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The FTC Google Settlement on Essential Patents Rewards Good Faith Bargaining, Deters Both Hold-Up and Hold-Out

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In a unanimous vote, the Federal Trade Commission ("FTC") announced it has closed its investigation into Google's search practices, concluding that the evidence "does not support" an antitrust case. The FTC also accepted Google's voluntary commitments to change business practices to enable competitors to opt-out of certain Google products and to facilitate AdWords clients' ability to commingle their advertising campaigns across platforms. This outcome is certainly good for consumers. Not to be overlooked, though, is the FTC's achievement in crafting and implementing a process through which competitors can negotiate the terms of standard essential patents ("SEPs") licenses. The FTC's consent order with Google clarifies the regulatory enforcement of FRAND commitments, and is a great first step to eliminate the opacity, posturing, and gamesmanship present in high-tech patent litigation.

As part of its larger agreement concerning Google's search business, the FTC announced that it settled charges with Google that it violated the Section 5 of the FTC Act by failing to license certain SEPs acquired from Motorola Mobility on a fair, reasonable, and nondiscriminatory basis ("FRAND"). The FTC alleged that Google failed to meet its licensing commitments by pursuing injunctive relief in court and exclusion orders at the International Trade Commission. Google has entered into a consent order agreeing not to pursue an injunction for its SEPs unless certain, specific conditions are met. Google must make a clear offer in writing, negotiate for 60 days, provide the option of binding arbitration, and participate in litigation if the putative licensee prefers that route. Even if the licensee chooses not to accept a license, Google must offer a proposed consent order before seeking an injunction, which effectively offers the licensee another chance to negotiate fairly or commit to arbitration. All licensees, whether they choose arbitration or litigation, must commit to honoring the independently determined royalty rate. This process should work well for Google in its negotiations with others in the mobile communications space, and this process is well-designed to be transportable to SEP cases in any industry.

The effect of this process is that gamesmanship no longer has a chance to survive. A SEP holder cannot engage in hold-up by demanding a royalty rate that is not FRAND. Licensees can employ an arbitrator to establish the royalty rate. Moreover, licensees can no longer seek litigation in perpetuity instead of accepting a license. Finally, by eliminating the opacity surrounding SEP litigation and ensuring an avenue for speedy, acceptable resolution the FTC implicitly tasked the standard setting bodies with developing dispute resolution procedures. Both Fiona Scott Morton of the Department of Justice and Howard Shelanski of the FTC have emphasized the role of the standards bodies in this process. This is important because any resolution that overly burdens SEP holders poses the threat to disincentivize future participation with standard setting bodies, which would unquestionably harm consumers.

The enforcement action also raises critical policy questions in the broader IP/competition arena. It is imperative that the FTC continue to address the broader competition problems that arise from patent misuse, and not relax after addressing one part of the problem.

Let's begin with a critical distinction in the IP ecosystem. Some firms such as Apple and Microsoft prefer to keep their patents and their technology proprietary. These firms want the sole source of the technology and assess the full toll for those who might want to practice the technology. These firms generally hold patents on software and functionalities within operating systems. Other firms like Motorola recognize that competition and consumers benefit through a more open environment for sharing technology and spurring innovation. This is particularly true for firms who manufacture the hardware products on which other firms' software operate.

After Motorola failed to reach agreements with both Apple and Microsoft it filed suit seeking injunctive relief. The FTC determined that Motorola had not done enough to seek a mutually beneficial licensing relationship, and determined that the pursuit of an injunction was an unfair method of competition in violation of the FTC Act. However, the FTC also acknowledged that potential licensees must also be bound to negotiating reasonably. This was Motorola's assertion in its litigation against Apple - it claimed that Apple rejected any license offer. Apple famously drew a line in the sand in Wisconsin in which it proclaimed it would not pay more than $1 per device, regardless of whether the court determined a higher royalty to be appropriate.

Finally, the FTC cannot stop here. Patent misuse permeates the high-tech market, and is certainly not isolated to SEPs. Patent Assertion Entities plague the system and do nothing but increase costs while preventing new competition. Thankfully the agencies have demonstrated a willingness to address this problem -- making a good start with a recent public workshop in Washington, D.C. to examine the practices of trolls and their effects on competition -- but this settlement cannot dampen their resolve. Furthermore, privateering (or the use of PAEs by operating companies) circumvents commercial agreements and causes effects similar to the hold up concerns identified with SEPs. Finally, the agencies must turn their attention to the creation and wielding of de facto essential patents by companies that encourage lock-in and commit hold up, but do so without the formality of participating in a standard setting organization. These practices require the same focus that the FTC has demonstrated in untangling the complex issue of standard essential patent licensing, they stifle competition to the detriment of innovation and consumers. Shedding light on these questionable practices of the patent wars could really help take us down the path towards patent peace.

Co-authored by Brendan Coffman

David Balto is a former policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and antitrust lawyer at the U.S. Department of Justice. He has been a senior fellow at the Center for American Progress and has worked with the International Center on Law and Economics, both of which receive funding from many organizations including Google. Mr. Balto has also published research and authored scholarship for Google on technology policy topics.

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