|The price of closing the Google search antitrust case: questionable precedent on patents|
The Federal Trade Commission yesterday closed its investigation of Google’s search business (see my comment here) without taking action. The FTC did, however, enter into a settlement with Google over the licensing of Motorola Mobility’s standards-essential patents (SEPs). The FTC intends that agreement to impose some limits on an area of great complexity and vigorous debate among industry, patent experts and global standards bodies: The allowable process for enforcing FRAND (fair, reasonable and non-discriminatory) licensing of SEPs, particularly the use of injunctions by patent holders to do so. According to Chairman Leibowitz, “[t]oday’s landmark enforcement action will set a template for resolution of SEP licensing disputes across many industries.” That effort may or may not be successful. It also may be misguided.
In general, a FRAND commitment incentivizes innovation by allowing a SEP owner to recoup its investments and the value of its technology through licensing, while, at the same, promoting competition and avoiding patent holdup by ensuring that licensing agreements are reasonable. When the process works, and patent holders negotiate licensing rights in good faith, patents are licensed, industries advance and consumers benefit.
FRAND terms are inherently indeterminate and flexible—indeed, they often apply precisely in situations where licensors and licensees need flexibility because each licensing circumstance is nuanced and a one-size-fits-all approach isn’t workable. Superimposing process restraints from above isn’t necessarily the best thing in dealing with what amounts to a contract dispute. But few can doubt the benefits of greater clarity in this process; the question is whether the FTC’s particular approach to the problem sacrifices too much in exchange for such clarity.
The crux of the issue in the Google consent decree—and the most controversial aspect of SEP licensing negotiations—is the role of injunctions. The consent decree requires that, before Google sues to enjoin a manufacturer from using its SEPs without a license, the company must follow a prescribed path in licensing negotiations. In particular:
Under this Order, before seeking an injunction on FRAND-encumbered SEPs, Google must: (1) provide a potential licensee with a written offer containing all of the material license terms necessary to license its SEPs, and (2) provide a potential licensee with an offer of binding arbitration to determine the terms of a license that are not agreed upon. Furthermore, if a potential licensee seeks judicial relief for a FRAND determination, Google must not seek an injunction during the pendency of the proceeding, including appeals.
There are a few exceptions, summarized by Commissioner Ohlhausen:
To the extent that the settlement reinforces what Google (and other licensors) would do anyway, and even to the extent that it imposes nothing more than an obligation to inject a neutral third party into FRAND negotiations to assist the parties in resolving rate disputes, there is little to complain about. Indeed, this is the core of the agreement, and, importantly, it seems to preserve Google’s right to seek injunctions to enforce its patents, subject to the agreement’s process requirements.
Industry participants and standard-setting organizations have supported injunctions, and the seeking and obtaining of injunctions against infringers is not in conflict with SEP patentees’ obligations. Even the FTC, in its public comments, has stated that patent owners should be able to obtain injunctions on SEPs when an infringer has rejected a reasonable license offer. Thus, the long-anticipated announcement by the FTC in the Google case may help to provide some clarity to the future negotiation of SEP licenses, the possible use of binding arbitration, and the conditions under which seeking injunctive relief will be permissible (as an antitrust matter).
Nevertheless, U.S. regulators, including the FTC, have sometimes opined that seeking injunctions on products that infringe SEPs is not in the spirit of FRAND. Everyone seems to agree that more certainty is preferable; the real issue is whether and when injunctions further that aim or not (and whether and when they are anticompetitive).
In October, Renata Hesse, then Acting Assistant Attorney General for the Department of Justice’s Antitrust Division, remarked during a patent roundtable that
In its own 2011 Report on the "IP Marketplace," the FTC acknowledged the fluidity and ambiguity surrounding the meaning of “reasonable” licensing terms and the problems of patent enforcement. While noting that injunctions may confer a costly “hold-up” power on licensors that wield them, the FTC nevertheless acknowledged the important role of injunctions in preserving the value of patents and in encouraging efficient private negotiation:
Consistent with this view, the European Commission's Deputy Director-General for Antitrust, Cecilio Madero Villarejo, recently expressed concern that some technology companies that complain of being denied a license on FRAND terms never truly intend to acquire licenses, but rather "want to create conditions for a competition case to be brought."
