White House Should Rein In The ITC On SEPs

by Orrick, Herrington & Sutcliffe LLP
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Law360, New York (August 01, 2013, 1:51 PM ET) -- Outlier (noun): a person or thing differing from all other members of a particular group or set. Oxford English Dictionary.

On June 4, 2013, the U.S. International Trade Commission issued the judicial equivalent of an outlier. That ruling barred Apple Inc.’s iPhone 4 and iPad 2 3G from import or sale because they infringe a Samsung Electronics Co. Ltd. patent covering an industry technical standard. This decision not only will harm consumers; it runs counter to almost every authority that has considered this issue in the U.S. and abroad. Congress gave the White House the ability stop the ITC’s outlier ruling from taking effect. The president should exercise his power to do so.

Industry standards allow today’s devices to operate seamlessly with each other. Standards result from a collaborative process involving industry participants. Anyone who uses Bluetooth or watches high-definition TV has benefited from standards.

Standards pose risks, however. Most all standards incorporate patented technology. Companies owning patents covering a standard — called standard-essential patents — might refuse to license them, or do so only under exorbitant terms. This is known as “patent hold-up.”

To prevent hold-up, standards-setting organizations require participants to promise to license their SEPs to others on “reasonable and nondiscriminatory terms.” This promise waives the right to exclude other companies from using those SEPs. The corresponding benefits for SEP owners are reasonable monetary compensation and widespread adoption of their technology through the standard.

The patent at issue in the ITC case was a patent Samsung claimed was essential to the Universal Mobile Telecommunications Standard for cellular networks. Despite making this pledge, however, Samsung sought to have the ITC exclude Apple’s products before ever making an offer to Apple on reasonable and nondiscriminatory terms. Specifically, Samsung refused to license its SEP unless Apple paid Samsung 2.25 percent of the price of each iPhone and iPad, or granted Samsung a license to the non-SEPs that make Apple products so unique.

Allowing Samsung to obtain an exclusion order undercuts the purpose of its promise to license on reasonable terms. Nonetheless, the ITC rejected that defense. The ITC further concluded that issuing an exclusion order was consistent with the “public interest,” despite Samsung’s promise to waive that right in return for having its technology included in the standard.

The ITC’s decision sets a dangerous precedent that extends far beyond Apple and Samsung. Once a standard is adopted, industry participants have no choice but to comply with that standard. Exclusion orders thus provide substantial leverage that allows SEP owners to demand royalties in excess of what is “reasonable.” Potential licensees are willing to pay such excessive royalties to ensure their products are not excluded from being sold. The result is higher prices for consumers and decreased innovation.

But the ITC’s ruling is not just wrong on the merits. It is contrary to almost every other legal authority that has spoken on this issue. Over the past year, the Federal Trade Commission has issued numerous statements that using SEPs to exclude products harms consumers; it also has entered into consent decrees prohibiting Google Inc., Motorola Mobility LLC and other companies from engaging in similar conduct. Likewise, the U.S. Department of Justice and the U.S. Patent and Trademark Office issued a joint policy statement in January 2013 that the kind of exclusion order issued by the ITC distorts competition and undermines the public interest.

The ITC’s decision also is an outlier when compared to decisions in U.S. courts. In June 2012, Judge Richard Posner of the Seventh Circuit Court of Appeals ruled that injunctive relief is unavailable to SEP holders who voluntarily commit to license those patents, as Samsung has done. The Ninth Circuit, as well as district court judges in Washington and California, also has ordered companies to cease seeking similar injunctive relief for SEPs in the U.S. and abroad.

Further, the ITC’s decision is contrary to international enforcement actions and court rulings. In December 2012 and May 2013, the European Commission issued two antitrust complaints against companies that refuse to abide by their promises not to seek injunctive relief for their SEPs. Indeed, one of those complaints is against Samsung for the exact same conduct approved by the ITC! Additionally, courts in Japan and the Netherlands have ruled that Samsung engaged in unlawful conduct by seeking injunctions on SEPs.

Finally, the ITC’s position is inconsistent with administration policy. Ironically, on the same day the ITC issued its exclusion order, the president’s Council of Economic Advisors and the National Economic Council issued a report acknowledging the consumer harm arising from exclusion orders issued on an SEP.

Fortunately, the White House can correct this error. The ITC statute gives the president until Aug. 5 to disapprove the ITC’s exclusion order “for policy reasons.” In his dissent from the ITC’s determination, Commissioner Dean A. Pinkert recognized that the exclusionary relief granted to Samsung is “not consistent with the public interest and should not issue.”

Commissioner Pinkert was wise to notice that there was something amiss about the ITC’s decision. Hopefully President Obama pays attention and vacates this dangerous outlier decision.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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