ROYALTY AMOUNT in FRAND: IP High-Court Grand Panel Decision Pre-Meeting AIPLA-Annual Washington, D.C. Oct , 2014 Hirokazu Honda Attorney-at-Law Abe, Ikubo & Katayama

Apple Japan G.K. v. Samsung Electronics IP High Court (Grand Panel) Heisei 25(ne)10043; Heisei 25(ra)10007, [Samsung Patent] JP ◦ Method and apparatus for transmitting and receiving packet data by using pre-established length indicator in a mobile communication system Claim 1 ◦ Method for data transmission Claim 8 ◦ Data transmission apparatus Abe, Ikubo & Katayama Oct , 2014

Preliminary Injunction against Apple by Samsung Declaratory Judgment Action by Apple 1 st Instance Decision (Tokyo District Court, Feb. 28, 2013) ◦ Rendered Declaratory Judgment; Samsung is not entitled to claim damages against Apple under the Patent. ◦ Dismissed Preliminary Injunction Petition Abe, Ikubo & Katayama Oct , 2014 Apple Japan G.K. v. Samsung Electronics IP High Court (Grand Panel) Heisei 25(ne)10043; Heisei 25(ra)10007, 10008

Issues Direct Infringement of Claim 8 Indirect Infringement of Claim 1 Invalidity of Claims 1 and 8 (lack of novelty / inventive step) Exhaustion / Implied License because of Samsung’s license to Intel for baseband chips Establishment of License Agreement bet. Parties through FRAND Declaration by Samsung FRAND Defense through Samsung’s FRAND Declaration under Article 1(3) of the Civil Code Amount of Damages Abe, Ikubo & Katayama Oct , 2014

License / FRAND Defense No license agreement was formed as a result of Samsung's FRAND declaration, because such declaration cannot be regarded as an offer for a license agreement. Samsung's exercise of the right to seek damages based on the patent right constituted the abuse of right: - to the extent exceeding the amount of the FRAND royalty, but - not to the extent of the amount of the FRAND royalty. Abe, Ikubo & Katayama Oct , 2014

Abuse of Right -1 A party intending to engage in the manufacturing, sale, etc. of a UMTS standard-compliant product would rely on the availability of a FRAND license through an appropriate negotiation with the patentee. Such reliance is worth protecting. Allowing the exercise of the right to seek damages exceeding the amount of the FRAND royalty would be detrimental to the reliance of parties who manufacture or sell the UMTS standard- compliant product on the availability of such license. Unless a patentee successfully alleges and proves the fact of the existence of special circumstances, such as: the prospective licensee has no intention of receiving a FRAND license, the patentee should not be allowed to claim damages exceeding the amount of the FRAND royalty. Abe, Ikubo & Katayama Oct , 2014

Abuse of Right -2 A party intending to engage in the manufacturing, sale, etc. of a UMTS standard-compliant product is presumed to have started its business understanding the necessity of paying the amount of the FRAND royalty in the future. ETSI IPR Policy, Clause 3.2, “IPR holders … should be adequately and fairly rewarded for the use of their IPRs.” If the prospective licensee alleges and proves the existence of special circumstances, such as: after discussing various circumstances in the process of the FRAND declaration and licensing negotiation, it is considered extremely unfair to permit the patentee to claim for damages not exceeding the amount of royalty, even considering the significance of the right to seek damages as a compensation for the public disclosure of an invention, the possibility cannot be precluded that such patentee's claim is restricted as an abuse of right. Abe, Ikubo & Katayama Oct , 2014

Abuse of Right -Injunction [Preliminary Injunction Cases] The party which makes a FRAND declaration does not anticipate the exercise of the right to seek an injunction to maintain its dominance over the market, so long as such party can obtain consideration for the FRAND license. The injunction should be allowed against a party engaged in manufacturing, sales, etc. of an UMTS standard-compliant product without any intention of receiving a FRAND license. (scrutiny shall be made before determining that the prospective licensee has no intention of receiving a FRAND license) The exercise of the right to seek an injunction would constitute the abuse of right and therefore is not allowed, if: the prospective licensee successfully alleges and proves the fact of the patentee having made the FRAND declaration and the prospective licensee's intention of receiving a FRAND license. Abe, Ikubo & Katayama Oct , 2014

