Thursday, January 3, 2013

Explained: the mechanics of the FTC Google consent order on standard-essential patents

In my first reaction to the FTC's consent order on Google's assertion of standard-essential patents (SEPs) I already explained that "[s]imply put, someone who triggers a court action or arbitration to have the FRAND [fair, reasonable and non-discriminatory] terms set, and is willing to take a license on the final terms, should be on the safe side now". Now that I have had the opportunity to digest the full text of the consent order in detail, I can explain more specifically how it works.

This summary of the key terms is not meant to express an opinion on whether the FTC should have sanctioned Google for its past conduct (as opposed to settling on the basis of a consent order), and is entirely unrelated to the search engine case.

In terms of impact on other cases, the order is a consent decree: Google accepted it as part of a broader settlement. It nevertheless ups the ante for Samsung and various other SEP holders pursuing injunctive relief because it will bear considerable weight with U.S. courts and the ITC.

The order establishes a set of rules that limit Google's pursuit of SEP-based injunctive relief to a specific set of scenarios and, conversely, enable implementers of standards to fend off the threat of injunctive relief through behavior that meets certain criteria. While I haven't had enough time yet to think about any loopholes that may still exist, my impression so far is that the FTC has really thought this through and is aware of a number of tactics commonly employed by SEP abusers. Over the last couple of years I've been watching a certain pattern of companies making licensing offers on outrageous, totally unacceptable terms, knowing that no one in his right mind would accept them, only to then seek injunctive relief against an allegedly-unwilling licensee. In addition to making prohibitive demands they were also looking for other excuses for the pursuit of injunctions, such as arguing that someone who disputes that a given patent is valid or infringed (or that it is truly essential to a particular standard) somehow waives his entitlement to a FRAND license. The FTC undoubtedly wanted to put an end to these games, recognizing that the mere specter of a sales or import ban is sufficient to result in an agreement on non-FRAND terms and, consequently, distortions of competition as well as harm to consumers, who would face fewer choices and/or higher costs.

In my understanding, the FTC's approach is that there should be a window during which the parties can negotiate without the threat of an injunction hanging over the potential licensee, but if the parties can't reach an agreement, they should have a U.S. district court or an arbitration tribunal set the terms for them. Either way, the outcome will be a license agreement, and on the road to such an agreement there generally won't be any injunctions.

The agreement defines circumstances under which Google does remain free to seek and enforce injunctions:

  1. a potential licensee is outside the jurisdiction of the United States district courts;

  2. a potential licensee "has stated in writing or in sworn testimony that it will not license the FRAND Patent on any terms", which is a very extreme scenario and is explicitly not meant to be a loophole for seeking or enforcing injunctions against those who challenge the validity, value, actual infringement or standard-essentiality of a given patent (in this regard the FTC order is clearly more helpful to implementers of standards, and in my view more balanced, than the way certain German courts apply the Orange-Book-Standard decision to FRAND cases);

  3. a potential licensee refuses to enter into a license agreement on the terms set by a final court ruling or through binding arbitration; or

  4. a potential licensee fails to provide a written confirmation in response to a "FRAND Terms Letter" from Google, which is a mechanism enabling Google to ensure that the other party will also make its own patents essential to the relevant standards available on FRAND terms (reciprocity).

Assuming that none of these unusual circumstances applies, the FTC order defines a variety of criteria that must be met well ahead of any pursuit of injunctive relief:

  1. At least six months prior to the pursuit of injunctive relief, Google must provide the potential licensee with a copy of the consent order and an offer to license. The only acceptable condition for the offer to license is reciprocity, and that concept does not give Google the right to demand a license to non-SEPs (or other types of non-standard-essential intellectual property), or to patents that are essential to other standards. Google can always offer additional patents, but those parts of an offer would simply not fall within the scope of the consent order.

  2. At least 60 days prior to the pursuit of injunctive relief, Google must make an offer to arbitrate the terms of a license agreement. If the potential licensee also wants to go down the arbitration avenue, the consent order then defines certain rules for the related next steps.

If Google fails to do (1) or (2) or both, it can't pursue injunctions. It's furthermore precluded from the pursuit of injunctions if the potential licensee has filed a request for a FRAND determination no more than seven months after the offer to license or three months after the offer to arbitrate (whichever is later), unless such action is dismissed upon a final ruling.

The combination of all these advance-notice periods has the following implications for the licensee: The potential licensee is in no rush after Google makes an offer to license and can negotiate for several months, except that confirmation of reciprocity must be given quickly. If negotiations haven't led to a result after four months, Google will have to send an offer to arbitrate (it can also do so earlier). Now the potential licensee (who is presumably interested in keeping the door to injunctive relief closed) must decide whether to submit to binding arbitration or to refer the matter to a United States district court. In the latter case, it must file a request "in any United States District Court of competent jurisdiction that the court determine at least the royalty terms of a global license for use of Respondents' FRAND Patents Essential to a Standard, to the extent the use of the relevant FRAND Patents is not covered by an existing license".

The FTC order also addresses potential issues relating to arbitration. For example, the parties may not agree on certain terms. It's clear that any disputed contract terms must be put before the arbitration tribunal, and reciprocity is the only acceptable precondition. Ideally the parties will agree on an arbitration organization, but if they can't, then the potential licensee can always propose the American Arbitration Association (AAA) or JAMS.

The FTC order furthermore ensures that Google can't leverage a Wisconsin-based court's dismissal without prejudice of a FRAND contract action in a way that would deprive Apple of the benefits of the consent order. Apple can simply bring a new request if necessary. But next time it really has to accept to take a license on court-determined terms.

The order will be in effect for ten years and there will be annual reviews of the situation. In the very short term, Google must demonstrate its compliance, which presumably means that we'll see various filings with courts and the ITC withdrawing requests for injunctive relief. And now there will be a 30-day period during which the FTC will accept comments on the proposed consent order.

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