Courts that “FRAND” Differently Part 2: Lessons To Be Learned

I recently posted about how two different courts –the High Court of England and Wales (“UK Court”) and China’s Chongqing Intermediate People’s Court (“Chinese Court”) – reached vastly different conclusions on the value of a fair, reasonable and non-discriminatory (“FRAND”) portfolio cross-license for the same set of cellular SEP portfolios.[1]  I originally wanted to title this series “Courts That Can’t Math.”

I changed the title, however, to Courts That "FRAND" Differently because the real issue is not whether each of the different courts in this global dispute can properly do mathematical calculations. Rather, the issue is how each of these different courts view the FRAND commitment and how each court values (or overvalues) SEP ownership as compared to standard implementation.  There are a lot of lessons that we could, and should, learn from these cases.  This post examines the first set of lessons – those directed primarily at structural issues.

Lesson 1 – If Courts Can’t Agree on What Is FRAND, It Is Unfair to Expect Implementers to Know

The first lesson that we should take away from these cases is simply this: if different courts cannot agree on what constitutes a FRAND rate for the same SEP portfolio, and those courts vary in their determinations by almost 200%, then it remains fundamentally unjust to punish implementers for being allegedly “unwilling” (like Germany and the UPC do) when they disagree with the SEP holder over the appropriate FRAND rate. Indeed, implementers rarely have as much information as each of the courts did in these cases so it is particularly egregious to punish them for being unable to determine if any specific offer is FRAND. 

Lesson 2: More Transparency is Needed

The second lesson has been stated over and over again: more transparency is needed.  First, we need greater transparency in court filings and court decisions.  Some courts – Germany and China I’m looking at you – do not have an easily accessible public database of court decisions.  But, the WTO found in the EU vs. China matter that the TRIPS agreement requires such publication. Decisions in SEP matters should be published and readily available to everyone. That is a fundamental necessity for transparency. 

On the other side of transparency, there were a lot of licenses cited in these cases.  The rates and terms are redacted (page after page in the China Decision) so not disclosed in the cases.  We can, however, infer that the rates varied significantly from each other.  There are so many questions that were not answered, or only partially answered, in the cases.  The questions include:  How much were the rates in each of the licenses and by how much did they vary?  Were the rates based on differences in the real value of the portfolio or other factors and what were those factors (we get some flavor of this in the case but not enough)?  In what way and by how much did threats of litigation and injunction cause license values to exceed FRAND (as each court found to some extent)? How do we evaluate the decisions of each of the courts when the information needed to do so is opaque? And of course, how can a court reasonably expect an implementer to be able to evaluate whether an offer is FRAND when they have far less information than did each of these courts and yet the courts themselves had a difficult time of it? 

Even if some of the terms are bespoke and thus merit confidentiality, it is hard to see why most of the terms and rates should be confidential.  Secrecy presents substantial problems for SEP implementers when it comes to licensing negotiations, as well as to courts, regulators, legislators and the public.  See, e.g. Licensing in the Real World - Secrecy vs Transparency.  Without clear information, an implementer really has no way of determining whether what is being offered is non-discriminatory, i.e. the same as what similarly situated implementers have paid.  Nor can anyone evaluate whether that amount – even if non-discriminatory – is in fact FRAND and represents the value of the SEP portfolio itself. 

I question whether all of the redacted information is truly confidential.  It is far past time for courts to more closely examine confidentiality claims, and to better balance the public need for more information against any claims of confidentiality. 

This also once again emphasizes that it is fundamentally unjust to punish implementers for being unable to determine whether a given offer is FRAND when they lack so much necessary information.

This also underscores that the European Union (EU) made a bad decision when it withdrew its SEP Proposal (see, EU Proposal).  If nothing else, the EU Proposal could have increased transparency by having a neutral determiner (the Competence Centre) review and determine whether specific license information merited confidentiality.  I would hazard a guess that, after seeing the same terms over and over again in multiple license agreements, that neutral determiner would also question why those terms were being withheld as confidential.

But even if the terms were determined to be confidential in some of the license agreements, the Competence Centre could also have been charged with amalgamating information about SEP licenses to provide accurate, anonymized data.  That would have left everyone – courts, policymakers, regulators, implementers, standard setting organizations, other SEP holders and we the public – better informed and better able to make realistic decisions.  Instead, everyone remains in the dark.

Lesson Three: More Investigation by Competition Law Authorities Is Warranted. 

It appears from the UK Court’s review that at least two patent pirates (see e.g. the following for why I call them patent pirates: The ISO Holdouts: The "Nordic Companies" and Wi-Fi (Part 6 in Convergence and Competition – A Tale of Two Standards) who are also some of the most prolific litigants and seekers of SEP injunctions –Nokia and Ericsson – charge significantly higher rates than do most other SEP licensors.  The UK Court found that the rates obtained by at least Nokia and Ericsson had they been influenced by the costs of litigation and the non-FRAND rate enhancement they received because of their pursuit of injunctions against implementers.  The China Court decided that at least the Ericsson license was so influenced.  The import of the UK Court’s discussion of these licenses are that the UK Court viewed these high rates as non-FRAND, and the China Court essentially agreed at least with respect to the Ericsson license. 

