The U.S. International Trade Commission (“ITC”) recently issued the public version of ALJ Essex’s Initial Determination in Inv. No. 337-TA-868 finding that InterDigital had not violated any FRAND obligation and that ZTE and Nokia had not infringed the patents-in-suit (see our June 19, 2014 post). Although the patents were found not to be essential to the 3G or 4G LTE standards, ALJ Essex’s Initial Determination provides an analysis of the FRAND issues at play — one that is highly critical of respondents that assert FRAND defenses without having first availed themselves of SSO procedures for resolving situations where licenses are not available (the FRAND analysis starts at page 108 of the decision).

FRAND Ruling

ALJ Essex initially indicates that, because he found that Respondents devices that practice the 3G and 4G LTE standards did not infringe the patents-in-suit, the patents are not essential to those standards and no FRAND obligations were triggered.  ALJ Essex nonetheless presents a full FRAND-defense analysis in the event that, on review, the Commission finds the patents infringed and essential to the wireless standards.

ETSI IPR Policy.  ALJ Essex summarized the Respondents’ FRAND position that is based on InterDigital’s participation in the European Telecommunication Standards Institute (ETSI)–specifically the Telecommunications Industry Association (TIA) and International Telecommunication Union (ITU) subcommittees–giving rise to certain obligations under ETSI’s Intellectual Property Rights (“IPR”) Information Statement and Licensing Declaration under ETSI’s Rules of Procedure from Nov. 30, 2011.  ALJ Essex notes that these ETSI Rules of Procedure are not themselves a contract under the applicable French law, but rather an agreement in principal, guiding parties in their interactions with ETSI, other members, and third parties.  He states that IPR policy’s “first goal … is that the IPR owner be ‘adequately and fairly rewarded for the use of their IPRs in the implementation” of the ETSI standards.  Further, patent owner agrees to license its IPR on FRAND terms only under certain conditions–e.g., the patent owner is “adequately and fairly rewarded” (though unclear how to assess that) and the patent owner has the option of requiring a licensee to reciprocate with a FRAND license on its patents covering the standard.

Duty To Declare Potentially Essential Patents.  Under the  ETSI Rules of Procedure, a patent owner must declare patents that might become essential, but need not declare or confirm that the patents actually are essential to the standard.  Specifically referencing ALJ Shaw’s finding in Inv. No. 337-TA-800, ALJ Essex notes that not all declared patents actually are essential to the standard, no ETSI or other group confirms essentiality and declared patents frequently are found not to be essential when challenged.

ETSI Provides Procedure If FRAND Not Offered.  ALJ Essex also considered ETSI Rules of Procedure that provide a procedure for dealing with participants that refuse to grant licenses on FRAND terms after a standard is published.  Those procedures (ETSI Rules of Procedure Section 8.2 Nov. 30, 2011) include alerting ETSI’s Director-General who gathers info from complainant and patent owner, ETSI seeking to change the standard to avoid the IPR, and referral to the European Commission.  But no respondent in this case made use of those procedures.  If respondents believed InterDigital violated ETSI’s policy, they could have approached ETSI to determine whether there was such a breach and “[i]t would be helpful to this ALJ, and the ITC, if we knew InterDigital had breached its duty to ETSI.”  Nothing in ETSI Rules of Procedure appears to preclude a party, like the patent owner here that instigated the investigation, from using legal means to pressure other parties into negotiations.  Further, although ETSI does not define FRAND terms, ALJ Essex recites “a FRAND rate is a range of possible values, depending on a number of economic factors.”

Patent Hold-Out To Pressure Lower Royalty.  ALJ Essex then faulted respondents’ decision not to follow the ETSI procedures, but instead participate in what may be considered “patent hold-out” behavior “which is as unsettling to a fair solution as any patent hold up might be,” explaining:

These Respondents chose take the actions that led to the allegation of infringement rather than follow ETSI policy for obtaining a license. … The Respondents create, outside of the framework of the ETSI agreement a situation where they use the technology that may be covered by the patent, without having licensed it.  This puts pressure on the IPR owner to settle, as the owner is not compensated during a period of exploitation of the IP by the unlicensed parties.  The ETSI IPR policy requires companies that wish to use the IPR covered by the agreements to contact the owner of the IP, and take a license.  By skipping this step, the companies that use the IPR in violation of the policy are able to exert a pressure on the negotiations with the IPR holder to try to make the agreement in the lower range of FRAND, or perhaps even lower than a reasonable FRAND rate.  They also are able to shift the risk involve din patent negotiation to the patent holder.  By not paying for a FRAND license and negotiating in advance of the use of the IPR, they force the patent holder to take legal action.  In this action, the patent owner can lose the IPR they believe they have, but if the patent holder wins they gets no more than a FRAND solution, that is, what they should have gotten under the agreement in the first place.  There is no risk to the exploiter of the technology in not taking a license before they exhaust their litigation options if the only risk to them for violating the agreement is to pay a FRAND based royalty or fee.  This puts the risks of loss entirely on the side of the patent holder, and encourages patent hold-out, which is as unsettling to a fair solution as any patent hold up might be.

