U.S. International Trade Commission Addresses Use of Standard-Essential Patents in Section 337 Investigations
The U.S. International Trade Commission recently published the final public version of its June 4, 2013, decision, which states that there is nothing in section 337 of the Tariff Act of 1930 that precludes the Commission from issuing an exclusion order as a remedy, even where the complainant is under an obligation to license its standard-essential patents.
On June 4, 2013, the full Commission of the U.S. International Trade Commission (the Commission) addressed, for the first time, the issue of whether infringement of a patent that has previously been declared “standard-essential” may form the basis for either a limited exclusion order or a cease-and-desist order under § 337 of the Tariff Act of 1930. For more information, see McDermott’s On the Subject “U.S. International Trade Commission Grants Injunctive Relief on Standard Essential Patent.”. The full public version of the Commission decision was released on July 5, 2013. In it, the Commission ruled that there is nothing in § 337 that precludes it from issuing an exclusion order as a remedy, even where the complainant is under an obligation to license its standard-essential patents (SEPs). Inv. No. 337-TA-794, Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers.
To facilitate the use of various electronics and other products for which interoperability is a necessary feature, stakeholders in the technology industry have frequently worked together to form standard-setting organizations (SSOs), which establish the baseline requirements for how those components necessary for interoperability will operate. Most SSOs have some form of intellectual property rights (IPR) policy that requires that any company taking part in setting the standard declare if the proposed standard would cover any patents it may own, and if it does, agree that those patents will either be licensed on a royalty-free basis or on “fair, reasonable and non-discriminatory” (FRAND) terms.
The complainant in this investigation, Samsung Electronics, possesses two patents that Samsung had previously declared “standard-essential” to the Universal Mobile Telecommunications Standard promulgated by the European Telecommunications Standard Institute (ETSI). ETSI’s IPR policy required Samsung to offer a license to the two patents on FRAND terms. After negotiations between Samsung and the respondent, Apple, broke down over licensing terms, Samsung filed a complaint at the Commission requesting a limited exclusion order against Apple’s mobile communication products.
Section 337 of the Tariff Act of 1930 provides that, in the event articles being imported into the United States are found to infringe a patent for which a domestic industry exists or is in the process of being established, the Commission “shall direct that the articles concerned . . . be excluded from entry into the United States, unless, after considering the effect of such exclusion upon the public health and welfare, competitive conditions in the United States economy, the production of like or directly competitive articles in the United States, and United States consumer, it finds that such articles should not be excluded from entry.” 19 U.S.C. § 1337(d)(1). These four statutory factors are typically referred to as “public interest factors.” Apple asserted that because the patents had been declared essential to the standard, “Samsung forfeited any right it might otherwise have to obtain an exclusion or cease and desist order when it made its FRAND commitments for the  patents,” or in the alternative, that issuance of a limited exclusion order for patents that have been declared standard-essential would not be in the public interest.
In his initial determination, the administrative law judge ruled that none of the patents at issue were valid and infringed. The Commission determined to review the initial determination. In connection with that review, the Commission sought views from the parties and the public as to whether Samsung’s declaration of the patents at issue as SEPs should affect either the Commission’s analysis of whether there was a violation of § 337 and what relief should be provided. The Commission also requested comments from the public concerning how it should determine if a patentee has made a FRAND offer, with specific reference to the Georgia-Pacific factors used to determine a reasonable royalty.
The Commission’s Opinion
The Commission’s opinion found one of the two SEPs to be both valid and infringed, and that the proper relief was a limited exclusion and a cease-and-desist order directed to the infringing articles. The Commission rejected Apple’s argument that it may not investigate a violation of § 337 based on infringement of patents subject to a FRAND undertaking, ruling that under § 337(b)(1), the Commission is required to investigate any alleged violation based upon a complaint under oath, whether or not those patents have been declared standard-essential. The Commission also rejected Apple’s theory that the Commission “cannot address infringement of standard-essential patents other than in the exceptional scenarios such as where a potential licensee has refused to pay a royalty after a U.S. court has determined that royalty to be FRAND, or where no U.S. court has jurisdiction over the potential licensee in order to set a FRAND rate,” ruling that § 337’s remedies could be imposed in addition to any other monetary damages or injunctive relief available from a district court.
The Commission next determined that Apple had not “properly argued any affirmative defense that would preclude the Commission from finding a violation based on assertion of a declared-essential patent.” The Commission found that Apple had failed to preserve a breach of contract theory because there was insufficient evidence of the proper legal interpretation of the FRAND declaration under French law (the operative law of the ETSI), and that no party had compared the claims of the two patents to the technical disclosures of the standards at issue, without which the Commission could not determine if the patent was truly essential to the standard. The Commission also found that Apple had failed to argue other FRAND-based defenses, such as promissory estoppel, laches or fraud. Finally, the Commission determined that even if Apple had offered evidence of the proper interpretation of ETSI’s IPR policy and had shown that the patents at issue were actually necessary to practice the standard, that the FRAND declaration was a legally enforceable obligation, and that Samsung was required to grant irrevocable licenses under FRAND terms to any party, it still would not have found in Apple’s favor, because the parties’ final offers were sufficiently close to each other that Samsung did not violate its obligation to negotiate in good faith. Importantly, the Commission found that Samsung was not under any obligation to make an initial offer that was FRAND, because “the SSO intends the final license to be accomplished through negotiation,” and “even if it were true that a FRAND agreement that requires Apple to pay Samsung ultimately is not reasonable, the offers that Apple criticizes do not necessarily demonstrate that Samsung has violated its FRAND obligations by failing to negotiate in good faith” (emphasis in original). The Commission specifically rejected Samsung’s statements that it would not seek injunctive relief in various European courts based on its FRAND obligations “as having little relevance.”