FRAND Royalty -Calculation (b) contribution ratio of the compliance with the UMTS standard by the Products (c) royalty rate cap, which is applied from the standpoint of preventing the aggregate amount of royalty from being unreasonably high This Case ◦ (b) is secret; (c) is 5%; (d) is 529 ◦ Total: JPY9,955,854 Abe, Ikubo & Katayama Oct , 2014 (a) Sales (b) Contribution Ratio (c) Royalty Cap (d) Number of Essential Patents for Standard

Contribution Ratio Contribution of the compliance with the UMTS standard is limited… Mobile communication functions supporting methods ◦ Not only W-CDMA, but GSM ◦ Wireless communication function Many other features and functions ◦ designs, user interfaces, available software, CPU, camera, audio function, display, GPS function, and various sensors Brand strength of both parties in the smart phone market and tablet device market; their marketing efforts to maintain and enhance such brand strength Size of memory Abe, Ikubo & Katayama Oct , 2014

Royalty Cap ETSI IPR Policy ◦ aim to "reduce the risk … that investment in the preparation, adoption and application of STANDARDS could be wasted as a result of an ESSENTIAL IPR for a STANDARD or TECHNICAL SPECIFICATION being unavailable“ To achieve this goal, it is reasonable that, not only the amount of royalty for each of the individual essential patents, but also the aggregate of such royalty (aggregate royalty) should be limited within the economically reasonable range. The aggregate amount of such royalty can be unreasonably high insomuch as that it becomes economically unfeasible for the users to comply with the standard. If the aggregate royalty becomes unreasonably high, it would be practically impossible for users to put the essential patent licenses into practice even if they obtain such licenses. Such situations would result in the inability to achieve the goal of the ETSI IPR Policy. Abe, Ikubo & Katayama Oct , 2014

Royalty Cap: 5% in this Case Both parties argued on the premise of the aggregate royalty cap of 5% Many owners of the UMTS standard essential patents support the 5% aggregate royalty cap with a view to prevent the aggregate royalty from being excessively high ◦ Nokia’s Advocating not exceeding 5% ◦ Samsung Counsel’s Remark in ITC ◦ Agreement among NTT Docomo, Ericsson, Nokia and Siemens ◦ Standard License Agreement by W-CDMA Patent Platform Abe, Ikubo & Katayama Oct , 2014

Ratio of Contribution of the Patent to the UMTS Standard It is reasonable to determine, based on the evidence submitted in this court action, that the contribution of the Patent to the UMTS standard is equivalent to other essential patents. The amount of the FRAND royalty for the Patent shall be calculated by dividing the amount of royalty by the number of all UMTS standard essential patents. The distribution of royalty to licensors in the patent pool is generally calculated by dividing the amount of royalty by the number of patents, without regard to the technical value of individual patents. The "W-CDMA patent platform" for the UMTS standard has also adopted such method of dividing the royalty amount by the number of patents. Abe, Ikubo & Katayama Oct , 2014

Amicus Curiae: First in Japan The IP High Court invited “Amicus Brief” from the public for the issue of FRAND defense: “Any restriction from enforcement of SEP (injunction / damages) where the patentee declared FRAND?” “Amicus Brief” were submitted to either of the attorneys for the parties; the attorneys submitted the same to the Court as evidence. 58 Briefs submitted: JFBA, JPAA, LES Japan, JIPA, AIPLA, JEITA, private companies, lawyers, patent attorneys, professors, etc. Abe, Ikubo & Katayama Oct , 2014

