Thursday, August 8, 2013

Shocked by Presidential veto, Ericsson and other FRAND patent holders make impractical proposals

The Presidential veto of Samsung's standard-essential patent-based ITC import ban against older iPhones and iPads, it's going to be very difficult (though not 100% impossible) for holders of FRAND-pledged SEPs to win such exclusion orders. While I believe it would make sense for SEP holders to focus on federal lawsuits in which they can seek monetary compensation, some are going to keep on trying regardless. In particular, those who have an ITC investigation going at an advanced stage are probably going to pursue those cases before they eventually focus on litigation in district court.

The two most advanced ones of all pending ITC investigations involving FRAND-pledged SEPs are the investigation of InterDigital's mid-2011 complaint against Nokia, Huawei and ZTE (another complaint filed in early 2013 targeted these three companies plus Samsung) and that of LSI and Agere's complaint against Funai and Realtek. In both cases, initial determinations rejecting FRAND defenses but finding no SEP violation have come down (in the InterDigital case, all patents-in-suit are SEPs, but not a single one was found valid and infringed; in the LSI/Agere case, there is presently no finding of a SEP violation by Realtek, a company that won a preliminary injunction in district court barring the complainant from enforcing an exclusion order in the event one issues). The Commission could still make liability findings involving one or more SEPs-in-suit, so parties making submissions in the public interest at this stage have to address FRAND issues anyway, just in case this becomes relevant. This was also the situation in the Samsung-Apple case: an Administrative Law Judge had cleared Apple's products in a preliminary ruling. And as all know by now, FRAND issues did play a role in the end.

The first public interest statements in the InterDigital case have just come in. Such submissions have been requested in the LSI/Agere case.

The Innovation Alliance, a SEP holder lobby group that counts InterDigital among its members, proposes that the Commission issue an exclusion order on the basis that "the [Administrative Law Judge] has already found that the complainant negotiated in good faith and did not breach any obligations to grant licenses on FRAND terms". I don't see how this entitles InterDigital to what Samsung was ultimately denied. Granted, there's a key difference: InterDigital undoubtedly wants a cash-only license deal as the outcome, while Samsung makes prohibitive demands in pursuit of a cross-license involving Apple's non-SEPs. But InterDigital also engages in tying because it insists on a license deal of worldwide scope without any chance of proving, in the ITC investigation, infringement of its SEPs in more than one jurisdiction (the U.S.). That's why I believe an import ban in InterDigital's favor would ultimately also be vetoed.

The Innovation Alliance tries to portray Chinese companies (Huawei and ZTE) as infringers:

"The best way to continue encouraging investment in innovation and technology development is to protect valid intellectual property rights from infringement by others, particularly foreign-based manufacturers who operate in exporting countries that do not have an established culture of respect for intellectual property."

I don't like this insinuation at all. Most mobile devices are manufactured in China, thus subject to the ITC's jurisdiction regardless of where their developers are based. The Innovation Alliance doesn't explain why U.S. innovators can't be protected by district courts awarding monetary relief as far as SEPs are concerned. If one thinks it through, allowing SEP abuse would even result in the very opposite of protecting U.S. innovators. If the U.S. did this, other countries could do the same. And companies like Huawei and ZTE, which the Innovation Alliance means to criticize, own plenty of SEPs. They could use them everywhere (not only in China) to force (other) innovators to grant them a license to non-SEPs.

Ericsson is a major SEP holder embroiled in two-way litigation with Samsung (at the ITC and in federal court). In January I warned against the consumer harm that might result from exclusion orders granted in favor of one or both parties. These days, presumably influenced (if not triggered) by Saturday's Presidential veto, Ericsson and Samsung filed a stipulation relating to their FRAND commitments in their two ITC investigations. The filing isn't publicly accessible yet. Whatever they've agreed upon, the parties can't stipulate to waive the public interest. At least Ericsson and Samsung have agreed on something, but if two citizens of a civilized country signed a contract under which they want to duke it out in a duel somewhere in the desert, law enforcers still have reasons -- and a basis -- to intervene.

I've uploaded Ericsson's submission in the InterDigital investigation to Scribd. To me it looks like what someone would write in a state of despair, trying to somehow preserve access to ITC exclusion orders over FRAND-pledged SEPs despite the Presidential veto. It's the quality of Ericsson's proposals that appears desperate to me. While I agree with Ericsson that non-identical license terms offered to different would-be licensees can nevertheless be non-discriminatory (though I may apply a considerably higher standard to the justification required for such differences than whatever Ericsson has in mind), I don't see how Ericsson's primary suggestion would work. The Swedish company would like the ITC to "issue conditional exclusion orders subject to the refusal of the respondent to accept a license on FRAND terms adjudicated by the Commission".

The ITC is a trade agency, not a federal court or an arbitrator. I disagree with those who actually want to abolish all Section 337 investigations (the ones that can result in import bans of infringing products), but the ITC needs more focus, not less, and Ericsson now wants it to address questions of monetary relief, which it hasn't done so far. In the meantime, a body of case law exists in U.S. federal court with respect to patent damages, a large part of which is about the determination of reasonable royalties, and case law concerning FRAND rate determinations is evolving rapidly. Ericsson doesn't explain why the ITC needs to do the job of the federal courts.

Ericsson argues that SEP holders need access to exclusion orders to have leverage against unwilling licensees. But even if the ITC made a royalty determination (which it may never want to) for parties that can't agree on a deal, this would have to be appealable. An appeal is only an option if the appellant doesn't face the threat of exclusion from a major market. And an appeal takes time. Also, a FRAND determination takes time. In the Microsoft v. Motorola case in Seattle, a special rate-setting trial was held, and a decision came down roughly six months later. Ericsson's half-baked proposal doesn't explain how and when the ITC should make a FRAND determination. Ericsson wants quick leverage, so presumably it wants a FRAND determination to be part of a final Commission decision, but I doubt that the ITC would want to set FRAND rates unless liability is established. Rate-setting requires briefing, and the related issues must be discussed at a trial. A trial must be properly prepared. So an ITC investigation involving FRAND-pledged SEPs would (if liability is established) take years to resolve, and an appeal would take well over a year.

Ericsson also defends InterDigital's tying practice (requiring a worldwide license) and generally wants to enable SEP holders to force alleged infringers into portfolio licenses without having to establish infringement (at least on the basis of a representative sample of patents from a portfolio) and validity.

I doubt that any of this helps the ITC to shape its policies, rules and procedures in the post-veto situation.

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