Saturday, July 6, 2013

More on Samsung's un-FRANDly patent terms

With the release of the (redacted) ITC decision June 4 granting Samsung exclusion of older iPhone models, Munich patent attorney Florian Mueller published two follow-up analyses Saturday of that decision. Both excoriating the five member majority and concluded that only commissioner Dean Pinkert understood the full implications of the case.

In his first posting, Mueller wrote

I'm outraged. The underlying rationale of the ITC ruling is a serious threat to innovation and competition. Among other things, it represents a radical departure from well-established antitrust principles concerning the illegal practice of tying (in this case, a Samsung proposal that required Apple to license its non-standard-essential patents to Samsung in order to get an SEP license). This totally runs counter to the ITC's mission to protect the domestic industry. In fact, no U.S. government agency has ever taken positions on standard-essential patents that could cause a similar extent of harm to innovative U.S. companies of all sizes in other jurisdictions. Basically, the ITC has adopted a blueprint that would enable other countries to engage in protectionism of the most extreme kind, allowing their domestic players to extort more innovative competitors from the U.S. and deprive them of intellectual property protection, while being able to point to a U.S. trade agency's opinion.
The posting summarizes Pinkert’s dissent. Here are a few key excerpts. From Pinkert’s footnote to the majority decision:
Commissioner Pinkert … notes that Samsung does not dispute that it has made FRAND licensing commitments in regard to the '348 patent, and, as explained in his dissenting views, he has considered the evidence before the Commission in the current phase of the investigation and has found the weight of the evidence to indicate that Samsung has not made FRAND licensing terms covering the '348 patent available to Apple.
From his decision:
I note in this regard that Samsung has made no effort to demonstrate that the license terms it has offered Apple specifically with respect to the '348 patent, or specifically with respect to a portfolio of declared-essential patents that includes it, satisfy an objective standard of reasonableness, has not identified a methodology for determining whether they satisfy such a standard, and nowhere suggests an intention to make them more attractive to Apple.

As the U.S. Federal Trade Commission has observed regarding commitments to license on a reasonable and non-discriminatory (RAND) basis:
RAND commitments mitigate the risk of patent hold-up, and encourage investment in the standard. [Citation omitted.] After a RAND commitment is made, the patentee and the implementer will typically negotiate a royalty or, in the event they are unable to agree, may seek a judicial determination of a reasonable rate. However, a royalty negotiation that occurs under the threat of an exclusion order may be weighted heavily in favor of the patentee in a way that is in tension with the RAND commitment. High switching costs combined with the threat of an exclusion order could allow a patentee to obtain unreasonable licensing terms despite its RAND commitment, not because its invention is valuable, but because implementers are locked in to practicing the standard. The resulting imbalance between the value of patented technology and the rewards for innovation may be especially acute where the exclusion order is based on a patent covering a small component of a complex multicomponent product. In these ways, the threat of an exclusion order may allow the holder of a RAND-encumbered SEP [standards-essential patent] to realize royalty rates that reflect patent hold-up, rather than the value of the patent relative to alternatives, which could raise prices to consumers while undermining the standard setting process.
The second article focuses on the antitrust implications of tying. His language is even more harsh:
In its ruling on Samsung's complaint against Apple, this ITC majority has taken the notion of intellectual property as an exclusionary right to such an extreme that the net effect is... the expropriation of innovators by extortionists. Anyone wielding standard-essential patents (SEPs) could abuse his gatekeeper role by requiring everyone else, at the threat of total exclusion from the market, to grant a license covering his non-SEPs as a condition for being allowed to operate at all. So a right to exclude could be abused in order to force others to give up their legitimate right to exclude.
Later on, he notes a relevant passage (cited by Pinkert) from a recent article by two of the world’s leading experts on patent licensing, lawyer Mark Lemley (of Stanford) and economist Carl Shapiro (of Berkeley):
While the issue is not free from doubt, we think that an offer made conditional on the would-be licensee licensing any patents other than standard-essential patents reading on the standard at issue is not a FRAND offer.
As Mueller concludes:
I don’t know any example of a case in which an antitrust authority or court of law considered anything other than a cash-only demand to be a FRAND demand. Again, a FRAND demand made at the threat of exclusion is something different than a voluntary FRAND agreement.

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