Monday, September 17, 2018

Coerced FRAND arbitration is Huawei's Trojan Horse in appeal of Samsung's anti-enforcement injunction

Huawei's lawyers have beaten my expectations with their reply brief in the Ninth Circuit antisuit (anti-enforcement) injunction appeal pending before the Federal Circuit. Reply briefs are often largely repetitive reinforcements of points previously stressed, and in this case it's practically already the second appeal as Huawei had (unsuccessfully) asked Judge William H. Orrick of the United States District Court for the Northern District of California to reconsider his decision to bar Huawei from enforcing a couple of Chinese patent injunctions prior to a San Francisco trial. But the Sidley team representing Huawei has filed something that will make the Federal Circuit hearing (date TBD) more interesting than I would have previously thought (this post continues below the document):

18-09-06 Huawei Reply Brief (Antisuit Appeal) by Florian Mueller on Scribd

I still doubt that the argument about whether the Ninth Circuit Gallo test replaces all of the Supreme Court's Winter preliminary-injunction criteria or only the irreparable-harm factor will be outcome-determinative: when upholding the injunction, Judge Orrick addressed the other Winter factors anyway.

With respect to international comity, Huawei is right that antisuit injunctions "virtually always" enjoin private parties, not courts, yet comity is always part of the consideration; in the international context one can even strike "virtually" because no U.S. court holds power over any foreign court. The truth is in the middle: there undoubtedly is a risk of alienating foreign judges if their rulings cannot be enforced, or if parties have to stay or withdraw suits in their courts, because of a U.S. injunction, but the degree of alienation is obviously nowhere near what it would be if a U.S. court based its decision on a principle such as the general primacy of U.S. law over the laws of all other countries.

With respect to China, let's face one thing: every U.S. judge knows that the rule of law, just like democracy, works differently in China. Huawei's lawyers portray the Chinese proceedings at 100% fair and comprehensive. Samsung's counsel obviously didn't suggest that the proceedings were unfair, nor did Judge Orrick say so in his order. The Federal Circuit will be diplomatic, too. But that doesn't mean that the appellate judges won't have their private and unspoken opinion anyway.

The strategic issue here is the one I mentioned in the headline: coerced FRAND rate-setting arbitration. In order to distinguish Huawei v. Samsung from Microsoft v. Motorola (with Samsung being the new Microsoft and Huawei being the new Motorola), Huawei points out that Microsoft said it would accept a court-determined FRAND rate without insisting on adjucation of all the defenses that Samsung is pursuing (though Judge Robart actually did hold some Motorola patents invalid anyway). But beyond differences between Huawei and Microsoft regarding the preconditions for rate-settings (which I simply attribute to the fact that the standards at issue in Microsoft v. Motorola were not nearly as critical to Microsoft's business as the ones in Huawei v. Samsung are to Samsung's core business, thus Microsoft was prepared to pay for invalid and non-infringed patents and exclusively concerned about injunctive relief), Huawei must deny that it is an unwilling licensor (not in the sense of unwillingness to extend a license, but to do so on FRAND terms) engaging in hold-up and instead argue that Samsung is an unwilling licensee engaging in hold-out. The one key issue in that context that comes up in different places in Huawei's appellate reply brief--one might also call it a red herring--is that Huawei seeks to leverage its proposal to have an arbitration panel set binding FRAND rates:

  • Huawei denies any accusations of hold-up by claiming that Samsung could avoid the enforcement of an injunction by simply agreeing to binding arbitration.

  • Huawei portrays Samsung as an unwilling licensee merely because of its reluctance, at this stage, to submit to arbitration.

Huawei points out that Samsung made a similar unwilling-licensee argument against Apple in that (in)famous ITC case that resulted in a presidential veto. That's historically accurate, and no one criticized Samsung (and the ITC majority at the time) more harshly than this blog did. What was wrong back then is still wrong today.

This blog has equally consistently opposed coerced arbitration over the years. There's nothing wrong with parties' consent to arbitration, except that it deprives courts of an opportunity to augment their body of FRAND case law (though they like to see their caseload reduced). What is highly problematic and often just hold-up by any other name is when a party that would rather have key determinations (on essentiality, infringement, validity, and on FRAND rates) made by courts of law faces enormous pressure to arbitrate. Coerced arbitration is a terrible thing and raises more issues than I can address in a single post, but let me highlight some that appear particularly relevant to the Huawei-Samsung situation:

While courts do hand down "sharp rulings" (as Apple called it in a filing five or six years ago), such as the FRAND determinations made by Judges Robart and Holderman that were way closer to zero than to the original royalty demands, arbitration tends to gravitate toward the middle. This means that a patentee can often achieve a supra-FRAND outcome by, which is an oversimplification but essentially correct, demanding twice that supra-FRAND rate. The willing licensee can't do more than argue a next-to-zero royalty (and even that is difficult without losing credibility with the panel). Simply put, the licensee can't counterbalance a multiple of a FRAND royalty by proposing a negative royalty.

In its reply brief, Huawei denies that it's adamant about receiving a 1.5% royalty, but it doesn't specify what else it is seeking, making it impossible from the outside to determine who's right. The Federal Circuit has access to the full record below and will form its opinion.

No less important is the following difference: while there is some room for forum-shopping, courts of law will simply decide a case based on its facts, statutes, and applicable case law, but arbitration is a much more free-form kind of dispute resolution and everything depends on the parameters. At the most, there are some arbitration courts that have certain procedural rules in place. But even on the procedural side the first fundamental disagreement may already arise when the licensee side would like to start with some validity, essentiality, and infringement determinations (such as of an exemplary set of asserted patents). Also, should one arbitration panel make such determinations, including rate-setting, for foreign jurisdictions or just for its local one? It's the parameters, stupid.

Coerced arbitration can disadvantage licensees in two ways. Either there's frightening uncertainty for a lack of parameters (which again means that a patent holder making unreasonably supra-FRAND demands has pretty good chances of getting a supra-FRAND outcome) or the parameters may outright disadvantage the would-be licensee.

If parties voluntarily submit to binding arbitration, after negotiating without undue pressure the procedural and substantive parameters, arbitration can be fair. But with the threat of enforcing an injunction that puts someone temporarily out of business, the parameters most probably won't be fair.

Hopefully the Federal Circuit won't adopt a proposal that would be tantamount to a de facto primacy of arbitration panels over courts of law when it comes to FRAND determinations.

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