Some Initial Thoughts on the Japanese IP High Court's Apple/Samsung Judgments

As I mentioned yesterday, Japan's IP High Court has now published English-language translations of its May 2014 judgments in the Japanese Apple/Samsung FRAND dispute.  By way of background, in 2007 Samsung declared Japanese Patent No. 4642898 (a "method and apparatus for transmitting/receiving packet data using a predefined length indicator in a mobile communication system") as likely to be essential to the practice of the UMTS standard, and indicated its willingness to license the patent on FRAND terms.  In 2012, Samsung alleged that certain Apple devices infringed the patent and moved for a preliminary injunction in two separate proceedings.  Apple filed its own action for a declaratory judgment.  In 2013, the Tokyo District Court held that Samsung had abused its right by seeking a preliminary injunction and was barred not only from injunctive relief but also from receiving damages, even in the amount of a FRAND royalty.  In May 2014, a Grand Panel of the IP High Court affirmed the finding that Samsung had abused its right but held that Apple was liable for the amount of a FRAND royalty, which the court fixed at ¥ 9,950,000, or a little under U.S. $100,000.  (For my previous posts on the case, see here and here.) 

What follows are some key points from the Grand Panel's judgments, and my (very preliminary, somewhat hastily put-together, and therefore to be taken with a grain of salt) thoughts regarding them:

1.  First, in the appeals from the district court rulings denying Samsung's requests for a preliminary injunction (Case Nos. 2013 (Ra) 10007 and 10008), the IP High Court states (in identical language found at pp. 24-25 of these judgments):

It is considered extremely difficult for a standard user to obtain the licenses in advance, after confirming whether each of such large number of patents is essential or not. Therefore, if the patentee is unconditionally allowed to seek an injunction based on the Standard Essential Patent, the use of the UMTS standard would become  practically impossible. Such situation would have a negative impact on the dissemination of the UMTS standard and run counter to the purpose of the ETSI IPR Policy aimed at the harmonization and dissemination of the communication standards. Further, if such situation arises, the general public would be unable to enjoy a variety of benefits which would be available if the harmonization and dissemination of communication standards was achieved.

In relation to a Standard Essential Patent, it is not appropriate to allow a party who made a FRAND declaration to exercise the right to seek an injunction based on the patent right against a party willing to obtain a license under the FRAND Terms.

. . . Meanwhile, the injunction should be allowed against a party engaged in manufacturing, sales, etc. of an UMTS standard-compliant product without any intention of receiving a FRAND license, as such party with no intention of obtaining a FRAND license is not considered to comply with the standards relying upon the FRAND declaration, and the patentee would not be adequately protected if the exercise of right to seek an injunction even against such parties is restricted. Nevertheless, as allowing the patentee to exercise the right to seek an injunction involves potential adverse effects as mentioned above, scrutiny shall be made before determining that the prospective licensee has no intention of receiving a FRAND license.

. . . Considering the totality of the above circumstances, the exercise of the right to seek an injunction based on the Patent Right by the appellant who made the FRAND Declaration would constitute the abuse of right (Article 1, paragraph (3) of the Civil Code) and therefore is not allowed, if the appellee successfully alleges and proves the fact of the appellant having made the FRAND Declaration and the appellee's intention of receiving a FRAND license.  

Reviewing the evidence before it, the court then concludes that Apple was a willing licensee and that Samsung, as a result, was not entitled to an injunction.  I haven't yet focused very carefully on the court's discussion of the evidence concerning the parties' negotiations, but in general (as I have written about ad nauseam by now) I think the court's approach is correct, as a matter of policy:  that is, that a FRAND commitment deprives the patent owner of the right to obtain an injunction, unless the licensee is the one that is abusing the process (though I still haven't quite thought through my own views as to what that latter condition means or should mean).  I think the Japanese court's approach, though, is closer in spirit to the U.S. approach under eBay (though I recognize that abuse of right is a distinct doctrine in its own right) than to the European Commission and German approaches of addressing the issue through the lens of competition law.  (Of course, abuse of right is also a potentially applicable doctrine in other civil law countries, and has been applied in the FRAND context in an Apple/Samsung dispute in the Netherlands (see my post here).

2.  In the appeal from Apple's action for a declaratory judgment (Case No.  2013 (Ne) 10043), the court concludes that, under French law (which governs as a result of the ESTI IPR Policy) the FRAND declaration did not form a license agreement (pp. 111-15).  I'm hardly an expert on French contract law, but my initial reaction is that this result is not surprising; I believe it would come out the same way under German law, and that (so far) the U.S. has been an outlier in concluding, in some instances, that FRAND declarations do give rise to enforceable contract rights.

3.  The court also concludes, contrary to the district court, that Samsung is entitled to a FRAND royalty--or, more precisely, that, "the appellant's exercise of the right to seek damages for Products 2 and 4 based on the Patent Right constitutes the abuse of right to the extent exceeding the amount of the FRAND royalty, but not to the extent of the amount of the FRAND royalty."  As I stated in one of my earlier posts, this clearly seems right as a matter of policy:  depriving Samsung (or any SEP owner) of even a FRAND royalty would seem grossly unfair and would risk deterring firms from participating in SSOs and from engaging in the optimal level of R&D.  (The court agrees; see p.122.)  Nevertheless, the court hedges a bit by suggesting that there could be exceptions in either direction--that is, that an SEP owner could be denied a FRAND royalty under "special circumstances" in which it would be "extremely unfair" to award such a royalty, or that an SEP owner could demand royalties in excess of FRAND under "special circumstances, such as that the prospective licensee has no intention of receiving a FRAND license" (pp. 123-24).  In any event, no such special circumstances existed in the present case.   

4.  On the amount of the FRAND royalty, here is the court's general methodology (pp. 132-33):

First, among the total sales turnover of Products 2 and 4 [the iPhone 4 and the iPad Wi-Fi+3G model, respectively], the percentage of the contribution of the compliance with the UMTS standard should be calculated ((3)A. below). Next, among the contribution ratio of the compliance with the UMTS standard, the contribution ratio of the Patent should be calculated ((3)B. below). For the purpose of the calculation of the contribution of the Patent among the contribution of the compliance with the UMTS standard, in order to prevent an excessively high royalty in aggregate, the calculation method should be such that the amount of royalty for the entire essential patent pool does not exceed a certain ratio ((3)B.(A) below). In this court case, as the specific details of other essential patents are unknown, the amount of FRAND royalty should be based on the division by the number of UMTS standard essential patents ((3)B.(B) below).

Unfortunately, the court redacts the percentage it concludes is reasonable for the contribution ratio of the compliance with the UMTS standard, although it does tell us that many other factors contribute to the turnover for these products.  It also tells us that the maximum "aggregate royalty rates for the entire UMTS standard" should not exceed "5% of the contribution ratio of the compliance with the UMTS standard to the sales turnover of Products 2 and 4" (p.136).  The court then observes that

The UMTS standard includes a large number of essential patents in addition to the Patent, and the UMTS standard cannot be implemented by the Patent alone. Therefore, it would be necessary to consider the degree of contribution of the Patent to the UMTS standard, in relation to other essential patents patented in Japan. . . .  [T]he technical contribution of the Patent to the UMTS standard is not significantly high.  Also, no evidence has been submitted which proves that the contribution of the Patent to the UMTS standard is higher than other essential patents. . . .  Based on the above, it is reasonable to determine, based on the evidence submitted in this court action, that the contribution of the Patent to the UMTS standard is equivalent to other essential patents.

Accordingly, given that the contribution by the Patent and other essential patents to the UMTS standard are equivalent, the amount of the FRAND royalty for the Patent shall be calculated by dividing the amount of royalty by the number of all UMTS standard essential patents.

The distribution of royalty to licensors in the patent pool is generally calculated by dividing the amount of royalty by the number of patents, without regard to the technical value of individual patents. The "W-CDMA patent platform" for the UMTS standard has also adopted such method of dividing the royalty amount by the number of patents. Calculation of the amount of the FRAND royalty by dividing the amount of royalty by the number of the UMTS essential patents is consistent with such practice in patent pools. (pp.136-37).

Based on this methodology, the court comes up with a royalty of ¥ 9,239,308 for the iPhone 4 and of ¥ 716,546 for the iPad, for a total of ¥ 9,955,854.  This strikes me as likely to be undercompensatory, though perhaps it's just a lack of proof that leads to the result the court reaches.  Nevertheless, I would expect a patent pool rate to be lower than a FRAND rate (as Judge Robart found in Microsoft v. Motorola, see my post here), and I generally would not approve of calculating FRAND royalties using the typical patent pool methodology of dividing up some aggregate value by the number of patents; different patents likely have different values, even if in the pool context transactions costs may dictate not bothering to take those differences into account.   I also question the assumption that aggregate royalties for the UMTS standard necessarily should be capped at 5% of the value of the contribution of that standard, which (whatever that contribution value is) must be less than 5% of the value of the end products--though the court does tell us that "both appellant and the appellee have submitted their respective allegations on the premise of the aggregate royalty cap of 5%" and "many owners of the UMTS standard essential patents support the 5% aggregate royalty cap with a view to prevent the aggregate royalty from being excessively high" (pp. 136-37).  (Of course, the topic of whether or how potential royalty stacking should affect the calculation of a FRAND royalty is itself quite an interesting, and complex, issue.  For some thoughts of mine, see here.)

5.  Finally, the court expressed thanks for the third-party submissions it solicited earlier this year on the question of "whether an owner of a patent essential for a standard developed by a standardization body, for which a (F)RAND declaration (a declaration to grant a license under (fair), reasonable and non-discriminatory conditions) is made, should be restricted from exercising the right to seek an injunction or the right to seek damages" (p.139; see my post here).  Specifically:

These opinions are valuable and useful references that helped the court make an appropriate judgment from a broad perspective, and we hereby express our profound gratitude to all the parties who kindly made great efforts to submit their opinions.   

I thought this was a very gracious ending to a judgment that, whether one agrees with it in all of its respects or not, appears to me to be quite thoughtful and must have been quite a laborious undertaking to draft in such a short time.