Friday, March 15, 2013

Google tells appeals court Apple is 'unwilling licensee', seeks injunction over FRAND patents

Last summer both Apple and Google's Motorola appealed Judge Posner's June 2012 dismissal of a two-way Apple v. Motorola patent infringement lawsuit. After Circuit Judge Richard A. Posner, sitting at the time by designation on the United States Court for the Northern District of Illinois, handed down his final ruling on the case, I predicted that the FRAND-related part of the decision -- Judge Posner limited the availability of injunctive relief to a scenario in which Apple would refuse to pay a FRAND royalty -- was going to be more influential going forward than the decisions he made with respect to three Apple patents. That has definitely been, and continues to be, the case.

Apple filed its opening brief in late November. Google filed its initial brief, which is both a response to Apple's brief with respect to its patents-in-suit as well as the opening brief for Google's appeal of the part of Judge Posner's ruling that relates to Motorola's patents-in-suit, yesterday. A public redacted version entered the appeals court's electronic document system this morning. I've uploaded the document to Docstoc.

There are three angles from which to look at the fact that Google is appealing the FRAND part of Judge Posner's ruling:

  1. At first sight it's regrettable that Google keeps fighting in the legal, regulatory and political arenas for SEP-based injunctions. This behavior is not just somewhat inconsistent but totally irreconcilable with Google's ever more vocal criticism of software patents and abusive patent litigation. SEP abuse is the worst form of patent abuse.

  2. But Google's unrelenting pursuit of SEP-based injunctions is definitely an opportunity for clarification. If the Federal Circuit upheld Judge Posner's ruling in whole or at least in important parts, it would help to curb standard-essential patent (SEP) abuse in U.S. federal court and could even influence the ITC, which grants import bans under a different legal framework than the eBay factors governing injunctions in federal court, but whose decisions are also appealed to the Federal Circuit.

  3. The Federal Trade Commission (FTC) is watching Google's SEP-based litigation closely. Under the envisioned consent decree Google isn't allowed to seek injunctions against willing licensees, and its compliance will be monitored. Also, the mere fact that Google continues to seek an injunction against Apple and to argue that Motorola's 2.25% royalty demand is in line with its FRAND licensing obligations calls into question the effectiveness of the action the FTC has taken so far.

All in all I believe the second aspect is the most important one. Google is doing this for all the wrong reasons, but depending on what the Federal Circuit ultimately decides, the outcome could be a pretty good one from a public interest point of view. Even if the Federal Circuit largely overruled Judge Posner on FRAND, there would at least be some more clarity and on that basis there could be a legislative initiative relating to SEP-based injunctions.

Judge Posner's ruling was not just about injunctions but also about damages. He threw out Motorola's demands and laid out certain criteria for SEP-based damages. In a subsequent post (probably over the weekend, or maybe early next week) I will discuss Google's position on SEP-based damages, which is all about capturing hold-up value. For example, it turns out now (about a year after the relevant statements were made in confidential documents filed with the district court) that a Motorola expert argued that the first SEP a patentee successfully enforces in court entitles its owner to 40% to 50% (or "at least 50 percent" based on a statement by a Motorola executive) of what would be paid for a license to an entire portfolio, which is almost as bad as the theory that ""it only takes one bullet to kill". Damages theories are important beyond questions of past infringement: they are also applied, or at the very least taken into consideration, in connection with the determination of future royalties. But in this post I'll focus on access to injunctive relief.

The injunction-related issue on appeal that Google raises is stated as follows:

"Did the district court err in applying an automatic rule that injunctions are never available for patents declared essential to SDOs [standards-developing organizations], and thus in declining to consider evidence that Apple was an unwilling licensee?"

Google's position is that "[t]he district court erred in categorically barring injunctive relief for infringement of standards-essential patents". It claims that Judge Posner "failed to apply the four-factor eBay test to evaluate Motorola’s claim for injunctive relief". Google is against "a bright-line rule permitting continued infringement not only of Motorola's '898 patent, but all FRAND-committed patents in Motorola's portfolio irrespective of the terms of those commitments, and even by parties that have consistently refused to take a FRAND license".

Google's Motorola describes Apple as a uniquely "unwilling licensee":

"Motorola offered considerable evidence showing that, unlike every other major cellular handset manufacturer, Apple has been an unwilling licensee vis-à-vis Motorola's standards-essential patent portfolio."

