Prof. Robert P. Merges, University of California at Berkeley School of Law
June 8, 2012
The mobile phone patent wars, which have been heating up over the past year and more, serve up a dizzying array of complex issues. This begins with the technology itself – a marvelous marriage between miniature hardware, sophisticated communications, and amazing software. Then there is the business landscape: dominated by large platform sponsors (Apple, Google, Microsoft/Nokia), but at a deeper level rich in multiple and diverse players, from component suppliers to handset assemblers to application writers and content providers. It is no wonder that the most popular metaphor is “the mobile ecosystem.”
Underneath the dual layers of technology and commercial players, however, lies another layer, the IP layer. This describes the highly complex web of IP rights that cover various aspects and components of the various mobile ecosystems. I am speaking here of everything from patents on elements of the handsets and communications infrastructure (servers, cell phone towers, etc.) to copyrights on applications and on content available via mobile platforms. This layer is if anything even more complex than the other layers. And it has taken on an outsized importance in the past year or so. That’s because this layer has become the locus for strategic battles in the mobile industry. It is the chosen battlefield on which the major participants have decided to fight for dominance and recognition.
Mobile phone patent litigation is the clearest example. The multitude of patents involved, together with the many separate owners, create a great deal of complexity in this landscape. Many commentators have pointed out that complexity of this nature threatens to undermine the advantages associated with patents. The transaction costs associated with complexity on this scale – and especially the fact of many widely dispersed owners – swamp the incentive-based gains conferred by patents.1
Practical people in many industries have devised numerous solutions to the problems engendered by such complex landscapes. Though the solutions take many different forms, they converge around a common theme. They are all premised on contracts. Numerous IP owners mutually agree to band together to reduce the bottleneck formed by so many rights in so many hands.2 In effect, the participants in such contracts agree to drop the high-intensity threat value conferred by their respective rights, at least within the limited circles their contracts create.
The strategy of diffusing potential IP blockages by contracting in advance is thus a common feature of the mobile phone landscape, as it is in many other industries. But now the very contracts that have permitted the industry to move forward despite the presence of so much property have come to play a key role in the current industry battlefield. The issue of the moment in this respect is the agreements that various patent holders entered into with standard-setting organizations. These agreements are a classic example of the type of solution mentioned earlier, permitting many IP rightholders to come together so a complex product can be built. In particular, in the standard-setting context, participants in standard-setting pledge to license their patents to users of the standard on fair, reasonable, and non-discriminatory terms (so-called “FRAND” agreements). Now that some of the patents so pledged are being litigated as part of the mobile phone wars, the meaning and impact of these commitments are being tested in a serious way.
Though we are as of now just at the outset of these disputes, already two fundamental issues have arisen that will impact many other disputes of this kind. The first is contractual privity. And the second is the status of such contractual commitments during periods of active litigation, when the standard-setting contracts or the patents underlying them are the subject of ongoing legal proceedings.
The first important issue stems from the fact that the patent holders involved in the mobile phone wars typically first enter into contracts with standard-setting organizations (SSOs) such as the International Telecommunications Union (ITU) and the Institute of Electrical and Electronics Engineers (IEEE). These are the contracts that contain the FRAND clauses mentioned earlier. The important point, from the perspective of the lawsuits over mobile phone patents, is that the parties to these suits are not typically involved in a direct contractual relationship. Each owner of an “SEP” or standards-essential patent (those that cover features or components included within a standard) enters into a contract with the SSO itself. The set of all patentee-SSO contracts creates the overarching structure within which individual patent licensing transactions are conducted. But individual members of SSOs must still enter into direct contracts to license their patents.
As a result, when two members of an SSO begin to fight over licensing deals and/or patent infringement, the status of the overarching SSO structure comes into play. From a legal point of view, the threshold question is whether an SSO member who refuses a license and is accused of patent infringement by another member can invoke the terms of the SSO contract in a way that affects the rights of respective parties to the lawsuit. Do members’ contracts with the SSO, in other words, affect the rights that members have against each other in litigation involving not the SSO itself, but only two of its members?
From the structure of SSOs, it has long been thought that the commitments of individual members were binding, and therefore redounded to the benefit of other members. The most popular theory from a legal point of view is that the other members are intended third party beneficiaries of each member’s promise to the SSO. In several recent cases, courts have confirmed that understanding.3 These are important rulings in several respects. The primary point is that the terms of SSO contracts will bear heavily on the rights and potential remedies of litigants who are SSO members. But in a larger frame, the rulings ratify the importance and workability of large transactional mechanisms designed to overcome the transaction costs of multiple, dispersed patent owners. The courts have held, in effect, that SSO members will be bound to their commitments to modify the high-intensity rights accompanying patents by joining together into joint licensing arrangements.
