Wednesday, October 10, 2012

UN agency's roundtable on wireless patent litigation reflects deep divisions in industry

Today the International Telecommunication Union (ITU), a UN agency that co-developed (for one example) the H.264 video codec standard, is holding a "patent roundtable" to discuss the implications of widespread patent litigation in the wireless devices industry. Three months ago I blogged about the announcement of this roundtable.

You can find some stakeholders' positions in their contributions published on this page. This morning I had the opportunity to follow over the Internet the first two of four sessions. I won't have access to the afternoon sessions. In my reporting on the morning talks, I am bound by the Chatham House Rule, so I can quote only without identifying speakers. This restrictive rule was unnecessary since none of the speakers voiced any positions on which his organization wouldn't have been on the record before. (I hereby waive my rights to anonymity under the Chatham rule with respect to the fact that one speaker mentioned me on a slide when he used a quote freely adapted from a recent blog post on Samsung having been a "good citizen" of the standard-setting universe).

While Chatham makes it difficult to cover the event in a comprehensive and useful way, I do wish to share some general observations here. Clearly, the industry is deeply divided over the issue of SEP enforcement. Against this background, it speaks to the ITU's influence that it managed to bring players like Apple on the FRAND-friendly side and the opponents of reasonably meaningful interpretations of FRAND pledges, above all (though not exclusively) Google's Motorola Mobility, together for a day. Attendees also include competition regulators and patent offices from different continents.

The two key issues are injunctive relief over SEPs and the question of an appropriate royalty base. Regulators are genuinely concerned, and they are taking action and slowly but surely stepping up the pressure. Today's New York Times reports on "widening scrutiny" of Google's use of Motorola's SEPs by the Federal Trade Commission of the United States. The European Commission has three SEP abuse investigations going (one involving Samsung, two involving Motorola Mobility). South Korea's Fair Trade Commission is investigating its local hero, Samsung. While these investigations are in progress, regulators are reluctant to take definitive positions on some of the key issues. And it became clear today that they still hope that the companies involved will strike agreements that render antitrust penalties unnecessary. Finally, there are organizations defending the interests of the patent system who on the one hand realize that the current SEP mess is a threat to the credibility of the IP regime as a whole (even though SEPs are only a minority of all patents) but on the other hand don't want to weaken the enforceability of patents if they can avoid it.

The two key issues I mentioned above -- injunctive relief and royalty base -- are pretty binary in nature. While a "no injunction" policy could have limited exceptions, such as the enforcement of injunctions after a company refuses to pay a court-determined royalty rate or the pursuit of import bans if infringing goods originate from unidentifiable sources, there's no way that any serious improvement over the status quo can be achieved as long as there's a huge loophole of arguing that injunctions must be available against those who are not "willing licensees". None of the speakers said that injunctions based on SEPs should be available under all circumstances -- there would be no support for that proposition. Still, certain stakeholders wish to use their SEPs not only for rent-seeking but even more so to extort cross-licenses involving non-standard-essential patents, and in order to have this opportunity (to the detriment of competition and innovation), they argue that they should be allowed to be a little bit pregnant.

The fact that some notorious abusers get support for their cause from companies that are actually pretty reasonable in their SEP enforcement doesn't change anything about the need to bar bad-faith players from engaging in hold-up. You can't set rules coming from the assumption that everyone will adhere to them in reasonable ways. The rules must have teeth because sooner or later someone will breach them. And the only way in which hold-up, which one regulator accurately defined as seeking compensation in excess of a FRAND rate at the threat of an injunction, can be effectively prevented is to remove the threat of an injunction except under clearly identifiable circumstances. The only solution to the hold-up problem is a very high degree of legal certainty. Unspecified distinctions between the willing and the unwilling just aren't helpful at all.

