Patent wars: a lull in hostilities?

Telecoms.com periodically invites expert third-party contributors to submit analysis on a key topic affecting the telco industry. In this piece Dr Christopher Stothers, a partner at law firm Arnold & Porter (UK) LLP looks at some recent developments in the patent wars that have blighted the smartphone industry and dares to anticipate a slightly more peaceful future.

For years telcos have faced threats to their business from patent wars and patent “trolls”; a term coined in the 1990s and typically directed at patent owners who do not use the invention themselves. However, a slew of recent court decisions in Europe, Japan and the US appear to have reduced the level of those threats, at least in the most critical cases involving a “standard essential patent”; one which relates to a component which is essential in order to manufacture a device which complies with a standard.

The threat of an injunction is a potent weapon in a patent owner’s armoury. Blocking the use of a component protected by a standard essential patent could potentially close down a manufacturer’s business by stopping the launch of a new device. This can happen even when the manufacturer developed its technology independently of the competitor who owns the patent, as it’s not usually possible to use this argument as a defence to threatened patent litigation.

Before the recent court decisions took place, telcos and other innovative manufacturers used to frequently complain that the threat of an injunction was being used to inflate the fees that patent owners demanded for the licensing of their patents. They often used the example of a 2006 case in which NTP sued RIM, which ended up having to pay a settlement of  $612m. In response, patent holders would complain that telcos were dragging their feet by refusing to agree on licencing terms until they were threatened with an injunction. Such companies were once described, memorably, as patent “grasshoppers” by the Chief Judge of the US Federal Circuit.

In patent disputes the courts used to often come down on the side of the patent owners, granting telcos injunctions against competitors if they held a valid patent which was found to have been infringed.

However, thanks to recent decisions, the threat of injunctions appears to be waning. Courts and competition authorities now seem to regard it as inappropriate to seek injunctions over standard essential patents, particularly when the patent owners have previously promised the standard-setting organisations to licence such patents on fair, reasonable and non-discriminatory (FRAND) terms. That said, the courts now also expect that telcos will enter into such FRAND agreements in relation to essential patents, and look unfavourably on those who don’t.

The first big decision came in April, when the European Commission decided that Motorola had acted anti-competitively by seeking and enforcing injunctions in Germany against Apple under an essential patent which Motorola had previously committed to the European Telecommunications Institute (ETSI) to licence on FRAND terms. On the same day, in a separate case, the Commission accepted Samsung’s commitments not to seek injunctions under standard essential patents against potential licensees who were willing to enter into a framework for determining FRAND terms.

Then in May, Japan’s Intellectual Property High Court gave its decisions in a dispute between Samsung and Apple. It refused to grant Samsung an injunction under a Japanese patent which had previously been the subject of a FRAND commitment, saying that this would be an abuse of rights.

These decisions followed developments last year in the US, where the Department of Justice, Federal Trade Commission (FTC) and Patent and Trademark Office all published statements which indicated concerns about the use of injunctions in relation to standard essential patents which were subject to FRAND commitments. Also, the FTC entered into two consent agreements with  patent owners, who agreed not to pursue injunctions under such standard essential patents.

The effect of all these decisions and developments is to put major pressure on patent owners not to seek injunctions on the basis of standard essential patents. This is essentially good news for telcos. However, there are three reasons why they probably do not signal a permanent ceasefire in the patent wars.

First, telcos still need to engage in genuine negotiations if they want to be protected from injunctions and pay only a FRAND royalty. This means the negotiation story will change and could lead to the resolution of patent-related disputes at an earlier stage. Although this should bring greater clarity to the market, earlier resolution could have significant cash-flow implications for telcos, particularly as the proper approach to determining FRAND licensing rates is still being developed by the courts.

Second, these decisions focus on patents which are essential to a standard. Although these patents will be critical to any business (as devices cannot be manufactured without them) there may be other patents which are just as important for a device but which are not “standard essential patents”, for example patents which cover a “must-have” functionality which has been heavily advertised to consumers. Telcos will still face the risk of potentially damaging injunctions over such “non-essential patents”.

Third, we have probably not yet heard the final word from the courts and the competition authorities. Although Motorola has apparently not appealed against the European Commission’s decision, similar issues have been referred to the European Court of Justice by the courts in Germany in a dispute between Huawei and ZTE where we can expect a decision in the next 12 months. Meanwhile in June, in the US, a decision which supported an injunction was made in a case brought by InterDigital against Nokia and ZTE. Public comment on this case has been invited by the US International Trade Commission.

These recent decisions appear to signal more a lull in hostilities than the end of the patent wars in the telecommunications sector. Patent owners and manufacturers will doubtless regroup and plan new offensives which incorporate these developments. In particular, we are likely to see a rise in disputes over standard essential patents being decided by private arbitration (rather than in the courts), together with a series of disputes over whether manufacturers have genuinely engaged in FRAND licensing negotiations. However, the reduction in threat of injunctive relief remains a welcome change and should allow telcos greater resources to concentrate on product development and competition for consumers.

About Christopher Stothers

Dr Christopher Stothers is a partner in Arnold & Porter (UK) LLP’s intellectual property litigation group in London. His practice concentrates on high value cross-border patent litigation, including opposition work before the European Patent Office, and the interface with competition law. His work includes representing a telecommunications company in patent revocation proceedings before the High Court and Court of Appeal in England, including issues of standard essentiality.