ALJ Essex found that a licensee would violate the ETSI IPR rules if it uses the patented technology prior to negotiating a license.  The requirement to negotiate rests on not only the patent owner, but on the standard implementer as well.   But Respondents appear to “pull the words Fair Reasonable and Non-discriminatory” from the ETSI IPR Rules … but have shown no interest in the rules of procedure for settling conflicts, or for obtaining licenses.”  For example, the ETSI Rules include a section “4.3 Dispute Resolution” that includes seeking mediation from other ETSI members and, if no agreement, “the national courts of law have the sole authority to resolve IPR disputes.”  But in this case there is no evidence that Respondents reported InterDigital to ETSI or sought a license.  Thus, InterDigital has not violated any duty under the ETSI policy.

Negotiate in Good Faith.  Respondent also failed to show that InterDigital did not negotiate in good faith.  ALJ  Essex discussed the different incentives the parties have in negotiating a FRAND rate.  InterDigital solely derives revenue from licensing its patents and may be inclined to grant FRAND licenses because they  ”allow[] for a profit”; in contrast, respondents benefit from holding out licensing discussions  because, with each passing day, “Respondents have not had to pay anything for a license they were by ETSI policy to obtain prior to adopting the potentially infringing technology.” Acknowledging that the threat of an exclusion order may move a license fee “in the upper direction on the FRAND scale,” ALJ Essex notes “there are  hundreds of other economic factors that go into the parties finding a royalty or flat amount both can agree on.”  ALJ Essex then reviewed the substance of the parties’ negotiations (heavily redacted in the public version) and concludes that, rather than negotiate for a license, “the respondents have attempted to put pressure on InterDigital by using IPR without a license.” Summarizing his findings, ALJ Essex finds InterDigital’s FRAND obligations have not been triggered:

The obligation that InterDigital has taken has been fulfilled, and the ETSI agreement anticipates that the parties if necessary will fall back on the national law involved. The Respondents have not taken the steps provided by ETSI to address a failure to license, and so have not done what they ought to do if they believe InterDigital has failed to negotiate in good faith. Finally, they have not followed the ETSI process for procuring a license, and have engaged in holdup by making the products that are alleged to infringe before taking a license. Under these facts there is no FRAND duty.

No “Patent Holdup” Concerns.  ALJ Essex concludes his FRAND analysis by rejecting arguments against exclusion orders for SEPs, which arguments were made by the U.S. Federal Trade Commission (“FTC”) and U.S. Patent & Trademark Office (“PTO”)/U.S. Department of Justice (“DOJ”). The FTC and PTO/DOJ essentially argued that FRAND license negotiations are tainted by the threat of an exclusion order, which creates the risk of patent holdup that allows the patent owner to secure an excessively high royalty rate on standard-essential IP. But ALJ Essex found no evidence that InterDigital had been negotiating in bad faith; rather, “it is the respondents that have taken advantage of the complainant and manufactured, marketed, and profited on good without taking a license to the IP at issue.” ALJ Essex further acknowledged the “hypothetical risk of holdup” in similar situations, but “we have evidence that it is not a threat in this case, or in this industry.” ALJ Essex cites TIA’s statement to the FTC that “TIA has never received any complaints regarding such ‘patent hold-up’ and does not agree that ‘patent holdup’ is plaguing the information and telecommunications technology standard development process.”

ALJ Essex found no basis to assume that exclusion remedy is not available in this case:

Neither the agreements imposed by ETSI, nor the law nor public policy require us to offer the Respondents a safe haven, where they are free to avoid their own obligations under the agreements, can manufacture potentially infringing goods without license or consequence, can seek to invalidate the IPR in question, and yet are free from the risk of a remedy under 19 USC 1337.

ALJ Essex concludes by fully rejecting the argument that limited exclusion orders should be removed as a remedy from cases involving FRAND encumbered patents:

For the Commission to adopt a policy that would favor a speculative and  unproven position held by other government agencies, without proof that the harm exists or that the risk of such harm was so great that the Commission should violate its statutory duty would damage the Commission’s reputation for integrity, and violate its duties under the law. We should and must determine the public interest, and the correct outcome of each matter based on the facts presented, and by applying the law to those facts. To take a pre-set position, without hearing evidence, would violate every concept of justice we are tasked to enforce.

FRAND-Based Affirmative Defenses.  ALJ Essex found the affirmative defenses–equitable estopple, unclean hands and patent misuse–to be “moot” given his finding that “Respondents to not infringe a valid patent and that InterDigital’s FRAND obligations are not triggered.”