsung is seeking damages as well as injunctions to block the injunctions sought by Huawei.

At a court hearing on 13 September 2016 in San Francisco, District Judge William Orrick said that he was not inclined to break up the patent and antitrust dispute between the companies to allow Huawei to seek a court-ordered global FRAND license rate for its patent portfolios prior to litigation over the alleged patent infringement and Samsung’s antitrust counterclaims. However, Judge Orrick allowed Huawei to argue for bifurcation by filing a five-page brief within the next week.

Judge Orrick then set a case schedule for a trial starting in two years on 17 September 2018. He also urged the opponents to settle the dispute sooner than that, noting that their plan to delay mediated settlement talks until deeper into the litigation proceedings was counterproductive. Furthermore, filing numerous lawsuits against each other to resolve their differences “is not the wisest way of dealing with the problem” that the companies have with each other.

Microsoft and Google make up

By Nicole Daniel

On 22 April 2016, Microsoft and Google announced that following their patent settlement, they have decided to end their long-running feud.

Microsoft’s spokesperson said that Microsoft will withdraw its regulatory complaints against Google. This step reflects its changing legal priorities. Google’s spokesperson said that the two companies came to an understanding that they wanted to compete on the merits of their products as opposed to legal proceedings.

In fall 2015, the two companies have since entered into a settlement agreement thereby dropping a number of patent lawsuits in the US and Germany.

Complaints to be dropped by Microsoft include a complaint filed in 2011 at the European Commission and complaints filed in Latin America.

This announcement is a further sign that the so-called worldwide smartphone wars are indeed winding down.

Antitrust Suit against Black & Decker and others revived by Fourth Circuit

By Nicole Daniel

On 15 September 2015 the Fourth Circuit revived an antitrust suit against Black & Decker Corp and others which accuses them of conspiring to boycott SawStop LLC’s table saw safety technology. However, the court upheld the dismissal of claims that the defendants manipulated the standard setting process to exclude SawStop LLC’s new technology.

In February 2014, SawStop launched its suit against Black & Decker Corp and other major toolmakers, claiming that the defendant manufacturers had colluded and thereby violated federal antitrust law.  SawStop claimed that the defendants,  through their industry organization Power Tool Institute Inc., refused to license a new safety technology created by SawStop. When a SawStop new technology blade detects contact between itself and a person the blade almost immediately retracts.

In its suit SawStop also accused the defendant companies of conspiring to change the standards of Underwriters Laboratories Inc., a company responsible for safety certification, to prevent a technology similar to SawStops’ from being installed as industry standard. Allegedly, to limit their product liability claims exposure, the defendant manufacturers planned to [have Underwriter’s Laboratories] implement an inferior safety standard; i.e. they wanted to implement a new standard through Underwriter’s Laboratories

In June 2014 the district court dismissed the entire case. The Fourth Circuit, however, in a split three-judge panel, found that even though SawStop did not have enough evidence to show that the defendant manufacturers’ participation in the process for setting safety standards for table saws went beyond cooperation that was ordinarily involved in such process, it did have enough evidence to go ahead with the alleged group boycott claim.

Judge G. Steven Agee for the majority wrote that the district court essentially committed two errors. The first error was to confuse standards for motion-to-dismiss and summary judgment. The second error was that a standard much closer to probability was applied even though the standard should have been closer to plausibility.

According to majority in the Fourth Circuit decision the district court applied the Supreme Court’s Iqbal and Twombly rulings, which to move ahead with an antitrust proceeding, require from the plaintiff to allege something that goes beyond parallel conduct, too stringent; especially given that the case in question was merely in the early stages.

Even though SawStop did not have enough details to plausibly allege that the defendants conspired to manipulate safety standards, SawStop put forward enough details to go ahead with the group boycott claim.

Therefore the Fourth Circuit revived the group boycott claim.

The Fourth Circuit further remanded the dispute over whether the plaintiff was harmed by the alleged anticompetitive behavior, or whether it was even necessary to show such harm since the alleged plot amounts to a per se antitrust violation. This issue was remanded since it had not been briefed sufficiently before the district court.

Importantly it was emphasized by the Fourth Circuit that its decision is not to be regarded as a “license for unlimited discovery” thereby noting that the district courts had power to restrict discovery.

Samsung Antitrust Complaint against Panasonic dismissed with Leave to Amend

By Nicole Daniel

On 30 September 2015, US District Court Judge Jeffrey White granted a partial dismissal of  Samsung’s third amended antitrust complaint against Panasonic Corporation, its affiliate Panasonic Corporation of North America and SD-3C LLC.

The dismissal concerned the market being described too broadly by Samsung. However, Samsung was given leave to amend its complaint.

In 1999 Panasonic and its partners developed SD cards as a modified format of the then-available flash memory cards. These are used in digital cameras and mobile phones. They also created SD-3C to license these SD cards to manufacturers. A standard license was created in 2003. In 2005 and 2006 two new forms of SD cards (the high capacity SD card and the microSD card) were developed, which were not covered by the 2003 license. Accordingly the SD Group met in the fall of 2006 to adopt an amended and restated license agreement.

Samsung started to manufacture the two new SD flash memory formats in 2006, and even though it refused to sign the 2006 license Samsung made the requested royalty payments to the defendants.

In June 2010 Samsung then filed suit alleging that the defendants conspired in order to monopolize the market for SD flash memory cards. Samsung also alleged that the licenses were anti-competitive agreements in restraint of trade.

The District Court granted two previous motions to dismiss in August 2011 and January 2012, since Samsung’s claims were time-barred. These statute of limitations determinations were reversed and remanded by the Ninth Circuit in April 2014. The panel held that the four-year statute of limitations had not expired at the time Samsung filed its complaint in June 2010 since it was alleged that the new licensing agreement between Panasonic and its coconspirators was adopted in the fall of 2006.

Accordingly Samsung filed a Third Amended Complaint, followed by a motion to dismiss by the defendants in February 2015.

In his opinion Judge White stated that the alleged market, i.e. flash memory cards, was too broad as it did not distinguish between reduced-size and full-size memory flash memory cards. Samsung was given leave to amend its complaint to address the deficiencies described by Judge White. However, Judge White held that Samsung offered plausible allegations that the defendants agreed to refrain from competing and instead opted to create a new technology standard in which the defendants could share control.

Google and Microsoft agree to end Patent Battle

By Nicole Daniel

On 30 September 2015 it was announced that the five-year patent battle between Google and Microsoft has come to a close. The companies decided to end all patent infringement litigation against each other and drop around 20 lawsuits in the United Stated and Germany. No financial terms of the deal were disclosed; instead the companies pledged that they will work together on certain patent matters to strengthen the defense of intellectual property.

Since 2010 Google and Microsoft were clashing over a number of issues involving a variety of technologies including smartphones, WiFi, patents and royalties related to technology in the Xbox game console.

The most famous and bitter feud concerned litigation involving Motorola Mobility, which Google owned from 2012 until January 2014, when was sold to Lenovo Group Ltd, while Google kept many of its patents.. In 2010 Microsoft claimed that Android infringed some of its patents and demanded royalties from smartphone makers (Samsung, Motorola Mobility) for Android licensing agreements.

This is a further sign that the so-called worldwide smartphone wars are winding down. In 2014 Samsung and Apple agreed to drop all litigation against each other outside of the United States.