Smartphones go nuclear
Recent interventions before the European Commission in relation to companies’ access to essential mobile telephony patents could have dramatic consequences for the industry as a whole.
The mobile phone wars of the last decade – during which mobile phone manufacturers have fought a series of increasingly bitter battles centred around access to essential patents – have in the last month escalated with the involvement of the European Commission.
In the past, such battles have tended to be played out in courtrooms around the world, with a focus on the enforcement of the patent rights themselves. Companies that hold patents essential to mobile phone technology are usually obliged to license them on fair, reasonable and non-discriminatory (“FRAND”) terms. As yet, there has been no definitive judicial pronouncement as to what FRAND means in terms of royalty rates. The litigating companies – generally competitors on the mobile phone market – almost invariably settle their disputes before the court rules on this point. The status quo suits many of those on the market. Those who hold a significant portfolio of essential patents fear a ruling that undervalues the patents, and even those who generally have to pay for access – because they own fewer patents than many of their peers – see a longer-term benefit in keeping FRAND from becoming overly prescriptive. Such companies typically seek instead to bolster their own essential patent portfolios, either by acquisition or by participation in the next generation of standardisation.
Now this status quo may have to change. First, the EC announced in January that it was starting an investigation into mobile phone giant Samsung in relation to its assertion of essential patents against other market players. Two weeks later the EC and its US counterpart approved Motorola’s deal with Google which sees the latter acquire Motorola’s substantial portfolio of essential patents. Probably in response to this ruling which gives Google’s Android platform a bargaining boost, two complaints have since been lodged with the EC: Apple about Motorola, and Microsoft about Motorola and Google. Both cite alleged breaches of FRAND licensing.
Involving the competition authorities is the nuclear option. Should such an authority proceed to a final decision it could change FRAND, and therefore the underlying dynamics of the industry, forever. Essential patent holding companies may fear that the EC will seek to restrict the levels of remuneration companies can seek for their patents by setting FRAND at an unrealistically low level, given the investment necessary to build up telephony standards.
A particular concern for such companies is the approach that the EC could take to essential patent holders’ right to seek injunctive relief. If the EC rules that a FRAND undertaking removes this right, patent holders will remain exposed to the problem of persistent patent infringement, and forced to continue multiple global patent battles. However cautiously the EC treads in this area, it could trigger dramatic changes. Any impact on patent rights or on investment returns would be hugely damaging in this important industry. Experience in other sectors where the EC has considered the inter-relationship between IP and competition law suggests that changes in the balance between these two regimes often has consequences far beyond the immediate legal and regulatory context.