Shooting from the Hip: The CAFC’S Sua Sponte Interpretation of ETSI’s IPR Licensing Declaration

A recent decision in the matter of Telefonaktiebolaget LM Ericsson, Ericsson AB, Ericsson, Incl. v. Lenovo (United States), Inc. et. al., saw the United States Court of Appeals for the Federal Circuit (CAFC) consider an appeal of the United States District Court for the Eastern District of North Carolina’s denial of Lenovo’s request for an antisuit injunction, preventing Ericsson from enforcing injunctions in Colombia and Brazil. While the CAFC’s decision to vacate and remand turned on the first threshold requirement of a three-part test for analyzing antisuit injunctions (i.e. that the domestic suit be “dispositive” of the foreign action), the court nonetheless makes other significant findings regarding the scope, and performance, of licensing declarations set forth by the European Telecommunications Standards Institute (ETSI). Several articles, including one from IPWatchdog, have already reported on the antisuit aspects of the decision. Accordingly, we focus on the contract-interpretation issues.

The CAFC’s Interpretation of the ETSI IPR Licensing Declaration Obligation

According to the decision, Lenovo believes that “…Ericsson’s FRAND commitment precludes Ericsson from pursuing SEP-based injunctive relief unless it has first complied with the commitment’s obligation to negotiate in good faith over a license to those SEPs” (emphasis in original). And even though acknowledging that “the district court did not reach this contract-interpretation issue”, the CAFC takes the issue up on its own accord and finds as follows (emphasis added):

On this issue, we conclude that a party that has made an ETSI FRAND commitment must have complied with the commitment’s obligation to negotiate in good faith over a license to its SEPs before it pursues injunctive relief based on those SEPs. Given the SEP-related concerns underlying the FRAND commitment, if the FRAND commitment means anything of substance, it must mean that an SEP holder that has made such a commitment cannot just spring injunctive actions against other standard implementers without having first complied with some standard of conduct. That standard of conduct, we conclude, must be—at a minimum—the very one imposed by the FRAND commitment’s good-faith-negotiating obligation.

In support of this conclusion, the decision of United States Court of Appeals for the Ninth Circuit in Microsoft v. Motorola is cited, which the CAFC states, “involved similar facts and issues—namely: SEPs, a commitment like the FRAND commitment here, and a foreign SEP-based injunction.” (emphasis added). According to that decision, the Court of Appeals for the Ninth Circuit found that “[i]mplicit in such a sweeping promise is, at least arguably, a guarantee that the patent-holder will not take steps to keep would-be users from using the patented material, such as seeking an injunction, but will instead proffer licenses consistent with the commitment made.” Realtek Semiconductor Corp. v. LSI Corp., 946 F. Supp. 2d 998, 1008 (N.D. Cal. 2013) and Medtronic, Inc. v. Catalyst Rsch. Corp., 518 F. Supp. 946, 947–48, 953–55 (D. Minn. 1981) are also cited. None of these cases, however, involve the IPR Licensing Declaration used by ETSI and, as such, none considered the proper interpretation thereof. In Microsoft v. Motorola, the contracts at issue were with the ITU (regarding the H.264 video-coding standard) and the IEEE (regarding the 802.11 wireless local area network standard). Realtek v. LSI also involved the IEEE standards. Medtronic did not consider a commitment to a standards setting organization at all, but rather a direct agreement between the parties preventing interference with Medtronic’s production of batteries. While the CAFC further points to the District Court for the Northen District of California’s decision in Huawei Techs. Co. v. Samsung Elecs. Co., No. 3:16-cv-2787, 2018 WL 1784065, at *8 (N.D. Cal. Apr. 13, 2018), which case did involve licensing related commitments made to ETSI, the decision itself relies on the Microsoft v. Motorola and Medtronic v. Catalyst decisions without considering the specific language of the ETSI IPR Licensing Declarations, or the laws of France that govern such declarations. Notably, neither the ETSI IPR Licensing Declaration, nor the broader ETSI IPR Policy, mention injunctive relief. Regarding French law, the CAFC simply states the following in a footnote:

Although the FRAND commitment is governed by French law, neither party has identified any specific aspect of French law that would compel an interpretation different from the straightforward one we adopt.

