G+ Communications v. Samsung: Splitting the FRAND Baby
“If the court interprets the commitment to ETSI to include an obligation to release past infringement…, without regard to the prior bad faith of an implementer, a suspension of the obligation would not only fail to discourage holding out but encourage it.”
A recent decision out of the Eastern District of Texas sheds further light on Judge Rodney Gilstrap’s interpretation of a patent owner’s commitment to the European Telecommunications Standards Institute (ETSI) pursuant to ETSI’s Intellectual Property Rights Information Statement and Licensing Declaration (“the ETSI Licensing Declaration”). The decision, however, also raises some questions for SEP owners.
A little over a year ago, we considered how French and California law would interpret a patent owner ‘s commitment to ETSI pursuant to the ETSI Licensing Declaration. The in depth analysis can be found here, while a summary version published on IPWatchdog can be found here. At a high level, we considered the issue both from the perspective of performance being possible without implementer engagement, and from the perspective of performance requiring implementer cooperation.
One decision we looked at was a Memorandum Opinion and Final Judgment of Judge Gilstrap in the matter of HTC Corporation, HTC America Inc v. Telefonaktiebolaget LM Ericsson, Ericsson Inc Case No: 6:18-CV-00243-JRG (E.D. Texas, 2019) which held as follows (emphasis added):
“Finally, the Court holds that, as a matter of French law, a member of ETSI who has submitted a licensing declaration pursuant to Clause 6.1 of ETSI’s Intellectual Property Rights (“IPR”) Policy satisfies its FRAND obligation by either (1) offering a license on FRAND terms and conditions, or (2) negotiating in good faith towards a FRAND license.”
With respect to this ruling, we noted that satisfying the commitment made to ETSI, apparently, “did not require any implementer involvement, at least not when it comes to satisfying the obligation by way of offering a FRAND license.” Further, we noted that “the negotiating in good faith prong might also be satisfied despite a lack of cooperation on the part of an implementer, for example, by offering arbitration on reasonable terms and conditions, but that is not clear from the ruling.” In view of Judge Gilstrap’s latest decision, this no longer appears to be the case.
The Parties’ Positions re: Discharge of the Obligation
Pursuant to a MEMORANDUM OPINION AND ORDER dated January 22, 2024, the United States District Court for the Eastern District of Texas, Marshall Division considered Samsung’s “Motion Under Rule 44.1 for Determination of French Law.” G+ Communications, LLC v. Samsung Electronics Co., Samsung Electronics America, Inc., Case No: 2:22-CV-00078-JRG (E.D. Texas). One such determination requested by Samsung was as follows:
“French law does not allow a SEP declarant to unilaterally discharge (and thus avoid) its irrevocable FRAND obligations, including its duty to negotiate in good faith and its obligation to license declared patents on FRAND terms.”
In support of its request, Samsung pointed to testimony from G+’s expert stating that the commitment made to ETSI is irrevocable. Further, Samsung cited the “irrevocable undertaking” language in the ETSI Licensing Declaration and noted G+’s failure to cite any decision finding the commitment could be discharged.
Conversely, G+ argued that (1) “under French law, when there are reciprocal obligations, one side’s failure to perform excuses the other’s”, (2) “Samsung and G+ each have reciprocal obligations to conduct negotiations for a license to a FRAND-encumbered patent in good faith… [and] a failure by one party to negotiate in good faith suspends the obligation of the other to do the same”, and (3) “French law provides a mechanism for an SEP holder to permanently discharge its obligation.” Regarding the latter, G+’s expert referred to Article 1345-2 of the French civil code.
In reply, Samsung sought to distinguish its own expert’s admission that “[w]hen in presence of reciprocal obligations a party doesn’t perform its obligation, it’s possible for the other party to ask for the termination of the contract or to suspend its own obligation” (emphasis in original) because, according to Samsung, “[the] FRAND licensing process fundamentally differs from typical bilateral contract negotiations, as it primarily relies on the SEP holder to honor their commitment and effectively finalizes [sic] the license under FRAND terms”, which Samsung’s expert also testified to.
By way of sur-reply, G+ challenged Samsung’s position that the “general bilateral contract principle” was inapplicable to the commitment made to ETSI.
The Texas Court’s Ruling
Somewhat splitting the baby, the Texas court found that “the obligation to negotiate towards a FRAND license in good faith may be temporarily suspended”, given both parties’ experts had agreed that the parties were “subject to reciprocal obligations of good faith during negotiations for a license to a FRAND-encumbered patent” and that “one party’s failure to fulfil its obligation to negotiate in good faith suspends the other’s.” A footnote provides additional color:
“To be clear, suspension of the duty to negotiate in good faith is tantamount to suspension of any duty to negotiate altogether. The Court is not aware of any authority, French or otherwise, requiring a party to continue to negotiate with a counterparty who has descended into bad faith in the negotiation process.”
