The Ninth Circuit's recent decision in FTC v. Qualcomm1 was another major victory for patent holders in the world war over standard essential patents (SEPs). The court found the FTC failed to establish that Qualcomm's alleged breach of its obligations to license SEPs on fair, reasonable, and non-discriminatory (FRAND) terms amounted to an antitrust violation. Following similar reasoning, a Texas court dismissed auto supplier Continental's antitrust claims against patent pool Avanci and its telecom licensors.2
The FTC has asked the Ninth Circuit to take the Qualcomm case en banc, and the case may end up at the Supreme Court. But for now, these decisions, as well as decisions in the United Kingdom and Germany,3 show that implementers pursuing antitrust claims for FRAND disputes against SEP holders face an uphill battle. They also serve as reminders that implementers can and should turn to patent- and contract-based theories as they seek the upper hand in the FRAND game.
The Narrowing Antitrust Window
A common allegation for FRAND-related antitrust claims is monopolization under Section 2 of the Sherman Act. A monopolization claim requires proof that a defendant with monopoly power is causing anticompetitive harm in a market. In the SEP context, courts appear willing to accept that SEPs confer monopoly power,4 but they resist claims of anticompetitive harm.
Breach of FRAND obligations
An SEP holder participating in a standard setting organization (SSO) is usually required to provide a license on FRAND terms. In view of the Ninth Circuit's decision in Qualcomm, an SEP holder's refusal to grant a license to certain implementers or demands for allegedly non-FRAND rates, without more, is not an antitrust violation.
Refusal to license
In Qualcomm, the FTC challenged Qualcomm's practice of refusing to license its chip-supplier competitors. The Ninth Circuit held that even assuming this practice breached Qualcomm's FRAND obligations, there was no evidence it harmed competition. According to the court, since Qualcomm's competitors can sell their chips to OEMs, all of whom are licensed, they, in effect, are free to use Qualcomm's SEPs. So they suffer no harm. And, the court continued, even if some competitors suffered as a result of Qualcomm's practice, several competitors entered the market during the relevant timeframe, showing that competition did not suffer.
Continental v. Avanci followed similar reasoning. The court dismissed auto component supplier Continental's monopolization claim against the Avanci pool and its telecom licensors based on their OEM-only licensing model. The court rejected Continental's claim of harm based on its inability to obtain a license, noting that Continental could supply components to licensed OEMs without paying royalties. So, concluded the court, Continental did not suffer any antitrust injury. The court noted that Continental may have a contract-based claim, but violating contractual FRAND obligations is not an antitrust violation.
In Qualcomm, the Ninth Circuit also rejected the FTC's allegation of anticompetitive harm based on Qualcomm's unreasonably high royalty rates, which according to the FTC, resulted from Qualcomm's monopoly. The court rejected the notion that excessive royalty rates are anticompetitive. The court added that any harm from the rates was to OEMs, not Qualcomm's competitors, and therefore the rates had no "direct impact on competition."5
Continental adopted the same logic. Even if downstream OEMs are forced to pay non-FRAND rates, the court noted that Continental failed to show the extra cost would be passed onto suppliers. In the court's view, upstream suppliers and downstream OEMs are distinct parts of the supply chain, and Continental failed to show the high rates paid by OEMs were an antitrust injury to Continental.
Qualcomm and Continental found that indirect harm to implementers do not suffice to establish antitrust injury. Neither decision, however, provided guidance on what type of injury would be sufficient to constitute harm to competition itself.
Breach of disclosure obligations
SSOs typically require SEP holders disclose their patents for technologies being standardized. Failure to disclose alone, however, even if deceptive or intentional, will likely not suffice for an antitrust claim. In Rambus v. FTC,6 for instance, the FTC asserted that Rambus violated Section 2 of the Sherman Act by deceptively concealing from the SSO its patents related to certain computer memory standards. The D.C. Circuit, however, held that deceiving the SSO, even if done to obtain higher licensing fees, did not in itself give rise to an antitrust violation. And although the FTC contended that Rambus's alleged deception prevented the SSO from standardizing non-proprietary technologies, the court found the FTC's evidence insufficient to show the SSO would not have standardized the same technologies without Rambus's deception.
In Apple v. Samsung,7 the Northern District of California recognized the potential viability of an antitrust claim based on an SEP holder's failure to disclose. In denying Samsung's motion to dismiss, the court found Apple sufficiently alleged the European Telecommunications Standards Institute (ETSI) would not have standardized Samsung's technology had it timely disclosed its patent rights. The parties subsequently agreed to dismiss the antitrust claim. So it remains unclear how such a claim would play out and, in particular, what kind of evidentiary support would be required.
