The debate over how to confront the abuse of standard-essential patents (SEPs) has been raging for some time, and it's not drawing to a close anytime soon. In the months ahead there could be some important developments in the European Commission's investigations of Samsung and Motorola Mobility's SEP assertions.
Commissioner Joshua Wright (United States Federal Trade Commission) gave a speech on Thursday, expressing only his views and "not necessarily" those of the FTC, on "SSOs [standard-setting organizations], FRAND, and Antitrust: Lessons from the Economics of Incomplete Contracts". Commissioner Wright discourages "attempts by antitrust agencies to influence SSOs' IPR policies", and I'm not going to comment on that part in this context. For the purposes of this post I'll focus on the part in which he says that "the antitrust laws are not well suited to govern contract disputes between private parties in light of remedies available under contract or patent law", which he states in slightly different words toward the end:
"The sanctions available to address patent hold-up and related concerns under other legal regimes are more than adequate to provide optimal deterrence against patent hold-up."
Actually, Commissioner Wright's speech is not even consistent in this regard. As I'll explain in a moment, the only mechanism he really believes in is self-regulation in terms of long-term disincentives for bad behavior, a radically permissive position favoring the commercial interests of SEP abusers. But before I say more about the different sets of remedies and why I disagree with Commissioner Wright, it's key to understand that what he says in his speech is absolutely inapplicable to the European situation. I want to stress this because the European antitrust investigations I just mentioned have reached a stage at which the remedies discussion may soon be in full swing and be increasingly held in public. No matter how Samsung and Google/Motorola may like Commissioner Wright's permissive extremism, this particular speech is implicitly and explicitly based on premises that apply to the situation in the U.S. and not the one in Europe. At least in Germany, the largest European market, there is no eBay v. MercExchange kind of equitable analysis in connection with injunctive relief; third-party beneficiaries are not recognized, so implementers of standards can't enforce contracts between SSOs and SEP holders; and there is no such concept as patent misuse that would render patents broadly unenforceable. Therefore, there's no alternative to antitrust law for the fight against SEP abuse in Europe.
Even in the U.S., where those additional tools are available, there is a need for competition enforcement in this context because of a need for deterrence. Commissioner Wright is a denier. He denies that there is a problem that needs to be solved, saying that "the empirical evidence of patent hold-up is so unremarkable". He didn't talk about any empirical evidence in his speech, and didn't explain why Samsung and Motorola's conduct is "unremarkable", even when courts have found their royalty demands completely out of line, with Chief Judge Rader telling Google's Motorola, just the day before this speech, that its demands were "crazy" and with Judge Robart awarding it less than one-twentieth of a percent of its original royalty demand. Instead of talking facts, Commissioner Wright stayed at a theoretical level and just expressed opinion after opinion. What exposes his permissive agenda is the passage on page 28 in which he disagrees with Judge Posner, or at least with the way he, I believe, misunderstands Judge Posner:
"Some commentators and some courts reason that -- as a matter of contract -- the F/RAND commitment is an agreement that damages are adequate compensation for infringement and therefore an injunction should not be granted under the Supreme Court's standard in eBay Inc. et al. v. MercExchange, L.L.C. No maxim of contract interpretation requires this result. Indeed, it is difficult to imagine why such an interpretation would hold in general in light of the fact that no SSO appears to uniformly disallow injunctions."
Professor Thomas Cotter, who also feels misunderstood by Commissioner Wright, explains on his Comparative Patent Remedies blog that "the contract and patent remedies issues are distinct; in theory, a court could decide that there is no contractual obligation to forgo injunctive relief but still conclude that an injunction is not warranted as a matter of the law of patent remedies, because damages are an adequate remedy". The way I would put it is that Commissioner Wright takes too contract-centric a perspective (also in other parts of his speech): what you agree on is one thing, and what implications it has is another. If interpreted narrowly, I would actually agree with what I just quoted from Commissioner Wright: a FRAND agreement is not an "agreement that damages are adequate compensation for infringement". But it's an agreement to make licenses available to all comers on FRAND terms, and in that light it's an agreement as a result of which damages are adequate compensation.
Regardless of whether one agrees or disagrees from an eBay perspective, the passage quoted above and the part in which he speaks out against "weakening the availability of injunctive relief" show that Commissioner Wright simply wants SEP holders to have a maximum degree of flexibility in how they use their rights. This permissive approach to SEP-based injunctive relief even under contract and patent law is absolutely inconsistent with his stated belief that "[t]he sanctions available to address patent hold-up and related concerns under other legal regimes are more than adequate to provide optimal deterrence against patent hold-up". If injunctions are available anyway, then how can there be "optimal deterrence against patent hold-up" (emphasis mine)?