Amicus Curiae: Summary -1 3 Types ◦ It is not appropriate to impose any restriction, as such restriction would have a negative impact on voluntary efforts of the licensor and licensee for the execution of a license agreement, and also may be detrimental to the technological innovation and standardization efforts. ◦ Pointing to the issues such as "patent hold-up," and asserting that a patentee should be subject to certain restrictions once it has made the FRAND declaration. ◦ A patentee should in no event be permitted to exercise the right to seek an injunction based on the patent right for which a FRAND declaration was made. Legal theories for restriction of a right to seek an injunction ◦ FRAND declaration gives rise to a contract for the benefit of a third party: a large number of concurring / dissenting opinions ◦ The principle of good faith or theory of abuse of right: a large number of opinions ◦ The Antimonopoly Act: quite few Abe, Ikubo & Katayama Oct , 2014

Amicus Curiae: Summary -2 Criteria for the restriction ◦ Licensees who have intentions to enter into a license agreement ("willing licensee") ◦ Licensees who do not ("willing licensee") ◦ The exercise of the right to seek an injunction is possible for an unwilling licensee, but not for a willing licensee ◦ Specific criteria for determining an unwilling licensee: varied opinions SEP owners should be restricted from seeking damages? ◦ No restriction should be imposed on this right: majority ◦ The permissible amount of damages should be limited to the amount of the FRAND royalty: some comments ◦ Some commented on the method of determination of the amount of the FRAND royalty. Abe, Ikubo & Katayama Oct , 2014

Comparison to Microsoft v. Motorola In consideration of: ◦ Contribution of standards to products (sales) ◦ Contribution of SEPs to standards ◦ Mitigate the risk of patent hold-up ◦ Risk of royalty stacking by aggregate royalties Creation of contract by FRAND ◦ [M v M] RAND commitments create enforceable contracts between Motorola and SSOs and Microsoft entitled to enforce contract as a third party beneficiary (Order dated Feb. 27, 2012) ◦ [A v S] The FRAND Declaration cannot be considered as an offer for a license agreement (under the laws of France). Abe, Ikubo & Katayama Oct , 2014

Comparison to Microsoft v. Motorola Hypothetical negotiation approach ◦ [M v M] Negotiation between “willing licensor” and “willing licensee”; Applied modified version of Georgia-Pacific factors ◦ [A v S] Not adopted hypothetical negotiation approach Consideration of reasonable royalty only on the economic value of patented technology itself, NOT on the value associated with incorporation of the patented technology into the standard ◦ [M v M] YES / [A v S] Not clearly stated (both parties seem to agree 5% as aggregated royalty) “Products” as a basis of calculation of royalty ◦ [M v M] Wi-Fi Chips / Not PC ◦ [A v S] Smart Phones; Tablets Abe, Ikubo & Katayama Oct , 2014

License based on FRAND Declaration -1 The FRAND Declaration cannot be considered as an offer for a license agreement under the laws of France. Expression in Declaration: "prepared to grant irrevocable licenses“ ◦ Compared with other possible wordings such as "hereby do license" or "commit to license," this is not definitive and contemplates further actions by the declarant. Declaration provides no guidance for the scope of the binding effect of the contract to be formed upon the acceptance, as it has no specific terms and conditions such as a royalty rate, territory or period of the license. Abe, Ikubo & Katayama Oct , 2014

License based on FRAND Declaration -2 Samsung opted for a reciprocity clause in accordance with the ETSI IPR Policy and the FRAND Declaration contains a provision setting forth that the license shall be subject to the condition that 6 the parties agree to reciprocate in relation to the standards. Interpretation of the ETSI IPR Policy, in accordance with which the FRAND Declaration was made ◦ The license is left to the negotiation between the parties, such as "potential licensor" or "potential licensee“ ◦ The provision that "ETSI expects its Members (as well as non-ETSI Members) to engage in an impartial and honest Essential IPR licensing negotiation process for FRAND terms and conditions" ◦ "Specific licensing terms and negotiations are commercial issues between the companies and shall not be addressed within ETSI“ ◦ "It is necessary to obtain permission to use patents declared as essential to ETSI's standards. To this end, each standard user should seek directly a license from a patent holder“ Background History for the adoption of the ETSI IPR Policy ◦ Some participants attempted to introduce a provision enabling the "automatic license" for users; however, this attempt failed because of strong opposition. Abe, Ikubo & Katayama Oct , 2014