Last week I wrote about the "defensive use" provision in the proposed FTC-Google patent antitrust deal having been identified as the primary area of concern. In the meantime I have seen some filings by Ericsson and Samsung with the United States International Trade Commission (USITC, or just ITC) that underline the urgent need for the FTC to recognize the most pressing problem with its envisioned Google (Motorola Mobility) standard-essential patent agreement.
It's the normal course of business that concerns are raised by different stakeholders and observers during the 30-day public comment period following a proposal for an antitrust settlement. The exceptional situation here is that the proposed deal structure has already demonstrably failed during that period. If it worked, Samsung and Ericsson would now be leveraging it against each other's SEP-based requests for sales and import bans, but they can't, mostly because of the "defensive use" provision.
The tit-for-tat between Ericsson and Samsung, partly over SEPs and partly over non-SEPs on both sides, reinforces my belief that the pursuit and enforcement of injunctive relief (such as in the form of ITC-ordered import bans) must not be legitimated by a quid pro quo reasoning. The FTC itself stressed in the overall Google settlement context that its task is to protect consumers, not competitors, but it reduces that mission statement to absurdity by allowing SEP abuse if it provides a party with more retaliatory power and potentially results in mutually assured destruction. The way to avoid consumer harm is to prevent bans, not to allow them for the purpose of (seemingly) equal fighting chances for competitors. Disallowing bans altogether already does the job of ensuring equal fighting chances, but it does not prioritize this objective over the interests of consumers.
Ericsson and Samsung each claim to have complied with FRAND, and that the other has not. Both are seeking U.S. import bans: Ericsson against (among other things) the market-leading smartphones (and leading alternatives to Apple's iPad in the tablet computer market), and Samsung, in retaliation, against some of the cellular base stations that carriers operating and expanding 4G networks desperately need. Under the FTC-Google deal logic, they could now both go ahead and win and enforce such bans because either one can claim that this is "defensive use" and only done for the purpose of equal fire power. If they both succeeded, U.S. consumers would no longer be able to buy smartphones from the market leader and tablet computers from the number one challenger to the incumbent (which might lead Apple to raise its prices), and those waiting for 4G coverage in their area would have to wait even longer, or might see coverage removed from their location to another as a result of shortage of supply, and 4G subscription fees might increase if Ericsson's competitors raise their prices and carriers pass those increases on to consumers.
It gets even worse: the accused products include components from other companies that hold SEPs. For example, many of Samsung's accused devices run Google's Android, which would potentially enable Google, under the envisioned FTC deal, to assert Motorola Mobility's SEPs against Ericsson, arguing that Ericsson's assertions of declared or alleged SEPs somehow affect/target Google's software or services distributed by Samsung (the proposed deal does not require Ericsson to sue Google directly because SEP enforcement against third-party products including Google's software or services would be sufficient to trigger the "defensive use" provision). Likewise, some of Ericsson's suppliers might then feel free to seek sales bans against Samsung's over their SEPs. How "defensive" is that?
I strongly encourage anyone interested in the FTC-Google deal to download some of Ericsson and Samsung's filings. I'll quote certain passages now, in chronological order. I'm just quoting and don't have an opinion at this stage on who's right here, though Samsung's track record, because of the dispute with Apple that triggered still-ongoing antitrust investigations on three continents and resulted in a preliminary ruling by the European Commission, is definitely worse than Ericsson's in this regard, for the time being. All that matters it that both allege SEP abuse and seek injunctions, which could have the effects described above. Another concern (than "defensive use") relating to the FTC-Google deal is also worth keeping in mind: each party claims to be a willing licensee (and licensor) while it says the other is not. Let's start with a November 27, 2012 complaint filed by Ericsson in the Eastern District of Texas (case no. 6:12-cv-00894), raising FRAND contract issues (you can skip right to the last paragraph quoted, paragraph 10, to get the summary):
"7. Ericsson has extended multiple offers to Samsung to renew the license on FRAND terms during the past two years of negotiations between the parties. These negotiations have been unsuccessful for the simple reason that Samsung refuses to pay the FRAND rate paid by its competitors for Ericsson's standard-essential patents. Instead, Samsung demands Ericsson renew its license at a rate that is a small fraction of the rate other similarly situated companies pay Ericsson. Samsung's refusal to pay a FRAND rate gives it an unfair competitive advantage over its competitors who have licensed Ericsson's patents.
8. Samsung has a history of manipulating its position on the amount of a FRAND rate depending on whether it finds itself as the licensor or licensee in a particular negotiation. The most recent example occurred when Samsung asserted its own patents, which it alleged were standard-essential against Apple. At the trial of that matter in the United States District Court for the Northern District of California, Samsung asserted all companies implementing a standard in its products must seek out and accept a license on FRAND terms. Yet, when the tables are turned and Samsung finds itself in the position of being the prospective licensee, it now refuses to license Ericsson's standard-essential portfolio at FRAND rates.
9. [...] Despite Ericsson's best efforts to negotiate a license, including many alternative FRAND royalty structures and frameworks that Ericsson offered to Samsung, Samsung refuses to renew its license or to cease infringing.
