Fair, Reasonable and Non-Discriminatory (FRAND) Terms

1. Fair, Reasonable and Non-Discriminatory (FRAND) Terms Daphne C. Lainson Smart & Biggar AIPLA Annual Meeting: IP Practice in Japan Committee October 2013

2. The FRAND Pyramid

3. Competing Interests • Adoption of standards • Lower production costs and costs to consumers, “shared” R&D expenses, reduced switching costs for consumers, more efficient uptake of new technologies, expanded customer base for standard compliant technologies, enhanced innovation around standards, improved product quality • But: • Potential for abuses by SEP owners, lobbying/bias over standard setting, reduction of competition once standard adopted

4. Standard-Setting Organizations (SSOs) • Develop and set industry standards • Voluntary membership • Different IPR obligations • Disclosure, FRAND commitments • Commitment to licence ≠ licence • Do not define FRAND terms • Actual licensing: negotiation outside of SSO and as between parties • Expectation: negotiations will be in good faith

5. What is FRAND? • No single, precise definition • Fair • Terms are not anti-competitive • Tied selling, bundling, free grant backs, exclusive licensing/restrictive covenants on licensing to other parties • Reasonable • Royalties do not result in uncompetitive pricing • “Price-stacking” • Non-discriminatory • All licensees are provided with similar terms and rates

6. SEPs/FRAND Concerns • Hold-up by SEP owner • Standard adopted and SEP owners engage in heavy handed negotiation (e.g., demanding excessive royalties) or withhold SEP protected technology • Impacts adoption of standard, increases cost to implementers and potentially consumers, affects other owners of SEPs for that standard • Royalty Stacking • Single product, multiple standards and SEPs = cumulative excessive royalties

7. SEPs/FRAND Concerns • Availability of injunctive relief • Equitable remedy: eBay Inc. v. MercExchange LLC (2006) 126 S Ct. 1837 • Factors: irreparable harm, adequacy of available legal remedies (e.g., damages), balance of hardships, public interest • FRAND obligation = admission money will make whole? • If SEP owner has a FRAND obligation, is injunction contrary to public interest (e.g., harms competition, added expense to consumers, harms innovation)? • See also Statement of FTC In the Matter of Google Inc. FTC File No. 121-0120 (January 3, 2013) • Statement released with publication of Google settlement • Seeking of injunctions, competition implications

8. SEPs/FRAND Concerns • Reverse hold-up by standard implementer • Pressure on SEP owner to negotiate unfavorable terms • E.g., imbalance in negotiating power between small, upstream SEP owner over standard not yet adopted by SSO and implementer • If an injunction or exclusion order is not available to a SEP owner, then this may shift the bargaining power to the implementer • Anti-trust concerns: Broadcom v. Qualcomm 501 F.3d 297 (3d Cir. 2007) • Patent holder’s intentional false promise to license SEP on FRAND terms and reliance by SSO on false promise when including patented technology in the standard = actionable anticompetitive conduct if SEP owner breaches promise

9. Microsoft v. Motorola—Good Faith Negotiationsand Reasonable Royalties • Microsoft claiming Motorola in breach of RAND obligations (good faith, fair dealing) to SSOs (ITU, IEEE): • Motorola offered SEPs at rates that are not RAND • Motorola sent two offer letters for two SEP portfolios (wireless communications, video coding standards) with RAND rate in each offer = 2.25% of the price of the end product • Motorola sought injunctive relief against Microsoft over SEPs • Proceedings in US district courts, the ITC and in Germany

10. Microsoft v. Motorola No. 10-cv-1823 (W.D. Wash., April 25, 2013) • Earlier decisions: • RAND commitments create enforceable contracts between Motorola and SSOs and Microsoft entitled to enforce contract as a third party beneficiary (Order dated Feb. 27, 2012) • Motorola’s commitment to SSOs required initial offers to license be made in good faith (Oder dated June 12, 2012) • Initial offers do not have to be on RAND terms, providing that a RAND license eventually issues (Order dated October 10, 2012) • Good Faith Negotiations? • In order to determine whether Motorola’s offer was in good faith, a comparison to a reasonable RAND royalty rate and a reasonable RAND royalty range (since more than one rate could be RAND) is required • Court therefore determining what is reasonable RAND licensing rate and RAND royalty range for Motorola’s SEPs

11. Motorola: Economic Guiding Principles • “A RAND royalty should be set at a level consistent with the SSOs goal of promoting widespread adoption of their standards.” • “In the context of a dispute…a proper methodology…to determine a RAND royalty should…recognize and seek to mitigate the risk of patent hold-up that RAND commitments are intended to avoid.” • “Likewise, a proper methodology for determining a RAND royalty should address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer.”

