A new face of FRAND in the US
Judge and jury in a recent case decided in the Eastern District of Texas have provided further evidence that the way in which SEP disputes in the US are viewed is changing. Sisvel's David Muus explains
On Friday 26th January, a verdict came out of the court of US District Judge Rodney Gilstrap (Eastern District of Texas) in the case of G+ Communications v Samsung (case number 2:22-CV-00078). With a damages award of $67.5 million, litigation cost and a running royalty fee on top, the defendant's total liability could run into nine figures.
But this is not the only reason why the case merits a close look. The decision – and in particular Judge Gilstrap’s opinion of 22nd January 2024 - sheds light on a new side of FRAND doctrine in the US that, despite its recent birth, comes with a growing body of case law.
The FRAND bargain and FRAND bargaining
While in Europe FRAND is a concept mostly grounded in competition law, in the US it is primarily based on contract law. The enforcement of FRAND principles in the US is centred on the contract between the standard setting organisation (SSO) and the companies that participate in standard setting by contributing their technology to solve the problems that the standard is designed to tackle. This contract usually includes an IPR policy under which the participant declares that it is willing to make licences to its patents available under certain terms.
In the case of cellular standards, 3GPP’s ETSI is the main SSO. ETSI’s IPR policy includes a requirement for participating companies to make an irrevocable declaration of whether they will make patents that they think might be or become standard essential – arguably those that cover the technology that they contribute to the standard – available under licences that have terms that are fair, reasonable and non-discriminatory; or, in short, FRAND.
What FRAND actually means is subject to many factors but, crucially, it is referred to as a rate, as well as a process of coming to agreement. Put in simple terms, FRAND is a bargain between implementer and inventor.
So far, US doctrine has focussed on the bargain aspect of the FRAND rate with the “Non-Discriminatory” part being the central theme. As a result, courts have looked at comparable agreements to see which rates have been applied to comparable cases. Nevertheless, they have also made efforts to establish if it is possible to calculate a fair and reasonable rate through a separate process looking at statistics (TCL v Ericsson, for example). This statistics approach is dubbed the “top-down method”.
The American approach differs to the one we have seen in continental Europe (and the one in London is different again). Where the US system is focussed on determining damage, continental European courts determine whether injunctions (basically a product ban) are justified.
European jurisprudence prioritises balancing fair competition and respecting individual rights. This shifts the focus from damage to good faith behaviour; or, put another way, whether parties have genuinely engaged in the proper process of bargaining a deal under FRAND principles.
Such an approach holds that the implementer of the standard will not face claims of exclusivity from the patent owner if it fulfils an obligation to seek a licence. For its part, the patent owner has to offer a reasonable (FRAND-bargain) rate, as well as equal terms to similar implementers. The implementer must actively seek this licence and agree it without undue delay. This is often described as the “two-way street” of FRAND negotiations. Until recently, this part of FRAND has not had a significant role in the US approach to SEP litigation. But that is beginning to change.
Not walking the walk
The first time I saw how a FRAND deal was negotiated being a central theme in a US SEP case was one in which a Sisvel subsidiary was involved: 3G Licensing v HTC, before the District Court of Delaware. Here the jury found that HTC wilfully infringed 3GL's patents and awarded damages that reflected the defendant's deliberate decision not to negotiate a FRAND deal. Now, the finding in G+ Communications v Samsung has gone further and gives even more weight to this emerging US FRAND doctrine that looks at the pre-contractual phase. The court held that G+ Communication’s FRAND commitment followed from ETSI’s IPR principles, which are part of a contract subject to French law. From there, the court came to a couple of interesting conclusions:
If a party is not negotiating a FRAND licence in good faith, the other party may claim attorneys' fees and litigation costs
“In a negotiation for a license to a patent where the patent has been contributed to an adopted standard (which patent is known as a standard essential patent), if either negotiating party (being either the patent holder or the implementer of the adopted standard) fails to negotiate in good faith and thereby prevents a license from being granted on fair reasonable and non-discriminatory terms, then the party who fails to act in go od faith is liable to the other party for any reasonable damages which arise from such breach, including but not limited to attorney’s fees and the cost of litigation.”
If a party is not actively participating in the FRAND-bargaining process, the other party’s requirement to do so is suspended.
“However, if in negotiating for a license to a patent burdened by a FRAND obligation either the patent holder or the implementer of the adopted standard fails to act in good faith and thereby prevents a license from being granted, the other party’s obligation to continue negotiations is suspended. This does not remove the burden of the FRAND obligation from the patent, but avoids obliging a party acting in good faith to continue negotiating with a party who fails to do so. If the bad faith actor ceases its bad faith and begins acting in good faith, the good faith negotiations must also resume.”
The cost of “why-don’t-you-come-and-get-it?”
The prior practice of focusing on rate and damages in US SEP cases has been said to support delaying tactics by implementers. After all, why would anyone pay royalties early if paying them at the last possible moment has no negative consequences?
The longer a process can be drawn out, the more likely it is that the patent owner fails or just gives up. This can be for many reasons: not enough money for expensive lawyers, not enough people to keep at it, or simply because the will to fight evaporates. The smaller the inventor is, the more likely that this happens. For the implementer this is a total victory.
While the patent owner is fervently searching for fair compensation with an empty wallet, the implementer holds all the money earned with the disputed technology firmly in its pockets. Simply denying the need for (or pretending to want) a licence until the last possible moment, knowing you will get the same deal either in verdict or negotiation regardless, is a smart commercial decision.
This strategy has been called “efficient infringement”. However, the term doesn’t really catch the injustice of denying the rights of inventors who created the reason why a product exists. For the unscrupulous, the “why-don’t-you-come-and-get-it” strategy has often been a successful one, especially when deployed by rich and powerful companies.
The decision in G+ Communications v Samsung throws a bit of sand in this engine of inventor abuse. It strongly suggests that implementers would be well-advised to rethink a strategy of holding-out on agreeing a fair and reasonable licence.
In G+ Communications v Samsung, the defendant's liability translated into not only a $67.5 million verdict for past infringement but potentially much more. For one, the court’s ruling leaves open the possibility that Samsung will be liable for G+’s costs. That the party not living up to its side of the bargain ends up paying for the other’s cost of litigation only seems fair.
However, it did not end there. Based on Law360’s reporting, the jury also told the defendant to pay $1.50 for the two patents for each product sold until 2030 (when one of the two patents-in-suit expires) and from 2030 until late into 2036 to continue to pay $0.50 for each relevant product sold.
It is estimated that Samsung currently sells about 24 million 5G products in the US per year. Even though its 5G sales should grow over time to reach more than 30 million per annum, just taking the current number for 2024-2037 may leave the defendant with a total bill of well over $300 million, plus payment of G+ Communication's litigation costs.
I suspect that G+ Communications would have accepted a less impressive number as a FRAND bargain. Suddenly, inventor abuse in the US doesn’t look so efficient as it did.
David Muus is Sisvel's Head of Licensing Programmes, based in Barcelona.