False FRAND theory
Another line of cases supports claims that fraudulent FRAND commitments may, in limited circumstances, be an antitrust violation. Broadcom v. Qualcomm8 involved an alleged scheme by Qualcomm to inflate royalty rates by inducing SSOs to standardize its technology with false FRAND commitments. In denying Qualcomm's motion to dismiss, the Third Circuit held that an intentionally false FRAND promise, coupled with an SSO's reliance, will support an antitrust claim if the patentee later breaches its FRAND commitments. After reviewing Broadcom's allegations, the court held it sufficiently alleged each element to survive a motion to dismiss. The case was subsequently transferred to California and the parties settled before any ruling on the merits.
Other courts addressing similar antitrust pleadings have followed the Third Circuit's reasoning. In Research in Motion v. Motorola,9 RIM alleged that SSOs relied on Motorola's false FRAND promises, harming RIM specifically and competition in general. Motorola moved to dismiss the claim. The court found RIM's allegations sufficed to survive a motion to dismiss. The parties subsequently moved to dismiss the case. In Apple v. Samsung, Microsoft v. Interdigital,10 and Wi-LAN v. LG,11 the courts similarly denied the SEP holder's motions to dismiss antitrust claims based on false FRAND theories.
The false FRAND theory appears to be the most likely scenario where an antitrust claim arising out of an SEP holder's FRAND commitments may succeed. However, because courts have mostly addressed this theory in motions to dismiss, it remains unclear whether the theory will succeed past the pleading stage. Further, this narrow possibility may not be available in every court. In Continental, for instance, the court held that deceiving an SSO, even where it resulted in the exclusion of competitors' technologies from being standardized, harms only competitors, not competition itself.
Neither Qualcomm nor Continental addressed the contractual issues arising from FRAND commitments. In contrast with federal antitrust claims, contract claims involve courts' interpretation of the particular FRAND agreement at issue. The scope of FRAND obligations, therefore, may vary from case to case, depending on the court and the SSO policy and FRAND agreement at issue.
Some SSO policies, such as ETSI's, include a choice-of-law provision that governs interpretation of FRAND commitments. U.S. courts, being pro freedom-to-contract, generally apply the law the parties choose. In TCL v. Ericsson,12 for instance, the court concluded that ETSI's policy created a contract under French law, so French law governed the FRAND commitments. So did the Northern District of California in Apple v. Samsung.13
If the SSO policy at issue does not include such provisions, courts may first decide the governing law based on the choice-law-of law rules of the jurisdiction,14 or apply the law of that jurisdiction. During negotiations, therefore, the parties should consider adding a choice-of-law provision in cases where the choice of law may make a difference. And where it may matter in court, the parties should provide adequate choice of law analysis upfront and take it into consideration when selecting a forum.15
FRAND and license-to-all
Whether FRAND commitments require an SEP holder to license every implementer depends on how a court interprets the FRAND agreement. Courts, in general, appear to favor the position that typical FRAND agreements obligate an SEP holder to license to "all comers."16
In HTC v. Ericsson,17 the court interpreted the ETSI policy as requiring SEP holders to offer licenses to device and component manufacturers, with no "if or when" conditions on licensing for one versus the other.18 The Ninth Circuit's caselaw offers a stronger affirmation of SEP holders' license-to-all obligation. In Microsoft v. Motorola,19 for instance, the court noted that an SEP holder "cannot refuse" a license to a manufacturer who commits to paying FRAND fees.20 The court interpreted the International Telecommunications Union (ITU)'s policy as requiring an SEP holder to make its SEPs accessible to everybody.
