Tuesday, January 8, 2013

DoJ/USPTO position paper on FRAND SEP remedies muddies the water

I just saw this joint policy paper by the United States Department of Justice and the United States Patent and Trademark Office on "remedies for standards-essential patents subject to voluntary F/RAND commmitments", and while there are some passages in it that I like, I think these two government agencies should have refrained from stating a position at all if for whatever political considerations they weren't able to come up with something that contributes to clarity.

The proposed FTC-Google agreement lacks the absolute clarity of the mid-November FTC-Bosch deal, but if interpreted reasonably it can help solve or alleviate certain problems. By contrast, the DoJ/USPTO paper is going to be part of the problem and not part of the solution.

While the FTC-Google agreement is in many (though not in all) respects consistent with Judge Posner's thinking on FRAND SEP injunctions, the DoJ/USPTO paper is, in terms of the effect that the proposed policies would have if adopted by courts and the ITC, downright antithetical to Judge Posner's stance. The biggest problem I have with the DoJ/USPTO paper is this passage:

"For example, if a putative licensee refuses to pay what has been determined to be a F/RAND royalty, or refuses to engage in a negotiation to determine F/RAND terms, an exclusion order could be appropriate. Such a refusal could take the form of a constructive refusal to negotiate, such as by insisting on terms clearly outside the bounds of what could reasonably be considered to be F/RAND terms in an attempt to evade the putative licensee's obligation to fairly compensate the patent holder. [...] This list is not an exhaustive one."

This is a totally open-ended loophole. The part on a "constructive refusal to negotiate" would be a huge loophole all by itself; the addition that the list is "not an exhaustive one" means that the DoJ and the USPTO aren't serious about curbing SEP abuse. They claim to be "concerned about the potential impact of exclusion orders on 'competitive conditions in the United States' and 'United States consumers' in some cases involving F/RAND-encumbered patents that are essential to a standard, and the conditions under which they may be denied", but they want to keep the door open to SEP-based injunctions. Anyone who understands the practical implications of FRAND SEP litigation just needs to see the paragraph above to understand that the DoJ/USPTO paper is, if evaluated with an effects-based approach, supportive of SEP abuse. Simply put, no SEP holder is going to be hard-pressed to come up with all sorts of theories to claim that an implementer refuses to engage in negotiation by insisting on unacceptable terms. An SEP holder wouldn't sue in the first place if he considered the implementer's proposed license fees acceptable.

Let's compare this to Judge Posner's much better approach:

"Motorola counters that Apple's refusal to negotiate with it after rejecting its initial offer of a 2.25 percent royalty warrants injunctive relief; by opting not to take a license ex ante, it argues, Apple should lose the FRAND safe harbor. But Apple's refusal to negotiate for a license (if it did refuse—the parties offer competing accounts, unnecessary for me to resolve, of why negotiations broke down) was not a defense to a claim by Motorola for a FRAND royalty. If Apple said no to 2.25 percent, it ran the risk of being ordered by a court to pay an equal or even higher royalty rate, but that is not the same thing as Motorola's being excused from no longer having to comply with its FRAND obligations. Motorola agreed to license its standards-essential patents on FRAND terms as a quid pro quo for their being declared essential to the standard. FTC Statement on the Public Interest, supra, at 2. It does not claim to have conditioned agreement on prospective licensees’ making counteroffers in license negotiations."

A world of difference: Judge Posner says that an injunction is inappropriate even if a defendant makes no counteroffer at all, given that a FRAND pledge is not conditioned on such behavior. The DoJ/USPTO paper says that a "constructive refusal to negotiate" justifies injunctions, and its definition of such a refusal knows no boundaries, citing as only one loophole the possibility of a counterproposal being too low in the patent holder's opinion.

One key element of Judge Posner's holdings that not only the DoJ/USPTO paper but also the proposed FTC-Google agreement don't adopt is the following:

"Motorola argues further that deprived of the possibility of injunctive relief, it will not be able to extract a reasonable royalty from Apple. Suppose, hypothetically, that the maximum reasonable FRAND royalty would be $10 million. If Motorola therefore demanded such a royalty, Apple, knowing that litigation is costly, would refuse, and Motorola would accept a lesser amount. Of course litigation would also be costly for Apple, and this might induce it to pay the $10 million rather than fight. But the deeper objection to Motorola’s argument is that the 'American rule,' which with immaterial exceptions makes the winning party in a litigation bear his litigation costs rather than being able to shift them to the loser, does not deem damages an inadequate remedy just because, unless backed by a threat of injunction, it may induce a settlement for less than the damages rightly sought by the plaintiff. You can't obtain an injunction for a simple breach of contract on the ground that you need the injunction to pressure the defendant to settle your damages claim on terms more advantageous to you than if there were no such pressure."

In the above paragraph, Judge Posner effectively said that the unavailability of injunctive relief (which by definition includes ITC exclusion orders) is a non-issue because the patent holder can sue for damages. As the paragraph quoted further above stated, an implementer who refuses to accede to a royalty demand runs the risk of a court possibly ordering a greater amount -- but even if we forget about this for the sake of the argument, and furthermore ignore that avoiding litigation is also an incentive to take a license, monetary compensation in the form of a damages award isn't inadequate only because the threat of injunctive relief will enable the patent holder to collect more money than otherwise.

If the FTC agreed with Judge Posner on this, it would not allow injunctions based on whether and how a defendant negotiates. But the FTC at least made an effort to define what an implementer needs to do to document a willingness to take a license on terms determined by a court of law or an arbitration tribunal. The DoJ/USPTO paper is a policy paper, not a contract; but in a context like this, where the problem can only be solved by removing the credible threat of injunctive relief over SEPs, a policy paper needs to be just as clear as a well-written contract if it's supposed to be useful and to protect competitive conditions and consumers.

I'm aware of the fact that the ITC's patent enforcement actions are governed by Section 337, and Judge Posner's ruling came down in federal court. Still, it would be possible for the ITC to adopt Judge Posner's common-sense approach to FRAND SEPs. The DoJ/USPTO proposal is the epitome of legal uncertainty. I'm thoroughly disappointed, and I don't know if parties to future patent purchases (especially if the patents involved aren't even standard-essential) will accept to be held by the DoJ to any higher standard than the one outlined in this paper...

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