16 March 2010
Technology standard-setting organizations (SSOs) often require the owner of a patent that is essential to an industry standard to commit to license that patent on terms that are fair, reasonable and non-discriminatory (FRAND). Signaling a potential expansion of that duty, a Los Angeles federal court recently suggested that a former owner of an essential patent may face antitrust claims for an assignee’s failure to license on FRAND terms. The decision raises questions about whether a patent owner remains under a FRAND obligation even after it conveys away ownership of a standard-essential patent.
The vague FRAND formulation can become a headache as would-be licensees attempt to tweak it in their favor. Some of them say FRAND requires essential patent owners to license all comers, regardless of their track records as IP licensees. Others maintain that FRAND requires unreasonably low royalties. And an alleged failure to license on FRAND terms has led antitrust plaintiffs to portray the original FRAND commitment as a monopolistic ruse.
Dictum in the new Los Angeles decision suggests another potential expansion of FRAND antitrust liability, but there are ways to minimize the resulting risk.
FRANDs Forever: Does the FRAND Obligation Survive the Patent’s Divestiture?
In 1997, the Advanced Television Systems Committee adopted the A/65 standard for digital television broadcast signals. Thomson Licensing S.A., which held various patents essential to the standard, promised to license on FRAND terms. Ten years later, Thomson sold two of the patents to Funai Electric Co., Ltd., which makes digital televisions and receivers. From then on, firms not already licensed by Thomson under the standard needed licenses from both Thomson, which had made a FRAND commitment, and Funai, which had not.
Funai’s competitor Vizio sought a license from Funai. But according to Vizio, Funai repudiated Thomson’s FRAND commitment and imposed “much higher” royalties. Vizio sued Funai in the Central District of California, challenging Thomson’s sale of the patents under Clayton Act Section 7 as well as Funai’s licensing and enforcement conduct under Sherman Act Section 2. Vizio alleged a Sherman Act Section 1 conspiracy between Thomson and Funai based on their alleged agreement to circumvent the FRAND commitment, and also asserted state law claims.
In an unpublished 11-page opinion, Judge A. Howard Matz dismissed all the federal claims except the conspiracy claim. Vizio, Inc. v. Funai Electric Co., Ltd., No. 09-0174 AHM (RCx) (C.D. Cal. Feb. 3, 2010). The core conclusion was that the “mere transfer of a valid patent” does not “create an unlawful monopoly.” This, the court held, meant that neither the transfer of the patents nor Funai’s alleged evasion of the FRAND commitment could harm competition.
Surprisingly, though, the court added that Thomson, which was not even a party to the litigation, might be liable for Funai’s repudiation of FRAND years after Thomson had assigned its patents: “[T]he allegations might suffice to state an antitrust claim against Thomson under the holding in Broadcom.” (In Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297 (3d Cir. 2007), the Third Circuit upheld antitrust claims based on a patent owner’s allegedly false promise to an SSO to license essential patents on FRAND terms.)
This dictum may not have been meant to point antitrust plaintiffs to firms in Thomson’s position—especially in a decision emphatically labeled as non-precedential even by the standards of unreported trial court rulings.1 And the dictum may not withstand analysis in a more carefully reasoned decision. But in the meantime, it gives antitrust plaintiffs what may be a formidable tool to use against firms that sell off essential patents.
Ways to Minimize Post-Sale Antitrust Liability
To minimize potential antitrust exposure to antitrust liability in connection with the conduct of a buyer/assignee/licensee, an owner of a patent subject to a FRAND commitment should consider:
- Confirming whether the relevant SSO’s rules required it to guarantee that subsequent owners of its essential patents would license on FRAND terms; and, if so,
- Including in any sale, assignment or exclusive license for a field of use encompassing the standard language explicitly requiring the buyer/assignee/licensee to assume the FRAND commitment (and to require the same of any subsequent buyer/assignee/licensee).
Because SSO rules are not always clear, and because antitrust enforcement agencies sometimes resolve ambiguities against patent owners, any ambiguity in a patent owner’s obligation may make it necessary to act as if the SSO rules require the FRAND obligation to convey with the patent.
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1. The opinion states that it “is not intended for publication or for inclusion in the databases of Westlaw or LEXIS.” Interesting articles on the implications of this proviso appear at http://www.abajournal.com/news/article/a_judges_unusual_request_dont_print_this_in_westlaw_or_lexis/ and http://legalresearchplus.com/2010/03/09/judge-says-keep-this-opinion-out-of-westlaw-and-lexis/.