Commissioner Wright's predecessor, Commissioner J. Thomas Rosch, was consistent. Just like Mr. Wright, he didn't consider SEP hold-up an antitrust issue, but unlike him, Commissioner Rosch expressed, in a footnote to an FTC submission to the ITC, "the view that the issuance of injunctive relief is inappropriate where the patent holder has made a FRAND commitment for a standard essential patent, even if the patentee contends that it has met its FRAND obligation" and advocated a bright-line rule prohibiting injunctions based on SEPs, the only exception being "when the licensee refuses to comply with the decision of a federal court or some other neutral arbitrator defining the FRAND terms". In a world according to Commissioner Rosch, implementers of standards wouldn't have to fear antitrust consequences for seeking injunctions, but they wouldn't get them anyway. By contrast, if Commissioner Wright's proposals were adopted, abusers would have plenty of opportunity and little, if anything, to fear in terms of backlash.
There's a lot in Commissioner Wright's speech that I disagree with, but for the remainder of this post I just want to highlight a few beliefs and assumptions that I consider wrong or at least highly doubtful.
Let's start with the alleged meritocracy of standard-setting:
"[A]lthough some may view SSOs' processes as collaborations among competitors, standardization at SSOs are subject to a rigorous evaluation process where contributing members compete to have their technology incorporated into the standard. The collaborations and the SSOs are, in fact, a playground for competition among competitors."
The way technologies are adopted by SSOs is not like a sports tournament or beauty pageant where everyone performs and the best performer (by more or less objective standards) takes all. It has a lot do with bargaining and horse trading. It's often like "if you support our encryption technique even though you think there are better alternatives out there, we'll support your handover mechanism even though we think it's not best of class". At a recent Senate hearing, Intel's Sr. VP and General Counsel Douglas Melamed noted that SEPs themselves are often insignificant except for their inclusion in a standard. Commissioner Wright's speech ignores research which found that "the involvement in the standardisation process is a stronger determinant than the technical value ('merit') of the patent" and various cases in which participants in standardization file for patents on photographic copies or minor variations of what they read and hear from other participants. I could imagine better "playground[s] for competition" than that...
I also think that Commissioner Wright overrates the contribution to the prevention of hold-up that "reputational costs" can make:
"[T]he decision to engage in hold-up results in short-term gains than can easily be overwhelmed in a 'repeated game' setting. Indeed, most firms and IPR holders are repeat players that hope both to license SEPs and to have their technology incorporated in subsequent standards. A reputation for engaging in patent hold-up would make it more difficult to convince SSOs and their members to adopt a firm's technology in the future, which would reduce the firm's ability to earn licensing revenue in the future. In addition, for firms that contribute patents to SSOs and implement standards in products, a reputation for hold-up as a licensor could affect the firm's position when operating on the other side of the bargaining table as a licensee."
The second point is true in some cases (for example, Samsung), but doesn't apply to non-practicing entities like InterDigital. It also doesn't apply if someone like Google buys a device maker primarily for its patent portfolio. Even where it does apply (such as Samsung's current situation in a two-front war with Apple and Ericsson), it's a partial solution at best.
I have a more fundamental problem -- actually, not just one problem -- with the belief that the "repeated game" setting keeps companies honest. Many companies have a rather short-term focus, while standardization is a long-term thing. If a company holds 2G, 3G and 4G patents today, it's generally going to be more interested in maximizing the value it gets out of those patents than in its influence over 5G and 6G, which will be adopted at a time when most companies in the industry will have a different management. Even if a company felt that aggressive SEP assertions adversely affected its ability to have some of its patented techniques included in 5G and 6G, it knows for sure that even 5G and 6G will have to be backwards-compatible with previous wireless standards. And the biggest problem is that many SEPs fall into the hands of acquirers who don't even plan to participate in future standard-setting processes.
Commissioner Wright is a hold-up denier:
"Some argue the primary purpose of injunctive relief is to allow patent holders to threaten to exclude a product from the market, and thus enable extraction of royalties above the F/RAND rate and other significant licensing conditions from willing licensees. Such reasoning assumes the rate negotiated with the threat of an injunction has to be above the F/RAND rate. But that assumption is dubious. Although the rate negotiated with the injunction threat is likely greater than the rate negotiated without the threat of injunction, it does not follow that the former is above F/RAND."
