1

Smartphone Patent Wars: Legal & Policy Issues of Standard Essential Patens in ICT

Industry

by Alex G. Lee1

As represented by “Smartphone Patent Wars,” patents for smartphones became the most

important strategic competition tool among market leaders. Especially, patents for mobile

communication standards, which are the so-called ‘Standard Essential Patents (SEPs),’ became

the center of legal and policy debates regarding their intellectual property rights (IPRs).

The author provides the implications of recent courts’ resolutions regarding FRAND

(Fair, Reasonable And Non Discriminatory) disputes to the ICT (Information and

Communications Technology) industry and provide several alternative options for resolving

FRAND disputes. The author contends that the current concerted resolutions in courts and

regulation agencies can results in adverse effects to the ICT industry. The author also contends

the main drawback of the recent proposals to resolve the disputes surrounding SEPs through the

ex ante FRAND licensing and the ICT industry players’ voluntary collaboration. From the

analysis of ICT industry players’ response to the outcomes of court resolutions, the author

contends a compromising way to provide FRAND Royalty adopting arguments from both sides

of the disputes. The author also contends a practical improvement to the voluntary collaboration

proposals to resolve the disputes surrounding SEPs.

1 Alex Geunho Lee, Ph.D., earned his J.D. from the Suffolk University Law School. He thanks to Professor Christopher Gibson for directing this thesis paper. He also thanks to Professor Michael L. Rustad, Ms. Hee-Eun Kim, Mr. Larry M. Goldstein and Professor Stephen Y. Chow for valuable comments.

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Table of Contents

I. Introduction

II. A Holistic Review of Current Issues in FRAND Disputes

A. Interpretation of FRAND Commitments

B. Determination of FRAND Royalty

C. Antitrust Issue

III. Implications for ICT Industry

A. Response of ICT Industry to the Courts’ Resolutions

B. Potential Adverse Effects of Courts’ Resolutions

C. Alternative Methods to Resolve FRAND Disputes

IV. Recommendations

A. FRAND Royalty and Injunctive Relief

B. Alternative Methods for FRAND Licensing

V. Conclusion

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I. Introduction

Smartphones, which are the convergence products of computers and mobile

communication devices, are now revolutionizing our life style, business activities, and society as

a whole. Current smartphone boom started when the first iPhone was released on June 29, 2007.

According to a market research by comScore in January of 2013, 129.4 million people in the

United States owned smartphones, which is about 55 percent of mobile subscribes.2 Globally,

total smartphone sales reached $250 billion in 2012.3

The heavy competition among smartphone manufactures for establishing competitive

market position in the newly formed lucrative business has led to recent intensive patent

infringement lawsuits, which are the so-called ‘Smartphone Patent Wars.’ Smartphone Patent

Wars began in 2009 when Nokia sued Apple and Apple countersued Nokia.4 Then, the

Smartphone Patent Wars extended globally involving new players from smartphone

manufactures to makers of smartphone related products such as tablets and entertainment

devices.5

When Apple accused Motorola and Samsung of infringement of its user interface

software and design patents, Motorola and Samsung counter-attacked through new patent

lawsuits utilizing their patents for mobile communication standards, which are the so-called

2Score Press Releases, U.S. Smartphone Subscriber Market Share, http://www.comscore.com/Insights/Press_Releases/2013/3/comScore_Reports_January_2013_U.S._Smartphone_Subscriber_Market_Share (last visited April 1, 2013). 3 AP News, Smartphone 4Q Sales Rise 36 PCT Led by Samsung, http://bigstory.ap.org/article/smartphone-4q-sales-rise-36-pct-led-samsung (last visited April 1, 2013). 4 Wikipedia, Smartphone wars, http://en.wikipedia.org/wiki/Smartphone_wars (last visited April 1, 2013). 5 Competing smartphone manufactures can be grouped as iOS group represented by Apple, Android group represented by Google and its subsidiary Motorola, and Windows Mobile group represented by Microsoft by the operating systems of the smartphones.

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‘Standard Essential Patents (SEPs).’ SEPs were a natural choice for Motorola and Samsung,

which were incumbents in mobile communication industry and holders of strong mobile patent

portfolios, to counter-attack Apple, which is the computer industry incumbent, and thus, lacks in

SEPs for mobile communications.

SEPs encompass intellectual property rights (IPRs) for the standardized technologies.

Usually, all the essential aspects of standardized technologies are specified in standard

specifications.6 Thus, SEPs can be defined as patents that include one or more claims that are

infringed by the implementation of certain standard specifications. Consequently, Apple’s

standard-compatible products that implement the standard specifications for mobile

communications may infringe SEPs of Motorola and Samsung. Therefore, Motorola and

Samsung sought to demand a sales ban of Apple’s standard-compatible products in addition to

monetary relief. The outcomes, however, were different than expected in the usual SEPs

litigation scenario.7

Standards are often developed and set-up through the standardization process by the

standard setting organizations (SSOs).8 If the adopted standards are covered by some patents

owned by the members that proposed the adopted standards, the members become the patentees

of SEPs. The patentee of SEPs may have market power in the relevant technology market

6 To facilitate interoperability among the industry players, participants in the development of standards establish specifications for the essential components of the standardized technology. “The standard specifications, however, do not define all the technical aspects for commercial products implementation. 7The main advantage of using SEPs is their easy of proof characteristic for infringement analysis. Once a patent in litigation is proved to be a SEP, it was an assumption that the accused standard-compatible product should infringe the SEP. Therefore, the infringer reluctantly came to the negotiation table for a licensing of the SEP. 8 In this article, SSO will be used interchangeably with the traditional term SDO (Standard Developing Organization). During the standardization process, participating members propose their preferred standard applications to the technical committees of SSOs. Board members of the technical committees, then, review the proposed standard applications and submit the adopted applications to the technical committees to decide whether to accept the adopted applications through a voting among the participating members. See, e.g., Wikipedia, Standards Organization, http://en.wikipedia.org/wiki/Standards_organization (last visited October 1, 2013).

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because the industry may be locked-in to using the standard and the value of SEPs becomes

significantly enhanced. Thus, the patentee can demand and obtain unreasonably high royalty

payments – hold up value - due to very high switching cost to alternative technology the

implementer should pay.9 Thus, the patent hold up occurs when a patentee of SEPs demands

unreasonably higher license fees after the standard is widely adopted than could have been

obtained before the standard was implemented.

To avoid the patent holdup problem, a majority of the SSOs require that the members

participating in the standardization process to agree ex ante to license their SEPs under fair,

reasonable, and nondiscriminatory (FRAND)10 terms ex post to any implementers of the standard.

