The European Commission announced today that it sent a Statement of Objections ("SO"), a preliminary antitrust ruling, to Google's Motorola Mobility, following more than a year of formal investigations based on a complaint lodged by Apple in February 2012 over alleged abuse of cellular standard-essential patents (SEPs). Samsung had already received an SO over alleged SEP abuse in December 2012.
The European Commission is also investigating a Microsoft complaint relating to Motorola Mobility's pursuit of injunctive relief over H.264 video codec SEPs. Today's statement on the SO in the Apple-related case does not say anything about the parallel case, but I believe Google is in for an SO in that case as well, given that Motorola's conduct against Microsoft was even more outrageous than Samsung's pursuit of injunctions against Apple. In particular, Microsoft had made a binding offer to take a license to Motorola's H.264 SEPs at ten times the MPEG LA pool rate (see the German injunction ruling) and had offered a $300 million bond (while indicating a willingness to talk about an even greater amount) in order to avert enforcement during the appellate proceedings. At the time, Google's Motorola rejected the licensing offer -- which appears exceedingly generous in retrospect, considering a U.S. court's findings of what those patents are actually worth (on a worldwide basis) -- as well as the bond. Its only objective was enforcement of injunctive relief against the Windows operating system and the Xbox gaming console. If a U.S. district court and, subsequently, an appeals court had not barred it from enforcement, that's what would have happened. (By way of comparison, Samsung didn't receive such a binding offer, and it never won an injunction in Europe.)
The Mannheim Regional Court granted Motorola a cellular SEP injunction against Apple in December 2011 (the patent-in-suit was found essential to GPRS, the data transmission standard built on top of GSM, the 2G cellular standard), which Motorola temporarily (until an appeals court sided with Apple) enforced in late January/early Februar 2012, forcing Apple to remove certain products from its German online store. Several months later, Google's Motorola accepted Apple's offer to take a license on financial terms to be determined by a court if the parties, as they both knew they would, failed to agree.
A couple of months after Motorola's allegedly-abusive enforcement, the European Commission cleared its purchase by Google but clarified that merger clearance merely means that the change of ownership does not raise or add to concerns over abusive conduct by the acquisition target.
In a Q&A document accompanying its announcement today, the European Commission described its legal position on the "willingness" of a licensee in connection with SEP injunctions as follows:
"In the case at hand, the Commission is of the preliminary view that Apple's willingness to enter into a FRAND licence manifested itself in particular by its acceptance to be bound by a German court's determination of a FRAND royalty rate. The Commission's preliminary view is that the acceptance of binding third party determination for the terms of a FRAND licence in the event that bilateral negotiations do not come to a fruitful conclusion is a clear indication that a potential licensee is willing to enter into a FRAND licence. This process allows for adequate remuneration of the SEP-holder so that seeking or enforcing injunctions is no longer justified once a potential licensee has accepted such a process.
By contrast, a potential licensee which remains passive and unresponsive to a request to enter into licensing negotiations or is found to employ clear delaying tactics cannot be generally considered as 'willing'.
In addition, in the Commission's preliminary view, the fact that the potential licensee challenges the validity, essentiality or infringement of the SEP does not make it unwilling where it otherwise agrees to be bound by the determination of FRAND terms by a third party. In the case at hand, Motorola required clauses that prohibited such challenges by Apple, even after Apple had agreed to be bound by a third party determination of the FRAND terms. The Commission's preliminary view is that it is in the public interest that licensees should be able to challenge the validity, essentiality or infringement of SEPs."
While the Commission bases this preliminary decision on the concept of a "willing licensee" (as it apparently did in the Samsung case as well), it does not state that the pursuit of injunctive relief is necessarily above board against a company that is "unwilling". One can speculate whether the Commission hints that injunctions over FRAND-pledged SEPs against unwilling licensees are acceptable, but it does not say so explicitly. It merely outlines what an implementer of a standard should or should not do if it seeks to avoid sales bans under the "willing licensee" doctrine. It should not be "passive and unresponsive to a request to enter into licensing neogitations" and it should not "employ clear delaying tactics". If it formally accepts "binding third party determination for the terms of a FRAND licence in the event that bilateral negotiations do not come to a fruitful conclusion", there's a strong presumption of willingness to take a license. Even if someone is not a "willing licensee", the patentee's unilateral conduct may still be deemed anticompetitive.
The third and final paragraph of the passage I quoted above shows that the Commission fundamentally disagrees with certain German courts, particularly but not only the Karlsruhe Higher Regional Court and the Mannheim Regional Court, which interpreted the Orange-Book-Standard ruling by Germany's Federal Court of Justice in such a way that companies relying on the antitrust-related Orange Book defense (which related to any situation involving a compulsory license, with SEPs being the primary but not the only example) had to agree to pay royalties -- and had to act immediately after the offer as though the offer had been accepted, though it might never be accepted -- regardless of whether a patent is valid or infringed, and had to drop their invalidity defense (which in Germany consists in a separate nullity action before the Federal Patent Court) the moment the patentee accepted the Orange Book offer (Motorola even forced Microsoft to drop its nullity actions right at a Mannheim trial, before and without accepting the offer). From a policy point of view I totally agree with Brussels on this, despite the greatest respect for the Mannheim Court's very competent and efficient adjudication of the technical aspects of patent infringement cases. Someone who shoots down a patent that should never have been granted in the first place (unfortunately, most patents must at least be narrowed or are entirely invalid once there is a post-grant review by a court of law) does the general public a huge favor.
