Tuesday, March 13, 2012

European Commission defines FRAND abuse more broadly than German courts do

The European Commission's clearance decision on Google's proposed acquisition of Motorola Mobility (MMI) contains a variety of interesting facts and opinions. Yesterday I commented on what the document says about settlement talks between Apple and MMI in light of the Google-MMI transaction. This follow-up post looks at what indications the document provides as to where the EU's top competition enforcer draws the line between acceptable and anti-competitive forms of use of FRAND-pledged, standard-essential patents (SEPs).

The decision to approve rather than block or delay Google's acquisition of MMI was independent from whether MMI's past use of SEPs (and, obviously, Google's unforeseeable future use of such patents) does or does not abide by applicable competition law. A month ago, European Commission Vice President JoaquĆ­n Almunia made a clear distinction between those two questions -- the competitive implications of the proposed merger on the one hand and of MMI's use of SEPs on the other hand -- in a detailed statement. The decision itself states this on multiple occasions (for example, footnote 11 notes that "nothing in this decision should be taken as supporting the position that Motorola Mobility's 2.25% rate is, or is not, a FRAND rate").

That said, the decision does touch on some of the key issues in this context. At this point, it's reasonable to assume that the European Commission would like to hold owners of SEPs to a considerably higher standard than German courts do in connection with the question of whether the holder of a given SEP is entitled to an injunction.

In this section of a recent blog post I explained how the German Orange-Book-Standard line works in practice. And in another recent post I showed how patent holder-friendly judges continue to move the goalposts in favor of patent holders (and contrary to the public interest).

In theory, Orange-Book-Standard lays out rules that enable an implementer of an industry standard to secure a license on FRAND terms. The would-be licensee has to make a binding offer that meets certain criteria, and has to act as if the license agreement he proposed were in force and effect. The problem is just that, in practice, this places too much of a burden on implementers, a fact that enables FRAND abusers in many cases to command an overall set of terms (even based on patents that shouldn't have been granted in the first place) that is out of step with FRAND.

There can be no doubt about the primacy of EU law in connection with antitrust rules (except that certain antitrust matters fail to meet the thresholds for EU intervention). Ultimately, if the EU decides, be it through opinions handed down by the Luxembourg-based EU courts or through legislative measures, that the holders of SEPs must be held to a higher standard than the one demanded by German courts, then German courts will have to apply the European framework to local cases. The EU is a work-in-progress in the sense that harmonization (assimilation) of rules between its member states has happened in some but by far not in all areas. There's constant progress, but it's an ongoing process.

In those areas in which there are still differences between national laws, Brussels obviously can't agree with all member states at the same time. But EU officials do respect the independence of national courts. Therefore, the "Googlorola" decision doesn't criticize the German line but states, totally non-judgmentally (like its reference to the 2.25% royalty rate), that "Google's interpretation of FRAND is largely in line with the current case-law of the German civil courts". Still, the Commission goes to extreme lengths to steer clear of blessing Google's position. That, in and of itself, is a sign that the Commission makes a distinction between EU rules and German case law. Paragraph 145 outlines the framework:

145. The Commission also notes that the obligations incumbent on Google as clarified in the letter to the SSOs are without prejudice to applicable laws. Applicable laws include Article 102 TFEU [Treaty on the Functioning of the European Union, the EU's de facto constitution], as well as any national competition legislation or national procedural law that further limit the possibility of a SEP holder to seek or enforce injunctions.

One could read the above paragraph as assigning to Orange-Book-Standard the relatively low rank of a "national procedural law" (law in the sense of case law) relating with access of SEP holders to injunctions. But there are much clearer indications of the Commission's line being different from Orange-Book-Standard.

The key area in which the Commission's "Googlorola" decision differs from Orange-Book-Standard is the point in time at which FRAND abuse occurs. The Orange-Book-Standard ruling said that the FRAND defense under antitrust law can only be invoked after the implementer of the standard has met various criteria (as explained before). By contrast, the Commission also considers a potential case of FRAND abuse a refusal to offer a FRAND license, an insistence on non-FRAND terms (such as a refusal to offer a "cash-only option"), or an offer on terms that aren't FRAND. Here's one quote that lists the three aforementioned types of misconduct:

"147. Overall, Google's incentives to forcibly extract cross-licences will be reduced because Google will be aware that if it breaches FRAND commitments, by either refusing to offer a cash-only option or by making that offer on non-FRAND terms, it could be in breach of Motorola Mobility's FRAND obligations and in any event potentially subject to proceedings under Article 102 TFEU and/or court proceedings."

