Painting with a Broad Brush: The European Commission’s Failure to Distinguish Seeking Damages for Past Infringement from Seeking an Injunction

Previously, we wrote about how alleged concerns of “hold-up” and a lack of “transparency”, two non-legal terms without accepted definitions, are being used to advocate for special rules applicable to patents subject to declarations regarding Fair, Reasonable and Non-Discriminatory (FRAND) licensing. These vague concepts are specifically chosen to obfuscate the real issues impacting FRAND licensing and used in an effort to shift traditional burdens of proof, regulate behavior previously found not to violate antitrust / competition law, and rewrite the express language of the commitment made by patent owners to the European Telecommunications Standards Institute (ETSI). The European Commission (EC) is the latest bull to enter the FRAND licensing China shop. Given much has already been written about the proposed regulatory framework (hereinafter “the Proposed Regulations”), we will focus our comments on one key issue: the EC’s failure to distinguish the seeking of damages for past infringement from seeking an injunction enjoining future activities.

What the Regulations Say About Damages

The Explanatory Memorandum section of the Proposed Regulations set forth two key limitations impacting the seeking of damages for past infringement: (1) “SEP holders cannot enforce their SEPs until they register” and (2) a “FRAND determination must be initiated by the SEP holder or implementer before initiating court proceedings in the EU.” The Proposed Regulations state that such restrictions are permitted under European law so long as corresponding to “objectives of general interest” and not constituting “a disproportionate and intolerable interference which infringes the very essence of the rights guaranteed” (see paragraph (42)). In the following sections, we analyze the various objectives and justifications advanced by the EC and consider whether they justify regulating the pursuit of damages for past infringement.

Addressing Hold-Up / Potential Abuse of a Dominant Position

Despite the term “hold-up” not being employed specifically, the Proposed Regulations conjure the spirit of the hold-up bogeyman by referring to “use of” and “access to” the standards and patented technology (emphasis added):

(3) “The success of a standard depends on its wide implementation and as such every stakeholder should be allowed to use a standard. …”

(17) “In line with the general principles and objectives of transparency, participation and access to European standardization …”

(31) “The purpose of the FRAND commitment is to facilitate adoption and use of the standard by making SEPs available to implementers on fair and reasonable terms …”

Similarly, the Explanatory Memorandum makes hyperbolic statements such as “… by including a patented technology in a standard, the SEP holder has a strong economic position vis-à-vis a potential standard implementer, because implementers that want to incorporate standards cannot work around these patents and must either pay for a licence or forego manufacturing of products that use the standard” (emphasis added).

What the Proposed Regulations ignore is that implementers typically implement the technology without a license and use money generated therefrom to defend against claims of infringement, challenge validity, or raise competition law claims. The only time an implementer needs to choose between paying and not commercializing the technology is when facing an injunction for infringing a patent without a license, but that could be many years after the infringement begins. In any event, seeking damages for past infringement in no way impacts anyone’s ability to practice a standard. Rather, use of patented technology embodied in the standard without a license is the problem when considering the past.

Related to this issue of access is the question of whether enforcing patents relating to standards violates European competition law. Interestingly, the Proposed Regulations refer to being “guided by… the Court of Justice judgment… in case C-170/13, Huawei Technologies Co. Ltd v ZTE Corp. and ZTE Deutschland GmbH” (hereinafter Huawei v. ZTE), and recognize that decision sets forth “certain conditions that must be fulfilled to prevent and abuse of dominant position by the SEP owner when seeking an injunction” (see paragraph (9), emphasis added).

Yet, despite the CJEU concluding that bringing an action for infringement seeking damages was not an abuse of a dominant position (see paragraphs 72-76 of Huawei v. ZTE), the EC states that its proposals are somehow “complementary to, but different from that of protecting undistorted competition, guaranteed by Articles 101 and 102 TFEU” (see paragraph (2), emphasis added). Later in the Proposed Regulations, however, reference is made to the Court of Justice’s judgment as justification for the proposed mandatory FRAND determination procedure, but without explaining how the judgment relates to the seeking of damages for past infringement (emphasis added).

(43) “… As confirmed by the CJEU, the provision of a mandatory dispute resolution as a precondition to access to competent courts of Member States is deemed to be compatible with the principle of effective judicial protection. The FRAND determination follows the conditions for mandatory dispute resolution outlined in the CJEU judgments, taking into account the particular characteristics of SEP licensing.”

