Last year the FTC negotiated a consent order with Google Inc. and its subsidiary Motorola Mobility (MMI) resolving charges that the companies engaged in unfair competition by violating the FRAND commitments for some of MMI’s standard-essential patents (SEPs). A key feature in the Commission’s Order is a requirement that Google offer potential licensees binding arbitration when negotiations over licensing SEPs break down.
Since the settlement was finalized in July, we have participated in public events to discuss elements of the Commission’s order. Although the order is only binding on Google, there has been great interest in understanding the arbitration provision in the Google/MMI Order and how it works. As with all Commission orders involving anticompetitive conduct, the remedy is designed to stop the unfair conduct and prevent it from happening again. Here is a roadmap for understanding how and when arbitration could occur under the Google/MMI Order:
The Problem: Google gained undue leverage during negotiations by breaching its FRAND commitment
As outlined in the Commission’s Complaint, Google/MMI made a number of FRAND obligations -- voluntary and affirmative commitments to standard setting organizations to license SEPs on “fair, reasonable, and non-discriminatory” terms. However, the FTC alleged that Google breached its FRAND obligations by seeking to enjoin and exclude implementers of its SEPs, including some of its competitors, from marketing products that were SEP-compliant. Google used these threats of exclusion orders and injunctions to enhance its bargaining leverage against willing licensees and thus to demand licensing terms that tended to exceed the FRAND range.
The Remedy: Google must take certain steps, including offering binding arbitration, before seeking an injunction
The Order, which is binding only on Google, requires that Google offer arbitration as a mechanism to establish a license before seeking an injunction. The Order does not prevent Google and potential licensees from resolving their licensing disputes in other ways, or affect the ability of potential licensees to seek court intervention. And, importantly, the Order requires Google to keep open its offer of binding arbitration until 30 days after it files an action seeking an injunction.
To improve the chances that the arbitration process will yield an agreement, the Order contains these additional requirements unless Google and the potential licensee agree to arbitrate on different terms:
- Before a potential licensee must decide whether to accept Google’s offer of arbitration, Google must provide an offer to license that contains specific licensing terms that Google is willing to accept. This ensures that a potential licensee knows the terms under which Google is willing to license before it must decide whether to accept Google’s offer of binding arbitration.
- Google’s offer of binding arbitration must include a commitment to license its FRAND-encumbered SEPs on the arbitrated terms. Under the Order, Google may require the potential licensee to abide by the results of the arbitration as a condition of offering arbitration. This ensures that the arbitration will result in a license agreement.
- The arbitration must include all of Google’s FRAND-encumbered SEPs that are essential to a given standard, and, if the FRAND commitment requires reciprocity, must include all of the potential licensee’s FRAND-encumbered SEPs essential to the same standard.
- Through the arbitration process, a potential licensee identifies which of Google’s proposed licensing terms, collectively or individually, are inconsistent with Google’s FRAND commitment and those terms are then subject to arbitration.
The Order explicitly leaves open the option for both parties to make arguments regarding the validity, essentiality, infringement, or value of the patents at issue in the arbitration.
Arbitration that occurs pursuant to the FTC’s Order relies on a neutral third party, the arbitrator, to resolve the parties’ disputes about the terms of a license agreement, including the FRAND royalty for the relevant FRAND-encumbered SEPs. The parties are free to agree on an arbitration organization or arbitration mechanism, but if they do not, the Order identifies three arbitration organizations as qualified arbitrators—the American Arbitration Association, JAMS, and the World Intellectual Property Organization. A potential licensee may select any one of these organizations, but if it does not, then Google may do so. This process prevents Google from dictating the choice of arbitrator and ensures that neither party can require the use of an unqualified arbitrator.
By setting defaults that guide the arbitration, the Order prevents the arbitration from being delayed by unreasonable demands or failures to agree. By creating a clear alternative to impasse, the Order seeks to encourage negotiations that result in a workable licensing agreement.