Just to be clear, the passage "refusing to offer a cash-only option" covers the first two of the three types of misconduct I stated. It makes clear that there's an obligation to make an offer (upon request), and additionally indicates that a would-be licensee has the right to request such an offer on a cash-only basis.

Under Orange-Book-Standard, not even one of those three types of misconduct would prevent a patent holder from obtaining injunctive relief. The Orange-Book-Standard test is limited to whether the patent holder refuses to accept an offer made by the would-be licensee. The three aforementioned scenarios could play a role under Orange-Book-Standard only in indirect ways. For example, if an implementer of a standard makes an offer on a cash-only basis, the patent holder couldn't refuse it (at least I'm not aware of any case in which it was allowed to) just on the basis of the offer being "cash-only". But if you read the above quote from the Commission document again closely, it certainly goes beyond Orange-Book-Standard. It's a pretty clearly-worded expectation that patent holders make offers if so requested, that they make such offers on cash-only terms if so requested, and that all of their offers be on FRAND terms (and never outside of the FRAND ballpark).

There are additional indications of the Commission's stance being that SEP holders have an obligation to offer licenses (as opposed to an obligation not to refuse offers from license-seekers), such as item (iii) in paragraph 55:

"55. FRAND commitments essentially oblige SEP owners: (i) to make the patent in question available to all interested third parties; (ii) not to discriminate between different licensees; and (iii) to offer a licence to the patent on fair and reasonable terms. [...]"

Narrower focus: entitlement to injunctive relief

In response to the foregoing, one might argue that Orange-Book-Standard exclusively addresses the question of when a FRAND defense can defeat a request for injunctive relief, as opposed to defining what kinds of conduct could give rise to claims under antitrust law. It would be conceivable, in principle, that a company's FRAND defense does not prevent a patent holder from winning an injunction (if the court thinks that, in case of doubt, the interests of patent holders have priority) but that the same implementer of a standard could succeed with an antitrust lawsuit seeking damages for a violation of competition rules.

Guideline (b) preceding the redacted version of the Orange-Book-Standard ruling supports a broader interpretation because it says that "the patent holder acts abusively only if [...]" (as opposed to saying "the patent holder loses his entitlement to injunctive relief only if [...]"). I am sure that any patent holder facing an antitrust abuse claim would point to that kind of wording. However, I do not wish to take a final position here prior to further research on the scope of Orange-Book-Standard. Let's assume, just for the sake of the argument, that Orange-Book-Standard must be appied narrowly to the question of injunctive relief. Even if one comes from that assumption, the Commission decision on "Googlorola" provides several indications that Brussels believes the enforcement or pursuit or even just the threat of an injunction can get owners of standard-essential patents in trouble. A couple of examples:

"132. Second, the Commission considers that any incentive that Google would have to use Motorola Mobility's SEPs to significantly impede effective competition is diminished because of the Commission's policy with respect to FRAND commitments, in particular its competition concerns with respect to the use of injunctions by holders of SEPs under Article 102 TFEU. [...] In addition, the Commission's vigilance with respect to the potential anti-competitive use of injunctions is demonstrated by the recent initiation of proceedings against Samsung. Given this context, the Commission considers that Google's incentives to use the threat of injunctions to forcibly extract cross-licences from good faith licensees are most likely be constrained by the prospect of an investigation based on Article 102 TFEU."

Article 102 TFEU is the antitrust abuse paragraph of EU law. What I just quoted doesn't say that any use of injunctions based on SEPs is necessarily illegal (though I personally believe that would be a good rule), but it points out that at least some use of injunctions can constitute a violation of EU antitrust law. The passage I just quoted has a narrow context: it's all about the forcible extraction of cross-licenses under the threat of injunctions. That is part of the three scenarios of abusive in connection with offers that I discussed further above. In particular, the refusal to offer a cash-only option is precisely what paragraph 132 refers to as "forcibly extract[ing] cross-licenses".

