Thursday, November 3, 2011

European Commission investigating Samsung over possible abuse of FRAND patents against Apple

Samsung's various attempts to shut down Apple products -- most recently the iPhone 4S -- with patents declared essential to the 3G industry standard have now given rise to an antitrust investigation by Europe's top competition "watchdog". This is the most important development to date related to the world-spanning dispute between these two companies. This investigation has the potential to force Samsung to withdraw most of its claims against Apple, but let's not forget that the underlying issue concerns the technology industry at large. Everyone -- not just Apple -- relies on FRAND standards.

I have been saying all along that patents that are contributed to industry standards on the basis of so-called FRAND (fair, reasonable and non-discriminatory) licensing commitments must not be used as strategic weapons. In my view, FRAND patent holders can ask for reasonable compensation, but they are not allowed to overcharge or to shut down products as long as an alleged infringer is willing to take a license on FRAND terms (if there actually is an infringement of valid patents). That view was also shared by a judge in The Hague, Netherlands, who dismissed a Samsung request for a preliminary injunction and held that Samsung had failed to honor its FRAND licensing commitment.

A recent court filing by Apple in California (a proposed amendment to Apple's counter-counterclaims against Samsung, many of which are FRAND-related) states the following (click to enlarge, or read the text below the graphic):

Here's the passage again, with the sentence on the European Commission investigation highlighted by me:

"Samsung's efforts to coerce Apple into tolerating Samsung's imitation have not been limited to the counterclaims here [in California]. Samsung has launched an aggressive, worldwide campaign to enjoin Apple from allegedly practicing Samsung's patents. Samsung has sued Apple for infringement and injunctions in no fewer than eight countries outside the United States. Indeed, Samsung's litigation campaign and other conduct related to its Declared-Essential Patents is so egregious that the European Commission recently has opened an investigation to determine whether Samsung's behavior violates EU competition laws. Apple brings these Counterclaims In Reply to halt Samsung's abuse and protect consumers, the wireless telecommunications industry, and Apple from further injury."

When I wrote this post, the European Commission's Directorate-General for Competition (DG COMP) had not yet announced that new investigation. Apple's court filing in California is the first public document in which this investigation was mentioned.

Update 1: statements by the European Commission and Samsung

Meanwhile Dutch website has received confirmation of a preliminary investigation from the European Commission and from Samsung. The Commission stated the following: "The Commission has indeed sent requests for information to Apple and Samsung concerning the enforcement of standards-essential patents in the mobile telephony sector. Such requests for information are standard procedure in antitrust investigations to allow the Commission to establish the relevant facts in a case. We have no other comments at this stage."

Webwereld's Andreas Udo de Haes also shared with me Samsung's official statement: "Samsung has at all times remained committed to fair, reasonable and non-discriminatory licensing terms for our wireless standards-related patents. We have received a request [for information from the] Commission and are cooperating fully. Note that this is a preliminary investigation and the European Commission has not yet determined whether to conduct a full investigation."

Update 2: contrary to some reports, there's no indication of Apple being the target of this preliminary investigation

The European Commission's statement has created some confusion since it confirmed that questions were sent to "Samsung and Apple". I can understand that many people interpreted this as indicating that Apple's conduct is also at issue, and knowing how news agencies work, they certainly have to take the regulator's own announcements literally, but since I watch the dispute between those two companies, I can say definitively that neither the Commission's statement nor Samsung's reaction nor Apple's court filing provide any reasonable indication that Apple's own behavior is being probed.

The Commission describes the scope of the investigation as "the enforcement of standards-essential patents in the mobile telephony sector", and Apple has not sued anyone over even one such patent so far. At the time when UMTS/3G was developed, Apple wasn't even in the wireless devicess business. Between those parties, only Samsung enforces allegedly standards-essential patents, and the capacity in which Apple received the Commission's requests for information must therefore be that of a witness and maybe also that of an informal or formal complainant. In order to evaluate a possible abuse of FRAND-pledged patents, a regulator needs to check into the history of negotiations between the parties, and it also needs the parties' help in order to find out confidential information about lawsuits. In many jurisdictions, it's hard to find any document in the public record, and in others, only a small part. That's why Apple's involvement is needed. It doesn't make Apple a target of the investigation, at least not at this stage based on what's been said.

If the Commission had any suspicions at this stage of Apple abusing its own intellectual property rights, the theory would have to be a different one than "enforcement of standards-essential patents". But no such theory is stated by the Commission. Chances are that Samsung will at some point try to argue that Apple's use of its intellectual property rights is anticompetitive, but that would be a different theory than "enforcement of standards-essential patents" (for example, in that case the Commission might conduct an inquiry into a suspected abuse of a dominant market position, but that's not what the available statements say).

