Expected Google Settlement on Standard-Essential Patents (SEPs)

As noted in our last post, several news reports suggest that the FTC’s wide-ranging 19-month investigation of Google’s business practices is coming to an end.

The FTC and Google are also settling a (somewhat different) matter regarding whether Google can seek injunctions when it asserts “standard essential” patents, also known as SEPs.

This post is more for explanation than advocacy. The competitive issues regarding these patents are complex, and it remains unclear what the ultimate settlement will say.

CNET has a nice description of the reported agreement:

Google is prepared to agree not to use its patent war chest to block the sale of products it believes infringe on its intellectual property. The agreement would cover what are known as standard essential patents, which cover technology used in technical standards. (Reuters uses the example of a patent that ensures one brand of wireless phone can call another brand.)

Google has used those patents in litigation around the world as part of the ongoing patent wars among device manufacturers. But at least one federal judge has ruled that standard essential patents can’t be used to win injunctions, and a majority of FTC commissioners have ruled in recent cases that such a use of essential patents can be considered anticompetitive.

According to Reuters, the settlement would leave room for Google to request an injunction if an infringing company refused to negotiate a license.

According to news reports, Apple and Microsoft lobbied antitrust authorities in the United States and Europe to investigate Google for seeking injunctions based on SEPs.

In this (somewhat long) post, after the flip, I’ll explain what SEPs are, where they fit within the broader mobile patent wars, and the effect of the conditions that appear to be part of the FTC-Google agreement.

(If I am confused or wrong about something, I’d be happy to correct it. Just comment below. )

What Are SEPs?

Standard essential patents, as noted, are patents that cover a technology that is used in a technical standard. A technical standard is some technology that is widely adopted by many players in an industry. Some “standards” include cellular interface standards such as the 3G and 4G LTE standards and wireless broadband technologies like WiFi. A “standard” often helps an entire industry or market grow, because companies can make devices that are compatible with widely-used technologies. For example, every maker of wireless modems, computers, and smart phones can be assured that these devices will be able to speak to one another as consumers expect through WiFi. A standard also reduces the costs for making the standardized technology (like WiFi chips) because costs go down through mass-production. And standards reduce complexity for consumers.

These standards are established by standard-setting bodies, in which many companies participate and work together to develop and agree upon proposed standards. Often, several companies might have patents on different pieces of a standard. If one sort of technology cannot be incorporated, because a company refuses to contribute the patent, then the companies setting the standard can design around that patent and create a standard that doesn’t infringe it. They can rely on other patented or unpatented technology if it is available.

All patents contributed to the standard are “essential” to using that standard; hence, they are called “standard essential” patents. Once a standard is set and adopted by a lot of players in the market, it’s often very hard for companies to opt-out of the standard and make technologies using non-standard technology. (Imagine a smartphone without a WiFi chip.) As a result, companies with patents on part of the standard could engage in “hold-up” against rivals—seeking huge sums of money and trying to weaken their competitors.

Most standard setting bodies have policies or requirements which mandate that companies contributing the patents agree to license them on “F/RAND” terms, which means fair/reasonable, and nondiscriminatory. (Americans tends to say RAND; in other countries, they throw on the F, but both names refer to the same thing.) F/RAND means: license to everyone, at a reasonable price, and without discrimination among licensees. But the bodies don’t define with precision which terms are F/RAND, and currently the primary means for determining if terms are F/RAND is litigation. That’s an expensive, complicated, and time-consuming way to figure out the meaning of those terms.

A key concern for the FTC and DOJ regarding SEPs has been the availability of injunctions for the enforcement of those patents. But first, let’s discuss how SEPs fit within the broader patent wars.

SEPs and the Mobile Patent Wars.

If you haven’t noticed, the patent system has seen finer days. Large tech companies are suing one another all over the world in different courts and venues for competitive advantage and patent-licensing fees. Apple, Microsoft, and Google/Android manufacturers like Samsung are all tied up in courts. These cases will influence the amount of leverage each company has when licensing patents to one another and when making business deals with other companies. Each of the companies has thousands of patents in its arsenal, and when they cross-license patents to one another, they have to value them to determine who pays whom, and how much.

In these negotiations (and lawsuits), Microsoft unsurprisingly relies on its own arsenal of many thousand US patents to seek licensing revenues and decrease the appeal of rival operating systems (particularly Android) to the benefit of Microsoft’s own mobile operating platform. Apple does the same, seeking licensing revenues and targeting Android, against which Steve Jobs had promised his biographer he would wage “thermonuclear war.” Google and the Android manufacturers also seek licensing revenues from others and try to protect the Android operating system and gain advantages over its rivals.