The members’ agreements to license their SEPs under FRAND terms are usually called FRAND

commitments. In general, FRAND commitments are interpreted as enforceable contractual

obligations between a member and an SSO.11 An implementer of the standard is a third-party

beneficiary of FRAND commitments and therefore entitled to a license of SEPs.12 FRAND

commitments can also be interpreted as encumbrances of SEPs as in servitudes for real

9 See, e.g., Mark A Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 Tex. L. Rev, 1991, 2007 (2007). 10 In this article, FRAND will be used interchangeably with RAND (reasonable, and nondiscriminatory). In FRAND, fair means to underlying licensing terms are not un-fair. Reasonable means that the licensing royalty rates should not be excessively higher than the value of benefits that can be acquired by the license. Non-discriminatory means licensors treat all licensees in a similar manner in licensing agreements. See, e.g., Wikipedia, Reasonable and non-discriminatory licensing, http://en.wikipedia.org/wiki/Reasonable_and_non-discriminatory_licensing (last visited October 1, 2013). 11 Mark A. Lemley, Intellectual Property Rights and Standard-Setting Organizations, 90 Cal. L. Rev. 1889, 1909-1918 (2002). 12 Here, the beneficiary includes both member and nonmember of the SSO. See, e.g., Lemley, supra note 10, at 1915.

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properties.13 Thus, FRAND commitments create FRAND-encumbered IPRs that run with

SEPs.14 An implementer of the standard holds entitlements of FRAND commitments to SEPs.

Considering all the interest parties surrounding FRAND commitments, the disputes over

SEPs in Smartphone Patent Wars lead to FRAND disputes involving directly concerned parties,

public policy initiated interruptions by regulation agencies, and courts’ interpretations about

FRAND commitments. These disputes take on an increasing importance in the information and

communications technology (ICT) industry.

The main purpose of this article is to understand the implications of recent courts’

resolutions regarding FRAND disputes to the ICT industry and provide several alternative

options for resolving FRAND disputes. I contended that the current concerted resolutions in

courts and regulation agencies can results in adverse effects to the ICT industry. I also

contended the main drawback of the recent proposals to resolve the disputes surrounding SEPs

through the ex ante FRAND licensing and the ICT industry players’ voluntary collaboration.

From the analysis of ICT industry players’ response to the outcomes of court resolutions, I

contended a compromising way to provide FRAND Royalty adopting arguments from both sides

of the disputes. I also contended a practical improvement to the voluntary collaboration

proposals to resolve the disputes surrounding SEPs.

This article is organized as follows. In Section II, I will present a holistic review of

current issues in FRAND disputes. This section includes details about major issues in FRAND

disputes, courts resolutions, and policy measures by regulation agencies: How to interpret

FRAND commitments?; When is a patentee of SEPs entitled to an injunctive relief?; Is an

13 Jay P. Kesan & Carol M. Hayes, FRAND's Forever: Standards, Patent Transfers, and Licensing Commitments (Illinois Public Law Research Paper No. 13-31, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2226533. p. 88 14 If the SEPs are sold to someone else, FRAND commitments automatically transfer to the new SEPs holder.

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exclusion order for SEPs in the International Trade Commission (ITC) available?; What is the

appropriate remedial compensations for SEPs?; Can exploitations of SEPs without limitation be

liable for antitrust violation?

Having understood the background of smartphone patent wars surrounding SEPs and

holistic review of current issues in FRAND disputes, I introduce implications of current legal

and policy issues surrounding SEPs for the ICT industry in Section III: Will the ICT industry

players agree to the outcomes of court resolutions?; Is there any possibility that the outcomes of

the current concerted resolutions in courts and regulation agencies affect the ICT industry

players adversely? Are there any better ways to resolve the disputes surrounding SEPs through

the ICT industry players’ voluntary collaboration?

In Section IV, I present a set of recommendations in light of the analysis above: Hybrid

approach to FRAND royalty; Law and economic analysis for injunctive relief; Collaboration

between SSOs and patent offices for ex ante FRAND licensing; and Establishment of

international arbitration agency for FRAND disputes resolution. I conclude this article in

Section V.

II. A Holistic Review of Current Issues in FRAND Disputes

A. Interpretation of FRAND Commitments

FRAND commitments under SSOs’ IPR polices

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Many SSOs adopt IPR polices to implement their members’ agreement to FRAND

commitments. However, definition of FRAND terms is not specified in SSOs’ IPR polices.15

Thus, what is meant by fair, reasonable, and nondiscriminatory is left to the interpretation of

parties who are involved in the FRAND commitments. Furthermore, SSOs’ IPR polices

normally do not specify the conditions for contractual agreement under the FRAND

commitments to form binding obligations to the parties. The reason behind the fact that SSOs’

IPR polices normally do not specify the conditions for contractual agreement under the FRAND

commitments can be understand as an effort to avoid risk of any antitrust liabilities.16 SSOs

often involve agreements among horizontal competitors. Thus, specifying the FRAND

commitments can be considered as raising traditional antitrust concerns such as price fixing,

exclusive dealing, etc.17 Consequently, the absence of clear definitions about FRAND terms for

binding obligations in SSOs’ IPR polices is the main causes of FRAND disputes surrounding

SEPs.18

15 See, e.g., Rudi Bekkers & Andrew Updegrove, A study of IPR policies and practices of a representative group of Standards Setting Organizations worldwide, project report on Intellectual Property Management in standard setting processes, STEP, 2012, http://home.tm.tue.nl/rbekkers/nas/Bekkers_Updegrove_NAS2012_main_report.pdf (last visited June 1, 2013).The report exampled twelve representative SSOs such as International Organization for Standardization (ISO), International Electrotechnical Commission (IEC), International Telecommunication Union (ITU), Institute of Electrical and Electronics Engineers (IEEE), European Telecommunications Standards Institute (ETSI), American National Standards Institute (ANSI), Internet Engineering Task Force (IETF), Organization for the Advancement of Structured Information Standards (OASIS), VMEBus International Trade Association (VITA). World Wide Web Consortium (W3C), High Definition Multimedia Interface (HDMI) Forum, and Nearfield Communications (NFC) Forum. Among the 8 SSOs that adopted FRAND commitments, none of the IPR policies specified the definition of the FRAND terms. 16 Anne Layne-Farrar, A. Jorge Padilla & Richard Schmalensee, Pricing Patents for Licensing in Standard-Setting

Organizations: Making Sense of FRAND Commitments, 74 Antitrust L.J. 671, 678-79 (2007). 17 U.S.DEPARTMENT OF JUSTICE & FEDERAL TRADE COMMISSION, ANTITRUST GUIDELINES FOR

THE LICENSING OF INTELLECTUAL PROPERTY, 1995, available at http://www.usdoj.gov/atr/public/guidelines/0558.pdf. (last visited Feb. 1, 2013). 18 See, e.g., Kai-Uwe Kühn, Fiona Scott Morton & Howard Shelanski, Standard Setting Organizations Can Help

Solve the Standard Essential Patents Licensing Problem (CPI ANTITRUST CHRON. March special issue, 2013), available at https://www.competitionpolicyinternational.com/assets/Free/ScottMortonetalMar-13Special.pdf. For example, if a patentee of SEPs offers a royalty for the licensing agreement to a potential licensee to comply with

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Courts’ interpretation of the FRAND commitments

In Microsoft, Co. v. Motorola, Inc.19, the court interpreted FRAND commitments such

that the patentee should grant the implementer a license to its SEPs under FRAND terms. The

Microsoft court ruled that the implementer was not required to negotiate for FRAND terms prior

to filing a breach of contract lawsuit. The court reasoned that, as a third-party beneficiary for

FRAND commitment between a patentee of SEPs and a SSO, Microsoft had an enforceable legal

right to a FRAND license from the patentee prior to a licensing agreement. Thus, the ruling

means that implementer’s offer and negotiation for a patent license were not conditions

precedent for the patentee to obligate to FRAND commitments. Consequently, if the

implementer believes that the patentee’s offer for the license does not meet FRAND terms, it can

bring a lawsuit for breach of FRAND commitments and dispute resolution.