DG COMP and the European dimension of this matter

DG COMP is a highly-respected competition enforcer that has imposed heavy fines and impactful remedies on major players including Microsoft and Intel. DG COMP is currently also investigating Google's conduct. Should Samsung be found to have violated European competition rules, it could also be fined. Many EU antitrust investigations are settled if the Commission can reach an agreement on remedies with a suspected abuser.

The 3G standard is implemented around the globe and Samsung's assertions of the related patents potentially raise antitrust issues in many jurisdictions. DG COMP could investigate even if this matter "only" had a significant effect on competition in the EU market. But Europe is particularly important in this context for the following reasons:

  • Five of the nine countries in which Samsung has asserted 3G patents against Apple are EU member states. For a recent list of those assertions, check out this blog post.

  • The 3G standard was developed by ETSI, the European Telecommunications Standards Institute. ETSI states on its website that it "is recognised as an official European Standards Organisation by the European Union, enabling valuable access to European markets."

    According to reports that I saw, the European Commission itself urged the telecommunications industry to form ETSI.

  • Apple raised FRAND defenses against Samsung's assertions of 3G patents around the world, and some courts, such as in Australia and the Netherlands, have said that Samsung's FRAND licensing commitments must be construed under French law since that's the governing law of ETSI's 3G standard-setting agreement. As far as applicable antitrust rules are concerned, French law is effectively EU law.

  • Nine years ago, the European Commission granted antitrust clearance to a set of 3G-related patent license agreements. Samsung Electronics was one of the notifying parties. (The other notifying parties were Alcatel, Cegetel, Electronics and Telecommunications Research Institute Korea (ETRI), France Telecom, Fujitsi, Royal KPN N.V., LG Information and Communications, Matsushita, Mitsubishi Electric, NEC, NTT DoCoMo, Robert Bosch GmbH, Siemens AG, SK Telecom, Sonera Corporation, Sony and Telecom Italia Mobile.) Antitrust regulators don't take it lightly if companies obtain approval of certain deal terms and years later behave anticompetitively with respect to the very same standard. Samsung will have a fair amount of explaining to do in Brussels.

  • Six years ago, the European Commission closed an investigation of ETSI after the organization changed its standard-setting rules in order to minimize the risk of "patent ambush".

Two kinds of intellectual property

Some may wonder why the European Commission isn't simultaneously investigating Apple's intellectual property assertions against Samsung. The Commission is monitoring all of those cases, as former competition commissioner Kroes indicated on Twitter in August (see the last part of this blog post). In 2010, the Commission looked into certain iPhone-related policies (development tools and cross-border repair services). But there's a fundamental difference between what Apple and Samsung are doing. Apple doesn't (ab)use any standards-related patents against Samsung. Apple only uses intellectual property rights with respect to which it never made any FRAND licensing commitment to any standard-setting organization.

There are really two kinds of intellectual property rights. It's quite easy for a participant in a standard-setting process to obtain monopoly power. If you have the leading players in the industry at a table defining an industry standard that everyone implements, everyone who holds patents deemed essential to that standard would be able, theoretically speaking, to shut down everyone else with those patents. That's why a FRAND licensing commitment is an indispensable prerequisite for participating in a standard-setting process. By contrast, it's much harder to develop powerful patents outside of a standard-setting process. Apple has single-handedly revolutionized an entire industry (if not multiple industries), and that's why it owns valuable patents that are not subject to FRAND licensing commitments.

A warning shot for Samsung, Googlorola and HTC

Samsung will now have to tread very carefully. If it continues to aggressively pursue its cases against Apple based on 3G patents, it will only make things worse in the EU antitrust case. Like I said, fines can be high. The European Commission would also have the power to force Samsung to license its patents to Apple on certain terms, which would render any injunctions useless.

Samsung wasn't too likely to win any injunctions based on those 3G patents anyway. But the mere fact that there's this antitrust investigation going on will make any injunctions based on Samsung's 3G patents even less likely, in the EU and elsewhere.

There are also other companies in the industry using FRAND patents in potentially problematic ways, including Motorola Mobility and, very recently, HTC. They, too, may face antitrust action. However, Samsung initiated scattershot litigation over such patents on a worldwide basis, and apparently reached a point at which Europe's competition regulator saw a need to take action.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Share with other professionals via LinkedIn: