How French and California Contract Law Would Interpret SEP Patent Owner Obligations Under the ETSI Licensing Declaration

“Based on general contract principles, the obligation to be ‘prepared to grant irrevocable licenses’ should be interpreted to allow for performance / discharge despite implementer cooperation.”

SEPIn the United States, the issue of whether or not one has complied with a licensing-related commitment made to a standards setting organization is often treated as a matter of contract. As we have written about before (here and here), some implementers wish to interpret such commitments so as not to lose entitlement to fair, reasonable and non-discriminatory (FRAND) licenses despite not negotiating in good faith or, as we like to say, to have their FRAND cake and eat it too. In a recently prepared article, we explore how such an interpretation lines up with basic contract law principles, particularly having reference to the language of the European Telecommunications Standards Institute’s (ETSI) Intellectual Property Rights Information Statement and Licensing Declaration [“the ETSI Licensing Declaration”].

Specifically, we focus on the language of the obligation set forth in the ETSI Licensing Declaration to be “prepared to grant irrevocable licenses…” in view of French and U.S. / California law. We consider the former given the choice of law provision in the ETSI Licensing Declaration stating, “the construction, validity and performance of this IPR information statement and licensing declaration shall be governed by the laws of France” (emphasis added). The latter is also considered, however, because if the contract is litigated in the state, California law still governs if French law conflicts with a fundamental public policy of California and the state has a greater interest in the issue. But where the laws do not conflict, there are no issues. For example, both California and French law appear aligned with respect to the black letter law rule of contracts that full performance of an obligation discharges the obligation. So, what does it mean to be “prepared to grant irrevocable licenses” and what is the significance of showing such a preparedness or a willingness to be prepared?

According to rules of contract interpretation set forth in Corbin on Contracts, the Restatement (Second) of Contracts, the California Civil Code and the French Civil Code, courts will consider, among other matters, the plain language of an obligation, the intention of the parties, what is a reasonable in the circumstances, what would make the obligation definite and capable of performance, and what would make the obligation lawful. An analysis of each of these considerations indicates that a patent owner’s obligation to ETSI should be capable of performance and discharge despite a lack of implementer cooperation.

Plain Language

Starting with the plain language of the obligation, note that agreeing to be “prepared” to do something is not same as agreeing that that something will in fact occur. For example, agreeing to make fields prepared for planting, does not require that crops be planted. Nor does the plain language meaning of the word “prepared” require any ongoing state of preparedness.

Intention of the Parties

Notwithstanding the plain language of the obligation, the intention of the parties to the contract must also be considered, as they could take precedence. ETSI’s intentions are set forth in three policy objectives included in the ETSI Intellectual Property Rights Policy [“the ETSI IPR Policy”]. These objectives essentially boil down to balancing two competing interests: (i) ensuring availability of the standards to implementers; and (ii) ensuring that owners of essential intellectual property rights are adequately and fairly rewarded for their contributions. Contrasting two possible interpretations of the obligation to be “prepared to grant irrevocable licenses”, one where the obligation can be performed / discharged irrespective of the cooperation of an implementer, and one where the obligation cannot be, ETSI’s Policy Objectives appear to favor the former. That is because the availability of the standards can be realized by requiring patent owners to offer FRAND licenses, and/or to offer to negotiate in good faith; implementers simply need to take patent owners up on such offers. Conversely, not allowing the obligation to be performed / discharged until such time as an implementer cooperates deprives patent owners of a fair and reasonable reward for their contributions and provides implementers with undue advantages in licensing negotiations for reasons explained next.

What is Reasonable?

With respect to what is a reasonable interpretation of the obligation, first consider, as we have written about before, that a patent owner’s obligation is to be prepared to grant irrevocable licenses, not to prove the need for licenses. Further, such an interpretation does not account for the fact that patent owners cannot legally require implementers to enter FRAND licenses (other than perhaps in China), but rather can only sue for patent infringement on a patent-by-patent, country-by-country basis. Rather, like all other contracts, licenses necessitate a meeting of the minds and both parties to assume a certain amount of risk. Allowing an implementer to exercise rights to FRAND licenses after forcing a patent owner to sue for infringement ignores the costs associated with doing so and places all the risk of uncertainties onto patent owners (instead of requiring implementers to choose between licenses they might not need and taking their chances on infringement, and potentially enhanced damages associated therewith, which is how most licensing schemes work (e.g. a fishing license)). And without any downside to not negotiating in good faith in a timely manner, an implementer can benefit from not obtaining licenses by amassing a war chest generated from commercializing infringing technology and using that money to defend infringement suits and launch validity challenges.

Nothing in the ETSI contract indicates any intention on the part of ETSI or patent owners that implementers could act in this way yet maintain entitlement to FRAND licenses. Further note, obtaining an injunction for patent infringement is, for all intents and purposes, impossible in the district courts of the United States. As such, allowing the obligation to be performed / discharged simply means that the implementer is potentially exposed to supra-FRAND damages for infringement, and possibly to supra-FRAND licensing rates going forward, neither of which have an impact on the availability of the standardized technology. In contrast, not allowing the obligation to be performed / discharged without implementer cooperation can greatly reduce a patent owner’s return on investment, and even make it such that the costs to enforce can exceed the value of a license.

Definiteness and Capable of Performance

Regarding definiteness and what is capable of performance, note that interpreting the obligation to be prepared to grant irrevocable licenses in such a way that requires implementer cooperation means performance / discharge of the obligation is not possible with an implementer intent on holding out. At a minimum, such an obligation is indefinite and uncertain. In contrast, an interpretation that allows for performance / discharge without implementer cooperation, for example, by requiring a patent owner to make a FRAND offer, makes the obligation definite and capable of performance and, therefore, preferable. Notably, the French Civil Code expressly prohibits “perpetual undertakings,” and further notes that contracts concluded for an indefinite duration may be put to an end at any time. Similarly, in his paper titled “A FRAND Contract’s Intended Third-Party Beneficiary”, J. Gregory Sidak points to a 1948 decision of the U.S. District Court of the District of Massachusetts that disfavored an interpretation of an obligation to license on reasonable terms that created a perpetual obligation (See Rudenberg v. Clark, 81 F. Supp. 42 (D. Mass. 1948)).

Lawfulness

Interpreting the obligation to be prepared to grant irrevocable licenses to require implementer cooperation that may never come also means that the obligation could exist long after the patents expire. Given that licensing patents after their expiration can violate antitrust laws and constitute patent misuse, an interpretation that avoids such a potential result, by allowing performance / discharge without implementer cooperation, is preferable.

Implied Conditions

Beyond rules of interpretation, both California and French law allow courts to imply stipulations and conditions necessary to make a contract reasonable in the circumstances. This includes implying conditions with respect to the time for performing an obligation. What is interesting about the law of implied conditions regarding the time for performance is that the rules are typically framed as a matter of providing an obligor with a reasonable time to perform, not in terms of how long an obligor must wait to perform. For, whoever complained about an online order being fulfilled too quickly, or a construction project being completed early?

Legal Decisions

Consistent with the foregoing, Judge Rodney Gilstrap ruled as follows with respect to satisfaction of the obligation set forth in the ETSI Licensing Declaration (emphasis added):

Finally, the Court holds that, as a matter of French law, a member of ETSI who has submitted a licensing declaration pursuant to Clause 6.1 of ETSI’s Intellectual Property Rights

(“IPR”) Policy satisfies its FRAND obligation by either (1) offering a license on FRAND terms and conditions, or (2) negotiating in good faith towards a FRAND license.

See HTC Corporation, HTC America Inc v. Telefonaktiebolaget LM Ericsson, Ericsson IncCase No: 6:18-CV-00243-JRG (E.D. Texas, 2019), Memorandum Opinion and Final Judgment.  Notably, Judge Rodney Gilstrap did not require any implementer involvement, at least not when it comes to satisfying the obligation by way of offering a FRAND license. Arguably, the negotiating in good faith prong might also be satisfied despite a lack of cooperation on the part of an implementer, for example, by offering arbitration on reasonable terms and conditions, but that is not clear from the ruling. To the extent negotiating in good faith does require implementer participation, however, Judge Rodney Gilstrap’s ruling makes knowing whether or not one has satisfied their obligation uncertain, for one cannot know if the terms offered were FRAND (more precisely, not a breach of FRAND) until such terms and conditions have been considered by a court. On the other hand, determining whether a reasonable offer of arbitration was made would be easily assessable from the outset.

What if Implementer Cooperation is Required?

But what if we are wrong and implementer cooperation is required to perform / discharge a patent owner’s obligation to be prepared to grant irrevocable licenses? More specifically, what happens in the event an implementer won’t engage?

Discharge by Tender of Performance

According to Corbin on Contracts, to the extent performance of one party’s obligation depends on the cooperation of another, the obligation to perform can be discharged if said cooperation is not forthcoming. California and French law reflect similar principles by implying a promise of good faith and fair dealing in every contract, with the former expressly noting that the promise includes refraining from interfering with the right of another party to receive the benefits of the contract. Consistent therewith, Judge Rodney Gilstrap allowed Ericsson’s declaratory claims that HTC “rejected, repudiated, and/or forfeited any rights associated with Ericsson’s FRAND declarations and is an unwilling negotiating partner” to proceed to trial, and HTC was ultimately found to have “breached its duty to negotiate with Ericsson in good faith for a license…”.

Discharge of Duty by Nonperformance of Condition

One thing that does not sit well with a reciprocal obligation to negotiate in good faith approach to interpreting the ETSI Licensing Declaration, however, is a point raised by HTC, namely, that implementers are not parties to the contract. To the extent the obligation to be prepared to grant irrevocable licenses is interpreted to necessitate implementer cooperation, perhaps an obligation to negotiate in good faith should not be implied in view of the lack of privity, but rather implementer cooperation should be implied as a condition to a patent owner’s obligation. Support for this approach can be found in Corbin on Contracts and the Restatement (Second) of Contracts.  With respect to the time limits for providing such cooperation, Corbin on Contracts further notes that even where a time is not specified, there will come a point at which the obligation is discharged despite a lack of performance on the part of the obligor. The Restatement (Second) of Contracts expresses a similar sentiment. Even more on point, Judge Charles Wyzanski, Jr. of the U.S. District Court for the District of Massachusetts read in a requirement that licensees act within 120 days of being offered a license, or show cause why their rights should not end, in the case of Rudenberg v. Clark, noted above.

A significant effect of making an obligation conditional on the occurrence of an event is the risk of forfeiture on the part of an obligee if the event does not occur within a reasonable time, whereas placing an implied obligation on the obligee to ensure the event triggering performance occurs would not result in discharge of the main obligation if breach of the implied obligation was not considered material. In view of the risk of forfeiture, the Restatement (Second) of Contracts sets forth rules to avoid such a potentially harsh result. These rules do not appear applicable to the ETSI situation, however, given the materiality of an implementer’s cooperation to the patent owner’s obligation, the fact that such cooperation is within an implementer’s control, and the fact that only patent owners have an obligation under the contract.  Further noteworthy is that implementers have already received what they are entitled to under the contract in terms of access to the standardized technology.

Prevention / Impossibility

With respect to an obligation requiring cooperation, an obligee’s refusal to cooperate may also be seen as “preventing” the performance of the obligor, or making an obligor’s performance “impossible,” thereby justifying discharge of the obligation. Even something “much less than actual impossibility,” to quote Corbin on Contracts, may result in discharge under California and French law. We note that such issues are common in the world of construction contracts, where a contractor’s obligation is often dependent upon an owner providing access to a work site or securing necessary permits. See, for example, Bomberger v. McKelvey, 35 Cal.2d 607 (Cal. Sup. Ct. 1950), NYU Hospitals Center v. HRH Construction LLC (In re HRH Construction LLC), Case No. 12-CV-1384 DAB (S.D.N.Y. 2015) and United States v. Bedford Assocs., Case No. 79 Civ. 1522 (HFW); No. 79 Civ. 1482 (HFW) (S.D.N.Y. 1982). See also California Civil Jury Instruction No. 4502 “Breach of Implied Covenant to Provide Necessary Items Within Owner’s Control” from the Construction Law series of California Civil Jury Instructions.

The Upshot: Implementers Must Cooperate

Based on general contract principles, the obligation to be “prepared to grant irrevocable licenses” in the ETSI Licensing Declaration appears as though it should be interpreted to allow for performance / discharge despite implementer cooperation. This is especially so in United States district court, where injunctive relief is, practically speaking, impossible and, therefore, no concerns about a lack of access to the standards exist. Even if the obligation were interpreted to require implementer cooperation, a failure to provide such cooperation in a timely manner would appear to further justify discharge, notwithstanding a lack of performance on the part of patent owners.

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