Given these inconsistencies, the EC should clarify how limiting the right to seek damages for patent infringement is complementary to the CJEU’s findings in Huawei v. ZTE, as those two things appear orthogonal.

Supporting Commitments Made to Standards Development Organizations

The Proposed Regulations also refer to FRAND licensing-related obligations associated with participating in standards developments as justification for the new restrictions, but without considering the language of any specific licensing related declaration, instead treating them all as one and the same. For example, the Proposed Regulations provide as follows (emphasis added):

(3) “… To ensure wide implementation and accessibility of standards, standard development organisations demand the SEP holders that participate in standard development to commit to license those patents on FRAND terms and conditions to implementers that chose to use the standard. … This Regulation should apply to patents that are essential to a standard that has been published by a standard development organisation, to which the SEP holder has made a commitment to license its SEPs on fair, reasonable and non-discriminatory (FRAND) terms and conditions and that is not subject to a royalty-free intellectual property policy, after the entry into force of this Regulation.”

With respect to the ETSI IPR Information Statement and Licensing Declaration set forth in the ETSI Intellectual Property Rights Policy (hereinafter “the ETSI IPR Declaration”) the highlighted statements are incorrect. According to the ETSI IPR Declaration, Declarants declare that they are “prepared to grant irrevocable licenses…”. They do not “commit to license” or make “a commitment to license”. As we have written about previously, the language of the ETSI IPR Declaration reflects the fact that licenses cannot be unilaterally imposed but rather, like all contracts, require a meeting of the minds. More important to the topic of focus in this article, the ETSI contract is silent with respect to being prepared to provide releases for past infringement. As such, even if one were to assume, for sake of argument, that commitments made to ETSI warrant further regulation of FRAND licensing, there is no basis in the language of the ETSI IPR Declaration to warrant the regulation of seeking damages for past infringement.

In view of the EC’s misunderstanding of licensing-related declarations like the ETSI IPR Declaration, the EC erroneously surmises that the “ultimate goal” of patent owners is “to conclude FRAND licenses” (see paragraph (31)). To the extent the EC is using a proper legal interpretation of the term “licence” (i.e. as pertaining to permission to conduct future activities), this statement is wrong for overlooking any compensation for past infringement. Even if the EC envisioned the granting of releases at FRAND rates when making this statement, the statement is still incorrect. For, as we have written about before, allowing implementers to hold out and use money generated from commercializing patented technology without a license to fight allegations of infringement and challenge validity, while maintaining the right to releases on FRAND terms and conditions, tips the balance of power in favor of implementers and does not adequately and fairly reward innovators for their contributions to the standards. Allowing enhanced or supra-FRAND damages to be awarded for willful infringement is important for discouraging hold-out and allowing innovators to recoup enforcement and defense costs. See also Jonathan Barnett and David Kappos’ article, “Restoring Deterrence: The Case for Enhanced Damages in a No-Injunction Patent System.”

Further, the EC completely ignores the condition of essentiality that precedes the language of being “prepared to grant irrevocable licenses” in declarations like the ETSI IPR Declaration, and that the burden of establishing the fulfilment of a condition is on the person alleging the obligation exists (e.g. an implementer arguing entitlement to FRAND licenses to avoid an injunction), and conversely proposes that patent owners be responsible for identifying essential patents (see paragraph (19) noted above). Going a step further, the Proposed Regulations inexplicably codify a popular play from the hold-out playbook by recognizing an implementer’s right to challenge essentiality in court, even though a lack of essentiality would mean no obligation to be prepared to license on FRAND terms and conditions in the first place:

(26) “… If the pre-selected SEPs are confirmed essential, the SEP owners may use this information in negotiations and as evidence in courts, without prejudicing the right of an implementer to challenge the essentiality of a registered SEP in court. …”

(35) “… In a situation where a FRAND commitment has been given by the relevant SEP holder, provisional injunctions of an adequate and proportionate financial nature should provide the necessary judicial protection to the SEP holder who has agreed to license its SEP on FRAND terms, while the implementer should be able to contest the level of FRAND royalties or raise a defence of lack of essentiality or of invalidity of the SEP. …”

As such, instead of requiring that implementers conduct their own analyses and choose between accepting essentiality and being entitled to FRAND licenses on the one hand, and fighting essentiality and taking their chances on infringement on the other, the Proposed Regulations seek to increase the transactional costs of patent owners while unfairly allowing implementers to have their FRAND cake and eat it too.

