FTC sides with Apple on essential patents, undercuts Motorola

December 6, 2012

Last month, when a majority of the commissioners on the Federal Trade Commission issued a statement warning about aggressive assertion of standard-essential patents in connection with the merger of two companies that make car air conditioners, Reuters took note. On its own, the FTC’s statement wasn’t particularly interesting. But the antitrust watchdog is reportedly looking into allegations that Google is abusing the portfolio of essential tech patents it acquired in its merger with Motorola. Perhaps the FTC’s statement in the auto air-conditioning case, Reuters said, was an indicator of where the commission stood on Google’s use of Motorola’s patents.

We now have some more substantive evidence of what the FTC thinks about those patents — and it doesn’t bode well for Google. This week the agency filed an amicus brief in cross-appeals by Apple and Motorola of Judge Richard Posner‘s pox-on-both-your-houses dismissal of their claims against one another last summer. (Posner sits on the 7th Circuit Court of Appeals but heard the case as a district judge in federal court in Chicago; Apple and Motorola’s cross-appeals of his ruling are before the Federal Circuit.) The brief claims to be in support of neither party, but in reality the FTC sided squarely with Apple, arguing that when Posner refused to grant Motorola an injunction based on Apple’s unlicensed use of standard-essential patents, the judge correctly applied the U.S. Supreme Court’s 2006 ruling in Ebay v. MercExchange.

More broadly, the agency asserted that injunctions should not be wielded as a threat in licensing negotiations by holders of standard-essential patents, which are supposed to encourage competition by promoting interoperability. In exchange for the industrywide adoption of their patents, the FTC said, companies like Motorola commit to licensing their patents on reasonable and non-discriminatory terms. “However, a royalty negotiation that occurs under the threat of an injunction may be heavily weighted in favor of the patentee in a way that is in tension with the RAND commitment,” the agency’s brief said. “High switching costs combined with the threat of an injunction could allow the patentee to obtain unreasonable licensing terms despite its RAND commitment because implementers are locked into practicing the standard.” That’s particularly true, the brief said in an argument that echoed Posner’s ruling, when the patent at issue covers just one component of a complex device. Using the leverage of an injunction in licensing talks “is the essence of hold-up,” the FTC argued.

The FTC’s brief is hardly the only encroachment on the dominion of Motorola’s standard-essential patents. As you probably remember, two different federal district judges have held that Motorola is obligated by the terms of its agreements with standard-setting bodies to license its IP to third parties (such as Apple and Motorola) on reasonable terms. U.S. District Judge James Robart of Seattle held a bench trial in November todetermine what such terms should be, rejecting Motorola’s attempts to reshape the case. (The company fared better at the end of Apple’s parallel case in federal court in Madison, Wisconsin, when U.S. District Judge Barbara Crabb decided on the eve of a bench trial that she wasn’t going to go to the trouble of finding a reasonable rate if Apple wouldn’t agree to abide by her ruling.) But the regulator’s firm stance is yet another indication that Motorola’s patents may not be as potent as Google thought when it acquired the company — particularly because the FTC is reportedly still deciding whether to bring an antitrust action against Motorola.

I should point out that the agency wasn’t the only amicus to file a brief at the Federal Circuit in the Apple and Motorola cross-appeals. Five other amici made appearances. All purported to support neither party, but only the brief from The Institute of Electrical and Electronics Engineers seems truly non-partisan and informational. Abrief by Cisco, Wal-Mart and several other big companies asks the Federal Circuit to clarify a standard for damages that reflects the value of any particular patent to an entire product; the argument seems to be a slap at Apple, which has accused other smart-device makers, including Motorola, of infringing its patents on nifty features. The Intellectual Property Law Association, on the other hand, argued in its amicus brief that the standard Posner applied in deciding that Apple hadn’t shown its potential damages would, if broadly adopted, make it impossible for patent holders to prove how much harm they suffered from infringement. That’s a pro-Apple argument.

Like the FTC, both Verizon and the American Antitrust Institute addressed injunctions based on standard-essential patents in their amicus briefs. Both agreed with the FTC (and Apple) that, generally speaking, injunctions shouldn’t be permitted when patent holders have agreed to license their IP on reasonable terms.

I left a message with Motorola counsel David Nelson of Quinn Emanuel Urquhart & Sullivan but didn’t hear back. Apple’s lawyer in the appeal, Joshua Rosenkranz of Orrick, Herrington & Sutcliffe, declined to comment.

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