Paragraph 135 again describes as a "significantly imped[ing] effective competition" the behavior of "forcing licensees to grant cross-licences under the threat of injunctions". The phrase "to significantly impede effective competition" is key terminology under EU merger guidelines.

On the surface, Paragraph 140 appears to be more sympathetic to an option that implementers of standards have under Orange-Book-Standard: they can make an offer to take a license on FRAND terms, leaving the determination of a FRAND royalty rate to a court if the parties fail to agree (which disagreement is foreseeable in some cases):

"140. In any case, the problem of a SEP holder not making a 'true' FRAND offer can be prevented if a potential licensee has the opportunity to have the terms of the cash-only option licence assessed by an independent third party (whether a court or arbitrator) without the threat of immediately being excluded from the market. Once an independent third party has assured that a licence compliant with FRAND obligations is indeed available, a potential licensee is no longer forced to accept a cross-licence on terms which it would not have otherwise accepted in order not to risk an injunction. Without such a possibility, FRAND negotiations may be distorted to the detriment of potential licensees and ultimately consumers who might be faced with less choice and innovation."

However, that paragraph doesn't say that patent holders are allowed to make overreaching demands. It merely addresses a way for would-be licensees to address the problem, and paragraph 144 then points out that EU law may be more demanding on SEP holders than Google's proposed Orange-Book-Standard approach:

"144. Whilst Google's interpretation of FRAND as outlined in its letter to the SSOs is not necessarily in line with the way the Commission considers FRAND should be interpreted in accordance with Article 102 TFEU (and should therefore not deemed to be approved by the Commission by means of this decision), it gives potential licensees a certain degree of protection and ability to contest the FRAND nature of royalty level before competent courts. It is notable that Google's interpretation of FRAND is largely in line with the
current case-law of the German civil courts."

Of all references to Orange-Book-Standard in the Commission decision on "Googlorola", that one is, relatively speaking, the most "Orange-Book-friendly" one, and even that one expresses potential doubt about the conformity of Google's position, which was simply derived from Orange-Book-Standard, with EU law.

For the diplomatic reason I outlined further above, the Commission decision steers clear of stating an outright disagreement with Orange-Book-Standard:

"158. [...] The German case-law sets out certain criteria for a competition law defence in the context of infringement proceedings with regard to SEPs (the so-called Orange Book criteria). For the purposes of this decision it can be left open whether Article 102 TFEU further restricts the possibility of the holder of SEPs in seeking and enforcing injunctions."

In a similar way, paragraph 113 states that "depending on the national court in question, an injunction may be granted without a detailed examination of whether FRAND and Article 102 TFEU have been respected". While Germany isn't mentioned explicitly there, it's the only EU member states in which MMI is currently pursuing injunctions based on SEPs.

But all of that diplomatic, purposely vague language cannot hide the fact that the European Commission wants negotiations (under FRAND rules) to take place before injunctions are sought, and that is a fundamental difference between the Commission's stance and the thrust of Orange-Book-Standard:

"106. [...] In the event licensing discussions fail, the SEP holder may ultimately take its counterparty to court and seek an injunction."

That sentence makes failed licensing discussions a prerequisite for the legitimacy of an effort to pursue injunctive relief.

Paragraph 126 has two sentences. The first one says that injunctions based on SEPs can be above board. But the second one reminds SEP holders of their duty to negotiate in good faith on FRAND terms:

"126. Furthermore, the seeking or enforcement of injunctions on the basis of SEPs is also not, of itself, anti-competitive. In particular, and depending on the circumstances, it may be legitimate for the holder of SEPs to seek an injunction against a potential licensee which is not willing to negotiate in good faith on FRAND terms."

In a strictly grammatical sense, the second sentence requires only the implementer of a standard, not the SEP holder, "to negotiate in good faith on FRAND terms", but since good-faith negotiations on FRAND terms are a two-way kind of interaction, there can be no doubt (especially in light of some of the other statements I quoted) that the Commission doesn't intend to hold SEP owners to any lesser standard. And Orange-Book-Standard would be a considerably lesser standard, though the Commission is too polite to criticize the Federal Court of Justice of Germany (or lower German courts that push the envelope even further in the wrong direction).

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