But with the Google case, the Commission appears to back away from its seeming support for injunctions, claiming that:
Reconciling the FTC’s seemingly disparate views turns on the question of what a “willing licensee” is. And while the Google settlement itself may not magnify the problems surrounding the definition of that term, it doesn’t provide any additional clarity, either.
The problem is that, even in its 2011 Report, in which FTC noted the importance of injunctions, it defines a willing licensee as one who would license at a hypothetical, ex ante rate absent the threat of an injunction and with a different risk profile than an after-the-fact infringer. In other words, the FTC’s definition of willing licensee assumes a willingness to license only at a rate determined when an injunction is not available, and under the unrealistic assumption that the true value of a SEP can be known ex ante. Not surprisingly, then, the Commission finds it easy to declare an injunction invalid when a patentee demands a (higher) royalty rate in an actual negotiation, with actual knowledge of a patent’s value and under threat of an injunction.
As Richard Epstein, Scott Kieff and Dan Spulber discuss in critiquing the FTC’s 2011 Report:
With this circular logic, all efforts by patentees to negotiate royalty rates after infringement has occurred can be effectively rendered anticompetitive if the patentee uses an injunction or the threat of an injunction against the infringer to secure its reasonable royalty.
The idea behind FRAND is rather simple (reward inventors; protect competition), but the practice of SEP licensing is much more complicated. Circumstances differ from case to case, and, more importantly, so do the parties’ views on what may constitute an appropriate licensing rate under FRAND. As I have written elsewhere, a single company may have very different views on the meaning of FRAND depending on whether it is the licensor or licensee in a given negotiation—and depending on whether it has already implemented a standard or not. As one court looking at the very SEPs at issue in the Google case has pointed out:
The fact that many firms engaged in SEP negotiations are simultaneously and repeatedly both licensors and licensees of patents governed by multiple SSOs further complicates the process—but also helps to ensure that it will reach a conclusion that promotes innovation and ensures that consumers reap the rewards.
In fact, an important issue in assessing the propriety of injunctions is the recognition that, in most cases, firms would rather license their patents and receive royalties than exclude access to their IP and receive no compensation (and incur the costs of protracted litigation, to boot). Importantly, for firms that both license out their own patents and license in those held by other firms (the majority of IT firms and certainly the norm for firms participating in SSOs), continued interactions on both sides of such deals help to ensure that licensing—not withholding—is the norm.
Companies are waging the smartphone patent wars with very different track records on SSO participation. Apple, for example, is relatively new to the mobile communications space and has relatively few SEPs, while other firms, like Samsung, are long-time players in the space with histories of extensive licensing (in both directions). But, current posturing aside, both firms have an incentive to license their patents, as Mark Summerfield notes:
While some commentators make it sound as if injunctions threaten to cripple smartphone makers by preventing them from licensing essential technology on viable terms, companies in this space have been perfectly capable of orchestrating large-scale patent licensing campaigns. That these may increase costs to competitors is a feature—not a bug—of the system, representing the return on innovation that patents are intended to secure. Microsoft has wielded its sizeable patent portfolio to drive up the licensing fees paid by Android device manufacturers, and some commentators have even speculated that Microsoft makes more revenue from Android than Google does. But while Microsoft might prefer to kill Android with its patents, given the unlikeliness of this, as MG Siegler notes,
Hand-wringing about patents is the norm, but so is licensing, and your smartphone exists, despite the thousands of patents that read on it, because the firms that hold those patents—some SEPs and some not—have, in fact, agreed to license them.
The inability to seek an injunction against an infringer, however, would ensure instead that patentees operate with reduced incentives to invest in technology and to enter into standards because they are precluded from benefiting from any subsequent increase in the value of their patents once they do so. As Epstein, Kieff and Spulber write:
Thus the problem with even the limited constraints imposed by the Google settlement: To the extent that the FTC’s settlement amounts to a prohibition on Google seeking injunctions against infringers unless the company accepts the infringer’s definition of “reasonable,” the settlement will harm the industry. It will reinforce a precedent that will likely reduce the incentives for companies and individuals to innovate, to participate in SSOs, and to negotiate in good faith.