On the other hand, in Orange-Book- Standard20, the German Federal Supreme Court

(BGH) ruled that the implementer was required to make an unconditional and reasonable offer to

license on FRAND terms prior to patent infringement. The Orange-Book- Standard case

involved SEPs for compact disk standard which was known as the Orange Book. As a defense

for the patent infringement, the defendant in Orange-Book- Standard argued that the plaintiff’s

enforcement of its SEPs violated EU’s antitrust law because the plaint abused its dominant

FRAND commitment and the licensee disagree with the royalty and refuse to proceed the licensing negotiation, the only way to resolve the dispute is to file a law suit for court’s decision about setting a reasonable royalty. 19 Microsoft, Co. v. Motorola, Inc., No. 2:10-cv-01823-JLR (W.D. WA 2012), Dkt. No. 465 at 12-17. (This lawsuit involves two SSOs’ SEPs – SEPs for IEEE’s 802.11 Wireless LAN standard and ITU’s H.264 video coding standard. To comply with IEEE’s IPR policy, Motorola submitted a Letters of Assurance promising that it will grant a license under reasonable rates, terms, and conditions in a non-discriminatory basis to an unrestricted number of implementers. To comply with ITU’s IPR policy, Motorola also submitted a Patent Statement and Licensing Declaration declaring that it will grant a license under reasonable terms and conditions in a non-discriminatory basis to an unrestricted number of implementers). 20 Orange-Book-Standard, Bundesgerichtshof (BGH), May 6, 2009, KZR 39/06.

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position in the market. The BGH in Orange-Book- Standard, however, ruled that making an

unconditional offer to license on FRAND was the precondition for the defendant to asset the

anti-competitive defense. Furthermore, the BGH in Orange-Book- Standard also rule that the

patentee of SEPs did not need to accept the offer if it believed that the implementer’s offer was

not reasonable and unconditional. Consequently, the implementer has burden to prove that the

patentee refuses the license notwithstanding the offer was unconditional and reasonable within

the meaning of FRAND terms.

The above mentioned two cases show a clear difference in interpretation of the FRAND

commitments. The Microsoft court interprets that patents of SEPs should offer a reasonable

royalty to the implementer and if the implementer believes that the patentee’s offered royalty for

the license does not meet FRAND terms, it can bring a lawsuit for breach of FRAND

commitments. On the other hand, the Orange-Book- Standard court interprets that the

implementer should offer a reasonable royalty to the patents of SEPs and if the patents of SEPs

believes that the implementer’s offered royalty for the license does not meet FRAND terms, it

can bring a lawsuit for patent infringement. Even if both cases provided different conditions for

FRAND commitment, they indicated the importance of determination of FRAND terms in

resolving FRAND dispute. Especially, a court should provide the reasonable royalty for

licensing agreements under FRAND terms - FRAND royalty. FRAND royalty will be discussed

in detail later of this section.

Availability of injunctive relief for SEPs

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In Apple, Inc. v. Motorola, Inc.,21 the court interpreted FRAND commitments such that

the patentee “implicitly acknowledged that a royalty is an adequate compensation for a patent

license.” Thus the patentee of SEPs is not entitled to an injunctive relief because “the

inadequacy of monetary relief22” is required for the entitlement of the injunctive relief and

FRAND royalty would provide the adequate remedy.23 In Microsoft, Co., v. Motorola, Inc.,24 the

court also ruled that a FRAND royalty provides an adequate compensation because a patentee

“has always been required to grant a license” to an implementer at FRAND royalty for its SEPs

and the patentee has not been irreparably harmed.

On the other hand, in Orange-Book- Standard,25 the BGH ruled that a patentee of SEPs is

entitled to injunctive relief. The court interpretation is such that the implementer was required to

make an unconditional offer to license on FRAND terms prior to patent infringement. The court

reasoned that the infringement of SEPs itself shows the implementer’s unwillingness to make an

unconditional offer to license on FRAND terms. Therefore, an injunctive relief is available for

infringed SEPs. However, the court also held that an injunctive relief is not available for

infringed SEPs “if the patentee discriminates or inequitably obstructs” to an implementer’s

unconditional offer to license on FRAND terms and conditions.

21 Apple, Inc. v. Motorola, Inc., No. 1:11-cv-08540 (N.D. Ill. 2012), Dkt. No. 1038 at 18-19. This case involves SEPs for 3G mobile communications (UMTS) standardized by ETSI. 22 This is one of four factors that should be considered in granting injunctive relief for patent infringement in eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006). The other three factors are 1. The patentee has suffered an irreparable injury; 2. A remedy in equity is warranted considering the balance of hardships between the patentee and infringer; 3. The public interest would not be disserved by an injunctive relief. 23 Id. at 21. 24 Microsoft, Co., v. Motorola, Inc., No. 2:10-cv-01823-JLR (W.D. WA 2012), Dkt. No. 607 at 12-15. 25 Orange-Book-Standard, Bundesgerichtshof (BGH), May 6, 2009, KZR 39/06.

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Availability of exclusion order for SEPs in ITC

In Motorola Mobility, Inc. v. Apple Inc.,26 the Administrative Law Judge ruled that

FRAND commitments do not preclude an exclusion order for SEPs in ITC (International Trade

Commission). The ITC reasoned that its investigations to determine whether to issue an

exclusion order banning importation of infringing product for violations of section 337 of the

Tariff Act of 1930 (19 U.S.C. § 1337) have a wider scope than investigations in courts because

its interests include public interest in addition to private interest.