10. Even more egregiously, Samsung has refused to provide Ericsson a license to its allegedly standard-essential patents on FRAND terms. Upon information and belief, Samsung refuses to license Ericsson under any declared standard-essential patents that it owns in an effort to compel Ericsson to license its patent portfolio at a small fraction of the rates that its competitors pay. This position violates Samsung's FRAND commitment."
So Ericsson's saying that Samsung doesn't want to pay what Ericsson believes it's entitled to because the market at large allegedly accepted its rates, and in order to avoid paying what it should in Ericsson's opinion, Samsung makes its own SEPs unreasonably expensive, hoping that ultimately the differential it will have to pay in recognition of Ericsson's stronger cellular portfolio will be minimal.
Ericsson is also saying that infringement by such an unwilling licensee must come to an end, in an attempt to justify its prayer for injunctive relief in federal court and its request for an ITC-ordered U.S. import ban.
On December 14, 2012, Samsung filed a pre-institution public interest statement aiming ideally to dissuade the ITC from even investigating Ericsson's complaint (that part did not work out) or at least to persuade it to keep the door wide open to the denial of an import ban on public interest grounds (that part is still possible). Since Samsung is presently trying to win a U.S. import ban (as well as injunctions in federal court) against Apple over SEPs, it obviously didn't put FRAND concerns front and center, but it's remarkable enough that it mentioned them at all:
"Finally, consumers and competitive conditions in the U.S. economy would be adversely affected by an exclusion order in this instance because the record will demonstrate that Ericsson has failed to discharge its FRAND obligations for the purportedly standards essential patents asserted in its complaint."
A week later, Samsung brought its own ITC complaint, partly based on 4G SEPs, against Ericsson. Ericsson, like Samsung, would also prefer for the complaint not to be investigated (I'm pretty sure that an investigation will start in a matter of days now) or at least for the related public interest concerns to bear maximum weight. But since Ericsson just started to enforce SEPs, it obviously can't take a pro-FRAND position of the kind that Apple and Microsoft, who made unequivocal commitments not to do this, have recently taken. Still, even Ericsson argues in a public interest statement filed on January 10, 2013 that U.S. consumers are hurt by FRAND SEP abuse:
"D. The requested remedial relief would have a significant impact on United States customers.
Samsung is a member of ETSI, and has agreed to abide by ETSI rules and bylaws, including offering patent licenses to its standards-essential patents on fair, reasonable, and nondiscriminatory (FRAND) terms. However, despite repeated requests from Ericsson and after years of negotiations, Samsung is seeking remedial relief without offering Ericsson a license on fair, reasonable, and non-discriminatory terms in breach of its obligations. In this situation, issuance of the proposed remedial order will magnify the effect of Samsung's breach of its contractual commitments by limiting U.S. network operators' choice for base station equipment and restricting the performance and growth of cellular networks for cellular subscribers in the United States."
Four days later, Samsung replied:
"II. Samsung has fully complied with its obligations to license its patents under FRAND terms and thus relief under Section 337 is available.
Ericsson's allegations regarding Samsung's failure to comply with its FRAND obligations are without basis. Ericsson, not Samsung, broke off license negotiations in favor of filing multiple patent infringement actions seeking injunctive relief for patents alleged to be essential for standards. Ericsson here seeks to use litigation to coerce unfair license terms on Samsung, far in excess of the terms of the prior two licenses between the parties and inconsistent with Ericsson's own FRAND obligations.
Samsung has at all times been in full compliance with its obligations to the relevant standards bodies, including good faith license negotiations with Ericsson. By contrast, Ericsson has not complied with its FRAND obligations, choosing litigation over negotiation. Under these circumstances, even if one or more of Samsung's patents is found essential to any industry standard implemented in the accused products, Samsung's request for an exclusion order would nevertheless be entirely appropriate and consistent with Commission precedent."
What looks like childish bickering ("he did that!" -- "no, I didn't, HE did!") is a dead serious fight between professionals over billions of dollars (maybe on an annual basis, but at least in the aggregate of several years). My curiosity as to who is right may be satisfied if litigation brings the facts to light before the parties settle, which I'm sure they will at some point, most likely before a final ruling. But if I were a U.S. consumer, I would want them to resolve their dispute through FRAND rate-setting actions in federal court, and I would not want them to seek SEP-based bans of each other's products (and to provide a third party, such as Google in this case, with an excuse to pursue SEP-based bans).
The ITC doesn't have to apply the FTC-Google deal to its analysis of the Ericsson-Samsung situation, but as a matter of law it must take the FTC's input into account. Ericsson and Samsung don't have to honor the terms of a Google agreement in a formal sense, but what if there's further escalation between these two parties and, potentially, third parties who sell them components? In that case, the FTC may want to take action, but unless it drops the "defensive use" provision from the Google deal, it will be unable to go after Ericsson and/or Samsung without overtly applying double standards, allowing Google as a U.S. company with domestic political clout to engage in conduct that foreign (here, Swedish and Korean) companies would be barred from.
Not only the FTC but even Google itself should understand that the "defensive use" clause is a recipe for disaster.
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