Authored by D. Brian Kacedon, Jameson Q. Ma, and John C. Paul
Questions relating to the licensing and enforcement of standards-essential patents have recently received much attention, in the media as well as in the courts. Standards-setting organizations ("SSOs") establish specifications to facilitate the interoperability for different manufacturers' products. Often, companies own patents that cover technology adopted in a particular standard. As a result, manufacturers whose patented technologies are incorporated into a standard may be placed in superior bargaining positions in negotiations with prospective licensors. For this reason, most SSOs have adopted policies regarding the licensing of such standard essential patents. The interpretation of these policies as well as the ramifications of agreeing to them are, however, a matter of much debate. In Apple, Inc. v. Samsung Electronics Co., Ltd.,1 11-CV-01846 (N.D. Cal. May 14, 2012), a district court was asked to address some of these issues in ruling on a motion to dismiss certain antitrust and breach of contract claims brought by Apple against Samsung.
Apple and Samsung are both members of the European Telecommunications Standards Institute ("ETSI"), which is an SSO headquartered in France. ETSI is one of six SSOs that make up the Third Generation Platform Partnership ("3GPP"). 3GPP sets standards for mobile phones including the Universal MobileTelecommunications Standard ("UMTS") that was at issue in this case. Like many standards organizations, ETSI requires its participants to use reasonable efforts to inform ETSI of essential intellectual property rights ("IPR") and to agree that they will license essential patents on fair, reasonable, and nondiscriminatory ("FRAND") terms. Samsung participated in ETSI and had claimed to have several patents that were essential to the UMTS. As a result, Samsung declared certain essential patents to ETSI and committed to licensing those patents on a FRAND basis.
Apple initially sued Samsung, alleging that Samsung's Galaxy cell phones and tablets infringe Apple's trademarks and patents. Samsung brought counterclaims against Apple, alleging infringement of Samsung's essential patents. Responding with its own counterclaims, Apple claimed, among other things, that Samsung violated federal antitrust laws based on its actions before ETSI and breached its contract with ETSI. Samsung sought to dismiss Apple's counterclaims for failure to state a claim (essentially arguing that the counterclaims lacked a legal basis).
Apple's Antitrust Claims
With respect to its antitrust claims, Apple alleged that Samsung (1) deliberately and deceptively failed to disclose the existence of its essential IPR during the standards-setting process and (2) committed to license its essential IPR on FRAND terms despite never having any intention to honor that agreement. According to Apple, as a result of this deception, Samsung excluded technologies that could perform the same functions as those covered by Samsung's essential IPR, therefore maintaining monopoly power in the relevant technology markets. And, according to Apple, Samsung sought to exploit this alleged monopoly power as leverage against Apple regarding Samsung's imitation of Apple's products.
According to the district court, to prove its monopolization claim, Apple had to establish that Samsung possessed monopoly power in the relevant market and that Samsung achieved or is maintaining monopoly power through anticompetitive conduct. Samsung argued that Apple failed to sufficiently allege (1) a market, (2) that Samsung possessed monopoly power in the relevant market, or (3) Samsung's anticompetitive conduct.
The district court ruled that Apple did sufficiently plead a relevant market. According to the court, Apple pled that the relevant markets are the various markets for technologies that—before the standard was implemented—were competing to perform each of the various functions covered by each of Samsung's essential patents. The district court rejected Samsung's argument that a "relevant market" must be a market of physical products because technology markets may serve as "relevant markets" for Sherman Act claims in the context of essential patents adopted by SSOs.
The district court also found that Apple had sufficiently alleged that Samsung had monopoly power in the relevant market. Specifically, Apple alleged that Samsung obtained the power to raise prices and exclude competition in the relevant technology markets and that Apple had been locked in to the technology standard adopted by ETSI, which conferred market power to Samsung. These claims were sufficient to allege that Samsung possessed monopoly power. The district court also noted the distinction between a normal patent—which generally does not confer antitrust market power on the patent owner—and a patent incorporated into a standard—which may confer antitrust market power on the patent owner because adoption of the standard eliminates alternatives to the patented technology.
Regarding Samsung's anticompetitive conduct, Apple offered two theories: that Samsung made false FRAND declarations; and that Samsung failed to disclose essential IPR. According to the court, an SSO can be used to create anticompetitive effects on relevant markets when a patent holder intentionally and falsely promises to license essential technology on FRAND terms, the SSO relies on that promise, and the patent holder later breaches the promise. The district court found that Apple's specific allegation of facts about when alleged false FRAND declarations were made, by whom, and for which patents were sufficient to state an antitrust claim.
Regarding the theory that Samsung failed to disclose essential IPR, the district court also found Apple's pleading sufficient. Specifically, it noted Apple's presentation of viable alternatives to each declared-essential patent coupled with allegations that ETSI would have adopted a different standard technology had Samsung's rights been known at the time of setting the standard. For these reasons, the district court denied Samsung's motion to dismiss Apple's antitrust claims.
Apple's Breach of Contract and Declaratory Judgment Claims
In addition to its antitrust claims, Apple also asserted a breach of contract claim against Samsung alleging that Samsung breached its agreement with ETSI to which Apple was a third party beneficiary. Apple also sought a declaratory judgment that it was either already licensed by virtue of Samsung's commitments to ETSI or that it had an irrevocable right to be licensed based on those commitments. The district court addressed Apple's breach of contract and declaratory judgment claims together because of the overlapping issues between the two claims.
Apple first argued that Samsung had breached its agreement to ETSI to license its essential patents on FRAND terms; to negotiate a license for its essential patents in good faith; and to timely disclose its IPR to ETSI. The court first held that it must apply French law to Apple's claims because ETSI's IPR policy included a choice-of-law provision to that effect. Under French law, the district court held that Apple had properly stated a claim for breach of contract as Apple was arguably a third party beneficiary to Samsung's agreement with ETSI and Samsung "arguably consented to enter into FRAND licensed by submitting its FRAND declaration in order to have its patents adopted by the standard setting organization."
In addition, the district court held that under French law parties can agree to negotiate in good faith and that Samsung's commitments to ETSI created a duty to negotiate in good faith. As such, Apple's allegations that Samsung had failed to negotiate in this manner were sufficient to state a claim for breach of contract. The district court also held that Apple's allegations were sufficient to state a claim that Samsung had failed to disclose its essential IPR based on Apple's allegations that Samsung's actions had foreclosed alternative viable technologies.
Finally, Apple also asserted that it was presently licensed to Samsung's essential patents by virtue of Samsung's commitments to ETSI and that by suing Apple for patent infringement, Samsung was in breach of this license. The district court, however, rejected this argument, noting that there was no firm offer and acceptance of the terms of a license between the parties. The district court also stated that it was not "plausible" that "Samsung's FRAND declarations constitute an offer to license" or that "anyone who uses the [essential] technology has a preexisting license merely because an ETSI member submitted a FRAND declaration." Thus, the court found that Apple could not proceed on this theory.
Strategy and Conclusion
This opinion illustrates that a patent holder's actions before an SSO can have important ramifications. Although the court did not rule on the merits of Apple's claims, this decision should highlight the possibility that one's actions before an SSO may give rise to antitrust and breach of contract claims. Thus, entities participating in an SSO should give careful consideration to the effect of their participation as well as the terms of any IPR policy maintained by that SSO.
1 The Apple decision may be found at: http://docs.justia.com/cases/federal/district-courts/california/candce/5:2011cv01846/239768/920/0.pdf?1337067894.
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