In Spansion, Inc. v. ITC,27 the court hold that the ITC is not required to apply the

traditional four-factor test of the Supreme Court’s eBay decision for injunctive relief used by

federal district courts. The court reasoned that legislative history of the amendments to Section

337 indicates that Congress intended injunctive relief to be the normal remedy for a Section 337

violation.28

In response to the ITC’s ruling of availability of exclusion order for SEPs two US

government agencies- Department of Justice (DOJ) and Patent & Trademark Office (PTO) -

jointly announced that in some instances the remedy of an exclusion order may be inconsistent

with the public interest.29 The agencies insisted that SPEs cannot be used to block sales or

imports of infringing products in cases where the patentee tries to exploit the SEPs’ market

26 Motorola Mobility, Inc. v. Apple Inc., In the Matter of Certain Wireless Communication Devices, Portable Music

and Data Processing Devices, Computers and Components Thereof, ITC Inv. No. 337-TA-745. 27 Spansion, Inc. v. ITC, 629 F.3d 1331 (Fed. Cir. 2010). 28 In Tariff Act of 1930, Congress eliminated the monetary remedy of §316 of the Tariff Act of 1922. This represents a legislative determination that an injunction is the only available remedy for violations of Section 337. Furthermore, Congress amended Section 337 to remove the requirement of proof of harm to domestic industry in 1988. This represents a legislative determination that it is unnecessary to show irreparable harm to the patentee. 29 U.S.DEPARTMENT OF JUSTICE & U.S. PATENT & TRADEMARK OFFIC, Policy Statement on Remedies

for Standards-Essential Patents , 2013, http:// www.justice.gov/atr/public/guidelines/290994.pdf (last visited Feb. 1, 2013).

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power through exclusion order for pressuring an implementer to accept unreasonably high

royalty against its FREND commitments.30 The agencies reasoned that such activity and

resulting exclusion order might be anti-competitive, and thus, harm consumers. The agencies

also mentioned that, in cases in which the implementer acts beyond the scope of FRAND

commitments, such as refusing to license on FRAND terms and conditions, an exclusion order

may still be appropriate.31

In response to the ITC’s ruling of availability of exclusion order for Samsung’s SEP of

3G mobile communications,32 the USTR (U.S. Trade Representative) vetoed against the ITC’s

ruling.33 The USTR exercised its latest veto of disapproving the ITC’s ruling 26 years ago. The

USTR reasoned that exploitation of SEPs can effect on competitive conditions in the US

economy and the US consumers adversely.

B. Determination of FRAND Royalty

Appropriate remedial compensation for SEPs

Another issue in FRAND disputes is the appropriate remedial compensation for SEPs. In

Apple, Inc. v. Motorola, Inc.,34 the court ruled that a FRAND royalty should not reflect the ex

post hold up value that SEPs acquired after a standardized technology was adopted widely in the

30 Id. at 6. 31 Id. at 7. 32 Samsung, Inc. v. Apple Inc., Certain Electronic Devices, Including Wireless Communication Devices, Portable

Music and Data Processing Devices, and Tablet Computers, ITC Inv. No. 337-TA-794. 33USTR representative Michael Froman’s letter to the ITC, http://www.ustr.gov/sites/default/files/08032013%20Letter_1.PDF (last visited Aug. 20, 2013). 34 Apple, Inc. v. Motorola, Inc., No. 1:11-cv-08540 (N.D. Ill. 2012), Dkt. No. 1038 at 18.

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relevant technology market. Thus, the FRAND royalty can be a measure of value the

implementer can obtain by adopting the standardized technology over available alternatives at

the time the standard was specified. In other words, FRAND royalty can be the maximum

royalty amount that a licensee would be willing to pay in return for the incremental profit

produced by implementing the patented standardized technology over the alternatives.35

Therefore, hypothetical negotiation framework to determine FRAND royalty subject to the

incremental value over alternatives at the time the standard was specified can be applied.

Opponents of the above court’s reasoning for FRAND royalty, however, argued that a

FRAND royalty should be determined as a reasonable royalty based on a hypothetical

negotiation at the time of infringement36 because the damages adequate to compensate would be

damages that place the patentee in the position it would have been but for the infringement.37

Opponents also argued that the FRAND royalty can be measured from a comparable licensing

price in the relevant licensing marketplace. On the other hand, proponents of the above court’s

reasoning for FRAND royalty, however, argued that market value for FRAND royalty could not

be used as providing the reliable FRAND royalty levels unless the comparable licensing royalty

has not been affected by enhanced market power of SEPs.38

FRAND royalty base and rate

35 Lance E. Gunderson, Stephen E. Dell & Scott W. Cragun, The Analytic Approach as a Technique to Determine a

Reasonable Royalty, in ECONOMIC DAMAGES IN INTELLECTUAL PROPERTY: A HANDS-ONGUIDE TO

LITIGATION 181, 182 (Daniel Slottje ed., 2006). 36 See, e.g., Motorola’s argument in Apple, Inc. v. Motorola, Inc., Case: 12-1548 (Fed. Cir. 2012), Dkt. No. 131 at 19. 37 Brooktree Corp. v. Advanced Micro-Devices, Inc., 977 F.2d 1555, 1579 (Fed. Cir. 1992). 38 Anne Layne-Farrar, A. Jorge Padilla & Richard Schmalensee., supra note 15.

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Two important questions that the disputes about the appropriate remedial compensations

for SEPs typically leave open are FRAND royalty base and rate. Courts may use a royalty base

equal to the entire market value of an infringing product if “the patented feature is the basis for

consumer demand” for the entire product.39 If the patented feature is not the basis for consumer

demand for the entire product, the royalty base should reflect only the contribution of the

patented feature to consumer demand.40 Thus, if a product consists of many components, the

royalty base can be the market value of the relevant component to consumer demand created by

the patented feature.41

In LaserDynamics, Inc. v. Quanta Computer, Inc.,42 the court ruled that the royalty base

can be the smallest saleable component that embodies the patented feature. By this reasoning,

the FRAND royalty base may be the smallest saleable component that embodies the relevant

SEPs. After the FRAND royalty base was determined, a royalty rate for a specific SEP can be

calculated by taking account of the economic contribution of the specific SEP to the smallest

saleable component that is used in determination of the FRAND royalty base. Additionally, to

evaluate whether a license meets FRAND requirement, a court must also ensure that the royalty

rate reflects the total royalty burden on that component to avoid royalty stacking problem.43

39 Marine Polymer Techs., Inc. v. HemCon, Inc., 672 F.3d 1350, 1360 (Fed. Cir. 2012) (en banc). 40 UNILOC USA, INC. v. MICROSOFT CORP., 632 F.3d 1292, 1318–19 (Fed. Cir. 2011). (When a standard is incorporated into only one component of a multi-component product, royalties based on the value of the entire product tend to compensate SEP holders for numerous technologies and features beyond those covered by their patents, thereby overcompensating them and leading to royalty stacking (the overall cumulative royalty costs for a given standard in excess of the total product cost)) 41 This situation is especially prevalent in the ICT industry. 42 LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 68 (Fed. Cir. 2012). 43 Even if the royalty rate for individual SEP is low, total royalty rates can be excessively large if the implementer should have licenses multiple SEPs from different patentees. See, e.g., Lemley, M. A., & Shapiro, C., supra note 8. "Royalty stacking refers to situations in which a single product potentially infringes on many patents, and thus may bear multiple royalty burdens. The term 'royalty stacking' reflects the fact that, from the perspective of the firm

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Guidelines for FRAND royalty determination

In Microsoft Co., v. Motorola, Inc.,44 the court provided basic guidelines for assessing

FRAND royalty. The Microsoft court devised the guidelines based on the Georgia-

Pacific analysis of the reasonable royalty45 modified to take into account SSOs’ primary goals

for requiring FRAND commitments. The court provided five primary goals for adopting

FRAND commitments: 1. Promotion of widespread adoption of SSOs’ standards; 2. Avoidance

of patent hold-up; 3. Avoidance of royalty stacking; 4. Creation of valuable standards; 5.