With respect to Samsung’s irrevocability arguments, Judge Rodney Gilstrap found that they depended on “an untenable application of the word ‘irrevocable.’” The lack of support for Samsung’s position that the “general bilateral contract principle” should not apply was also noted (emphasis added):
“SEP holders maintain an obligation to license its SEPs on FRAND terms and to negotiate toward such licenses in good faith. These obligations are irrevocable in the sense that SEP holders cannot withdraw them or take them back. However, their irrevocable nature does not mean they are static. Samsung does not cite any French authority showing that irrevocable commitments cannot be suspended. Samsung’s offerings in this regard do not persuade the Court.”
An Analysis of the Ruling
The decision outlined above raises many questions.
First and foremost, the ruling appears to significantly narrow the ways in which the commitment to ETSI can be satisfied without any explanation for doing so. As an initial matter, we note that the obligation is confusingly referred to as “an obligation to license [a patent owner’s] SEPs on FRAND terms” in one place, and “the obligation to license an SEP on FRAND terms” in another (emphasis added to both quotes), despite the court recognizing that it takes two to tango (i.e. to negotiate a license). A better understanding of Judge Gilstrap’s interpretation is that the commitment made to ETSI involves an “obligation to negotiate toward a FRAND license in good faith” (emphasis added), as is stated several times, in slightly different ways, throughout the decision. While this latter interpretation is consistent with the second manner of satisfying the obligation set forth in HTC v. Ericsson, our question is this: what happened to satisfying the obligation by way of offering a license on FRAND terms and conditions?
Further exacerbating matters is that the consequences of the obligation being suspended are not clearly explained. According to the MEMORANDUM OPINION AND ORDER, “[i]t is both practical and logical that the obligations of a party acting in good faith be suspended when a counterparty to a negotiation for a FRAND license is acting in bad faith” but “when the counterparty ceases acting in bad faith, the barrier to consummation of the license on FRAND terms is removed and the negotiations can and must resume (in good faith)” (emphasis added to both quotes). If the court interprets the commitment to ETSI to include an obligation to release past infringement (as it has done in the past: see here), without regard for the prior bad faith of an implementer, suspending the obligation will not only fail to discourage holding out but encourage it. That is because, unlike a typical sale of goods contract, the goods have already been delivered (i.e. the patented technology) and, as such, there is very little incentive for an implementer to pay if not losing the right to FRAND terms and conditions (e.g. being exposed to supra-FRAND damages for willful infringement) by stalling. Perhaps signaling that the scope of the commitment does not extend to those periods during which an implementer does not negotiate in good faith, the decision goes on to state that suspending the obligation “prevents the party acting in good faith from being taken advantage of by the counterparty” and that “such a suspension can counter the effects of… holding out.” Regarding hold out specifically, Judge Gilstrap states that “[h]old out occurs when a standard implementer ignores the demands of the SEP owner ‘because the odds of getting caught are small’” and “[i]f such holdout occurs, the SEP owner is then free to pursue lawful remedies.” But exactly what that means is unclear.
Finally, the court’s narrowing of the ways in which the commitment to ETSI can be satisfied seems to have been influenced by Samsung’s arguments regarding irrevocability. Respectfully, the fact that an obligation cannot be retracted has no bearing on whether or not the obligation can be performed, and thereby discharged, or excused. For example, one can make an irrevocable commitment to brand a neighbor’s horse. That does not mean, however, that the obligation cannot ever be discharged by performance or excused, for example, because the neighbor will not allow access to their property. Rather, irrevocability refers to the fact that, absent a valid defense, the obligor cannot unilaterally refuse to perform without being in breach.
As King Solomon knew full well, splitting the baby can get messy.
Aside re: Compensable Damages Under French Law for Breaching a Duty to Negotiate in Good Faith
For sake of completeness, but unrelated to the issues above, Judge Gilstrap also found, as per Samsung’s request, that, as a matter French law, litigation costs and attorney’s fees are compensable losses for purposes of breach of a duty to negotiate in good faith required by the ETSI Licensing Declaration (emphasis added):
“In a negotiation for a license to a patent where the patent has been contributed to an adopted standard (which patent is known as a standard essential patent), if either negotiating party (being either the patent holder or the implementer of the adopted standard) fails to negotiate in good faith and thereby prevents a license from being granted on fair reasonable and non-discriminatory terms, then the party who fails to act in good faith is liable to the other party for any reasonable damages which arise from such breach, including but not limited to attorney’s fees and the cost of litigation.”
Further notable is that the obligation to negotiate in good faith is applicable both to patent owners and implementers purporting to want FRAND licenses.
Image Source: Deposit Photos
Author: matintheworld
Image ID: 408739738
