In the latest development in the smartphones war, the European Commission has now issued two decisions in respect of standard essential patents (SEPs), fair, reasonable and non-discriminatory (FRAND) commitments and anticompetition rules. The commission started two investigations in 2012 after Motorola and Samsung both tried separately to enforce SEPs against Apple in Europe. The decisions for these two investigations have now been published and provide a welcome clarification as to what could amount to an abuse of a dominant position when dealing with SEPs.

Standard Essential Patents

Patents are generally considered to provide an acceptable balance between allowing up to a 20 year monopoly as an incentive for investments into innovation and, on the other hand, publishing a complete disclosure of the invention as a further spur to innovation and a protection of the public interest. Patents are therefore not considered as being anti-competitive per se and the anticompetition bodies have always been reluctant to get involved in licensing negotiations, which are generally considered as being a private contractual matter.

Standard setting organisations, such as the European Telecommunications Standards Institute (ETSI), identify particular patents as being SEPs. In other words, the inventions protected by such patents are necessarily implemented when the corresponding standard is implemented. In general, holders of SEPs agree to license their SEPs on FRAND grounds. This is designed to ensure a balance between making technology standards accessible to manufacturers who wish to produce products which conform to a given standard (thus promoting standardisation and its associated benefits to the industry and, ultimately, to consumers) and ensuring fair remuneration to the SEP holders who have invested in and developed the technology to make the standard possible. However, the FRAND terms are not determined in advance and have to be determined between the SEP holder and the potential licensee.

Problems can therefore arise between SEP holders and potential licensees in determining what exactly constitute FRAND terms. In the Motorola and Samsung cases, such a disagreement led to both Motorola and Samsung (as SEP holders) seeking an injunction on Apple products using the standards in question (the 2G GSM standard in the case of Motorola and the 3G UMTS standard in the case of Samsung). The question considered by the commission was whether or not Motorola and Samsung were abusing their dominant positions as holders of SEPs by threatening such an injunction.

Motorola v Apple

In the Motorola decision, it was decided that Motorola had abused its dominant position in seeking and enforcing an injunction against Apple. Motorola had previously agreed to license the SEP in question to third parties on FRAND terms. Furthermore, Apple had agreed to have, in the case of a dispute, the German courts determine the FRAND terms between the two parties with a view to showing its willingness to take a FRAND licence. However, upon disagreement on what the FRAND terms should be, Motorola used instead the threat of an injunction against Apple in Germany with a view to forcing Apple into a settlement under Motorola’s terms. The settlement included, amongst others, the restriction that Apple could not contest Motorola’s patents in German courts.

This was decided to be anti-competitive on the part of Motorola. The main reasoning for this was that the actions of Motorola could potentially lead to SEP holders asserting their dominant position by extracting high royalty rates from (or imposing other restrictive conditions on) licensees using their SEPs despite the licensees being ‘willing’ to take a FRAND licence. Such actions would ultimately have a negative impact on consumer choice, prices and innovation.

This decision also clarifies that licensees of SEPs can ensure ‘safe harbour’ against injunctions by SEP holders who offer their SEPs on FRAND terms by agreeing to have FRAND terms determined by a court or arbitration in the case of a dispute.

It is worth pointing out that the decisions did recognise injunctions on the basis of SEPs to be a suitable remedy on unwilling licensees, thus giving SEP holders effective means to enforce their IP rights against licensees who are truly unwilling to license SEPs on FRAND terms. Whether or not a licensee is willing or unwilling will continue to be determined on a case by case basis when the ‘safe harbour’ provision is not invoked (meaning that a licensee is not necessarily unwilling just because they have not agreed for FRAND terms to be determined by a court, for example).

It was also decided that Motorola could not impose the ‘non-contest’ restrictions on Apple, the reasoning for this being that licensees (and, ultimately, consumers) should not have to pay fees for the use of SEPs which are not actually valid or infringed. Furthermore, the Motorola decision makes clear that licensees are not ‘unwilling’ simply if they wish to contest the SEPs they are licensing. Previously, following the 2009 ‘Orange Book’ ruling of the German Federal Court of Justice, it was established that a licensee can raise a competition law defence against an application for injunctive relief if:

  1. the licensee has made an unconditional offer to license under terms that cannot be rejected by the patent holder without abusing its dominant position; and
  2. the licensee actually acted as if it had entered into a valid patent license.

In the context of SEP licensing, this latest development in the Motorola case thus means that point number (2) should not be interpreted as saying that a willing licensee is not entitled to contest the validity or infringement of an SEP. Such an interpretation would be anti-competitive.

This seems to reflect the commission’s desire to continually improve the efficiency of European markets by ensuring that manufacturers and consumers are not paying a premium for SEPs that are not valid, infringed or essential.

It is also noteworthy that the commission decided that, despite Motorola being found to have abused its dominant position and despite European law giving the commission the means to impose a potentially significant fine on Motorola, Motorola would not be fined for its actions against Apple. The commission appears to have recognised that the lack of clarity and harmonisation in Europe on the matters of SEPs and anti-competitive behaviour made it challenging for Motorola - and in fact for any actor in the telecommunications industry - to assess what would have constituted anti-competitive behaviour.

Samsung v Apple

In the Samsung case, Samsung had sought an injunction against Apple in several European Union (EU) member states on the basis of SEPs for the 3G standard. During the commission’s investigation, however, Samsung committed to a licensing framework for establishing an agreement with licensees on FRAND terms. The decision has now made this licensing framework legally binding and has recognised that this framework is compliant with European anti-competition laws. The framework can be summarised as:

  1. a mandatory negotiation period of up to 12 months; and
  2. if the negotiation fails, a determination of FRAND terms by a court or by arbitration.

For licensees who agree to the framework, Samsung agreed not to seek an injunction against them in Europe on the basis of SEPs for smartphones or tablets for a period of five years.

So where does this leave us?

Certainly, use of the ‘safe harbour’ provision should give licensees more clarity, certainty and confidence in being able to license valuable SEPs on FRAND grounds without fear of their products being subject to injunctions if negotiations on the FRAND terms go sour. Furthermore, the fact that, in the event of a dispute, the FRAND terms are to be decided by a court or arbitrator would suggest that the outcome of such FRAND disputes would hopefully result in terms which are fair to both licensee and SEP holder.

The commission is of the opinion that national courts and arbitrators are well placed to decide FRAND terms. They may, however, seek guidance from the commission regarding the interpretation of EU law. The commission is currently considering a number of questions referred to it by the Mannheim Regional Court regarding the setting of FRAND rates in the Motorola and Apple dispute, the results of which will be published on the commission website when they become available. It will be interesting to see how the commission considers the FRAND rates in this case should be determined and the influence that this decision will have on national courts and arbitrators in deciding FRAND terms in future cases of dispute.

It will be particularly valuable to see how courts and arbitrators (which are, of course, judicial rather than commercial entities) make decisions regarding what exactly constitute FRAND terms, given that such decisions are highly commercial in nature and that companies already find FRAND negotiations very challenging. It will also be interesting to see how SEP licensees and national courts and arbitrators react to this latest development with regards to their confidence in contesting SEPs.

Useful links

The European Commission website.