Exclusion of hold-up value in the reasonable royalty. The court, then, modified the Georgia-

Pacific factors to account for the five primary goals for requiring FRAND commitments. The

key modifications to the Georgia-Pacific factors that the court utilizes in its procedures for

FRAND royalty determination are as follows.

making the product in question, all of the different claims for royalties must be added or 'stacked' together to determine the total royalty burden borne by the product if the firm is to sell that product free of patent litigation." 44 Microsoft Co., v. Motorola, Inc., No. 2:10-cv-01823-JLR (W.D. WA 2013), Dkt. No. 681 at 25-41. 45 Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). (Fifteen factors for determining reasonable royalty are as follows. 1. Royalties patentee receives for licensing the patent in suit; 2. Rates licensee pays for use of other comparable to the patent in suit; 3. Nature and scope of license in terms of exclusivity and territory / customer restrictions; 4. Licensor’s established policy and marketing program to maintain patent monopoly by not licensing others to use the invention; 5. Commercial relationship between licensor and licensee, such as whether they are competitors or inventor and promoter; 6. Effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales; 7. Duration of patent and term of license; 8. Established profitability of the products made under the patent, its commercial success and its current popularity; 9. Utility and advantages of patent property over old modes and devices ; 10. The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefit of those who have used the invention; 11. The extent to which the infringer has made use of the invention and the value of such use; 12. The portion of profit or selling price customarily allowed for the use of the invention; 13. The portion of realizable profit attributable to the invention as distinguished from non-patented elements, significant features / improvements added by the infringer, the manufacturing process or business risks; 14. Opinion testimony of qualified experts; 15. Outcome from hypothetical arm’s length negotiation at the time of infringement began)

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� First, the court modified the term ‘an established royalty’ in the Georgia-Pacific factor 1

as a royalty established through negotiation under FRAND commitments. By this

modification, the court could consider a royalty in a patent pool for the specific SEPs at

issue or comparable licensing transactions as a candidate for the royalty established

through negotiation under FRAND commitments.

� Next, the court tried to capture only the ex ante value based on any contribution of the

patented technology to the standard with respect to the Georgia-Pacific factors 6 and 8.

Here, the ex ante value is an economic value of patented technology excluding value

added by being included in the standard. Thus, the ex ante value is comply to the

FRAND commitments because it the economic value of patented technology itself

without involvement of hold-up value.46

� Then, the court evaluated FRAND royalty for the value of a SEP determined through the

hypothetical negotiation on the contribution to the standard itself and to the

implementer’s products with respect to the Georgia-Pacific factors 10 and 11.47

C. Antitrust Issue

46 Microsoft Co., v. Motorola, Inc., No. 2:10-cv-01823-JLR (W.D. WA 2013), Dkt. No. 681 at 39. 47 See, e.g., In re INNOV A TIO IP VENTURES, LLC, No. 1:11-cv-09308 (N.D. Ill. 2013), Dkt. No. 975 at 84-86. (The court applied the Microsoft court’s guidelines to calculate FRAND royalty of WiFi SEPs. The court calculated the royalty cap using the average profit margin of the WiFi chips that cover all the implemented features of the WiFi standard in the infringing products. Then, the court calculated FRAND royalty by multiplying the average profit margin to the contribution of patentee’s SEPs to the profit and pro rata share of patentee’s SEPs to the total number of WiFi SEPs providing similar contribution to the profit.)

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The final issue in FRAND disputes is whether the exploitations of SEPs without any

limitation can be liable for antitrust violation. Generally, it is not presumed that holding a patent

means its owners have market power in the context of antitrust violation analysis.48 However, a

patentee of SEPs may have market power in the relevant technology market because the industry

may be locked-in to using the standard and all products must be compatible with the standard.

Thus, if the patentee of SEPs exploits SEPs for excluding competitors in the revenant market, the

exploitation may be considered as abuse of market power created by the standard, with a specific

intent to maintain or strengthen its monopolistic market power.49

In Rambus, Inc. v. Fed. Trade Comm’n,50 the court ruled that Rambus did not violate

Section 2 of Sherman Act as claimed by Federal Trade Commission (FTC) that Rambus’s failure

to disclose SEPs during the standardization process was exclusionary and anticompetitive

conduct. The court reasoned that Rambus’s failure to disclose SEPs in breach of FRAND

commitments did not have an anticompetitive effect. Thus, the mere breach of FRAND

commitments is not enough to show anticompetitive behavior of a patentee of SEPs.51

On the other hand, the European Commission, which is the European Union's

competition authority, announced that the patentee of SEPs in breaching of FRAND

commitments could potentially be subject to proceedings under Article 102 TFEU.52 The

48 35 U.S.C. Section 271(d); Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006). 49 The patentee of SEPs can be liable for violation of section 2 of Sherman Act. 50 Rambus, Inc. v. Fed. Trade Comm’n, 522 F.3d 456 (D.C. Cir. 2008). 51 In Vizio, Inc. v. Funai Elec. Co. Ltd., 2010 WL 7762624 (C.D. Cal. 2010), the court reasoned that more aggressive anticompetitive activity than mere attempt to harm competition is required to prove antitrust liability. 52 TEUF (Treaty on the Functioning of the European Union) Article 102 prohibits any abuse of dominant market position.

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European Commission issued a statement of objections to Samsung’s exploitation of its SEPs in

bringing a patent lawsuit against Apple for breach of FRAND commitments.53

III. Implications for ICT Industry

Having understood the current issues in FRAND disputes and courts’ decisions, I turn my

attention now to the implications of current legal and policy issues surrounding SEPs for the ICT

industry. I first discuss ICT industry players’ response to the outcomes of court resolutions. I

then discuss any potential adverse effects of the outcomes of the current concerted resolutions in

courts and regulation agencies to the ICT industry. Finally, I discuss the recent proposals to

resolve the disputes surrounding SEPs through the ICT industry players’ voluntary collaboration.

A. Response of ICT Industry to the Courts’ Resolutions

Will the ICT industry players agree to the outcomes of courts resolution that injunctive relief is

not available for SEPs?

