On Friday, the U.S. International Trade Commission issued a Notice on its review of Judge Essex’s decision in the InterDigital v. Nokia investigation and found that Nokia did not infringe InterDigital’s 3GPP patents (see our May 12, 2015 post on Judge Essex’s decision).  Recall that, in granting partial review of Judge Essex’s decision, the Commission focused on receiving comments on both a claim construction estoppel issue and FRAND issues (see our June 26, 2015 post).  The Commission’s decision was based on the claim construction issue preclusion issue without commenting on the FRAND issues presented, stating:

[T]he Commission finds that issue preclusion applies with respect to the proper construction of the claim limitation “successively [transmits/transmitted] signals” based on the Commission’s determination in [the ] Inv. No. 337-TA-868, which relies substantively on the Commissions’ determination in [the] Inv. No. 337-TA-800, as affirmed by the United States Court of Appeals for the Federal Circuit (InterDigital Commc’ns, Inc. v. Int’l Trade Comm’n, 2015 WL 669305 (Fed. Cir. FEb. 18, 2015)).  The Commission further finds its prior constructions of the claim limitation “successively [transmits/transmitted] signals” in the 868 and 800 investigations are persuasive authority which the Commission should apply uniformly to the asserted patents.

The Commission also finds that issue preclusion requires a finding of non-infringement with respect to the asserted claims of the ‘966 and ‘847 patents, and that the evidence in the record independently supports a finding of non-infringement with respect to the claim limitation “successively [transmits/transmitted] signals as previously construed by the Commission in the 868 investigation.

So the investigation is now terminated.

The Commission noted that it had received public comments from several interested entities.  These comments are summarized below.

Chairwoman Edith Ramirez, U.S. Federal Trade Commission.  Chairwoman Edith Ramirez of the FTC, submitted Comments reflecting her view — i.e., not the official views of the FTC itself.  She took issue with Judge Essex’s allocating to the putative licensee (or “implementer”)  the burden of proving breach of a FRAND obligation, asserting that the patent holder should establish that the implementer was an unwilling licensee as part of the public interest analysis:

This investigation raises an important and unresolved question for the ITC: what standard should the ITC use to evaluate evidence concerning patent hold-up when a complainant seeks an exclusion order for alleged infringement of a FRAND-encumbered standard essential patent?  I recommend that, as part of its public interest analysis before issuing an exclusion order, the ITC require a SEP holder to prove that the implementer is unwilling or unable to take a FRAND license.  This standard would ensure that an exclusion order issues only when it would not facilitate patent hold-up and thus only when such an order would be consistent with the public interest.  It would also establish a balanced approach to ITC remedies by ensuring that a SEP holder follows through with its FRAND licensing commitment, while at the same time recognizing that both the SEP holder and the standards implementer have a duty to negotiate in good faith towards a meaningful resolution of FRAND issues.

Chairwoman Ramirez also disagreed with Judge Essex’s view that patent hold-up is not real, citing the Microsoft v. Motorola decision by Judge Robart and the Realtek v. LSI decision by Judge Whyte as examples that “the danger that bargaining conducted in the shadow of an exclusion order will lead to patent hold-up is real.”  (see our May 1, 2013 post and Feb. 27, 2014 post for summary of the FRAND determinations in the Microsoft and Realtek decisions, respectively).  Thus, she would require the patent holder to show that the implementer is an unwilling licensee, and she provided some examples of how the patent holder would show that:

A SEP holder may demonstrate an implementer’s unwillingness in a number of ways.  First, an implementer may be unwilling if it affirmatively demonstrates that it will not negotiate with the complainant.  An implementer may also be unwilling if it engages in a “constructive refusal to negotiate a FRAND license with the SEP owner or refusal to pay what has been determined to be a FRAND royalty.”  For example, this may occur when an implementer refused to license the patent holder’s FRAND-encumbered SEPs unless it also obtains a license to the patent holder’s differentiating patents, or insists on terms that are clearly outside a reasonable interpretation of FRAND.  When there is a dispute between the parties about what terms are FRAND terms, the meaning of FRAND must first be determined by a neutral adjudicator in order for the implementer’s offer to be evaluated in the context of a FRAND range.  An implementer may be unable to take a license if its is bankrupt, or otherwise financially unable to satisfy the terms of a FRAND license.  Finally, an exclusion order may be in the public interest when the respondent is outside the jurisdiction of the United States District Courts or is otherwise judgment-proof.

