Shortly before Christmas (21 December 2012), the EU Commission made an announcement that must have come as an early gift for Apple and a significant blow to Samsung in the companies’ on-going smartphone patent war. According to the EU competition watchdog, Samsung’s enforcement of some of its patents against Apple amounted to ‘abuse of a dominant position’ in contravention of the EU’s anti-monopoly law, Art 102 TFEU.
The Commission’s preliminary findings raise interesting questions about the uneasy interface between competition policy and patent law, two legal nerve-centres of high-technology regulation. The nub of the issue can be put very simply: what role should competition law play in defining the terms of access to patents?
The nature of patent rights
In most circumstances, the answer would be ‘none at all’. Patents are state-granted monopolies in the form of time-limited property rights. The core of a property right is exclusive control. For patents, this control means the right to unilaterally set the terms of access to protected inventions, by charging licensing fees or blocking use by way of injunctions. Watering down this right by competition law would arguably weaken inventors’ abilities to appropriate the full value of their inventions, and so weaken incentives to invest in inventive activity. Although this ‘incentive’ theory of patents is still robustly defended in the literature, it seems to overlook the complex reality of patents in practice.
In high-tech industries, for example, the role of patents is arguably more ‘strategic’ than incentivizing. Patents may be used to saddle rivals and new entrants with increased costs, gain access to technology (via strong-arm cross-licensing), and build a fence around key inventions by defensive patenting. Although nothing is wrong in principle with the strategic use of patents, it does have the potential to negatively impact competition and consumers in some circumstances. This risk is arguably increased where the strategic use of patents affects access to technological standards, as in the Samsung-Apple dispute, which is the focus of the Commission’s preliminary decision.
Standards and the strategic use of patents
The Commission’s objection to Samsung’s behaviour related only to ‘standards-essential patents’ (‘SEPs’). Technological standards are aspects of technology that enable devices to work together, like the wireless standards 3G, WiFi or Bluetooth. If a patent is ‘essential’ to a standard it means that every company that makes standard-compliant devices requires a license. Because SEPs give their owners enhanced market power, EU competition law demands that standard-setting organizations (“SSOs”) contractually limit SEP-owners’ exercise of their rights by committing to license their patents on Fair, Reasonable And Non-Discriminatory (“FRAND”) terms.
Facts of the case
In the present case, Samsung owned SEPs over the 3G standard subject to a FRAND commitment, and attempted to negotiate a FRAND license with Apple. These negotiations broke down over disagreement about what a ‘fair’ and ‘reasonable’ royalty-rate was for the SEPs. At this point, Samsung applied for injunctions in numerous jurisdictions with respect to the SEPs. In the Commission’s view, applying for injunctions in this specific context is an abuse of a dominant position under Art 102 TFEU.
Unpacking the Commission’s Findings
By censuring Samsung’s use of injunctions in the above circumstances, the Commission’s theory of harm is likely based on a concept called‘ patent holdup’. Given the indispensability of the SEPs to Apple, Samsung’s application for injunctions could drive up the royalty-rate since Apple’s other option apart from paying the royalty would be to watch its products get removed from the market. In addition to charging the market value of the patent, Samsung could therefore also levy a ‘tax’ for the indispensability of the patent (also called its ‘strategic value’), in much the same way a highway bandit extracts what he wants by posing the fatal either/or, ‘your money or your life!’
The likely result of the Commission’s decision would be to force SEP-owners and licensees to negotiate FRAND royalties in good faith. If these negotiations break down, the Courts would likely be available as venues for determining FRAND-based royalty rates but will not be available for injunction applications, unless the SEP-owner wants to deal with an antitrust case.
Whether or not the risk of ‘patent holdup’ is an economically robust basis for antitrust intervention is still an issue raging in the literature. However, by taking this decision (and assuming it is affirmed in subsequent appeals), the Commission has sent a clear signal to the market that it strongly opposes strategic patent stockpiling and assertion over crucial technological standards, and that it is willing to act accordingly.
This signal may be well timed as the smartphone patent wars shift their focus from 3G to the new 4G LTE standard, and manufacturers brace themselves for the rush of new patent infringement claims.