The way I interpret the Commission's Q&A, it's walking a fine line by disagreeing only with certain lower courts' interpretation of the Orange-Book-Standard ruling by the Federal Court of Justice. The Q&A says the following about Orange Book:
"The 2009 'Orange Book' ruling of the German Supreme Court established that a potential licensee can raise a competition law defence against an application for an injunction by showing that (i) it has made an unconditional offer to license under terms that cannot be rejected by the patent-holder without abusing its dominant position, and (ii) it actually acted as if had entered into a valid patent licence. The Supreme Court's ruling did not specifically relate to SEPs. The Commission's preliminary view is that an interpretation of that ruling whereby a willing licensee is essentially not entitled to challenge the validity and essentiality of the SEPs in question is potentially anti-competitive."
National courts of EU member states such as Germany are required by European law, which trumps national law in antitrust and certain other fields, to avoid rulings that would be inconsistent with the Commission's interpretation of EU law. With the Q&A the Commission published today, it's still not 100% clear (it probably never will be) exactly where the Commission draws the line, but key elements of the Orange Book case law by German regional courts and higher regional courts have now been explicitly labeled as "potentially anti-competitive".
The Düsseldorf Regional Court, which had also issued various rulings conflicting with the position outlined by the Commission today, accurately interpreted the Commission's announcement of the Samsung SO as a clear indication that the Commission considers some of the requirements German courts imposed on defendants in recent years ("imposed" in the sense that failure to meet these requirements would make an Orange Book defense fail) excessive. Rather than granting an injunction to Huawei in a dispute with ZTE over an SEP, the Düsseldorf court referred a handful of questions to the Court of Justice of the European Union (CJEU), to which defendants in antitrust cases can also appeal any Commission decisions. The Commission states in today's Q&A that it "will fully take account of any guidance on questions of law by the European Court of Justice that are of relevance for the Commission's investigation".
The Commission's Q&A also compares the scope of the investigation of Motorola's use of SEPs against Apple with the proposed consent order by the United States Federal Trade Commission in the Google/Motorola case:
"The proposed Consent Order by the FTC only applies to the future seeking and enforcing of injunctions. It does not cover agreements that are the result of behaviour occurring prior to the Consent Order, such as the one that the Commission is examining in this investigation. However, the Commission's concerns about the potential anti-competitive use of SEPs are similar to those that underlie the proposed Consent Order."
By "agreements that are the result of behaviour occurring prior to [an antitrust ruling and/or settlement]", the Commission means the aforementioned acceptance of Apple's Orange Book offer by Google, which at the time was in full control of Motorola Mobility after closing the acquisition. In other words, the Commission is inclined to hold Google liable for seeking to benefit from an unfair agreement resulting from acceptance of an offer Apple had to make under duress, at the threat of injunctive relief due to Motorola Mobility's conduct enabled by certain German courts. There is also a potential issue with such an agreement in the case relating to Motorola's use of SEPs against Microsoft. It turned out in February that Google recently declared an "acceptance" of Microsoft's H.264-related Orange Book offer, which Microsoft disputes because the "acceptance" comes with a condition Microsoft never wanted to accept. At the very least, Google's declaration of (and insistence on) an "acceptance" likewise shows that Google sought to benefit from a deal that came into being under anticompetitive duress. Google's Motorola also benefited from the fact that Microsoft was obligated last year to withdraw its nullity actions against a couple of H.264 SEPs. While the court took that initiative, Motorola's counsel had every opportunity to declare that his client would not insist on such a requirement.
If the final EU-level determination is that the Orange Book contract between Google and Apple came into being under anticompetitive duress, the agreement as a whole may be null and void. At the very least, certain anticompetitive clauses, such as the one barring Apple from challenging the infringement and the validity of the covered SEPs, would be stricken. As far as I know, a FRAND rate-setting case relating to that Apple-Motorola license agreement is pending in Mannheim, with a trial being scheduled for the rather near term. The European Commission's decision creates a situation in which the Mannheim Regional Court may decide to stay the rate-setting case until a final EU antitrust ruling (which could be appealed) issues. That would seem the most logical next step in my view. Apple needs to be given the opportunity to challenge the infringement and the validity of the patents in question, and a rate-setting decision should relate to only those patents that are actually found valid and infringed, which is (if Motorola's transatlantic track record in SEP infringement litigation is any indication) only a small minority of Motorola's cellular SEPs (in a worst-case scenario, which is not the most likely one but not completely unrealistic, it could be that Motorola cannot prove Apple's infringement of a single valid cellular SEP held by Motorola).
The final EU ruling will come down after Google has had the chance to defend itself at a hearing. It may or may not be consistent with the SO.
The acquisition of Motorola Mobility has given Google zero leverage against Microsoft so far, and very limited leverage against Apple. In this recent post I summarized all of Google's patent-related defeats (and its few minor, merely defensive wins) during the last month (April) and also talked about the key decisions made in March. Not only did Google pay a hefty price for patents of rather low strategic value but it also bought some SEP-related antitrust problems.
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