Fresh Guidance for Owners of Standard-Essential Patents: Reasonable Royalties Can Be Expected; So Can Penalties if You Overreach

By Thomas Carey. Chair of our Business Practice Group

 

Until recently, thousands of companies had agreed to license their standards-essential patents (SEPs) on fair, reasonable and non-discriminatory (FRAND) terms in the course of participating in standard-setting organizations (SSOs), even though they were uncertain as to how or whether those commitments could be enforced or interpreted. A recent flurry of activity has brought the meaning and enforceability of FRAND commitments into sharp focus.

The Cellphone Wars
The most exceptional event was the August 3, 2013 decision by the US Trade Representative to overturn an exclusion order issued by the US International Trade Commission (ITC), the first such reversal of the ITC in over 25 years^[1]. The ITC order would have prevented Apple from bringing certain of its products into the United States because they infringed a Samsung patent essential to the 3G wireless communications standard.

Samsung had participated in the development of that standard. In doing so, it had committed to make its SEPs available on FRAND terms. The Apple products in question adhered to the applicable standard and, according to the ITC, used the Samsung technology. Although Samsung had offered a license to Apple over the course of prolonged negotiations, Samsung was persistent in asking for a license back of certain Apple patents that were not SEPs and not subject to FRAND commitments.

Before the ITC rendered its decision, the Department of Justice and the US Patent and Trademark Office issued a joint statement supporting a theory that we have reported as gaining traction worldwide: that injunctive relief should not be available to remedy infringement of patents that are the subject of FRAND commitments. This theory is based on the doctrine that injunctive relief is available only where monetary damages is not an adequate remedy; by agreeing to license on FRAND terms, the patent holder has conceded that it would be adequately compensated for a license if a reasonable royalty were paid.

An ITC exclusion order is comparable to an injunction in that it prevents the importation, and thus the sale, of the infringing product. Many observers felt that the ITC should have denied Samsung its requested relief on this basis.

The ITC rejected this argument. Furthermore, it complained that the parties had not adequately briefed the question in the initial ITC proceedings before the administrative law judge, and therefore it was not in a good position to rule on whether the Samsung patent really was essential to the 3G standard, how important it was to the standard, and what precisely the FRAND obligations were.

One of the ITC’s commissioners argued in dissent that Samsung had violated its FRAND obligations by consistently tying its license offers to Apple to a cross-license of non-SEP patents. While the dissenter did not accept the notion that the ITC could never exclude the importation of products on the basis of infringement of FRAND-burdened SEPs, he felt that no exclusion order should be granted because of Samsung’s failure to offer FRAND terms and the relative unimportance of its patent to the 3G standard.

On August 3, 2013, the US Trade Representative, with the backing of the White House, reversed this ITC’s exclusion order. The Trade Representative’s decision gave the ITC two succinct instructions in handling similar cases in the future. It directed the ITC:

1. To consider whether exclusion orders of products infringing FRAND-burdened patents is an appropriate remedy at the outset of the proceeding, rather than at the end; and
2. To require the parties to develop the factual record relating to the FRAND issue in the initial ITC administrative proceeding.

(More)