In these suits and negotiations, Google will claim that its collection of SEPs provides tremendous value. Apple relies more on patents regarding its products’ designs and interfaces, so if courts respect those patents, then Apple has a stronger position in its negotiations. According to Google, Microsoft attempts to leverage several “de facto” standards—patents everyone needs but that are not subject to F/RAND conditions through standard-setting bodies. (An example of one of these “de facto” standards is the Active-Sync protocol, which Google refers to in this letter to Congress.)

Should Injunctions Be Available for SEPs?

When companies sue one another in district courts, they ask for “damages” (money) or “injunctions” (an order saying that a company can’t do certain things, like sell an infringing product). Often, injunctions are a far bigger threat than merely the payment of money, as a company could be forced to forego sales of millions of smartphones. When companies sue over patents, they often seek injunctions. Not only do companies sue one another in district courts, they go to the International Trade Commission, which can provide injunctions against infringing foreign goods coming into the US market. Since smartphones (from Apple products to HTC devices) are made abroad, even American companies are suing one another at the ITC to keep goods out of the US.

Those who oppose injunctions based on infringing SEPs argue that an injunction gives the patent-holder too much leverage to seek outrageous sums, to force the cross-licensing of other technologies cheaply, or to threaten competitors. Simply put, almost everyone needs the SEP to make a standard technology and compete in the market, and an injunction threatens to shut companies out. Additionally, since a company has already agreed to license the SEP at a reasonable price, they should be unable to get an injunction, which suggests (to some extent) that the mere payment of money-damages is not an adequate remedy for infringement. An assumption that seems to underlie these arguments is that a company deserves the leverage and licensing fees it would have received for the brilliance of its invention alone, not added leverage and fees merely from exploiting its role in a standard.

Google and others have argued that injunctions should be permitted for SEPs under certain conditions for a variety of reasons, and the DOJ and the FTC have both largely agreed that there are some conditions under which injunctions should be acceptable.

There are few reasons for this. First, companies with SEPs need some recourse to injunctions or else licensees will have little incentive to negotiate and will take their chances in court, hoping for a ruling that they can pay less than the licensor requests. If the court can only set a reasonable royalty, the patent-holder would have little leverage. Second, without the injunction, the value of SEPs will decrease, so fewer companies will contribute to standards, despite standards’ general benefits. Third, they accuse other companies of assigning their SEPs to patent assertion entities (often called, pejoratively, “trolls”), and these trolls will sue competitors without fear of injunction (as they don’t make anything) and will claim that they never agreed to the contractual F/RAND commitments that the first party made in a standard-setting proceeding.

Last year, the DOJ approved several patent acquisitions and considered the effect of SEPs in approving two of those transactions. First, Google acquired device maker Motorola in May, 2012, partly for its patent portfolio, as a way to better protect its open-source Android operating system and partner device makers in the ongoing global litigation. Industry experts agreed: the patents Google acquired would give the company some leverage to defend against patent suits by Microsoft and Apple, the other major players in the mobile market. Second, in 2011, a collection of companies including Microsoft, Apple, and RIM bought the Nortel patents. While the DOJ was reviewing the transaction, both Microsoft and Apple issued statements that they would not seek injunctions based on SEPs.

Google did not make the same statement that Microsoft and Apple made (though they might have been happy to make a similar statement about design patents and de facto standards). Google issued a statement simply agreeing not to seek injunctions for infringement of SEPs under particular circumstances. (I’d recommend an excellent speech by DOJ official Joseph Wayland about SEPs in general and the approval of these transactions.)

Injunctions Will Still Be Available for SEPs.

From what we can glean from news reports, the FTC is not foreclosing Google from seeking injunctions based on SEPs. At the very least, when companies refuse to negotiate over SEPs, Google would be able to seek an injunction.

It remains unclear to me if Google could seek an injunction early in the case, based on the probability of winning and other factors (known as a preliminary injunction) or only after the end of the litigation.

Concluding Thoughts.

The issue is complex.

Where you stand depends partly on what you think about the value of different kinds of patents, about the value of standard-setting organizations, and maybe even your preferences among mobile operating systems.

The experts watching the FTC investigation seem hopeful that it will bring some clarity to the SEP issue.

As both the DOJ and FTC have previously suggested, standard-setting bodies might be able to provide some clarity through their policies, helping to define which terms would be considered F/RAND and under what conditions injunctions could be sought.

If the FTC and Google are able to craft an agreement that balances competing concerns, it could become a blueprint for standard-setting bodies and the way courts handle standard essential patents generally in the future.

That could provide a little more clarity for everyone, and hopefully encourage more deal-making and licensing, rather than litigation.

Disclosure: Google is a client of my law firm. But these thoughts shouldn’t be attributed to Google or to anyone else.

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