In response to the court ruling that patentees of SEPs are not entitled to an injunctive

relief,54 Motorola agued in its responsive brief55 that the district court violated Supreme Court

53 European Commission Press Releases, http://europa.eu/rapid/press-release_IP-12-1448_en.htm (last visited April 1, 2013): “Samsung's seeking of injunctions against Apple in various EU Member States on the basis of its mobile phone SEPs amounts to an abuse of a dominant position prohibited by EU antitrust rules. While recourse to injunctions is a possible remedy for patent infringements, such conduct may be abusive where SEPs are concerned and the potential licensee is willing to negotiate a license on FRAND terms. The sending of a Statement of Objections does not prejudge the final outcome of the investigation.” 54 Apple, Inc. v. Motorola, Inc., No. 1:11-cv-08540 (N.D. Ill.). 55 Apple, Inc. v. Motorola, Inc., No. 12-8540 (Fed. Cir. 2013), Dkt. No. 131 at 56-74.

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precedent in eBay56 avoiding the negative consequences of courts’ rulings57 and violating the

principle of equity for granting injunction as specified in Patent Act58 by creating a bright-line

categorical rule prohibiting injunctive relief for patentees of SEPs under all circumstances.

Nokia also expressed its concern about categorical rule prohibiting injunctive relief. Nokia

insisted that courts should consider the appropriateness of relief on a case-by-case basis.59

Motorola and Nokia cited the joint statement of DOJ and PTO as a their reasoning for case-by-

case approach:60 Even if the agencies insisted that SEPs cannot be used to block sales of

infringing products in cases that the patentee tries to exploit the SEPs’ market power through

injunction, if the implementer is acting beyond the scope of FRAND commitments such as

refusing to license on FRAND terms, however, an injunction may still be appropriate.61

BlackBerry also expressed its position against the categorical rule banning injunctions because

the categorical rule can ruin a balanced approach between providing exclusive right for

contributing innovation and fair competition in the marketplace.62

On the other hand, Intel argued that allowing injunction for SEPs could open a door for a

patentee of SEPs to exploit SEPs for unreasonable compensation that would distort fair

56 eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). 57 An absolute bar on injunctive relief regarding SEPs would foreclose patent holders’ right for fair compensation and increase patent litigation. 58 35 U.S.C. §283. “The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable.” 59 Nokia’s amicus briefs with the Federal Circuit: Apple, Inc. v. Motorola, Inc., No. 12-8540 (Fed. Cir. 2013), Dkt. No. 53-1. 60 DOJ & PTO report, supra. note 28. 61 Id. at 7. This means that SEP implementers seeking a license must also respect FRAND obligations, although FRAND commitments bind SEP holders only. 62 BlackBerry’s amicus briefs with the Federal Circuit: Apple, Inc. v. Motorola, Inc., No. 12-8540 (Fed. Cir. 2013), Dkt. No. 154.

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competition and harm consumers.63 Considering a wide spread use of standard-compatible

products, granting injunction for SEPs could create risky precedent against the equitable

principal of eBay. Microsoft also expressed its position supporting courts’ decision for banning

injunctive relief with respect to SEPs.64

Will the ICT industry players agree to the courts’ determination of FRAND Royalty?

Qualcomm expressed its serious concerns about courts’ ruling to diminish the value of

SEPs in its comments to FTC.65 Qualcomm insisted that there is nothing wrong with the

licensing practice of using the price of the entire end product as the appropriate royalty base,

because licensing at the end user device level has been an industry custom in the

telecommunications sector. By the telecommunications industry custom, Qualcomm explained

that patentees of SEPs usually did not enforce licensing obligation to component manufactures.

Therefore, FRAND royalty base cannot be the smallest saleable component that embodies the

relevant SEPs.

Additionally, Qualcomm reasoned that the contribution of the patented feature to

consumer demand should not be limited to components of devices because extended consumers’

benefits are coming from the services provided by the network connecting devices.66 Therefore,

63 Intel’s amicus briefs with the Federal Circuit: Apple, Inc. v. Motorola, Inc., No. 12-8540 (Fed. Cir. 2013) Dkt. No. 137. 64 Microsoft’s amicus briefs with the Federal Circuit: Apple, Inc. v. Motorola, Inc., No. 12-8540 (Fed. Cir. 2013), Dkt. No. 144. 65 Comments of Qualcomm, FTC Standards Workshop, Project No. P11-1204, June 13, 2011, http:// ftc.gov/os/comments/motorolagoogle/563708-00022-85574.pdf (last visited Feb. 1, 2013). 66 According to MIT Technology Review, Smartphones Are Eating the World, March 15, 2013, http://www.technologyreview.com/photoessay/511791/smartphones-are-eating-the-world/ (last visited Feb. 1, 2013), mobile operators’ service market was $1.2 trillion and mobile phone (including smartphone) market was $269 billion globally in 2012. In fact, mobile network operators commonly subsidize mobile phone prices, and thus, consumers actually do not pay the full cost of the phones. Hence, even to base licensing royalties on the cost to the

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the smallest saleable component that embodies the relevant SEPs is actually the device itself in

the telecommunications sector. Furthermore, developing standard technology in mobile

telecommunications is a high-risk business. Thus, without strong patent protection and return for

R&D, there will be no encouragement for further investment in telecommunications standards.

Consequently, artificially diminished royalties on mobile telecommunications standard-

compatible products will impede innovation, and thus, harm to the industry and consumers

ultimately.67

On the other hand, Cisco, HP, and several other IT companies argued that the use

of the entire market value as a royalty base should not be used unless all of the profit of the

infringing product is attributed to the features of SEPs.68 Thus, the value of SEPs should be

determined by apportion to the contribution actually the patented features made to the accused

product. They also insisted that patentees bear the burden of proof for the value of SEPs.

B. Potential Adverse Effects of Courts’ Resolutions

Traditionally, most of patentees of SEPs do not enforce their SEPs unless a large portion

of their revenue is derived from the licensing of SEPs,69or unless the patentees are accused of

consumers of the phone is incorrect, since the phone prices are maintained at an artificially low level by the network operators. 67 Qualcomm also expressed its concern about reverse hold up such that an infringer refuses to negotiate in good faith for a FRAND license. 68 Cisco et al.’s amicus briefs with the Federal Circuit: Apple, Inc. v. Motorola, Inc., No. 12-8540 (Fed. Cir. 2013), Dkt. No. 93. 69 Qualcomm’s licensing revenue reached $1.6 billion in 2012.

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patent infringement by competitors.70 As the courts resolution for FRAND commitments

seriously limit the exploitation of SEPs, patentees of SEPs may seek other ways to exploit SEPs.

One possibility is the adoption of “patent privateering.”

