A Licensor’s FRAND Commitments Do Not Limit A Licensee’s Rights

“The FRAND commitment is rights limiting but also opportunity expanding…. But as conceived of by the authors of the series to which this article responds, there is no trade off in the FRAND commitment…. That is a misguided view of the FRAND commitment divorced from both its origins and purpose.”

https://depositphotos.com/81355246/stock-illustration-patent-license.htmlPart one of this two-part series responding to a series of articles on FRAND statements addressed the appropriate royalty base for cellular standard-essential patents (SEPs).

This article now addresses the fourth and fifth articles in that series, where the authors describe the “FRAND process.” The authors start from a mistaken premise that holders of SEPs subject to FRAND commitments enjoy more rights than all other patent holders traditionally possess, and that SEP holders’ FRAND commitments impose obligations on potential licensees rather than on the SEP holders themselves. For example, the authors appear to recoil at the idea that “SEP owners should prove to prospective licensees that licenses are needed.” As the authors apparently conceive of the FRAND process, potential licensees have no right to challenge the claims of SEP holders as to the necessity of a license. The only relevant question to them appears to be how large a royalty payment should be, without regard to the patent merits.

The authors’ view of the FRAND process fundamentally misconceives the nature and purpose of a FRAND commitment, what it means to declare a patent essential to a standard, and the nature and purpose of the burdens under the patent system.

The Nature and Purpose of the FRAND Commitment

The authors’ description of the “FRAND process” is divorced from the standard-setting context in which FRAND commitments arise and the competition problem that FRAND commitments were meant to address. The benefits that come from standardization—promoting competition and innovation—are intended for consumers. It is for this reason that standard setting—which, is, “after all, implicitly an agreement not to manufacture, distribute, or purchase certain types of products”—is permitted under the antitrust laws. Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500-01 (1988).

One consequence of standard setting is that patents covering technology incorporated into the standard become “essential” to using the standard. When that happens, an SEP owner acquires market power that is a consequence of standardization and its elimination of competitive alternatives and is not owed to simply having patent rights, which by themselves do not necessarily confer market power. See, e.g., Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 314 (3d Cir. 2007). In particular, companies that wish to offer products that support a standard make investments that leave them vulnerable to later being shut out from doing so or being subject to unreasonable royalty demands from SEP owners.

The FRAND commitment acts as a check on a SEP holder’s ability to exercise the market power of its SEPs attributable to the creation of a standard and the elimination of competitive alternatives to the standardized technology. Id. at 313. Thus, when a holder of a declared essential patent voluntarily agrees to accept a FRAND commitment, it has willingly agreed to limit the exclusionary rights associated with that patent. In return—and if its patent is truly essential and infringed by practicing the standard—it benefits greatly by expanding the pool of potential licensees for the SEP to include all those that support the standard.

A FRAND commitment is thus a unilateral and voluntary decision by the SEP holder to trade away the ability to exercise certain patent rights—such as the ability to pick and choose what parties it licenses and limitations on its ability to exclude users from a market—to obtain the powerful licensing benefits created by standardization. But such a unilateral commitment by a SEP holder does not impose obligations on potential licensees to take a license or even to negotiate. Assertions that the SEP holder and potential licensee are similarly situated, such as InterDigital’s contention that “both parties have an obligation to negotiate in good faith,” overlook this distinction. Rather than imposing obligations on a licensee, the FRAND commitment creates an option for a potential licensee to receive a license on FRAND terms if a license is shown to be necessary. To be sure, a potential licensee that does not take a license to a SEP that it is using remains subject to all the risks and consequences facing any infringer, including paying damages and the potential for enhanced damages if warranted. But, critically, those consequences arise from patent law, not from another party’s decision to license on FRAND terms.

U.S. courts have rejected the notion the authors advance that an SEP holders’ FRAND obligations somehow impose reciprocal obligations on potential licensees. In Core Wireless Licensing S.a.r.l. v. Apple Inc., 6:12-cv-100 (E.D. Tex.), Core Wireless, a patent assertion entity that acquired declared-essential cellular patents from Nokia, pursued a breach of contract theory against Apple, claiming that FRAND commitments made by Nokia to the European Telecommunications Standards Institute (ETSI) for the Core Wireless patents imposed contractual obligations on Apple as an ETSI member. Specifically, Core Wireless claimed that the FRAND commitments—with which Apple had no involvement—contractually obligated Apple either to negotiate in good faith with Core Wireless or to pay FRAND royalties to Core Wireless without a showing that Apple was actually using the patents. Core Wireless pursued this theory at trial but failed to offer evidence of the existence of such obligations arising through membership in ETSI, with the court later dismissing the claim. Core Wireless Licensing S.a.r.l. v. Apple Inc., No. 6:12-CV-100-JRG, 2015 WL 4775973, at *3-4 (E.D. Tex. Aug. 11, 2015).

Similarly, in Apple Inc. v. Telefonaktiebolaget LM Ericsson, Inc., the court rejected Ericsson’s argument that Apple’s declaratory judgment patent case on Ericsson’s SEPs should be dismissed in favor of a pending Ericsson portfolio declaratory judgment claim in Texas. No. 15-cv-00154-JD, 2015 WL 1802467 (N.D. Cal. Apr. 20, 2015). As the court observed in concluding that the Ericsson case would not resolve the parties’ licensing dispute, “there exists no legal basis upon which Apple may be compelled to take a license for Ericsson’s patents on a portfolio-wide basis, as much as Ericsson may be able to point to business realities that make such an outcome unlikely, imprudent or uneconomical on Apple’s part.”  Id. at *2.

Nor do the cases that the authors cite support the proposition that a licensor’s FRAND commitments impose obligations on a potential licensee simply to acquiesce to the essentiality of a licensor’s SEPs or prevent the licensee from challenging the patent merits. For example, in HTC Corp. v. Telefonaktiebolaget LM Ericsson, the court merely addressed the burdens in litigation when a declaratory judgment is sought. Thus, the court concluded that where HTC pursued a breach of contract claim that Ericsson breached its FRAND obligations, and Ericsson sought a declaratory judgment that it had not breached those obligations, the burden of proof rested on HTC. No. 6:18-CV-00243-JRG, 2019 WL 4734950, at *5 (E.D. Tex. May 22, 2019) (“The burden of proof in a breach of contract claim rests on the party alleging breach, which in this case is HTC.”). Likewise, Koninklijke KPN N.V. v. Sierra Wireless, Inc. addressed the burden to prevail on a breach of FRAND claim where even the patent holder “argue[d] that its patent may not actually be essential.”  No. 17-90-LPS, 2020 U.S. Dist. LEXIS 67016, at *7 (D. Del. Apr. 16, 2020). Those decisions do not preclude a licensee from challenging the merits of a licensee’s SEPs during negotiations, including their essentiality.

Declared Essential Patents are Not Necessarily Essential and Infringed

The authors’ contention that licensees should not be able to challenge the essentiality of claimed SEPs also ignores that there is a massive volume of declared SEPs, many of which are not actually essential, infringed, valid, or enforceable. A licensee would be remiss not to take steps to ensure that a licensor can demonstrate that its declared SEPs are in fact essential and infringed and should be licensed before agreeing to pay for them.

To start, there are many thousands and thousands of declared SEPs for cellular standards. For example, for 5G alone, as of January 1, 2020, there are already 95,526 patents or patent applications declared essential across a total of 21,571 unique patent families. Tim Pohlmann & Knut Blind, Fact finding study on patents declared to the 5G standard 9 (Jan. 2020).

Standard-setting organizations take no steps to confirm that any of these declared SEPs is actually essential. For example, ETSI’s Guide on IPRs provides the following disclaimer about patents and patent applications declared as potentially essential to ETSI:  “ETSI has not checked the validity of the information, nor the relevance of the identified patents/patent applications to the ETSI standards and cannot confirm, or deny, that the patents/patent applications are, in fact, essential, or potentially essential.” ETSI Guide on IPRs § 3.1.2 (Sept. 19, 2013).

While the fact that a patent is claimed to be “essential” might at first suggest that it is likely to succeed in litigation, that is frequently not the case. In fact, one study found that declared SEPs fared worse in U.S. litigations in district courts and at the International Trade Commission than a cohort of similar patents that were not SEPs. Looking at how patents fared across litigations, the study found that SEPs resulted in infringement findings only 27% of the time as compared to 60% of the time for patents in the non-SEP cohort. RPX Corp., Standard Essential Patents: How Do They Fare? 5.

One vivid example of the shortcomings of claimed SEPs is demonstrated through Core  Wireless’s failed litigation campaign asserting 14 former Nokia cellular SEPs against Apple. In Texas, Core Wireless dismissed nine before trial and Apple was found not to infringe the five remaining SEPs. Core Wireless Licensing S.à.r.l. v. Apple Inc., No. 6:12-cv-100 (E.D. Tex.). Next, Core Wireless asserted five SEPs against Apple in California, three of which it dismissed before trial. The two patents asserted at trial were ultimately found not infringed and unenforceable, respectively. Core Wireless Licensing S.a.r.l. v. Apple Inc., 899 F.3d 1356 (Fed. Cir. 2018); Conversant Wireless Licensing S.A.R.L. v. Apple, Inc., No. 15-CV-05008-NC, 2019 WL 4038419, at *1 (N.D. Cal. May 10, 2019)..

Given the low rate of success for declared SEPs in litigation—of presumably the patents the patent holder views as among its strongest—potential licensees are right to be skeptical of claims of essentiality and to push SEP holders to demonstrate the merits of their patents.

The Traditional Burdens of the Patent System Still Apply to SEPs

The fact of making a contractual FRAND commitment also does not somehow lessen a patent holder’s traditional burdens of proof, where it is up to the patent holder to prove infringement, and a defendant is free to raise any meritorious defenses. For example, in Innovatio IP Ventures, LLC Patent Litigation, the court rejected the argument that SEPs should be entitled to a shortcut. It concluded that “[a]lthough . . . alleged infringers may force RAND-obligated patent holders into court to enforce their patents . . . this reality does not present significant concerns unique to the RAND context.”  No. 11 C 9308, 2013 WL 5593609, at *11-12 (N.D. Ill. Sept. 27, 2013). Accordingly, the court declined to “give the ability of alleged infringers to force a lawsuit any special consideration in the RAND analysis beyond what it receives in a typical patent case.”  Id. Likewise, the Federal Trade Commission noted that an arbitration provision in a consent decree resolving an investigation of Motorola Mobility’s pursuit of SEP injunctions did not “negate or alter traditional burdens of proof, or deprive implementers of their rights to seek judicial review, challenge infringement, or raise defenses such as validity, exhaustion, and essentiality.”  In re Motorola Mobility LLC and Google Inc., FTC Docket No. C-4410, Letter to Commenters at 5 n.13, July 23, 2013. These authorities are consistent with the Apple position the authors critique that the traditional “burdens of proof should be applied to test the merits of SEPs and owners’ royalty demands, just as they are for all patents.”

Putting patent owners to their burden of proof is a critical aspect of the patent system and vital to innovation. The United States Supreme Court has emphasized that there is an “important public interest” in patent challenges because “[i]f they are muzzled, the public may continually be required to pay tribute to [the patentee] without need or justification.” Lear, Inc. v. Adkins, 395 U.S. 653, 670 (1969). Such challenges are important to eliminate invalid patents and in the case of SEPs, also to demonstrate when they are not essential.

Thus, contrary to the authors’ suggestion, there can be value in litigating SEPs. There is no justification in offering SEP holders a shortcut around proving the merits of their patents that is unavailable to other patent holders. The authors point to the decisions by UK courts in the Unwired Planet case as recognizing the “tension” of SEP holders having to litigate country-by-country. But the solution of the UK courts was simply to flip the burden, placing it on the defendant to litigate country-by-country to invalidate SEPs under the license it has been forced to enter to stave off an injunction excluding its products from the UK market. That outcome improperly inverts the burden of proof by making it the responsibility of the licensee to prove that it does not need to pay royalties rather than having the SEP holder demonstrate its entitlement to royalties. Further, the Unwired Planet approach of global rate setting will only serve to create competition among countries to become SEP litigation destinations that are favorable to SEP holders or to potential licensees. It increases the risk of inconsistent outcomes and disincentives for parties to engage in negotiations rather than trying to sue first in a preferred jurisdiction.

That appears to be exactly what happened in the events leading to the recent (and now settled) litigation between Ericsson and Samsung. Samsung filed the first case in China because, as Samsung explained, “the Chinese courts, like the UK courts, will decide worldwide SEP license rates.” Samsung’s Opposition to Ericsson’s Application for Anti-Interference Injunction Relating to Samsung’s Lawsuit in China at 4, Ericsson Inc. v. Samsung Elecs. Co. Ltd., No. 2:20-cv-380-JRG (E.D. Tex. Jan. 1, 2021). Samsung also obtained an anti-suit injunction from the Chinese court prohibiting Ericsson from, among other steps, seeking to adjudicate elsewhere the licensing terms for Ericsson’s 4G and 5G SEPs. Id. at 5. Meanwhile, Ericsson was pursuing litigation against Samsung in the Eastern District of Texas, where it obtained its own anti-anti-suit injunction ordering Samsung to “[t]ake no action in the Chinese Action that would interfere with this Court’s jurisdiction to determine whether Ericsson or Samsung have met or breached their FRAND obligations as they relate to both Ericsson and Samsung’s 4G and 5G SEPs.”  Memorandum Opinion and Preliminary Injunction at 15, Ericsson Inc. v. Samsung Elecs. Co. Ltd., No. 2:20-cv-380-JRG (E.D. Tex. Jan. 11, 2021).

A Misguided View

The FRAND commitment is rights limiting but also opportunity expanding. The SEP owner voluntarily agrees to certain limitations on its exercise of patent rights—that preserve ex ante competition for the benefit of consumers and assure potential users that licenses for the standard will be available to them—in exchange for the opportunity to have its technology incorporated into the standard and benefit from widespread adoption and licensing of its technology if the standard is successful. But as conceived of by the authors of the series to which this article responds, there is no trade off in the FRAND commitment. Instead, the authors suggest a SEP holder expands its rights and its opportunities, while the rights of a potential licensee are limited through a contract to which it is not even a party. That is a misguided view of the FRAND commitment divorced from both its origins and purpose that will harm not only the standards ecosystem but also future innovation in the marketplace.

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