Recently, NYU Law’s “Competition, Innovation, and Information Law Program” hosted a presentation by John Harkrider, a prominent antitrust litigator on the frontlines of the Smartphone Wars and partner at Axinn, Veltrop & Harkrider LLP. Harkrider offered his inside perspective on the FTC’s July 2013 ruling on Google’s Motorola Mobility purchase, and on the question of when a holder of FRAND-encumbered patents (licensed on fair, reasonable, and non-discriminatory terms) should be able to obtain an injunction against an alleged infringer. Drawing on his first-hand experience as Google co-counsel in both the Motorola acquisition and subsequent FTC action, he argued that the much of the narrative about Standard-Essential Patents (SEPs), FRAND licenses, and the use of injunctive relief stems from widespread misunderstanding of the industry and the motivations of its key players. He argued that, contrary to what a number of commenters claim, these kinds of injunctions are not inherently bad – they can be a necessary tool for bringing obstinate infringers to the bargaining table.
For a bit of context: smartphone manufacturers are members of standard-setting organizations which ensure compatibility and interoperability of devices and software manufactured by different companies. When a company owns a patent essential for maintaining such a standard (an SEP), that company is obligated to license that patent with terms that are considered FRAND. Naturally, there are significant differences of opinion between licensor and licensees as to whether a license’s royalty rates are fair and reasonable compliant, or whether it is appropriate to seek injunctions against an alleged SEP infringer.
“Hold Up” and “Hold Out”
Those who oppose SEP owners’ right to seek injunctions contend it grants too much power to patent owners, allowing them to demand exorbitant rates beyond what is fair and reasonable. However, Harkrider hypothesized, if “hold up” was really a significant occurrence, we would see 1) higher profits among SEP holders than among SEP implementers; and 2) SEP holders exercising their “hold up” power to prevent implementers from pursuing suits against them. Instead, Harkrider noted that Apple (primarily an implementer) dominated the market while simultaneously refusing to pay royalties for use of Motorola Mobility’s SEPs, and both Apple and Microsoft have been able to obtain large judgments against SEP holders.
Harkrider believes that “hold out” – the refusal to agree to and/or pay a fair and reasonable rate by the licensees (particularly Apple and Microsoft) – is a much more common and significant concern. Whereas implementers who are willing to agree to a FRAND license but feel the patent holders’ terms are unreasonable or discriminatory, are able to bring breach of contract actions to enforce their interests. Yet SEP holders are at a disadvantage in obtaining remedies against those implementers who refuse to abide by FRAND license terms or pay an appropriate rate. While a single breach of contract claim brought by an implementer can encompass hundreds of SEPs, the holders of large portfolios of these patents must litigate potentially hundreds of separate patent infringement claims in order to obtain damages that might come close to royalties they would have otherwise received under the FRAND license. Without the threat of injunction and exclusion from the market, infringers such as Apple and Microsoft have almost no incentive to negotiate FRAND licenses or pay the fees, since infringement suits take several years to resolve and are likely to yield judgments that are still less than the royalties they would have paid under the license.
The Motives and Strategies of the Players
Harkrider pointed to how the business models of the combatants in the Smartphone Wars provide insight into their strategies. Whereas the telecom industry had previously been comprised of companies that all held large portfolios of SEPs, the newer major players – Apple, Microsoft, or Google – held very few SEPs. And while Apple held about 4,500 design and software patents, and Microsoft held about 18,000 proprietary software patents at the time of the Motorola acquisition in 2011, Google’s roots in the open-source community has led to comparatively few patents (about 1,500), only acquiring them when necessary as a defensive tactic.* Harkrider also stressed that Google is essentially an advertising company, and therefore more interested in simply increasing the number of people online, regardless of the device they are using to do so.
Harkrider argued that these conflicting business models led Apple and Microsoft to team up against Android (Google’s mobile operating system): pointing to their consortium purchase of nearly 900 Novell patents at $450 million, Microsoft’s $7 billion Nokia purchase, and the Rockstar Consortium’s $4.5 billion acquisition of another 4,000 Nortel patents, which Harkrider didn’t hesitate to characterize as a “super troll.” He argues that Google’s $12.5 billion acquisition of Motorola Mobility and its approximately 17,000 patents must be viewed in this context as an effort to restore balance to the playing field. It also spurred a shift in the battle from previous non-standard essential patent litigation to a focus on SEPs. Because Microsoft and Apple still have relatively few SEPs in their portfolios, they now seek to neutralize Google’s improved defensive position by arguing to ban SEP holders’ right to bring injunctions. Since this would not affect their rights to bring injunctions based on their large portfolios of non-SEPs, this would leave them with substantial power over Google.
Lamenting the “rush to judgment against Google,” during the FTC’s inquiry, Harkrider argued that the more significant issue in the Smartphone Wars are not SEPs, but “patent aggression” by the software firms (Microsoft and Apple) responding to the new threat of marketplace competition posed by Google’s open-source Android technology. Google’s use of injunctions was merely a ‘defensive’ tactic, he urges, employed to finally force Apple and Microsoft to end their “hold out” and negotiate FRAND licenses in good faith and pay the appropriate royalties (noting that both companies have pursued aggressive patent enforcement against Android devices over the past several years). He ultimately praised the FTC’s final ruling on the Motorola Mobility case for recognizing the complexity of the situation and declining to ban injunctions by SEP holders.
This post also relied on Harkrider’s article “Seeing the Forest Through the SEPs,” published in the ABA’s magazine Antitrust Magazine, at 23 ANTITRUST 22 (Summer 2013) (available to ABA members here, or on Westlaw or Lexis-Nexis).
*The number of patents reportedly held by Apple, Microsoft and Google in 2011 appeared in Harkrider’s presentation, as well as his ABA article cited above. He cited the ETSI IPR Online Database as his source.
Colleen Raspberry is a J.D. candidate, ’15, at the NYU School of Law.