The future of FRAND patents
An interesting development has occurred in the current mobile patent wars between major giants Apple, Motorola and Samsung. While these cases are technically about patent infringement, there is a lot more at stake than just ensuring a patent is not being infringed. These companies all have popular devices on the market and an unlimited fund for legal fees. The main issue is that neither side wants to back down because not only is there a lot at stake financially for each side, neither company wants its products out of the market. The companies would rather fight tooth and nail to retain their assets rather than reach a settlement and compromise. Therefore the current cases involve a series of suits and countersuits and endless delays. FRAND patents are being used as a legal tactic causing delay in these cases.
FRAND patents are not novel but have recently been called into question in the mobile wars. If a company has a patent on something that is declared essential for an industry standard, then the company must license the patent to third parties under FRAND terms, that is, fair, reasonable and non-discriminating terms. Any companies that hide their essential patented technology and use it to hinder competition entering the market or to extract high license fees can be guilty of antitrust violations. Basically, the patent holder cannot pick and choose which companies can use essential technologies because otherwise the company would gain an unfair advantage over the entire industry. The company must try to charge about the same amount to each party requesting a license. The FRAND concept is one way to prevent the abuse of power in an industry.
Recently, Motorola made headlines when it was discovered that it had asked Apple for 2.25% of its wireless devices sales in exchange for a patent license that would cover its intellectual property. Motorola would stand to gain almost $2.1 billion in retroactive fees from iPhone revenues since 2007. The total would be just under $93 billion, a huge dent in Apple’s pocketbook. The license was for a patent Motorola owned for 3G/UMTS technology, declared essential in implementing open industry standards. Apple did not accept this term at the time because it felt that the fee was excessive and unreasonable. While this number does seem excessive, part of the problem is that the FRAND standards are hard to define. Since each cross-licensing negotiation varies and involves different patents from each side, what is fair and reasonable to one party may be completely unreasonable to the other party involved.
Apple’s best defense to show it was correct in not agreeing to the licensing terms is to prove that Motorola offered the same terms to other companies. Apple has filed motions to get information from Nokia, HTC, LG and Sony Ericsson among others, to find out how much Motorola asked them to pay in royalty fees. Apple could then defeat the sales injunction asked for by Motorola and bring Motorola under the radar of the European Commission (EC) for possible FRAND abuse.
Apple is also involved in patent lawsuits with Samsung across ten countries including the United States and Germany. Apple happens to be Samsung's biggest customer. Recently, an appeals court in Germany upheld a ban on the sale of Samsung's Galaxy Tab 10.1 and 8.9 models but another German court denied Apple’s request to take the Galaxy Tab 10.1N off the market. Samsung holds several FRAND patents relating to 3G wireless technology and may have used these as a way to hinder Apple. The EC is currently investigating Samsung for possible antitrust regulations violations. The EC can fine companies up to 10% of their global turnover if it finds them in breach of EU competition rules.
In light of these lawsuits, it is evident that FRAND abuse may be more prevalent than thought, due to the lack of defined standards under which patent holders must operate. On one hand, companies could be over-reaching by claiming to have hundreds of patents that are essential to industry standards. Then they use these same patents for the basis of patent infringement lawsuits to prevent their competitors from moving forward in the market. On the other hand, licensors of FRAND patents are being forced to accept terms that simply may not be fair, reasonable or non-discriminating, but must do so in order to gain access to the essential technology. The companies involved in the current mobile wars either want to avoid losing market-share, avoid paying out large sums of royalties and fees or prevent unnecessary disclosure of intellectual property.
Just yesterday a letter was leaked to the press that Apple had written back on November 11 in which it proposed that the European Telecommunications Standards Institute (ETSI) set basic rules for FRAND licensing of standard-essential patents. Although Apple has been using possible FRAND abuse as a legal tactic, Apple itself is not shielded from the same type of scrutiny in the future. Apple proposes three specific principles as a solution: appropriate royalty rate, common royalty base and no injunction. Apple’s proposal has gained support from companies not involved in the mobile patent wars, including Cisco, which holds a large number of FRAND patents but has advocated for reasonableness and restraint. With other industries agreeing that FRAND terms need to be reformed, we will have to wait and see what effect this has on the current mobile lawsuits in Europe and in the rest of the world.