Whatever evidence Motorola may have presented, the real issue is that it was and still is adamant about its 2.25% royalty demand. If it had more reasonable demands, Apple would likely have taken a license. License deals are usually not announced, let alone published, but I've heard from reliable industry sources that Apple has in fact concluded a number of SEP license deals, and I know that it's having licensing discussions all the time. There have also been references to this fact (even though the details were kept confidential) in some pleadings.

There's a company that is a lot more licensing-oriented than Apple but also hasn't been able to do a deal with Motorola: Microsoft. By coincidence, the Microsoft-Motorola dispute started less than week before Motorola sued Apple. Microsoft has done patent license deals, mostly cross-licenses, with more than 1,100 companies, including all major Android device makers except Motorola. But just like Apple, Microsoft has also refused to succumb to Motorola's attempted hold-up.

At first sight it looks like a huge injustice that "Apple has not paid one dollar for its use of Motorola's hundreds of fundamental patents" despite generating, as Google's brief accurately notes and almost understates, "billions of dollars in profits". At a closer look it's Motorola's -- not Apple's -- behavior that is unusual here. And Motorola's royalty demands are certainly not supported by the fact that it has succeeded with only one of ten SEP assertions against Apple.

Google says that Judge Posner's "categorical rule barring injunctions for all FRAND-committed patents [...] would deprive the district courts of their discretion to fashion appropriate remedies on a case-by-case basis". In no small part this analysis should, if Google got its way, be based on the specific wordings of FRAND licensing pledges (in this case, the relevant one is Motorola's subscription to the ETSI SEP licensing policy). I want to be realistic here: it won't be easy for Apple (and the amici curiae supporting it) to defend Judge Posner's holding that all FRAND licensing promises run counter to injunctive relief. Appeals courts tend to dislike rules that appear somewhat inflexible. But there are contexts in which flexibility means too much legal uncertainty, and I think Judge Posner got it right by suggesting that SEP holders should only seek monetary compensation in court, i.e., damages (or past infringement and court-ordered future royalties. The problem with flexiblity about injunctions is that the mere threat of injunctive relief can already have profoundly anticompetitive effects.

Google and other aggressive enforcers of SEPs argue that "hold-up" (at the threat of an injunction) is only one side of the equation, the other being "hold-out" (infringers refusing for years on end to pay). From a policy point of view it's clear to me that the anticompetitive and anti-innovative effects of "hold-up" are far, far worse than those of "hold-out". Access to injunctions, or the mere threat of it, enables a patent holder to become "the dictator of the royalties", and if an injunction is actually enforced, it can put a company out of business in a matter of months. The damage of "hold-out", if any occurs, is just that someone gets paid later (after proving actual infringement of actually valid patents in court) than he should have been. The solution is to impose litigation expenses on the losing party and to increase the amount owed for pre-judgment infringement by an interest rate above the market rate. By contrast, the negative effects of hold-up are irreversible: if a company settles, there's a deal in place that can't be revisited later, and if it's put out of business, no one can bring it back. For hold-out, the cost of litigation (even without a "loser pays" rule) is enough of a disincentive for everyone contemplating to engage in this behavior -- but for hold-up, there's no disincentive (other than in a few extreme cases triggering antitrust intervention), so it must be clear from the beginning that it can't and won't succeed.

In its brief Google describes a June 2012 FTC statement to the ITC, which Judge Posner quoted, as only an "interim [...] statement". Besides downplaying its relevance and pointing, as usual, to the fact that it's "not binding on the courts", Google says "the FTC does not advocate a per se rule against injunctions on [F]RAND-encumbered patents". The June 2012 statement didn't appear to leave too much room for SEP-based injunctions, but based on the various loopholes in the settlement with Google that the FTC proposed in January, it's unfortunately true that the FTC's position isn't perfectly clear. The whole question of who's a "willing licensee" is a can of worms. Google also points to a joint policy statement of the Department of Justice (DoJ) and United States Patent and Trademark Office (USPTO), which could have been clearer.

The outcome of the Posner appeal could provide more clarity than the FTC has provided so far, and it would be binding on all U.S. courts hearing patent infringement cases.

Apple will respond to Google's attack on the FRAND part of Judge Posner's ruling in its second brief, and now that Google has filed its opening brief, we will see submissions from stakeholders supporting one side or the other.

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