Thursday, October 17, 2013

EU Commission market-tests totally insufficient FRAND commitments offered by Samsung

For about two years I was hopeful, and to a reduced extent I still am, that European Commission Vice President Joaquín Almunia was going to curb the increasingly-rampant abuse of FRAND-pledged standard-essential patents (SEPs) and provide a greater degree of clarity especially in connection with injunctions. But a press release issued by the EU's top antitrust regulator today shows that there is considerable risk that the ultimate outcome of the EU investigation of Samsung's SEP assertions against Apple, despite a preliminary ruling against Samsung that came down last year, could be thoroughly disappointing.

Samsung's proposal has now also been published on the Commission's website.

Actually, if the proposed "commitments" the Commission is now submitting to a market test were ultimately considered acceptable, it would have been better for the EU not to take any action in this regard at all. Samsung's proposals would make things worse, not better, and they would increase, not decrease, legal uncertainty. I am absolutely stunned that the Commission, after countless speeches by Mr. Almunia that stressed the importance of preventing FRAND abuse, decided to market-test Samsung's offer instead of rejecting it outright. Samsung's proposal is far weaker than the FTC-Google consent decree, which I don't exactly like either because it doesn't make sense to me to require the target of an abusive SEP assertion to do this or that.

Here's the deal: Samsung would make a commitment for only five years (!) -- which is ridiculously short because there is no reason for which the abusive pursuit of SEP-based injunctions would be any more legal in five years' time than it is today -- not to pursue SEP-based injunctions relating to smartphones and tablet computers, provided that a defendant who doesn't want to be the target of such injunction requests "agrees to a particular licensing framework". The choice between facing an injunction or agreeing to licensing is, on the face of it, similar to the FTC's approach, but Samsung's proposal to the EU is structurally far worse. Here's how the Commission describes it:

"The licensing framework consists of: (i) a negotiation period of up to 12 months and (ii) if no agreement is reached, a third party determination of FRAND terms by either a court or an arbitrator, as agreed by the parties. If the parties cannot agree on either submitting to court or arbitration, the parties will have to submit to arbitration."

As for the first part, it's not a bad idea to let companies negotiate, but this whole antitrust issue is about scenarios in which a patent holder makes out-of-this-world demands and doesn't want negotiations to succeed. This "negotiation period" would provide Samsung and other abusers with the option to claim that an implementer of a standard failed to participate (constructively or at all) in such negotiation, which I'm sure is part of Samsung's plan.

The second part -- third-party determination of FRAND terms -- is the more important one at any rate. And the last sentence of what I quoted would have disastrous consequences and make the European Commission a supporter, not a fighter, of FRAND abuse. I'll repeat it:

"If the parties cannot agree on either submitting to court or arbitration, the parties will have to submit to arbitration."

This is a downright perversion of the concept of arbitration. It's arbitration that must depend on an agreement between parties. But parties must always have access to a court of law, with or without an agreement. Anything other than that would be irreconcilable with the rule of law. Under Samsung's proposal, the result of an arbitration proceeding could only be appealed to a second arbitration panel, but not to a court of law.

If the Commission accepted these terms (for now I still doubt that it will, and I hope I won't be proven wrong), the net effect would be that the pursuit of injunctions would be considered OK if an implementer of a standard does not agree to arbitration on the patent holder's terms.

This wouldn't be the same straightforward extortion as demanding an out-of-this-world royalty rate or a cross-licensing involving non-SEPs, but it would create even greater legal uncertainty than the status quo. The target of abusive SEP assertions will still face a high risk of the outcome being a supra-FRAND royalty rate.

Samsung has a high drop-out rate of SEP assertions, as do other SEP holders, but it seeks royalties based on the assumption that all of its declared-essential patents are actually essential and valid. The way to ensure that SEP holders get paid only for their true SEPs, and not rewarded for violating the standard-setting rules through overdeclaration, is to require them to prove in court that their patents are actually infringed and valid. Samsung's proposal to the Commission would not prevent an implementer from challenging the validity and infringement of Samsung's SEPs, but it would reverse the burden of proof in this regard.

Also, a fundamental drawback of arbitration is that it's usually private -- under Samsung's proposal, it would be "conducted in strict confidence" --, so it does not result in the creation and refinement of a body of case law that gradually increases clarity. With court opinions on FRAND terms, stakeholders get smarter and smarter. With secret arbitration, there's a maximum degree of uncertainty every time. I repeat myself: if the European Commission accepted these proposals, the result would be less clarity than if the Commission had never investigated Samsung's conduct in the first place.

Even the world's number one SEP holder (at least the number one wireless SEP holder), Qualcomm, is critical of arbitration as a FRAND royalty rate-setting mechanism.

FRAND determinations by courts are working out pretty well so far. There are already two rate-setting opinions by U.S. judges (Judge Robart, Judge Holderman), which are useful to courts not only in the U.S. because their FRAND-specific considerations make sense with respect to reasonable-royalty determinations in all jurisdictions. And I was quite encouraged by a Mannheim trial in June that this can also work out in Europe.

Last December, the European Commission appeared strong and determined. It issued its Statement of Objections despite Samsung's unilateral withdrawal of all of its European SEP-based injunction requests against Apple. The Commission said it still needed to investigate what had happened because the pursuit of injunctions had already caused harm. Less than a year later, the Commission market-tests "commitments" by Samsung that are more like a promise to resume its abusive conduct.

One company that is going to read Samsung's proposal with great interest is Ericsson, which is embroiled in a two-way SEP dispute with Samsung in the United States. Ericsson might actually propose to Samsung an arbitration proceeding of the kind it suggests, and if Samsung refuses, then Ericsson might simply seek injunctions against Samsung in Europe.

I may do some follow-up on this market test soon. This is just my initial reaction.

Finally I'd like to refer the CPI subscribers among my readers to this article by two Orrick lawyers on "The Next Chapter of Disputes Involving Standard-Essential Patents". Among other things, that article shows statistics according to which only about one in eight SEP assertions by companies like Samsung, Motorola and InterDigital succeeds in court.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Share with other professionals via LinkedIn: