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Is the FRAND Regime Due for an Overhaul?

In today’s technology-heavy world, technical interoperability standards are quite common.  Because those standards are often patented, patent owners may have the ability to extract a monopoly price and some argue those owners can “reduce[] the number of competitors practicing the standard.”  Holders of patents covering technology used in setting standards – so-called standard essential patents (SEP) – must agree, among other things, to license such patents on fair, reasonable, and non-discriminatory (FRAND) terms in order to avoid potential anti-competitive effects of this collaborative effort.   However, if a party practices the SEP without a license, typical standard setting agreements will permit the patent owner to pursue remedies available under the patent laws, including seeking an injunction.

Renata Hesse, a DOJ official in the Antitrust Division, recently argued that SEP owners should not be able to pursue such injunctions.  Indeed, in February 2015, Hesse wrote to the Institute of Electrical and Electronics Engineers Standards Association – the largest standard-setting organization in the world – and gave it a stamp of approval for its new revisions under FRAND, which will limit a SEP owner’s ability to seek injunctions.  More generally, Hesse argued that “the ability for standard-setting organizations to confer market power to a patent owner creates the opportunity for anti-competitive behavior.”  Thus, she believes that “competition law [should be a] mechanism” to resolve licensing disputes.

Senior Circuit Judge Douglas H. Ginsburg of the D.C. Circuit, however, believes the existing framework for resolving licensing disputes provides sufficient protection against possible harm to competition.  In support of his contention, Judge Ginsburg cites three cases where the court simulated – or asked the jury to simulate – a hypothetical negotiation over a reasonable royalty rate where the patent owner has an obligation to license its patent on FRAND terms.  For example, in Microsoft Corp v. Motorola, Inc., the judge used a modified version of the Georgia-Pacific  factors “for determining ‘reasonable royalty’ damages to set a FRAND range for fees.”

Further, Judge Ginsburg argues that SEP owners should be allowed to pursue injunctions against alleged infringers.  With the eBay Inc. v. MercExchange, LLC decision, Judge Ginsburg reasons, the Supreme Court has already weighed the anticompetitive effects and provided the appropriate test for determining whether an injunction should be granted.  Threatening potential antitrust sanctions for enforcing intellectual property rights would only “diminish the incentives for companies to innovate and for industries to adopt standards.

In an article published in October 2014, Judge Ginsburg argued that SEP owners have no credible threat of securing an injunction because, to date, there is not “even one injunction or exclusion order that actually kept a product off the shelf because it infringed a SEP.”  Thus, a SEP holder could not extort higher licensing fees by threatening to obtain an injunction, because obtaining an injunction is so unlikely.

In April 2015, however, Hesse argued that the recent spike in litigation over FRAND patent royalties demonstrates that the FRAND regime is no longer “working very well.”  Furthermore, while it may be true that an injunction has not kept a product off the market, she has seen “several examples of exorbitant licensing fees either quashing competition or hurting consumers by lowering a product’s quality.”

This debate will likely continue as the FRAND litigation unfolds.  And if the increase in FRAND litigation continues perhaps we will see the issuance of the first injunction to keep a competing product off the market.