12. Motorola: Economic Guiding Principles • “…the RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property.” • “…a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.”

13. Motorola: Hypothetical, Bi-lateral Negotiation • Hypothetical negotiation between “willing licensor-willing licensee” • Applied modified version of Georgia-Pacific factors • Factors applied within the RAND licensing context • E.g., Past royalties received relevant if negotiated under a RAND obligation or comparable negotiations (patent pools) • Hypothetical negotiation would set RAND royalty rates by looking at: • Importance of the patent portfolio to the standard; and • Importance of the standard and patent portfolio to the products at issue • Motorola analysis applied in In re Innovation IP Ventures LLC 11-cv-09308(N. Dist. IIl. ED, 3 October 2013) • Innovation IP Ventures sues on acquired patents with RAND obligations and Court asked (pre-trial) to assess quantum of potential damages

14. Motorola: Holding • District Court finds: • Video coding portfolio • RAND royalty rate: 0.555 cents per unit (All products) • RAND royalty range: 0.555-16.389 cents per unit (Windows, Xbox) • Wireless communication portfolio • RAND royalty rate: 3.471 cents per unit (Xbox) • RAND royalty rate: 0.8 cents per unit (All other products) • RAND royalty range: 0.8-19.5 cents per unit (Xbox)

15. Motorola: Jury Verdict • Unanimous Jury Verdict - September 4, 2013 • Motorola breached contractual commitments to IEEE and ITU • Damages incurred by Microsoft: $11,492,686 • Motorola’s conduct in seeking injunctive relief violated duty of good faith and fair dealing with respect to its contractual commitments to the IEEE and ITU • Damages (attorneys fees and litigation costs) attributable to breach: $3,031,720

16. Injunctive Relief • Apple v. Motorola No. 1-11-cv-08540, 2012 WL 2376664 (N.D. Ill. June 22, 2012) [under appeal] • Unless implementer refuses to pay a royalty that meets the FRAND requirement, the Court is not justified in granting injunctive relief • By committing to license patents on FRAND terms, patentee implicitly acknowledges that a royalty is adequate compensation • Apple v. Motorola No. 3:11-cv-00178-bbc, 2012 WL 5416941 (W.D. Wisc. October 29, 2012) • Depending on specific obligations to the SSO, a RAND commitment may not deprive a SEP owner from seeking injunctive relief

17. Injunctive Relief • Realtek Semiconductor v. LSI Corp. No. C-12-03451 RMW, 2013 WL 2181717 (N.D. Cal., May 20, 2013) • Failure to offer a license on RAND terms before seeking an exclusion order or injunctive relief = breach of RAND commitment • Microsoft v. Motorola No. C10-1823JLR (W.D. Wash., August 11, 2013) • Seeking injunctive relief may be a breach of the duties of good faith and fair dealing, if the SEP owner is under a RAND commitment • Attorney’s fees and litigation costs as damages may be available

18. Exclusion Orders • ITC Inv. No. 337-TA-947 • Samsung successful in obtaining exclusion and cease and desist orders as against certain Apple products under 19 U.S.C. §1337 (“s. 337”) (June 4, 2013) • USTR disapproves ITC order (August 3, 2013) • S. 337 gives President (USTR) ability to disapprove exclusion and cease and desist orders on policy grounds • Cites DOJ/USPTO Joint Statement of January 8, 2013 re remedies for SEPs subject to voluntary FRAND commitments • Public interest: exclusion orders may pressure an implementer of a standard to accept more onerous licensing terms, affecting competition and price to consumers • In the future, ITC to: (1) thoroughly consider public interest; and (2) have a well developed factual record with specific findings on hold-up and reverse hold-up

19. Concluding Remarks • SEP Owners with FRAND obligations: • Royalty proposed in initial offer may be subject to duties of good faith and fair dealing • Reasonableness of royalty: hypothetical, bi-lateral negotiation • Breach of duties: damages • Seeking injunctions (exclusion orders) may be a breach of duties of good faith and fair dealing • Breach of duties: Attorneys fees/litigation costs • Implementers of standards: • Refusal to pay a RAND royalty may support injunctive relief (exclusion orders)

20. THE END Thanks for your attention! Questions? Daphne C. Lainson Partner Smart & Biggar dclainson@smart-biggar.ca