FTC Approves Final Order in Google SEP Investigation, Responding to Commentators in a Separate Letter

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1 WRITTEN BY BRENDAN J. COFFMAN AND KOREN W. WONG-ERVIN JULY 22-26, 2013 PATENTS FTC Approves Final Order in Google SEP Investigation, Responding to Commentators in a Separate Letter Last week, in a vote, with Commissioner Maureen Ohlhausen dissenting and Commissioner Joshua Wright recused, the FTC approved a modified final Decision and Order settling charges that Google and Motorola Mobility engaged in unfair methods of competition by breaching its commitments to standard-setting organizations (SSOs) to license its standard essential patents (SEPs) on fair, reasonable, and nondiscriminatory (FRAND) terms. The final Order differs only slightly from the proposed Order issued in January, with what the Commission describes as technical modifications to several provisions in the Order, including those pertaining to the arbitration process established to resolve disputes over FRAND terms. (FTC Press Release at 1.) The fundamental aspects of the settlement remain unchanged. Google is barred from seeking injunctive relief based on infringement of a FRAND-encumbered SEP except in certain circumstances, including when a potential licensee has stated in writing or in sworn testimony that it will not license the FRAND Patent on any terms, refuses to enter a License Agreement covering the FRAND Patent on terms that have been set in the Final Ruling of a Court or through Binding Arbitration, or does not provide the written confirmation requested in a FRAND Terms Letter within thirty (30) days of when the FRAND Terms Letter was delivered. (Final Order II.E.2-4.) The main changes to the final Order and Complaint include: (1) the Commission removed the count from the complaint alleging that Google has engaged in unfair or deceptive acts or practices; (2) the Commission modified the Final Order to clarify that Google and Motorola may still negotiate broad cross-licenses with SEPs and non-seps so long as the potential licensee has the option to seek separate licenses on FRAND-encumbered SEPs; (3) the Commission established a protocol for when a potential licensee stalls in selecting an arbitrator; (4) the Commission clarified that Google may revoke or rescind a FRAND commitment under Section II.A only if the relevant standard has finally been rescinded or revoked ; (5) the Order now requires Google to provide an offer to arbitrate substantially in the form of new Exhibit D; and (6) the Commission modified Section IV.B(2) to clarify that Google must make an offer to

2 arbitrate within sixty days, but also includes language stating that Google may condition the Offer to Arbitrate on the Potential Licensee making the same binding and irrevocable undertaking. The FTC also issued a separate letter to the twenty-five commenters, responding to their primary concerns and explaining the modifications that the Commission made to the final Order. First, the FTC addressed the scope of its Section 5 unfair methods of competition authority and the Order s impact on innovation, stating that it disagrees with Commentators who argue that the Commission s actions in this case are outside its authority to challenge unfair methods of competition under Section 5 and lacking limiting principles. (Ltr. at 2.) Some commenters express[ed] concern that prohibiting injunctions through a consent order alleging unfair methods of competition could harm competition by reducing incentives to innovate and to participate in standard setting. (Id.) The FTC responded stating that it does not believe that merely requiring firms to abide by the licensing commitments they willingly make to SSOs will reduce incentives to innovate or to participate in standard setting. (Id.) According to the FTC, the breach of a FRAND commitment risks substantial harm to the competitive process and consumers, which justifies the Commission using its authority... to prevent misuse of the standard-setting process. (Id.) Second, the FTC responded to comments regarding the Noerr-Pennington doctrine, stating that it do[es] not believe that imposing Section 5 liability on Google for violating the FRAND commitments [Motorola] made, and Google formally assumed through a letter of assurance to the relevant SSOs, offends the First Amendment. By taking this action, we are doing no more than simply requir[ing] those making promises to keep them. (Id. at 3 (quoting the FTC Analysis of Proposed Consent Order to Aid Public Comment).) Third, the FTC responded to commenters who raised concerns over the Defensive Use exception (which allows Google to seek injunctive relief against a firm that itself files a claim for injunctive relief against Google based on the firm s FRAND-encumbered SEPs), stating that [t]his provision is specifically tailored to the circumstances of this matter and its inclusion in the Order does not indicate a particular view about defensive-use exceptions generally. (Ltr. at 4.) Fourth, the FTC clarified that the Order does not require Google to immediately withdraw all pending legal claims that seek injunctive relief. The Order instead protects Potential Licensees against whom Google has pending litigation by prohibiting Google from obtaining or enforcing injunctions or exclusion orders in pending litigation. (Id.) Lastly, the FTC responded to concerns that documents and other information supporting the Commission s decision to issue the Order have not been made public, explaining that the Commission is not at liberty to publicly divulge or discuss most of the information it reviewed because it is confidential, competitively sensitive, and not subject to public disclosure by statute. (Id. at 5.) Final Decision and Order, In the Matter of Motorola Mobility LLC and Google Inc., Docket No. C-4410, available at -2-