In Qualcomm, the district court granted the FTC's motion for partial summary judgment that Qualcomm's FRAND commitments required it to license to all comers, including chip-supplier competitors. Qualcomm contended that Ninth Circuit precedents were irrelevant because they involved different SSO policies. The court rejected that contention, noting that the SSO polices at issue used almost identical language and Qualcomm failed to identify any contrary statements from other courts. On appeal, the Ninth Circuit did not disturb this part of the district court's ruling.21
FRAND and injunctions
Some SSOs impose contractual restrictions on SEP holders' freedom to seek injunctive relief. The Institute of Electrical and Electronics Engineers (IEEE), for instance, amended its policy to prohibit SEP holders from pursuing injunctive relief except in limited circumstances.22 The current legal environment, however, may result in fewer restrictive policies. For instance, in a supplemental business review letter issued in September 2020, the DOJ urged the IEEE to change its policy on injunctions to guard against holdout.23
Absent explicit restrictions or waivers, however, contractual interpretation of typical FRAND language does not preclude an SEP holder from seeking injunctive relief. Injunctions, as a patent remedy, remain available for infringement of FRAND-encumbered SEPs; no per se rule prescribes otherwise. In Apple v. Motorola,24 the Federal Circuit rejected the argument for a separate injunction rule for SEPs; they are subject to the same eBay framework that applies to other patents. As a practical matter, however, injunctions (or ITC exclusion orders) based on SEP infringement have been extremely rare in the United States.
In contrast with European courts, U.S. courts have not established hard-and-fast rules for how the parties' negotiation conduct affect SEP holders' ability to obtain injunctive relief. Caselaw demonstrates, however, that U.S. courts, like their European counterparts, frown upon gamesmanship. For instance, the Federal Circuit noted that an injunction may be justified if an infringer unilaterally refuses FRAND rates or unreasonably delays negotiations.25 On the other hand, injunctive relief may not be available if an SEP holder sues for infringement before initiating licensing negotiations. In Realtek v. LSI,26 for example, the court held that LSI breached its FRAND commitments by seeking injunctive relief in the ITC before offering a license. Because there was no indication that Realtek was unwilling to accept a license, the court considered LSI's conduct as a "clear attempt to gain leverage in future licensing negotiations and [was] improper."27
Patent law and FRAND rate calculation
FRAND rates are usually at the core of FRAND disputes. They not only directly affect the monetary damages an SEP holder may obtain, but also whether an SEP holder is liable for breaching FRAND obligations. So winning or losing often hinges on a court's FRAND-rate determination. In HTC v. Ericsson,28 for instance, the court held that to satisfy FRAND obligations embodied in ESTI's IPR policy, an SEP holder must either offer FRAND terms, or negotiate in good faith towards them. The court concluded Ericsson's license offers were FRAND.
Although clarity and consistency are worthy goals, "precision and absolute certainty" remains "a doomed undertaking" in FRAND rate determination.29 In the handful of cases where the courts set FRAND rates, they applied several different methodologies. In general, however, FRAND rates set by courts tend to be significantly lower than SEP holders' demands.
In Microsoft. v. Motorola,30 the first U.S. case of court determined FRAND rates, Motorola demanded $3.00 to $4.50 per unit for its 802.11 SEP portfolio, and $0.50 to $0.63 for its H.264 portfolio. The court rejected those demands and determined the FRAND rates to be $0.03471 and $0.00555 per unit respectively. It reached these rates based on a modified Georgia-Pacific analysis, adapting its list of factors for a hypothetical licensing negotiation for an SEP. In re Innovatio31 followed a similar modified Georgia-Pacific analysis and combined it with a top-down approach. Under the top-down approach, a court first identifies the total value for all SEPs in the standard as the "top," and apportions this "top" to an SEP holder based on a ratio of the number of SEPs owned by the SEP holder compared to the total number of all SEPs. The court determined a FRAND rate of $0.0956 per chip for Innovatio's 802.11 portfolio containing 19 SEPs, much lower than Innovatio's proposed rates of $3.39 to $36.90 per end device. The recent and now-vacated TCL v. Ericsson decision also chose the top-down approach to arrive at a FRAND payment of $16.5 million, significantly lower than Ericsson's demand of nearly $100 million.
The Qualcomm and Continental decisions demonstrate that antitrust is an unlikely vehicle for resolving FRAND disputes. Unless the Ninth Circuit, sitting en banc reverses the panel decision in Qualcomm, the Fifth Circuit reverses the Continental decision, or the Supreme Court steps in to change things, antitrust challenges to SEP licensing practices face an uphill battle.
Contract and patent law, on the other hand, provide a different perspective and more flexibility for implementers during negotiations and in court. When negotiating FRAND terms, the parties should review relevant case law interpreting similar SSO policies, and the damages methodologies courts have endorsed or criticized. In addition, the parties should be mindful of creating a record of willingness and diligence and beware of engaging in behavior that could be characterized as bad faith. As in traditional contract settings, the covenant of good faith will play a role in the FRAND world. And that applies to both sides.
1 FTC v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020).
2 Cont'l Auto. Sys. v. Avanci, Civil Action No. 3:19-cv-02933-M, 2020 U.S. Dist. LEXIS 173799 (N.D. Tex. Sept. 10, 2020).
