Samsung asked the Federal Circuit to expedite the appeal of Ericsson's anti-antisuit injunction from the Eastern District of Texas. Ericsson's counsel then put enormous effort into an opposition filing, considering that this is only about a briefing schedule and not yet about the actual appellate decision. Yesterday, Samsung replied to Ericsson's opposition brief (this post continues below the document):
21-02-08 Samsung Reply ISO ... by Florian Mueller
The interesting part is not the continued bickering over the schedule. Granted, Samsung's lawyers did a very good job making a boring secondary matter almost entertaining to read--I would truly regard that as an accomplishment. But there's one aspect of this filing that ignited my interest: Samsung's reply to Ericsson's suggestion that Samsung should simply have accepted Ericsson's proposal to resolve their FRAND royalty dispute through arbitration.
I'm a longstanding critic of the notion that arbitration is the answer to SEP disputes. It's not hard to see why policy makers, competition enforcers, and at times even judges would rather refer parties to arbitration, just so they wouldn't have to deal with the intricacies of SEP licensing. Unlike the other popular alternative dispute resolution method, mediation, arbitration is sure to yield a result. But as Apple explained in a court filing almost a decade ago, arbitration gravitates toward the middle between both parties' demands while courts are more likely to enter "sharp" rulings. The way I always explain this to people is that if you're an implementer of a standard and you're dealing with a SEP holder asking for $5 per unit when $0.50 might be more accurate, you can't counterbalance that demand in arbitration: even if you proposed $0.01, the middle would still be $2.50, and negative royalties are obviously a non-starter. And that's not the only issue.
That is not to say arbitration could never be fair. It depends on the parameters.
The parameters that Ericsson proposed to Samsung (you can find the proposed Arbitration Agreement on pages 21-24 of the PDF shown above) leave a lot to be desired, and Samsung's reply brief highlights the key issues that Samsung raised, subsequently to which Ericsson didn't make a better proposal for how to go about arbitration:
In Section 3, Scope of the Arbitration, the approach to the FRAND determination is set forth as follows:
"The Arbitral Tribunal shall resolve the Disputed Terms by deciding the license terms and conditions that the Parties may respectively impose without violating their commitments to license their relevant standard essential patents on fair, reasonable, and non-discriminatory 'FRAND' terms and conditions." (emphasis in original)
Samsung has a far larger product business than Ericsson. Therefore, its exposure to Ericsson's patents is greater than Ericsson's exposure to Samsung's patents, and Ericsson will be a net licensor as a result of this cross-license. That's why Ericsson proposes that the arbitration panel set the highest rate possible within the FRAND range. What the sentence quoted above says is that the arbitrators should set the maximum royalty rate that wouldn't be an outright FRAND violation, while a fair approach to arbitration would mean to determine the most reasonable point within the FRAND range, which is never the maximum.
The practical effect of a "maximum non-violating" royalty rate would be that Ericsson would merely have to raise some doubt about a certain demand being an outright violation, and would get away with it. So, practically speaking, the outcome would almost certainly be supra-FRAND.
The next paragraph looks reasonable at first sight, but isn't when viewed in context:
"With the exception of the preceding paragraph, nothing herein shall restrict the ability of the Parties from presenting any evidence or making any arguments in the arbitration, including without limitation arguments regarding validity, essentiality, infringement or the value of the patents to be licensed under the Final Complete GPLA (as defined below)."
It's one thing that you're not barred from presenting evidence or making arguments. It's another whether it actually produces an effect. As Samsung told Ericsson in a November 1, 2020 letter (pages 25-27 of the PDF shown above), "it is unreasonable to expect an arbitrator to rule upon all potentially relevant validity and infringement issues in such a proceeding." And the overall structure of Ericsson's proposed arbitration agreement is such that payments would be due, without providing for potential adjustments to the royalties based on subsequent findings of invalidity and/or non-infringement.
Samsung told Ericsson an arbitrator shouldn't have to "dictate a range of terms for a bsuiness deal between the parties." Instead, Samsung, argues, the parties should negotiate as many terms of an agreement as possible and then, possibly, proceed to arbitration of "a reasonable scope of disputed issues."
Interestingly, the just-expired Ericsson-Samsung cross-license agreement provided for arbitration under JAMS rules, so Samsung is surprised that Ericsson wants to set the terms of a new agreement under a different set of rules.
Finally, Samsung criticizes that "Ericsson's proposal does not provide any mechanism for appeal." In this context, Samsung stresses that 5G "is relatively new" (thus no precedent yet). Samsung's rejection of Ericsson's arbitration proposal doesn't say so explicitly, but between the lines it appears to indicate that Ericsson should have to prove the strength especially of its 5G patents in arbitration or in court.
The transparency of U.S. litigation often proves helpful. Those two exhibits to Samsung's filing (Ericsson's proposal and Samsung's response) are now publicly accessible, and those dealing professionally with the question of SEP disputes can see what "willingness to arbitrate" means in many cases: it means that SEP holders want to tilt the playing field in their favor. That's why it's key not to allow SEP holders to enforce injunctions only because an implementer declined to arbitrate. Arbitration can work, but only if both parties define some specific questions that arbitration should answer, and the parameters under which the arbitration proceeds.
The proposal Samsung disagreed with--despite Ericsson threatening with renewed litigation--would have resulted in a supra-FRAND royalty rate with no adjustments based on invalidity or non-essentiality findings.
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