Chairwoman Ramirez also recommended that, if a FRAND rate is determined during an ITC investigation, “the ITC delay the effective date of Section 337 remedies and provide parties an opportunity to execute a FRAND license.”

She indicated that an implementer may be a willing licensee if it “commits to be bound by terms that either the parties themselves will determine to be FRAND, or that will be determined by neutral adjudication,” such as by the implementer “instituting a declaratory judgment action or other proceeding in which a court will set FRAND terms.”  She also indicated that a respondent should be able to “present[] affirmative defenses, including arguments about non-infringement, invalidity, or unenforceability” without “waiv[ing] the alternative position that … the patent is a SEP and hence the SEP holder’s FRAND commitment applies.”

Commissioner’s Ohlhausen and Wright, U.S. Federal Trade Commission.  Commissioners Ohlhausen and Wright of the FTC submitted Comments with a very different view from Chairwoman Ramirez.   They do not recommend “presum[ing] patent holdup is prevalent” and, instead, recommend following Judge Essex’s “evidence-based approach to the public interest inquiry.”  They approach the issue from an imperical, evidentiary economics point of view that patent hold-up is not a widespread probability in all instances, even if a theoretical possibility in some.  Their introduction, reproduced below, summarizes their key points:

The ITC should not begin its analysis by initially imposing upon the SEP holder the burden of proving that the accused infringer is unwilling or unable to take a license on FRANd terms.  This approach presumes patent holdup is frequent and results in significant negative consequences for competition and innovation.  Such a sharp departure from the current state of the law requires substantiation in the form of robust and reliable empirical evidence.  However, the data simply do not support such a presumption.  Beyond lack of empirical support, the proposed approach is contrary to sound economic analysis, would be contrary to the United States Trade Representative’s (USTR’s) directive in the Samsung matter, and would create a conflict between the standard imposed by the ITC and that required by federal courts.  It would also threaten to deter participation in standard setting by, among other things, encouraging reverse holdup and holdout, thereby depriving consumers of the substantial procompetitive benefits of standardized technology.

There is no empirical evidence to support the theory that patent holdup is a common problem in real world markets.  The theory that patent holdup is prevalent predicts that the threat of injunction leads to higher prices, reduced output, and lower rates of innovation.  These are all testable implications.  Contrary to these predictions, the empirical evidence is not consistent with the theory that patent holdup has resulted in a reduction of competition.  To the contrary, wireless prices have dropped relative to the overall consumer price index (CPI) since 2005, output has grown exponentially, features and innovation continue at a rapid pace, and competition between mobile device manufacturers has been highly robust with meaningful entry over time.

Recognizing the theoretical nature of holdup concerns, federal courts, including the United States Court of Appeals for the Federal Circuit, have held that concerns about holdup must be proven, and that accused infringers must bear the burden of demonstrating that the patent holder used injunctive relief to gain undue leverage and demand supra-competitive royalties.  Likewise, in an August 3, 2013 disapproval letter in the Samsung matter, the USTR instructed the ITC to “make explicit findings” to the extent possible on the presence or absence of patent holdup or reverse holdup in each particular case when conducting the public interest inquiry.  Any proposal to presume the existence of holdup contradicts the decisions of federal courts and the USTR’s directive.

(see our Aug. 3, 2013 post for a summary of the USTR’s directive in the Samsung v. Apple ITC investigation referenced above).

