Friday, September 13, 2013

Wright on Standard-Essential Patents and FRAND

FTC Commissioner (and former George Mason University Law Professor) Josh Wright has published the text of a speech he gave yesterday at George Mason, titled "SSOs, FRAND, and Antitrust:  Lessons from the Economics of Incomplete Contracts."  Text is available here.  Commissioner Wright argues, among other things, that incomplete contracts are pervasive throughout the economy--as Commissioner Wright puts it, "all contracts are incomplete"--and that incomplete contracts are not necessarily inefficient.  Rather, they may result from the parties deciding, ex ante, that the cost of trying to pin down the consequences of ever likely contingency may outweigh the benefits.  Thus, "[t]he fact that a patent holder or licensee may ex post be able to take advantage of contractual incompleteness or ambiguity to 'hold-up' its transacting partner does not imply that the contract is inefficient ex ante or that it emerged from a defective contracting process." So far, so good.  Commissioner Wright then takes issue with proposals of some commentators that SSOs should require patentees to be more specific than they currently are about what FRAND terms would be or to adopt certain disclosure or licensing policies, arguing that SSOs themselves are better positioned than are governmental actors to determine what information should be disclosed or what policies adopted.  It may be that in the SSO context less specificity ex ante is optimal, given how difficult and time-consuming it would be determine FRAND terms in advance.  Again, I think this may be right, though we had some robust discussions of this very issue at the University of Florida workshop that I live-blogged.yesterday and the day before.

I part company with Commissioner Wright, however, when he asserts that a general rule denying owners of FRAND-encumbered SEPs the option of obtaining injunctive relief would be a bad idea, because it might retard innovation (see page 25 of his text, citing an article by Ganglmair et al. that I take issue with in the paper I presented at the Florida workshop).  I also think he conflates the contract and patent remedies issues, at pp. 27-28 of his text.  Commissioner Wright notes that SSOs themselves don't require a commitment to forgo injunctive relief, and he asserts that the ability to obtain an injunction might be "part of the understanding among the SSO and its members."  That may be or may not be the case; I have, so far, reserved judgment on the contract-law issue.  Where I disagree, however, is where Commissioner Wright states that "some commentators and some courts reason that--as a matter of contract--the F/RAND commitment is an agreement that damages are adequate compensation for infringement and therefore an injunction should not be granted under" eBay.  It seems to me that the contract and patent remedies issues are distinct; in theory, a court could decide that there is no contractual obligation to forgo injunctive relief  but still conclude that an injunction is not warranted as a matter of the law of patent remedies, because damages are an adequate remedy.  I further disagree with Commissioner Wright's concern that a no-injunction rule may result in so-called "reverse hold-up," a concept that I view as something of a bogeyman (again, see my paper, if interested), and his assertion that it is "dubious" to assume that "the rate negotiated with the threat of an injunction has to be above the F/RAND rate."  In my view, FRAND makes the most sense if it is understood as a commitment to license the patent for its ex ante (pre-standard adoption) value over the next-best available alternative, because otherwise the patentee captures some of the value deriving from the act of standardization itself.

Finally, while I usually welcome citations to my work, I'm a little baffled by Commissioner Wright's two citations (at p.9 n.15 and at p.22) to my paper Patent Holdup, Patent Remedies, and Antitrust Responses, 34 J. Corp. L. 1151 (2009).  The first citation seems to suggest that I believe SSO members should be precluded from collectively setting the price of SEPs ex ante, when in fact my paper argued (as many other commentators have as well) that such collective action should be analyzed under antitrust's rule of reason.  The second citation cites my paper (without a pin cite) for the proposition that "Others have argued that SSOs are best conceived of as collaboration among competitors who have entered into a de facto quid pro quo with antitrust authorities by which the authorities allow collusive interaction in the form of standardization in exchange for tougher antitrust scrutiny."  I was a bit taken aback when I read this, because I don't remember ever thinking this, much less stating it.  Although I do think the D.C. Circuit got it wrong in Rambus--that is, I think that deceptive conduct before an SSO can be an antitrust violation even if the SSO would have chosen the same standard in the absence of deceptive conduct--subject to this caveat I actually don't think that U.S. antitrust law has much of a role to play in regulating breaches of SSO policies, as I argue in the paper I presented at the Florida workshop.

Anyway, Commissioner Wright's paper is stimulating and I recommend it, notwithstanding my disagreements as noted above.            
In other SSO/FRAND news, the Federal Circuit heard the appeal from Judge Posner's decision in Apple v. Motorola this past Wednesday, September 11.  There are several substantive issues as well as issues over whether an injunction is an appropriate remedy for the infringement of an SEP.  You can download the audio recording here.  Florian Mueller's write-up is here.  Towards the end of the audio tape, both parties address the issue of whether the hypothetical willing licensor/willful licensee negotiation should be assumed to take place at the time of infringement or prior to the date on which the standard was adopted.  The latter is, of course, the economically correct position. 

Judges on the panel are Chief Judge Rader and Judges Prost and Reyna.

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