Wednesday, July 11, 2012

At Senate hearing, FTC and DoJ argue that import bans over FRAND patents must be an exception

Six United States senators recently wrote to the ITC to express concern over Motorola Mobility's pursuit of ITC import bans over standard-essential patents -- and not just over what the Google subsidiary is doing but over the wider issue. Today the Judiciary Committee of the Senate held a one-hour hearing on this topic, which drew "an amazing amount of interest" according to its chairman, Senator Patrick Leahy (D-Vt.), one of the sponsors of last year's patent reform bill, also known as the Leahy-Smith America Invents Act.

I watched the live webcast and would like to share a few observations and takeaways.

The witnesses at the hearing, entitled "Oversight of the Impact on Competition of Exclusion Orders to Enforce Standard-Essential Patents", were Joseph Wayland, Acting Assistant Attorney General (Department of Justice), and Commissioner Edith Ramirez of the Federal Trade Commission. Questions came from Chairman Leahy, Senator Chuck Grassley from Iowa (the Ranking Member, i.e., the leader of the Republican members of the committee), Senator Chris Coons (D-Del.), whose children love the Xbox, and Senator Mike Lee (R.-Utah), an antitrust expert.

There was consensus among the senators who spoke and the witnesses that abusive enforcement of SEPs can harm competition and innovation and, as a result, consumers. While everyone agreed that intellectual property enforcement is key to the innovation economy, nobody doubted that SEPs, especially after a FRAND promise has been made, raise unique issues when it comes to exclusion orders.

There was unanimity among all speakers who touched on this subject (and all of them did in one way or another) that the appropriate FRAND royalty rate is based on the value of a given patent before the technique is covered becomes a mandatory part of a standard. Prior to inclusion in a standard, a patent can generally be worked around. There are many ways to encrypt data, compress data, assign bandwidth to multiple clients in a client-server environment, etc. -- but if a standard prescribes only one particular solution, then the holder of a patent on the mandatory technique gets undue leverage over implementers. Nobody argued that the value of SEPs is in any way related to the value of standard-setting itself or, as some SEP holders like to argue in court, to the opportunity that an implementer finds in a market that would be inaccessible without implementing the relevant standard.

Senator Lee tentatively suggested the possibility of making it a rule that ITC import bans should be unavailable with respect to SEPs. He didn't say that there should or would be a legislative initiative, but my interpretation of his related questions is that he would see significant benefits (in terms of maximum clarity). That's also what I concluded from the aforementioned letter (of which he was a lead signatory). Of all the speakers today, Senator Lee definitely most clearly aligned with Judge Posner's position on injunctive relief over SEPs.

The FTC and the DoJ stopped slightly short of what Judge Posner ruled and what Senator Lee suggested. Both of them certainly made clear that import bans over SEPs should be unavailable in most cases involving SEPs. But they left the door open to exceptional circumstances in which exclusion orders might be warranted. When the senators tried to find out what kinds of scenarios they meant, two possibilities were mentioned:

  1. cases in which a patent holder wouldn't be able to sue an infringer for damages in federal court for lack of jurisdiction but the entry of infringing goods into the market must be stopped somehow; and

  2. scenarios in which an implementer behaves unreasonably in totally unspecified ways.

The first scenario makes sense to me from a rule-of-law point of view, and I believe it's not at all inconsistent with Judge Posner's stance. The second scenario, however, is a huge loophole. As long as that loophole exists, SEP abusers are always going to claim that their particular case represents an exceptional case in which an import ban should be ordered. In fact, Samsung and Motorola Mobility make that claim, even though the only thing that's exceptional about their cases is the outrageousness of their royalty demands.

For reasons of interinstitutional diplomacy and deference, the FTC and the DoJ probably don't want to take the position that another government agency should be stripped of jurisdiction over an entire category of cases, just like they wouldn't like the ITC to argue that the FTC or the DoJ should lose their responsibility for certain cases. In the short term, both the DoJ and the FTC appear to be glad that the ITC asked a number of FRAND-related questions in its review notice in the Motorola/Apple case. And they're very well aware of the fact that the mere threat of an exclusion order will often result in license agreements on terms that are far more favorable to patent holders than a FRAND rate. Anyway, it's not the FTC's or the DoJ's task to set or change the rules for the ITC. That's the prerogative of lawmakers, and in the Senate the discussion has apparently just started. This could be the beginning of a process that might bring about meaningful change.

All of the senators asked very good questions, but in my opinion Senator Lee asked the best one of all of them. He wanted to know whether there would be any concern over making exclusion orders unavailable when SEPs are involved as long as patent holders can seek monetary compensation in district court. And the witnesses couldn't -- and didn't even try to -- argue that this type of remedy (damages) would be insufficient when SEPs are involved, given that those must be licensed on FRAND terms and are inherently non-exclusive. In that light, only the first scenario -- the one in which there is no other way to prevent the importation of infringing products due to lack of jurisdiction over an infringer -- could be used as an argument for keeping the door open to such exclusion orders. But this kind of scenario could be an explicit and clear-cut carve-out from a general rule that exclusion orders over SEPs should never issue. The witnesses didn't state any particular reason for which the second scenario (in which the patent holder claims that the implementer alleged of infringement acted extremely unreasonably) would justify import bans.

For now, it's good to know that the FRAND abuse issue already has such high-level attention on Capitol Hill. I wish the German Bundestag could also pay attention to this problem. It may happen at some point.

[Update] Here's the FTC's official statement on its testimony at today's hearing. And here's Senator Leahy's statement. [/Update]

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: