ABOVE FRAND LICENSING OFFERS DO NOT SUPPORT A CALIFORNIA UCL ACTION IN TCL V ERICSSON

By Robert B. McNary¹

"There needs to be some other conduct . . . than mere breach of. . . FRAND obligations"²

Disputes involving standards essential patents arise when contributors of proprietary technology to industry standards and standards implementers wishing to make use of that proprietary technology fail to agree on fair, reasonable, and nondiscriminatory ("FRAND") licensing terms for proprietary technology that reads on the standard. Resolving these FRAND disputes in a fair and efficient manner is highly important for the continued expansion of global technology networks. The proper role of antitrust and competition laws in this process—if any—has been an ongoing topic of discussion.

In recent remarks regarding innovation policy, Assistant Attorney General for Antitrust Makan Delrahim stated his general preference for using contract law—not antitrust law—for disputes involving standard essential patent licensing commitments:

Where a patent holder has made commitments to license on particular terms, a contract theory is adequate and more appropriate to address disputes that may arise regarding whether the patent holder has honored those commitments. The Division will not hesitate to bring a sound antitrust case, but as competition advocates, we must strive to ensure that we use the antitrust laws for their intended purpose, which is to address practices that harm competition. Using the antitrust laws to impugn a patent holder’s efforts to enforce valid IP rights risks undermining the dynamic competition we are charged with fostering. So when it comes to disputes that arise between intellectual property holders and implementers regarding the scope of FRAND commitments, we advocate for the application of more appropriate theories, other than the blunt instrument of antitrust.³

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This preference for contract law, as opposed to antitrust and unfair competition laws, follows the opinions of several enforcement officials and commentators, including former FTC Chairman Deborah Platt Majoras in her 2008 N-Data dissenting opinion,⁴ former FTC Commissioner Joshua Wright,⁵ and former FTC Commissioner Maureen Ohlhausen in multiple speeches, articles, and agency opinions.⁶

This article summarizes how this contract law approach was recently reflected in a decision in private litigation in the Central District of California. In TCL v. Ericsson, Judge James Selna dismissed TCL’s California Unfair Competition Law ("UCL") claim on two grounds: (1) a lack of standing for an unlicensed seller of standard-compliant devices, and (2) a lack of harm to competition, absent evidence of an intentionally false promise to a standards development organization. As discussed below, the TCL case proceeded on contract-only grounds, an approach consistent with both the current Assistant Attorney General’s view and the California Supreme Court’s general guidance that the California UCL is "not an all-purpose substitute for a tort or contract action."⁷

I. COMPETITION CLAIMS IN TCL V. ERICSSON

The TCL v. Ericsson case involved plaintiff TCL, a Chinese mobile phone company selling devices around the world, and Ericsson, a major contributor to and developer of global 3G (third generation) and 4G (fourth generation) telecommunications standards developed by the European Telecommunications Standards Institute ("ETSI"). As a major holder of patents essential to those standards, Ericsson had signed over 150 licensing agreements with more than one hundred telecommunications industry participants. TCL sold mobile phones relying on cellular standards but it had never taken a license for Ericsson’s 3G or 4G patents. After many years of unsuccessful negotiations in which Ericsson tried to get TCL to take a license, in March 2014, TCL filed a lawsuit against Ericsson in Santa Ana, California federal court. TCL’s suit alleged that Ericsson breached its voluntary contractual commitment to ETSI to license its 3G and 4G patents on fair, reasonable, and non-discriminatory terms, including that Ericsson’s royalty demands violated this FRAND commitment.

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TCL also alleged Ericsson’s royalty demands violated the California UCL.⁸ Ericsson moved for summary judgment on the UCL claim in June 2016, asserting that TCL had produced no evidence in discovery of harm to competition or exclusion of rivals, including no evidence that Ericsson made any false promises to any standard-setting organization in undertaking its FRAND obligations. After briefing and argument, the court agreed, granting summary judgment for Ericsson on the UCL claim.⁹ The court ruled for Ericsson on two grounds: (1) that an unlicensed implementer of a standard has lost no money or property, and therefore has no standing for a California UCL claim; and (2) that harm to competition in an unlicensed implementation case requires an intentionally false promise to a standards-development organization. For both reasons, TCL’s UCL claim was dismissed.

II. TCL’S LACK OF STANDING FOR A CALIFORNIA UCL CLAIM

Ericsson’s motion asserted that TCL lacked standing to assert a private action under the California UCL, as TCL had never "lost money or property as a result of the unfair competition."¹⁰ To satisfy the UCL’s standing requirements, a plaintiff must establish, at minimum: (1) that the plaintiff sustained an economic injury—that is, a "loss or deprivation of money or property"; and (2) that the challenged business practice caused that economic injury.¹¹

A. A Possibility of Paying Higher Royalties Was Not a Loss of Money or Property

First, Ericsson argued there was no evidence that TCL experienced any loss of money or property from the Ericsson licensing practices at issue. As an unlicensed implementer, TCL had not paid licensing fees to Ericsson for the use of Ericsson’s 3G or 4G patents. Having not paid any higher royalties or suffered any higher costs, TCL did not offer any expert testimony showing any increased costs, decreased profits, or loss of business, according to Ericsson.

In response, TCL argued that a "threat" of paying royalties and business "uncertainty" stemming from Ericsson’s alleged licensing practices qualified as economic injury. Ericsson replied that the California Supreme Court has held that an "intangible" injury does not suffice—the injury must specifically involve lost money or property.¹²

Ericsson also argued that the same issue had recently been decided in standard essential patent licensing litigation between Apple and Motorola, with highly similar factual allegations.¹³ Apple had alleged that the defendant "engaged in unfair competition when it promised standards-setting organizations that it would disclose essential patents and license those patents on reasonable and nondiscriminatory terms, . . . refused to offer [the plaintiff] a reasonable and nondiscriminatory license, and sued [the plaintiff] for patent infringement."¹⁴ Like TCL, Apple complained that the defendant had offered it a license with "exorbitant royalty rates," but had refused to pay royalties and nevertheless continued to manufacture and sell infringing products incorporating the defendant’s patented technologies.¹⁵ The court granted summary judgment for Motorola, for Apple’s failure to show any injury from the alleged breach of licensing commitments.¹⁶

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Judge Selna similarly rejected TCL’s argument that there was "other economic injury" caused by Ericsson. The court noted that "TCL only points to hypothetical injury that TCL might have incurred if it had entered into a non-FRAND license" and "never entered into a non-FRAND license."¹⁷ Furthermore, the court explained, "business uncertainty alone does not count as ‘economic injury’ under the UCL because it is not ‘money or property.’"¹⁸ Under these circumstances, the court held, an unlicensed implementer cannot show "other economic injury" for purposes of a California UCL claim.¹⁹

B. Infringement Litigation Defense Costs Were Not Sufficient Economic Injury

TCL also opposed Ericsson’s lack of standing argument by noting Ericsson’s multiple patent infringement actions against TCL in multiple countries. TCL argued its "significant expense" incurred as a result of litigation in which Ericsson sought to enjoin TCL from practicing Ericsson’s standard essential patents.

Again, Ericsson argued that the same issue had arisen in Apple v. Motorola, and that court had determined the First Amendment of the Constitution protects parties who petition the government for redress, including through private litigation.²⁰ Like TCL, Apple also claimed litigation costs for defending against the defendant’s patent infringement litigation.²¹ The argument failed for Apple, as the court concluded the plaintiff’s UCL claim necessarily sprung from the defendant’s "attempt to enforce its patent," and under the Noerr-Pennington doctrine, the First Amendment protected that litigation conduct against both antitrust and UCL liability.²² Ultimately, the court granted Motorola’s motion for summary judgment on Apple’s antitrust claim, its California UCL claim, and its claims for declaratory relief based on antitrust or unfair competition theories of liability, because "Motorola is immune from liability for these claims under the Noerr-Pennington doctrine."²³

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TCL argued that a "sham litigation exception" to the Noerr-Pennington doctrine may apply. Ericsson noted that such claims require "clear and convincing evidence" that the defendant pursued the infringement suits "pursuant to a policy of starting legal proceedings without regard to the merits and for the purpose of injuring a market rival."²⁴ Ericsson argued that TCL had not introduced evidence of either requirement, and TCL responded that Ericsson’s infringement suits were "causally connected" to anticompetitive behavior and therefore part of an anticompetitive "scheme." Ericsson responded that the Supreme Court has made clear that "genuine petitioning activities are ‘not illegal, either standing alone or as part of a broader scheme itself violative of [antitrust law].‘"²⁵

Judge Selna ultimately agreed with Ericsson, holding that spending "millions of dollars defending against actions by Ericsson seeking injunctions or exclusion orders" cannot be the basis for TCL’s "economic injury" due to the Noerr-Pennington doctrine.²⁶

The court noted that

[a]lthough there is evidence in the record that TCL spent millions of dollars defending against actions by Ericsson seeking injunctions or exclusion orders, such injury cannot be the basis for TCL’s "economic injury" due to the Noerr-Pennington doctrine. [¶] The Noerr-Pennington doctrine provides absolute immunity for statutory liability for conduct when petitioning the government for redress.²⁷

Relying on the Supreme Court’s opinion in Professional Real Estate Investors v. Columbia Pictures, Judge Selna explained that "[t]hose who petition government for redress are generally immune from antitrust liability."²⁸ Applying the Ninth Circuit’s opinion in Sosa v. DirecTV, he also distinguished certain California "cases that have found UCL standing based on prior litigation costs" as having omitted "discussion of the Noerr-Pennington doctrine," but credited the decisions which "directly considered the doctrine," and "have found that injury flowing solely from previous, protected litigation activity cannot be the basis of standing under the UCL."²⁹

As to sham litigation claims, the court explained that TCL must also have proof that Ericsson’s lawsuits were objectively baseless, or were started without regard to their merits, or involved making intentional misrepresentation to a Court. The court found no evidence of any of those factors. The court also concluded that TCL’s claim that Ericsson’s litigation is "causally connected" to Ericsson’s anticompetitive behavior would still not deprive the litigation of its First Amendment protection.³⁰

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III. TCL’S LACK OF EVIDENCE OF HARM TO COMPETITION REQUIRED FOR ITS UNFAIR COMPETITION CLAIM

As a separate and independent ground for summary judgment, Ericsson also argued that TCL had not submitted sufficient evidence to show "conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition."³¹ This harm to competition—not just a single market participant—is the hallmark of unfair competition claims under the California UCL, especially as "a UCL action based on a contract is not appropriate where the public in general is not harmed by the defendant’s alleged unlawful practices."³²

Ericsson’s motion argued that TCL must prove an impact on competition in a relevant market—not just harm to TCL.³³ Under this view, TCL’s failure to produce substantial evidence proving a relevant market, and an injury to competition within that market, entitled defendant to judgment on an unfair competition claim.³⁴ TCL argued in response that "supracompetitive prices and restricted output" allowed an antitrust plaintiff to skip establishing a cognizable relevant market. Ericsson’s reply was that TCL had not identified any distortion of competition by alleged "supracompetitive" prices and "restricted" output—by neglecting to provide any expert analysis of any actual market.

Ericsson also asserted that TCL’s UCL claim relied on an allegation of an "intentionally false FRAND commitment," yet TCL had failed to establish such intent. TCL’s claim did generally follow Broadcom Corp. v. Qualcomm Inc., a decision on the pleadings in the Third Circuit, which held that (1) in a consensus-oriented private standard-setting environment, (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with a standard development organization’s reliance on that promise when including the technology in a standard, and (4) the patent holder’s subsequent breach of that promise, could be actionable anticompetitive conduct.³⁵ Ericsson argued that TCL failed to meet this standard by failing to adduce evidence of intent, including failing to offer any expert opinion on intent or motive.

The court agreed with Ericsson, concluding that TCL points to "absolutely no evidence in the record" from which it could be reasonably concluded that Ericsson made an intentionally false promise.³⁶ Thus, the court held, "[w]ithout any evidence of an intentionally false promise to a standard setting organization, TCL cannot satisfy Broadcom’s test to show anticompetitive behavior by Ericsson with regard to its participation in the development of a standard."³⁷

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Importantly, in so holding, the court rejected TCL’s argument that its alleged evidence that Ericsson has breached FRAND was sufficient evidence that Ericsson has necessarily done so in an anticompetitive way. Ericsson argued that the importance of an intentionally false promise for an unfair competition claim—i.e., deception during standards development—is that it premises the harm to competition distinguishing a UCL claim from a breach of contract claim.³⁸ The court agreed, holding that there was no authority "for this kind of bootstrapping of a breach of contract case, without more, into a violation of the policy or spirit of antitrust laws." The court specifically noted that, "as the Broadcom court made the ‘intentionally false promise’ and subsequent ‘breach of that promise’ two separate elements, it is clear that there needs to be some other conduct by Ericsson than mere breach of its FRAND obligations."³⁹

IV. CONCLUSION

The district court’s grant of summary judgment to Ericsson on TCL’s UCL claim highlights an important development in FRAND litigation: the central role of contract-based private litigation claims. The primacy of contract claims is consistent with the fundamental goals of the California UCL, which requires economic injury and harm to competition, and the competition goals of antitrust and unfair competition laws generally, as recently stated by Assistant Attorney General Delrahim. As licensing disputes continue to reach courts with both contract and competition claims, however, litigants must pay close attention to all requirements of an additional competition claim. In most cases, the proper approach is a contract case alone.

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Notes:

^1. Robert McNary is Counsel in the Antitrust Practice Group at Crowell & Moring LLP. He was one of Ericsson’s counsel in the referenced TCL litigation. The views expressed in this article are those of the author alone and do not necessarily represent the views of his current or former employers or any current or former clients.

^2. TCL Comms. Tech. Holdings, Ltd. v. Telefonaktienbolaget LM Ericsson, No. SACV 14-0341 JVS (DFMx), 2016 WL 7049263, at *6 (C.D. Cal. Aug. 9, 2016).

^3. Makan Delrahim, Assistant Attorney General, Antitrust Division, U.S. Dep’t of Justice, "The Long Run: Maximizing Innovation Incentives Through Advocacy and Enforcement," Keynote Address at the LeadershIP Conference on IP, Antitrust, and Innovation Policy, Washington, DC (April 10, 2018), available at https://www.justice.gov/opa/speech/file/1050956/download. See also, "Take It To The Limit: Respecting Innovation Incentives In The Application Of Antitrust Law," Makan Delrahim, Assistant Attorney General, Antitrust Division, U.S. Dep’t of Justice, Remarks as Prepared for Delivery at USC Gould School of Law, Los Angeles (November 10, 2017), available at https://www.justice.gov/opa/speech/file/1010746/download; Andrew Finch, Principal Deputy Assistant Attorney General, Antitrust Division, U.S. Dep’t of Justice, "Trump Antitrust Policy After One Year," Remarks Delivered at the Heritage Foundation (February 23, 2018), available at https://www.justice.gov/opa/speech/file/1028906/download.

^4. In the Matter of Negotiated Data Solutions LLC, FTC File No. 0510094, Dissenting Statement of Chairman Majoras at 4 (FTC January 23, 2008), available at https://www.ftc.gov/sites/default/files/documents/cases/2008/01/080122majoras.pdf. Then-Commissioner William Kovacic joined the dissent. See Dissenting Statement of Commissioner William Kovacic (FTC January 23, 2008), available at https://www.ftc.gov/sites/default/files/documents/cases/2008/01/080122kovacic.pdf.

^5. Joshua D. Wright, "SSOs, FRAND, and Antitrust: Lessons from the Economics of Incomplete Contracts," Remarks at the George Mason University School of Law, Arlington, VA (September 12, 2013), available at https://www.ftc.gov/sites/default/files/documents/public_statements/ssos-frand-and-antitrust-lessons-economics-incomplete-contracts/130912cpip.pdf.

^6. See, e.g., Maureen Ohlhausen, "The Elusive Role of Competition in the Standard-Setting Antitrust Debate," 20 Stan. Tech. L. Rev. 93, 97 (2017); In the Matter of Motorola Mobility LLC and Google Inc. , FTC File No. 1210120, Dissenting Statement of Commissioner Ohlhausen (FTC January 3, 2013), available at https://www.ftc.gov/sites/default/files/documents/public_statements/statement-commissioner-maureen-ohlhausen/130103googlemotorolaohlhausenstmt.pdf.

^7. Korea Supply Co. v. Lockheed Martin Corp., 63 P.3d 937, 948 (Cal. 2003) (quotation omitted).

^8. Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200 et seq.

^9. TCL Comms. Tech. Holdings, Ltd. v. Telefonaktienbolaget LM Ericsson, No. SACV 14-0341 JVS (DFMx), 2016 WL 7049263, at *7 (C.D. Cal. Aug. 9, 2016).

^10. Cal. Bus. & Prof. Code § 17204; Clayworth v. Pfizer, Inc., 233 P.3d 1066, 1086 (Cal. 2010).

^11. Kwikset Corp. v. Super. Ct., 246 P.3d 877, 884-85 (Cal. 2011).

^12. Id. at 886.

^13. Apple, Inc. v. Motorola Mobility, Inc., 886 F. Supp. 2d 1061, 1077 (W.D. Wis. 2012).

^14. Id.

^15. Id.

^16. Id.

^17. TCL, 2016 WL 7049263 at *4.

^18. Id.

^19. Id.

^20. Apple, 886 F. Supp. 2d at 1076-77.

^21. Id.

^22. Id.

^23. Id. at 1079.

^24. Kaiser Found. Health Plan, Inc. v. Abbott Labs., Inc., 552 F.3d 1033, 1044, 1046 (9th Cir. 2009).

^25. Oregon Nat. Res. Council v. Mohla, 944 F.2d 531, 534 (9th Cir. 1991) (quoting United Mine Workers of Am. v. Pennington, 381 U.S. 657, 670 (1965)) (emphasis in original).

^26. TCL, 2016 WL 7049263, at *2.

^27. Id. (citing Sosa v. DirecTV, Inc., 437 F.3d 923, 929 (9th Cir. 2006)).

^28. Id. (quoting Prof’l Real Estate Inv’rs, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 56 (1993)).

^29. Id. at *3 (citing James R. Glidewell Dental Ceramics, Inc. v. Keating Dental Arts, Inc., No. SACV 11-1309-DOC ANX, 2013 WL 655314, at *13-14 (C.D. Cal. Feb. 21, 2013) ("[B]ecause Defendant’s only attempt to establish economic injury rests on the allegation that Plaintiff’s lawsuit caused it to lose business, the Court finds that the . . . Noerr-Pennington doctrine appl[ies]")).

^30. Id.

^31. Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 187 (1999).

^32. Rosenbluth Int’l, Inc. v. Super. Ct., 124 Cal. Rptr. 2d 844, 847 (Cal. Ct. App. 2002).

^33. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977).

^34. T.W. Elec. Serv, Inn. v. Pacific Elec. Contractors Ass’n, 809 F.2d 626, 635 (9th Cir. 1987); ChriMar Sys., Inc v. Cisco Sys., Inc, 72 F. Supp. 3d 1012, 1017-20 (N.D. Cal. 2014); Sidibe v. Sutter Health, 51 F. Supp. 3d 870, 884-87 (N.D. Cal. 2014).

^35. Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 314 (3d Cir. 2007).

^36. TCL, 2016 WL 7049263, at *5.

^37. Id.

^38. See Broadcom, 501 F.3d at 314; Apple Inc. v. Samsung Elecs. Co., Ltd., No. 11-cv- 01846, 2012 WL 1672493, at *7 (N.D. Cal. May 14, 2012); Microsoft Mobile Inc. v. Interdigital, Inc., No. 15-723-RGA, 2016 WL 1464545, at *1-2 (D. Del. Apr. 13, 2016).

^39. TCL, 2016 WL 7049263, at *6.