When watching or reporting on an event like today, it's always important to think about important stakeholders who did not attend. For example, no consumer organization spoke out, at least not during the part I had access to. And there are presumably many companies in the industry who are concerned about the hold-up problem but stayed away from today's meeting because they decide to spend more time on problems they face today than on an issue that could cause even bigger problems tomorrow. This is not the ITU's fault: the event was as open and inclusive as it could be. But I believe there's a silent majority of stakeholders who oppose injunctive relief over FRAND-pledged SEPs, yet don't have as much of a motivation, and in some cases may simply lack the resources, to voice their positions the way certain FRAND abusers and rent-seekers do. As a result, the number of speakers taking a particular position at a given event isn't necessarily representative.

With regulators hoping that industry will work it all out (though they'll act if that hope fades), standard-setting organizations seeing a rift within their membership and the patent system being torn between concerns over the reputation of the system and the enforceability of the intellectual property rights it grants every day, litigation continues unabatedly, requiring the courts to resolve the pending and steadily-progressing disputes with the means at their disposal.

For a long time, standard-setting has been extremely consensus-oriented, with decisions usually being reached unanimously even after heated debates over the right way forward. But the stakes are too high this time around. This is about the rules under which some of the most deep-pocketed companies in history are fighting for market share in a rapidly-converging high-tech industry, in which hardware, software and services of different kinds are all part of one market as opposed to separate industries. A company like Apple can't allow others to abuse SEPs in order to force Apple to relinquish its crown jewels in the form of comprehensive cross-license agreements involving SEPs and non-SEPs on terms that don't meet Apple's strategic needs. At the same time, Google wants to get away with Android's proven wide-ranging infringement of third-party rights, and it either wants to get so much leverage out of Motorola's SEPs that it can solve the problem through a cross-license on favorable terms or it wants to at least create a situation in which non-SEPs are subjected to pretty much the same enforcement restrictions as SEPs. Either way, Google could neutralize Apple's patents. They can meet at a dozen roundtables and still won't agree. Those are just two of the companies involved, but their diametrically-opposed strategic interests show that even the most skilled dealmakers wouldn't be able to broker an agreement.

Consensus won't resolve this fundamental conflict. All of these companies just do what they believe is best for their shareholders. The courts and the regulators have to apply the law with a view to overarching policy goals. It wouldn't make sense to base any decisions on one's vision for the smartphone industry -- standards are relevant beyond this one field. One of the speakers told the story of how sun time had to be replaced with standardized time in order to have reliable railroad schedules. The following was not said by the aforementioned speaker, but just imagine for a moment what would have happened if the owners of essential patents had been able to prevent their rivals from measuring, communicating and processing standardized time. With such non-smartphone standardization issues in mind, it's not hard to see that the positions advocated by Apple in a letter to ETSI last year and indirectly endorsed by Judge Posner this year are, for overarching reasons, in the public interest, regardless of whether one agrees with Apple's enforcement of non-standard-essential patents against its Android rivals.

Even if it's impossible to find common ground, meetings like today's ITU roundtable serve various useful purposes. The quality of the presentations I saw was really high. But a roundtable is not a substitute for the court decisions that will have to come down in the months and years ahead, or for decisive regulatory action. While I was watching the debate, I was thinking that some of the participants may recycle parts of today's manuscripts and slide decks further down the road if, for example, the European Commission conducts hearings on some of the pending SEP antitrust cases. If it gets to that point, a decision in favor of one position or another will come down. There were no winners or losers today because they all contributed to a timely, well-organized and informative event. In a way, today's winner was the ITU.

[Update] At the press conference it was explained that a working group is going to have a number of informal meetings ("they can meet as often as they need") over the next 12 months or so to develop proposals. The contentious nature of SEP injunctions and the "R" in FRAND was confirmed, but the ITU considers itself uniquely positioned, thanks to its vast experience in resolving global issues, to provide a forum in which a constructive exchange of thoughts may lead to a compromise. That said, I still believe that judicial and regulatory decisions will be needed. [/Update]

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