The Commissioners also provide some insight into the difference between “holdup”, “reverse holdup” and “hold out”, stating:

Holdup requires lock-in, and standard-implementing companies with asset-specific investments can be locked in to the technologies defining the standard.  On the other hand, innovators that are contributing to a standard-setting organization (SSO) can also be locked-in if their technologies have a market only within the standard.  Thus, incentives to engage in holdup run in both directions.  There is also the possibility of holdout.  While reverse holdup refers to the situation when licensees use their leverage to obtain rates and terms below FRAND, holdout refers to licensees either refusing to take a FRAND license or delaying doing so.

Ericsson.  Ericsson had submitted Comments that favored Judge Essex’s evidentiary-based approach and recognition that “FRAND licensing places obligations on both” innovators and implementers.  Thus, “threats posed by either hold-up or reverse hold-up, should be evaluated based on evidence; mere conjecture regarding FRAND issues should not preclude the entry of an otherwise appropriate exclusion order.”  Ericsson also asserts that “[s]peculation regarding the impact of an exclusion order on the parties’ future negotiations shoudl play no role in the public interest analysis,” agreeing with Judge Essex that a district court action for breach of contract would provide a remedy if the patent holder breaches its obligation to license on FRAND terms after an exclusion order is entered.

Ericsson asserts that the patent holder’s “willingness to accept an arbitral determination of FRAND terms reflects an absence of hold-up.”  In contrast, “delaying tactics in negotiating indicate the presence [of] reverse hold-up.”  Ericsson also asserts that whether a patent covers a significant or minor portion of an accused device should not impact the grant of an exclusion order, because the FRAND obligation applies even after an exclusion order is entered and, “to the extent that the portion of the device that is covered by the claims is standard-essential, the FRAND commitment ensures fair and reasonable licensing terms commensurate with the value of the covered portion.”

Intel, Dell and Hewlett-Packard.  A joint submission of Comments was made by Intel, Dell and Hewlett-Packard that take a more implementer-oriented approach with concerns that standardization may confer unearned market power to SEP holders and that the public interest requires limiting exclusionary relief absent “extraordinary circumstances.”  They summarized their view as follows:

[T]he public interest generally precludes an exclusion order on FRAND-encumbered SEPs, except in limited circumstances, including when: (1) the respondent refuses to accept (or unjustifiably delays in accepting) a license on terms that have been independently determined to be FRAND-compliant by a court or binding arbitrator in a final, non-appealable judgment; (ii) the respondent is unable due to financial distress to pay a FRAND royalty; or (iii) the patentee has no ability to assert an infringement claim against the importer or its customer, such that in rem jurisdiction over imported goods in an ITC action is the only practical option that the patentee has to prevent continued infringement.

J. Gregory Sidak of Criterion Economics.  J. Gregory Sidak, Chairman of Criterion Economics, submitted Comments in response to those submitted by Chairwoman Ramirez of the FTC.  He states that Chairwoman Ramirez’s “proposal that the ITC make the SEP holder bear the burden of proving an implementer’s unwillingness is problematic and misguided.”  His discussion uses a hypothetical licensing transaction where there is a reasonable range of FRAND royalty rates, where focusing on whether the SEP holder accepted the implementer’s offer (or counter-offer) “would grant the implementer the right to obtain a FRAND rate at the lower bound of the FRAND range” that results in “a massive wealth transfer from SEP holders to implementers.”

He further states that “the Chairwoman’s presumption that patent holdup routinely occurs in the real world has no support in economic theory or empirical fact.”  Further, “if one assumes that patent holdup might occur, one should consider that the symmetric risk of reverse holdup might also occur.”  Placing the burden on the patent holder to establish reverse holdup, as Chairwoman Ramirez suggests, is an “asymmetric treatment of the patent-holdup conjecture and the reverse-holdup conjecture [that] has no basis in economic theory.”  Further, presuming that patent holdup exists in every case is contrary to the Federal Circuit’s instructions in Ericsson v. D-Link that “a jury may be instructed that a theoretical conjecture of patent holdup can affect the computation of a FRAND royalty only when empirical evidence supports that conjecture.” (see our Dec. 5, 2014 post summarizing Ericsson v. D-Link)