3 FTC Press Release, available at FTC Letter to Commenters, available at, ITC Rejects Novel Attempt to Include FRAND Defense in PAE Case On July 5, ITC Administrative Law Judge Theodore Essex denied Ericsson s motion to amend its response to Adaptix s complaint to include an affirmative defense of Breach of FRAND Obligations (breach of contract, estoppel, patent misuse, and unclean hands), on the grounds that, among other things, Ericsson failed to demonstrate that there is any legal support for its defense. (Order at 5.) Adaptix brought the case alleging that Ericsson infringed U.S. Patent No. 6,870,808, which Adaptix asserted to be essential to the ETSI 4G Long-Term Evolution (LTE) wireless standard. Ericsson sought to add a defense based on allegations that Samsung, an Adaptix licensee who is not a party to the investigation, failed to disclose the existence of the essential patent to ETSI. According to Ericsson, Samsung knew Adaptix was indicating that a license under the asserted patent was required to practice the LTE [standard], and Samung s failure to disclose the asserted patent constitutes a breach of [its ETSI agreement], which Ericsson has standing to assert as a third party beneficiary. (Id. at 2.) The ALJ agreed with the brief submitted by ITC staff, concluding that Ericsson s motion failed to establish good cause for its proposed amendment because, among other things, Ericsson failed to cite any law for its assertion that Samsung s actions and alleged legal obligations constitute a defense against Adaptix s patent infringement claim. Without any authority or explanation, the ALJ cannot even determine if there is good cause for these amendments. For example, patent misuse requires that the patentee has impermissibly broadened the physical or temporal scope of the patent grant and has done so in a manner that has anticompetitive effects. Ericsson provides no explanation how Adaptix broadened the physical or temporal scope of the patent. (Id. at 5-6 (quoting Princo Corp. v. Int l Trade Comm n, 616 F.3d 1318, 1328 (Fed. Cir. 2010) (en banc).) The ALJ further stated that he did not find credible Ericsson s contention that it was misled by Adaptix regarding Adaptix s FRAND obligations. Ericsson s proposed amended response does not point to a single fact that Adaptix misrepresented or how Adaptix s position that it lacks FRAND obligations on the asserted patents is so unreasonable. (Order at 5.) Lastly, the ALJ found that Ericsson s proposed amendments would prejudice Adaptix and Staff. As Staff cogently explains, while Ericsson has bandied about the word FRAND in this investigation, it has not provided any notice of this theory that Adaptix s license with Samsung created FRAND obligations. (Id. at 6.) Source: Order Denying Ericsson s Motion to Amend its Response to the Complaint, In the Matter of Certain Wireless Communications Base Stations and Components Thereof, Inv. No. 337-TA-871 (July 5, 2013), available at content/uploads/2013/07/337-ta-871-order-denying-motion-to-amend-answer- PUBLIC-VERSION.pdf. -3-

4 New Proposed Legislation Aims to Expand Expedited Review of Business Method Patents On July 22, Congressman Darrell Issa and Congresswoman Judy Chu introduced the Stopping the Offensive Use of Patents Act or the STOP Act, bipartisan legislation that would expand the review of business method patents under the America Invents Act. Specifically, the STOP Act would amend the Transitional Business Method Program, which allows alleged infringers of business method patents to participate in an expedited review before the USPTO to challenge the validity of the patent at issue, by expanding the scope of patents subject to review by replacing the phrase financial product or service with an enterprise, product, or a service. The STOP Act would also eliminate the sunset provision in the original bill, scheduled for The STOP Act tracks closely with Senate legislation introduced by Senator Chuck Schumer (D-NY). According to Rep. Issa, patent trolls are manipulating the overly broad and poorly determined patent definition to win settlements and damages from tens of thousands of American Inventors.... The STOP Act provides tools for legitimate patent holders to put an end to the abuse. (Press Release at 1.) Similarly, Rep. Chu stated that patent trolls are a drain on our national productivity and economic output.... The STOP Act will deter abuse and arm smaller entities with the support they need to fight back. (Id.) Bill, available at Press Release, Issa and Chu Introduce Bipartisan Bill to Protect Innovators from Frivolous Patent Litigation, (July 22, 2013), available at FTC Commissioner Ohlhausen Proposes Limited Use of Section 5 in the Standard-Setting Context On July 25, speaking to the U.S. Chamber of Commerce, FTC Commissioner Maureen Ohlhausen described the Commission s exercise of its unfair methods of competition (UMC) authority as a sea of uncertainty, and urged the Commission to adopt a policy statement or other guidance on how and when the agency will pursue standalone Section 5 cases. Commissioner Ohlhausen proposed six factors for enforcement of UMC authority: (1) UMC authority should be used solely to address substantial harm to competition or the competitive process ; (2) UMC authority should be used only where there is no procompetitive justification for the challenged conduct or where such conduct results in harm to competition that is disproportionate to the benefits; (3) the FTC should avoid or minimize conflict with other institutions, most notably the DOJ; (4) any efforts to expand UMC beyond the antitrust laws must be grounded in robust economic evidence that the challenged practice is anticompetitive and reduces consumer welfare ; (5) prior to using UMC, the agency should consider using its many non-enforcement tools (e.g., conducting research, issuing reports and studies, and engaging in competition advocacy) to address the perceived competitive problem; and (6) the agency -4-