Curiously, the CAFC does not address that, prior to its decision, the limitations on seeking injunctive relief for infringement of patents subject to ETSI’s IPR Licensing Declaration were not based on the language of the declaration itself, but rather originated from antitrust / competition law. See, for example, the European Court of Justice’s (CJEU) judgment in Huawei Technologies Co. Ltd v ZTE Corp. and ZTE Deutschland GmbH, and the European Commission’s Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee: Setting out the EU approach to Standard Essential Patents. See also the various policy statements, and statements of interest, of US Government agencies regarding standards related patents and the intersection of intellectual property and antitrust laws (which we wrote about here, here and here). Notably, in support of its interpretation, the CAFC also refers to the U.K. Supreme Court’s decision in Unwired Planet Int’l Ltd. v. Huawei Techs. Co. [2020] UKSC 37, [72], which states that “the operation of the ETSI regime requires the SEP owner to offer a FRAND licen[s]e… as [a] precondition[] of the grant of an injunction.” A closer inspection reveals, however, that the breach being considered in that case was of article 102 of the Treaty on the Functioning of the European Union (“TFEU”), as guided by the CJEU’s decision in Huawei v ZTE, which article deals with abuse of a dominant position (competition law). See, for example, the opening paragraph of the UK Supreme Court’s ruling:

Fourthly, …there is a question whether the court should refuse to grant the owner of such a SEP an injunction on the ground that it has breached EU competition law because it has not complied with the guidance given in the judgment of the Court of Justice of the European Union (“CJEU”) in Huawei v ZTE (Case C-170/13) EU:C:2015:477; [2015] 5 CMLR 14; [2016] RPC 4.

We recognize that, because seeking injunctive relief with respect to standards related patents can violate antitrust / competition law, this does not mean that the contract itself cannot also preclude such actions. The fact that no other court or government agency has found such a contractual obligation to exist, however, in the approximately 30 years since the current ETSI IPR Licensing Declaration was first deployed makes the CAFC’s decision quite unexpected. Also surprising is the CAFC taking up the issue sua sponte, and not mentioning any prior cases that considered such issues (two of which are discussed in the following section).

The CAFC’s Views Regarding Performance of the ETSI IPR Licensing Obligation

With respect performance of the ETSI IPR Licensing Declaration obligation, the CAFC’s decision states the following (emphasis added):

At least one way an SEP holder can satisfy this good-faith-negotiating obligation is by making an offer at a rate that is actually FRAND. In other words, if an SEP holder has already made such an offer, this “negotiating” obligation requires no more of the SEP holder.

Though not cited, this conclusion appears consistent with Judge Rodney Gilstrap’s ruling in HTC Corporation, HTC America Inc v. Telefonaktiebolaget LM Ericsson, Ericsson Inc, Case No: 6:18-CV-00243-JRG (E.D. Texas, 2019), Memorandum Opinion and Final Judgment, which held as follows:

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.

As we wrote about here (and in more detail here), there are several issues with the CAFC’s (and Judge Gilstrap’s) position regarding performance of the obligation. One is that requiring an offer be made on FRAND terms and conditions, to satisfy the obligation, means that a patent owner cannot know if they have been successful until the offer has been considered by a court. Further, such an approach raises another important question: do underlying patent issues (e.g. infringement, validity…) need be considered first? If so, that can introduce significant delay and unduly shift patent risks to the owners contrary to the Policy Objectives set forth in Section 3 of the ETSI IPR Policy. And what about foreign patents? For, any requirement to assess those would appear to raise jurisdictional issues (as discussed here: see Apple’s Motion to Dismiss Count VIII for Lack of Subject Matter Jurisdiction).

In fairness, the CAFC did not say that “making an offer at a rate that is actually FRAND” is the only way for patent owners to satisfy their obligation, but the court did not present any of the other ways either. The main problem with a general obligation to negotiate in good faith is determining what, precisely, that entails. For example, does negotiating in good faith necessitate the cooperation of the prospective licensee (which is by no means assured), or can the obligation be met unilaterally? And how long does a patent owner have to fruitlessly negotiate before ceasing to do so does not constitute a lack of good faith? [ASIDE: The CAFC also did not mention Judge Gilstrap’s recent ruling in G+ Communications, LLC v. Samsung Electronics Co., Samsung Electronics America, Inc., Case No: 2:22-CV-00078-JRG (E.D. Texas), which found that, as a matter of French law, the obligation to negotiate in good faith can be temporarily suspended (see here for additional analysis on that decision). How that decision fits in with the CAFC’s ruling is unclear]. As we previously wrote, allowing the obligation to be unilaterally satisfied by providing notice and offering arbitration on reasonable terms and conditions is preferable from the perspectives of not being at the mercy of an uncooperative licensee, certainty of the obligation, and avoiding extensive litigation to assess performance. Notably, that was the approach taken by the Federal Trade Commission in its Decision and Order In the Matter of Motorola Mobility LLC and Google Inc., albeit with respect to ensuring compliance with antitrust laws. Interestingly, despite resulting from the very Microsoft v. Motorola saga referenced above, the CAFC did not mention this consent decree.