3 See Unwired Planet v. Huawei,  UKSC 37 (Aug. 26, 2020); Sisvel v. Haier, Case KZR 36/17 (German Federal Court of Justice, oral opinion May 5, 2020); Nokia v. Daimler, Case 2 O 34/19 (Mannheim Regional Court Aug. 18, 2020); Sharp v. Daimler, Case 7 O 8818/19 (Munich Regional Court Sept. 10, 2020).
4 See, e.g., Research in Motion Ltd. v. Motorola, Inc., 644 F. Supp. 2d 788, 792-93 (N.D. Tex. 2008).
5 Qualcomm, 969 F.3d at 999.
6 Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008).
7 Apple Inc. v. Samsung Elecs. Co., No. 11-CV-01846, 2012 U.S. Dist. LEXIS 67102 (N.D. Cal. May 14, 2012).
8 Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3d Cir. 2007).
9 Research in Motion, 644 F. Supp. 2d 788.
10 Microsoft Mobile, Inc. v. Interdigital, Inc., Civil Action No. 15-723-RGA, 2016 U.S. Dist. LEXIS 49498 (D. Del. Apr. 13, 2016).
11 Wi-LAN Inc. v. LG Elecs., Inc., 382 F. Supp. 3d 1012 (S.D. Cal. 2019).
12 TCL Commc'n Tech. Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, No. CV 15-2370 JVS(DFMx), 2018 U.S. Dist. LEXIS 234535, at *18-19 (C.D. Cal. Sept. 14, 2018), rev'd in part, vacated in part, 943 F.3d 1360 (Fed. Cir. 2019).
13 Apple Inc. v. Samsung Elecs. Co., No. 11-CV-01846, 2012 U.S. Dist. LEXIS 67102, at *35-40 (N.D. Cal. May 14, 2012).
14 See, e.g., FTC v. Qualcomm Inc., No. 17-CV-00220-LHK, 2018 U.S. Dist. LEXIS 190051, at *24-25 (N.D. Cal. Nov. 6, 2018), vacating as moot, 969 F.3d 974 (9th Cir. 2020).
15 Apple, Inc. v. Motorola Mobility, Inc., 886 F. Supp. 2d 1061, 1082 (W.D. Wis. 2012) (noting that neither party conducted an adequate choice of law analysis and applying Wisconsin law to claims concerning the IEEE).
16 Microsoft Corp. v. Motorola, Inc., 696 F.3d 872, 876 (9th Cir. 2012).
17 HTC, Corp. v. Telefonaktiebolaget LM Ericsson, No. 6:18-CV-00243-JRG, 2019 U.S. Dist. LEXIS 2872 (E.D. Tex. Jan. 7, 2019).
18 Id. at *13 (emphasis in original).
19 Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024 (9th Cir. 2015).
20 Id. at 1031.
21 On appeal, the Ninth Circuit reversed the district court's judgement based on antitrust grounds without reaching contractual issue. See FTC v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020).
22 IEEE SA Standards Board Bylaws, IEEE SA, https://standards.ieee.org/about/policies/bylaws/sect6-7.html (last visited Oct. 7, 2020).
23 Updated Response to Updated Response to Electrical and Electronics Engineers, Incorporated's 2015 Request for a Business Review Letter (Sept. 10, 2020), justice.gov, https://www.justice.gov/atr/page/file/1315291/download.
24 Apple Inc. v. Motorola, Inc., 757 F.3d 1286 (Fed. Cir. 2014).
25 Id. at 1332.
26 Realtek Semiconductor Corp. v. LSI Corp., 946 F. Supp. 2d 998 (N.D. Cal. 2013).
27 Id. at 1008.
28 HTC Corp. v. Telefonaktiebolaget LM Ericsson, 407 F. Supp. 3d 631 (E.D. Tex. 2019).
29 TCL Commc'n Tech. Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, No. CV 15-2370 JVS(DFMx), 2018 U.S. Dist. LEXIS 234535, at *27 (C.D. Cal. Sept. 14, 2018), rev'd in part, vacated in part, 943 F.3d 1360 (Fed. Cir. 2019).
30 Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR, 2013 BL 113102 (W.D. Wash. Apr. 25, 2013).
31 In re Innovatio IP Ventures, LLC Patent Litig., No. 11 C 9308, MDL Docket No. 2303 (N.D. Ill. Sept. 27, 2013).
Originally published by Law360
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