European Commission Renews Investigation on Essential Patents Licensing

The European Commission has been pretty quiet about antitrust and licensing issues surrounding standard essential patents since the Commission ended its investigations against Rambus and Qualcomm in 2009. Both Rambus and Qualcomm were accused by its competitors of violating European Competition laws by their licensing behavior towards standard essential patents. Allegedly they misused their market dominance by demanding too high royalty rates for the licensing of patents protecting standardized technology, which necessarily must be implemented to build a standardized product. This behavior was said to violate Sec. 102 TFEU (former Article 82 EG). However, the Qualcomm proceeding was closed without any substantial conclusion after all complainants had withdrawn their complaints. And also the Rambus proceedings did not end with a formal decision but by a commitment voluntarily offered by Rambus. In short, by this commitment Rambus complied to a significant lower royalty scheme for the licensing of its standard essential patents.

However, the Commission has moved again against standard setting policies. According to a recent document of an US District Court (Northern District of California San Jose Division) originating from a proceeding between Apple and Samsung, the European Commission has opened an investigation against Samsung to determine whether Samsung’s behavior related to its UMTS-essential Patents violates EU competition laws.

The background of the US proceeding is once again an alleged patent infringement. Samsung started a worldwide litigation campaign and sued Apple for patent infringement in not less than nine countries. Samsung alleges that Apple infringes several patents, which are essential for building UMTS-standard compliant cell phones. The document by the US district court concerns a counterclaim by Apple accusing Samsung that they “unlawfully misappropriate the distinctive design and patented features that are hallmarks of Apple’s success” by “counterfeiting” Apple’s products. Apple did not only raise its counterclaims in the US but also in Europe and particular in Germany. There they recently reached an permanent injunction against Samsung for infringing a design patent by Apple. The District Court Düsseldorf has enjoined Samsung to market their popular Galaxy Tab in almost the whole of Europe.

Whether Samsung might also get an injunction against Apple for the infringement of their UMTS essential patents is now very doubtful in the light of the Commission’s new investigation. The background of this investigation and the alleged complaint by Apple is, that Samsung committed to license their essential IPR at fair, reasonable and non-discriminatory (FRAND) terms, while participating in the ETSI UMTS Standardization process. Furthermore, if a patent protected technology is adopted for a technical standard the patent holder achieves a dominant position at the licensing market for that patent and is consequently addressed by Article 102 TFEU.

Apple did not made any FRAND commitment and had never had an obligation to do that, because, as far as can be seen, Apple does neither hold any standard essential patents nor any essential design patents. However, Apple’s design patents (and even their patents regarding their user interface) might not be essential in its original meaning in the sense of technical essentiality as it is defined by Standard Setting Organizations as ETSI regarding standardized technology. But Apple’s patents, and that tells us their market performance, are very important for successful marketing in a highly standardized product market in which distinction from competitors is hardly reachable within the standardized technology ecosystem. In other words, Apple’s patents might not be technically essential but feature a significant (economic) relevance for the standardized products. These patents are also called standard relevant patents.

This raises a very interesting question not so much about FRAND and its meaning but rather about the relation between standard essential and standard relevant patents. It is very common that companies reciprocate their licenses with any other company holding essential patents regarding a particular standard if both of them want to implement the standard in their products. As long as both companies are on the same economic stage and hold a similar number of essential patents the cross-licensing of standard essential patents does actually not raise any substantial issues. But we get some problems if one side is only interested in licensing (i.e. R&D firms or NPEs) and does not need any reciprocal license or the ratio of the essential patents count differs significantly. This leads to substantially differing interests regarding the desirable royalty rate. In principle, almost every dispute about the licensing of standard essential patents and FRAND-terms originates from that situation.

Under antitrust scrutiny this mismatch of licensing interests is actually easy to control. The misuse of market dominance through the discriminatory or exploitative licensing of essential patents is prohibited by Article 102 TFEU. Thus the European Commission is able to sanction at least potentially extreme outcomes. According to the German Federal Supreme Court in re Orange-Book-Standard (KZR 39/06), the misuse of standard essential patents could even be objected against a patent infringement claim under particular circumstances.

The standard relevant patents issue adds another level to the whole dispute. Holders of standard essential patents are bound to antitrust law and last but not least even to a former FRAND commitment. Thus, they are not free in fixing an appropriate royalty rate for their essential patents and even not free to license their essential IPR at all. Holder of a standard relevant patent do not achieve a dominant position and thus are not addressed by Article 102 TFEU. The holder of the standard essential patent sustains a significant loss in bargain power opposite to an implementer, who does hold only standard relevant patents. While the holder of an standard essential patent is obligated to license its essential IPR by antitrust law or even by its FRAND commitment, the holder of an standard relevant patent is not obligated to do so. Nevertheless, the interest of the holder of the essential patent in licensing the relevant patent is not only understandable but also justified. However, its interest does not find any legal support. Even more seriously, the holder of the relevant patent could reject any licensing request without leaving its strong bargaining position while he could enforce a compulsory license at – in the worst case – FRAND royalty terms at the same time.

Stephan Dorn