5 must provide clear guidance and seek to minimize the potential for uncertainty in the UMC area. (Speech, Appendix at 1-2.) With respect to standard-setting in particular, Commissioner Ohlhausen stated that she continue[s] to believe that [the FTC] should not impose liability on an owner of a standardessential patent merely for enforcing its patent rights in the courts or at the International Trade Commission without evidence of other anticompetitive conduct. (Id. at 18.) Furthermore, claims based on deception on a standard-setting organization are now viable Section 2 claims, and should no longer be pursued as a standalone Section 5 claim. (Id.) In closing, Commissioner Ohlhausen recommended that the Commission focus primarily on improving the implementation of the antitrust laws rather than trying to expand its UMC authority. (Id. at 19.) Source: Commissioner Ohlhausen Speech, available at Nebraska Attorney General Orders PAE Law Firm to Cease and Desist Patent Infringement Enforcement Efforts On July 18, the Attorney General of Nebraska ordered Farney Daniels PC to cease and desist the initiation of any pending and all new patent infringement enforcement efforts within the State of Nebraska pending the outcome of an investigation into whether the firm s activities on behalf of patent-assertion entities (PAEs) violate the Nebraska Consumer Protection Act and the Uniform Deceptive Trade Practices Act. According to the Nebraska Attorney General s Office, Farney Daniels PC has allegedly issued demand letters on behalf of PAEs containing unsubstantiated infringement assertions and false, misleading, or deceptive statements. (Ltr. at 1.) Farney Daniels PC represents patent licensing company MPHJ Technology Investments LLC. In May 2013, the Vermont Attorney General filed a complaint against MPHJ alleging that it engaged in unfair and deceptive trade practices in violation of the Vermont Consumer Protection Act by sending a series of demand letters to businesses and non-profit organizations in Vermont threatening patent litigation if the businesses did not pay licensing fees. Letter from Nebraska Attorney General to Farney Daniels LLP (July 18, 2013), available at Ryan Davis, Neb. AG Launches Probe Of 'Patent Troll' Law Firm, Law360 (July 19, 2013), available at (subscription required). -5-

6 PHARMACEUTICALS FTC Chairwoman Ramirez Testifies Before Senate Judiciary Committee on Reverse-Payment Settlements On July 23, FTC Chairwoman Edith Ramirez testified before the Senate Judiciary Committee regarding reverse-payment settlements, stating that ending anticompetitive pay-for-delay settlements in the pharmaceutical industry is one of the Commission s top priorities. (Speech at 1.) The Chairwoman stated that the Commission will continue to: (1) pursue pay-for-delay matters currently in litigation and seek appropriate relief for consumers; (2) monitor private litigations alleging pay-for-delay agreements and leverage Commission experience and expertise by filing amicus briefs where appropriate; (3) investigate pending pay-for-delay matters; (4) examine new settlements that companies file with the Commission pursuant to the Medicare Modernization Act of 2003 (MMA) and investigate those that raise anticompetitive concerns; and (5) issue regular reports on pharmaceutical settlements filed with the Commission pursuant to the MMA. (Id. at 3.) When determining whether to pursue a case, the Commission will consider the seriousness of the violation, the potential consumer harm, the Commission s ability to remedy the harm, the legal principle at stake in each matter, and the potential deterrent effect of an enforcement action. (Id.) The Chairwoman also discussed the Supreme Court s recent decision in Federal Trade Commission v. Actavis, Inc., characterizing it as an important victory for consumers and a vindication of basic antitrust and free market principles. (Id. at 2.) As for proposed legislation to address pay-for-delay agreements, Chairwoman Ramirez stated that she welcomed the bill introduced by Senators Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa), which would create a presumption of anticompetitiveness for Hatch-Waxman settlements in which a branded drugmaker pays a generic to delay market entry. The Chairwoman reportedly stated that, this issue has been a top priority for the agency for many years, and we re going to continue to devote as many resources as necessary. At the same time, these lawsuits are resource intensive and time consuming, [so] I believe the legislation would create more of a bright-line rule [and] more of a deterrent effect. Testimony of Chairwoman Ramirez, Pay-for-Delay Deals: Limiting Competition and Costing Consumers (July 23, 2013), available at Melissa Lipman, FTC Leader Backs Tough Pay-For-Delay Legislation, Law360 (July 23, 2013), available at on (subscription required). -6-

7 Visit our resources page at: hived.authcheckdam.pdf A special thanks to Debbie Bellinger for her weekly contributions to tidbits. -7-