From the perspective of contractual privity, these decisions mean that SSO members are necessarily in contractual relationship with each other as well as with the SSO itself. Through the device of third party beneficiary principles, SSOs create a binding series of bilateral obligations among all SSO members. The sum of all contracts between an SSO and its members is a web of bilateral commitments that bear directly on the rights between members themselves. What this means practically is that, when one member asks another for a license, this request takes place against an overarching contractual relationship that already exists. The parties are in privity (by virtue of their SSO commitments) even before they reach a specific licensing deal between themselves. This overarching contractual relationship thus modifies, shapes, and in some ways constrains any dispute that may arise out of such a request for a bilateral license.
SSO Member Relations During Disputes
The second important contractual issue raised by the mobile phone wars is this: What effect does a dispute have on the existence and terms of the overarching relationship during periods when SSO members are in legal dispute with one another? This too is a complex issue, raising a number of difficult legal questions. At the heart of the matter, however, is the issue of how effectively the SSO structure will serve to permit ongoing technological progress and commercial activity during the inevitably long periods when members’ patent and/or contract rights are in dispute.
In this connection, a recent district court decision in the Western District of Washington may be an important early indicator. The court ruled in Microsoft Corp. v. Motorola, Inc.4 that (1) one member’s licensing request of another did not necessarily place that member in breach of the basic SSO agreement; and (2) the filing of a lawsuit by an SSO member did not necessarily represent the end of the other party’s obligation to license patents under FRAND terms. Under the facts in that case, the court denied summary judgment on both these issues. The result is an uneasy sort of partial truce. The parties are still in dispute – in this case, over the validity, infringement, and potential damages stemming from some Motorola patents – yet at the same time their relationship is nonetheless governed by the terms of the SSO agreement. Neither Motorola’s licensing request, nor Microsoft’s refusal of the offered terms, put the parties in breach of the SSO commitment, the court ruled. And so, even though the licensing refusal led directly to patent infringement litigation, the parties are still bound during the period of this litigation by the overarching SSO agreement.
This has a number of strategic and policy-level implications. Most importantly, it may bear on the question of the remedies available to the patent owner, Motorola. It may affect whether Motorola can successfully request an injunction against the accused infringer, Microsoft. Microsoft can argue that by entering into the SSO, Motorola effectively waived its right to obtain an injunction against another SSO member. In the alternative, Microsoft can argue that the FRAND commitment represents a sort of stipulation that compensation in this amount constitutes an adequate royalty, and therefore that one of the essential requirements for obtaining an injunction (i.e., that there be “no adequate remedy at law”) is lacking in this case.
For the same reason, the fact that both parties are bound to each other through the SSO agreement, and that this agreement remains in effect despite an ongoing dispute, might affect the money damages that Motorola can obtain. Though there is plenty of room for argumentation, it might make sense that a FRAND commitment should affect the calculation of damages in a lawsuit between SSO members. Perhaps the resulting damages will be much lower than they would have been without the SSO agreement – in which case, the result would mean that what is fair and reasonable is quite a bit lower than what is required to compensate the patentee for the full costs of the infringement. Or perhaps it will be quite small, meaning a minor downward bias in the choice of what compensation is adequate under the facts. The fact remains that the SSO agreement will play a role in the calculation of damages, and that is significant enough.
Both these implications depend on the court having denied summary judgment for both parties. In some cases, grant of summary judgment may me warranted, in which case the uneasy truce just described – and its implications – may not follow as readily. Yet even so the result here seems to apply to a substantial number of cases. As long as a licensing request is not completely outrageous, and as long as one or both parties only files a lawsuit (as opposed to taking more precipitous action), the standing truce described here may well prevail.
The ultimate point here is that SSOs are very widely employed in complex industries such as mobile telephony. As with other contractual arrangements designed to modify and in some ways soften the impact of full-blown property rights, they significantly modify the rights of parties that enter into them. If the transaction cost savings that SSOs promise are to be realized, the obligations entailed must be applied in bilateral, member-to-member disputes. And they must be employed to permit “business as usual” as much as possible during the inevitably long periods of dispute brought on by contemporary patent litigation. Any other result would undermine the basic purpose of the SSO, and lead to precisely the sorts of transaction costs that parties to SSOs are trying to reduce when they form them and make initial commitments to them.