USTR Disapproves USITC 337 Ruling on Apple v. Samsung

Economists Ink: A Brief Analysis of Policy and Litigation


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EI Principal Robert Stoner has consulted in a number of matters concerning standard-setting organizations and standard-essential patents.

The U.S. Trade Representative (USTR), in a virtually unprecedented move, recently disapproved an earlier U.S. International Trade Commission (USITC) determination issuing an exclusion order under Section 337 of the Tariff Act. The order would have excluded certain Apple Inc. smart phones and tablet computers from being imported to the United States. Those products allegedly infringed a standard-essential patent owned by Samsung Electronics. The conflicting decisions hinged on whether Samsung had violated its obligation to license that patent on a fair, reasonable and non-discriminatory (FRAND) basis as it had promised to do when the patent was embedded in the standard. The USITC effectively ruled that Samsung did not violate its FRAND obligations. By contrast, the USTR decision effectively found that the USITC had not demonstrated that Samsung had made a bona fide FRAND offer, thereby reasoning that the USITC determination contravened the public interest in having firms with standard-essential patents abide by their FRAND commitments.

The USTR endorsed a view expressed in an earlier policy statement by the U.S. Department of Justice (DOJ) and the Patent and Trademark Office (PTO) that exclusion orders based on standard-essential patents should be issued only in very limited circumstances. That statement, in language quoted by the USTR, suggests that such orders may be issued if the firm that wishes to use the patent refuses to pay a FRAND royalty or to negotiate to determine FRAND terms. Whether that exception applies depends on the parties’ behavior in negotiations. Did the patent holder try to “hold up” the would-be licensee, using the leverage created by the inclusion of its patent in the standard to receive a high royalty? Or did the patent holder negotiate in good faith and fulfill its FRAND obligation while the would-be licensee rejected a legitimate FRAND offer, perhaps even engaging in “reverse hold up” to gain a strategic advantage? On that point, the USITC and USTR differ.

The USITC found that Samsung bargained in good faith and fulfilled its FRAND obligations, with no indications of hold-up. It indicated that, if anything, Apple had engaged in reverse hold up. Apple challenged the validity of Samsung’s asserted patents and the existence of infringement before it took a license. In effect, the USITC found Apple refused to accept a FRAND offer or to negotiate a FRAND license. The USITC also found that it was reasonable for Samsung to offer Apple a reduced royalty rate if Apple would agree to license some of its patents to Samsung as part of a comprehensive cross-licensing arrangement. The USITC observed that cross-license arrangements are consistent with industry practice. Moreover, the USITC indicated that Apple may have unjustifiably insisted on a lower royalty rate from Samsung similar to that achieved by licensees who had given Samsung other considerations, such as cross-licenses, in addition to royalties.

The USITC position was controversial. One commissioner dissented from the finding that Samsung had made FRAND terms available to Apple. Observers who have objected to the USITC position make two major arguments. First, some of Samsung’s offers allegedly involved unrealistically high royalty rates. Such offers would have resulted in a very high aggregate Apple royalty when combined (“stacked”) with royalties on other asserted standard-essential patents. Some have noted the challenges in determining if an offer meets the terms of a FRAND obligation, particularly if other standard-essential patents also must be licensed.

Second, some observers have questioned the USITC’s determination that Samsung’s offer involving cross-licensing constituted a legitimate FRAND offer. The USITC noted that cross-licensing is common. Some commentators have also stated that offers involving cross-licensing can be FRAND offers. Nonetheless, determining whether an offer involving cross-licensing is FRAND can depend on numerous factors that are specific to the industry, parties, technologies and products involved. (The patents proposed for cross-licensing, which are not standard-essential, are at the center of another dispute between Apple and Samsung. In that dispute, the USITC recently awarded Apple an exclusion order against certain Samsung products. That order is currently under review by the USTR.)

Some have argued that the USITC may not be the best venue to address licensing issues related to standard-essential patents. The USITC can only issue exclusion orders; it has no authority to award damages for infringement. Product exclusion may be a less desirable remedy when standard-essential patents are at issue, because whole categories of products could be banned based on the failure of a bilateral FRAND negotiation and the USITC’s subsequent ex-post evaluation of whether FRAND commitments have been met. Perhaps for that reason, the DOJ-PTO statement urges the USITC to consider whether money damages rather than exclusionary relief is the appropriate remedy for infringement of a standard-essential patent.

Moreover, because the USITC does not assess damages in Section 337 matters, it may not be in the best position to determine what the appropriate royalty would have been in the event of infringement. The absence of that experience may make the USITC a less desirable venue for disputes involving FRAND negotiations, as the question of an appropriate royalty is related to the question of the reasonableness of an offer made in negotiations. (U.S. district courts are the primary venue for determining royalties and damages in patent infringement suits.)

Standard-setting organizations themselves may be able to avoid future litigation by developing more explicit terms for licensing essential patents. For example, before a patent is embedded in a standard, the holder may be required to commit to royalty rates. Bilateral negotiations to work out different arrangements, such as those involving cross-licensing, would be allowed, but if they failed, the parties would use the royalty rates in the agreement rather than engage in extensive litigation. Given the uncertainties involved in the development of technologies and the use of standards, however, patent holders and standard-setting organizations may find it difficult to require explicit commitments concerning royalties.

If the USITC is to consider whether the parties in a Section 337 matter that involves a standard-essential patent have engaged in either hold up or reverse hold up, it must confront a number of difficult questions that require a highly fact-intensive, ex-post investigation of the negotiating process. The USTR decision instructed the USITC that to fully assess the public interest issues in cases involving standard-essential patents, it should develop a “comprehensive factual record” on the essential nature of the patent and the negotiating history of the parties. It should also make explicit findings assessing the degree to which FRAND obligations were met based on that record.