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Fair, Reasonable and Non-Discriminatory (FRAND) Terms. Daphne C. Lainson Smart & Biggar AIPLA Annual Meeting: IP Practice in Japan Committee October 2013. The FRAND Pyramid. Competing Interests. Adoption of standards

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Fair, Reasonable and Non-Discriminatory (FRAND) Terms

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Fair, Reasonable and Non-Discriminatory (FRAND) Terms

Daphne C. Lainson

Smart & Biggar

AIPLA Annual Meeting: IP Practice in Japan Committee

October 2013

The FRAND Pyramid

Competing Interests

  • Adoption of standards

    • Lower production costs and costs to consumers, “shared” R&D expenses, reduced switching costs for consumers, more efficient uptake of new technologies, expanded customer base for standard compliant technologies, enhanced innovation around standards, improved product quality

  • But:

    • Potential for abuses by SEP owners, lobbying/bias over standard setting, reduction of competition once standard adopted

Standard-Setting Organizations (SSOs)

  • Develop and set industry standards

    • Voluntary membership

    • Different IPR obligations

      • Disclosure, FRAND commitments

  • Commitment to licence ≠ licence

  • Do not define FRAND terms

  • Actual licensing: negotiation outside of SSO and as between parties

    • Expectation: negotiations will be in good faith

What is FRAND?

  • No single, precise definition

  • Fair

    • Terms are not anti-competitive

      • Tied selling, bundling, free grant backs, exclusive licensing/restrictive covenants on licensing to other parties

  • Reasonable

    • Royalties do not result in uncompetitive pricing

      • “Price-stacking”

  • Non-discriminatory

    • All licensees are provided with similar terms and rates

SEPs/FRAND Concerns

  • Hold-up by SEP owner

    • Standard adopted and SEP owners engage in heavy handed negotiation (e.g., demanding excessive royalties) or withhold SEP protected technology

    • Impacts adoption of standard, increases cost to implementers and potentially consumers, affects other owners of SEPs for that standard

  • Royalty Stacking

    • Single product, multiple standards and SEPs = cumulative excessive royalties

SEPs/FRAND Concerns

  • Availability of injunctive relief

    • Equitable remedy: eBay Inc. v. MercExchange LLC (2006) 126 S Ct. 1837

      • Factors: irreparable harm, adequacy of available legal remedies (e.g., damages), balance of hardships, public interest

      • FRAND obligation = admission money will make whole?

      • If SEP owner has a FRAND obligation, is injunction contrary to public interest (e.g., harms competition, added expense to consumers, harms innovation)?

    • See also Statement of FTC In the Matter of Google Inc. FTC File No. 121-0120 (January 3, 2013)

      • Statement released with publication of Google settlement

      • Seeking of injunctions, competition implications

SEPs/FRAND Concerns

  • Reverse hold-up by standard implementer

    • Pressure on SEP owner to negotiate unfavorable terms

      • E.g., imbalance in negotiating power between small, upstream SEP owner over standard not yet adopted by SSO and implementer

      • If an injunction or exclusion order is not available to a SEP owner, then this may shift the bargaining power to the implementer

      • Anti-trust concerns: Broadcom v. Qualcomm 501 F.3d 297 (3d Cir. 2007)

        • Patent holder’s intentional false promise to license SEP on FRAND terms and reliance by SSO on false promise when including patented technology in the standard = actionable anticompetitive conduct if SEP owner breaches promise

Microsoft v. Motorola—Good Faith Negotiationsand Reasonable Royalties

  • Microsoft claiming Motorola in breach of RAND obligations (good faith, fair dealing) to SSOs (ITU, IEEE):

    • Motorola offered SEPs at rates that are not RAND

      • Motorola sent two offer letters for two SEP portfolios (wireless communications, video coding standards) with RAND rate in each offer = 2.25% of the price of the end product

    • Motorola sought injunctive relief against Microsoft over SEPs

      • Proceedings in US district courts, the ITC and in Germany

Microsoft v. Motorola No. 10-cv-1823 (W.D. Wash., April 25, 2013)

  • Earlier decisions:

    • RAND commitments create enforceable contracts between Motorola and SSOs and Microsoft entitled to enforce contract as a third party beneficiary (Order dated Feb. 27, 2012)

    • Motorola’s commitment to SSOs required initial offers to license be made in good faith (Oder dated June 12, 2012)

    • Initial offers do not have to be on RAND terms, providing that a RAND license eventually issues (Order dated October 10, 2012)

  • Good Faith Negotiations?

    • In order to determine whether Motorola’s offer was in good faith, a comparison to a reasonable RAND royalty rate and a reasonable RAND royalty range (since more than one rate could be RAND) is required

    • Court therefore determining what is reasonable RAND licensing rate and RAND royalty range for Motorola’s SEPs

Motorola: Economic Guiding Principles

  • “A RAND royalty should be set at a level consistent with the SSOs goal of promoting widespread adoption of their standards.”