What Happened to the Condition of Essentiality?

In addition to not explaining the basis for its interpretation, nor setting forth a practical approach for assessing performance, the CAFC overlooks that the obligation to be prepared to grant irrevocable licenses set forth in the ETSI IPR Licensing Declaration is conditional, i.e. only “[t]o the extent that the IPR(s)… are or become, and remain ESSSENTIAL…”. Take, for example, the following characterization of the obligation from the background section of the CAFC’s decision, which makes no mention of essentiality (emphasis added):

To address SEP-related concerns, ETSI has an Intellectual Property Rights (“IPR”) policy under which SEP holders declare that they are “prepared to grant irrevocable licen[s]es” to their SEPs on “fair, reasonable[,] and non-discriminatory (‘FRAND’) terms and conditions.” J.A. 2137–38 (quoting ETSI IPR policy cl. 6.1); J.A. 1009–10 (same). The parties refer to this declaration as a “FRAND commitment,” and we do the same.

The decision then goes on to refer to Ericsson’s “FRAND commitment” as being the basis for a potential antisuit injunction, seemingly implying that essentiality has been established. Confusingly, the CAFC adds the following in a footnote (emphasis added):

In referring to a party’s SEPs [standard essential patents], we assume that they are subject to the FRAND commitment but express no opinion on whether they are, in fact, standard-essential.

But if the CAFC does not have an opinion on essentiality, how then can it conclude that an obligation conditioned on essentiality could justify an antisuit injunction?

Further concerning is the opening sentence of the background which refers to patents subject to the ETSI IPR Declaration as being declared essential (emphasis added):

This dispute concerns the 5G wireless-communication standard developed by the European Telecommunications Standards Institute (“ETSI”)—and, particularly, patents declared to be essential to complying with that standard (standard-essential patents or “SEPs”).

As we have previously explained, submitting an IPR Declaration to ESTI does not involve patent owners declaring essentiality. Rather, the ETSI IPR Declaration refers to “…the Declarant’s and/or its AFFILIATES’ present belief that the IPR(s) disclosed in the attached IPR Information Statement Annex may be or may become ESSENTIAL…” (emphasis added).

Beyond the implied contractual obligation read into the ETSI IPR Licensing Declaration, the court notes that its conclusion also aligns with general principles of equity (see Footnote 15) (emphasis added):

Our conclusion—i.e., that an ETSI FRAND-committed party must have complied with the commitment’s obligation to negotiate in good faith over a license to its SEPs before pursuing injunctive relief based on those SEPs—rests on how we interpret the FRAND commitment. We note additionally, however, that such a conclusion fits well within the general common-law principle, recognized in at least this country, that “one seeking equitable relief [e.g., an injunction] must do equity and come into court with clean hands.” See, e.g., Primerica Life Ins. Co. v. Woodall, 975 F.3d 697, 699 (8th Cir. 2020); see also 11A Wright & Miller § 2946, p. 106 (“A principle closely related to the clean-hands maxim is that before plaintiff will be permitted to invoke the aid of a court of equity, plaintiff must do equity.”).

This alternative position also appears, however, to rest on the assumption that the patents are subject to an obligation to be prepared to license on FRAND terms and conditions (i.e. that the patents are essential). Otherwise, why would Ericsson have unclean hands?

As we wrote about previously (here and here), the CAFC’s assumption as to the existence of an obligation may be the result of the patent owner’s own characterization of its patents as being essential, and/or by virtue of the parties’ claims / counterclaims seeking declarations regarding commitments made to ETSI, but that is by no means clear from the decision.

Muddy Waters

With respect to taking up the contract-interpretation issue for the first time on appeal, the CAFC notes several considerations guiding its use of discretion in this regard. One such consideration is “whether the proper outcome is beyond doubt, rendering a remand pointless”. For at least the reasons set forth above, we respectfully disagree that the proper interpretation of ETSI’s IPR Licensing Declaration was beyond doubt, especially given the novel approach taken by the CAFC. Despite what one can only assume was the CAFC’s best intention to provide clarity to this space, its ruling only further muddies the waters.

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Author: alexskopje
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