Contrary to most assumptions about the patent system, it needs stronger, not weaker, property rules. With a no-injunction rule (whether explicit or de facto (as the Google settlement’s definition of “willing licensee” unfolds)), a potential licensee has little incentive to negotiate with a patent holder and can instead refuse to license, infringe, try its hand in court, avoid royalties entirely until litigation is finished (and sometimes even longer), and, in the end, never be forced to pay a higher royalty than it would have if it had negotiated before the true value of the patents was known. Flooding the courts and discouraging innovation and peaceful negotiations hardly seem like benefits to the patent system or the market. Unfortunately, the FTC’s approach to SEP licensing exemplified by the Google settlement may do just that.
In her dissent in Google, Comissioner Ohlhausen articulates the problems with the FTC’s settlement. First, writes Commissioner Ohlhausen,
As Commissioner Ohlhausen points out, the FTC’s treatment of Apple as a “willing licensee” betrays the complexity of such issues and the confusion this settlement may engender. While the FTC acknowledges that injunctions are appropriate when a patentee is faced with a licensee who is unwilling to license its patents at a reasonable rate, if even Apple is here considered a “willing licensee,” then such an acknowledgement is a null set. As Ohlhausen points out, in treating Apple as a willing licensee, the Commission
This sort of strategic behavior by licensees is precisely why injunctions are necessary and appropriate in such cases. To turn them into antitrust violations seriously threatens to undermine the licensors’ appropriate bargaining power and the efficient functioning of SEP licensing.
Perhaps most significant, the Commission’s settlement continues the agency’s recent trend of making a hash of its Section 5 authority. As Commissioner Ohlhausen has noted once before (in dissenting from the Commission’s settlement in the Bosch case)—on the same day, as it happens, that Berin Szoka and I did—the FTC is charting a dangerously unprincipled course on Section 5, particularly with respect to its interpretation of its unfairness jurisdiction. In his Separate Statement in Google, Commissioner Rosch sounds a similar concern about the absence of “limiting principles” on the scope of the Commission’s authority to bring Section 5 cases under the Act’s unfair methods of competition prong. In the Google case, the Commission asserts unfairness jurisdiction without even the minimal limitations the agency itself has adopted. As Commissioner Ohlhausen notes:
Summing up, Commissioner Ohlhausen writes:
Ohlhausen is correct that, with the Google settlement, the FTC continues to operate in this realm without meaningful limits—a problem that some in Congress have begun to notice, as well, as Berin and I point out.
A significant problem with the SEP settlement as configured by the FTC is that it seems to make illegal the use of injunctions even to enforce perfectly reasonable royalty rates. Motorola has, since before it was purchased by Google, sought a royalty rate of 2.25% for its SEPs—an amount well in-line with rates charged by others with SEPs that read on the same standards. In its litigation with Microsoft, it is precisely this royalty that Motorola was seeking to enforce—and Microsoft was refusing to pay. There is a legitimate dispute over how that amount is to be calculated, but this is the very definition of a contract dispute, and both Motorola’s past practice as well as overall industry practice suggest it is perfectly consistent with Motorola’s FRAND obligation to seek such royalties.
To turn Motorola’s effort to receive a reasonable royalty for its patents by means of an injunction against a willing—but not willing enough—licensee into an antitrust problem seems directly to undermine the standard-setting process. It also seems to have no basis in law.
This seems to be precisely the case here—made all the more poignant by the fact that, arguably unlike N-Data, Motorola was seeking not an increase from previously agreed-to royalty rates, but rather the enforcement of royalty rates perfectly consistent with its past practice. As I have noted before in discussing this issue:
But the Commission actually explicitly adopts this interventionist posture in defending itself against Commissioner Ohlhausen’s criticism. Writes the Commission:
And thus we come back, full circle, to the problem of Section 5. While Section 2 does not permit a case based on “the exercise of leverage acquired solely through the standard-setting process,” the FTC interprets Section 5 to operate without the sensible economic constraints imposed by the Court on Section 2 cases. As Kobayashi and Wright note:
Precisely the same could be said of the Google settlement. Whatever its merits in bringing clarity to the licensing of SEPs, the case (and others like it, including Bosch), it really is Time for Congress to Cancel the FTC’s Section 5 Antitrust Blank Check.