EU Commission’s Approach to Standard-essential Patents and FRAND sharpened by ‘Smartphone War’ (Part 2)

In Part 1 of our series of two postings on political and business issues in the discussion on FRAND licensing in Europe, we sketched the EU Commission’s political approach towards maintaining free markets in times of standard-essential patents.

Now, in Part 2, we will have a closed look at what the various industry players in the ‘smartphone war’ say and do.

The ‘Smartphone War’: The significance of Mr Almunia’s agenda can be easily derived for the global patent conflict that initially started between Apple and Samsung and meanwhile, after months of infringement suits and injunctions, involves also essentially all other important Internet and mobile telco players such as Google, Motorola, Microsoft, Nokia and HTC. In an earlier posting we considered this to be a sort of stress test for the patent system as it currently is.

The markings A and B in the above diagram relate to important milestones of the smartphone war in November 2011 and February 2012 connected with the FRAND:

Apple suggests FRAND conditions to ETSI. In a writing to ETSI dated 11 November 2011 Apple demanded guidelines to be issued according to which patents essential to mobile telecommunications have to be licensed under FRAND conditions. Not overly altruistically, Apple demanded “appropriate royalty rates” on a “common royalty basis”, i.e. “the industry average sales price for a basic communications device”, as well as “no injuctions” based on a patent for which the proprietor has made a FRAND commitment, regardless of whether the patent is in the end licensed under FRAND conditions or not. In the meantime, Microsoft (cf. press release, MS blog) and Cisco (cf. writing to ETSI) supported Apple’s suggestions.

Samsung’s standard essential patents: Also in November 2011 the EU Anti-Trust Authority (Joaquín Almunia’s Directorat-General of Competition) initiated hearings with Samsung as to a possible abuse of a dominant market power in regard of the company’s patents essential to the 3G mobile technology.  The EU Commission became aware of that issue only by a hint of Apple in an infringement suit initiated by Samsung in California, according to which Apple has asked Samsung for FRAND licenses for months in vain, even though the Koreans have committed themselves vis-a-vis ETSI to grant such licenses. In January 2012, lastly, the EU-Commission announces formal investigations against Samsung, due to the suspicion that Samsung hindered competition in the internal marked with their 3G patents.

Google affirms FRAND licensed to IEEE: In February 2012 it became public that also Google contacted standards organisations (cf. writing to IEEE) in order to affirm that licenses to the purchased Motorola patents, which are essential to mobile telecommunication standards at least partly, will continue to be available under FRAND conditions. The desired effect of this declaration was forthcoming, as the EU Antitrust Authority approved the take-over of Motorola on 13 Februar 2012, just like the US Depatment of Justice on the same day (cf. Google blog).

Quite naturally, the related press release of the EU Commission followed exactly the guidelines drawn by Commissioner Almunia three day before (cf. part 1 and here) and also pointed to the earlier EU Directives on horizontal agreements (IP/10/1702 und MEMO/10/676) in order to emphasis the relevance of FRAND licenses for free access to standardised technology.

FRAND not equals FRAND: Even though all players appear to want the same, namely a unified FRAND regime for telecommunications standards, there are significant differences in the details of the proposals. For instance, as Apple – supported by Microsoft and Cisco – suggests a no-injunction clause, i.e. an exclusion of injunction actions on patents that were subject to a FRAND commitment, Google clearly stated in its letter to IEEE that it “reserves its rights to use any and all judicial remedies against counterparties that refuse a RAND license” and that it intends to take the same (aggressive) position as Motorola took in the past. That means that Google wants to keep the injunction option if negotiations on actual FRAND conditions fail. Apparently, Google does not want to be restricted in their tactical options just obtained by purchasing Motorola’s enormous patent portfolio.

Using such measures in connection with standards-essential patents, however, is a two-edge sword, as can be concluded from both the upcoming investigations of the EU Commission against Samsung and the observations of EU Competition Commissioner of Competition Almunia (cf. part 1).

Apple files FRAND complaint against Motorola: Google will also have to think hard about another issue that became public last week. After the EU Commission started formal investigations against Samsung due to missuse of its standards-essential patents, Apple raises very similar accusation against Motorola as well, as can be concluded from Motorola’s annual report to the U.S. Securities and Exchange Commission (SEC):

On February 17, 2012, the Company received a letter from the European Commission, Competition Directorate-General, (the ‘Commission’) notifying it that the Commission has received a complaint against Motorola Mobility, Inc. (‘MMI’) by Apple, Inc. (‘Apple’) regarding the enforcement of MMI’s standards-essential patents against Apple allegedly in breach of MMI’s FRAND commitments. Apple’s complaint seeks the Commission’s intervention with respect to standards-essential patents.

Apple apparently drew some consequence from the various patent infringement suits and injunctions filed by Motorola against Apple in Germany, the main battle field in Europe (cf. [1, 2, 3, 4, 5, 6]). In concrete terms, Apple considers Motorola’s demand for 2.5% of the total iPhone sales as compensation for using Motorola’s UMTS-essential patents neither fair nor reasonable (cf. here).

It can be expected that Apple – which already asked the EU Commission earlier to arrange for FRAND licensing in the mobile communications sector - is knocking on Almunia’s open door by this complaint, who only recently commented the approval of Motorola’s takeover by Google in a somewhat threatening way:

We have approved the acquisition of Motorola Mobility by Google because, upon careful examination, this transaction does not itself raise competition issues. Of course, the Commission will continue to keep a close eye on the behaviour of all market players in the sector, particularly the increasingly strategic use of patents.

Microsoft complains as well: Yesterday , Joff Wild pointed the community to a posting in an official Microsoft blog announcing that Microsoft – again – supports Apple’s view on its general FRAND policy:

Microsoft filed a formal competition law complaint with the European Commission (EC) against Motorola Mobility and Google. We have taken this step because Motorola is attempting to block sales of Windows PCs, our Xbox game console and other products. Their offense? These products enable people to view videos on the Web and to connect wirelessly to the Internet using industry standards.

One does not have to be a prophet to assume that the EU Commission will almost certainly have a look at Motorola’s patent practice soon, given evidences like the investigation against Samsung and Almunia’s promise:

I can assure you that the Commission will take further action if warranted to ensure that the use of standard essential patents by all players in the sector is fully compliant with EU competition law and with the FRAND commitments given to standard setting organisations.

Nobody should underestimate the EU Commission’s – and Commissioner Almunia’s – ability and willingness to impose severe penalties on anti-trust law abusers, since competition law has always has been a central political issue of the EU Commission and an issue in which some very large market participants have been taught the meaning of fear, as Microsoft certainly will remember.