Patent privateering is a kind of trolling practice by which holders of SEPs assign patent

trolls to engage in exploiting their IPRs encumbered by FRAND commitments.71 This kind of

outsourcing practice of patent enforcement to patent trolls can adversely affect the ICT industry

and consumers. First, patent privateering can increase patent lawsuits significantly because

patent trolls do not make products or services, and thus, they do not need to worry about counter

lawsuits. Second, patent privateering can harm consumers directly because patent trolls

willingly sue consumers instead of manufactures or service provides.72

Another possibility is the increasing activity of developing SEPs without participating in

SSOs, and thus, without obligations to FRAND commitments. FRAND commitments bind a

patentee who participates in a SSO and agrees to IPR policies of the SSO. If a patentee develops

SEPs without participating in a SSO, however, the patentee does not have the contractual

obligations to FRAND commitments.

Sometimes, developing SEPs without participating in a SSO is possible because some of

key aspects of the technologies adopted during the standardization can already be developed by a

third party who is not the participating member of the SSO. Thus, if the third party filed a patent

70 A common outcome of the counter-attack is a cross-licensing between the two parties in the dispute. 71 See, e.g., Tom Ewing, Indirect Exploitation of Intellectual Property Rights By Corporations and Investors: IP

Privateering and Modern Letters of Marque and Reprisal, 4 HASTINGS SCI. TECH. L.J. 1 (2012). 72 Consumers who simply use an infringing product also infringe the patent: 35 U.S.C. §271. In their article Patent

Assertion Entities and Antitrust: Operating Company Patent Transfer (The Antitrust Source April 2013), available

at http://www.ropesgray.com/~/media/Files/articles/2013/04/Antitrust-Attacks-on-Patent-Assertion-Entities.pdf, Mark S. Popofsky and Michael D. Laufert provides r several ways to challenge the patent privateering exploiting current antitrust liabilities.

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covering the technologies adopted as the standard, he or she can further develop it though patent

prosecution process to be a SEP. In an actual case, when Adaptix, a subsidiary of a patent troll

Acacia Research, sued Ericsson at the ITC for infringement of its 4G LTE SEP,73 Adaptix

claimed that it has no obligations to FRAND commitments because it did not participate in

ETSI’s LTE standardization procedures.

C. Alternative Methods to Resolve FRAND Disputes

Ex Ante FRAND licensing

To provide a forum for discussion among the different stakeholders regarding FRAND

disputes, the ITU organized a one-day workshop74 and a follow-up series of meetings.75 The

main purpose of the workshop and meetings was to provide a guide to resolve FRAND disputes

at the SSO level by adapting IPR policies of SSOs to the changing needs of the ICT industry.

Among several ideas exchanged at the meetings, the workshop introduced one interesting

proposal that may resolve FRAND disputes before the standards are fully deployed. The

approach to resolve FRAND disputes ex ante is named as a pseudo-pool approach to FRAND

licensing.76 The basic concept of the pseudo-pool approach to FRAND licensing is to adopt the

licensing scheme of traditional patent pools under the administration of SSOs. Thus, under the

pseudo-pool approach, the patentees and potential implementers set the reasonable royalty upon

73 Adaptix, Inc. v. Ericsson, Inc., Certain Wireless Communications Base Stations and Components Thereof, ITC Inv. No. 337-TA-871. 74 ITU Patent Roundtable, http://www.itu.int/en/ITU-T/Workshops-and-Seminars/patent/Pages/default.aspx. 75 TSB Director's Ad Hoc Group, http://www.itu.int/en/ITU-T/ipr/Pages/adhoc.aspx. 76 Jorge Contreras, Fixing FRAND: A Pseudo-Pool Approach to Standards-Based Patent Licensing (Antitrust Law Journal, Fall 2013, Forthcoming) available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2232515.

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final approval of a standard for the licensing of the whole SEPs (aggregate royalty) within the

SSO itself or through an authorized third-party agency similar to the patent pool administrator.

Then, each patentee of SEPs will receive a share of the aggregate royalty proportional to the

number of SEPs.

The main advantage of this approach for FRAND licensing is the setting of the total

royalty that the implementers should pay independent of the number of SEPs for a given

standard. The main drawback of this approach for FRAND licensing is the determination of

SEPs because most of candidates for SEPs cannot be granted from a patent office upon final

approval of a standard.77 Additional disadvantage of this approach is the cost and inefficiency

in the royalty setting process, which may affect the standardization process itself.

Arbitration for FRAND licensing

Another method to resolve FRAND disputes at the SSO level and through the ICT

industry players’ voluntary collaboration is to utilize arbitration as proposed by Lemley and

Shapiro.78 The arbitration approach to FRAND licensing is to adopt the negotiation scheme of

traditional baseball-style arbitration. In the baseball-style arbitration, each party proposes a

reasonable licensing royalty and the arbitrator choose one. To make the arbitration binding, the

arbitration clause can be included in the IPR policies of SSOs that a patentee of SEPs should

agree to. In the case of unwilling licensee, the patentee can sue for monetary damages and

injunctive relief.

77 Almost all patents are filed during the standardization process, and thus, they will still be in pending and their claims can be changed log time after final approval of a standard. 78 Mark A. Lemley & Carl Shapiro, A Simple Approach to Setting Reasonable Royalties for Standard-Essential

Patents (Stanford Public Law Working Paper No. 2243026 , 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2243026.

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The main advantage of this approach for FRAND licensing is its simplicity and

efficiency for the determination of the royalty. The main drawback of this approach for FRAND

licensing is to establish expertise and authority of the arbitrator by which not only the parties of

the license but courts honor his or her decision.79

IV. Recommendations

A. FRAND Royalty and Injunctive Relief

Hybrid approach to FRAND royalty

As can be seen in the previous discussion, there is no consensus among the ICT industry

players to accept either the traditional entire product or rather the smallest saleable component,

as FRAND royalty base. A method to resolve disagreement about FRAND royalty base may be

a hybrid approach to royalty base that was suggested by the 3G licensing platform.80 The 3G

licensing platform, which is the licensing organization for 3G mobile SEPs, adopted reference

market value of the entire product as a royalty base, if the product consists of several functional

blocks. For example, if the product performs 3G mobile communication and other functions that

give values to the users of the product, the royalty base only take into account the value

proportional to the 3G mobile communication function embedded in the entire product. Thus, if

a mobile phone of price T includes a component of price A for mobile communication function

79 The court can refuse to recognize or enforce an arbitration award (i.e., the decision of an arbitrator) only under limited circumstances provided in the New York Convention, such as “against public policy.” The Convention is available at: http://www.uncitral.org/uncitral/uncitral_texts/arbitration/NYConvention.html. 80 Larry Goldstein & Brian Kearsey, Technology Patent Licensing 154 (Aspatore Books 2004).

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and other components of price B for other independent functions and multiple components of

price C for common functions supporting both mobile communication function and other

independent functions, FRAND royalty base for mobile communication is A in the smallest

saleable component approach and T in the entire market approach. In the hybrid approach to

FRAND royalty, however, FRAND royalty base for mobile communication is A + C x [A/(A+B)]

taking into account the net contribution of the multiple components for common functions to

mobile communication. Consequently, FRAND royalty base is a compromise value between the

two extremes such that it is the entire product value including only the smallest saleable function

contributed by the patented feature of a SEP.

