Friday, January 4, 2013

Comparison of the FTC's standard-essential patent agreements with Google and Bosch

There's still an intense debate over yesterday's FTC-Google settlement. In my first reaction and my subsequent explanation of the mechanics of the patent part of the deal, I focused on the implications of the agreement for Google's (Motorola's) ongoing disputes with Apple and Microsoft, and to a lesser degree on related cases such as Samsung's pursuit of injunctive relief against Apple, but not at all on the question of whether the FTC should have done more. However, in light of ongoing processes in other jurisdictions, particularly Europe, there will be some more talk about whether the framework the FTC agreed upon with Google is a useful blueprint for FRAND abuse prevention.

Settlements are always a suboptimal way to set the record straight on an issue of transcendental importance. They are legally binding with respect to only the issues settled and have merely persuasive impact on similar cases (in addition to indicating to third parties what kinds of commitments they may have to make at some point in order to avoid an antitrust proceeding). Consent means no appeal, but an order by a regulator that is upheld by an appeals court becomes a formal precedent. The risk to the regulator is that the decision may be reversed or vacated in whole or in part -- but to the extent the regulator prevails, a decision that survived an appeal has broader impact.

The European Commission issued a Statement of Objections (SO) against Samsung irrespectively of Samsung's unilateral withdrawal of its European SEP-based injunction requests. As a result, Samsung may be fined for its past conduct. In that event, if Samsung appeals the decision and an EU court upholds the decision, there will be a Europe-wide effect on the case law. If Samsung accepted a fine without an appeal, the EU decision would still be more influential than a mere settlement. With or without an appeal, but provided that there's a ruling and not just an agreement, the European Commission could achieve some harmonization of national rules (particularly with a view to the German Orange-Book-Standard framework). National courts would take note of any settlements but wouldn't really have to change their own approach unless they want to, while they can't ignore EU-level decisions.

Still, settlements are important signals to the market, and the strongest signals are the ones that are easiest to decipher. After I read the FTC-Google consent order for the first time, I knew what kinds of steps Google and a potential licensee could take, but it still wasn't clear to me at which point a given party would have to take a certain initiative in order to keep the door open or closed to the pursuit of injunctive relief. I had to re-read the document (29 pages including appendices) to get that message, and after reading it for a third time I finally felt I was able to summarize the stipulated mechanics, but still couldn't say with certainty that there are no loopholes (I did, however, acknowledge that a number of common loopholes appeared to have been closed). And I was actually in a privileged position to figure out the deal, having read each and every FRAND-related pleading in any pending actions involving Google's Motorola Mobility, Samsung and certain other players. By contrast, it took me only a couple of minutes (!) to fully understand the concise SEP-related part of the November 2012 FTC agreement with Bosch, despite the fact that I'm entirely unfamiliar with the field of air conditioning recovery, recycling and recharging (ACRRR) products and any litigation involving Bosch or SPX.

The SEP part of the FTC-Bosch SEP deal is easily explained: no SEP-based injunctions ever except ("if, and only if") one of three things applies -- an SEP is being used for purposes other than implementing the relevant standard, a defendant declares itself (in writing) unwilling to take a license or refuses to take a license on terms that "that have been determined to comply with the [FTC-Bosch deal] through a process agreed upon by both parties or through a court". This means that a defendant who uses those SEPs only for the implementation of a standard and isn't crazy enough to declare in writing a categorical unwillingness to take a license doesn't have an obligation to do anything in order to avoid injunctions other than take one on terms that a court (or, if the parties agree on arbitration, an arbitration tribunal) ultimately deems to be in line with FRAND.

In practical terms, this means that implementers don't face the risk of injunctions even if they completely ignore any legal letters from Bosch. All that Bosch can do is sue for FRAND royalties. That is, by the way, consistent with Judge Posner's approach.

Compared to that straightforward structure, the FTC-Google agreement is much more complex, and that complexity comes with potential risks. Implementers of standards might make formal mistakes or miss deadlines, and then the patent holder would be free to seek injunctions. Even if defendants act in good faith and try to do what the FTC expects them to do, Google could still try to argue that a requirement wasn't met, or that some exception applies. Microsoft points out one loophole in its reaction to the FTC-Google deal:

"Google can even continue to use its standard essential patents to fend off patent infringement actions against it: the proposed decree gives Google leeway to sue for an injunction on its standard essential patents if it takes the position that injunctive relief sought against it is based on a patent that is standard essential. Since it is often hard to tell which patents are standard essential, the risk of injunction lawsuits from Google may dissuade firms from seeking to enforce their non-standard essential patents against the company."

That strategy of invoking a defensive provision, possibly even in absurd cases only to create legal uncertainty, would not work for Bosch under its deal with the FTC.

I don't believe Google is going to successfully seek or enforce injunctive relief against Apple or Microsoft. Microsoft brought a FRAND contract lawsuit more than two years ago and is now just awaiting the district court's rate-setting decision. Apple may have temporarily overplayed its hand in a somewhat similar case, but it was willing to drop its somewhat arrogant "no more than $1 per unit" position in the context of reciprocity, and it still has all options to sort out any SEP issues with Google. But if the sole purpose of this exercise had been to protect Apple and Microsoft from Google's abusive conduct, the most efficient and, especially, most clear-cut solution would have been to have Google withdraw its pending SEP injunction requests against those companies and to promise not to bring any new ones. If the objective was to set a policy for SEP enforcement, then the straightforward agreement with Bosch has just been diluted by a convoluted set of rules -- a downgrade.

The length and complexity of the Google order suggests to me that the FTC was well aware of the various games that Google and some other SEP holders try to play, but that the regulator wasn't prepared to present Google with the choice between making an easy-to-understand, impossible-to-circumvent commitment and facing formal antitrust charges.

When discussing the work that the FTC did here, let's distinguish between "doing things right" and "doing the right things". At the level of "doing things right" in detail, I have a lot of respect for all the scenarios and possible loopholes the FTC took into consideration when drafting the order, though there may be some weaknesses (such as the possible loophole of Google saying that a non-SEP enforced by someone else is standard-essential, creating legal uncertainty about the availability of injunctive relief). But at the strategic level of "doing the right things", I'm unconvinced to say the least and hope that better solutions to the rampant problem of SEP abuse will be found elsewhere.

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