Addressing a Lack of Transparency

One objective that comes up again and again in the Proposed Regulations is that of promoting transparency (see paragraphs (1) and (2)), including with respect to “total royalty rates (aggregate royalty)” (see paragraph (15)), and “the number of SEPs” and “parts of the standard covered” (see paragraph (17)).

But is transparency really the issue? For when it comes to the number of standard essential patents, the patents in question are public, as are the standards. So, too, is the ETSI database, which provides some links between the patents and sections of the standards. Accordingly, there is no issue with respect to implementers not having access to the necessary information. We recognize, however, that the relevant information is mixed with a lot of irrelevant information (non-essential patents, invalid patents, etc.). But there have been several litigations in the wireless cellular space where the total number of essential patents for 3G and/or 4G have been analyzed (Unwired Planet v. Huawei, TCL v. Ericsson (vacated), Archos v. Philips), and there are many companies that have produced reports on essentiality and offer services to analyze such publicly available information.

Regarding FRAND terms and conditions, many patent owners have announced upper limits for their rates and there have been several litigations where FRAND licenses have been unpacked and/or FRAND rates analyzed (e.g. Unwired Planet v. Huawei, TCL v. Ericsson (vacated), Archos v. Philips, IDCC v. Lenovo (UK), HTC v. Ericsson). Further, various reports regarding aggregate royalty rates for cellular wireless technology have been published by industry experts like Keith Mallinson (WiseHarbor), Alexander Galetovic (formerly of Universidad Adolfo Ibáñez), and Greg Sidak (Criterion Economics), which reports consider, among other things, corporate disclosures of publicly owned companies. That said, there are some known unknowns (as Donald Rumsfeld famously said) when it comes to the terms and conditions being agreed to for standards-related patents. But this lack of transparency cuts both ways. On the one hand, a patent owner knows how much each implementer pays for its patents but does not know how much those implementers pay other patent owners. On the other hand, an implementer knows what it pays to all patent owners but not what other implementers pay for the same patents. This is no different from how supply contracts work in many industries. In any event, the Proposed Regulations do not address this specific opacity head-on, for example, by requiring all licenses be disclosed to the EC or, going a step further, be made public.

Predictability

In view of the foregoing, what the EC appears to be getting at when referring to transparency is not gaining access to information, but rather, who should bear the transactional costs of sorting through such information and figuring out what are FRAND terms and conditions for a given portfolio—what the EC refers to as “promoting… predictability” (see paragraph (1)).

But what is the EC’s justification for placing additional burdens on patent owners and providing increased predictability for those who chose to commercialize the patented technology of others without a license (aka infringers)? Especially given there are no competition law issues associated with seeking damages for past infringement and the ETSI IPR Declaration is silent with respect to releases.

Regardless of any potential justification for restricting the seeking of damages for past infringement, the Proposed Regulations will not result in more efficient licensing for one simple reason: they do nothing to address hold-out. Oddly, the EC recognizes “the limited use of dispute resolution procedures for resolving FRAND disputes” as an issue affecting FRAND licensing (see paragraph (2)), but instead of requiring mandatory arbitration according to reasonable procedures in view of the amount at stake, for example, the Proposed Regulations propose optional procedures and/or giving non-binding opinions (re: an aggregate royalty (see paragraph (16)), FRAND terms and conditions (see paragraphs (34) and (41)), and essentiality (see paragraphs (29)). Somewhat self-servingly the Proposed Regulations state that “… [e]nsuring access to swift, fair and cost-efficient ways of resolving disputes on FRAND terms and conditions should benefit SEP owners and implementers alike” and that “a properly functioning out-of-court dispute resolution mechanism to determine FRAND terms (‘FRAND determination procedure’) may offer significant benefits for all parties” (see paragraph (31) (emphasis added)). But unlike court proceedings or binding arbitration, the Proposed Regulations offer no such ways or mechanisms for actually reaching a resolution. Rather, the Proposed Regulations envision that litigation will follow, which it certainly will. As a result, the Proposed Regulations, if adopted, will only serve to delay resolution of any disputes, and place an additional cost burden on patent owners.

In the words of the EC, the Proposed Regulations, as they pertain to restricting the pursuit of damages for past infringement are “a disproportionate and intolerable interference which infringes the very essence of the rights guaranteed”, given the essence of patent rights is the right to sue for infringement. The only efficiencies to be realized by the Proposed Regulations appear to be in the pursuit of efficient infringement.