White House Reins in ITC on Standard-Essential Patents

by Orrick, Herrington & Sutcliffe LLP
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On Aug. 3, 2013, the Obama Administration vetoed the U.S. International Trade Commission’s June 4 order excluding certain Apple Inc. (“Apple”) products from import because they were found to infringe a standard-essential patent (“SEP”) owned by Samsung Electronics Co., Ltd. and Samsung Telecommunications America Inc. (“Samsung”). The veto, officially termed a “disapproval” and issued by U.S. Trade Representative Michael Froman, is the first such action since 1987. The Administration’s veto likely will bring the ITC in line with the growing consensus of courts and competition authorities across the globe that has sharply limited injunctive or exclusionary relief for SEP infringement.

Background

An SEP is a patent essential to a technical standard adopted by an industry standard-setting organization (“SSO”). Typically, in return for an SEP’s inclusion in the technical standard, standard participants agree to license their SEPs on fair, reasonable, and non-discriminatory (“FRAND”) terms. Notwithstanding these promises, SEP owners have sought injunctions or exclusion orders against companies for allegedly infringing SEPs in several recent court cases and administrative proceedings.

Many regulators and courts have expressed concern that SEP owners’ pursuit of injunctive or exclusionary relief may damage the integrity of the standard-setting process. Electronic device manufacturers, who implement relevant industry standards in reliance on SEP owners’ promises to license their SEPs on FRAND terms, may be forced to pay licensing fees in excess of FRAND terms to avoid a crippling injunction or exclusion order. As a consequence, seeking injunctions and/or exclusion orders on SEPs can distort competition and increase prices for consumers.

Samsung's ITC Complaint Against Apple 

Samsung filed a complaint against Apple in the ITC alleging infringement of four patents. The Administrative Law Judge ruled that Apple did not infringe any valid patent claims. The ITC reversed in part, ruling that Apple did infringe one of the four patents. Samsung had claimed that this patent was essential to the Universal Mobile Telecommunications Standard for cellular networks, and had agreed to license the patent on FRAND terms. The ITC issued exclusion and cease-and-desist orders that would have prevented Apple from importing certain iPhone and iPad models that operate on the AT&T network. One Commissioner dissented, reasoning that the exclusionary relief granted to Samsung was “not consistent with the public interest” determination required in ITC cases.

Administration Letter

The White House, acting through the United States Trade Representative, disapproved the ITC's exclusion order. The Administration’s veto letter reaffirms concerns over “patent holdup” raised by the Department of Justice and the U.S. Patent and Trademark Office in their joint Policy Statement on Remedies for Standard-Essential Patents Subject to Voluntary/FRAND Commitments dated January 8, 2013. For this reason, exclusion orders for SEPs should be rare, such as when the alleged infringer is beyond the jurisdiction of U.S. courts.  Further, the letter stated:

in any future cases involving SEPs that are subject to voluntary FRAND commitments, the Commission should be certain to (1) to examine thoroughly and carefully on its own initiative the public interest issues presented both at the outset of its proceeding and when determining whether a particular remedy is in the public interest and (2) seek proactively to have the parties develop a comprehensive factual record related to these issues in the proceedings before the Administrative Law Judge and during the formal remedy phase of the investigation before the Commission, including information on the standard-essential nature of the patent at issue if contested by the patent holder and the presence or absence of patent-hold up or reverse hold-up.


Implications

The implications of the Administration’s veto extend far beyond Apple and Samsung. Most immediately, the veto is likely to have a significant impact on the numerous SEP-related cases now before the ITC. These include actions by Samsung and Ericsson against each other (both parties assert SEPs) and cases where SEP owners seek exclusion orders against Nokia, ZTE, Huawei and RealTek among others.

However, the real impact of the Administration’s decision is that it decreases the ITC’s attractiveness as a forum for SEP owners. Nearly every other legal authority that has spoken on this issue—including the U.S. Department of Justice; the U.S. Federal Trade Commission; the U.S. Patent and Trademark Office; the 9th Circuit Court of Appeal; district courts in California, Illinois and Washington; the European Commission competition authority; and courts in Japan and the Netherlands—has issued statements and rulings that the kind of exclusion order issued by the ITC distorts competition, undermines the public interest, and harms consumers. The ITC ruling overturned by the Administration had been an outlier in that regard. The Administration’s decision likely will change that going forward.

It is important to note that the reasoning underlying the Administration’s veto only applies to SEPs. Other patents generally are not encumbered with a promise to license on FRAND terms and the accompanying waiver of the right to exclude in all but rare circumstances. Likewise, non-SEPs do not implicate the same competition and public interest concerns. Industry participants are not “locked in” to using the patented technology through a standard, and instead may attempt to design around the patented technology. Going forward, the Administration is not likely to change its treatment of exclusion orders that the ITC issues for infringement of non-SEPs, which are almost never vetoed.

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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