The Commission also declined to take any position on the proper standard for determining whether or not a given offer is FRAND, despite asking for comments from both the parties and the public on whether the Georgia-Pacific factors used to determine a reasonable royalty in district court litigation should be applied, and if so, whether they should be modified in any way to reflect the nature of FRAND negotiations.
With respect to remedy and the public interest, the Commission rejected the theory that whether a patent has been declared standard-essential should be considered when the public interest is analyzed. The Commission found that its consideration of the public interest is limited solely to the four factors listed in § 337(d)(1), which do not include whether a patent is essential to the standard. The Commission also noted that no wireless network that was compatible with Apple’s products had stated any concerns to the Commission, and declined to extend the effective date of the remedial orders. However, the Commission did craft exceptions to the exclusion order for the importation of certain products where the component containing the infringing functionality had already been licensed by Samsung, as well as exceptions for repair and replacement of products already purchased by consumers.
Commissioner Pinkert’s Dissent
In dissent, Commissioner Dean Pinkert argued that the Commission should not issue an exclusion order based on Samsung’s obligation to license its SEPs on a FRAND basis. While Commissioner Pinkert did not dissent from any of the Commission’s factual findings, nor would he have adopted a blanket rule that relief under § 337 is unavailable for SEPs, he would have found that the evidence of record indicated that Samsung was unwilling to make a FRAND licensing offer with respect to the SEPs. While the patent at issue was “standard-essential,” it represented a small portion of the underlying value of the accused devices. In Commissioner Pinkert’s view, because the cost of the underlying baseband processor with the accused functionality cost much less than the accused product, Samsung’s offer of a license based on the cost of the end product was not reasonable, and the absence of a FRAND offer should have a bearing on whether relief under § 337 is in the public interest. Specifically, Commissioner Pinkert found that it was neither fair nor non-discriminatory for a FRAND-encumbered patent holder to require licenses to non-FRAND-encumbered patents as a condition for licensing the FRAND-encumbered patent. Commissioner Pinkert also would have found that the statutory language of § 337(d)(1), as well as the legislative history of the statute that “any evidence” of price gouging or monopolistic practices on the part of the complainant would be a proper basis for denying exclusion, suggests that the section should be read broadly.
Implications for Litigants Before the Commission
The Commission’s rejection of a per se rule barring exclusion orders for patents that have been declared standard-essential is likely to lead to an explosion of new complaints involving SEPs at the Commission. Over the past few years, several district courts have refused to grant an injunction after a finding of infringement of an SEP, ruling that because the owners of SEPs have agreed to license those patents on FRAND terms, the patent owner is fully compensated by a reasonable royalty. Because the Commission cannot grant damages, such an argument is unavailable to respondents in a Commission investigation.
Potential Commission complainants seeking to enforce SEPs should expect to see an increase in counter-suits requesting that a district court determine what constitutes a FRAND royalty rate, and/or requesting that a complainant be enjoined from proceeding before the Commission based on its FRAND obligations. With the Commission now standing ready to provide an exclusion order remedy on a finding of infringement (contrary to current district court injunctive relief practice), litigants that dispute whether an offered rate is FRAND (as opposed to litigants who object to paying any rate for various reasons), may try to moot Commission proceedings by seeking a court-imposed FRAND rate, combined with an order requiring the complainant to take no additional action before the Commission until the court can determine a FRAND rate.
Presidential review, which has largely been a formality to date, may also take on increased importance. The president has not disapproved of a Commission decision in 25 years. However, in discussing remedy and public interest, Commissioner Shara Aranoff specifically noted that while the Commission was limited to considering the four factors listed in its enabling statute, the statute permits the president to disapprove the Commission’s determination “for policy reasons” and places no limits on those “policy reasons,” and stated “that most of the arguments put forward by the parties and public commenters with regard to the public interest factors . . . are in fact policy arguments that are better directed to the President.” In response, Apple has already sent a letter to the U.S. Trade Representative stating its belief that the president should disapprove of the Commission’s decision for policy reasons.
Finally, pressure for legislative action on this issue may increase. Prior to this decision, several members of Congress had written directly to the Commission expressing their concern that the Commission would grant exclusion orders based on SEPs. The Federal Trade Commission has taken the position that the owner of an SEP should not receive injunctive relief except under very narrow conditions. The U.S. Department of Justice and the U.S. Patent and Trademark Office have also independently expressed concerns about enforcement of SEPs. With the Commission declining to refuse to grant an SEP-based exclusion order based on its interpretation of § 337, Congress may feel pressure to consider altering the statute to limit (or even bar) such investigations by the Commission.