Tuesday, March 5, 2013

Japanese court deemed Samsung's delayed disclosure of essential patents abusive conduct

On Thursday Apple successfully defended itself against the assertion of a standard-essential patent (SEP) by Samsung in Japan. On a global scale this was Samsung's 22nd SEP assertion to have been dismissed, dropped or stayed. It was the first pro-FRAND ruling by an Asian court that I've ever heard of. And now that Apple has filed a redacted translation of the relevant passages of the Tokyo District Court's ruling, it turns out that it's also the first time in the earth-spinning Apple-Samsung dispute for Samsung to be found to have abused the standard-setting process through untimely disclosures.

A California jury did not identify any standard-setting misconduct by Samsung last summer, and Apple did not succeed with a motion for judgment as a matter of law (JMOL) concerning this issue. A Dutch court had also ruled against that theory, though it agreed with Apple that Samsung was not entitled to injunctive relief.

With a view to a ruling scheduled for this week's Thursday on a Samsung request for a U.S. import ban against UMTS-capable Apple products, Apple filed a judicial notice with the United States International Trade Commission (USITC, or just ITC), to which it attached a redacted translation of the Abuse of Rights section of the Japanese ruling. Here's Apple's notice, with the partial translation starting on page 6 of the PDF file (this blog post continues below the document):

13-03-04 Apple Notice to ITC of Japanese FRAND Ruling by

The translated part of the ruling has its legal basis in Article 1(3) of the Japanese Civil Code. I found an interesting write-up on this legal concept, which provides the following translation of the entire Article 1 of Japanese Civil Code (the third paragraph makes more sense in context):

"(1) A private right shall conform to the public welfare;

(2) The exercise of right and performance of duties shall be conducted in good faith and sincerity;

(3) No abuse of rights shall be permitted."

Different jurisdictions have different ways of stating and applying these universal principles. For example, Article 14(2) of the German Constitution states that "property confers obligations" and that "its use shall also serve the public interest", and Article 242 of the German Civil Code establishes a good faith principle in connection with the performance of legal obligations. The German Orange-Book-Standard framework (injunctive relief over standard-essential patents) is based on an old principle of Roman law ("dolo petit qui petit quod statim redditurus est" -- he who demands something he has to surrender immediately acts in bad faith", meaning that you can't seek an injunction if you immediately owe the defendant a license), which requires an analysis under antitrust law but ultimately involves Article 242. While German law is somewhat complicated in this context, Japanese law apparently provides the courts with a straightforward and powerful tool, in the form of Article 1, to declare patents unenforceable or, at least, to deny certain remedies.

In the United States, the denial of injunctive relief is a question of equity. It's difficult enough even for owners of non-SEPs to satisfy the eBay v. MercExchange factors. Judge Posner held in Apple v. Motorola that FRAND-pledged SEPs are generally antithetical to injunctive relief. The ITC is not formally bound to the eBay factors, but it must consider the public interest before ordering an import ban. Considering that the concept of abuse of rights under Japanese law includes the notion that "a private right shall conform to the public welfare", the Japanese FRAND decision may be more pertinent to the ITC's public interest analysis than one might usually think given the difference between the American and Japanese legal systems.

The Tokyo District Court based its holding of an abuse of rights on three findings:

  1. Based on Samsung's obligations under its FRAND pledge to ETSI, the court concluded that Samsung failed to honor its duty to negotiate in good faith. This reminds me of a Dutch court ruling denying Samsung injunctive relief for, among other reasons, its failure to meet its FRAND obligations to negotiate in good faith (instead, Samsung sought a sales ban). But there are jurisdictional differences in terms of what a party that once made a FRAND pledge must do in negotiation. In the Japanese case it was outcome-determinative that Samsung withheld information Apple would have needed to evaluate whether the terms Apple offered and Samsung demanded were FRAND. Apple had requested such information and was apparently willing to ensure confidential treatment of such information. Samsung just demanded a 2.4% royalty rate (that fact has been known for well over a year) without much explanation:

    "Samsung breached its duty of good faith to provide the counterparty with material information at the stage of preparation for the execution of a FRAND license agreement for the Patent as to the patent that was declared as standard essential based on FRAND declaration in the present case and conduct negotiations in good faith">/p>

  2. The Japanese court furthermore took issue with the fact that "under such circumstances circumstances, Samsung, as of the date of the conclusion of the oral proceedings, still maintained a petition for a preliminary injunction" (this, again, is very similar to the logic of the aforementioned Dutch ruling).

  3. And finally, the standard-setting misconduct part: "Samsung disclosed the Patent (disclosure of the international application number of the application in the present case) to ETSI approximately two years after the technology of the Patent (alternative E-bit interpretation) was adopted as a part of the standards at Samsung’s request to amend the 3GPP standards".

The ruling also makes reference to "any other circumstances surrounding the course of licensing negotiations between Apple and Samsung". Since the published translation is heavily-redacted, it's unclear what those other circumstances are, but the three grounds outlined above appear to have been the most important ones.

The Japanese ruling is very strict: the patent was deemed unenforceable, precluding Samsung even from claiming damages (as opposed to "only" ruling out injunctive relief as other courts in the world have done, which is all that matters in the Samsung v. Apple ITC case as the ITC cannot award damages anyway).

Even if the ITC felt that the Japanese court's findings have no bearing on what the appropriate conclusions should be under U.S. law and the statute governing the ITC (Section 337), at the very least this first Asian pro-FRAND decision has considerable political weight. It would be more than just odd if a U.S. government agency that was originally set up to protect the domestic industry became the first entity in the world to grant Samsung enforceable (after a 60-day Presidential review) injunctive relief against Apple. Even in Korea the two injunctions Samsung had won were stayed pending an appeal. In the Netherlands Samsung will have to content itself with a minor amount of damages, and in the rest of the world it hasn't won anything with its SEPs to date.

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