At the end of the first sentence, there is footnote 50, a reference to a paper by the chief economists of the FTC and the European Commission (and a former DoJ official). So Commissioner Wright knows he can't speak on behalf of the entire FTC here.
The passage I just quoted is not illogical, but ignorant of reality. It's true that if A (rate negotiated at threat of injunction) is greater than B (rate negotiated without such threat), both A and B could both be within the FRAND range. However, Commissioner Wright's speech ignores the fact that the potential hold-up value of a SEP portfolio exceeds the FRAND value of even the most valuable portfolio. Using a hold-up kind of logic, Motorola sought to defend its royalty demands from Apple and Microsoft. In the Microsoft case, the court found it was entitled to less than one-twentieth of a percent of its original demand, and in the Apple case, Chief Judge Rader couldn't see why a single SEP was worth hundreds of millions of dollars. What Motorola demanded from those companies is not identical to what it would have obtained if it had succeeded in hold-up, but these examples show that certain SEP holders seek not just 20% or 50% more than a FRAND rate but huge multiples of a FRAND rate. Therefore, the result of hold-up is indeed more likely than not to be above FRAND.
From a business point of view I also disagree with the Commissioner on what level of deterrence is needed. Footnote 56 refers to a paper he co-authored and quotes the following sentence:
"Because multiple damages are not required to generate optimal deterrence, remedies for breach of contract, or preventing the enforcement of the patent through estoppel, waiver, or other equitable doctrines, can serve to optimally deter undesirable patent holdup if they impose approximately single damages."
As for "remedies for breach of contract", Microsoft just obtained a $14.5 million jury verdict against Google's Motorola. While this is a significant success, Motorola knew all the time that this (or even a higher damages award) might happen, but it nevertheless pursued injunctions against Microsoft for an extended period of time. It did, however, withdraw its remaining SEPs-in-suit from the ITC investigation of Microsoft's Xbox shortly after a settlement with the FTC, and in December 2012, Samsung dropped all of its SEP-based injunction requests against Apple in Europe, where a Statement of Objections came down a few days later, but continued and still continues to pursue injunctive relief against Apple in the United States, though it knows that Apple could ultimately also win damages for breach of contract in a U.S. court. So much for breach damages as an "optimal" deterrent. There's empirical evidence that antitrust action serves as a deterrent while the prospect of damages doesn't.
Under the "American Rule" (no recovery of legal fees by prevailing party) it's also hard to see how defensive concepts like estoppel or waiver could deter misconduct. If at all, there are extreme cases of patent misuse that could result in broader enforceability issues, but I'm not aware of any SEP holder really having been hurt by any of that so far.
Contrary to what Commissioner Wright says, I believe SEP abuse is an antitrust issue, not only in Europe where other fields of law can't contribute to a solution, but also in the United States. Companies getting together and defining a standard comes with exclusionary risks. Alternative technologies are excluded by standardization itself; and the companies sitting at the standard-setting table can, if FRAND doesn't mean much, later exclude new entrants. Not so long ago, RIM (BlackBerry) was a new entrant. So was Apple. So were HTC and countless others. The next wave of new entrants must also be able to rely on FRAND promises.
In an April 2013 speech on patent assertion entities, Commissioner Wright argued that "antitrust law should stay focused on competition problems such as cartels, acquisitions that create or enhance market power, or exclusionary conduct by monopolists". In that other context (patent assertion entities) I actually agree with him that it's not really an antitrust issue -- at least I haven't seen any evidence that PAEs violate antitrust law. But SEP abuse falls into all three of the domains he said antitrust law should focus on. Competitors getting together and defining a standard raises cartel issues. And it's not just a cartel in terms of a group of companies acquiring and exercising collective market power: after the standard is set, everyone walks away from the table with a portfolio of essential patents, giving every single SEP holder monopoly power that can be abused (the third item on Commissioner Wright's list of antitrust priorities). The collective monopoly spawns individual monopolies -- if this isn't an antitrust issue, what else is? Finally, SEPs also play a role in many "acquisitions that create or enhance market power" (provided that SEPs are actually transferred, which is not the case in the Microsoft-Nokia deal, but was a key issue in Google-Motorola).
So there will be more antitrust complaints, investigations and rulings in the SEP context than Commissioner Wright would like to see.
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