  • “In the context of a dispute…a proper methodology…to determine a RAND royalty should…recognize and seek to mitigate the risk of patent hold-up that RAND commitments are intended to avoid.”

  • “Likewise, a proper methodology for determining a RAND royalty should address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer.”

Motorola: Economic Guiding Principles

  • “…the RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property.”

  • “…a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.”

Motorola: Hypothetical, Bi-lateral Negotiation

  • Hypothetical negotiation between “willing licensor-willing licensee”

  • Applied modified version of Georgia-Pacific factors

    • Factors applied within the RAND licensing context

      • E.g., Past royalties received relevant if negotiated under a RAND obligation or comparable negotiations (patent pools)

  • Hypothetical negotiation would set RAND royalty rates by looking at:

    • Importance of the patent portfolio to the standard; and

    • Importance of the standard and patent portfolio to the products at issue

  • Motorola analysis applied in In re Innovation IP Ventures LLC 11-cv-09308(N. Dist. IIl. ED, 3 October 2013)

    • Innovation IP Ventures sues on acquired patents with RAND obligations and Court asked (pre-trial) to assess quantum of potential damages

Motorola: Holding

  • District Court finds:

    • Video coding portfolio

      • RAND royalty rate: 0.555 cents per unit (All products)

      • RAND royalty range: 0.555-16.389 cents per unit (Windows, Xbox)

    • Wireless communication portfolio

      • RAND royalty rate: 3.471 cents per unit (Xbox)

      • RAND royalty rate: 0.8 cents per unit (All other products)

      • RAND royalty range: 0.8-19.5 cents per unit (Xbox)

Motorola: Jury Verdict

  • Unanimous Jury Verdict - September 4, 2013

    • Motorola breached contractual commitments to IEEE and ITU

      • Damages incurred by Microsoft: $11,492,686

    • Motorola’s conduct in seeking injunctive relief violated duty of good faith and fair dealing with respect to its contractual commitments to the IEEE and ITU

      • Damages (attorneys fees and litigation costs) attributable to breach: $3,031,720

Injunctive Relief

  • Apple v. Motorola No. 1-11-cv-08540, 2012 WL 2376664 (N.D. Ill. June 22, 2012) [under appeal]

    • Unless implementer refuses to pay a royalty that meets the FRAND requirement, the Court is not justified in granting injunctive relief

    • By committing to license patents on FRAND terms, patentee implicitly acknowledges that a royalty is adequate compensation

  • Apple v. Motorola No. 3:11-cv-00178-bbc, 2012 WL 5416941 (W.D. Wisc. October 29, 2012)

    • Depending on specific obligations to the SSO, a RAND commitment may not deprive a SEP owner from seeking injunctive relief

Injunctive Relief

  • Realtek Semiconductor v. LSI Corp. No. C-12-03451 RMW, 2013 WL 2181717 (N.D. Cal., May 20, 2013)

    • Failure to offer a license on RAND terms before seeking an exclusion order or injunctive relief = breach of RAND commitment

  • Microsoft v. Motorola No. C10-1823JLR (W.D. Wash., August 11, 2013)

    • Seeking injunctive relief may be a breach of the duties of good faith and fair dealing, if the SEP owner is under a RAND commitment

      • Attorney’s fees and litigation costs as damages may be available

Exclusion Orders

  • ITC Inv. No. 337-TA-947

    • Samsung successful in obtaining exclusion and cease and desist orders as against certain Apple products under 19 U.S.C. §1337 (“s. 337”) (June 4, 2013)

  • USTR disapproves ITC order (August 3, 2013)

    • S. 337 gives President (USTR) ability to disapprove exclusion and cease and desist orders on policy grounds

      • Cites DOJ/USPTO Joint Statement of January 8, 2013 re remedies for SEPs subject to voluntary FRAND commitments

        • Public interest: exclusion orders may pressure an implementer of a standard to accept more onerous licensing terms, affecting competition and price to consumers

    • In the future, ITC to: (1) thoroughly consider public interest; and (2) have a well developed factual record with specific findings on hold-up and reverse hold-up

Concluding Remarks

  • SEP Owners with FRAND obligations:

    • Royalty proposed in initial offer may be subject to duties of good faith and fair dealing

      • Reasonableness of royalty: hypothetical, bi-lateral negotiation

      • Breach of duties: damages

    • Seeking injunctions (exclusion orders) may be a breach of duties of good faith and fair dealing

      • Breach of duties: Attorneys fees/litigation costs

  • Implementers of standards:

    • Refusal to pay a RAND royalty may support injunctive relief (exclusion orders)


Thanks for your attention! Questions?

Daphne C. Lainson


Smart & Biggar


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