The FTC recently issued two decisions and proposed consent orders concerning Section 5 of the Federal Trade Commission Act (“FTCA”) and standard essential patents (“SEPs”).  Not only do these decisions emphasize the Commission’s willingness, under certain circumstances, to bring stand-alone Section 5 claims against holders of SEPs, but they also attempt to provide a template for the resolution of SEP licensing disputes.

Bosch and Google

The FTC alleged that Bosch violated Section 7 of the Clayton Act and Section 5 of the FTCA through its proposed $1.15 billion acquisition of SPX Service Solutions.  In addition to Bosch potentially controlling 90% of the relevant market, SPX allegedly reneged on a commitment to license certain SEPs on fair, reasonable and non-discriminatory terms (“FRAND”). 

The proposed Bosch consent order requires Bosch to license, royalty-free, certain SPX patents that “may be essential” to the practice of two industry standards.  Bosch is also required to offer a royalty-free license to all potential implementers for certain enumerated patents.

Mere weeks after the Bosch consent order, the FTC entered into a settlement with Google.  In relevant part, the FTC Complaint alleges that Motorola (prior to its acquisition by Google) reneged on a commitment to license its SEPs relating to smartphones, tablet computers, and video game systems on FRAND terms,  Instead, Motorola sought injunctions against those it had promised to license on FRAND terms.  The conduct allegedly violated Section 5 and impaired competition in the market for electronic devices such as iPhones, iPads and Xboxes.  This conduct continued after Google acquired Motorola in June 2012.

Ultimately, Google agreed to withdraw its claims for injunctive relief and to offer licenses on FRAND terms to all comers.  

So . . . Why should I care?

While issues regarding SEPs can be somewhat complex, the practical aspects of these FTC actions should not be ignored.  Five aspects of these actions should be noted.

First, these actions show that a majority of the Commissioners are willing to bring stand-alone Section 5 claims in the context of SEPs.  According to the Commission in Google, bringing a stand-alone Section 5 claim “allows the Commission to protect consumers and the standard-setting process while minimizing the often burdensome combination of class actions and treble damages associated with private antitrust enforcement.”  The Commission also noted that “[p]atent holders that seek injunctive relief against willing licensees of their FRAND-encumbered SEPs should understand that in appropriate cases the Commission can and will challenge this conduct as an unfair method of competing under Section 5 of the FTC Act.” 

Second, these decisions clarify the FTC’s views regarding the harm associated with entities reneging on promises to license SEPs on FRAND terms.  Expanding its language from its Bosch Statement, the Commission said in Google:

[t]he threat of an injunction allows a SEP holder to demand and realize royalty payments reflecting the investments firms make to develop and implement the standard, rather than the economic value of the technology itself.  In addition to harming incentives for the development of standard-compliant products, the threat of an injunction can also lead to excessive royalties that may be passed on to consumers in the form of higher prices.  Alternatively, an injunction or exclusion order could ban the sale of important consumer products entirely.  This type of “patent ambush” harms competition and consumers and is rightly condemned by the Commission.

Third, the Commission hopes that “the Proposed [Google] Order may set a template for the resolution of SEP licensing disputes across many industries . . .”  Thus, through its actions, the FTC seeks to encourage industry to carry forward on commitments to license SEPs on FRAND terms.      

Fourth, using Section 5 in this fashion raises the specter of Commission enforcement that is not subject to articulated limiting principles.  The Bosch order resulted in a strong dissent  from Commissioner Ohlhausen, in part because she saw no limiting principles in the enforcement policy laid by the Commission:

[i]f the Commission continues on the path begun in N-Data and extended here, we will be policing garden variety breach-of-contract and other business disputes between private parties. Mere breaches of FRAND commitments, including potentially the seeking of injunctions if proscribed by SSO rules, are better addressed by the relevant SSOs or by the affected parties via contract and/or patent claims resolved by the courts or through arbitration.

The Google settlement resulted in a separate statement by Commissioner Rosch and another dissent by Commissioner Ohlhausen.  Commissioner Rosch noted that, as in Bosch, the Google settlement did not contain limiting principles when bringing a stand-alone Section 5 claim.  Commissioner Ohlhausen dissented, in part, because “the majority says little about what “appropriate circumstances” may trigger an FTC lawsuit other than to say that a [FRAND] commitment generally prohibits seeking an injunction.”

Finally, the private bar already has voiced considerable concern that may serve to sensitize the FTC to potential adverse consequences to its approachFor instance, the American Intellectual Property Law Association (“AIPLA”) requested clarification on several points of the proposed Bosch order.  The AIPLA noted that Bosch could require a patent owner to grant royalty-free licenses to its patents which include those patents not determined to be essential to practicing the standard—that is, those patents that “are not necessarily” essential or those that “may be essential” to the practice of the relevant standards.  The AIPLA requested further insight into the possibility that a patent holder could be required to license patents that neither the Commission nor a court has determined to be essential to practicing a standard. 

Assuming that both the Bosch and Google orders become final, they will be widely cited and influential in future investigations and litigation regarding SEPs, though not technically binding on others.

While the comment period for the proposed Bosch consent order closed on January 9, the comment period for the proposed Google consent order closes on February 4.