It is well past time for competition law authorities to look more closely at the behavior of these, and other, aggressive and litigious SEP holders to determine whether they are seeking, and obtaining, supra-FRAND rates. Kudos to Brazil for taking steps to do so but others should as well. See, Brazilian Competition Authority Entertains Thoughts of Doing Something About SEP Abuses and Back to Basics Part 2 – Injunctions and Licensing for some of the types of questions competition law authorities should be asking and the types of behaviors they should be examining.

Lesson Four: The European Union Continues to Expand Its Egregious ASI Policy

Samsung filed complaints with the European Telecommunications Standards Institute (“ETSI”), the standards adoption body that governs European cellular standards, alleging that ZTE had violated ETSI’s Intellectual Property Policy.  China Decision at 17.  The German court hearing one of the many cases in this global FRAND war issued an ex parte preliminary injunction requiring Samsung to withdraw its ETSI complaint and not submit any further complaints to ETSI.[2]

In other words, the German court forbid a party from seeking a determination from the very standard setting body whose intellectual property rights (“IPR”) policy was at issue in the case.  As I have discussed in the past, FRAND commitments are multi-part obligations.[3]  The first part of the obligation is a contractual obligation to the standard setting organization to which the commitment was made.  In Europe, that commitment was made to ETSI.  Thus, among the fundamental questions in the German case were: (1) what obligations did each party (as SEP holders and implementers) owe each other under ETSI’s IPR policy, and (2) what amount would be FRAND for each SEP holder’s portfolio under ETSI’s IPR policy (as well as under European competition law). 

It makes absolutely no sense, if the German court truly wanted to know what ETSI’s FRAND obligation requires from SEP holders, to forbid Samsung from seeking a determine from ETSI itself on what ETSI’s IPR policy requires from SEP holders.  The European courts do not seem to care:  when was the last time any German (or UPC court) mentioned ETSI at all or tried to make a determination of what ETSI’s IPR policy requires? 

Instead, the EU courts have repeatedly replaced fair consideration of FRAND with their own biased views that favor aggressive SEP holders.  The German and UPC courts have developed a settled policy of issuing anti-suit injunctions (ASIs) to prevent SEP implementers from seeking decisions in other fora – in this instance, ETSI – that view (or may view) the FRAND obligation differently.[4]

What is good for the goose is good for the gander.  If China’s ASI “policy” violates TRIPS, then so does the EU’s ever expanding ASI policy.  Worse, unlike China’s “policy,” the EU’s policy thwarts the very purpose of the FRAND obligation which requires SEP holders to provide FRAND licenses to all implementers.  See, Anti-Suit Injunctions: Hypocrisy Reigns in the European Union.

Conclusion

As the UK Court stated:  “this profusion of litigation is a symptom of a dysfunctional system . . . .”  What we have now is indeed a dysfunctional system.  It is opaque, expensive and, in Europe and many other places, very biased in favor of SEP holders at the expense of standard implementation. 

The most important lesson we should take away from these cases is that it is far past time to address this dysfunctional system.  Changes are needed.  The time to act is now. 

[1]          The UK Court judgement is here: Samsung-v-ZTE-FRAND-judgment-REDACTED-Final-for-hand-down.pdf (“UK Decision”). An unofficial version of the original version of the Chinese Court’s judgement can be found here: Attached judgment ┃ Six-year license fee of $731 million! Chongqing No. 1 Intermediate People's Court issued a first-instance judgment on the ZTE v. Samsung case.  I am using a machine translated copy of the decision and my cites will be to the pages in my translation which may not be exactly the same as in the original decision (“China Decision”). 

[2]          The German court that made this decision included Judge Schoen who is notorious for nearly always finding SEP holders to be “willing” licensors and almost never finding implementers to be “willing” licensees no matter how high the offer by the SEP holder nor how reasonable the counter-offer by the implementer.  He also is the judge who stated that: (a) he would allow SEP holders to cherry pick their licenses to show a particular offer was in that range of what previously was agreed which of course compounds the problem of non-FRAND licenses and that (b) German courts do not need to apply the European Directive on proportionality (the “IPRED”) before issuing injunctions in SEP cases.  See, We are Incapable of Making FRAND Determinations Say More UPC and German Judges.

[3]          Of course, part of the obligation stems from competition law.  See, Back to Basics – An Overview of Competition Law, Standard Development and Standard Setting.

[4]          The German and UPC courts appear to be using ASI’s selectively against jurisdictions that (a) do not automatically issue injunctions in SEP cases; (b) require SEP holders to live by their obligation to provide FRAND licenses to all implementers (i.e. grant interim licenses); or (c) as in the case of ETSI, might opine on what FRAND means in a way that would show that the European courts view of such obligation was incorrect.  For example, neither the German nor UPC courts have issued an ASI against jurisdictions, such as Brazil, Colombia or the U.S. ITC, that issue injunctions (or in the case of the US ITC, exclusion orders) as a matter of course in SEP cases.  In other words, the EU’s ASI policy seems to have as a goal to impose the EU court's own biased views of the FRAND obligation world-wide and also to force parties into potentially non-FRAND licenes by stopping other courts and entities that disagree from opining before the EU courts can issue injunctions which tend to force parties into such agreements.