Bloomberg News

Import Ban Too Strong as Patent Case Remedy, FTC Says

June 07, 2012

Google Inc. (GOOG:US)’s bid to block imports of Microsoft Corp. (MSFT:US)’s Xbox gaming system and Apple Inc. (AAPL:US)’s iPhone based on patents owned by its Motorola Mobility unit may hurt competition, the U.S. Federal Trade Commission said.

Weighing in on cases before another U.S. agency, the International Trade Commission, the FTC said in filings yesterday that companies should be limited in their ability to win orders blocking imports of competitors’ products over the use of patents built into industrywide standards.

Motorola Mobility is citing its standard-essential patents to persuade the ITC to stop imports of Apple and Microsoft devices made in Asia. The ITC is gathering comments on whether such an import ban would be in the public interest. Final decisions in the cases are scheduled for August.

“We are concerned that it might be hindering innovation,” FTC Chairman Jon Leibowitz said in an interview with Bloomberg Government yesterday in Washington.

An import ban on the iPhone would affect sales of a product that generated $47 billion in sales last year, or 43 percent of Apple’s revenue. Microsoft’s entertainment division (MSFT:US), which includes sales of the Xbox, generated $8.9 billion in global sales in fiscal 2011, about 13 percent of Microsoft’s revenue.

Patent Disputes

The FTC’s position would limit the power of companies like Motorola Mobility, Samsung Electronics Co. and InterDigital Inc. (IDCC:US) to use the international trade agency as a forum in patent disputes. Each company has asserted patents that cover aspects of industry standards they helped establish.

Companies participating in standard-setting groups pledge to license patents that cover aspects of the standards on “reasonable and non-discriminatory” terms. Such patents should be treated differently than other patents, Leibowitz said. Patents convey the power to exclude others from using an invention.

“A royalty negotiation that occurs under threat of an exclusion order may be weighted heavily in favor of the patentee in a way that is in tension with the RAND commitment,” the FTC wrote.

The result could be royalty rates that would lead to higher prices for consumers and less participation in standard-setting groups, the agency said. It suggested the ITC refrain from imposing an import ban or delay imposition until both sides mediate in good faith.

Good-Faith Talks

Google, in filings with European and U.S. regulators in February, said it wouldn’t seek to block the use of standard- essential patents as long as good-faith licensing talks are under way. Motorola Mobility said it “would welcome having Apple and Microsoft join the more than 50 other companies” who have licensed the company’s portfolio.

“To date, however, neither party has been willing to enter into a cross-license on reasonable terms and thus we all find ourselves in seemingly endless litigation,” Motorola Mobility said in an e-mailed statement.

An ITC judge in April said Microsoft’s Xbox infringes four Motorola Mobility patents, including three related to industry standards covering Wi-Fi technology and video decoding. Another judge said Apple’s iPhone and iPad tablet computer infringed a patent related to 3G technology.

‘Growing Chorus’

“The FTC joins a growing chorus of regulators from around the world who recognize the danger posed by companies who try to use standard-essential patents to block the sale of products,” David Howard, Microsoft’s deputy general counsel, said in an e- mailed statement.

The European Union is investigating complaints by Microsoft and Apple that Motorola Mobility is unfairly using standard- essential patents to block competition. Samsung also is being probed by the EU. Huawei Technologies Co. filed a complaint over royalty demands by InterDigital over third-generation technology on mobile phones.

There’s no clear definition of fair and reasonable, said Andrew Updegrove, a lawyer with Gesmer Updegrove in Boston who advises standards boards.

“If people knew what RAND meant, there’d be a lot less to argue about,” Updegrove said. “What the big patent owners want to do is retain complete flexibility of negotiation.”

The Business Software Alliance, a trade group whose members include Apple and Microsoft, and computer maker Hewlett-Packard Co. (HPQ:US) also filed comments saying there shouldn’t be an import ban.

Android Challenge

Motorola Mobility filed its ITC case against Cupertino, California-based Apple after the iPhone maker challenged other makers of phones running on Google’s Android operating system.

The dispute over Xbox began after Microsoft approached Motorola Mobility and demanded patent royalties on smartphones that run on Android. Motorola Mobility responded by claiming it was entitled to royalties on the Xbox.

Motorola Mobility sent letters to Microsoft with what it said was a standard demand for a 2.25 percent royalty on the end price of products that use the inventions, including the Xbox and Windows products. Microsoft contends that would add up to as much as $4 billion in annual royalties, a figure Motorola Mobility disputes.

Microsoft, based in Redmond, Washington, filed a lawsuit accusing Motorola Mobility of breaching its contractual obligations.

Company Pledges

Apple and Microsoft have pledged that they wouldn’t use their own standard-essential patents to block products.

“We think it’s an abuse of the patent system to use an essential patent to block the import and sale of a competitor’s product, and Apple has never used standards-essential patents in that way,” Apple said in February. Kristin Huguet, an Apple spokeswoman, said the company stood by that statement.

The ITC has more than a dozen pending cases involving smartphones and tablet computers, and lawsuits have spanned four continents with Apple and Microsoft going against makers of Android devices. Most don’t involve standard-essential patents.

The case against Microsoft is In the Matter of Gaming and Entertainment Consoles, 337-752 and the case against Apple is In the Matter of Wireless Communication Devices, 337-745. Both are at the U.S. International Trade Commission (Washington).

To contact the reporters on this story: Susan Decker in Washington at sdecker1@bloomberg.net; Eric Martin in Washington at emartin21@bloomberg.net.

To contact the editors responsible for this story: Bernard Kohn at bkohn2@bloomberg.net; Joshua Goodman at jgoodman19@bloomberg.net.


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