FRAND Commitments and Injunction Standards


Economists Ink: A Brief Analysis of Policy and Litigation

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EI Principal Robert D. Stoner has provided expert assistance in a number of matters involving intellectual property and FRAND commitments.

Both U.S. and European courts have addressed the question of when to grant an injunction against an implementer’s use of a standard essential patent (SEP). A recent ruling by the European Court of Justice (ECJ) establishes a standard for granting an injunction that is close to the standard used by the U.S. courts. The U.S. International Trade Commission (ITC) apparently continues to use a more permissive standard, despite objections from other U.S. agencies. Courts and agencies will continue to wrestle with the questions of what injunction standard is appropriate and how it should be implemented.

The ECJ ruling deals with patent infringement disputes involving a standard-essential patent (SEP) that the holder has committed to license on a fair, reasonable, and non-discriminatory (FRAND) basis. The ruling sets forth two conditions for the patent holder to seek an injunction in such a dispute. First, the SEP holder must have alerted the patent implementer to potential infringement and sent the implementer a written offer of licensing terms. Second, the implementer must have failed to respond in good faith to the offer but rather adopted delaying tactics and appeared unwilling to negotiate. Otherwise, seeking an injunction can be viewed as abusing a dominant position.

The ruling attempts to strike a balance between allowing patent holders to pursue injunctions to preserve patent rights and avoiding possible anticompetitive ramifications of patent “hold-up.” Commentators disagree on the extent to which the ruling limits injunction rights. How limiting the standard is will depend largely on who has the burden of proof. For example, the standard will be more limiting if patent holders have the burden of proving unwillingness and could not successfully do so if the implementer made a counter offer. The standard would be much less limiting if implementers have the burden of proving that their counter offer was a FRAND offer and the patent holder was breaching his FRAND obligation.

This ECJ ruling appears to be generally consistent with recent U.S. precedent. The ability of FRAND-encumbered patent holders to receive injunctions in U.S. Federal Courts is limited under the Supreme Court’s eBay standard to situations in which monetary damages are unlikely to sufficiently remedy plaintiff’s injury. Subsequent decisions implied that when there were FRAND licensing commitments, injunctions would be awarded only if the potential licensee was unwilling to pay a FRAND royalty. Underlying these decisions, particularly the appeals court decision that affirmed Microsoft v. Motorola, was the concern that SEP holders should not be able to use injunctions as part of the bargaining process to hold up willing potential licensees and undermine the implementation of the standard.

The eBay limitation on injunctions does not extend to the ITC in Section 337 (unfair import trade) investigations. The ITC is required to issue exclusion orders against infringing imports, even if they involve FRAND-encumbered SEPs, unless there is an overriding public interest in not doing so. The Department of Justice (DOJ) and U.S. Patent & Trademark Office (PTO) in 2013 released a joint policy statement that cautioned the ITC that an exclusion order could be inconsistent with the ITC’s public interest obligation if it allowed a patent holder to hold up an implementer on FRAND-encumbered patents, thus undermining the standard-setting process. The policy statement, however, also said that an exclusion order may be an appropriate remedy in some circumstances, such as where the potential licensee is unwilling to negotiate or refuses a FRAND license. Such hold-out conduct may be used as a bargaining tool to get a lower license rate (reverse hold-up). According to the DOJ/PTO statement, the ITC should base its final determination on a case-specific inquiry that fully considers the public interest factors. Later in 2013, the United States Trade Representative (USTR), following the DOJ/PTO admonitions, overturned an ITC exclusion order in the Samsung-Apple case.

In response to a recent ITC decision in InterDigital v. Nokia, several Federal Trade Commission (FTC) commissioners expressed highly divergent views on FRAND injunction issues. Chairwoman Edith Ramirez stated that because patent hold-up is a primary concern, the patent holder should have the burden of establishing that the implementer is an unwilling licensee to get an exclusion order. By contrast, Commissioner Ohlhausen and then Commissioner Wright stated that the contention that patent hold-up is prevalent has little empirical economic support. Therefore, to avoid an exclusion order, the implementer should have the burden of showing that the patent holder has breached his FRAND obligation. (A similar commissioner split occurred previously when the FTC negotiated the Bosch/SPX consent decree.)

Thus, the appropriateness of injunctions for FRAND-encumbered patents depends on the relative likelihood of patent hold-up vs. reverse hold-up. The theory of hold-up posits that standard-implementing companies with asset-specific investments can be locked-in to the technologies defining the standard, thereby leaving themselves vulnerable to high royalty demands. While this theory has a significant history in the economics literature, some have challenged the notion that patent hold-up occurs frequently in the real world. These commentators point out, for example, that the mobile phone industry, which has been at the center of recent FRAND litigation, has experienced exponential growth in the last 10 years, with rapid innovation and falling prices. Moreover, smartphone makers have been immensely profitable, despite being the target of patent litigation. These commentators argue this experience indicates that royalty costs are not unreasonably high and can be passed on to consumers with little impact on market shares or profits.

These commentators also state that reverse hold-up is as serious a problem as hold-up. Several recent articles in the economics literature on SEP royalty negotiations argue that reverse hold-up is a significant risk, even when injunctions are possible. For example, using a simple model that captures some of the relevant institutional features surrounding enforcement of SEPs, one group of authors finds that hold-up does not necessarily arise in equilibrium, and that the implementer may often engage in reverse hold-up. In particular, these authors find strong theoretical reasons to expect that reverse hold-up is a significant possibility in licensing negotiations when courts do not grant injunctions simply because the patents are valid and infringed but require other conditions, such as a licensee’s unwillingness to negotiate.

From an economic standpoint, many implementation standards are difficult to implement because the analysis required to establish willingness or unwillingness is highly subjective and fact-specific. Each negotiation is unique, and there are no clear economic criteria for determining whether a potential licensee is unwilling to negotiate or simply unwilling to accept the offers of the patent holder. In many ways, the clearest way to make the distinction likely would be to estimate the FRAND rate. One then could assess the willingness of the licensee to negotiate in good faith given that rate. That rate, however, is unknowable in a litigation setting unless the court tries to determine it, as has occurred in a few cases.