Ex Post Pseudo-pool Approach

The main concept of the ex post pseudo-pool approach to FRAND licensing is to set the

total royalty that the implementers should pay independent of the number of SEPs for a given

standard, which was the main advantage of the ex ante pseudo-pool approach. The patentees of

SEPs for a given standard may form the ex post pseudo-pool to set the total royalty. The

difference from the traditional patent pools is that the ex post pseudo-pool does not administrate

the licensing processes. The ex post pseudo-pool can also evaluate whether the patentees’ SEPs

are truly the SEPs through an authorized third-party agency or experts. Then, each participating

members of the ex post pseudo-pool can receive a share of the FRAND royalty proportional to

the number of true SEPs.

Law and economic analysis for injunctive relief

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It would be valuable to study the adequate compensation and availability of the injunctive

relief for SEPs at the fundamental level beyond courts’ interpretations based on contractual

obligation of FRAND commitments.81 The fundamental goal of providing certain exclusive

rights for a limited time to one’s invention is to create incentives which can maximize social

welfare (the difference between the economic benefits and costs) provided by the patent system.

The economic benefits of the patent system are well described in the justification theories for the

patent system.82

The most familiar justification of the patents system is that the patent system encourages

useful inventions to society by providing patent rights as an incentive. The presumption of this

justification is that motivating useful inventions always serve society beneficially and there

would be no inventions without the patent system. Therefore, under this justification of the

patent system, stronger the patent protection the more useful inventions will result in. This

justification is called ex ante justification of the patent system because it focuses on the role of

the patent system before the creation of inventions.83

The next justification of patent system is that the patent system induces commercial

exploitation of inventions.84 The rational of this justification is that, absent patent protection,

inventions would not be commercially exploited further due to fear of free ride on the inventions.

Thus, under this justification of the patent system, exclusive rights, like the real property rights,

are necessary to promote efficient use of inventions for maximizing the social welfares.

81 Apple, Inc. v. Motorola, Inc., No. 1:11-cv-08540 (N.D. Ill. 2012); Microsoft Co., v. Motorola, Inc., No. 2:10-cv-01823-JLR (W.D. WA 2012). 82 See, e.g., The Patent Prospector, Patent Economics, http://www.patenthawk.com/blog/2005/04/patent_economics_part_4_incent.html (last visited Oct. 1, 2013). 83 Mark Lemley, ‘Ex Ante Versus Ex Post Justifications for Intellectual Property,’ 71 U. Chi L. Rev. 129 (2004). 84 Id.

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Therefore, a case study for social welfare provided by SEPs85 taking into accounts the

benefit provided by interoperability and the cost provided by the strong patent protections would

provide another insight for the adequate compensation and availability of the injunctive relief for

SEPs.

B. Alternative Methods for FRAND Licensing

Collaboration between SSOs and patent offices for ex ante FRAND licensing

As an alternative method to resolve FRAND disputes, ex ante FRAND licensing at the

SSO level by adapting IPR policies of SSOs was proposed. By the ex ante FRAND licensing,

FRAND royalty can exclude the ex post hold up value that SEPs acquired after a standardized

technology was adopted widely in the relevant technology market. The main drawback of this

approach for FRAND licensing is the determination of SEPs because a patent office cannot grant

most of candidates for SEPs upon final approval of a standard. A possible solution to this

drawback would be the collaboration between SSOs and patent offices for ex ante granting of

patents filed by the participating members of SSOs cover the standardized technology through an

accelerated patent prosecution in the patent offices. 86

For example, IPR policies of SSOs can include a clause for the requirement of

accelerated patent prosecution of patents relate to any proposal submitted during the

85 A good example for the case study will be the 3G mobile communications because there are enough information for empirical analysis. 86Ex ante granting of SEPs would be possible utilizing the existing accelerated patent prosecution program in the patent offices. For example, USPTO operates the expedited examination of patent applications such as Prioritized Examination and Accelerated Examination.

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standardization. Additionally, a SSO and a patent office can make an agreement for

collaboration regarding accelerated patent prosecution of SEP candidate applications.

Establishment of international arbitration agency for FRAND disputes resolution

As another alternative method to resolve FRAND disputes, arbitration approach to

FRAND licensing through ICT industry players’ voluntary collaboration was proposed. By the

arbitration approach to FRAND licensing, FRAND royalty can be proposed by both parties in

licensing agreement. The main drawback of this approach for FRAND disputes resolution is to

establish expertise and authority of the arbitrator. A possible solution to this drawback would be

the collaboration between SSOs and other international authorities.

For example, World Intellectual Property Organization (WIPO) can be a good candidate

for the collaboration because WIPO can select qualified arbitrators and train them for FRAND

disputes resolution.87 Furthermore, WIPO could provide guidelines for evaluating essentiality of

SEPs and reasonable royalty for FRAND licensing. Specifying WIPO as the authorized

arbitration agency in the arbitration clause that is included in the IPR policies of SSOs can make

patentees of SEPs subject to arbitration in WIPO in case there is any dispute concerning FRAND

commitments.

Still, this method, however, does not solve the issue completely because implementers of

SEPs who are not the member of an SSO cannot be make bind the implementers to the

arbitration in WIPO. Thus, it may be necessary to include a special clause that FRAND

commitments and obligation of arbitration in WIPO only applied when implementers of SEPs

agree to resolve any FRAND disputes through arbitration.

87 WIPO can utilize WIPO’s Arbitration and Mediation Center.

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It would also be valuable to study the possibility of inclusion of relevant provisions

regarding FRAND disputes resolution in the Agreement on Trade-Related Aspects of Intellectual

Property Rights (TRIPS Agreement) like provisions on compulsory licenses of patents.88

V. Conclusion

In this article, I presented the background of Smartphone Patent Wars and

FRAND disputes surrounding SEPs among ICT industry incumbents. FRAND disputes involve

directly concerned industry parties, public policy agencies, and courts. I reviewed in details

courts resolutions, policy measures by regulation agencies, and industry parties’ response

regarding interpretation of FRAND commitments, adequate remedy, availability of injunctive

relief for SEPs, determination of FRAND Royalty, and antitrust matters. I also discussed

potential adverse effects of courts’ resolutions to the ICT industry and alternative methods to

resolve FRAND Disputes at the SSO level and through voluntary collaboration among ICT

industry players.

Considering the increasing disputes regarding SEPs in ICT industry, SSOs, courts, and

regulatory agencies should make more efforts to resolve FRAND disputes. I have tried to

provide a little contribution to the efforts of resolving FRAND disputes through

recommendations and suggestions for further studies.

88 Article 31 of the TRIPS Agreement specifies the compulsory licenses of patents.